Globally, the road transportation sector is responsible for 45% of the worldwide demand for oil however, the demand for crude oil from the sector could stall in the coming decade due to developments in the electric vehicle (EV) sector.
The internal combustion engine (ICE) has driven the world to new destinations for more than 100 years. Its technical superiority can be attributed to the energy density of oil derived liquid fuels. However, after over a century at the front of the pack, the ICE is now being challenged by the fast acceleration of EVs.
EVs offer opportunities in the energy trilemma including security of supply, affordability and environmental sustainability, it is a game-changer in the evolution of both the energy and transport industries.
Factors driving the EV revolution include the improvement in battery, solar photovoltaics (PV) and wind technologies (and subsequent reduction in their costs) and the widespread embrace of electrification by automotive manufacturers.
According to a report by Deloitte, Enter the Volt-Age: Electric vehicle disruption of the oil and gas industry, change will not come in the form of a one-for-one fuel switch from petrol to electricity, but rather through a fundamental re-imagination of the concept of transportation. The challenges and opportunities of this major disruption are significant.
With EV releases coming from every major car manufacturer, autonomous-EV (A-EV) trials underway throughout the world, and emissions and ICE ban legislation in the works, the global transportation transformation could impact all industries.
While currently representing less than 2% of new vehicle sales, EVs present both the biggest threat and opportunity to energy companies of all forms.
To date, two major barriers to EV adoption have been a lack of vehicle options and upfront price. Historically representing more than 50% of the cost of EVs, battery costs have fallen by more than 70% since 2008, and are forecast to fall another 60% by 2025. With cost declines in batteries, forecasters predict EVs to be cheaper than their ICE counterparts by 2025.
Toyota has outlined plans for all cars to have battery electric or hybrid electric options by 2025. Volkswagen has announced plans for all 300 models to have electric versions by 2030. Ford will be investing more than US$10 billion into electrification by 2022. Jaguar Land Rover will have all models with electric options as soon as 2021, and every new Volvo launched from 2019 will have an electric motor.
Oil and gas leaders must be ready
Because of these developments, oil and gas leaders must be ready to operate on a vastly different playing field and compete against much more tech-savvy competitors.
While the oil industry has been focusing on reducing internal cost structures and on shareholders returns – several regions throughout the world have been preparing for outright bans of ICE vehicles.
Major European cities including London and Paris, and major oil-importing countries such as India and China have started planning for the removal of ICE vehicles from the road.
In addition to the environmental incentive to remove ICE vehicles, oil-importing countries including the United States, China, India and Australia have security of supply reasons to encourage fuel switching. India imports more than 80% of its crude oil, while Australia depends on foreign supplies of crude and refined product for more than 90% of its oil use.
China is among the world’s largest importers of oil, and is encouraging consumers to switch to EVs by providing incentives for locally made, long range vehicles and charging infrastructure through 2020. China’s long-term goals are to reduce dependence on imported energy sources and improve air quality, and has set a target to limit oil dependence to 70% of demand.
The impact on the oil industry
In a new Deloitte survey of representatives from a range of industries, over a third of respondents say the impact of EVs on their business will be felt as soon as 2020. 80% say EVs will affect their business by or before 2030, just 12 years away.
The survey was conducted to gain an understanding of industry perspectives on EVs and their impact on business. The overwhelming finding is while oil and gas companies have a high level of awareness of the potential of EVs to disrupt their business models, they are not rising to this challenge to the same extent as other sectors.
When asked whether they see EVs as an opportunity or threat to their business, not only was the percentage of oil and gas respondents identifying EVs as an opportunity significantly lower than the overall percentage (50%) versus 65%, but a material percentage of oil and gas representatives saw EVs as a threat (20%).
By contrast, representatives from the mining sector unanimously see EVs as an opportunity. In interviews, mining executives commented that they view EVs as a means to reduce fuel and maintenance costs of ICE vehicles in their operations.
EV trials are already underway at companies operating fleets with predictable routes and centralised charging opportunities. Multiple resource companies are already trialling EVs to help not only with reducing carbon emissions, but also with reducing costs and increasing security of energy supply.
Oil and gas sector companies are evaluating the adoption of EVs in their own internal fleets, especially for light weight vehicles used in day-to-day operations, citing increased reliability, lower maintenance and the ability to charge them using their own power generation infrastructure.
While just over half of the respondents from oil and gas companies are preparing for EVs, this is a significantly lower proportion than in the transport services and mining sectors. This is likely due to transport being a more significant proportion of total costs in transport services and mining than in oil and gas and hence they are more active in looking for options to reduce these costs.
However, despite the possible threats, Australia oil and gas leader Bernadette Cullinane said the drive towards a low carbon future is creating new opportunities for the oil and gas sector. She said the shift from hydrocarbons to electrons is leading many in the oil and gas industry to fundamentally reimagine what the energy company of the future looks like.
“The EV opportunity is enormous – oil and gas operators must recognise this and should not ignore the rise of EVs. They should use their massive competitive advantage in the form of large capital reserves, great technological prowess and their skills in managing large and risky capital projects and operations to get out in front of the unfolding energy and transport revolution.”
Oil and gas executives expect EVs to disrupt their business models more than companies in other industry sectors, however, they:
- Don’t view EVs as an opportunity to the same extent other companies do.
- Are the only industry sector to view EVs as a threat to their business.
- Are less prepared for the shift to EVs than others.
- Are undertaking less activities to get ready for the shift as compared to others.
- Do not view the shift to EVs as good for their business.
- Are less convinced EVs will have an impact by or before 2030 as compared to companies in other sectors.
