Most big oil companies are considering how they can change their focus from oil to gas and renewables. Leading the way is French oil major Total, writes Fereidoon Sioshansi, publisher of newsletter EEnergy Informer. 

Oil and water, as everyone knows, do not mix – and until now – the same was true of oil and electricity. The two industries have different cultures and are run by different types of people.

Over time, however, three things began to change: First was the rise of natural gas – increasingly used for power generation – within what was traditionally oil-dominated business. Second – a more recent phenomenon – is the rise of renewables also playing a growing role in power generation, especially in countries and states with mandatory carbon-reduction and/or rising renewable targets.

All oil majors, for example, have come to recognize the growing role of natural gas in their portfolios. But the threat posed by the expected rise of EVs and renewables is yet to be acknowledged by most

A third reason, at least for oil majors who are forward-looking, is the realization that the continued growth in demand for oil, which has historically been driven by the transport sector, may be coming to an end due to the expected rise of electric vehicles (EVs).

It should, therefore, come as no surprise that virtually all oil majors have been internalizing what may be the potential impacts of these 3 trends on their long-term business prospects and whether the time has arrived to adjust how they invest and plan for the future.

Aggressively expanding

The change in focus has been in the making for some time. All oil majors, for example, have come to recognize the growing role of natural gas – now extensively used for power generation the world over – in their portfolios. But the threat posed by the expected rise of EVs and renewables is yet to be acknowledged by most, at least publicly.

In April 2018, the French oil major Total announced that it was not only aggressively expanding its footprint into gas and renewables but went a step further by acquiring an electricity distribution company.

When the CEO of an oil company publicly admits that he is driving an electric car, you know you have reached a tipping point

During the CERAWeek conference in Houston, Texas in March 2018, Patrick Pouyanné, Total’s CEO, revealed that Total was pivoting to become a major natural gas and electricity company as it moves towards lower carbon energy sources. Perhaps people listening to his speech did not read between the lines when he said instead of being an oil-and-gas company, “maybe we will become … a gas-and-oil company,” as reported in the April 2018 issue of this newsletter.

He then stunned many in the audience when he revealed that he was an EV driver. When the CEO of an oil company publicly admits that he is driving an electric car, you know you have reached a tipping point. Mr. Pouyanné is simply the latest convert. He has discovered what many have been saying for some time.

Incredibly inefficient

The internal combustion engine (ICE), which pretty much dominates our global transportation system, is incredibly inefficient by design. Which explains why being in oil business has been so consistently profitable for so long.

According to the Rocky Mountain Institute (RMI), on average, only 0.5% of the fuel consumed by a typical ICE vehicle is used to move the driver with the rest wasted as unwanted heat and in getting the fuel to the tank. Perhaps not 0.5%, maybe it is 5% or 15% – but you get the point. Just open the hood and take a look inside the engine. Most of what you see – the belts, the radiator, the water pump – are there to keep the engine from melting down – which is what happens if any of them fails.

Other parts including the exhaust, the muffler and the catalytic converter are designed to silence the noise of the explosions taking place within the engine and to capture some of the pollutants that come out of the exhaust. Not a pretty picture when you think about it.

Does it make sense for an oil-and-gas or gas-and-oil company to get into electricity? The answer is a resounding yes

Having seen the light at the end of the tunnel, in April 2018 Pouyanné surprised many within and outside his own company when he announced that Total was expanding into the electricity business by acquiring ¾th of the French energy retailer Direct Énergie for €1.4 billion ($1.7 b). He characterized the transaction as a “friendly” deal and an integral part of Total’s strategy “to expand along the entire gas-electricity value chain and to develop low-carbon energies,” adding that the move was entirely “in line with our ambition to become a responsible energy major” – whatever that means.

Total apparently plans to make a tender offer for the rest of Direct Énergie at the same price. The move surprised many – and not just in the oil but electricity business, making Total the third player competing against majority government-owned Electricite de France (EDF) and not far behind Engie.

The deal would give Total roughly 3 million customers in France. Pouyanné has said he is targeting 6 million in France and another 1 million in Belgium by 2022.

Perfect sense

Does it make sense for an oil-and-gas or gas-and-oil company to get into electricity? The answer is a resounding yes. According to Pouyanné this gives Total a growing market for its expanding gas portfolio. Moreover, it offers an outlet as it continues to invest in renewables, accelerating the company’s expanding renewable production.

Total has been investing in solar and wind including the acquisition of EREN RE in Sept 2017 with the aim of reaching a renewable generation portfolio of 5 GW within 5 years

Total has been investing in solar and wind including the acquisition of EREN RE in Sept 2017 with the aim of reaching a renewable generation portfolio of 5 GW within 5 years. [Total earlier acquired solar PV producer SunPower in 2011 and battery producer Saft Groupe in 2016, editor.] Direct Énergie currently has a portfolio of 1.35 GW of combined gas and renewable generating capacity. The pieces not only fit together but make perfect sense.

But that is not the end of Pouyanné’s strategy. He is clearly looking beyond oil – or at least hedging against a future where oil demand may peak, plateau and begin its eventual decline as increasing numbers of cars, buses and delivery trucks go electric over the next 2 decades – as broadly expected. As noted by the Financial Times reporting on the recent acquisition, this latest in a string of power sector acquisitions by Total is also part of its “long-term hedge against the threat posed to oil demand by the rise of electric vehicles.”

While there are a wide range of predictions on how fast the switch to electric transportation will be, there are suggestions that by 2025 as many as 25 million EVs will be sold per annum as more people follow Total’s CEO by driving an EV.

Pouyanné recently told Bloomberg, “I’m convinced that, in a big city, we’ll have plenty of electric cars in 10 to 15 years.” Not only will an increasing number of cars sold globally be electric, but many of them will be autonomous as new transportation models emerge based on increased sharing and pooling. The end of the internal combustion engine (ICE) is likely to be followed by the end of private car ownership and – in time – human drivers. It is a matter of time.

B. C. Forbes is famously quoted as saying: “If you don’t drive your business, you will be driven out of business.” All indications are that Total is taking steps to stay in business.

Will EVs Follow PVs?

Everyone knows what happened to the penetration of solar PVs with a continued drop in prices. But what about the price of batteries and electric vehicles (EVs)? Will they fall as dramatically, and persistently as solar PV prices have? And if so, what will be the impact on the penetration of EVs globally, say over the next 2 decades? The answer to this question will determine, to a large extent, how fast and how soon they move from a niche product to mainstream.

If the price path of EVs follows that of PVs, not only do they get propelled to mainstream, but increasingly gain foothold in rapidly growing developing markets where much of the growth is projected to take place – as happened with the PVs. The biggest market, not surprisingly, is in China with 131 GW of installed solar capacity by end of 2017 while India is #6 with 18 GW, ahead of the UK, France, Australia or Spain and gaining ground.

In its latest snapshot of the global PV market – the Photovoltaic Power Systems Program – the International Energy Agency (IEA) suggests that EVs may in fact be on a similar path as the PVs while acknowledging that the linkage between the two is “not yet straightforward.”

The IEA, however, points out that cheaper and more abundant solar PVs has already given rise to solar energy, which in turn, is likely to lead to cheaper storage technologies, including batteries for electric vehicles. One thing clearly leads to another.

According to the IEA, “To charge electric vehicles during work hours, the need for additional energy sources will become a key, while concepts such as virtual self-consumption will rapidly get the favors of many.”

“The accelerated development of the EV market could be compared to the development of the PV market, with similar penetrations.”

“With more than 1.2 million EVs sold in 2017 (or 1.5% of the global car market), the penetration of this industry could reach the same level as the PV penetration in the power sector in the coming years and then evolve even faster.”

A report by the Electric Power Research Institute (EPRI) looking at the future of electrification and its impact on electricity demand concludes that electricity’s role in the US continues to grow, projecting a range from 32% to 47% of final energy demand by 2050. One of the reasons for the growth, needless to say, is the projected growth of EVs, replacing oil in the transport sector. Similar trends can be expected elsewhere around the world as EVs move mainstream.

EPRI, in part, notes that, “In the past 70 years, electricity has grown from 3% of final energy in the US — that is how energy is ultimately consumed — to 21% today. But electric utilities have struggled with stagnant or declining load growth for years, limiting sales and their ability to spread around their fixed costs. They are turning to electric vehicles as a way to increase load, which is the most high-profile electrification shift happening. But there are a range of technologies that could be shifted across the economy, including heat pumps for space and water heating, electric technologies in industry, and heavy transportation.”

EPRI acknowledges that while today an EV may cost more than one with an internal combustion engine (ICE), they already have lower operating costs. Once their acquisition cost reaches parity with ICEs and a more convenient charging infrastructure emerges, few drivers would want to buy yesterday’s technology.

The conversion of the transport sector to electric – increasingly supplied by renewable energy resources – and that of all cars to autonomous mode is pretty much accepted as conventional wisdom – the debate is primarily focused on the pace of change and the ultimate scenario that may emerge once the conversion is accomplished. Not everyone, of course, agrees that the end of oil is near or in fact ever possible.

The EPRI report examines opportunities and challenges of electrification – not just in the transport sector – with different environmental policies and technological assumptions including a scenario with a carbon tax of $15/ton of CO2 starting in 2020 and a “transformation scenario” in which the carbon tax starts at $50/ton CO2. Under each scenario, the report shows broad electrification and technology advances that include efficiency gains along with lower emissions and energy use – not surprising.

Editor’s Note

Fereidoon Sioshansi is president of Menlo Energy Economics, a consultancy based in San Francisco, CA and editor/publisher of EEnergy Informer, a monthly newsletter with international circulation. This article was first published in the Junel 2018 edition of EEnergy Informer and is republished here with permission.

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