by Bernadette Cullinane, Australian Oil and Gas Leader and Global LNG Leader; and Steve McGill, Energy Specialist, Deloitte Australia
Around the world, a decisive transition is underway – the transition from the age of easy oil and automotive transport in the form of the internal combustion engine, to a renewable energy-driven electrified transport future. Alarmingly, new research suggests that the energy industry is less prepared for the shift to electric vehicles than other industries – in this article, Bernadette Cullinane and Steve McGill outline the steps we need to take to take advantage of the opportunities electric vehicles have to offer.
Deloitte has been closely studying and commenting on the transformation of the energy and transport industries for the last few years, and we now describe this as the transition from the ICE (internal combustion engine) age to the volt age – the age of renewable energy, battery storage and electric vehicles.
Undeniably, the growth of renewables, battery storage and electric vehicles will have an impact on the oil, gas and LNG industries.
This linkage is not well understood yet, but it has the potential to change the game dramatically in many ways – by reducing demand for petroleum products such as petrol and diesel, and by creating new, unforeseen risks for LNG.
The home of LNG consumption – and electric vehicles
The volt age may unfold in a large-scale way in Asia, home to 60 per cent of the world’s population, and the demand centre for more than 65 per cent of worldwide LNG demand¹. Asia is also the source of supply for more than 85 per cent of battery manufacturing capacity² and 98 per cent of solar photovoltaic production³.
The growth rates and cost reductions associated with these technologies are exponential, and Asia will drive this transition.
The transition to the electrified future, and the simultaneous transformation of transport and energy industries, will in turn reshape the global LNG industry.
LNG producers cannot afford to wait until they have a large competitor before they act. Action is required now to be ready for the energy transformation that is already underway.
Electrification is disrupting energy and transport around the world Electric vehicle opportunities and new applications are emerging daily, and are appearing in many different forms – from mines to trucking; and from Southern California to Beijing, electrification of transport is appearing in all sectors.
There are many advantages and compounding benefits of electricity – improved automation, less maintenance, increased ability to digitise and significantly less noise – enabling truck deliveries at night, regenerative braking for mine haul trucks carrying loads downhill and lower fuel costs.
China is leading the way, with a massive push by the government to clean up air quality and improve the environment, which is driving the development of large-scale manufacturing of renewable energy in the form of solar photovoltaic panels, electric vehicles and lithium-ion battery cells.
The change is coming and it is coming fast
All major auto manufacturers and several technology companies are pushing into electric vehicles. Autonomous electric vehicles, led by tech companies like Google and their self-driving technology development company WAYMO, are already on the road, having driven more than four million miles in the US 4. Autonomous vehicles could amplify the impact of electric vehicles.
Major auto manufacturers are making big plans for electric vehicles, and are scaling up production rapidly:
- Volvo has announced all new models will have an electric option starting next year
- By 2021, Hyundai plans to have 31 electric vehicle or fuel cell vehicle models on the road, and Jaguar Land Rover plans to have all models with an electric option
- By 2025, Bloomberg New Energy Finance expects electric vehicles and ICE vehicles to be at capital cost parity
- By 2025, BMW is expected to have 25 electric vehicles in their line-up, Toyota will be providing a hybrid or battery option for all models, and VW will have 50 electric vehicles available
- Looking over the horizon, Volkswagen is expected to have all 300 models with an electric option5
While conventional automobile players are making big plans, many emerging companies, particularly those from China, are moving ahead fast and leading the electrification push:
- BYD, already one of the largest battery suppliers in the world, will have a four-fold increase in battery production capacity by 2020
- BAIC, currently the world’s second largest electric vehicle maker, aims to be 100 per cent electric by 2025
- Tesla is challenging the trucking industry, previously thought of to be out of scope for electrification, with its Tesla Semi on tour across the US6
Oil and gas companies are not well prepared for the EV disruption
To understand the perspectives of oil and gas executives on the topic of electric vehicles, in January to April 2018, Deloitte conducted a survey of 100 industry executives on the impact of electric vehicles on their business.
We compared the responses of oil and gas executives to executives from other companies, and found nearly 70 per cent of oil and gas executives expect electric vehicles to disrupt their business, but they:
- Are less inclined to view EVs as an opportunity
- Are not preparing for this shift as well as executives from other industries reported they are
- View the shift as positive, unlike other executives
- Believe the impact of EVs will take longer than executives from other industries7
However, our research shows given how fast the disruption is occurring, oil, gas and LNG producers must act now to be ready.
The transformation has begun and the speed is accelerating
There have been significant milestones achieved on the path to transformation of the energy industry including:
- The 2015 Paris Climate Accord, which set the global framework for objectives and the imperative to act
- Recent cost declines in wind, solar and storage, resulting in a new era of grid-parity and cost competitiveness that has seen renewable energy become the cheapest source of new power generation capacity
- Recent shareholder pressure on carbon intensive industries such as mining brought about corporate decarbonisation targets, divestment of carbon intensive assets, and challenges around social license to operate
- New reporting standards like the Task Force on Climate-Related Financial Disclosures (TCFD), which while voluntary, is becoming standard across the resources industry
- Increasingly, major conventional energy companies are undertaking transitional activities including market entries into electricity generation and retail and the addition of EV charging to fuel stations
These actions are signposts that the road ahead is changing.
This is not the first time energy majors have invested in renewable and alternative energies; however, what is different this time around is that renewable energy is now cost-competitive and able to stand up on its own.
The volt age is here
Transformation of the energy industry has begun and the time to act is now. To participate fully in the electrified energy future, oil, gas and LNG companies should not ignore the transition to electrification and renewable energy, and should not discount it.
With great change comes great opportunity, but oil, gas and LNG companies must prepare for the future by building new business models around integrating LNG, electric transport, renewable energy and battery storage to provide to customers, stakeholders and investors low-carbon and cost-competitive energy solutions.
¹ IGU, 2018
² IEA, 2017
³ NREL, 2018
4 WAYMO, 2017
5 Company announcements, Bloomberg NEF 2017
6 Company announcements, Deloitte research
7 Deloitte research