How should the oil and gas industry respond to the emergence of a market for EVs?

June 5, 2019 Stephen George and Mark Routt

The often-proclaimed electric vehicle (EV) boom is turning out to be more of a gradual growth. Yet, despite the slow pace, we can expect a decrease in demand for oil and gas. Here, Stephen George and Mark Routt, KBC’s chief economists, discuss how the industry should respond to the emergence of the EV market in order to protect investments.

Wherever we look, there will be some uptake in electric vehicles (EVs) over the next decade. But the EV share of new car sales is still very small and thus barely moves the needle on the total global vehicle fleet. This is a trend that will take a long time to develop. While it cannot happen overnight, we should be aware of the emergence of this market and prepare for its impact on the oil and gas industry.

The next steps differ by geography. European refiners are likely to be the first to see demand slipping. Today Europe has a deficit of middle distillates of around 1 million bpd. This will already be starting to narrow as the aftershocks of ‘Dieselgate’ have seen European diesel car sales plunge in the past few years, mostly replaced by gasoline-powered ICEs.

US refiners will see less impact in the near term as much of that market is constrained by ‘range anxiety’ and the success of Tesla in growing the US market is unlikely to scale indefinitely. The focus on profitability and the refining of opportunity crudes will see US refiners continuing to push out fuels for export to Latin America, which is struggling to invest in its aging downstream infrastructure.

Asian and Middle Eastern refiners should see oil demand continue to grow despite a rise in EV sales in China and, if it occurs, in India. The key here is to monitor the rate of EV sales growth and production capacity, and to watch for any regional inflection points in oil product demand.

Globally, markets will readjust. Rising oil demand in Africa and Latin America will continue to support Atlantic Basin refiners. We see both markets as slow to embrace alternative vehicle technology. Similarly, there are few signs of evolution in the domestic Russian market—given a program of refinery upgrades that serves both domestic and export oil markets, the day of Russian EVs looks to be many years away.

We have argued that changes in transport fuel demand will come incrementally rather than suddenly. Oil and gas demand is less likely to slip away than it is to slow its inexorable growth. In this climate, refiners are best placed to connect existing assets into an adaptable value chain, rather than supporting major capital projects and making risky long-term investments.

We see an increasing case for strategic, intelligent value chain optimization projects that link assets and their interconnecting supply chains more strongly. Assets and their supply chains exist as holistic optimization systems through which the value of all molecules must be maximized, not just finished product streams.

An Asset Optimization (AO) campaign assures capital efficiency by developing the necessary operational flexibility and identifying strategic investments to avoid assets becoming stranded and a drag on achievement of return on capital employed (ROCE) targets.

Each asset is unique; so too are the value chains in which they exist. The asset optimization solutions adopted should incorporate a flexible approach to more efficiently address variable costs, optimization of all stages from raw material through intermediates to finished product, and being responsive and agile through Digitalization.

Our AO Maturity Model helps organizations to understand and accept where they are in their journey to excellence, from an asset optimization perspective, and then to plan and execute actions that assure future competitiveness. It entails designing an ambitious, yet realistic, destination and a clear roadmap to destination attainment.

Doing this will ensure that organizations are able to defend against the gradual decline in fuels markets. Evolutionary change can be hard to see, but the case for it should not be ignored. Regular AO assessments of the resilience of assets should be a foundation of your Operational Excellence program.

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