Rising global concerns and the need for clean technology as enumerated by 194 signatories to the Paris Agreement require that emission of carbon dioxide be gradually reduced to limit the global temperature increase below 2-degree Celsius. Viewed from a global and domestic perspective, over the longer term, this is bound to act as a disruptor for the oil and gas industry in general and oil refining and marketing companies in particular. The International Energy Agency (IEA) has projected the global oil demand to reach 105 million barrels per day (MBPD) by 2040, which is a 7.5% increase from the 97.7 MBPD level in 2017. Oil demand is likely to reach a saturation point in the next decade and a half, given the global environmental concerns and the steps taken by global auto majors to gradually shift to alternate and cleaner energy sources.
In order to achieve emission targets, overhauling the transport sector is a key imperative, as it accounts for about 23% of global greenhouse gas emissions (as per IEA). The global car fleet currently runs on about 19 MBPD of equivalent crude oil, which is one-fifth of the current crude oil consumption of 97.7 MBPD. In this regard, electric vehicles (EVs), both battery EVs and plug-in hybrid EVs, are seen as the silver lining, for they can help reduce carbon footprint, lower operating costs and are more energy-efficient. Globally, EV sales have already surpassed 1 million in numbers, up by 50% year-on-year in CY2017, supported by their growing familiarity, improvements in driving range, fall in battery prices, along with the availability of tax and other incentives.
Albeit, this is just 1% of global demand, it has the potential to grow by 40% per annum in the medium term. What would drive this growth? A major cost of EVs, which is the battery, has fallen to almost one-fourth—to about $208/kWh in CY2017 from $800/kWh in CY2011. This battery cost is expected to continue to fall to as low as $70/kWh by 2030. This will make EVs cost-competitive over the next decade—even as EVs are very expensive today and beyond the reach of a majority of retail customers. Further, strong incentives by countries/governments such as lower taxes and toll exemptions auger well for EV growth. Nonetheless, the main challenge to growth is the need to build adequate infrastructure for charging EVs, which is bound to take time.
As far as India is concerned, domestic refining and marketing companies are investing in brownfield and greenfield expansion of refineries to cater to the rising demand for petroleum products as the economy progresses. They are also looking over the horizon as to what will happen to their margins and profitability as the demand for EVs shows signs of picking up momentum in India, with various governmental initiatives encouraging institutional customers (state road transport organisations and government departments) to adopt EVs. Since auto fuels (diesel and petrol) form around 50% of total product volumes derived from every tonne of crude oil processed, any impact on demand of auto fuels could have a significant bearing on the demand growth of crude oil and gross refining margins of refineries.
Further, substitutes in the form of domestic gas and LNG could slow down the demand of other petroleum products like naphtha, furnace oil and LPG, which could put more pressure on profitability. Moreover, reduced project returns for new projects in the sector, in the absence of fiscal support, can be a deterrence even as existing players with their depreciated assets base remain better placed. While many of the above risks will play out over the next decade, greater diversification to petrochemicals and other forms of energy—including natural gas chain, EV infrastructure and renewable energy—will be imperative for Indian refining and marketing companies in order to mitigate the disruptive potential of EVs over the longer term.
Group Head, Corporate Sector Ratings, ICRA Ltd
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