Is Big Oil’s Transportation Fuel Dominance Coming to an End?
“Oil’s dominant position in transportation fuels has proved impregnable for more than a century, but real threats abound now,” said Brent Giles, Lux research director and lead author of the report, Dealing with Threats to the Transportation Fuel Oil Industry.
The trillion-dollar oil industry, which gets 80 percent of its revenues from transportation fuels, needs to diversify to counter serious threats from alternative fuels and battery technologies, according to the report.
In an interview with Environmental Leader, Giles says the Paris climate deal, in which 195 nations committed to keep a global temperature rise this century to below 2 degrees Celsius, looks like the tipping point.
“We’re looking at the regulatory trends in the space and they’ve been pretty lacking in the past,” Giles said. “But after Paris we stared to think that maybe there was some real movement. We know the commitments the world made; we’re not really sure how that’s going to translate into action.”
Lux Research analysts created three adoption scenarios — low, medium and high — for gasoline and diesel substitutes through 2030. “None of these three scenarios is particularly rosy for the oil and gas industry,” Giles said.
Even in the case of moderate adoption, biofuels would be a $220 billion industry worth a 13 percent share of transportation fuels in 2030. Meanwhile electric vehicles are approaching an inflection point between 2035 and 2040 where half of all cars sold will be plug-ins. All told 31 percent of global vehicles will be running on alternative fuels in 2030, and the drop in demand will make typical oil production in the UK, Brazil, Canada and parts of the US uneconomical.
Big oil is really dependent on being the choice of fuel for transportation: jet fuels, diesel and gasoline,” Giles said. “We know the airline industry would very much like to get the focus off of it by adopting biofuels. They don’t want to be that 1 percent. Electric cars are truly becoming an option. And another interesting thing about the biofuels space is a lot of the new fuels are drop-in so they don’t require any new infrastructure.”
The report offers suggestions to help oil companies manage these risks and stay in business.
First, costs will need to go down. Upstream costs in 2014 were 25 percent to 30 percent below 2012 highs, largely driven by a collapse of demand. Costs can be lowered further over the next decade, thanks to advances like robotics, improved fracturing methods, lean engineering and treatment solutions for flowback water.
Giles says a number of startups in the upstream space can help oil companies cut costs. These include companies focused on robotics, increase automation and remote monitoring like Robotic Drilling Systems, BluHaptics Technology and Fluidion.
Others help oil producers target fracking operations more carefully so they don’t fracture unproductive rock. These include FracGeo, Intelligent Dots and Biota Technology.
Additionally, oil companies need to diversify, the report says. Natural gas and bio-derived natural gas offer opportunities. Bio-fuels are another area, as exemplified by advances made by Neste and Valero Energy.
“Neste, an oil refiner, has grown its renewables business from $370 million in 2010 to $2.7 billion in 2015 and is the global leader in renewable diesel,” Giles said. “And Valero Energy has diversified its biofuels business and moved beyond traditional ethanol. The company generated $3.4 billion in 2015.”
The report also says specialty chemicals could make a difference between profit and loss for oil majors, and steer them into an industry that is less vulnerable to regulatory limits. But oil companies need to position themselves well to manufacture unusual, high-value chemicals rather than just the commodities most produce today.
The transportation sector is the biggest contributor to US carbon dioxide emissions, outpacing even the power sector. If the US is to meet its commitments under the Paris agreement, the oil industry — and its carbon footprint — is bound to become a target.
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