Big Oil taps into electric era

Automakers are trumpeting their long-term intentions to forsake gasoline engines for electric motors. Big Oil hears the message and is taking halting steps to adjust its business model to survive in an era when gasoline sales could start drying up.

Full-electric and plug-in hybrid vehicles are projected to account for more than half of global light-vehicle sales, or more than 60 million vehicles, by 2040, according to Bloomberg New Energy Finance. That poses an existential threat to today's vehicle fuel providers.

As a hedge, the oil industry is making early and relatively inexpensive investments in electrified-vehicle charging infrastructure and technology to get ahead of potential disruption.

Royal Dutch Shell in January said it had agreed to buy Greenlots, a Los Angeles EV charging and energy management company.

The Greenlots acquisition "clearly signals Shell's entry into the U.S. EV charging market," the energy conglomerate said in emailed responses to questions from Automotive News.

"The U.S. is a core market," Shell said. "It offers potential for a fully integrated value chain — from generation, to power marketing, and end-use."

The oil giant is likely to make more such deals. Shell's New Energies business, which is handling the Greenlots acquisition, said it plans to spend $1 billion to $2 billion a year through 2020 on commercial opportunities, including electric vehicle charging infrastructure.

"A mosaic of different fuels will be needed to meet growing demand for transport in a low-carbon energy future," Shell said.

Shell is not alone in its EV infrastructure ambitions. Competitor Chevron is an investor in ChargePoint, a major charging network provider in the U.S. Meanwhile, BP is gobbling up charging networks in Europe.

For oil companies, EV charging infrastructure investments are like a "call option," said Salim Morsy, advanced transportation analyst with Bloomberg New Energy Finance.

"It's a pretty affordable way to hedge their downstream business," Morsy said. "If electric vehicles do become a reality over the medium term, [the energy companies] will have had an entry point that's affordable and protects them from potential erosion in their core business for fossil-fuel marketing and distribution."

The industry's move to electrification is a one-way street, said John Gartner, director of transportation at Navigant Research.

"It's not like 25 years from now, oil is going to make a comeback," Gartner said. "So why not get involved and be aware of the new technology?"

EV infrastructure investment is also a real-estate play.

Major oil companies have national networks of service stations along transportation corridors that could easily accommodate electric chargers.

"We believe ... acquiring Greenlots, is a step towards ensuring customers can access a range of refueling choices over the coming decades, as new technologies evolve to co-exist with traditional transport fuels," Shell said.

The world's automakers have revealed plans to invest at least $90 billion to electrify their fleets, according to Reuters. That has gotten the attention of oil industry boardrooms.

The single biggest use of oil is transportation, and the largest share of that segment is fuel for cars and trucks, said Jim Burkhard, who heads oil, energy and mobility research at IHS Markit.

EVs are expected to displace 5 percent, or about 5 million to 6 million barrels a day, of oil by 2040, according to research firm Wood Mackenzie.

Big Oil's interest in EV charging infrastructure is recognition that over the next 15 years the EV market will keep growing and gradually edge out internal combustion-powered vehicles, said Ben Kellison, Wood Mackenzie's director of grid research.

"While the oil companies are not expecting peak oil for more than a decade, more and more of the transit-related fuel is going to be electricity," Kellison said. "So getting a piece of that now is something they are interested in."

Oil companies' investments in EV charging infrastructure are more about learning than revenue generation. "This isn't about generating a profit tomorrow, or even next year," Burkhard said.

For now, low use and high cost make owning and operating EV charging stations in the U.S. mostly unprofitable. Capital requirements are extremely high, especially for fast charging. Chargers can cost $60,000 to $150,000, according to Morsy, the Bloomberg analyst.

There's not enough volume over which to spread the high fixed costs. Typically, a public fast-charging station will handle one to three charging sessions a day, Morsy said.

While EV charging hardware is a high-cost, low-margin business, the network management software and services business is more profitable.

That is one reason Shell was interested in Greenlots, whose subscription-based software platform helps network operators such as Electrify America monitor their charging stations efficiently, set pricing and manage the electricity load. The platform also helps EV drivers find chargers and pay for the sessions.

"Shell liked our value play because we weren't just making hardware, which quickly can be commoditized," Greenlots Senior Vice President Lin-Zhuang Khoo told Automotive News. "Our software serves as a control system to help network operators more efficiently manage their charging hardware."

Greenlots could help Shell build and operate its own charging network, while opening a revenue stream in licensing high-margin software.

The oil company is "investing in the electricity upstream business via bets on wind, solar and other renewables," Khoo said. "In my opinion, the Greenlots acquisition is a downstream play toward electricity delivery to capture a larger part of the value stream."

Much of Big Oil's interest in EV charging infrastructure has been confined to Europe, where the economics of the business are more attractive.

BP last year spent $170 million to buy British EV charging company Chargemaster.

Shell has acquired NewMotion, a Dutch EV charging provider, and First Utility, a British power provider. Shell also partnered with Ionity — a joint venture of BMW Group, Daimler, Ford Motor Co. and Volkswagen Group — to install chargers at its service stations in 10 European countries.

EV adoption in Europe has been faster than in the U.S., driven by regulation and stringent greenhouse-gas emission standards. Electrified vehicles accounted for 4 percent of new-vehicle sales in Europe in the fourth quarter, vs. 3 percent in the U.S., Morsy said.

Major European cities, including Paris and London, are considering banning gasoline-fueled vehicles or imposing heavy fees on their use in congested downtowns.

The price difference between gasoline and electricity in Europe also drives EV adoption and investment in the sector.

Gasoline "taxes are far higher in Europe than in the U.S." Navigant's Gartner said, "The price delta between electricity and liquid fuels is higher in Europe than it is in the U.S., where we haven't been increasing gas taxes in a while."

In the U.K., gasoline costs about $6 per gallon, compared with less than $3 per gallon in the U.S., according to Bloomberg New Energy Finance.

To make money on EV charging, operators typically must charge 50 to 60 cents per kilowatt-hour, Morsy said. That's more than an equivalent amount of gasoline costs in the U.S.

While the U.S. is off to a slow start in adopting EVs, analysts suggest that's going to change as battery and other costs tumble. The price of EV batteries, now less than $200 per kilowatt-hour, is declining 18 percent with every doubling of manufactured volume, Morsy said.

"Over the next five to seven years, on an unsubsidized basis, the upfront costs of electric vehicles in most markets will be competitive with internal combustion engine vehicles," he said. "There will no longer be this kind of subsidy or regulatory requirement to push [EV] supply into the market."

As EVs become more affordable and prevalent, the need and use of public EV charging infrastructure will rise. The number of public EV chargers in North America is expected to grow from 85,000 at the end of 2018 to more than 876,000 in 2028, according to Wood Mackenzie Power & Renewables.

"With EV penetration around 1 percent nationally, we are still in the early years," Khoo said. "The market still needs 10 to 20 times more infrastructure to meet projected demand from EVs."

In the grab for EV infrastructure, oil companies face a formidable competitor: electric utilities.

U.S. electric utilities account for nearly $2.5 billion in proposed or approved investment in EV infrastructure, according to Wood Mackenzie. These funds, if approved, will allow utilities to indirectly invest and partner with network providers and other stakeholders to get stations up and running, but will ultimately leave them owning less then 10 percent of U.S. charging stations through 2025.

For power companies, investing in EV charging is an opportunity to capitalize on what likely will be a surge in electricity demand.

As the building industry and consumers become more energy efficient, EVs offer a "load growth" opportunity for utilities, Gartner said.

Navigant says demand from EVs in 2027 will represent an additional 8 percent load on the electric grid.

But utilities and Big Oil are expected to take different approaches to investing in EV charging infrastructure.

U.S. utilities are unlikely to manage or acquire national or regional charging networks. Instead, they most often offer incentives and assist network providers and businesses with equipment and services to connect public and workplace chargers to the grid.

"We don't see utilities getting involved in the station ownership and consumer relationship," Kellison said. "They are not looking to be the charging provider across their territory."
Regulated utilities can't put charging infrastructure beyond their service territory and are bound by rules on how much they can invest within their territory, Gartner said.

"Oil companies are international in scope," he said, "so that's why they have a broader geographic strategy."