Electric vehicles likely to pose threat to oil companies: ICRA

The predicted shift away from fossil fuel driven vehicles to electric ones could pose a threat to oil refining and marketing companies, particularly the newer ones, according to a report by rating and research agency, ICRA.

While this is intuitive, the assessment is significant because India’s downstream oil companies do not see electric vehicles as a threat. Many of India’s refining majors have maintained that electric vehicles (EVs) are not an immediate threat as the high cost of EVs would make them unattractive.

However, ICRA’s analysis shows that costs of batteries are falling rapidly – from $800/kWhr in 2011 to $208 in 2017, and the expectation is that it could fall to $70 by 2030 or even earlier. ICRA believes that when battery costs fall below $100 per kWhr, and if crude oil prices are around $90 a barrel, EVs could take petrol and diesel-powered vehicles head on. “The high risk of electrifying the automobile fleet looms on the downstream players,” the ICRA report noted.

ICRA recognises the lack of infrastructure for charging vehicles – especially commercial vehicles that are used for longer hauls – as a “hurdle”. However, global companies, such as ABB, are keen on building the necessary infrastructure.

Impact on new projects

Nevertheless, while the existing refineries might be able to withstand the demand disruptions because their assets are well depreciated, the viability of greenfield refinery products would come under pressure in the long term, the agency cautions. It observes that Indian oil-refining and marketing companies are investing in brownfield and greenfield expansion of their refineries to satisfy the country’s growing demand.

“Electrification of vehicles in the country will not mean that downstream companies will go out of business as petroleum products are also demanded by other sectors such as airways and petrochemicals,” the report notes. However, diesel and petrol form around 50% of the total product volumes derived from every tonne of crude oil processed by a refinery, and a much higher share of 65% in terms of value derived from crude oil, it notes. Thus, any impact on demand of auto-fuels could have a significant bearing on the demand growth of crude oil and gross refining margins (GRMs) of refineries.