BNP Paribas Says The Party Is Over For Oil Companies
Does it seem to you as though the world is poised at the precipice of a major realignment of traditional thinking? A Volkswagen executive this week said electric cars will reach price parity with conventional cars in the near future, something that seemed nearly impossible a few years ago. Now a new report entitled Wells, Wires, And Wheels from French investment bank BNP Paribas comes with this stunning announcement — “We conclude that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors.”
The report continues with a warning for European utilities. “If all of this sounds far-fetched, then the speed with which the competitive landscape of the European utility industry has been reshaped over the last decade by the rollout of wind and solar power — and the billions of euros of fossil-fuel generation assets that this has stranded — should be a flashing red light on the oil industry’s dashboard.”
BNP Paribas is the world’s 8th largest bank in terms of total assets. The lead author of the report is Mark Lewis. Before joining BNP Paribas in January, he was head of research at the Carbon Tracker Initiative, head of European Utilities Research at Barclays, chief energy economist at Kepler Cheuvreux and head of energy research at Deutsche Bank.
The report introduces a new concept called Energy Return on Capital Invested or EROCI, which allows a comparison of the energy yielded from a given level of investment in different energy sources. Its primary thrust is taking a look at the transportation sector, although its findings apply to all sectors in which fossil fuels are a significant factor.
It is not our intention to reproduce the complete report here but rather to focus on its conclusions, which are breathtaking. Please feel free to browse the complete report at the link above.
The report says, “We define net energy as the amount of energy that does useful work after taking in to account all energy-transportation and energy-conversion costs and losses. What we are most interested in is how much a given capital outlay on oil and renewables translates into useful or propulsive energy at the wheels: in other words, for a given capital outlay, how much mobility can you buy?”
Here’s one example of the shocking news contained in the report: “We calculate that for the same outlay on these different energy sources (wind and solar), oil would have to trade at $9/bbl to yield as much useful energy for gasoline-fueled long distance vehicles as offshore wind would yield in tandem with EVs, $10/bbl for as much useful energy as onshore wind in tandem with EVs, and $10/bbl for as much as useful energy as solar-PV in tandem with EVs.”
In other words, oil producers must be able to find a way to make money at $10 a barrel or less in order to compete with EVs powered by renewables. For diesel powered vehicles, which are more efficient that gasoline powered vehicles, the numbers are between $17 – $19 per barrel.
The Oil Incumbency Advantage
The report notes that oil has a 100-year head start on renewables. “The oil industry today enjoys a massive scale advantage over wind and solar of several orders of magnitude — oil supplied 33% of global energy in 2018 compared with only 3% from wind and solar. This scale advantage over wind and solar gives oil the further advantages of speed and convenience: the oil industry is so massive that the amounts that can be purchased on the spot market can provide very large and effectively instantaneous flows of energy.”
But time is not on the side of the oil companies. The report indicates they must continue to explore new sources of petroleum constantly and need to replace about 10% of their resources every year. It is getting harder to find new sources of oil and and the costs of production are going up every year.
The Economic Advantage Of Renewables
To balance out that incumbency advantage, the report “considers how much useful energy can be delivered from a $100bn outlay on the spot market today, whereas our EROCI analysis for wind and solar looks at how much energy can be delivered from $100bn spent on new projects. Even allowing for this structural advantage enjoyed by oil in terms of flow rates, however, we think the economics of renewables are already impossible for oil to compete with when looked at over the cycle.” (Emphasis added.)
It assumes that $100 billion invested in new oil production in 2018 would result in 240 terawatts of net energy. By comparison, the same $100 billion would result in 3.9 times that amount of net energy if invested in onshore wind, 3.4 times as much if invested in offshore wind, and 4.7 times if invested in solar.
Conclusion
There is a great deal of discussion about assumptions and methodology, which you are welcome to peruse at your leisure. The bottom line for the authors of the study is this: “In short, the economics of renewables in tandem with EVs as a competitor to oil as a road-transportation fuel are becoming irresistible. The implications for both policy-makers and the oil majors are very far reaching.”
And of course, all of this emphasis on economics leaves out what may ultimately may be the most important part of the discussion, the non-monetary considerations that are arguably even more important — reduced carbon emissions leading to better human health and a sustainable environment for all living things.
But business is business. Intangibles may factor in somewhere but the economic bottom line is what today’s version of weaponized capitalism values most. Which begs the question, if you are in the business of selling energy and renewables allow you to create about 4 times more of your stock in trade than investing in oil, why wouldn’t you?
[Correction: An earlier version of this story misspelled the name of the bank, and has now been edited to reflect the correct spelling, BNP Paribas.]
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