06/09/2019

Some years back I visited one of the major automobile manufacturers with some investor clients of mine. We met the CTO of that particular company who asked us ‘what is the biggest mistake the automobile industry has made in the last century?’ Despite the varied responses from the audience, we were all surprised by his answer: ‘We never controlled the fuel value chain’ and to that he added ‘and we won’t make the same mistake with electric cars.’ And indeed, they will not, as many of the automobile manufacturers now endeavour to supply power to their EV customers. What makes it all the more interesting is that their biggest competitors targeting those EV customers are likely to be the oil companies, which begs the question whether we are seeing a breakdown in the century old relationship between Big Oil and Big Auto?

The interesting thing about the EV revolution is that the automobile manufacturer does not need the oil company. Rather what the auto manufacturer needs is the ability to connect to a power grid, already in place across much of the world. This in turn leads to some very exciting new business model possibilities for automobile manufacturers like Tesla that have the potential to offer customers full service packages comprising financing, servicing and insurance, as well as electricity. A full service package that they cannot offer with diesel or gasoline, not least because it is very difficult to hedge against future moves in the oil price. And more importantly because they do not control the oil value chain.

When it comes to electricity, the value chain is very different. Across most of the world, there is a power grid in place that can be easily accessed by power generators and customers. All that is needed is a grid connection and a meter. Oftentimes these grids are very big. For example, nearly all European countries are connected together to make one power system, meaning that it is possible to generate power in Finland and deliver it to Portugal. It is also possible to buy long-term power purchase agreements at fixed prices which offset fuel price risk. This has only become possible in recent years due to renewable technologies such as wind and solar which have no fuel costs.

This in turn begs the question what will the oil companies do to future-proof themselves? The answer is simple: Big Oil will go into natural gas and electricity. They will advocate for natural gas as the perfect fuel to provide electricity when the sun is not shining and the wind is not blowing. They will go into renewables. They will go into EV charging. They may even go into power generation. In fact, we are already seeing this in Europe. All of the major European players – Total, Shell, Repsol, Eni, BP and Equinor – are developing strategies in and around electricity and are promoting gas as the way to balance renewables. Most are involved in power trading and renewables development, while some have been very active in making acquisitions and investments in downstream electricity.

Shell, for instance, is not only the largest owner of EV chargers in Europe, but also has a retail electricity business called First Utility. Total has been even more aggressive. They are heavily invested in renewables, as well as owning the solar equipment manufacturer Sunpower and the battery producer Saft. They are now also owners of Direct Energy, the second biggest supplier of energy in France.

What all this means though is that the century long relationship between Big Oil and the automobile industry, which started with Rockefeller and Henry Ford, is finally breaking down and that can only be a good thing for the customer.