Oil and Gas

The Future Prospects of the Oil and Gas Industry… and Where EVs Come In

Recently, I wrote about the Permian Basin and how a lack of pipeline infrastructure is keeping crude oil stuck there. I also mentioned that the oil industry needs more storage in Cushing, Oklahoma.

But there’s even more to the story…

Oil companies, large and small, have a rapidly growing problem: electric vehicles.

EVs are the fastest-growing segment of the automotive industry. Nearly every vehicle manufacturer on the planet has plans to transition to EV production.

That’s not good for the sale of gasoline and diesel.

There’s no question that renewable energy and EVs are driving a massive disruption in the energy sector. I’ve been writing about this for nearly a decade, and it’s finally coming to pass.

Of course, there will always be a need for some oil and gas for those industries (airlines, plastics, etc.) that can’t do without them. But the reality is that 70% of all oil consumed in the U.S. is used for transportation. And 45%, or about 9 million barrels per day, is gobbled up by personal vehicles.

That number is going to rapidly shrink as the number of EVs in the U.S. increases. So is the ultimate peak of oil demand just around the corner?

The answer may be a little clearer when we take a look at what Big Oil is doing.

Big Oil’s Big Move

A number of oil companies see the writing on the wall with the rise in EV sales.

Perhaps no oil company is taking the energy transition more seriously than Royal Dutch Shell (NYSE: RDS-A), the world’s No. 2 oil explorer.

It formed a new division called Integrated Gas and New Energies. And if its new director, Maarten Wetselaar, has his way, Shell will become the largest power company in the world in a decade or so.

In a recent Bloomberg interview, he said, “We are not interested in the power business because we like what we saw in the last 20 years; we are interested because we think we like what we see in the next 20 years.”

Shell hopes to generate returns of 8% to 12% annually. That’s a lofty goal, especially in what has historically been a very low-margin business.

But the coming shift to electric transportation isn’t the only thing driving Shell’s decision.

In 2016, Norway was the first country to announce a ban on the sale of vehicles with internal combustion engines by 2025.

The country is home to only 5 million people, but it’s also home to a $1 trillion-plus sovereign wealth fund – the world’s largest. And that fund has big investments in most of the world’s publicly traded oil companies.

But maybe not for long.

Norway’s finance ministry told its fund managers to start getting rid of its oil and gas holdings.

Like Norway, governments across Europe are pressuring oil companies to recognize the shift away from oil and gas. They want to protect their investments.

Shell isn’t the only one listening. Other big companies are also trying to rapidly transition away from the oil and gas business.

BP (NYSE: BP) purchased the largest EV charging company in the U.K. a year ago.

Total SA (NYSE: TOT) has investments in solar and wind. It also wants to be an electricity provider, as evidenced by its purchase of French power company Direct Énergie.

Hold Your Horses

It all sounds great… until you look at the numbers.

Shell’s $1 billion-per-year investment in new energy solutions is less than 10% of its annual capital budget.

The efforts of Total and BP amount to little more than toe-dipping into uncharted waters. And investors are placing higher degrees of risk around the transition to clean energy.

Still, I like where Shell is going. With an annual dividend yield of 5.89%, it’s one of the best performers in the Big Oil sector.

Big Oil may be a good investment yet… if it can adapt early enough.

I think the transition will happen faster than anyone realizes.

Good investing,

Dave