New research conducted by BNP Paribas Asset Management into the economics of competing investments into either the oil industry or renewables might start more alarm bells ringing for those investing online in oil and gas companies and utilities. Until now, the oil industry has argued that the profitability gap between investing in upstream oil projects compared to renewables left little incentive for significant capital to be directed towards renewables. But the BNP study suggests that argument may now be approaching the end of its shelf life.
One of the big ‘business’ advantages oil has over renewables is the pace of returns. Once a new oil field is operating, it provides a large, instant flow of energy. The oil industry has also had significant advantages of scale. But again, the BNP Paribas research posits that this is an advantage that can be put down to ‘incumbency’ and that is now with a limited timescale.
Investment in renewables is almost 100% concentrated on the upfront cost of buying and installing equipment. This expense is significant but has been dropping quickly in recent years. And once that initial investment has been made, renewables produce energy over an overage operating life of 25 years at a short-run margin cost that is effectively zero.
Based on the changing cost to return balance between the renewables and oil industries, the BNP whitepaper, ‘Well, Wires and Wheels – EROCI and the Tough Road Ahead for Oil’, assessed the return on investment that $100 billion invested in oil or renewables would deliver. The methodology looked at the energy both would produce over 25 years if used to power specifically cars and other light vehicles.
The results didn’t look good for oil. The BNP analysts found that the same $100 billion outlay into both oil and renewables, if made today, would see the renewables investment produce 6 to 7 times more ‘useful energy’ for an electric vehicle than the oil would for a petrol vehicle. If the car were diesel, the renewables investment would still return 3 to 4 times more ‘useful energy’ to power an EV.
Those calculations are based on oil at an average price of $60 a barrel. The research calculated “the long-term break-even oil price for gasoline to remain competitive as a source of mobility is USD 9 – 10/barrel, and for diesel USD 17 – 19/barrel”.
The study identified that around 40% of current oil demand powers technology ‘susceptible to easy electrification’. To compete with renewable energy sources at current costs, the analysts forecast that new long-term oil projects are not viable if break-even costs are much above $20 a barrel. In a summary of the research’s finding published in The Financial Times, Mark Lewis, BNP Paribas Global Head of Sustainability Research, concludes:
“The economics of energy are now on the side of the angels. This should be a flashing red light on the oil industry’s dashboard”.