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Electric Vehicle Growth in China set to shrink oil demand, devalue oil companies

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-Institutional investors should take prompt action and de-risk their oil-related assets

HONG KONG /PRNewswire/ — A new WWF-Hong Kong report reveals that electric vehicles (EVs) will become a cost-competitive alternative to internal combustion engine-powered vehicles (ICE vehicles) by the mid-2020s thanks to the evolution of the technology and the policy support by government for their uptake. This is set to have a huge impact on demand for oil, thus devaluing oil companies.  In view of this trend, WWF-Hong Kong believes that Asian institutional investors should take prompt action to establish a prudent carbon risk exposure policy, de-risk their oil and other fossil fuel-related assets in their investment portfolios, and hedge their risk where necessary.

Key findings and recommendations of WWF’s report on electric vehicles development
Key findings and recommendations of WWF’s report on electric vehicles development

This newly-published report, titled No Middle Road: The Growth of Electric Vehicles and their Impact on Oil, estimates that due to continued improvements in battery technology, the cost of EV batteries will drop and their performance will increase significantly. As a result of these developments, EVs are expected to become cheaper to own and operate than ICE vehicles by the mid-2020s, and that their uptake will be rapid. Currently there are 1.3 million EVs in use around the world. One-fourth of these can be found in China. With EV sales in China expected to double in 2016 to 700,000 units, the report forecasts that it will take between 10 and 20 years for EVs to reach 100 per cent penetration in China.

The report also estimates that by the late 2020s, the decline in the use of fossil fuels will lead to one million barrels of crude oil being displaced per day. This figure will further decline to between two and four million barrels per day by 2035 on the back of EV growth. This can directly affect the valuation of oil companies, who currently have oil assets listed on their balance sheets that may never be realized and therefore will need to be written down.

Jean-Marc Champagne, WWF-Hong Kong’s Climate Finance Advisor and a former investment banker remarked that, “One to four million barrels may appear to be a small figure when compared with the daily global demand for oil which currently stands at 95 million barrels. But when we consider the marginal changes in supply and demand and the speed of change, this one million drop is highly significant. As other large economies also embrace EV’s, the drop in oil demand will be even more significant.”

WWF-Hong Kong has identified 64 carbon-intensive companies in Asia, who are currently tying up approximately one trillion USD in capital. These companies and their investors are believed at greater risk from policy and technology evolutions which are part of the global response to climate change.

“Finance and capital markets have a significant role to play in tackling climate change and helping the world meet the requirements of the Paris Agreement.” explained Markus Shaw, Managing Director of the Shaw Family Office in Hong Kong. “Asset owners and asset managers need to better understand these risks and de-risk their holdings where necessary. Such an approach is prudent financially, and makes a positive contribution to the planet.”

According to the International Energy Agency’s forecast, if global carbon reductions are to be kept in check and the global temperature rise capped at 2 degree Celcius, by 2030 the global EV stock will need to be around 140 million vehicles. WWF estimates that by then, China will account for between 56 and 87 per cent of the global EV stock, creating a strong likelihood that global tailpipe emissions will be brought down to the target figure.

The Paris Agreement includes a commitment from global leaders to limit global warming to “well below 2 degree Celcius” and to pursue an even stricter 1.5 degree Celcius target. Ratified by more than 80 countries which account for more than 60 per cent of global greenhouse gas emissions, this historic global climate deal entered into force on 4 November.

According to climate scientists, if the world is going to keep temperature rises to below 2 degree Celcius, then 80 per cent of known fossil fuel reserves will need to stay in the ground. WWF believes that the world needs to make substantial new investments in low carbon industries, and at the same time ensure that a major reduction in capital flows to carbon intensive industries is made.

The report can be downloaded here: http://wwf.hk/nomiddleroad

Photo – http://photos.prnasia.com/prnh/20161212/8521608111

Source: WWF-Hong Kong

Written by asiafreshnews

December 13, 2016 at 10:26 am

Posted in Uncategorized

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