Why energy companies are still investing gasoline in the age of the electric vehicle

Source: By Marissa Luck, Houston Chronicle • Posted: Thursday, August 1, 2019

Tucked away off a Houston highway and behind a tightly-secured check point, Royal Dutch Shell’s tree-lined campus is packed with hundreds of researchers working on the next technological breakthroughs that could transform how the Anglo-Dutch oil major powers the world economy through the energy transition.

As Shell’s largest research and development center, the 200-acre Houston campus has 1,500 employees and hundreds of contractors. They’re working on everything from formulating new biodiesel to advancing liquefied natural gas into transportation fuels. Their research also extends into something more tangible in the near term: how to improve gasoline.

Even as Shell opens hydrogen-fuel filling stations in California, invests millions of dollars in electric vehicle startups and develops biofuels, it is still pouring billions in research for advancing its core product, fossil fuels. Shell and other oil companies, such as Exxon Mobil and BP, are investing in clean technologies — and launching public relations campaigns to tout their initiatives — but their fortunes are still tied to traditional cars and the billions of people that drive them.

The vast majority of oil companies’ capital spending and research and development dollars continues to go into fossil fuel products and technologies, according to data from energy research groups. The sector as a whole invested $22 billion in low carbon technologies from 2010 to last year, according to an analysis done by CDP, a London research firm, but that represents only a small share of the industry’s spending — just 1.3 percent in 2018.

“It’s very interesting to see if these companies are putting their money where their mouth is,” said Luke Fletcher, analyst at CDP.

But Fletcher and other analysts said increasing investments in clean tech isn’t as simple as turning on a switch. Higher returns and ongoing demand for gasoline and diesel will keep investment flowing into fossil fuels for at least a couple of more decades, analysts said.

Sarina Arnold, fuel scientist at Shell’s Houston research center, noted that her colleagues are working on next generation fuels and clean energy as the world tries to make the transition to a no- or low-carbon economy.

“We are an energy company so we are constantly evolving and adapting to everything that comes in,” she said. “But what is important to realize is that obviously a lot the work that gets done here is to help that new development of the (internal) combustion engine be the best it can be.”

Boosting efficiency

Arnold spent the past five years leading a team of researchers in Houston developing Shell’s latest premium gasoline fuel, which became available in North American gas stations this summer. The fuel promises to reduce engine friction — a major source of wasted energy and wear in engines — while preventing a buildup of carbon deposits and corrosion, which can reduce the engine’s performance, leading to higher emissions and lower fuel efficiency.

Standing in a bright red lab coat inside the fuel lab, Arnold pointed to valves, pistons and other engine parts that were pulled from a battery of tests performed on the the new fuel. The parts pulled from engines using a standard premium gasoline product were caked with black carbon deposits that look like old dried mascara. The parts pulled from engines using Shell’s new fuel were visibly less worn and cleaner without the black carbon deposits. Shell says its new V-Power Nitro+ fuel removes about 70 percent of the carbon deposits left by traditional gasoline.

Arnold said Shell is responding to growing demand for fuel-efficient vehicles that can meet stricter environmental regulations. Innovations that increase fuel efficiency have changed how fuel interacts with the engine, requiring a change in chemistry to respond to the higher temperatures and higher pressures in many modern engines.

“One thing about the internal combustion engine is that has been improved so much over the years,” Arnold said. “As engines evolve and become more efficient there are more demands on the fuel, so the fuel formulation evolves alongside the engine development.”

Earlier this month, Exxon Mobil also unveiled a new premium gasoline fuel at its 11,500 stations nationally. Exxon also devotes significant resources to developing new types of gasoline products and each new premium grades of gasoline can take three to five years to develop, said Eric Carmichael, Americas fuels marketing manager for Exxon Mobil.

Electric vehicle adoption a ways off

While automakers such as Ford, Volkswagen and GM boost electric vehicle production, EVs still lag behind traditional cars. There were about 1.1 million electric cars on American roadways in last year, up 361,0000 from the previous year, according to the Paris-based International Energy Agency. But overall electric vehicles and plug-in hybrids still accounted for less than 2 percent of the U.S. auto market, according to the IEA.

“We put a lot of focus on time and effort around gasoline vehicles because still the majority of people who are on the road today are going to be in gasoline (powered car),” said Shannon Bryan, North America fuels manager at Shell.

The consultancy Boston Consulting Group estimates that roughly half of new cars sold will have some type of electric engine under their hood, including hybrids by 2030. The share of new car sales exclusively powered by batteries will be roughly 20 percent by 2030, according to the consulting firm.

The conventional internal combustion engine, however, will still account for roughly 75 percent to 80 percent of the North American car fleet, according to Boston Consulting Group. The firm expects electric vehicles won’t have a noticeable impact on fuel demand until about 2025 to 2027, said Ilshat Kharisov, managing director and partner at Boston Consulting Group’s Houston office.

As that demand begins to wane, the question for oil companies is how much should they continue investing in traditional fuels.

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“One of the most important strategic question s that the oil and gas industry is trying to answer is whether to keep their portfolio of businesses or diversify into power business or pursue step-out opportunities, like renewables,” Kharisov said.

In a January interview, Gretchen Watkins, Shell’s president of North American operations admitted that many new energy projects aren’t yet as profitable or lucrative as the company would like. She added that the company will have to see profits rise before investing more heavily in renewables.

Analysts say that’s a problem many energy companies face.

Valentina Kretzschmar, director of corporate research at the energy research firm at Wood Mackenzie, estimates that returns on investments in oil and gas projects are typically about 15 percent or more, roughly double what the returns companies see on renewable energy projects, which typically range from 6 to 7 percent.

Kretzschmar said that helps to explain why the top seven oil companies spent $11.5 billion acquiring new oil and gas assets between 2016 to 2018 , more than double what they spent acquiring renewable assets and other clean technologies in the same time period.

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“Oil and gas returns are still way higher than returns on renewable projects,”said Kretzschmar. “The European majors have been investing in a number of new technologies, but they’re still in the embryonic stages of this development. They’re trying to find part of the value chain that they can work with that suits them.”

At the Shell fuel lab in Houston, plans are underway for the next iteration of its premium gasoline product. But even as researchers work on new gasoline blends, fuels manager Shannon Bryan said there’s a shift at the company to think of itself as a not just a gasoline supplier but a “mobility retailer” — one that also can supply electric vehicle charging stations and alternative fuels.

“Our role is to make sure whatever you use for your vehicle transport we have a high quality offering to be able to go with that,” said Bryan, the North American fuels manager.