Is Shell's Shocking Revelation Good News for Tesla?

fool.com ^ | October 13, 2013 | Tyler Crowe

[ckilmer]

Cats and dogs. Oil and water. Name any cliche about polar opposites and they have probably been used to compare the oil industry and electric vehicles. So, it seems almost impossible that an oil company would make the claim that electric vehicles will be the predominant transportation fuel, but Royal Dutch Shell (NYSE: RDS-A ) is making that very claim.

Is Shell contemplating going into a new business? Are they playing some kind of Jedi mind trick on us?

Let's take a look at some of the things that Shell is saying and see if it is making a compelling case to invest in Tesla Motors (NASDAQ: TSLA ) and the rest of the electric vehicle industry.

Admitting defeat, sort of... This week Shell released what it calls the New Lens Scenarios, a report on what it sees as the future of energy over the next 50 years. Much of the report reads like you would expect from an oil company, but there were some very interesting tidbits that seem to go against what you would expect from a company like Shell. Probably the most glaring example was this little chart.


Source: Royal Dutch Shell

No, you don't need to check your glasses prescription: Shell is saying the rise in the use of natural gas, electricity, and hydrogen as transportation fuels will result in oil having a meager 22% of the global transportation market by 2060. There are lots of factors that went into this prediction, such as increased urbanization, more efficient urban planning, and regulations on CO2 emissions. But the people at Shell believed these factors were so powerful that it made the following claim:

By 2070, the passenger road market could be nearly oil-free

It seems like a pretty bold statement, and one that seems to be endorsing the very technology that could threaten the company's profitability. If you sift through the details, though, you notice that Shell lumps electric and hydrogen into the same group. Also, It just happens to be that that both Shell and Total (NYSE: TOT ) are currently the only two of the integrated major oil companies that have stated in their annual reports that they are actively developing hydrogen based fueling technology for vehicles. So, on the surface it may sound like a dig at its own industry, but it may just be a pitch for what it is developing down the road.

Stamp of Approval for Tesla? Even though Shell may have not intended to endorse a company like Tesla or natural gas designer Westport Innovations (NASDAQ: WPRT ) with this report, seeing estimates that electric and natural gas vehicles could play such a large role in the future of transportation is bound to create some excitement among investors. When you consider total vehicle sales hovered around 80 million last year, the market potential for these companies is immense.

You would never want to buy a company on long-term trends alone, but it does make for a good starting point. If you do want to build an investment thesis for a company like Tesla or Westport using these long-term trends, though, there is one question you need to ask yourself:

Do I have the patience and the temperament to invest in a company based on these long-term trends?

The opportunity for Tesla and Westport are there. Both companies are technological leaders in their respective fields, and their offerings are so attractive that many other companies in the space are lining up to work with them with either joint ventures or manufacturing contracts. But these are growing companies that are bound to hit a bump or two down the road. Right now, Westport isn't expected to generate a net profit before 2016, and even Tesla CEO Elon Musk has said that the company's stock is bound to swing as "confidence waxes and wanes." Your resolve as an investor will more than likely be tested, so be ready for anything the market may throw in your path.

What a Fool believes
For many of us, the first glance at the chart from Shell might suggest one thing, but it could mean something completely different. Also, keep in mind these are predictions on what someone thinks may happen 50 years out from now. If we all have learned anything, it's that we are excruciatingly bad at predicting the future. In the past three months alone, analysts and pundits have predicted oil to both go under $30 and over $150 by 2015. Then again, perhaps we are good at predicting, because we give ourselves such a wide range to work with.

[nascarnation]

It’s really unfortunate how the EPA emission laws have crippled diesels in the US, especially on-road diesels.
Low compression, massive EGR, wasted fuel for DPF burnoffs, etc.

If you could use the latest super high pressure injection and electronics technology with 1990s era emission laws, you’d see some stunningly good fuel economy.

[Colorado Doug]

"claim that electric vehicles will be the predominant transportation fuel"

So how does one burn these electric vehicles? Must be some sort of external combustion machine that uses these electric vehicle for fuel.

[ckilmer]

As oil prices go up beyond a certain point ($200/bbl), coal to gasoline plants will become a riskless investment.
..........
I think we are seeing the top of the oil market. Supply is rising pretty sharply in north america and iraq. and the gulf states except Iran are raising production.

that’s pretty much meeting rising demand from asia. demand in the USA is falling pretty steadily.

[ckilmer]

Shell and others can make all the guesses they like about decades to come, why should it affect our personal and public decisions, behaviors, and policies in 2013-2017 (for example).
...........
agree. It shouldn’t affect decisions based on 2013-2017 timeframe.

[ckilmer]

And given that just a few years ago coal accounted for about half of our electricity it’s tough to see where the juice to charge all those batteries will come from.It’s highly unlikely that it will come from solar or wind.
..........
agree, the obama admin is killing the coal industry. the power plants are shifting over to natural gas.

10-15 years out however,4th generation portable nuclear reactors will likely come on stream. these will likely be lftr thorium or waste uranium reactors.

there is a very big push in the nuclear community to make this happen.

[ckilmer]

The 1950, 1960 guy would have nukes leading the pack.
.........
yeah you have that right. the two big exciting things of the 50’s and 60’s were space travel and unlimited dirt cheap nuclear power.

neither happened.

space travel was too expensive and complicated. but that is slowly changing.

the USA actually did develop a nuclear power that would have just collapsed the cost of energy. it was based in lftr thorium reactors designed by the head of the oak ridge laboratories alvin weinberg. (he also held the original patents on current light water reactors)There were two working models that ran from roughly 1966-1970.
http://nucleargreen.blogspot.com/2012/04/why-molton-sakt-reactors-will-robably_18.html
http://www.triplepundit.com/2012/04/liquid-fluoride-thorium-power-pros-cons/

[ckilmer]

There are lots of factors that went into this prediction, such as increased urbanization, more efficient urban planning...

... and Agenda 21 and ICLEI.
.........
all fair criticisms except that Shell is an oil company. what would their interests be in predicting less oil consumption.

[The Antiyuppie]

When nuclear power was first pushed by the AEC, it was going to be so cheap that it wouldn’t even be metered at residential homes - the only cost being infrastructure maintenance. Ho, ho, ho.

[ckilmer]

Yes you’re right. shell as well has taken an interest in lftr nuclear reactors. the reason is that they have for many years worked on trying to extract oil from oil shale in the green river basin of colorado wyoming utah. the principle cost of that process is electricity.

If they can get a nuclear reactor to produce electricity for 1/4 - 1/10 current costs —then the process becomes competitive.

[The Antiyuppie]

All oil companies are energy companies. Exxon dabbled in solar cell production, for instance. They want to get their hat in the ring for anything new, so that they won’t be blindsided by disruptive technology. At their scale, they can afford to do this.

[ckilmer]

But I fail to see why any existing coal-fired plant cannot be converted into a combined cycle gas-turbine/steam turbine plant. Surely some bright engineer types could figure out how.

..........
that is what’s happening now. the electricity plants are being converted from being coal fired to being gas fired.

[ckilmer]

Compressed gas. Get in a wreck and Kaboom! Might as well go back to the Stanley Steamer.
..........
yeah, this was the case 40 years ago. but the technology has advanced since then to make the natural gas vehicles much less combustible.

[ckilmer]

When nuclear power was first pushed by the AEC, it was going to be so cheap that it wouldn’t even be metered at residential homes - the only cost being infrastructure maintenance. Ho, ho, ho.
.............

the two big exciting things of the 50’s and 60’s were space travel and unlimited dirt cheap nuclear power.

neither happened.

space travel was too expensive and complicated. but that is slowly changing.

the USA actually did develop a nuclear power that would have just collapsed the cost of energy. it was based in lftr thorium reactors designed by the head of the oak ridge laboratories alvin weinberg. (he also held the original patents on current light water reactors)There were two working models that ran from roughly 1966-1970.
http://nucleargreen.blogspot.com/2012/04/why-molton-sakt-reactors-will-robably_18.html
http://www.triplepundit.com/2012/04/liquid-fluoride-thorium-power-pros-cons/

they were abandoned by the feds because the reactors were not dual use. (they couldn’t ALSO be used to make nuclear weapons)

[Mr. K]

what is the smallest diesel engine commercially available? do you know?

[C210N]

All the more reason to be saying WTF to Shell.

The article states the factors they used, and I’m pointing not at oil reserves, gas/solar/whatever economies... but at their stated factors of “increased urbanization” and “efficient urban planning”.

For whatever reason, seems to me Shell is somehow inclined to factor in or do the bidding of Agenda-21/ICLEI.

[preacher]

[The Antiyuppie]

The smallest one I’ve ever seen in a car is a 0.75L turbodiesel in a European smart car, and of course, we can’t buy it here.

There are small diesels on eBay from China, but I don’t think that these are built to stationary/industrial specifications - they are more for lawn equipment, etc.

[ckilmer]

For whatever reason, seems to me Shell is somehow inclined to factor in or do the bidding of Agenda-21/ICLEI.
.....
Energy production and distribution right now is very centralized. I don’t know if it can get more centralized than it is currently.

Even without the climate control games of the ICLEI and Agenda-21 — virtually the only direction that energy production and distribution can go is toward increased decentralization.

Right now its happening only at the fringes. I’m not to sure that it can go much from there. I don’t think for example that solar or wind can handle base load electric production. but solar panels are being put on a lot of houses— especially in the west and southwest. those numbers can only increase as the cost of roof top solar power decreases. there is a tremendous desire from many quarters to get off the grid. big companies like google and amazon are putting up their electrical (primarily solar and wind) power plants. the US military is contracting with portable nuclear power companies to install portable nuclear power plants at US military bases so as to get off the grid.

Its likely shell got part of their data from the the US EIA
US energy information agency

http://www.eia.gov/forecasts/aeo/MT_electric.cfm

Renewable generating capacity accounts for nearly one-fifth of total generating capacity in 2040 in the AEO2013 Reference case. Nearly all renewable capacity additions over the period consist of nonhydropower capacity, which grows by more than 150 percent from 2011 to 2040 (Figure 82).

[Zhang Fei]

I think we are seeing the top of the oil market. Supply is rising pretty sharply in north america and iraq. and the gulf states except Iran are raising production.

I believe the cost of marginal oil production (fracking, offshore drilling) is around $80/bbl. When you factor in risk (finding cost-effective wells, country-specific political wrangling) $100 seems like the right price. Even fracking won't be forever. They will run out just as the massive oil wells of the past petered out. Heck, OPEC oil wells aren't as productive as they used to be, and domestic demand is skyrocketing, partly because of uneconomic subsidies that fix prices at a fraction of world levels. Gasoline in Saudi Arabia is $0.48 a gallon. They'd be better off setting the prices at market levels and giving everyone a bigger stipend. But there are probably entrenched interests that would be harmed by it. And so many OPEC producers over-consume. Saudi Arabia doesn't even have the biggest gasoline subsidies - Venezuela, which charges $0.18 a gallon, has that honor, despite producing expensive to refine heavy crude oil.

[Wonder Warthog]

"...that is what’s happening now. the electricity plants are being converted from being coal fired to being gas fired."

Good to see that sometimes the obvious solution actually gets implemented.