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Preparing the Downstream Oil and Gas Industry for the Mobility Revolution

Preparing the Downstream Oil and Gas Industry for the Mobility Revolution

Fueling the future

Preparing the downstream oil and gas for the mobility revolution

kpmg.com Introduction

The increasing adoption of electric ultimately have a profound impact on oil refining, , and lubricants demand. Oil and gas know this. And yet, it’s common to underestimate how the confluence of multiple forces outside the oil and gas industry will increase the velocity and impact of the switch to the electric from the internal combustion engine. Specifically, we believe the downstream companies in the coming introduction of autonomous vehicles, years. What currently seems like a coupled with Mobility as a , slow-moving threat may have more will combine with additional societal near-term implications. and trends to drive a more Downstream oil companies may precipitous disruption than typically struggle with preparing for a disruption expected—one which is likely to pull with an unclear, yet potentially electric vehicles into the market and accelerated, timeline. An approach to shift the composition of the fleet much transformation that takes measured quicker than currently anticipated. steps and addresses hotspots first can These external forces will usher in strike the balance between protecting a fundamentally new transportation today’s business and paradigm and begin to disrupt tomorrow’s.

© 2017 KPMG LLP, a Delaware limited liability and the U.S. member firm of the KPMG network of independent 1 member firms affiliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. About the authors

Andrew Steinhubl Olli Valikangas Principal, Advisory Managing Director, Advisory 713-319-2614 312-665-3436 [email protected] [email protected]

Andy, the strategy leader for KPMG Energy and Natural Olli, a managing director in KPMG’s Strategy Group, has Resources, has more than 35 years of sector experience. 15 years of experience in Energy and Natural Resources He has led transformational programs precipitated by serving multinational majors and regional . He disruption, including new and , specializes in oil and gas, and works side by side with supply and demand shocks, regulation, and new forms companies to develop operating model and of competition. Andy also is an author and speaker on improvement strategies. Olli is a founding member of multiple disruptive issues and topics facing the energy KPMG’s Sustainable Value Improvement (SVI) approach to industry. Most recently, he led panel discussions on the helping energy sector companies address value creation future of mobility and energy implications at the and performance improvement challenges and has spoken Los Angeles and Detroit Auto Shows, and he presented at widely on the topic. He also recently co-presented at the the American Fuel & Manufacturers annual American Fuel & Petrochemical Manufacturers annual meeting and KPMG Global Energy Conference. meeting on the impact of mobility trends on oil and gas downstream businesses.

Contents

3 Disruption on the fast 17 Take action across the value chain

The push and pull of electric, 12 25 Summary autonomous, and MaaS fleet adoption

15 Know your exposure 26 How KPMG can help

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 Disruption on the fast track

A new set of forces is on the horizon, beyond the confines of the . These forces in isolation would likely not impact oil and gas companies for some time, but when layered upon one another, have a compounding effect that is laying the groundwork for disruptive change.

The downstream industry is at risk of see a broader picture, a fundamentally EVs are struggling to meaningfully being overly complacent about new mobility paradigm comes into “push” their way into the U.S. market demand destruction. The common view. EVs, autonomous vehicles based on economic and other belief is that oil demand from , (AVs), shared economy business experience factors alone. India, and emerging markets will models such as Yet, the combination of EVs and other offset the impact of hybrid and electric (MaaS), and advanced technologies leading to autonomous and increasing fuel economy are combining with societal shifts vehicles, coupled with the social standards; OPEC recently raised its such as urbanization and the influence forces cited, will create a “pull” for forecast for demand through 2040. of Millennial employee and consumer accelerated electrification. In values, including sustainability. However, there’s a hint at trouble; particular, we envision that the most Together, these technological and the same OPEC report also noted significant near-term disruption will social changes represent rapidly that faster penetration of electric cars occur in major U.S. metropolitan areas developing trends and forces that has the potential to reduce these where these forces are concentrated. could lead to the faster EV penetration demand outlooks.1 More recently, OPEC mentioned. Just how quickly and widely EVs equity markets “have spoken.” Shale will penetrate the market remains oil producers were compelled to limit The total number of EVs on the to be seen. Regardless, wherever growth spending within current cash compared to internal combustion we end up on the scale between flows, focusing on returns versus engines (ICE) is still relatively small, modest disruption on one end and production growth, or face reduced and the barriers to rapid expansion massive upheaval on the other, the stock prices as a repercussion. are well known. Limited battery oil and gas industry still needs to Industry analysts cite concerns range, high installed battery cost, prepare for impact. Here are a few of over oil demand destruction as the long “refueling” times, and sparse the developments that downstream rationale for favoring returns now recharging infrastructure are just a companies should keep an eye on. versus production growth. few. Today, ICE-equipped cars have significant economic, refueling, and While the industry is well attuned to other driving experience advantages. monitoring the adoption of electric Hence, despite various incentives, vehicles (EVs), by stepping back to

1“Opec sees more global oil demand despite electric cars,” Financial Times, November 7, 2017.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 3 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. adoption in the remains tepid, for now. Outside of the United States, A mobility paradigm shift is fueling faster-than-anticipated governments are pushing EV adoption EV uptake by regulatory . Norway, the United Kingdom and France are among the countries with set dates for firm bans on pure ICE-powered vehicles in the coming decades, while others like India and China are anticipated to follow. In tandem, automakers are committing to boosting EV production and/or ending ICE-only production, as announced it would do as soon as 2019. In the United States, without much government pressure outside of California, EVs remain a niche market accounting for less than 1 percent of U.S. auto . This generally market-driven EV growth is currently slow going, but several trends and forces at will boost the pace.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 4 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. A generational shift will underpin consumer demand for EV, AV, and MaaS. It comes as no surprise that younger in unmanned mobility, and the same AV MaaS providers.3 It’s particularly generations Y (a.k.a. Millennials) and number are interested in mobility on important to note that generations Y Z are more willing to use self-driving demand. and Z are the largest living generations technology than Gen X and the in the United States, and it’s these At the same time, Y and Z are Boomers, according to the J.D. Power two massive population groups who known as “green generations” for 2017 U.S. Tech Choice Study.2 In fact, will exercise significant buying power a reason. They are loyal to and not only is Generation Z interested in as increasingly autonomous and willing to pay more for brands that the new technology, but half said they electric vehicles come to market and embrace sustainability, making them are also interested in mobility sharing mobility services expand. enthusiastic customers for electric or co-, 56% are interested

Millennials, who are becoming the largest component of the workforce and a major component of 64% Say there is solid evidence urbanization, demonstrate affinity the earth is warming for sustainable MaaS

76% 78% Expressed genuine Think owning a is difficult interest in the environment due to high costs of gas and 64% 69% Would be willing to pay Believe it’s important for more if they knew some brands to be ecologically money was going toward conscious an environmental cause

Survey: What should America’s energy policy be?

66 percent of global consumers say they’re willing to pay more for sustainable brands—up 55 percent from 2014. 73 percent of global millennials are willing to pay more for sustainable offerings—up from 50 percent in 2014

Develop alternative energy Expand exploration of oil, , and

Source: Nielson Global Survey of Corporate Social Responsibility and Sustainability 2015 Source: Adage, TheCityFix, Pew

2 U.S. Tech Choice Study, J.D. Power, April 2017. 3“The sustainability imperative: New insights on consumer expectations,” Nielsen, October 2015.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 5 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Miles traveled will soar. Even as car ownership declines, we Working parents will grow For a hint at the potential for increased believe AV and MaaS usage will comfortable sending kids off to MaaS miles, look at Uber’s statistics stretch vehicle use at both ends of soccer practice and piano lessons in today. According to the , 75% the age spectrum. According to our shared transportation or, eventually, in of the U.S. population lives in a county research and analysis, lower-cost personally owned driverless vehicles. with access to its service, with wait AVs and the widening availability Meanwhile, future retirees will times of less than seven minutes.4 of mobility services will tap latent enjoy independent mobility currently demand and generate miles hampered by physical limitations. otherwise not traveled under the current paradigm.

Dense Uber networks have formed in and around cities across the nation

New York City Chicago Los Angeles Type A: Dense urban center, large Type B: Significant urban center, Type C: Unclear urban center, vast suburban metro area, high public sprawling suburban metro area, suburban metro area, low public transit usage medium public transit usage transit usage Average wait for closest Uber: Average wait for closest Uber: Average wait for closest Uber: 6:09 minutes 6:43 minutes 5:24 minutes n = 27,908 n = 12,928 n = 18,107

Minutes wait: Less than 3:00 3:00 – 5:00 5:00 – 7:00 More than 10:00 Not available 7:00 – 10:00 Notes: (1) Census tracts were sampled a minimum of four times. Those that returned an available Uber at least once were defined as having regular Uber service. (2) Average wait time calulation is population weighted and only includes areas where Uber is available. Source: KPMG analysis of SafeGraph cellphone location data

Distributions of U.S. personal miles traveled (PMT) per capita by age group 2014–2050 (in thousands) 2014 Parents can be everywhere 2050 at the same time 82 percent would want mobility options for kids, according to a focus group

“I do not have to take keys away from dad” Safe independence Convenience Independence 79 percent of people would want for the kids of “my time” for seniors mobility options for seniors

Note: (a) Discounted 25 percent from U.S. Bureau of Transportation Statistics (BTS) total Vehicle-miles traveled (VMT) for 1995, 2001, 2009, 2014 (assumed to be commercial miles), (b) multiplied by NHTS occupancy rates applied 2009 rate to 2014 numbers. Source: U.S. BTS data, NHTS data, U.S. Census data, KPMG analysis

4“Lyft extends service throughout 32 states,” USA Today, August 31, 2017.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 6 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Autonomous driving is already here, and governments are preparing for AVs.

In recent years, deep learning (an The J.D. Power study highlighted a Entire legal, regulatory and advanced form of artificial intelligence) dichotomy in consumer sentiment ecosystems will need to change has propelled autonomous driving between increased interest in what to make way for AVs. Government from fantasy to reality. It was once was described as “new technologies” must reimagine infrastructure finance thought that large-scale infrastructure but also increased skepticism about once funding from taxes would be required before deploying the same “automated technology.” begins to evaporate, and it will likely AVs on any mass scale, yet as this take an act of Congress to address As KPMG’s own research suggests, paper goes to print, manufacturers are the redefinition of automobile drivers are increasingly willing to climb building vehicles that are capable of licensing, liability and insurance in an into fully autonomous vehicles for navigating the streets with their own autonomous world.6 However, policy a ride once they clearly understand embedded technology alone. Today’s fixes are in the works and government risk versus reward, get excited about drivers are already benefiting from is increasingly focused on supporting the technology, and can imagine the many of the same technologies that AV innovation. The federal government lifestyle benefits.5 Furthermore, for will guide fully autonomous vehicles, has taken steps; the National Highway many, the compelling economics of including driving assistance and Traffic Safety Administration has ride sharing (which will increasingly collision protection. developed a Federal Automated take place in autonomous vehicles) Vehicles Policy, and the U.S. In fact, consumer caution about AVs versus personal car ownership could Transportation Department identified may actually be misunderstanding. tilt the scale. 10 pilot sites to test AV technologies.7

5“Self-Driving Cars: Are We Ready?” KPMG, 2013. 6 “Beyond Speculation: Automated Vehicles and Public Policy,” The Eno Center for Transportation, May 2017. 7“Cities Rush to Build Infrastructure—for Self-Driving Cars,” The Wall Street Journal, November 9, 2017.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 7 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. In the burgeoning sharing economy, The penetration of transportation- MaaS is taking hold, excess capacity—be it in cars, houses, on-demand companies such as Uber especially in and clothing, or another —is demonstrates that MaaS has already increasingly accessible at the touch made a huge impact in urban settings. around population of a smartphone app from companies With transportation on demand, such as Uber and Lyft, Airbnb, and families may decide they need only centers. Rent the Runway. one car, or none at all.

Islands of autonomy

In its latest white paper on disruption Los Angeles-San Diego “A binary star megaregion” in the , KPMG discusses how autonomous vehicles coupled with mobility services will create a new transportation mode. However, the takeover will occur in individual metropolitan markets first, creating unique “islands of autonomy.” One such “island” is Los Angeles-San Diego where travelers experience very long-duration (even if not long- distance) commutes. As such, that market might support autonomous vehicles with space for work or systems for leisure for the 90-minute-plus trips. As we discuss in this paper, several trends indicate that these AVs will increasingly be electric powered.

Read more about the emergence of AVs in cities around the world at http://www.kpmg-institutes.com/institutes/manufacturing-institute/articles/2017/11/islands-of-autonomy.html

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 8 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. City and state investment in infrastructure can help drive AV and MaaS adoption—and the tilt toward EVs.

More local governments large and Today, those sensors might be For example, KPMG teamed with small are pursuing initiatives to used to control street lights, aid a predominant OEM for a major create smart ecosystems, enabled first responders or monitor traffic. European city to evaluate diesel by sensors and of Things Once in place and bolstered by IoT, versus electric . The analysis (IoT) connectivity, to support mobility data analytics and high-powered incorporated societal costs such as services, environmental sustainability, , this same sensor emissions and noise into classic life and other efforts to improve the lives infrastructure will be used to cycle total cost of ownership analysis. of their citizens. improve the safety and navigation This “TrueCost” approach solidified of AVs, accelerating their use, the choice of electric over diesel

while supporting MaaS fleet drivers buses for public transit.

with improved congestion and

parking control.

“Smart Cities” architects are utilizing tools to incorporate societal costs into Total Cost of Ownership Conventional versus true total cost of ownership (major European city – KPMG/OEM assessment)

Tru e TCO for diesel Tru e TCO for electric bus Sustainability Socio-economic Socio-economic Environmental Environmental Admin & garage Admin & garage Fuel/Energy Fuel/Energy Driver

Driver Lease Conventional TCO Conventional TCO Conventional

Accessibility Impact Cost U.S. $

Greenhouse gasses $134 per ton of CO2 Safety Local Ranges according to type: NO2, VOCs, S02

Varies according to level of noise indoors Noise and outdoors (i.e. 75 decibels = U.S. $2500 per person per year A value of time of approx. $6.50/hour per Travel times passenger wait time

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 9 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Urban MaaS fleets will become increasingly autonomous and electric.

One of the key issues holding back Taxi utilization pattern alleviates refueling concerns EV adoption is range anxiety, but that matters less in the city. Today’s EVs have enough range to make them attractive to MaaS fleet operators in urban areas like New York City, where the average taxi drives 190 miles per day and the vast majority of trips are less than 12 miles each.8 EV recharging may not be a concern either, as MaaS taxi fleets can recharge during their off-peak, overnight hours or between shifts. As MaaS expands, fleet operators in major cities could look to buy up the new AV cars as they roll off the production line. When electrified, these urban AV workhorses can offer a lower cost per mile traveled Source: NYC TLC TPEP Trip-sheet data, 2012 compared to ICE vehicles. And, since MaaS companies will look to meet government (including ) sustainability and emissions goals as well as cater to the green consumer, they could have a bias toward EVs.

82014 Factbook, http://www.nyc.gov/html/tlc/downloads/pdf/2014_taxicab_fact_book.pdf

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 10 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Changing MaaS fleet economics drive the mobility tipping point

Levelized cost per mile MaaS (Uber)

POV*/ICE AV/ICE MaaS AV/EV MaaS *Personally owned vehicle (POV)

The battle of the ownership models: The first transition The battle of the powertrains: The second transition Today, the levelized cost per mile for personal vehicle In the future, AVs will shift the cost advantage to favor ownership (POV) is significantly lower than for ride-hailing MaaS. With MaaS established as the advantaged model, services (MaaS). Yet, companies such as Uber and Lyft are further advances in electric vehicle (EV) technology will attracting a large and growing number of customers. Why? make the electric powertrain a continually greater challenge to the internal combustion engine (ICE). Younger generations are less interested in making a significant upfront investment to buy and own Lower EV maintenance and fuel costs will further increase underutilized, depreciating assets. With no car, they AV MaaS operating cost advantages. Meanwhile, EV eliminate annual payments for insurance, registration, battery costs will continue to decline, per the DOE R&D maintenance, etc., and they don’t need to pay for parking. Roadmap. Instead, they access reliable, on-demand ride services Finally, smart government focus on sustainability and AV- within 5-15 minutes. friendly infrastructure, as well as generational affinity for As those who hold on to their vehicles drive less, their low green transportation, will continue to support the growth of annual miles driven significantly increases their costs per AV EV MaaS fleets in urban settings. mile; MaaS becomes more appealing. While at this point the shift to MaaS is still powertrain agnostic, autonomous vehicle technology (AV) will begin to eliminate MaaS driver cost, making the economics of AV MaaS more compelling.

Levelized Cost per Mile (cost to a consumer) Assumptions: Note: (a) Average Uber cost per mile for 5 min to 20 min trip in top 10 largest cities in U.S in 2015 (b) AV MaaS and POV assume 5 year TCO (MaaS - 70k miles/year, POV – 15k miles/year) (c) AV/EV vehicle used for comparison is 2018 Bolt, AV/ICE is 2018 Prius (d) 2.2% historical price growth CAGR applied to ICE sale price forecast (e) 50% drop in EV battery price between 2017-2025 (from $250/kWh to $125/kWh), range = 240milies/60kWh Battery (f) AV MaaS includes 30% operator profit margin (g) Fuel Assumptions = $3.00/gal ICE (10 year national historical average), $0.12/kWh EV Sources: (1) Uber (2) Business Insider (3) AAA (4) Kelley Blue (5) KPMG Analysis

As miles traveled become increasingly battery powered and not gas powered, autonomous MaaS fleets will drive gasoline displacement on the urban streets that 80 percent of the U.S. population calls home.9 The remaining issue is how far and how fast does adoption of electrified AVs move beyond urban areas?

9United States Census 2010 © 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 11 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The push and pull of electric, autonomous, and MaaS fleet adoption

In sum, right now there’s just a gentle push toward greater EV adoption in the United States relative to the rest of the world, limited to a few states with strong emissions reduction policy mandates. EVs still face the challenges of However, as the trends We also foresee further EV higher costs, lack of charging penetration into the personal infrastructure and underdeveloped we outlined take hold vehicle market as current barriers battery technology, feeding an and a fundamentally new to adoption such as the lack of a economic and convenience disparity transportation paradigm charging infrastructure fall away; that favors ICE. There’s little pressure battery and EV costs decline through for environmental regulation and is established, we believe next-generation technologies such as subsidies that favor EVs, with much the marketplace will solid-state -ion; and fleet owner stronger mandates coming from flip, and consumers will interest and Millennial and other European regulators than their U.S. societal preferences for sustainable counterparts. In other words, the U.S. not just be pushed by mobility begin to influence the remains primarily (and increasingly subsidies and regulatory market, ushering in a second round of uniquely, compared to other OECD efforts but pulled toward significant changes impacting the oil nations) market versus policy driven. EV adoption. and gas industry.* Fleet turnover, once a key data point used by the oil and gas industry to Our estimates indicate this flip will anticipate demand, will matter less as occur faster in the largest U.S. cities. personal car miles are displaced over Beyond urban centers, we anticipate time by AV EV MaaS fleet miles. ICE- adoption of AV EV MaaS fleets in drive train cars may remain in the fleet, suburbs, just as ride sharing has but be driven less frequently. penetrated these areas.

*In an upcoming paper, we address how these barriers will affect further EV adoption, as well as how the power and utilities sector will be impacted.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 12 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Shift from “Push“ to “Pull” forces driving EV adoption

Push Parity Pull

Limited to luxury segment; AV MaaS fleets adopt EV in Widespread AV EV MaaS Overall otherwise uneconomic selected major metro areas; fleet adoption in cities adoption versus ICE EVs advantaged in mid- and dense suburbs; rapid market and parity in mass extension of personally market owned EVs

Limited DC charging Home and office charging Supplemental on-the-road Charging available options proliferate fast-charging infrastructure alleviates range anxiety infrastructure issues

Multiple cities planning Proliferation of sensors and Smart infrastructure and Smart city and for digital infrastructure to IoT; leveraged to enhance sustainability convergence address safety, accessibility, mobility underpin continued electrification and sustainability electrification expansion Fleet mobility choices incorporate sustainability

Manufacturing scale, other New chemistries increase Battery cost and range Battery learning curve, power density and push issues no longer a factor battery cost to $100 per kWh – new chemistries at 4x technology Incremental changes to (at parity or better) energy density and half the and range battery materials drive close cost to ICE cost parity

Direct EV subsidy Make ready infrastructure EVs integrated into utility and other utility investments infrastructures as viable Distributed resource, incorporated in allowable distributed resource Regulatory demand response, power rates providing grid services pricing pilots in CA and select other areas

Lower for longer oil prices Lower for longer oil prices Lower forever oil prices

Oil market Limited liquid fuels demand Flattening gasoline demand Significant gasoline and destruction due to hybrid, other increasing ICE improvements, EV demand destruction penetration

2015–2020 2020–2030 2030+

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 13 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Displacement forces will soon be material –– External ecosystems are evolving quickly, with near-daily developments –– OEMs and digital disruptors are already beginning to combine forces –– Demand for sustainable mobility is gaining momentum –– The convergence of these forces has the potential to materially impact mix in select regions or markets

The new dynamics in downstream: The clockspeed dilemma

For companies to thrive in this new environment, they must solve what we call “the clockspeed dilemma.” That is, the challenge of seeing, adapting to, and keeping pace with faster or multiple rates of innovation imposed by sometimes seemingly external ecosystems. Downstream companies, like other capital intensive industries, are slowed down by a legacy clockspeed linked to new development costs, competitive dynamics, and brand development investment. But new, digital competitors such as Uber and Apple are crossing competitive ecosystems and moving at faster and often multiple clockspeeds. Competing “Clockspeeds” Combined with changing social demographics and attitudes, competitors and forces outside the fuels retail industry are changing the level and type of demand for transportation. In some ways, this is threatening fuels demand, yet it is also unlocking latent transportation Incumbent Newcomer demand, potentially creating entirely new choice and usage segments offering the potential for new value and Movies Netflix growth opportunities. Music Apple Executives must reconcile these multiple forces and paces Hospitality Airbnb of change driven by social and digital trends, including mobility services expansion, electric vehicle proliferation, Transport Uber and vehicle autonomy, and how their combined effects may bring change and opportunity across various aspects of today’s fuels retail business and operating models. Incumbents must now look beyond For more information, see “The clockspeed dilemma: traditional sector boundaries What does it mean for automotive innovation.”

Source: https://assets.kpmg.com/content/dam/kpmg/pdf/2016/04/auto-clockspeed-dilemma.pdf

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 14 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Know your exposure

Disruption to the U.S. oil and gas industry won’t happen everywhere, or overnight. But change is happening in pockets—right now. By understanding where to anticipate impact first, oil and gas companies can take a measured approach to transformation.

The conventional thinking about By 2040, an estimated 530 million EVs, or 34 percent of the cars on the road, the impact of technology and will displace up to 8 million barrels of transportation fuel per day10 with the U.S. regulation on oil demand may be accounting for 15-20 percent of that. Netback reductions will then flow up the too conservative. value chain to refining, and EV penetration displacing lubricants demand as well. On one hand, internal combustion engines may stay the preferred Forecast for changes in global liquids demand from cars drivetrain globally for some time, 2015–2035(a) helping to sustain oil demand worldwide. Cars account for just an estimated 20 percent of global oil demand, and most forecasts indicate increased global net growth in demand for cars, particularly from developing nations, while the infrastructure challenges to EV uptake remain. However, individual companies face more or less exposure depending on their footprints. In urban centers where EV adoption rates are likely higher, localized impacts on fuel displacement may Source: (a) BP Energy Outlook 2017; BP, “Back to the future: electric vehicles and oil demand” become significant, creating a disproportionate impact on the liquid fuels value chain. And past industry When companies understand their exposure, they can experience has demonstrated that the begin to determine what kinds of actions to take—buy, impact of supply or demand changes at the margin have disproportionate build, or partner in new businesses—as well as where to impact on retail netbacks. As act first and ultimately when to take action. Bloomberg recently articulated, EVs don’t have to destroy the fuels market to disrupt it.

10Electric Vehicle Outlook, Bloomberg New Energy Finance, 2017.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 15 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Potential EV impact on fuel consumption in the United States by zip code

Potential electric vehicle impact on annual fuel consumption in California by 2040...

California fuel demand  could decrease by 36% ...and how this could impact the top 10 Equal to the loss of 3.5 selling brands in California billion gallons or the volume of more than  3,300 gas stations

Potential 2040 gallons fuel lost (at a zip code level) Minimal to no impact Less than 500K gallons Less than 1M gallons Less than 5M gallons Less than 10M gallons More than 10M gallons

Source: KPMG analysis

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 16 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Take action across the value chain

Once oil and gas companies understand their geographic exposure to the massive trends reshaping their industry, they can begin to craft their plan of action by reviewing their exposure along the value chain to identify how and where these trends will play out.

Note that the value chain is being necessary for the long term. Ideally, turned on its head. The industry when the trends we identified needs to stop thinking about following hit the oil and gas industry in full Below, we offer examples a supply-out model organized force, companies will have the right of how oil and gas around refining crude and supplying business lines and operational companies can prepare lubricants and fuels to keep up with structures to secure their continued market demand growth. Increasingly, business success. their retail, lubricants, successful downstream players will and refining businesses While it’s helpful (and less daunting) need to follow a consumer demand for change by positioning to think about that change as short-, model in which companies must work medium- and long-term, there are no themselves for new back from customers and anticipate clear lines or timeframes for action, value pools while at the more differentiated needs in terms of but rather, a fluid transition from core same time repositioning driving occasions and implications for to future businesses. vehicle and drive train type. That’s why existing assets ahead of we present the following table with Further, as companies move down disruption. retail fuels on the left-hand side—the the table toward shifting the core, customer is, literally and figuratively, their requirement for new technology in the driver’s . and data and analytics capabilities increases. The ability to create The table also displays the spectrum innovative solutions and build a of preparedness top to bottom, from captive customer base through deep protecting core businesses in the understanding of consumer behavior short term, to investigating alternative will separate the winners and losers in business and structural options, and the new paradigm. finally shifting core businesses as

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 17 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Retail Lubricants Refining

Short Leverage D&A to Investigate adjacencies Affirm/expand position Protect term optimize margin capture and positions in non- in less-impacted fuels the core (deeper customer ICE applications/ segments understanding, pricing, segments ranging, etc.) Segment and evaluate Diversify the value “advantaged” versus Explore new capital add beyond products “at-risk” assets structures and review to services portfolios Develop export Medium Expand plug-and-play markets/new value Investigate term Review forecourt fuel solutions chains optionality mix and pilot new offers (e.g., highway offerings) Create more dynamic Pilot alternative fuels lubricant formulation/ manufacturing (e.g., Investigate new process via , micro LNG, and data feedback loops hydrogen) ownership models

Drive stickiness Re-gear technology and Pursue digital strategies through vehicle-based shift molecule mix Long (e.g., attracting the technology (e.g., lighter ends, Shift the term ) chemicals, etc.) core

Offer B2B/fleet services Offer B2B/fleet services (e.g., integrated energy offer)

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 18 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Retail Retail asset ownership presents particular challenges, especially given the trend among major players to re-integrate into retail sites in light of shrinking demand and a desire to secure offtake. Yet, in a future world of centralized fleets and at-home, overnight electric refueling, the role and value for these sites diminished. Retail owners need to stay agile in order to avoid stranded assets down the road, optimizing the value of their current assets while identifying appropriate sites to acquire or retain that are fit for future refueling patterns.

Use data and analytics to win customers and even greater details By using D&A, retail can not only the fight for customers. about them, from home ownership to create an edge over the competition Data and analytics (D&A) is nothing income. From there, fuels retailers can and improve margins, it can begin to new to the energy sector. For years, customize offers, and even sell the build the right mix of products and retail fuels has been tracking basic data to other retailers. services for customers who will need less and less gasoline over time as information, such as how much Take “John,” for instance. He usually more hybrid and fully electric cars hit gas each station is selling, and how fills up his weekly at the start of the road, and MaaS takes off. profitable the location is. his Monday morning commute, after However, data not just related to which he buys his coffee at a café Review capital structures and internal operations (volumes, margins, down the street. Based on John’s portfolios to secure control of competitor analysis, etc.) but to the and other customer data, the gas retail fuel . retailer introduces gourmet coffee and retail gasoline customer journey The company-owned and -operated or pastries to its backcourt offering to can produce even greater insight, “co-co” model is making a comeback. capture some of that business. It then informing everything from the stock After years of shifting to dealer- goes further by pushing promotions that retail locations should keep in operated and eventually dealer-owned for a discounted donut with coffee their stores, how to price their gas retail locations to reduce capital directly to John on the display screen by time of day and relative to the expenditures and shed liabilities from of the tank where he’s filling up. Now competition, and how successful their , oil companies are looking not only is John stopping in Mondays incentive programs are. at the co-co model as a way to hold on for gas, he’s back every day for his to the retail customer base and gain New sources of that data are ready to breakfast. Meanwhile, other non- greater control and insight into their be mined with existing infrastructure. gas retailers are pushing relevant retail operations. For example, cameras already advertising through that fuel in use at gas stations can capture display screen to John based on the A co-co model allows oil companies license plates, and with minimal valuable data they purchased. direct access to the valuable data investment in software, identify repeat required for analysis, greater pricing

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 19 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. control, and command of backcourt for plug-in vehicles. This marks a Or, if and when EVs move to car sales of non-fuel products. Further, significant shift from current behavior battery swapping—instead of charging, the co-co model can better secure characterized by frequent visits to owners replace the battery as needed distribution for fuel compared to fueling stations. for a quicker return to the road— dealer-based models that allow these locations can serve as battery Furthermore, so-called fast charging is owners and operators to switch . some years away. With a battery that brands. Again, as fewer customers takes half an hour or more to charge, These B2B businesses are a jump ball. require fuel, or they fill up less often, retail fuel outlets should be looking First movers will have an advantage control over D&A, products, price, and for ways to entertain—and thereby in a crowded field that could include distribution are key to protecting the attract—customers who seek quality car dealerships and other retailers core business and preparing food, entertainment, and Wi-Fi during in addition to retail fuel. Even if for change. charging. EV adoption remains sluggish, the How much an oil company’s retail convergence of trends suggests footprint matches the electrification Explore partnerships and retail fuels in urban centers could heat map will determine the speed at ownership models. increasingly shift to more of a B2B which it must pursue in-depth D&A One efficient way for oil and gas model serving MaaS companies initiatives and alternative operating companies to get into new lines of that will look to squeeze oil and gas structures. However, even for those business would be to partner with— companies for economies of scale. with a more suburban footprint, it or even buy—companies outside their The retail footprint will be challenged. just makes good business sense to industry. For example, a franchise introduce operational improvements, partnership can enhance the retail Pursue digital strategies. rationalize price and footprint, and find offering with an expanded backcourt Part of serving an AV EV fleet may ways to better serve a customer who with room for shopping, eating, and be monitoring the sensors of these is increasingly in control. Meanwhile, relaxing. Another partnership could connected cars, and servicing the those companies operating in heavily be formed with the regional utility hardware and software now under urban areas may even decide to shift company to supply EV charging at the hood. their retail footprint outside of the favorable rates. Finally, retail fuel business cities, focusing instead on outlying The challenge will be deciding to pull transformation comes full circle and highway dominance. the trigger on establishing these back to data analytics, as oil and Evaluate the fuel mix and destinations and partnerships to begin gas companies should think of their data as an asset they can monetize pilot new offerings. building customer traffic and demand, or waiting for EVs to take off and then in addition to improving their own We have established that the retail create demand. Cost-benefit analysis operations. Data about customer footprint is important to preserve for and pilot programs can produce purchases and behavior has value to guaranteed distribution and data. But information even before EVs begin other industries that would likely pay if consumers are going to be buying to overtake ICE engines, providing for the insights retail gas gathers on gas on a less regular basis, what will valuable guidance. a daily basis. these retail gas outlets offer? Perhaps fuel retailers can build Build a business-to-business destination experiences. While EV offering. and AV uptake will likely occur in As the usage of both mobility services urban areas first, the most creative and autonomous vehicles increases, exploration for retail fuel may appear and autonomous MaaS fleets begin to not in the city but in the country—or form, a new B2B opportunity opens more specifically, on the highway. up to service those self-driving cars en masse. In one model, oil and gas Individual EV and plug-in hybrid (PHEV) companies with retail locations near hybrid drivers needs for charging urban centers can adapt their current stations will largely coincide with footprint to serve fleet vehicles with long-distance trips, rather than regular integrated offerings such as charging, charging that can take place at home cleaning, maintenance, and more.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 20 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 21 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Lubricants

Lubricants may be the part of the value chain most exposed to the changing environment, given the lower maintenance and materials needs of EVs compared to ICE vehicles.

Research adjacent and Look to add value beyond the a replaceable, recyclable cartridge new businesses. existing products. that allows an oil change in just Many lubricant manufacturers, BP is one example of an oil and gas 90 seconds. The oil cell that holds particularly the most retail consumer- company that has committed to the cartridge also contains a oriented, will need to diversify to creating new lubricants businesses. microchip and sensors to monitor 12 counter what’s expected to be a Castrol innoVentures is tasked oil level and quality. Plug-and-play drop-off in demand for their traditional with exploring opportunities in lubricants cartridges are, similar to products as more electric vehicles hit smart mobility, products “beyond the replaceable battery, the type of the road. Geographic footprint may internal combustion” applications, innovation -made for AV fleet also factor in to the speed of that and intelligent operations through maintenance. diversification for those with a heavy venture capital investment, There’s also an opportunity for presence in population centers. partnerships, and other means. lubricant manufacturers to shift from Recently announced projects include To start, today’s ICE lubricants product supplier to service provider a joint solution with Zubie, have room for improvement. Oil by leveraging data gathered from a connected and service companies such as Exxon, BP, and car sensors to improve and even provider; as well as investments in Royal Dutch Shell are working with car customize lubricant formulation for Peloton Technology, focused on safety manufacturers to develop thinner oils specific fleets. and efficiency in heavy trucking; and designed to improve ICE fuel economy GreenSteam, specializing in energy- This applies to serving businesses in the face of regulatory pressure and saving solutions for commercial outside of automotive, as well. For competition from hybrids and EVs.11 shipping. example, oil and gas companies could Manufacturers could also begin to play a role in placing, monitoring, and explore applications for non-internal Develop fleet service and analyzing data from sensors on wind combustion engines, which require turbines and other renewable energy higher-value lubricants. other business-to-business equipment, and tailoring the lubricant offers. At the same time, manufacturers formulation based on that data. Consider the coming mobility most exposed in the retail market paradigm and the products and should evaluate and consider services that will be required to pursuing a greater presence in other serve its players. Nexcel, one of the segments, such as sustainable pioneering ideas developed through energy. According to ExxonMobil, the innoVentures, is a prime example company’s synthetic oils and greases of adding value with a plug-and- are used in more than 40,000 wind play option. The new technology is turbines globally.

11“Big Oil and Auto Makers Throw a Lifeline to the Combustion Engine,” The Wall Street Journal, November 18, 2017. 12“How Castrol is reinventing the oil change,” January 28, 2016.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 22 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 23 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Refining

Refining will likely be the last part of the value chain to feel the impact of the trends, but it is destined to feel the most pain. With multibillion- dollar assets at stake, refiners need to act before changes hit their ; if they are reacting, it’s already likely to be too late. The key to strengthening their position is to create advantaged access to crude, and advantaged locations to place refining outputs.

Affirm and expand in less- Segment “advantaged” an agreement with Andeavor impacted fuels segments. versus “at-risk” assets to (previously Tesoro). The company For some refiners, that expansion will develop export markets and was able to negotiate for improved economics and create efficiencies mean looking abroad. It’s no surprise new value chains. that we anticipate trends impacting through a shorter delivery pipeline, Refineries near the urban areas where make Andeavor’s adaptations to ICE vehicle demand will take off more we expect these trends to hit first are quickly in U.S. urban centers than in its refinery worth the investment, at greater risk for declining demand. and strengthen a regional business American cities, for example, Refineries along the West Coast are so refiners may explore business to in an area likely less to be impacted prime examples. Cut off as they are near term. the south. from distribution to the interior of More, affected oil and gas companies the country where fuel demand will Re-gear the manufacturing need to begin thinking about owning decline less rapidly, these refinery technology to pilot alternative the entire value chain for export, owners will need to find outlets for fuels. such as the transportation to take the their product, which may very well be Ultimately, as demand for gasoline product to the final customer. In light Latin America. declines, companies that hold on of lower demand and lower refinery Refiners with a heavy footprint in the to their refinery assets will need to optimization, previously unattractive hot spots we identified also should repurpose them to manufacture other returns on such assets are looking look for opportunities to build or materials, from bio fuels to chemicals better. By working backwards from purchase other assets positioned to to lighter ends. For example, as part of the final destination, or the customer, serve customers away from those its Grow the Gulf initiative, ExxonMobil companies can figure out what they urban areas. is expanding its chemical plant need to own or control to drive the capacities to turn those molecules greatest net back. When EP Energy Corporation into plastic, rubber, and other chemical struggled to find a market for its substances. hard-to-refine crude, it entered into

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 24 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Summary

The impact of electric vehicle adoption The near-term question is not just By anticipating disruption, oil and gas on gasoline consumption does not when the change will occur, but companies have an extraordinary appear to be an imminent challenge where. These forces are initially limited opportunity to deepen and create to downstream players, particularly globally, but disruptive locally. The advantages across the value chain, when viewed through the typical effects will first be in urban areas protecting and ultimately shifting their industry supply-demand lens. But and in the retail fuels section of the core businesses and assets to operate focusing on EV trends in isolation value chain before spreading through successfully in an increasingly electric, risks missing the influence that the the lubricants and refinery segments autonomous, and digital driving world. collision of autonomous vehicles and of the chain, and ultimately fanning other external ecosystems will have out geographically. on accelerating EV uptake, and the proportion of EV versus ICE miles driven as part of a fundamentally different mobility paradigm.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent 25 member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. How KPMG can help The signals for disruptive change in the downstream sector are everywhere. The energy sector must anticipate that change or get caught flat-footed; oil and gas companies can start pre-positioning their business models now.

KPMG helps companies understand will hit first, assist with the review oil and gas leaders to anticipate and the new downstream dynamics and prioritization of assets, find ultimately adapt to a new era of and the influence of “external” greater value from and defend core electric, autonomous vehicles and the ecosystems breaking through into operations, and develop clear yet sharing economy. the traditional oil and gas sector. flexible strategies to evolve into new We help identify where disruption businesses. We work closely with

Orient to capitalize Evaluate strategic on new value pools responses Identify asset –– Determine which specific value exposure pools fit best with new strategic –– Create strategic “playbooks” direction that will support asset and –– Profile assets to determine corporate planning –– Identify any capabilities that geographic and product-based might need to be developed or exposure –– Incorporate scenario capability enhanced to best capture target into models to determine how –– Develop model to understand value pools executing on strategies may extent and time-phasing of affect financial and operating –– Create a detailed impacts metrics implementation plan and –– Prioritize assets to guide roadmap to serve as guiding –– Capture relevant tactics and strategic option development documents next steps to be utilized in more detailed planning activities

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