The Fundamental Case: The Electric Vehicle Pivot
Gas Infrastructure Opportunities in the Permian
We continue our Gas Infrastructure Series today and take a look at one of the three key fundamentals driving profitability growth for energy producing and infrastructure companies.
Focus will be on the latter with exposure to Permian. We’ll use this framework to underpin our bull case for gas infrastructure stocks in the long-term.
For the sake of keeping these posts to a reasonable length, we break The Fundamental Case into three separate posts - one for each driver. Today will be the 2nd driver: Electric Vehicles
We’ve already covered:
Today we cover:
LT Driver: The Fundamental Case: The Pivot to Electric Vehicles
What we’ve yet to cover:
LT Driver: The Fundamental Case: LNG Capacity Hitting the Gulf in 2024/25
LT Driver: The Political Backdrop
5 stocks to benefit from the execution of each driver
The Call on the Grid Will Increase Substantially
Gasoline burned in ICE’s will be replaced by electric-powered battery vehicles. First gradually, then suddenly.
On top of all the other uses we have for electricity, the coming influx of electric vehicles is likely to overwhelm the grid unless power generation plants are built faster than ICE vehicles are retired.
Leaving this job solely up to renewables is a disaster waiting to happen. In fact, we’re already seeing nations threaten bans on electric vehicle usage to avoid blackouts!
Obstacles we’ll encounter (we’ll flesh these out in the future):
Impediments to reliable and timely grid/transmission build-out to accommodate electrification
Restraints on availability of key battery minerals production likely to impede many bullish EV growth forecasts
For now - we’ll use relatively conservative assumptions to account for these likely setbacks.
Renewables Just Can’t Handle it
Electricity growth EXCLUDING electric vehicles is already growing at a rate faster than GDP.
EVs have hardly penetrated the grid - and renewables are STILL having a hard time keeping up with demand.
There’s no doubt that the only near-term solution is to deploy natural gas-fired plants to remedy any potential dislocations that developers forsee across the grid.
Let’s look at some numbers to put this bullish thesis into context.
EV to Natural Gas Demand - Napkin Maths
Electric vehicles currently make up *LESS THAN* 1% of the global fleet. 10 million passenger EVs on the road today.
EIA forecasts this rising to 31% by 2050.
662 million additional EVs hitting the road from 2021-2050!
Here’s how this same data looks overtime:
The inflection really starts to happen around the 2030 timeframe. In-line with several nations’ (and automakers!) mandates to reduce or completely delete Internal Combustion Engine (ICE) sales by the 2025/2030 timeframe.
How does this translate to higher natural gas demand?
The average electric vehicle consumes 0.30-0.35 kWh per mile.
With the average driver traveling 10,000 - 14,000 per year, one battery electric vehicle would consume about 3,900 kWh per year.
An additional 662 million EVs on the road would then mean another 2,580 TWh of supply needed to support demand.
Context: Global electricity demand for Electric Vehicles today is 80 TWh. Another 2,580 TWh on top of that over a 30-year period is a 32x increase!
It’s highly unlikely that renewable capacity alone will be able to fill the gap.
Translating 2,580 TWh in natural gas terms becomes an incremental 24.1 bcf/d of demand.
Due to gas plant efficiencies of 58%, we would need closer to an additional 41.6 bcf/d of supply over the next 30 years to fill the demand gap!
Context: current global natural gas production is 463 bcf/d
Conclusion: Given only the conservative estimate of 31% of the passenger vehicle fleet being comprised of Battery Electric Vehicles, global natural gas demand would increase 10% by 2050
Though it may not sound like much, in reality it’s an enormous needle-mover given the long life-cycle of exploration-to-production of low-decline natural gas resources.
Keep in mind that this also only includes passenger vehicles and a conservative assumption of its penetration – nothing else.
For fun, if we make more aggressive assumptions, say EVs make up 100% of the fleet by 2050 instead of 31%, this would translate to a 30% increase in natural gas demand by 2050.
A monumental task greater than achieving Net Zero itself.
Caveats
Again - It’s worth noting this is of course contingent on sufficient production of battery materials to continue its growth trajectory. A topic we will discuss and dive deep into another time.
For now, just know the following:
The assumption that EVs will be predominately powered by gas-fired plants is not outlandish
Countries are already seeing issues with renewables when they begin to make up >50% of the electric grid
The assumption of 672 million EVs on the road by 2050 is relatively conservative
This estimate isn’t in-line with Net Zero 2050 standards.
On a Net Zero 2050 basis, we would need 2 billion Electric Vehicles
Overall – the impact of Electric Vehicle penetration on natural gas demand will be incremental
Though not the main driver of increasing future natural gas demand, it could certainly be in the top 3
Also worth noting - in the commodity space - every additional molecule required to fulfill demand has an outsized impact on pricing.
A 1% change in crude supply is enough to move prices +/- $30/bbl !
Wrapping Up
The Electric Vehicle Penetration driver for increasing natural gas demand, although highly uncertain, is one that will increase stresses on the grid and force policymakers to adopt new technologies, solutions, and reliable baseload power generation sources to fulfill the dreams of achieving global decarbonization.
We know renewables will certainly have a tough time filling this gap.
This bodes well for our bullish investment thesis on Permian infrastructure assets – discussed on a higher level here. With many drivers in the short, medium, and long-term, the value of reliable fossil fuel infrastructure assets already on the ground will continue to increase as barriers to construct them only rises.
The emerging disconnect is apparent – and only a major shift in global rhetoric regarding Net Zero by 2050 could alleviate some of these barriers. However, it’ll be too late by then.