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Oil companies should branch into renewables: Fitch Ratings

Fitch Ratings has warned that oil companies not diversified into renewables could struggle to access capital as the advance of battery technologies and the rise of electric vehicles (EVs) curbs global demand for oil.

The ability of EVs to compete head-to-head with the internal combustion engine would be “resoundingly credit-negative for the oil sector”, says Fitch, one of the world's "big three" credit ratings agencies.

It would take several decades of strong growth for EVs to come close to rivaling regular automobiles on the world’s roads, Fitch acknowledges in a research note. But, it adds,reduced demand for oil due to EVs “could tip oil markets from growth to contraction earlier than anticipated”.

“The narrative of oil’s decline is well rehearsed, and if it starts to play out there is a risk that capital will act long before any transition occurs. This could reduce oil companies’ access to equity and debt capital, increasing funding costs during a crucial period."

Transportation accounts for 55% of oil consumption globally.

The financial implications of improving battery technology will resonate far beyond the oil industry, Fitch warns. Batteries could cause “disruption” across a range of industries that account for nearly one-quarter of all outstanding corporate bonds.

"We believe it will be important for oil companies to react early," Fitch says, noting that many oil companies are taking “initial steps” today to hedge against the profound changes coming to energy markets, with some diversifying into storage or renewables or focusing more on natural gas.

France’s Total, for one, is the majority owner of US-based solar group SunPower and French battery maker Saft. Royal Dutch Shell has signaled its intention to become a major player in offshore wind.

“If nothing else, this diversification will help guard against the risk that the markets turn against them,” Fitch says.

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