BP Plc has announced that it will shift spending to carbon-free energy projects as it sees a diminished future in the petroleum industry it once helped to found. The U.K. corporation’s challenge will be to find equal returns for shareholders in a new sector that traditionally depends on subsidies.
BP becomes the first major international oil company to make a such a move. Other oil majors remain investors in projects from hydrogen to wind to solar to algae, while maintaining core objectives in oil and gas production. BP, meanwhile, is essentially heading for the exits, as it will allow oil and gas production, the core of its business, to drop by 40% – the equivalent of 1 million barrels per day during the next ten years, according to the company’s new strategy.
Selling assets and cutting spending on exploration will keep the cash flowing in. Meanwhile, BP seeks to align itself with climate change initiatives from the EU, the United States and other governments as it boosts annual spending on low-carbon energy projects by a factor of 10 to $5 billion. In this regard, it will likely seek to cooperate with legislative bodies pushing for low-carbon solutions.
The rise of renewables
Climate change from carbon emissions has resulted in reductions in the amount of ice cover at the world’s poles, and can be traced to the increasing severity and frequency of extreme weather conditions around the globe. Nations around the world have pledged to cut greenhouse gas emissions in order to mitigate the effects of rising temperatures, storms and droughts which wreak economic havoc.
According to its new strategy, BP will focus on funding renewables, low-carbon technologies, bioenergy, and positions in hydrogen and Carbon Capture, Utilization, and Storage (CCUS) technologies that reduce carbon from emissions. BP additionally envisions the development of 50MW of renewable energy, a 20-fold increase from 2019.
This is part of BP’s larger plan to pivot “from being an international oil company focused on producing resources to an integrated energy company focused on delivering solutions for customers.”
A surprise turn
The strategy, which sees such a dim future in oil, comes as a surprise from such a long-entrenched industry player. BP’s founding in Iran at the beginning of the 20th century was an important moment in the advent of the modern oil industry. And prior to World War I, its ability to convince the U.K. government to switch the British navy, then the world’s most dominant, from coal to oil marked another major rite of passage for the commodity and its importance.
That said, BP also has first-hand experience with the major environmental damage that can come from the oil industry. A blowout at the Deepwater Horizion drilling rig at the company’s Macondo prospect in 2010 resulted in oil spilling into the Gulf of Mexico for 87 days. The bill for the resulting damages and compensation for the world’s largest-ever oil spill has run to over $60 billion.
The company further outlined its carbon-free strategy as including bioenergy production to grow to over 100,000 barrels per day from 22,000 bpd. It also sees its hydrogen business to grow to have 10% share of core markets; global customer interactions to rise from 10 million to 20 million a day, and electric vehicle charging points to increase from 7,500 to more than 70,000. BP plans to create energy partnerships with 10-15 major cities around the world and three core industries, according to the strategy.
Company shares rose more than 10 percent in the week following the announcement as investors found clarity in the strategy, which includes $25 billion in divestments over the next five years, and cutting dividends in half to a level it pledges to sustain. The new strategy also met ESG investor expectations, as an understanding exists that environmental concerns will change energy markets over time.
However, delivering equal or better returns to shareholders within this strategy will be a challenge for BP. Wind and solar energy sources have traditionally been high cost, require state subsidies and come with reliabilty problems. Hydrogen, for example, is one of the more expensive items on the menu when it comes to fuels production, and clean hydrogen produced from renewable sources all the more so.
Yet technological innovations over the past decades – such as the increase in solar cell yields and the development of some of the largest-ever wind turbines – have led to huge advances in capabilities of many renewables. And this has resulted in adjustments in consumer patterns, including the rise of electric cars, suggesting that future consumption could also shift away from oil.
Future regulations in the energy business are fairly clear to see, at least in intention. Governments like the EU seek to move towards carbon neutrality. That includes providing advantages, even subsidies, for carbon-free alternatives and penalizing pollution. That future will include wind, solar and eventually hydrogen energy – which, twinned with increased battery life and electric cars, can fundamentally tip the balance away from the oil market.
Betting on the oil industry’s future
Meanwhile, BP may be right about the future of the oil industry, which is not as bright as in the past. Most of the world’s “easy” oil has long ago been found and claimed. Countries exporting from such reserves, such as Russia or Iraq, have already long claimed the large portion of the gains for the state in taxes. And when the discussion turns to tax, the business becomes a lobbying game as much as a feat in engineering and technology.
That sort of lobbying effort doesn’t look like a good bet right now for any oil major. Shutdowns from the coronavirus have hammered demand and price, leaving oil exporting governments from the Middle East to Eurasia to Latin America no alternative but to tighten their grasp on available cash streams to fund budgets.
For sure, there is no shortage of lobbying in the clean energy sphere. Yet apparently BP sees a better opportunity in deploying its technological, engineering and management skills in this area – and not just for altruistic reasons, if share price gains are to be believed.
The oil industry has always been cyclical, and it will bounce back from the pandemic. But it is also clear that the energy industry will develop in other non-traditional, non-hydrocarbon directions. The new BP strategy has effectively announced that the company wants to be in those places in scale.
BP has quite simply taken the first step to becoming a new business – and has set the table so that its own engineering, management and technology (and lobbying) skills will be the deciding factor in making that business work.