BP’s Energy Transition
BP, formerly the British Petroleum Company, has long been known as one of the world’s seven oil and gas giants. Along with Chevron, Exxon Mobil, Eni, Royal Dutch Shell, Conoco Phillips, and Total, BP has become one of the world’s largest publicly traded oil and gas companies. In terms of total market capitalization, BP is ranked as the world’s sixth-biggest energy company, according to a report from the global energy research and consultancy group, PFC Energy. Since the company was founded in 1909 by William Knox D’Arcy, BP has gone through a number of significant transformations over the years, which have contributed to its dominance as a vertically integrated oil and gas company. However, as the global coronavirus pandemic has ravaged the oil and gas industry, BP’s leadership team recently surprised investors and policy makers with a plan to cut oil production and dramatically increase spending on renewable energy initiatives.
Time for a New Strategy
At the beginning of August, BP’s Chief Executive Officer Bernard Looney reported that the company had lost $16.8 billion in the second quarter of 2020. This significant loss mirrors the struggle that other oil companies have been going through as a result of the collapse in global oil prices. While BP’s decline in revenue and mounting pressure from investors may not be as severe as the downfall of Exxon Mobil, the company hasn’t experienced a challenge like this since the Deepwater Horizon disaster that took place in the Gulf of Mexico back in 2010. As a result of the recent monumental challenges in the global oil and gas industry, the London-based oil and gas conglomerate announced a series of new energy targets that will be achieved by 2030. These targets include a 40 percent reduction in oil and gas production and the development of 50 gigawatts of renewable energy generation capabilities (Carpenter, 2020).
Slashing oil and gas production and increasing investments in renewable energy, electric vehicle charging, and hydrogen production are exactly the opposite themes that one would expect to come from an oil company’s earnings report. While a surprise like this accompanied with the revelation of a $16.8 billion loss in the second quarter would usually send investors into a panic, BP’s share price soared by over seven percent after this plan was revealed by CEO Bernard Looney (Reed, 2020). While others in the oil and gas industry have labeled Looney’s plans as a form of lunacy, BP’s leader conveyed a resounding confidence in the ability of his company to make a successful switch to alternative forms of energy. In a Bloomberg Media interview, Looney said, “You have to knit together lots of different energy sources. We are natural gas, we’re in solar, we’re in wind, we have one of the world’s largest trading organizations” (Rathi and Mathis, 2020). The company appears to be poised to embrace the impending global energy transition away from fossil fuels and towards alternative forms of energy.
Fossil Fuel Predictions
Over the next 30 years, BP executives expect that the global demand for fossil fuels will fall by over 75 percent if policy makers remain committed to limiting global warming to 1.5 degrees Celsius (Ziady, 2020). Through a process of active portfolio management, BP announced that it will cut around one million barrels of oil per day from its global oil and gas operations (Hirs, 2020). While the company currently holds debt in excess of $50 billion, Looney says the company will start spending $5 billion annually on energy projects related to solar, wind, hydrogen, and cleaner-burning natural gas (Reed, 2020). Moreover, the company pledged not to conduct any future operations related to oil exploration in countries where BP’s oil and gas infrastructure isn’t already present. This strategy is exactly the opposite of Exxon Mobil’s position on exploration. For example, Exxon Mobil has continued to invest billions of dollars on oil exploration efforts in countries like Guyana in an attempt to secure oil assets for a future rebound in oil prices.
Increasing Renewable Energy Spending
Increasing spending on renewable energy initiatives during a time when the company has continued to amass a significant amount of debt has created some cause for concern, particularly from dividend-focused investors. In order to finance the new investments in renewable energy, Looney announced that the company would slash shareholder dividend payouts by 50 percent to 5.25 U.S. cents per share. Although, as a countermeasure against shareholder backlash, BP has also pledged to dedicate 60 percent of all surplus profits to investors through a series of share buybacks. Executives released a statement that says, “The board believes setting a dividend at this level takes into account the current uncertainty regarding the economic consequences of the Covid pandemic, supports BP’s balance sheet and also provides the flexibility required to invest into the energy transition at scale” (Ziady, 2020).
In 2020 alone, BP expects to spend $1.5 billion on efforts to begin the restructuring process for its energy operations. Earlier this year, the company sold its petrochemical assets and revealed plans to cut 10,000 jobs from its global workforce (Ziady, 2020). These cuts were aimed at getting BP’s finances back on track, while also allowing for more flexibility in terms of future spending. BP plans to sell more of its oil and gas infrastructure even if oil prices rebound in the near future. Energy analysts with BP predict that oil prices will hover around $55 per barrel in long-term scenarios. Unfortunately for BP, much of its current oil and gas assets were developed to be profitable when oil prices were between $65-$70 a barrel. At a July strategy meeting, BP executives discussed how the company currently still owns around $17.5 billion worth of oil and gas assets and infrastructure that are not economically viable with low oil prices.
Return on Investment
For many decades, BP and other major oil companies like Exxon Mobil, Chevron, and Royal Dutch Shell told investors that oil and gas production and consumption would continue to increase in the future. However, as environmental advocates, global policy makers, and even big banks are increasing pressure on the fossil fuel industry over the impacts of climate change, the pledge to continuously increase oil production may no longer be realistic. Instead, major oil and gas companies are now grappling with the changing energy environment and renewed political pressures. Between 2020 and 2025, BP expects to sell $25 billion worth of oil and gas infrastructure to finance new ventures in renewable energy development (Zhdannikov & Bousso, 2020). How will this shift in priorities impact BP’s bottom line? From an historical standpoint, major oil and gas companies have traditionally targeted for a 12 percent to 15 percent return on their oil-related investments. By switching to renewables, BP is targeting for an eight to 12 percent return on their investments (Zhdannikov & Bousso, 2020).
BP’s Green History
This isn’t the first time that BP has unveiled plans to go green. Nearly 20 years ago, BP spent millions of dollars on efforts to rebrand its image from “British Petroleum” to “Beyond Petroleum.” With a new environmentally friendly sunflower logo, BP had pledged to diversify its assets and business operations away from just oil and gas. However, even with this major rebranding effort, not much has changed since then for BP. So what is different now? One of the key difference in BP’s early 2000s greening efforts and today’s commitment to renewable energy can been seen in actions that the company plans to take.
In the early 2000s, BP didn’t make a commitment to invest in renewable energy. Instead, BP pledged to make its existing fossil fuel operations more efficient. Its efforts were designed to cut emissions, and the changes that were outlined were highly ambitious. In 1998, former BP CEO Lord John Browne publicly pledged to cut BP’s carbon emissions by as much as 10 percent below 1990 levels, which was representative of an astonishing 40 percent emissions cut from its business as usual scenario (Frey, 2002). BP’s emissions targets were even more bold than the Kyoto Protocol, which was an international climate agreement formulated in 1997 to limit greenhouse gas emissions from industrialized nations. While the actual emission savings from Browne’s originally rebranding commitment is subject to a wide array of interpretations, Browne’s vision was the first of its kind to come from the fossil fuel industry. He often expressed how it was his goal to offer answers to questions about global warming, rather than provide excuses. With BP’s renewed commitment to environmental sustainability, Browne’s legacy seems to be making a comeback again within BP’s leadership team.
A Diverse Business Model
In the year 2000, BP made a commitment to spend $200 million on its corporate rebranding efforts (Frey, 2002). This pales in comparison to current CEO Bernard Looney’s $5 billion annual commitment to renewable energy. While environmentalists and renewable energy advocates have praised Looney’s vision for a more sustainable and environmentally friendly business model, Looney’s efforts to be green may simply be a side effect of the desire to keep BP profitable in the coming decades. Transforming BP’s exclusive oil and gas business model into a new model that embraces the idea of diversifying its energy infrastructure will strengthen the long-term viability of the company. With this vision, Looney stresses the BP will be able to regain growth and profitability over the next decade.
In addition to diversifying its business model, will investments in renewable energy also attract new investors to BP? BP’s executives hope to create sustainable value. A company that values sustainability will undoubtedly attract investors who value efforts to decarbonize. As many institutions have been divesting financial assets from fossil fuel companies. BP’s transformation towards a net-zero business model may ultimately yield benefits for both the environment and BP’s bottom line. With these commitments being made to a new kind of future for BP, energy analysts are wondering if other major oil and gas companies will follow BP’s lead.
Charlie Donovan, who is the executive director of the London-based Centre for Climate Finance and Investment, says that growth in green energy initiatives is the one thing that is clear about the future of the energy industry. The future of fossil fuels is less certain. Therefore, while BP’s move may seem abrasive or bold in the near term, the long-term growth potential of the renewable energy industry appears to be stronger than ever. Jennifer Rowland, who is an energy analyst at Edwards Jones, shares a similar view. She says, “There are significant risks for BP. However, the risk of inaction is just as significant, as the value of their traditional oil and gas assets, as well as their relevance in the energy world, could be diminished over time” (Reed, 2020). If other major fossil fuel companies start to follow BP’s efforts, the global energy transition may undoubtedly come faster than originally anticipated.
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Frangoul, A. (2020). “BP CEO says dividend cut ‘deeply rooted in strategy’ as energy giant ramps up renewable investment.” CNBC.
Frey, D. (2002). “How Green Is BP?” The New York Times.
Hirs, E. (2020). “BP’s Strategic Shift to Renewables.” Forbes.
Rathi, A. and Mathis, W. (2020). “BP Shows Oil Majors How to Green a Polluting Company. Bloomberg Media.
Reed, S. (2020). “BP Reports a Huge Loss and Vows to Increase Renewable Investment.” The New York Times.
Takahashi, P. (2020). “Millions of dollars later, oil giant BP is prepping its next step toward cleaner energy.” The Houston Chronicle.
Zhdannikov, D., and Bousso, R. (2020). “Exclusive: BP poised to sell ‘stranded assets’ even if oil prices rally.” Reuters.
Ziady, H. (2020). “BP will slash oil production by 40% and pour billions into green energy.” CNN Business.