Going green won’t be easy for BP

Ed Clowes

Feb 19, 2020

AFR

When BP’s new boss posted his first picture on Instagram last week, few would anticipate the vitriol that awaited. “I am looking forward to sharing what I am up to,” chief executive Bernard Looney innocently wrote. The caption was paired with a professional photo of him smiling.

Someone immediately replied in the comments section: “Great to know who should get the guillotine for greenwashing a fossil fuel company that’s killing our planet!” Dozens of similar messages followed shortly after. If Looney didn’t already know what was riding on his company’s grand climate plan, and the magnitude of the task he faces in changing the public perception of his 111-year-old company, he certainly does now.

BP has been the target of climate activists, protesting earlier this month against the company’s sponsorship of the British Museum, but the oil company is promising to change its ways. Getty

So, when he took to the stage at the Royal Lancaster Hotel in London last week, people held their breath. “The direction is set. We are heading for net zero. There is no turning back,” Looney told the packed room. “We have got to change.”

The existential crisis that the £96 billion ($187 billion) oil titan faces – according to a number of BP employees, shareholders, investors and analysts who spoke to The Daily Telegraph – is that if it simply gives up selling fossil fuels its value as a company will slump. But to continue selling oil is to turn a blind eye to the inevitable reality that institutional investors, regulators and activists will conspire to make it a toxic business.

So, did Looney succeed in pleasing both demanding shareholders and out-of-patience climate activists?

The new ambitions and structure announced is “effectively ripping up the rule book on the way that oil and gas companies have operated for over a century”, says Lydia Rainforth, lead oil analyst at Barclays. Instead, BP will “focus on delivering the full skill set of the company to both reduce emissions and deliver value for shareholders”.

Such effusive praise for the vision, which included scrapping the company’s century-old structure in a bid to dramatically slash carbon emissions, was almost universal from those who watch stocks like BP.

“We think it is potentially a game-changer for the company and the industry,” says Gordon Gray, global head of oil and gas equity research at HSBC. “For a company of BP’s scale, a net-zero scope 3 footprint from its own production is a climate-related ambition on an unprecedented scale.”

At the event, the company said it would launch a huge restructuring, axing its traditional upstream and downstream model – which divides the business of extracting oil from that of selling it – to a system that puts more focus on green energy. It also pledged to achieve net zero by 2050 on all operations and oil and gas production. It will also halve emissions from the oil and gas it sells.

Amid all of the optimism, a sense of doubt emerged: Where was the detail?

To be fair, Looney warned the audience he would not be going into specifics that afternoon. Instead, he would be setting out the company’s sweeping ambition for its future, against a backdrop of souring public sentiment towards companies that are believed to damage the environment, but promised a more comprehensive plan of action at the company’s capital markets day in September. But some worry about what will happen to the tens of thousands of jobs that rely on BP’s upstream business? Would the company continue to say one thing, and lobby for another?

Perhaps the most pressing question, however, was how BP will cut its emissions while still selling oil? “There is nothing ambitious about a plan that is simply not credible,” says Murray Worthy, oil and gas campaign team leader at Global Witness. “BP’s net-zero pledge looks like an attempt to grab some positive headlines by a new chief executive but with little substance to show how it will achieve these grand claims.”

The charity’s research has found that, as of 2019, more than half of BP’s $US140 billion ($209 billion) planned investment in oil and gas in the next 10 years is incompatible with cutting global warming to 1.5C, in line with the Paris agreement. It argues any new investment in oil and gas is not compatible with this target, either.

And what of BP’s lucrative dividend – the third-largest in the UK – which shareholders expect to continue?

“The dividend is a key element of the BP investment case and we expect this to remain,” says Stuart Lamont, an investment manager at Brewin Dolphin.

BP’s management have committed to growing sustainable, free cash flow and this, coupled with lower debts through the selling of assets, should enable it to spend on new energies while maintaining its dividend, Lamont adds. But how will BP grow its free cash flow while reducing its carbon emissions? Some see this contradiction as a cause for concern.

“BP appears to be using shiny net zero promises as a cover to continue extracting oil and gas,” says Kiri Hanks, a policy adviser at Oxfam.

“If we are to prevent a climate catastrophe, companies like BP must commit to keeping fossil fuels in the ground and invest meaningfully in low carbon technologies.”

In recent years, the notion of stranded oil assets has gained momentum – the International Energy Agency warned in 2017 that oil and gas companies could be forced to abandon over a trillion dollars worth of assets by 2050 if they fail to adapt to climate change. While BP’s assets may become stranded under its new plan, says Brewin Dolphin’s Lamont, he expects the restructuring of BP’s upstream portfolio, along with its carbon neutral targets, to mean that poorer returning assets are sold prior to this happening.

In the audience last week were a number of BP employees, listening eagerly to their chief executive’s speech in the hope of hearing something reassuring about the security of their jobs. Looney did not say if restructuring would mean redundancies – BP employs 73,000 people – but analysts warn many of these roles might be at risk.

However, it’s not all bad news, Lamont says. “The restructuring may result in job redeployment, although it is important to stress that the meeting earlier this week was a soft launch of Bernard Looney’s vision as chief executive,” he says. “We are expecting further detail in September, which will likely provide greater [clarity] on tangible near and medium-term targets and what this means for BP’s employees.”

Activists hoping for a plan for how BP will exit the oil business were left wanting, as were investors looking to hear about how the company would maintain its dividend while investing in less profitable clean energies.

Analysts say that BP will need to implement detailed mechanisms for measuring progress on its plans, or else risk seeing its ambitious vision collapse under pressure from financial imperatives.

“The detail is still to come, particularly in terms of shorter-term milestones against which to benchmark progress towards its longer-term ambitions,” HSBC’s Gray says.

Echoing this, Barclays’ Rainforth adds that “change is never easy and turning the words into action is the next task for the management team, but we like the ambition”.

In an Instagram post the day after his grand plan was unveiled, Looney wrote that there was still a lot of hard work to do.

“Thank you for all your constructive concerns this week,” he said. “We are listening.”

Until September, that is all BP can do – as the world waits eagerly for details on its plans.

The Telegraph London