Can BP succeed at moving beyond petroleum?
The recent actions of BP have signified a true commitment to a low carbon future. With plans to become a carbon neutral energy company by 2050, the company took its first step into the offshore wind industry in October, with a $1.1bn deal to buy a stake in two projects owned by Equinor of Norway. Having been one of the world’s oil and gas ‘supermajors’ for several decades, in this blog we question whether BP can BP really succeed at moving beyond petroleum?
A question of timing
An oil major moving into greener sources is a mammoth task – this kind of transition really has no precedent and is nearly impossible to predict. The success of such a significant strategic change will largely come down to leadership, cultural change and learning from mistakes others have made before them. Oil supermajors such as BP have some of the best engineering and risk management expertise in the world and are very much used to dealing with regulatory affairs and changing public opinion. These are exactly the skills needed for successful decarbonisation, but up until now, it has never been a priority for shareholders. Now, in a world increasingly committed to going green, there is huge pressure from all sides to move away from oil, including from investors, whose doubts have begun to weigh on BPs financial performance. This, combined with the pandemic, has only strengthened commitments to a shrinking carbon footprint.
Will history repeat?
This isn’t the first time BP has positioned itself as being ‘beyond petroleum’, but this was only as a marketing slogan in the 90s. It is important nevertheless, as it shows the company noticed changing consumer opinions. In 2008 oil prices rocketed up again making oil production extremely lucrative once more. So, sceptics say when crude and natural gas prices rise back up after the pandemic, it’s possible the firm might go back to its roots, regardless of growing shareholder pressure to go green. Yet over a decade on, things are different, so it’s unlikely we would see a direct u-turn in business strategy. There is a huge sense of urgency now and pressure from governments, investors, campaigners and consumers to drive change from the status quo.
Of course there are pitfalls which might occur. A major one would be to only go after solar and wind energy, which are the areas that are familiar to BP, rather than the truly innovative solutions emerging in the present day. The major challenge of giving up oil is that neither of the alternatives taken alone substitute all chemical fuel needs and applications. Green hydrogen, renewable natural gas and geothermal energy are all areas, which could be advanced through BPs expertise and knowledge.
Will BP be the trendsetter?
BP certainly isn’t the only oil major to venture beyond petroleum. In the weeks following BP’s announcement, competitors rushed to do the same – Royal Dutch Shell, Italy’s ENI, and France’s Total all announced goals for net-zero carbon emissions by 2050. By contrast, U.S. energy companies such as Exxon Mobil and Chevron have resisted efforts to set emissions targets. No oil major wants to be seen as being blasé about climate change, so with BP taking the lead, others will be watching closely to see whether their actions are ones worth following.
To summarise – it’s difficult to predict what will happen here, but there is always a chance of success in every available course of action. BP’s goal to drop daily oil and gas output by over 1 million barrels by 2030 is ambitious and represents a 40% drop in the company’s upstream oil and gas production. The question is whether renewables will be able to fill the hole left by the million missing barrels. BP said it expects returns of about 8% to 10% from its low-carbon investments, whilst traditional oil and gas projects typically yield a return of around 15%, so until clean resources become more profitable, BP may need to take on more debt to improve this imbalance.
In terms of investors, critics say oil majors will likely lose out to established players in the renewables sector. However, companies like BP have huge advantages over these smaller players, namely, their big balance sheets, which allow them to invest more, and faster, than their smaller competitors. This, in addition to their decades of experience, makes them well placed to work towards these ambitious targets.
Again, the success of significant strategic changes will largely come down to motivation, commitment and purposeful long-term thinking. This isn’t about just adding a few windmills here and there! BP has the tools and with a detailed roadmap outlined by their CEO, this marks a big step in a company transforming itself in the face of the energy transition. It is a calculated move designed to address the different energy demands of the future.