Welcome back to Energy Source. Last week I compared BP and Exxon’s divergent oil demand outlooks and asked who you thought was more correct — BP’s plateau this decade and then decline or Exxon’s continued rise? Thanks for all the great responses, which leaned towards Exxon’s view.
BP is back in the spotlight in this issue. It’s sounding a bit more Exxon-ish in fact. The company is leaning back into petroleum as its oil and gas business gushes profits and governments around the world fret about energy security. What are we to make of its latest pivot?
In Data Drill, Amanda looks at US government forecasts after President Joe Biden went off script in his State of the Union speech and said the country would need oil for “at least another decade”. On that topic, make sure you check out Myles’ story on what work from home, electric vehicles and efficiency is doing to America’s petrol demand — long a driver of oil markets.
Thanks for reading — Justin
Join us on March 15-16 at the FT’s Climate Capital Live, where politicians, business leaders and financiers will discuss how organisations move from climate commitments to real action. Register for your pass today and claim 10 per cent off using promo code NEWS10.
BP’s strategy blows in the wind
BP this week pivoted . . . again.
The British oil major’s chief executive Bernard Looney told investors that the company planned to slow its shift out of oil and gas. Rather than cutting fossil fuel output by 40 per cent by 2030, as Looney had pledged in 2020, it now plans to cut it by about 25 per cent and will spend $8bn more on the business than it had planned. Looney said BP would also spend $8bn more on bioenergy, EV chargers and convenience stores. But the headline was clearly a backtrack from Looney’s splashy commitment a few years ago to start weaning the company off fossil fuels.
The echoes of the early 2000s’ “Beyond Petroleum” campaign and subsequent reversal are clear.
There is logic to the move. Oil and gas prices are high, making the company’s fossil fuel operations hugely profitable once again. Many investors were never really convinced by BP’s transition strategy, which called for putting profits from oil and gas operations into lower-return, clean energy businesses. The strategy was not green enough to compete with “pure-play” renewables groups, but no longer oily enough to keep up with the other oil majors. A lot of investors would prefer to cobble together their own energy transition portfolio rather than bet on a company trying to do it all.
Its shares popped on the news, a sign that investors wanted BP to return a bit closer to its roots. Sharpening its clean energy focus on the potentially higher returning biofuels and EV charging parts of the portfolio, rather than wind and solar, probably also helped. And in a sense, by announcing it will produce more oil for longer, BP is indicating it plans to hold on to valuable reserves for longer.
The share price rise was surely a relief for Looney after BP has badly underperformed its Big Oil rivals over the past year.
It’s worth asking, though, if BP will stick with this latest strategy. When Looney announced the pivot away from oil and gas in 2020, fossil fuel prices were weakening fast, ESG investment was ascendant and renewables groups were attracting eye-watering valuations. BP’s promise to clean itself up and profit along the way slotted easily into the zeitgeist. Fast forward a couple years and fossil fuels are profitable once again, the world is worried about energy security and BP is leaning back into petroleum.
The tumult caused by Russia’s full-scale invasion of Ukraine was unforeseen, but the risk is the company looks like it lacks conviction in its transition strategy. One of the few certainties in the oil industry is that it moves in cycles — business is booming now but it will bust again. And when it does, will BP stick or twist again?
It’s not clear it fixes the problem it has with investors, especially in the US, who see the strategy of trying to do everything as too muddled.
To Looney’s credit, he has been more open than others as he wrestles with the question of how climate change and the need to decarbonise must also bring change for Big Oil.
It still marks a contrast to the US fossil fuel producers that have defended their commitment to oil and gas.
Exxon’s chief executive Darren Woods argued to investors recently that its strategy of “leaning in when others leaned out” of the oil business was “paying off”. He pointed to investor returns as evidence.
There is more riding on BP’s — and Looney’s vision — than the company’s stock performance. If a company of BP’s size, experience and resources is struggling to make the energy transition work for investors, it doesn’t augur well for the speed of the global decarbonisation effort. Or at least Big Oil’s role in it. But if Looney has figured out a new way to profit from the great wind down, maybe markets will still come round. (Justin Jacobs)
Usually the US president is given round after round of applause from members of their own party during a State of the Union address. But there was a line on Tuesday in President Joe Biden’s speech that brought a chorus of boos from Democrats.
“We’re still going to need oil and gas for a while . . . at least another decade,” said Biden. He then called on producers to drill more wells.
Despite the heckling, Biden’s comments are largely in line with analyst forecasts and highlight an inconvenient truth about the country’s energy transition.
Even with the large growth in renewable capacity and the flurry of clean energy projects announced in recent months, the US is on track to be a large consumer, and producer, of fossil fuels well into the future.
Claudio Galimberti, senior vice-president of analysis at Rystad Energy, called the president’s remarks an “injection of realism” to his climate agenda.
“For the foreseeable future, oil will still be an extremely important source of energy,” said Galimberti. “We are almost certain that oil demand will continue to increase, and if it doesn’t increase, it does not decrease in the next seven years.”
Oil and gas will still be the main sources of US energy consumption by mid-century, according to the Energy Information Administration’s annual energy outlook. The EIA also expects US oil and gas production to grow through to 2050, with gas production up almost 24 per cent.
Rystad Energy forecasts that even if the US is to keep warming to 1.6°C by mid-century (its ideal scenario), oil demand will still amount to 14.5mn barrels a day in 10 years and 2.6mn barrels a day by 2050.
Abroad, the US will continue to play a “fundamental role” in balancing oil and gas markets. Rystad Energy expects US LNG exports will more than double by the end of the decade, making up nearly a third of the global market share. (Amanda Chu)
International Energy Agency says the power sector is close to a “tipping point” in carbon dioxide emissions.
Norwegian energy group Equinor made a record $75bn profit during energy crisis.
Opinion: Windfall taxes are not the only option for fossil fuel profits.