The energy transition was always going to be a dirty business. BP this week rowed back from its 2020 climate commitments, including the headline pledge to cut production by 40 per cent by 2040. Given that those promises were three years ago dubbed “cynical” by Friends of the Earth, the oil and gas major may rather have proved the environmental campaigners’ point.
BP couched its move in terms of a changed world following Russia’s invasion of Ukraine. The balance of the energy trilemma — about finding energy security, affordability and sustainability — has shifted. It will invest in and produce more fossil fuels in the near term, and sell fewer of its assets, so that production falls only about a quarter by 2030 compared to 2019. Emissions from its oil and gas business will drop 20 per cent to 30 per cent, rather than 35 per cent to 40 per cent.
The story does not entirely make sense. True, BP upped its investment plans by $1bn in both fossil fuels and transition businesses. But we know the group thinks that the result of the Ukraine war will be an accelerated transition: it cut its forecast for medium-term oil demand in its energy outlook last month. “If you accept the world is changing quicker than you thought but put half your money into old technology that’s not really turning the ship,” says Kingsmill Bond, energy strategist at clean energy non-profit RMI.
The new targets owe more to another tripartite tension: the demand for cash returns from its investors, the need to invest in a future clean energy business, and the fossil-fuel cash flows required for both. BP’s shares have not hugely underperformed its climate-conscious European peers but they have all been outstripped by the oilier American companies. Amid talk about transatlantic bids, and investor scepticism about returns in low-carbon businesses, this is an attempt to change the mood.
It is not a total catastrophe climatewise: the extra 500,000 barrels of oil equivalent a day of production in 2030 would mostly have been sold to other producers. BP is cutting its own operational emissions, scope 1 and 2 in the jargon, faster than expected. But its changes all aim to boost near-term returns. In low carbon, less money is going to long-dated, lower-return businesses such as renewables, and more to areas like electric vehicle charging and convenience stores. In oil, the mantra is basically more quick barrels to capitalise on higher than expected oil prices.
This is not a capitulation to the US model either. BP last year put 30 per cent of investment into low-carbon areas: by 2025, that will be 45 per cent of spending, and half by 2030. Compare that to ExxonMobil, which will put maybe 8 per cent of investment into “lower emissions” this year. Three-fifths of spending in that bucket, which will total $17bn in the years to 2027, goes towards reducing its own emissions — investment BP counts within upstream. BP, with roughly half Exxon’s operating cash flow last year, plans $60bn investment in low-carbon businesses to 2030.
If BP can be rewarded by investors for that, as Europe’s energy dinosaurs thrash around looking for a post-asteroid future, it probably counts as progress. The world needs more investment in energy full stop. Oil and gas shareholders have seemed pretty resistant to management teams spending much more on anything, clean or dirty.
But this is also a shift born out of forecast oil prices being unexpectedly higher for longer. Resources groups, miners included, are notorious for shuffling assets in and out of favour as commodities prices fluctuate. Long-term planning it is not. “Investors could be concerned that these strategic pivots look quite procyclical,” said Biraj Borkhataria at RBC Capital Markets. “BP is in some ways moving with the environment. It’s better to talk up oil when it’s at $80 a barrel, than $40.”
Lower oil prices would mean tougher choices about investment dollars; higher would mean more pressure for barrels. BP’s various stakeholders — whether cash-hungry or climate aware — will need convincing there will not be a shift if the market moves again.