BP’s Radical Transformation and Future Optics

Investors, environmentalists and the public are demanding that fossil fuel companies make changes to their business models to reduce emissions, even as consumer demand for oil, gas and even coal remains robust. With one of the most challenging years on record for transport and transport-affiliated industries, the COVID-19 pandemic has forced a major rethinking of business strategy for the world’s largest energy producers. In September of this year, Bernard Looney, CEO of British Petroleum (BP), made his long-awaited pitch to investors concerning his unprecedented ideas for the future of BP. Mr Looney presented a vision of a BP independent of oil and gas and heavily invested in renewables, also setting ambitious targets for the energy giant, including but not limited to reaching 50 gigawatts of renewable energy production by 2030 and converging on net-zero emissions by 2050. Mr Looney further stated that the company would only pursue renewable capacity that came with the right returns, rather than chasing capacity for the sake of it.

 

Some of the earliest opportunities for BP in the renewables sector have been in hydrogen. Preliminary plans to break into the industry included partnering with Danish wind power group Ørsted to develop a green hydrogen project at the Lingen refinery in Germany, producing hydrocarbons from oil. The idea is to extract hydrogen through the electrolysis of water, splitting water into hydrogen and oxygen, and using hydrogen fuel cells to generate electricity. The project’s green expansion had been stagnant since 2016, however events this year seem to have acted as an accelerator, with talks of eventually extending the size of the plant to 500 MW, ten times the initial hydrogen energy capacity. The refinery will be powered via a North Sea wind farm, an increasingly attractive location for renewable wind power. BP has also formed a foothold in the offshore wind farm industry by agreeing to buy a 50% stake in two Equinor projects, a Norwegian petroleum refiner, for 1.1 billion USD.

 

BP’s new green investment horizon is broad, as the firm seeks further opportunities spanning solar power and biofuels. This includes a joint venture between BP and Bunge Bioenergia, a joint venture that combines BP and Bioenergia’s Brazilian bioenergy and sugarcane ethanol businesses. The venture covers 11 sites with a total production capacity of 32 million metric tonnes of sugarcane a year, to be converted to biofuel, a diesel alternative. Finally, Lightsource BP, a partnership in solar power has seen BP increase its stake to 50% and a plan to expand to 10GW of solar energy by 2023.

 

There are however opposing ethical and economic arguments concerning BP’s pledge. Analysts at Morgan Stanley calculated that per unit of energy produced, there is up to 5 times as much capital required to produce the energy through renewables as opposed to through oil and gas projects. In addition, although BP’s stock has rallied since it’s COVID-19 challenges began in March, and investor confidence has returned, as the company begins to sell or dismantle its lucrative petroleum and petrochemical arms, it will need to see rapid and substantial returns in its new ventures to limit the damages to its balance sheet. On the other hand, from investors’ perspectives, investment in oil stocks and derivatives is becoming less and less attractive as ESG opportunities have shown outstanding returns this year. This will especially be the case with the EU’s new green finance rules, starting next year, which will impose tougher disclosure requirements on investors in oil companies. Combined with the UK’s ten-point plan geared towards creating a green economy, public and private efforts to launch renewable enterprises will rise quickly. As it stands, the EU’s plans have won the support of a range of investors; in particular their plans to increase investments in renewables by a factor of 10 in the coming years and to move away from oil were even praised by organisations such as Greenpeace, which has used this year to rally a call for greater action against climate change.

 

BP’s transformation has only just begun and there remains a lot the firm’s new strategy has yet to prove. However, it is evident from its rapid and diverse range of renewable investments that the firm is motivated and fully aligned with its new goals.

 

By Will Kollard

Sector Head: Edouard Nelson

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