A Strategy for a Leaner, Smaller BP

Copyright © 2022 Energy Intelligence Group All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited.

As the coronavirus pandemic unfolded earlier this year, Europe's majors got serious about setting out their stalls for the energy transition. As low-carbon targets were set and elements of strategy revealed, the region's biggest oil companies seemed to be attempting to outdo each other with every announcement. After BP's declaration in February that it would be a "net-zero" emissions company by 2050 made headlines, a succession of European peers announced updates about their own transition plans (EIF Feb.19'20). Now, BP has revealed much-anticipated details about how it intends to become an "integrated energy company" and how it will get to net zero, replete with 2030 targets for emissions, goals to reduce its oil and gas production and gigawatt objectives for investment in renewables (EIF Aug.5'20). These plans are designed to make BP leaner and fitter, but -- as its new, fixed dividend policy suggests -- perhaps it will also become a much smaller company over time (EIF Aug.5'20). What does BP's array of emissions targets for 2030 reveal about its strategy for managing those emissions? BP announced a handful of emissions reductions targets for 2030 that fit with the first three "Aims" of the strategy it set out back in February. To recap: Aim 1 targets net-zero emissions, on an absolute basis, from BP's operations by 2050. These are Scope 1 and 2 emissions, which amounted to some 55 million tons of carbon dioxide equivalent in 2019. Aim 2 targets absolute net-zero emissions associated with BP's equity production, i.e. Scope 3 emissions, which totaled 360 million tons of CO2e in 2019. Aim 3 is to cut the carbon intensity of the products BP sells by half. The new strategy requires BP to have achieved 30%-35% of Aim 1 (i.e. reduce net emissions from operations by one-third) by 2050. But its 2030 target for Aim 2 looks more ambitious still: to reduce Scope 3 emissions from the use of its equity production by 35%-40%. This seems counterintuitive given that oil companies have little control over how their ultimate customers use their products. Yet, the math could work in a context in which BP has a greater share of renewables and gas in its energy mix, and a smaller share of oil. When it comes to Aim 3, BP's seemingly less ambitious target of a 15% reduction in the carbon intensity of its sold products makes sense considering that these products include oil and gas supplied to BP's refineries by third parties. Yet this still marks a reasonable milestone given the 2050 target is to reduce carbon intensity by 50%. However, a weakness here is that even if carbon intensity falls, absolute emissions can rise if volumes of product sold increase significantly. Indeed, BP reckons this a likely phenomenon as it pursues fast-growing transport markets around the world; for example, in India where it recently launched a retail fuels joint venture (EIF Jul.15'20). Still, on this matter CEO Bernard Looney told analysts recently: "There is no one path to Paris." BP plans to reduce its oil and gas production by around 1 million barrels per day by 2030, and refining capacity by 500,000 b/d, so how will it achieve this? A key plank in BP's strategy is to reduce upstream oil and gas production from 2.6 million barrels of oil equivalent per day in 2019 to 1.5 million boe/d by 2030, and cut refining throughput by 500,000 b/d to 1.2 million b/d. This reflects a new priority for what it calls "resilient and focused hydrocarbons." The upstream target will be achieved over two stages and involves natural field declines, according to Looney. The first, from 2020 to 2025, will see flattish production as new major projects come on stream. But by the second half of the decade underlying production declines will start to occur. Meanwhile, Looney insisted that BP is not in a rush to sell assets given that up to $13 billion of its new $25 billion divestment target for the next five years will include outstanding proceeds from the company's sale of its Alaska assets to Hilcorp Energy and its petrochemicals business to Ineos. But if producing assets are sold, targeted headline production would be reduced further. As BP focuses on value over volume, lower upstream production is expected to feed into its refining operation. This partly accounts for some of the targeted cut in its refined products, but the company also wants to focus on advantaged feedstock as part of its plan to high-grade its refining business in order to boost margins and deliver sustained cash flow from it. How much will it cost BP to build a portfolio of renewable power assets? BP aims to build a portfolio of renewable power capacity -- across solar and wind -- that will amount to 50 gigawatts, net to the company, by 2030 (from 2.5 GW in 2019). This will be costly given the investment that will be required. Last year, some $282.2 billion was invested in 184 GW of renewable energy capacity (excluding hydroelectric) around the world, according to a report from the Frankfurt School-UNEP Collaborating Centre, suggesting an average cost of $1.54 billion to acquire 1 GW of clean energy capacity. The good news is that costs are coming down quite sharply. And if BP favors solar plant, then the cost of acquiring renewable generating capacity would get closer to $1 billion per gigawatt. Still, it will be a tough deal for an $80 billion market cap company, with a heavily geared balance sheet, to find $50 billion-plus to invest in renewables over a 10-year time frame. But it could be achieved if the bulk of the $4 billion-$5 billion per year BP plans to spend on low-carbon energy is used alongside some form of project financing. Much more tough would be if BP intended to go further and replace the oil and gas output lost through the shrinking of its production with renewable generating capacity. Given that a typical barrel of oil holds the equivalent of 1,700 kilowatt hours, even to replace the energy provided by 1 million b/d would require BP to own enough renewable generating capacity to deliver 71 GW of power around the clock, 365 days a year. This would require a renewables portfolio a magnitude greater than the 50 GW planned for 2030, along with hundreds of billions of dollars of investment. So, although BP is set to grow a sizable portfolio of new energy assets, it looks set to become a smaller company overall.

Carbon Capture (CCS), Earnings
Wanda Ad #2 (article footer)
Russia's Gazprom plans record spending for next year, making use of windfall profits to adapt to changing reality.
Fri, Dec 2, 2022
US natural gas prices are expected to moderate in 2023, but until they unveil their 2023 budgets producers are being cagey about how this will affect their spending plans.
Fri, Dec 2, 2022
Environmental analytics provider Project Canary is collaborating with Denbury and others to "harmonize" CCS standards.
Thu, Dec 1, 2022