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Editorial: Excitement to Execution

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"We need to move from excitement to execution," says BP CEO Bernard Looney. The comment framed the company's landmark three-day strategy update this week, where it gave the most-detailed picture yet of how the oil majors might shift their businesses to profit from the energy transition. The event offered plenty of excitement as a team of new-look executives presented glowing assessments of how BP could achieve the type of returns and growth that would keep dividend investors interested, while also attracting capital looking for growth. Renewables businesses that generally return 8% to 10% could ratchet up margins with trading, scale, industrial expertise, digitalization and access to cheap capital (EIF Aug.5'20). Hydrocarbon production will continue to contribute yet decline over time, with new investments requiring high returns and old ones divested or wound down as cash cows. But make no mistake, the odds are stacked against BP. McKinsey has found that more than three-quarters of businesses that try to radically change their models fail -- a figure acknowledged by BP's new sustainability leader Giulia Chierchia, a veteran of the consultancy. BP's new business model will require a fundamental shift from one focused on supplying finite commodities to a globally fungible market to one focused on providing the right energy products to the right customers, all whose needs will vary (EIF Aug.12'20). As energy supply becomes abundant and diversified, consumer choice will play a greater role in the business. Demand for energy -- and for different forms of it -- will take precedence over supply. Some of those consumers will be small -- individual people making daily choices about where to charge their electric vehicle. Many more will be large, as companies and cities look to decarbonize. Regardless, BP can no longer bank on putting oil or gas into a pipeline and expect a guaranteed market on the other side, much less a profitable one. The consumer focus could give BP and others taking a similar strategic route access to less cyclical markets. Power prices have held up much better than oil during the pandemic. Major customers like Microsoft appear eager to form lasting relationships that could offer growth at scale. BP laid out legitimate reasons why its future could be brighter as a consumer-driven energy company than as a commodity-driven oil major. There was no shortage of excitement. But now comes the execution. The skepticism that BP faces from investors and others is not unfounded. Big Oil has struggled for most of this century to meet growth and returns targets -- and that's within their core business lines. Every company has claimed to have found religion when it comes to executing major projects. Yet most still routinely run into significant issues, sometimes with short-term execution but more often with long-term economics. The more-than-$50 billion of write-downs the industry has taken just this year have spanned every asset class and geography (EIF Aug.19'20). The Chevron-led Tengiz project was already more than 25% over budget before Covid-19 forced the consortium to demobilize thousands of workers. All this reminds that the industry has had persistent problems translating plans into profits. It's no wonder investors are worried about BP's ability to execute in areas where it has far less experience. This is not to say that BP's story won't resonate. But translating excitement into execution will be critical to that success.

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