The inconvenient truth behind BP’s pivot on climate change

The US majors are largely sticking to their knitting, investing little in renewable energy or other clean energy-related projects while maximising profits from their legacy assets and showering their shareholders with cash via dividends and share buybacks.

There is an obvious financial rationale for BP’s dialling back of its climate-related goals.

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It’s not just the short-term opportunity to generate bumper profits from strong oil prices and the big spike in gas prices that a combination of the pandemic-related dearth of investment in new production and then Russia’s invasion of Ukraine have created.

According to BP, it can generate returns on investment of 15 per cent to 20 per cent from its fossil fuel projects. The returns from bioenergy are about 15 per cent, but only 6 to 8 per cent for renewables such as solar and wind. Within the new strategy and the additional investment in non-fossil fuel projects is a tilt towards biofuels, electric vehicle charging and its convenience business.

But BP would argue that there’s also a social rationale to its revised plan.

The war in Ukraine, the choking off of access to the Russian gas that supplied 40 per cent of Europe’s gas requirements and the embargoes Europe and the US imposed on Russian oil was a potential “lights off” moment for Europe and its governments.

They scrambled to secure alternate supplies, paying whatever it took to compete with the traditional Asian buyers for LNG, re-opening mothballed coal mines and expanding the production of existing mines, restarting dormant nuclear facilities and buying oil from non-Russian producers.

The rate of expansion of renewables has been impressive, and will continue to be, but it will be decades before there is no material demand for fossil fuels.

The Western governments – and this includes the Biden administration in the US – have also been urging oil and gas companies to increase production.

As Looney himself said this week, where the conversation when BP made its original pledge to reduce its carbon emissions was almost entirely around cleaner energy, there’s now much more emphasis on energy security and affordability.

If the transition to cleaner energy were to be smooth, he said, it required investment in the current energy system – one that is still primarily dependent on oil and gas.

There is substantial logic to that quite pragmatic perspective. The world can’t instantly move to net zero carbon emissions.

Securing energy supply

There has to be a transition from a fossil fuels-dominated energy sector to that clean new world, and that will necessarily continue to involve oil and gas between now and 2050.

In turn, that means the existing producers will need to invest in maintaining adequate production over the next couple of decades if the lights are to remain on, homes are to remain warm in winter and cool in summer and industries are to continue to operate.

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The flow-on effects of the war in Ukraine to the energy sector in Europe, with ripple effects throughout the globe, are a reminder of how brittle and vulnerable the system is.

The rate of expansion of renewables has been impressive, and will continue to be, but it will be decades before there is no material demand for fossil fuels.

That means there will probably have to be new investment in production to sustain supply if energy is to be both available and affordable – a discussion point in the debates around the current energy market here, particularly the gas market.

BP’s plan is to focus on “short term, fast payback” projects which it argues will be appropriate in a world that will be reducing its fossil fuel usage to meet the 2050 target.

The cynics would say the company’s arguments about security and affordability are a cloak for greed – that it doesn’t want to miss out on the opportunity for the unusually fat profits its North American peers will enjoy and has succumbed to pressure from its own shareholders to deliver the far higher returns available from its legacy business relative to its cleaner energy investments.

There’s no doubt a strong strain of truth to that view. BP is a commercial organisation whose shareholders expect competitive returns.

The more pragmatic would accept, however, the other, perhaps inconvenient truth. The turmoil experienced in energy markets last year dictates a response from oil and gas producers if the kind of chaos and crisis that almost overwhelmed Europe last year isn’t to become a permanent and pervasive feature of the world we live in.

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