OPINION: Don’t say it out loud, but BP is back into petroleum

When Bernard Looney took over as chief executive officer of BP in 2020, he promised to quickly decarbonize the British oil major, cutting oil and gas production by 40% by 2030 and channeling billions of dollars into wind and solar projects. It was a stronger version of the “Beyond Petroleum” slogan BP once used.

On Tuesday, Looney altered course. The company put out some fine words about its commitment to green energy and several billion dollars in investment to back it. But in tandem, it promised shareholders it would invest heavily into oil and gas projects. Instead of a 40% output cut, oil and gas production would fall by 25% by the end of the decade.

Don’t say it out loud -- because Looney took pains to emphasize that rather than reversing strategy, he was “leaning in” to it -- but the new slogan is somewhat closer to “Back into Petroleum.” A rival joked that Looney’s climb-down meant BP stood for “Bitter Pill.” Hyperbolic, perhaps, but there’s a point.

Borrowing from language that ExxonMobil used last week, Looney explained his new vision on a Bloomberg TV interview: “We have to invest in today’s energy system, and the reality is that today’s energy system is predominantly an oil and gas system. And that needs investment.”

Of course, this is right. But it was also true back in 2020 when Looney decided instead to shrink the company’s fossil fuel footprint dramatically.

For now, the energy “transition” remains a bit of a misnomer: Renewables are an addition to the system, with consumption of oil, natural gas and coal at a record high in 2023. At some point, fossil fuel demand would start to fall on an absolute basis, but the world’s energy system isn’t quite there yet.

The problem that BP faces is similar to much larger European competitors Shell and TotalEnergies -- it’s having an identity crisis. For investors seeking to profit from fossil fuels, these companies offer a mixed bag of highly accretive oil business and a so-so renewables unit, while American firms offer a more direct exposure to oil profits. For shareholders more interested in renewables and the fight against climate change, BP isn’t green enough and probably never will be.

This identity crisis translates into money. On a price-to-earnings ratio, BP is trading at about five times compared to the eight to nine times of Exxon and Chevron. The company, handicapped by the disastrous Gulf of Mexico oil spill and a traumatic exit from Russia, is a shadow of its former self. Despite record profits in 2022, its market capitalization stands at little more than $100 billion, down from a peak of $250 billion in 2006.

Now, the promise to pump more oil and gas is likely to attract fossil fuel shareholders, particularly from the U.S. In early trading, BP shares surged about 4%, signaling a positive reception.

Whether the new strategy works, though, depends largely on high oil and gas prices, higher spending and a shift to green projects with a higher payback. If all goes as planned -- a rather big if -- BP promised shareholders it would be able to generate underlying earnings (Ebitda) of $51-$56 billion by 2030, up from a previous target of $39-$46 billion by the same year.

A key plank of the revised strategy is a stronger focus on green investments close to BP’s heart, such as bioenergy, hydrogen and charging points for electric vehicles, which return 15%, rather than wind and solar, which return 6%-8%. Note that the company considers growing its convenience retail unit as part of its “transition” business, so in BP-speak, ordering a cup of coffee at one of its gas stations helps to save the planet.

The cost of pumping more oil and gas is higher spending, which will rise to $14-$18 billion, up from a previous target of $14-$16 billion. That’s going to test investors, particularly when a chunk of that money will go into low-returning green projects. The plan for extra shareholder returns is based on rather punchy price assumptions. BP would need at least $70 per barrel of Brent crude, up from a previous assumption of $60 per barrel. Today, Brent is trading just above $80 a barrel. Because BP’s projections are inflation-adjusted based on 2021 values, it means that the company would need even higher nominal oil prices by the end of the decade. Even assuming inflation at just 3%, nominal Brent prices will need to rise to more than $85 a barrel by 2030.

By altering course, BP has finally acknowledged what had been crystal clear to shareholders for a while: Pumping fossil fuels is very profitable, and demand for oil and gas will stay strong for longer. It hasn’t pulled a U-turn, but it isn’t going in a straight line either.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.” This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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