BP restore its faith in oil and gas [Global Gas Perspectives]

BP’s shift in strategy towards expanding its oil and gas is driven in part by the fact that its stocks have been underperforming all majors, including Shell, with many shareholders expressing concerns that BP’s energy transition policies have been contributing to this under-performance. Lower earnings have also impacted BP’s cash flow and ability to reduce debt.

Even though BP’s profitability depends largely on its oil and gas operations, since 2020 it has been shifting emphasis toward low-carbon businesses. This is now seen to have contributed to performance uncertainty and lower returns than BP’s investors would like to see. 

In contrast, Shell’s performance and profitability appear to have benefited from greater focus on oil and gas, while scaling back on its plans to reduce emissions and invest in renewable power generation.

During the last calendar year BP’s share price slumped by 17%, while Shell’s appreciated by 9%. Among majors, including Shell, BP ranks last in terms of share performance.

TotalEnergies is doing better than both because it has been consistently adhering to the policy that its core business is to sell oil and gas, while investing in renewables and alternatives for the future. CEO Patrick Pouyanné, insists that “the energy transition is no simple process, that renewables will continue to be expensive and show bad returns for a considerable time, and that the world will need hydrocarbons for many decades to come.”

However, more recently both Shell and now BP appear to have come to a similar conclusion.

BP’s under-performance has made the company a target for takeover. In April, Abu Dhabi’s ADNOC reportedly did exactly that. It expressed interest to acquire BP, but talks did not progress due to concerns by ADNOC about how BP would fit within its overall strategy. Nevertheless, without a significant improvement in performance, BP could attract other takeover interest in an industry where consolidation is back in vogue again.

All energies growing

BP produces an annual Energy Outlook that, the company says, is used to guide its own corporate strategy. The introduction to the 2024 edition, states “the Energy Outlook is produced to inform BP’s views of the risks and opportunities posed by the energy transition and is published as a contribution to the wider debate about the factors shaping the future path of the global energy system. But the Outlook is only one source among many when considering the prospects for global energy markets and BP considers a wide range of other external scenarios, analysis and information when forming its long-term strategy.”

In the latest edition, BP increased its forecasts for global oil and gas demand, “signaling a slowdown in the transition to clean energy.” This is due to the fact that renewable power sources, even though expanding rapidly, are not expanding quickly enough to meet the growing global energy demand. This is driven by “increasing levels of prosperity and rising living standards” in emerging economies, but also the increasing energy needs of AI data centers.

According to the Outlook, the world is in an “energy addition phase” where both low-carbon energy sources, like renewables, and fossil fuels are increasing in consumption.

Even though the Outlook stated that delaying the transition to clean energy could be “costly,” it also stated that oil would continue to “play a significant role in the global energy system for the next 10 to 15 years.”

Based on the current global energy system trajectory, BP forecasts that oil demand will be close to 98mn barrels/day by 2035, about 5mn b/d up on last year’s estimate. It points out that any decline in the use of oil for road transport will be offset by rising oil demand in the petrochemicals industry.

Similarly, the Outlook’s natural gas demand forecast in 2035 is 3% up on last year’s estimate.

It is likely that these new forecasts are used to “inform” BP’s evolving energy strategy and its shift back to oil and gas.

Looney dials back transition plans

During his tenure as CEO, Bernard Looney, in a new strategy unveiled in 2020, spearheaded efforts to shift investments into renewable and low-carbon energy, pledging to cut oil production by 40% by 2030. 

But by early 2023 he was forced into a reversal. Worried that since the 2020 decision the company’s shares significantly underperformed those of its peers, but also driven by high profits, he scaled back plans to cut oil output from the original 40% down to 25% by 2030, compared to 2019 levels. BP also reduced its plans to cut emissions from fuels sold to customers to 20% to 30% by 2030, compared to the 2020 target of 35% to 40%. But it retained its target to reduce its total emissions to net-zero by 2050.

Looney justified this by saying: "we need lower carbon energy, but we also need secure energy, and we need affordable energy. And that's what governments and society around the world are asking for." 

He emphasised that the world needs “secure” energy alongside renewables. “It’s clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon — all three together, what’s known as the energy trilemma…To tackle that, action is needed to accelerate the transition. And -at the same time- action is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it’s needed today.”

With Looney’s departure in June last year, the ascend of Murray Auchincloss as BP’s new CEO has been ushering further change.

On taking his position, he initially confirmed that Looney’s renewable and net-zero strategies would remain unchanged, with low carbon technologies retaining their strong role in BP’s core activities.

But after the 2023 results, Auchinloss pledged to turn BP into a “higher value company,” by “pragmatically adapting” to changes in energy demand. This includes increasing oil output to the end of 2027 by more than previously stated and increasing its LNG portfolio by 9% by the end of 2025.

Already, BP expects its 2024 upstream oil production to be higher in comparison to 2023.

 BP CEO Murray Auchincloss. Source: BP

Auchincloss takes it further

By July this year, BP rediscovered confidence in the future of oil and gas, buoyed by profits that were largely generated from its oil and gas business. Auchincloss promised to shift focus to expanding the company’s core oil and gas business and returning more cash to shareholders.

BP confirmed that it will develop a new oilfield in the Gulf of Mexico, targeting to produce initially 80,000 b/d from the Kaskida field, discovered in 2006.  

Auchincloss went as far as to say: “Our recent go-ahead of the Kaskida development…demonstrates our commitment to delivering as a simpler, more focused and higher value company.” He said that with natural oil reservoir decline between 3-5%/year, BP will continue to develop high quality oil fields in the future.

Referring to 2030 oil and gas targets, he said decisions about which projects to proceed with over the next two years “will really determine that.” He added “as we get through 2024 and 2025 and decide those, then we’ll update you in due course about what 2030 really looks like.”

On the back of improved second-quarter results, BP raised its dividend by 10% to $0.08/share and said it would continue buying back $1.75bn of shares/quarter for the remainder of the year. By the end of 2025, it plans to buy back shares worth at least $14bn, potentially supporting its share price even more.

This is a start in reassuring its shareholders who expect the company to scale back climate ambition further and improve performance, return to “pragmatism” and prioritise shareholder value. Auchincloss implied this when he said recently “we are really, really driven by returns.”  

One of BP’s top investors said in May that they would “not be surprised if BP decided it had been too ambitious and moved more in line with its peers and not cut oil and gas production as much as it initially said it would.”

BP’s position is that “a resilient oil and gas business is an essential part of our transformation to an integrated energy company. The world cannot simply ‘switch off’ the existing system before it has built the new. The transition has to be orderly, so that supply keeps pace with demand…Achieving this requires huge investment in lower carbon energy. And it requires ongoing investment in oil and gas.”

BP’s view is that without continued investment, oil and gas production would fall suddenly, not gradually. Faster than the world can build lower carbon alternatives. As a result, “further investment in oil and gas helps to meet the world’s growing energy consumption. And it can help to fund the transition to lower carbon energy as well.”  

This resonates with many others. Michele Della Vigna, head of natural resources research at Goldman Sachs said last year that “the world’s infrastructure is not ready to become fully electric overnight…We don’t have enough charging networks. We don’t have enough battery factories. We are going to see increases in oil demand until the end of decade…We’ve been advocating for a while that even under a Paris-aligned scenario industry still needs to develop oil and gas.” He added “I don’t think it comes at the expense of low-carbon projects.”

BP's decision in February 2023 to dial back climate targets and the 20% share price bounce that followed, “raise questions about the value investors place on environmental investing” – it appears that returns and shareholder value trump that. However, given the success of that action, it is becoming increasingly likely that BP will revisit its oil and gas and climate targets in the not too distant future.