Editorial: Harvest and quit? [NGW Magazine]

The new CEO at BP has set out his intentions with uncompromising clarity: more and more will be spent on non-oil and gas activities, with net zero carbon from all its operations being the goal in 2050.

The former head of the company’s upstream division, Bernard Looney announced February 12 that he also wants to halve the carbon intensity of the products BP sells by 2050 or sooner; to install methane measurement at all of its major oil and gas processing sites by 2023; and also to halve the methane intensity of its operations. Being affordable and reliable are the bare minimum for energy products these days: an oil company’s output now has to be impeccably clean, too, he said.

Looney has set a long time-frame; but if the plan is not universally adopted then the plan could turn out to be a spectacular act of self-harm: no other company of that size and corporate structure has made such a commitment. Can it carry its shareholders with it?

Equinor is state-owned and backed by a massive sovereign wealth fund and set a lower target; Repsol, a ‘net-zero emissions by 2050’ company, is relatively small but even so it is mentally writing off assets to the tune of $4.8bn in light of the lower oil and gas prices implied by the Paris Agreement. From now on, the Spanish company’s upstream business will be all about the generation of value and cash over volume.

BP is going to take the same approach: the oil and gas it does work with has to bring the highest margins possible. Given that the new plan came the same day as the announcement of an – of course, long-term – offtake agreement with Kosmos for LNG from the Greater Tortue area, some continuity is still on the agenda.

Outdoing the European majors Total and Shell, who have created “integrated gas and power” divisions from the relevant parts of their upstream, power and LNG trading books, BP has rewritten its vocabulary. It has abandoned traditional divisions ‘upstream’, ‘refining, marketing and chemicals’ altogether – important though the products will be. And among the ‘integrators’ holding this structure together will be a trading and shipping team, from whom much will be expected. Legal and finance teams are also reassuringly still in place.

The new structure will make like-for-like comparisons difficult for the first year of the financial quarterly reports; compounding that may be new metrics, such as intensity/barrel of oil equivalent.

More generally, is this another example of “harvesting and quitting,” as the energy economist Dieter Helm has put it? If indeed there is a finite amount of oil and gas that may be produced before the world’s carbon budget is used up, as Looney agrees, then each barrel produced up until that point is worth less than the one before until the last one is given away. All the rest will remain untouched. So an early switch of focus is desirable.

Looney’s plan, if universally adopted, offers the promise of a delay to that unknowable date. Adding to the delay is the rejection of coal and the rise of renewables, coupled with new demand for cleaner gas, especially in transport.

Gas has been a major beneficiary of the coal reduction in Europe although some countries need a well-designed market to incentivise gas – in the case of Germany – and to penalise renewables for unreliability. Hastening that unknown date however is the rise of coal burn in Asia, which makes a mockery of Europe’s efforts.

A few days on, the response has been broadly positive, but the share price ended the week lower than it started, despite the spike on February 12. The major’s strong commitment to retaining the dividend – it paid out $8.5bn last year – and meeting energy demand will however require a very steady hand at the tiller.

The expected break with the past met approval from most quarters, although it is unlikely to be radical enough to restore sponsorship deals with the arts – money the company will now need for the herculean task facing it.

Former CEO Bob Dudley, the man who restored order after the horrific Macondo well disaster, has himself now moved on, leaving a company shorn of some value but also nimbler and with a substantial presence in resource-rich Russia.

But when investment firms like BlackRock talk about withdrawing their money from oil companies – it controls $7 trillion overall – there is just cause for concern. Will BP’s peers be quick to follow suit; or will they wait to see how pension funds, Oxbridge colleges and individual shareholders respond to this new model?

France’s Total is yet to set out a programme for emissions reduction. Despite expanding into renewables and shifting from oil to cleaner gas in recent years, it faces the same environmental criticism as its rivals. But CEO Patrick Pouyanne made clear this month Total has no intention of moving away from fossil fuels. Where there is demand, there must be supply, and decarbonisation means more expensive energy for consumers, he said.

The US majors such as ExxonMobil, Chevron and ConocoPhillips have similarly been slow to adapt to the new spirit of the times.

A year ago, when ExxonMobil restructured, it even created three new upstream divisions. The aim was to double profits by 2025 and no mention was made of reducing its carbon footprint. Maybe that strategy will prove to be the successful one. Companies that have voluntarily incurred costs in the pursuit of a goal that proves to have been miscalculated will come off worse.