In February 2020, then-new CEO Bernard Looney told the world that one of the world’s oldest and largest oil companies would become a net-zero company by 2050. To achieve this, the company will cut oil and oil, and gas production will increase by 40% by 2030.
Four years and one major crisis later, BP has abandoned not only its original 40% production cut target, but also a revised 25% downward target. In other words, BP is a return to basics. And commodity investors who haven’t been paying attention should do so, as should transition investors.
“This is certainly a challenge, but it is also a huge opportunity. It is clear to me and to our stakeholders that if BP is to fulfill its role and achieve its purpose, it must change. We want to change – this is the right thing for the world and for BP,” Bernard Looney said when announcing the company’s new direction in 2020.
When this statement was made, there was great excitement in the world of climate change activists. Activists were not satisfied, but acknowledged it was a step in the right direction. Investors took the news differently. BP’s stock price plunged immediately after the new policy was announced, but rebounded in the second half of the year.
Then the pandemic hit, and energy demand plummeted, leading to slumps in prices. BP seemed to believe at the time that the industry would never recover. Because in one of the latest World Energy Outlook editions, global oil demand peaked back in 2019 and has never returned to that level. BP still believed its net-zero plan and 40% cut in oil and gas production by 2030 were on the right track. And now it’s 2022.
Oil demand has been on the rise since the lockdown began to be lifted in stages. Once China joined the list of participants in lifting lockdowns, the recovery in demand began in earnest. The Ukraine war took over that momentum, along with security concerns over price hikes not seen in years.
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As a result of this rally, energy companies have been the best performers on the stock market, overtaking big tech companies and posting record profits, resulting in higher dividends and large share buybacks. This also led to a reconsideration of some of Big Oil’s transition plans. In the case of BP, the company’s senior executives have been forced to abandon plans to cut oil and gas production by a further 25% by 2030 after recent harsh reminders that the world still runs on hydrocarbons. It became.
All these developments have also caused investors to rethink the energy transition and the security of energy supplies. This has caused investors to think twice, and pro-transition news outlets say investors should be cautious because oil companies are not serious about the transition, and worse, the direction of their operations is unclear. is sounding the alarm.
The Institute for Energy Economics and Financial Analysis said in a recent report that “a decarbonized economy threatens the fossil fuel industry’s core business model, and the sector needs a cohesive and coherent plan to navigate this changing world.” It doesn’t seem to have provided any information.” The report focuses on BP’s latest news on its U-turn in oil and gas production cuts, suggesting that BP basically has no idea what it wants to do about its future, and that this That should make investors nervous about the oil and gas industry as a whole. .
This criticism certainly has a lot of merit in the context of a business world that is steadily moving towards a cleaner, greener energy future. Because such future economics makes sense. But the actual business world in which BP and all other companies operate differs from that vision.
It has been pointed out that the economics of the energy transition, as envisioned by its proponents and proponents, does not necessarily make sense. That’s why BP and other companies are abandoning their initially ambitious goals and momentum. It was the result of years of activist pressure that was warmly received by politicians in decision-making positions.
However, these companies realized that their migration efforts were not paying off and reversed course. You might call it a lack of a “coherent and consistent plan.” On the other hand, some might call it flexibility in the face of reality that turns out to be different from expectations. In addition to the news that BP has abandoned its 2030 production cut target, fellow giant Shell has scaled back its transition ambitions, and fellow giant Total Energy has also reduced its exposure to offshore wind power, at a similar time. It was reported that they are considering reducing the amount. It just announced a $10.5 billion oil and gas development in Suriname.
The energy industry seems to have a pretty clear outlook on the future. Hydrocarbons remain the most widely used energy source on Earth. Their alternatives don’t seem to live up to the hype. Big oil companies are therefore scaling back their transition ambitions in favor of businesses that have proven to be profitable for companies and their investors. Sometimes it really is that simple. ”
Written by Irina Slav for Oilprice.com
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