BP to ramp up fossil fuel production and slash renewables
Critics warn that the oil major's doubling down on fossil fuel expansion risks stranded assets and long-term financial fallout
British oil major BP will increase annual oil and gas investment to $10bn through 2027 as part of a fundamental strategic reset, the company announced on Wednesday in a Capital Markets update.
Investment in low carbon energy such as renewables will be “significantly lower” over the coming years, with spending likely to come in at $1.5bn to $2bn per year — more than $5bn per year below the previous guidance.
“Today we have fundamentally reset BP’s strategy,” BP CEO Murray Auchincloss said. “We are reducing and reallocating capital expenditure to our highest-returning businesses to drive growth, and relentlessly pursuing performance improvements and cost efficiency. This is all in service of sustainably growing cash flow and returns.”
BP’s new official position is that the energy transition “has been slower than expected” and that the company went “too far, too fast” in its “overly ambitious” support for renewables, the oil exec added. Meanwhile, oil and gas is in a major “growth phase” and will be needed for decades to come, hence the need for increased investment.
This last point contradicts findings from the International Energy Agency, which forecasts a decline in oil and gas demand after 2029. Ironically, this means that the focus on fossil fuel expansion could present serious risk to shareholders, the very stakeholders whom BP is attempting to woe in its “reset”.
“Even shareholders who don’t care about climate risk, should be worried,” said Mark van Baal of Follow This, a long-term activist shareholder. “BP risks a dramatic decline in share value as the market adjusts to the realities of disruptive innovation, stranded assets, and climate liabilities. Sooner or later oil companies will be held liable for the costs for climate damage.”
Even prior to Wednesday’s strategic “reset” that scraps all previous climate aims and targets, BP has made very limited progress decarbonisation, he added. “With less than 10% of investments in low carbon energy since 2020, it’s clear BP never made a serious effort to transition. The previous CEO Bernard Looney was an excellent salesman of green promises, but BP never walked the talk.”
Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics, said BP's decision to reduce capital expenditure on renewables and double down on its fossil fuel assets will be “shocking but not surprising” to investors focused on sustainability.
“Having already cut back its energy transition targets in 2023, BP's subsequent underperformance compared with peers has created pressure for BP management to focus on sustainability of a financial rather than ecological nature,” she said.
For sustainable investors, this will hardly be “the end of the argument”, she added. Several of BP's shareholders decided to vote against the company's chair the last time BP reduced its commitment to energy transition, after not being offered the opportunity to vote on the company's adjusted strategy. That's a "possibility again this year", unless BP decides to table a "say-on-climate" vote at its upcoming AGM as 48 investors have already requested.
Short term versus long term risk
Elliott Management, known for its short-term activist investment strategy, has a track record of pushing for overhauls, boardroom changes, or company breakups.
It also has a near 5% stake in BP.
“Elliott’s agenda is most certainly not focused on the long-term future of BP," said Van Baal. “Short-term activists ignore risks such as peak oil and gas, stranded assets, carbon taxation, liability for climate-related damages, and disruptive innovation.”
Meanwhile long-term investors, including Robeco, Rathbones and Phoenix Group, have urged BP to allow shareholders to vote on its climate strategy at the firm’s upcoming AGM in spring.
BP's blames a "changed world" for its climate backslide
When asked about the reason for its change of direction, Auchincloss said that five years ago the "energy transition" was "the number one thing that all of the nations ... and all the corporations were thinking about". That gave the corporation confidence to pursue a more ambitious decarbonisation transition plan.
However, since then, shocks such as the COVID-19 pandemic and the Russia-Ukraine war, have "impacted the ability of nations and corporations" to afford the transition.
"We find ourselves in a different place now," he said. "Nations are prioritising affordability, assurance of flow, security of supply. The transition isn't being valued as much as it was five years ago."
As oil and gas companies turn their back on climate commitments, it's important to remember that the "oil and gas" for energy security argument has already begun to wear thin among various nations.
The Ukraine war, for example, has put pressure on the UK and the EU to ween themselves off Russian gas and focus more on renewables for energy security.
Moreover, renewables are often cheaper than fossil fuels for energy generation, with some analysts now arguing that the transition is now an unstoppable economic force. This contradicts the big oil's "affordability" argument in favour of new oil and gas investments.
BP’s transition strategy challenged
What does Elliott’s stake in BP mean for the oil giant’s renewables business?
