BP’s transition strategy challenged
British oil giant BP, once seen as a leader in the energy transition, is scaling back its ambitions, leaving its capital expenditure misaligned with net zero goals.
In the midst of the pandemic in early 2020, former BP CEO Bernard Looney announced a drastic target: reducing oil and gas production by 40% by the end of the decade while significantly ramping up investments in renewables. Though celebrated by climate campaigners, the decision was poorly received by many shareholders. BP’s share price plunged in the wake of the announcement and remains down more than 14% compared to 2020 levels.
One of the key architects of BP’s net zero strategy is the firm's new CEO Murray Auchincloss who took over last year. He may now be overseeing a potential U-turn.
By late last year, speculation was rife that BP might abandon its ambitious targets to cut oil and gas production. Earlier this week, the firm announced that its much-anticipated investor day, originally scheduled for 11 February in New York, had been postponed to 26 February in London as Auchincloss recovered from a medical procedure.
However, it isn’t just the Canadian executive’s health that is under scrutiny. BP also warned that its Q4 results could be affected by declining oil and gas revenues and lower refining margins. The rescheduled Capital Markets Day is expected to provide further clarity on BP’s production cuts.
CAPEX challenges
While BP has yet to formally confirm any U-turn, its capital expenditure over the past three years indicates that the firm is far from aligned with its net zero goals, as new research reveals.
A comprehensive review of BP’s Financial Investment Decisions (FIDs) by the Australasian Centre for Corporate Responsibility (ACCR) shows that none of the investment decisions made in 2023 aligned with the International Energy Agency’s (IEA) Net Zero Emissions (NZE) pathways for oil and gas.
The report warns that if BP scales back its production cut targets, it is forecast to produce 84% more oil and gas in 2030 than it had aimed for in 2020. BP’s CAPEX decisions are based on scenario modelling that assumes oil prices will remain at $60 per barrel and gas prices above $4.50 per million British thermal units (MMBtu) by 2030—assumptions significantly more optimistic than those of its peers and well above the IEA’s net zero emissions scenario.
Additionally, BP’s CAPEX estimates exclude spending on projects below $250 million and investments through joint ventures and equity-accounted entities. As a result, over 80% of its 2023 investment decisions were not included in its so-called Paris-consistent CAPEX evaluation framework, according to Nick Mazan, UK company strategy lead at ACCR.
“BP claims its CAPEX is aligned with the goals of the Paris Agreement. However, if all oil and gas companies applied the same price-based framework as BP, they would sanction enough projects to exhaust the remaining carbon budget for a Paris-aligned world five times over,” Mazan said.
The report also highlights that BP’s financial risk modelling scenarios do not extend beyond 2030, despite many current investment decisions having implications well beyond that timeframe.
The “valley of death”
BP finds itself caught between the short-term demands of shareholders focused on profit margins and the long-term expectations of investors prioritising net zero targets. The interim period, dubbed the “valley of death” by the Financial Times, is becoming increasingly difficult to navigate.
At present, renewables account for less than 10% of BP’s earnings. With profits from oil and gas declining, BP, like many of its peers, is facing a vacuum. In a bid to keep investors at bay, the oil giant announced major job cuts, with some 4700 workers facing redundancies.
BP is not the only one facing challenges. Some of its main competitors, including Shell, Total, and Exxon, are also reporting lower profits amid a significant drop in oil prices since 2022. Meanwhile, major shareholders such as BlackRock, State Street, and Vanguard—some of whom previously supported climate ambitions—are scaling back their commitments, with BlackRock leaving the Net Zero Asset Managers initiative.
Mark van Baal, founder of the shareholder campaign group Follow This, argues that BP’s backtracking reflects decreased shareholder pressure to reduce emissions. “When the votes for our resolutions increased, oil majors’ ambitions increased. When they decreased (after 2021), carbon reduction targets went down, as we have seen at Shell and BP,” he said.
Last year, Follow This did not file a resolution at BP’s AGM, as major shareholders adopted a wait-and-see approach with a new CEO taking over. The group has not yet decided whether to file a resolution at this year’s AGM, but van Baal emphasises that investor action is critical: “Investors hold the key to tackling the climate crisis through their votes at AGMs, yet only one in five has used that key in recent years.”
Shareholders back off BP to ramp up pressure on Shell and Exxon
ACCR's full report CAPEX beyond Paris is available here
