The COVID-19 crisis and climate change are catching up with Big Oil. It is no longer business as usual. The era of stranded assets – oil left in the ground, a fantasy concept peddled by allegedly out-of-touch environmentalists only a few years ago – may have arrived.
As if to prove the point, BP, the former British Petroleum that is Europe’s second-biggest oil company, on Monday unveiled oil and natural gas write-downs of as much as US$17.5-billion after taxes, or US$21-billion pretax. The latter is equivalent to a quarter of BP’s market value on the London Stock Exchange.
The write-down marks what may be the start of a Bernard Looney-inspired revolution at BP. Mr. Looney, 49, is the Irish engineer and career BP insider who replaced Bob Dudley as chief executive in February and immediately swung into action.
Within days of taking the job, he announced a grand plan to make BP carbon-neutral (net-zero emissions) by 2050. As the coronavirus onslaught took on global dimensions, sending oil prices into the toilet, Mr. Looney culled 10,000 jobs. Then came the massive write-down and admission that the easy money era was pretty much over. In an internal webcast the week before the write-down news, Mr. Looney said: “The oil price has plunged well below the level we need to turn a profit. We are spending much, much more than we make.”
Anyone can understand that concept – best to avoid a slow-motion financial suicide. But low prices aren’t BP’s only problem. The other biggie is how to achieve net-zero emissions while maintaining profits and, crucially, the hefty dividend. BP’s dividend is worshipped by pensioners. It accounts for fully 7 per cent of the dividends paid by FTSE 100 companies. But with a yield of 10 per cent, the dividend seems unsustainable, and BP is wary of taking on new debt to finance the payments when the price of oil is so low.
The write-down was triggered by the begrudging acceptance of two related realities. The first was that oil prices are likely to stay lower for longer, the reverse of the “stronger for longer” mantra that ruled the thinking of oil and mining bosses until about the middle of the past decade. The second was that low prices and the global decarbonization effort mean that some oil reserves may never be pumped – the dreaded stranded asset scenario. To oil companies, oil left in the ground is like a parked passenger jet: Neither pays the rent.
BP reduced its long-term price assumption for Brent crude by 27 per cent, to US$55 a barrel (the price on Monday was about US$41, down by a third in the past year). The forecast for American gas was cut by 31 per cent. The impairment charges and exploration write-offs will cost the company between US$13-billion and US$17.5-billion in the second quarter.
In a statement, BP said it would have to adapt to a world where oil is neither needed nor wanted as much as it used to be, noting that “the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy and energy system, as countries seek to ‘build back better’ so that their economies will be more resilient in the future.”
So is BP launching a black-to-green transformation? Don’t count on it.
The company has a history of talking green and doing little to nothing about it. The net-zero pledge was easy. It came with almost no details or milestone commitments. BP will no doubt mill through three or four more executives before 2030, meaning Mr. Looney will not take the blame if the goal is missed.
While rivals Chevron and ExxonMobil have little interest in replicating BP’s pledge, it is hard to say yet that BP is at the forefront of the decarbonization revolution. Job No. 1 is keeping investors happy. Loading up on wind and solar farms, and leaving oil in the ground, may not be what they want.
Twenty years ago, under John Browne, the CEO who turned BP into a global energy competitor, the company launched a US$200-million public relations campaign to rebrand itself as Beyond Petroleum, complete with a starburst green and yellow logo that carried no hint of the core business. The implication was that BP, in time, would become a diversified energy company, with oil just one of its divisions.
The transformation went nowhere. BP realized it was better at drilling holes than operating wind and solar farms and got rid of them shortly after Beyond Petroleum was rolled out. It doubled down on its oil bet by investing heavily in U.S. shale oil and gas and the Alberta oil sands. BP’s Deepwater Horizon oil spill in 2010 in the Gulf of Mexico, one of the industry’s worst disasters, reminded the world that BP’s heart was black, not green.
BP might be greenwashing itself again by pledging to embrace a net-zero future, to the point that it is writing off huge chunks of value in its hydrocarbon business. If Mr. Looney wants to emerge as the man who transformed BP into a green-tinged, diversified energy company, he will have to follow up with some firm spending and milestone commitments to embrace beyond doubt that BP’s future is “Beyond Petroleum." If he doesn’t, BP will remain part of the climate problem, not the solution.
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Eric Reguly