Unearthed today: Beyond Petroleum?

I’m reading about… BP and climate

“A low-grade hurricane that is slowly scraping along the East Coast. A wildfire in California that has led to evacuation orders for 8,000 people. And in both places, as well as everywhere between, a pandemic that keeps worsening.” The New York Times reports on life in a warming world – a world, it reports, for which we are ill-prepared. 

Amid the coronavirus pandemic, there is heightened concern that the smoke, while not necessarily increasing the rate of infection, can make cases of Covid-19, the disease caused by the virus, worse. At the same time, more frequent disasters make it harder to recover, according to Samantha Montano, an assistant professor of emergency management at Massachusetts Maritime Academy. Climate change makes it harder to respond to all disasters.

“What makes climate change so insidious is that it alters hazards, like flooding, just enough to turn what otherwise could have been just an emergency into a disaster, and disasters into catastrophes,” Dr Montano said. “Not only does this lead to more damage but also traps people in a cycle of recovery.”

The article captures the growing awareness of the reality of climate change as something which is here now, impacting on our daily lives. It is a reality which is changing the mindsets of investors who are in turn changing their priorities by the day. Enter BP, the UK oil “super-major” and the biggest oil producer in the US, with huge investments in the beleaguered and capital intensive fracking industry and the highest net-debt of any of its rivals. It also has a new boss and so, perhaps predictably, it is the first to spell out what this new reality means in detail.

The company has changed its forecasts for the oil price, predicting the economy will take years to fully recover from the pandemic, by which time demand growth will be suppressed by the energy transition. As a result, it has written off billions of dollars in assets as effectively stranded: oil that it would make no economic sense to pump. Taking that into account, it made a quarterly loss of $16.8bn, the highest since the massive Deepwater Horizon blowout. To trim costs, it is laying off 10,000 people and spending more than a billion on restructuring. It has halved the dividend it pays, whilst promising to try to keep it at this new level and to invest heavily in share buy-backs once its debt is under control.

But that is not the only new spending it is promising. BP is also trying to pivot away from a dependence on the core business which was going so well but has now gone very wrong.

Asset sales and portfolio management will not just raise much-needed cash to pay off that debt, they will also cut the amount of oil BP pumps by a striking 40%. Significantly, the firm has also promised not to open up any new national frontiers in its oil exploration. While BP will continue to invest most of its cash through to 2030 on finding and pumping oil, it will also aim to increase investment in low-carbon to $5bn a year, installing a total of 50GW of renewable capacity by 2030. To put that in perspective, that’s a little more than the UK’s current installed capacity.

The message to BP’s sceptical shareholders is clear: we will be more resilient than our rivals, we have a plan for when the oil game runs out of steam and we are mindful of the planet. The signal goes further than that too. BP’s move will likely pile on the pressure to some of its rivals, even – perhaps – on governments.  

This is lucky because the impact on the hurricanes, heat-waves and floods – on the scientific reality of climate change from this move alone – is less clear. After all, this is not – yet – BP’s specialist area. 

One of BP’s biggest bets in renewable generation to date is not what many might imagine. It is an investment in producing power from Brazilian sugar-cane. Brazil, by the way, just liberalised its laws on sugar-cane production to allow for greater deforestation. But by my read power from that source would count as renewable capacity. And what does BP classify as a low-carbon investment? In its announcement, BP flags bioenergy, hydrogen and carbon capture and storage as possible future bets. If the hydrogen comes from gas, not wind; if the carbon capture only captures a fraction of the carbon or stores it imperfectly; if the bio-energy leads, directly or indirectly, to deforestation, then the amount of carbon saved by these investments may not be significant – especially when put alongside the much larger ongoing investments in extracting oil and gas. 

This perhaps explains why there are two numbers in the release which are notable in their caution. With all this investment, BP is promising to reduce the “carbon intensity” of the products it sells by 2030 – but only by “at least” 15%. On methane emissions from oil and gas specifically, there is a promise to have a “measurement of methane in place by 2023, and progress underway to halve its intensity”.

As Ben Caldecott argued recently – albeit in a different context – it is possible to divest without doing a great deal to tackle climate change. The investment in renewables and limits on new geographies for exploration should not be discounted. But as BP looks keen to divest itself of the more expensive, risky bits of its business, it risks handing them over to more ruthless operators, with even weaker methane and climate targets. After all, if they don’t make economic sense to BP why should they make sense to someone else, unless they feel freer to cut environmental corners? By way of example, BP has already gotten rid of its plastics and petrochemicals business to Ineos, a firm with amongst the sketchiest commitments to climate action. Some of BPs rivals may see not a threat but an opportunity. And yet despite the sales what emerges, at least over the next 10 years, is still 85% as carbon-intensive, as destructive to the planet, as the company we have today. 

The most fundamental question probably relates though to BP’s ongoing role in advocacy, its seat at the highest tables. Indeed, advocacy for a sustainable future is a key part of the company’s proposal. BP’s strategy shift will buy the firm credibility not just with investors, but also with governments and regulators. Don’t be surprised if BP plays a large role in the UK’s coming climate summit, for example. And yet it takes that seat as still, fundamentally, a company which profits off – and depends on – the environmental destruction which drives climate change. It takes that seat as a company which needs a market for those assets it has not yet written off and which will still, by 2030, be up to 85% as polluting per unit of energy it sells as it is right now.  

To keep to its word BP will be invited to advocate against its short- to medium-term interests. It will be invited to support policies which would further squeeze its own margins and reduce the value of the assets it is trying to sell. It will be invited to oppose policies which would reduce the costs of extracting and selling its core product.

Crucially, to stay true to its word, BP must avoid using its new-found credibility and power to drive up the risks of global heating by swerving attention away from proven policies which reduce fossil fuel use to those with a sketchier scientific basis; like an over-reliance on tree planting or carbon capture to mitigate ongoing fossil fuel use. It’s not a done deal.