British Petroleum (BP): From Deepwater Horizon Menace to Wind Power Angel?
BP, an oil and gas supermajor, are investing in their future through renewable energy and natural gas deals. Is this enough or should they be doing more?
When you think of BP, it’s quite likely that the memory of the infamous Deepwater Horizon oil spillage in 2010 comes to mind, still to this day. One of the world’s seven oil and gas supermajors[i], BP are not exactly a company that reminds one of consistently socially responsible business practices, let alone considerable investment in sustainable energy sources. They aren’t alone in this bad press: the oil and gas industry as a whole has driven an (arguably) negative image through its historical scepticism about climate change. In 2014, Lord Browne, ex-BP chief, went as far as to say that “[the industry] do not want to acknowledge an existential threat to their business”[ii], the “threat” being scientific evidence of global warming.
So what are the risks that BP is up against, in the now increasingly pervasive face of climate change? I have taken a snapshot below of some interesting ones worth highlighting, from their Investor CDP 2013 Information Request[iii]. Although slightly out-of-date, these risks highlight the way BP were thinking even before the Paris Climate Change Conference last year:
“• Long term strategic business risk, arising from policy, technology and customer behaviour, including changes in demand patterns, and with respect to fundamental portfolio balance, financial resource allocation and geographical participation.”
“• Operational and compliance risk, down to the individual asset level, for example with respect to mandatory measurement and reporting of operational GHG emissions.”
“• The risk from the changing climate to new projects and existing operations, over all relevant time scales, to help inform new business investments and to assist existing operations to consider and take action as needed in relation to potential impacts.”
It is positive to note that BP seem to have taken steps to move in a more sustainable direction, in order to face some of the risks of climate change it currently perceives. They have acknowledged that “global action on climate change is needed”[v]. According to The Economist, in the run-up to the Paris Climate Change Conference in 2015, the company modelled potential “demand destruction” scenarios based on the climate pledges made during that time[vi]. Although the company sold off their last solar energy asset following the Gulf of Mexico disaster, it is heartening to see that BP are now potentially on the brink of making a large investment in their US wind power business by the end of 2016. As a bit of context, they actually operate one of the largest renewable (wind) energy businesses owned by a large global oil company[vii]. They also invest in biofuels in Brazil, and through this avoided 0.7 million tonnes of carbon dioxide emissions in 2015[viii]. In addition, they now collaborate with players such as the World Bank and the Oil and Gas Climate Initiative, in formal partnerships to reduce emissions.[i]
BP’s Upstream portfolio is roughly 50% natural gas. While natural gas is a controversial topic in some circles (there are arguments for it being not much better for the climate than coal) it is still widely viewed by many as a lower-carbon alternative energy source. Their major gas supply chains to Europe are being developed (bringing gas from the Caspian Sea in their Southern Gas Corridor Project). China and India, two countries with large carbon footprints, are also recipients of BP’s gas supply.[ix]
A key concept (and risk) worth noting is that of “stranded assets”. This is a risk often discussed by thought leaders such as Carbon Tracker and Jeremy Leggett in the UK. Carbon Tracker define stranded assets as “fossil fuel energy and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes in the market and regulatory environment associated with the transition to a low-carbon economy.”[iv] BP and the other oil and gas majors will need to take additional steps to buffer themselves against such uncertainties, as this will not be attractive risk for their shareholders to weather (no pun intended). Indeed, there is a non-zero risk that such companies will need to entirely rethink their business models in the not-so-distant future, especially as the costs of renewable technology fall and industry players such as Elon Musk potentially succeed in their innovations. Further serious investment into the renewables space would be advisable, or at least partnerships with groups working in this space.
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Student comments on British Petroleum (BP): From Deepwater Horizon Menace to Wind Power Angel?
Very interesting how a big oil and gas company like BP still can seek out alternative energy investments to offset growing concern over fossil fuel use. While it still seems like their core business will be in supplying oil and gas for the foreseeable future, supplementing this with wind farm investments will help diversify their energy portfolio and make them more attractive to investors. Ultimately, the oil and gas suppliers are still essential to the world economy, but hopefully through more fuel-efficient technology the world will be able to use these energy sources in a way that minimizes impact.
Kara – thank you for sharing this post. For these large O&G companies, it essentially comes down to the fundamental question – Are they just Oil and Gas companies or Energy companies? – In their current state, even though they are an oil and gas organization, they will have to eventually migrate significant segments of their organizations to renewable or alternative forms of energy (assuming mostly localized – due to current technology limitation) thus not only protecting their organization and shareholder value, but also in the process creating opportunities to face climate change challenges.
After being involved in many natural disasters, it is encouraging to see BP involved in investing in alternative sources of energy. SubodhChawla question about whether O&G companies are just focused on O&G or could be considered Energy companies raises a great question that I think most these companies board of directors are trying to address. I don’t think there’s an easy solution to that question, but the O&G is shifting from its traditional definition and big players should be the one embracing these changes. It is unlikely that we will get rid of fossil fuel energy, but going forward I expect to see more companies such as BP changing their market mix and increasing revenues generated from renewables sources of energy.