BP Strategic announced its shift away from oil to greener energy resources including natural gas,
renewable fuels, wind, solar and hydrogen. This change in course is evocative of when Netflix
abandoned DVD rentals in favor of streaming. Netflix shareholders had a big win.
Will this work out similarly for BP shareholders?
BP’s statement that it will reduce its carbon footprint in exploration and production
by 35% to 40% by 2030 is consistent with its goal of cutting oil production by 40%, or 1.0 million
barrels per day, through “active portfolio management.”
This means that BP has identified assets that it will sell.
With a self-imposed 10-year window to accomplish these reductions,
no one expects BP management to begin a large divestiture program in the midst
of the pandemic and oil price collapse. Shareholders would revolt.
Nevertheless, buyers will be lining up, and bargains will be had.
Majors and independents can be expected to buy out BP’s share of joint developments.
National oil companies such as Saudi Aramco or Sinopec are also likely buyers.
BP’s overhanging supply of oil properties for sale will also depress asset prices globally for a time,
exacerbating the beating that oil companies have taken in the market.
This partial exit will provide the cash to pay down debt from earlier acquisitions,
pay dividends and pay for ramping up BP’s endeavors in the carbon-lite energy economy.
Can BP make the transition? With a pre-pandemic worldwide workforce of more than 70,000,
the company has relied upon a hierarchical, command and control management style—apart
from the entrepreneurs in its world-class commodities trading group.
BP will maintain much of its current workforce, albeit 10,000 layoffs lighter due to the pandemic,
to achieve maximum asset values while divesting.
However, the carbon-lite energy workforce globally has been more entrepreneurial and dynamic.
These individuals will fit well with BP’s trading group,
but the overall change in culture will be jarring for the old-timers.
Of the low carbon businesses that BP can enter,
the company is already securing and supplying agricultural and bio feedstocks to renewable fuels producers.
BP itself has added renewable diesel production to its Cherry Point Refinery in Blaine, Washington.
The renewable fuels processed from agricultural feedstocks are closest to BP’s legacy business
and benefit from an established network of fueling stations for distribution to consumers.
BP may consider integrating upstream and buying the farms and slaughterhouses to secure
feedstock; otherwise it will not be an integrated producer of ethanol or renewable diesel.
Hydrogen produced from natural gas still produces carbon,
but hydrogen produced by electrolysis using wind or solar power is carbon-free, hence its moniker “
green hydrogen.” While the technology for producing hydrogen is not new,
the infrastructure necessary to distribute hydrogen either for use in fuel cells or
as a substitute for natural gas is still in its infancy. Hydrogen cannot just be dropped into
world energy markets as a direct substitute for natural gas.
Wind and solar energy are clearly part of the future for BP.
Offshore wind farms utilize much of the same technology required for offshore drilling.
The distribution of energy from these supplies is via local and national grids,
and BP may benefit from plugging into a ready grid. In developing nations,
BP may have to pay to develop the grid to distribute the electricity to consumers.
Wind and solar have benefited worldwide from direct and indirect government subsidies
and regulated markets. Even in the so-called deregulated Texas electricity market, the transmission
lines necessary to bring West Texas wind energy to the populous cities hundreds of miles away
have been paid for by regulated charges to all consumers.
But wind and solar are traditionally low margin because of rapid technological change and competition from cheap natural gas.