ImpactAlpha, Feb. 10 – On his first day as CEO of BP last Wednesday, Bernard Looney was greeted by Greenpeace protestors who had blocked the entrance to the oil giant’s London headquarters with oil barrels and solar panels. Climate change will be the defining challenge for Looney, just as righting the ship after the Deepwater Horizon disaster in 2000 marked the reign of his predecessor, Bob Dudley.
Looney, a 21-year veteran of BP who oversaw its worldwide oil and gas exploration, development and production, must steer the company to a low-carbon future. That means milking current oil and gas profits while transitioning the company to more climate-friendly sources of energy—and writing down increasingly stranded fossil- fuel assets. Shareholders and protestors alike are watching Looney’s first public remarks on Wednesday. Will BP, which once branded itself Beyond Petroleum only to fall into a Deepwater Horizon hole, leave the climate laggards to join the leaders?
Oil and gas companies “face an existential threat as technological advances and renewable alternatives gain traction,” says Kathy Hipple, a financial analyst with the research firm Institute for Energy Economics and Financial Analysis, or IEEFA. “We are in the midst of a profound energy transition, and the oil majors have largely been caught off-guard by the speed of the transition.”
Looney is expected to significantly raise the company’s climate ambitions. One possibility: broadening BPs emissions reduction targets beyond those generated from its own operations. The more expansive measure, known as Scope 3, encompasses emissions generated from the downstream use of the oil and gas – by people fueling up their cars and driving, for example. The emissions make up 90% of BP’s carbon footprint.
That could catapult BP into the small group of oil and gas companies who have committed to such broad-based measures. Only Shell, Total and Repsol monitor their Scope 3 emissions today. The Spanish company Repsol has gone the farthest, with a goal to be carbon neutral by 2050, meaning it will eliminate or offset as much CO2 as it generates. Repsol has also proactively written-down oil and gas assets.
On the other end of the spectrum is Exxon Mobil, which has continued to invest in carbon-intensive projects and has not committed to emission reductions.
BP to date has been middle-of-the pack. “BP’s recent strategy has largely focused on drilling for oil and gas, with minimal capital expenditures going toward alternatives,” says Hipple. Last year, BP’s board supported a shareholder resolution proposed by Climate Action 100+, agreeing to lay out and report on a strategy consistent with the Paris goals for the first time. (It has yet to do so). It has also said it aims to reduce emissions from its own operations (not that of its customers’) to net-zero by 2025.
BP has touted clean-energy investments, such as a $200 million stake in solar company Lightsource and a $170 million acquisition of Chargemaster, the UK’s largest electric car charging network. Yet it plans to spend $71 billion to develop new oil and gas assets. For every $1 spent on renewable energy, BP sinks $32 into fossil fuels, according to Greenpeace, and shareholder dividends outpace renewable spending 18-fold.
Carbon Tracker has calculated that oil and gas companies will need to cut their combined production by more than a third by 2040 to keep emissions within international climate targets and protect shareholder value. “The real issue here,” said Andrew Grant of Carbon Tracker, “is there are finite limits of CO2 we can emit into the atmosphere.”
Stick a fork in it
Oil and gas companies have underperformed the broader market for a decade, with no signs of a turnaround. A global glut, rather than climate concerns, is depressing oil prices. But rapidly declining costs for renewables are making new fossil fuel projects economically unviable.
BP and its peers have struggled to keep up their lofty shareholder dividends over the past decade, resorting to issuing debt and selling assets to meet shareholder distribution payments, notes Hipple.
Even Mad Money’s Jim Cramer declared on CNBC that fossil fuel stocks are “done,” adding, “We are in the death knell phase.”
Major asset owners and managers are pressing fossil fuel companies to explain how they fit in low-carbon scenarios. Last month, the Church of England Pensions Board shifted £600 million into a new passive index based on Transition Pathway Initiative (TPI), an asset owner-led initiative that tracks whether companies are aligned with Paris goals. Shell and Repsol made the cut; Exxon, Chevron and BP did not.
“The message is clear to all publicly listed companies: put in place targets and strategies aligned to Paris and be rewarded with inclusion in the Index, or work against the long term interests of beneficiaries and wider society, and be excluded,” said the pension board’s Adam Matthews.
Adam Grant of Carbon Tracker is skeptical that BP or any of the oil and gas majors are ready to take the necessary actions to stave off the catastrophic effects of climate change. “The truth is, everyone is just planning to get bigger,” he said, noting that oil chiefs are rewarded for getting bigger, replacing reserves and increasing production.
Any serious commitment, therefore, should align executive compensation with climate goals.
Of BP and its new CEO, says Grant, “I’ll be looking for a certain degree of rigor to show they are serious.”