Helge Lund, BP’s Chairman of the Board, is perhaps ideally suited to take BP to its next challenge: the first super-major to become an investment vehicle which is both green and can guarantee shareholders a handsome return on investment.
Lund is a veteran of oil and gas politics, having served as Equinor’s CEO for 10 years, and CEO of British Gas before it was taken over by Shell. As Board Chairman of BP, he is chartering BP’s green future. Not only has he overseen the company’s transformation to becoming greener, he is in the process building an investment structure, which now requires only a few skilled accountants. The company has either sacked employees or will be delegating BP’s headcount to its joint ventures. The goal is becoming lean and mean, reducing costs and hopefully increasing margins. What to
date has happened?
What BP Promised
In 2020, BP painted a glowing portrait for its shareholders of how it would reach the promised green land:• An underlying EBIDA (Earnings before interest, depreciation and amortization) of between 5% – 6% per year through to 2025 with returns in the range of 12% – 14% in 2025 – up from around 9% today.• After allowing for the impact of divestments, and reflecting the expected share buyback commitment, EBIDA per share is expected to grow by 7%- 9% per year through to 2025.• From 2025 onwards, when its low carbon projects start to kick in, expect growth of between 12%- 14% to be maintained.• BP has announced it wants to reduce its oil production by 2030 by 40%. • According to BP, its $25Billion divestment will provide the basis for up-scaling its low-carbon business. A pipeline of 25 oil and gas projects, and additional 18 projects in the pipeline are also key
factors.• BP also announced that it would be spending $5Billion per year to green itself and
by 2030 will have 50GW of net regenerating capacity. To date the company has a planned pipeline of 20GW of green generating capacity.
To date, BP has taken the following green steps:
BP and Ørsted announced that they will jointly develop a full-scale green hydrogen project at BP’s Lingen refinery in Germany. The two firms intend to build an initial 50MW electrolyser and associated infrastructure, which will be powered by renewable energy generated by an Ørsted offshore wind farm in the North Sea and the hydrogen produced will be used in the refinery.
BP and Equinor revealed that BP would become a 50% partner, of the non-operated assets Empire Wind(Offshore New York State) and Beacon Wind (Offshore Massachusetts). BP and Equinor will jointly develop four assets in two existing offshore wind leases located offshore New York and Massachusetts that together have the potential to generate power for more than two million homes. BP is to pay Equinor $1.1 billion for interests in the existing US offshore developments and to form astrategic partnership to pursue other offshore opportunities together in the fast-growing US market.
Most recently, BP joined Statkraft and Aker Offshore Wind in a consortium bidding to develop offshore wind energy in Norway. The partnership – in which BP, Statkraft and Aker Offshore Wind will each hold a 33.3% share – will pursue a bid to develop offshore wind power in the Sørlige Nordsjø II (SN2) licence area. According to the consortium SN2’s favourable location provides power export access to local and adjacent markets. The consortium also intends to explore opportunities to provide clean power to electrify offshore oil and gas facilities.
BP is to purchase 9GW of solar development projects in the US from independent US solar developer 7X Energy. The acquisition represents a significant step towards developing its net renewable generating capacity to 20GW by 2025 and to 50GW by 2030.
Finally, BP and ENI have stated that they will be merging their assets in Angola into a joint venture, possibly with a view to also bringing in other African assets. This could include:
Algeria, where BP has helped to deliver two major gas developments at Salah Gas and In Amenas, both of which are joint ventures with Sonatrach and Equinor.
BP currently produces, with its partners, close to 60% of Egypt’s gas production through the joint ventures the Pharaonic Petroleum Company (PhPC) and Petrobel (IEOC JV) in the East Nile Delta as well as through BP’s operated West Nile Delta fields.
In Mauritania and Senegal, BP and its partners are developing the Greater Tortue Ahmeyim gas field with a 30-year production potential. The field has an estimated 15Trillion cubic feet of gas and is forecast to be a significant source of domestic energy and revenue.
What will happen to BP’s 20% share in Russia’s Rosneft which comprises three oil and gas joint ventures? Maintaining a presence in Russia could be very strategic, given the country’s oil and gas assets and the fact that a green strategy is still waiting to be discovered.
The New Energy Players
The speed with which BP has unveiled its strategy indicates that it wants a seat at the green table,occupied by the new energy elite-Engie, Enel, E-on,Iberdrola, Ørsted, RWE, and Vattenfall- who have pole positions in determining the direction of the global renewables market. Is BP’s $5Billion per year investment to green itself and its goal of 50GW net regenerating capacity by 2030 enough to warrant it a place at the green poker table? Perhaps a starting position, but hardly enough to be classified a heavy-weight, green poker player! Consider the competition:• Engie: in 2021 will spend €11-12Billion on investments across a broad swath of sectors including solar, wind (on and offshore), hydro plants, biogas, and developing gas and power lines, and will have 33GW of global renewable installed capacity by 2021.• Enel: strategic plan outlines total investments of €190Billion by 2030 and tripling renewable capacity to 145GW. • Ørsted: by 2030 will have installed capacity of 50 GW. • Iberdrola: in the period 2020-2025, will be spending €75Billion on renewable energy and has a pending target of 95GW of installed wind capacity.• RWE: by 2022 RWE will have 28.7 GW of installed wind and solar capacity.• Vattenfall: In the Nordic countries Vattenfall has low emissions with practically 100% of the electricity produced based on renewable hydro-power and low-emitting nuclear energy.
Then there is the paradigm that BP and the other majors have to face: an oil company becoming an energy company. The oil company strategy: high risk = high returns being replaced by high risk= low/no returns.
New energy companies by contrast- Engie, Enel, Iberdrola, Ørsted, RWE and Vattenfall- all are low risk: their dividends are competitive with the oil majors. Iberdrola has a 5% dividend planned for 2021, and Enel paid 5.15% in 2020, and Engie 4.77% in 2019. Their stock prices are steady and positive. Their green strategy has been delivered, in place and accepted by the investor community.
It should not be surprising that the investor community is wondering how a transformed BP can become an energy company promising to deliver results that other energy companies can only dream about: an EBIDA per share of between 7%- 9% per year through to 2025 and from 2025 onwards when low carbon projects start to kick in growth of between 12%- 14%.
Answers may start to appear more quickly than we realize.
Charles Donovan, Director of the Centre for Climate Finance and Investment at Imperial College and lead author of a recent study released by Imperial College and the IEA (International Energy Agency) found that renewable energy investments are delivering massively better returns than fossil fuels. The study(May 2020) analyzed stock market data to determine the rate of return on energy investments over a five-and 10-year period.
Renewables investments in Germany and France yielded returns of 178.2% over a five year period, compared with -20.7% for fossil fuel investments. In the UK, also over five years, investments in green energy generated returns of 75.4% compared to just 8.8% for fossil fuels. In the US renewables yielded 200.3% returns versus 97.2% for fossil fuels.
Green energy stocks were also less volatile across the board than fossil fuels, with such portfolios holding up well during the turmoil caused by the pandemic, while oil and gas collapsed. Yet in the US which provided the largest data set, the average market cap in the green energy portfolio analyzed came to less than a quarter of the average market cap for the fossil fuel portfolio—$9.89Billion for the hydrocarbons versus $2.42Billion for renewables.
Speaking to Forbes.com, Donovan said “The conventional wisdom says that investing in fossil fuels is more profitable than investing in renewable power. The conventional wisdom is wrong.”
That BP has taken the step of becoming an investment vehicle is a bold and radical step and could create a number of exciting investments. BP’s strategy is in place. Now the implementation.
The various joint ventures could provide new possible investment options, given the decentralized decision-making and shorter lines of communication.
BP’s strategy is one being developed and watched by the other majors. How long can the other majors including ENI, Equinor, Shell, and TOTALEnergies continue to balance the various investment balls in the air, hoping to fund both their exploration and development assets and their renewables? This can continue for a short time but ultimately more strategic decisions have to be made. More crossovers between the oil majors and the new energy players. Also, more mergers downstream. In short, a total revamp of the energy value chain.
The oil majors have helped propagate their own myth that fossil fuels yields are indeed better than renewables. With BP proclaiming it is now an energy company the company may have a lot of explaining to do to convince its shareholders that their return on investment and their golden dividend can be guaranteed.
Is not BP’s strategy to become a partner with Equinor in its US offshore wind projects, and their decision to partner with Ørsted at BP’s Lingen refinery in Germany to produce hydrogen the most visible evidence that the energy value chain is starting to produce new alliances?
In Africa, the BP-ENI joint venture could set off a series of mergers and acquisitions among the other majors and national oil companies. Perhaps with a new strategy in place renewable energy in Africa headed by the majors may become a serious part of the mix.
Finally, do not be surprised that the BP’s Net Zero Scenario of reducing fossil fuels to 20% of today’s share of primary energy by 2050 becomes a reality. The urgency of the task ahead is virtually a guarantee that this BP scenario will happen sooner rather than later. 2030 and not 2050 could become BP’s new deadline to become CO2 neutral.
Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia, and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report.