BP in Transition: An Open Letter to BP Shareholders

By Gerard Kreeft

Dear Shareholder;

BP’s announcement on February 27 that it was withdrawing from Russia was welcomed in Western circles, but has a nasty side effect: the loss of 50% of its global oil reserves. While the company has put on a brave face, there is strong need to demonstrate how BP will maintain its golden dividend and continue its transformation from oil giant to a new green energy giant. Of the oil majors operating in Russia, BP’s departure of its 19.75% of Rosneft was the most severe. Yet according to the company….” BP’s financial frame and distribution guidance remains unchanged”. Can shareholders simply assume that BP’s strategy is sound? Must shareholders just go ahead and accept everything that BP tells them?

BP’s share price in the period 2018-2022 has, with the exception of Repsol, been the biggest laggard of the oil majors. Chevron, ENI, ExxonMobil, Equinor and Shell have all fared better. Regardless of one’s perspective of the ongoing energy transition, a company’s share price and accompanying dividend policy are holy items. Europe’s new energy companies—Engie, ENEL, Iberdrola, Ørsted and RWE– have also have shown diverse results ranging from being laggards to first-in-class. The key message from the investor community is clarity of message, regardless of whether a company is only pursuing hydrocarbons or low carbon solutions.

Lessons learned from TOTALEnergies

BP could well take a page from the TOTALEnergies’ playbook to learn how a loss of oil reserves can be compensated by new energy sources, helping the company to become greener, sooner rather than later. Perhaps even ensuring shareholders that it will become CO₂ free in 2030 instead of 2050 as is now the case.

In the summer of 2020, the French oil and gas giant announced a $7Billion impairment charge for two Canadian oil sands projects. This might have seemed like an innocuous move, merely an acknowledgement that the projects hadn’t worked out as planned. However, it opened a Pandora’s box that could change the way the industry thinks about its core business model—and point the way toward a new path to financial success in the energy sector.

While it wrote off some weak assets, it also did something else: TOTALEnergies began to sketch a blueprint for how to transition an oil company into an energy company.

Patrick Pouyanné, the company’s chairman and CEO, now says that by 2030 the company “will grow by one third, roughly from 3Million BOE/D (Barrels of Oil Equivalent per Day) to 4Million BOE/D, half from LNG, half from electricity, mainly from renewables.”^[1] This was the first time that any major energy company translated its renewable energy portfolio into barrels of oil equivalent. So, while the company was slashing down proven oil and gas from its books, it was adding renewable power as a new form of reserves.

Each of the oil and gas majors spilled red ink in 2020, and most took significant write-downs, but TOTALEnergies’ oil sands impairments were different. The company wrote off reserves of oil and gas that the company had previously deemed all but certain to be produced.

Proven reserves long stood as the holy of holies for the oil industry’s finances—the key indicator of whether a company was prepared for the future. For decades, investors equated proven reserves with wealth and a harbinger of long-term profits.

Because reserves were so important, the reserve replacement ratio (RRR), the share of a company’s production that it replaced each year with new reserves, became a bellwether for oil company performance. The RRR metric was adopted by both the Society of Petroleum Engineers and the US Securities and Exchange Commission. An annual RRR of 100% became the norm.

But TOTALEnergies’ write-offs showed that even proven reserves are no sure thing and that adding reserves doesn’t necessarily mean adding value. The implications are devastating, upending the oil industry’s entire reserve classification system as well as decades of financial analysis.

How did TOTALEnergies reach the conclusion that reserves had no economic value? Simply put, reserves are only reserves if they’re profitable. The prices paid by customers must exceed the cost of production. TOTALEnergies’ financial team decided those resources could never be developed at a profit.

The company hasn’t abandoned oil and gas, and its hydrocarbon investments may prove problematic over the long term. However, its renewable investments will add ballast to the company’s balance sheet, keeping it afloat as it carefully chooses investments, including oil and gas projects, with a high economic return.

Meanwhile, competitors that stick to the old business model will have no choice but to continue to develop hydrocarbons—even if their proven reserves ultimately prove to be financial duds.

 BP’s Outlook

BP maintains, that in spite of losing 50% of its reserves, the company can maintain its green goals:

• 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.
• Reducing its oil production by 40% by 2030.
• Its $25Billion divestment will provide the basis for up-scaling its low-carbon business. A pipeline of twenty-five oil and gas projects and an additional eighteen projects in the pipeline are also key factors.
• Spending $5Billion per year to green itself and by 2030 will have 50 GW of net generating capacity. To date the company has a planned pipeline of 20 GW of green generating capacity.
• Partnering with 10-15 cities and 3 core industries in decarbonization efforts and doubling customer interactions to 20 million per day, all by 2030.

A key component of BP’s strategy is building an investment structure, which 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 to become lean and mean, reducing costs and, hopefully, increasing margins. In short becoming an investment vehicle.

To date the company has initiated a series of joint ventures to speed up its transition.

• BP and Ørsted have partnered to develop zero-carbon ‘green hydrogen’ at BP’s Lingen Refinery in north-‎west Germany, BP’s first full-scale project in a sector that is expected to grow rapidly. The 50 MW electrolyser project is expected to produce 1 ton of ‎hydrogen per hour – almost 9,000 tonnes a year – starting in 2024. The project could be expanded to up to 500 MW at a later stage to replace all of Lingen’s fossil fuel-based hydrogen. Final investment decision is due later this year.
• BP and Equinor revealed that BP will 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 of New York and Massachusetts that together have the potential to generate power for more than two million homes.
• 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.
• In Angola, BP has merged its upstream activities with ENI to form Azule Energy, which could become a model for other African countries.

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 position in determining the direction of the global renewables market. Is BP’s $5Billion per year investment to green itself and its goal of 50 GW net generating capacity by 2030 enough to warrant it a place at the green table? Perhaps a starting position but hardly enough to be classified as a heavyweight! Consider the competition:

• ENGIE: In 2021 the company spent more than $11Billion on investments across a broad swath of sectors, including solar, wind (on and offshore), hydro plants, biogas, and developing gas and power lines, and it will have 50 GW of global renewable capacity installed by 2025.
• Enel: The company’s strategic plan outlines total investments of $231Billion by 2030 and tripling renewable capacity to 154 GW.
• Ørsted: By 2030, the company will have an installed capacity of 50 GW.
• Iberdrola: From 2020–2025, the company will be spending $165Billion on renewable energy and has a pending target of 95 GW of installed wind capacity.
• RWE: By 2030, RWE will have 50 GW of installed wind and solar capacity.
• Vattenfall: In the Nordic countries, Vattenfall has low emissions, with practically 100% of the electricity produced by renewable hydroelectric power and low-emitting nuclear energy.

Food for thought

Originally BP’s Net Zero Scenario was to reduce fossil fuels to 20% of today’s share of primary energy by 2050. Given its reserve losses and the urgency to become greener more quickly, 2030 could become the new deadline for BP to become CO₂ neutral.

BP’s board has recommended investors vote against a shareholder resolution filed by Dutch activist group Follow This urging the British energy company to accelerate its energy transition strategy. In a report ahead of its May 12, 2022 annual general meeting, BP said that the resolution was “unclear, generic, disruptive and would create confusion as to board and shareholder accountabilities”.

Shareholder revolts–across the entire oil and gas spectrum– have increasingly voted against recommendations of oil & gas companies concerning environmental resolutions. Consider the shareholders’ revolts in 2021 concerning Chevron and ExxonMobil! Shareholders of both companies voted for stricter environmental measures, contrary to recommendations of their boards.  This does not bode well for BP in 2022.

The board, if it is to preserve its hide, should be prepared to discuss the following options:

BP’s West Nile Project in Egypt: “Whether a company is an oil company or an energy company seems to matter little to investors. Instead, they demand clarity”.

How will the company exit its remaining 20% of primary energy? Perhaps putting it in a joint venture much like its Angolan assets which have been merged with that of ENI?

What mega-investments can BP make so that it can become, very quickly, a giant of new energy? Some examples:

Hyphen Hydrogen

The Hyphen Hydrogen project in Namibia will invest $9.4 billion over a period of nine years. The project sponsors aim to produce 5 GW of power by 2030 and 3 GW of electrolysis capacity.

Hyphen is a Windhoek-based joint venture between British Virgin Islands-registered investment holding company Nicholas Holdings and German renewables developer Enertrag. The Namibian Government says that a large focus would be on exporting hydrogen to Europe and to sell some of the output to neighbouring countries, to “take advantage of the vision that our leaders have for the African Continental Free Trade Area”.

Morocco-UK Power Project 

A second project which has received much media attention is the Morocco-UK Power Project which will produce 10.5 GW of power. The solar and wind farm will be built in Morocco’s Guelmim-Oued Noun region, and it will supply the UK with clean energy via subsea cables. The twin 1.8 GW high voltage direct current (HVDC) subsea cables will be the world’s longest.

The Xlinks Morocco-UK Power Project will cover an area of around 1,500 square kilometres in Morocco and will be connected exclusively to the UK via 2,361 miles (3,800 km) of HVDC subsea cables.

The project will cost $21.9Billion. Xlinks will construct 7 GW of solar and 3.5 GW of wind, along with onsite 20GWh/5GW battery storage, in Morocco. The transmission cable will consist of four cables. The first cable will be active in early 2027, and the other three are slated to launch in 2029.

The Morocco-UK Power Project will be capable of powering a whopping 7Million UK homes by 2030. Once complete, the project will be capable of supplying 8% of Britain’s electricity needs.

While this energy divergence for Europe will be welcomed, it sends a double message to Africa. Providing Europe with potential renewable energy is only part of the equation; it is  also important that Africa’s energy transition is geared for its own domestic use.

 Finally, the investor outlook

BP’s profile has been discussed, but what is the verdict of the investor community? Of the seven majors—BP, Chevron, Eni, ExxonMobil, Equinor, Shell, Repsol and TOTALEnergies—BP aside from Repsol, has been the industry laggard between 2018 and 2022.

 Table 1: Stock market prices of  majors 2018-2022(NYSE)

Note: Values based on 5 January 2018 and 1 April 2022

In comparison, during these five years, Repsol’s stock is down 32%, BP’s stock is down 30%, Shell 19%, ENI 14%, and TOTALEnergies down by 10%, whereas Chevron’s stock rose by 28%, ExxonMobil was up by 46% and Equinor more than doubled to 65%.

 Regardless of how one views the energy transition, the messaging and the guaranteeing of the golden dividend have been key factors in maintaining the price levels of the stock market prices of the majors. Even the current spike of oil prices has contributed only marginally to the BP share price.

Yet the recent oil crisis demonstrated how far the oil majors will go to defend their sacred oil dividend. According to an IEEFA(The Institute of Energy Economics and Financial Analysis) report of March 2021 the oil supermajors combined to spend almost $50bn on payouts to their investors in 2020 to prop up their dividend policies: $20.5billion from their core business, the remaining $29.4 billion borrowed.^[2]

Whether a company is an oil company or an energy company seems to matter little to investors. Instead, they demand clarity. That is why Chevron, which is on track to make 2022 the 35^th consecutive year with an increase in annual dividend payout per share, has maintained its value. The same reasoning applies to ExxonMobil. And why Equinor’s message of spending more than one-half of its capital spending on low carbon energy by 2030 is a leader in offshore wind technology, which has caught the fancy of its investor community.

The compromise of straddling both sides of the divide—hydrocarbons and low carbon solutions—has failed to spark  investor confidence in ENI, TOTALEnergies, Shell and Repsol.

 On a similar note, there is good news and bad news for Europe’s new energy companies. Engie, the large French energy giant, has seen its share price  decrease by 19%. ENEL, the Italian power company, has seen its share price increase 40%. Iberdrola, the Spanish power company, has had an increase of 38%. The two big winners are Ørsted, the Danish power company which has seen its stock soar by 142% and RWE, the German utility giant, has seen a stock price increase of 60%. Ørsted’s constant low carbon energy news has resonated with investors. Again, like the oil majors, the messaging is key.

 Table 2: Stock market prices of new energy companies 2018-2022

Finally, the BP message for the investor community is  ambiguous.  BP has always portrayed itself as the greenest of the major oil & gas companies changing their corporate logo to the sun-burst green and yellow logo.  They promoted themselves as “Beyond Petroleum”.  But BP’s diminished stock price and market capitalization is very disappointing.   BP must re-examine its future roadmap and decide whether it can continue being an oil company and an energy company.  Bernard Looney became CEO of BP in February 2020 and was tasked by BP’s board to navigate the energy transition.   Understandably BP’s shareholders are upset and are questioning the wisdom and strategies carried out by Mr. Looney and his executive management team.

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, and contributes to IEEFA (Institute for Energy Economics and Financial Analysis).

[1] TotalEnergies Strategy and Outlook Presentation, 9/30/2020, Totalenergies.com/media/news

[2] James Murray, ‘Super majors spending more on investors  than earnings from business”, Institute for Energy Economics and Financial Analysis, March 8, 2021 https://ieefa.org/supermajors-spending-more-on-investors-than-earning-from-business