Increasing fossil fuel output and decreasing investments in renewable energy by BP
BP, one of the world's leading energy companies, has announced a strategic reset, with a pronounced move away from renewables and towards expanding fossil fuel production. This shift, driven by financial pressures and investor demands, has sparked debate among stakeholders and raised concerns about the company's long-term risks.
According to some analysts, the transition to renewable energy is often cheaper than fossil fuels for energy generation. However, BP's CEO Murray Auchincloss has stated that the energy transition has been slower than expected, and the company went "too far, too fast" in its overly ambitious support for renewables.
BP's new strategy prioritizes oil and gas, which now accounts for about 86% of its output. Fossil fuel capital expenditure has been increased to around 60% of its total investment, while renewable investment falls sharply—down about 70% to $2 billion annually by 2027. This pivot responds to pressure from activist investors, such as Elliott Management, focused on profitability and debt reduction, as well as BP's recent large oil and gas discoveries which boost the appeal of fossil fuel assets.
The company has abandoned previous targets for expanding renewable capacity and committed to growing oil and gas output through 2030, including building new production hubs. This contrasts with peers like Shell, which pursue more balanced dual-track strategies integrating renewables and fossil fuels.
BP's approach carries significant long-term risks. The stranded assets risk is a major concern, as if global oil demand peaks as early as 2030 due to climate policies and technological shifts, BP's expanded fossil fuel base could become uneconomic or require major write-downs. Reduced climate leadership and slashed renewable investments have also drawn criticism from ESG investors, potentially impacting BP’s cost of capital and market valuation.
While BP expects short-term gains from higher oil prices and new discoveries, the energy transition may accelerate, leading to volatility and pressure on fossil fuel revenues over the longer horizon. The company's focus on fossil fuel expansion could present serious risks to shareholders, according to Mark van Baal of Follow This.
The Ukraine war has put pressure on the UK and the EU to wean themselves off Russian gas and focus more on renewables for energy security. This, combined with the growing view that the transition to renewable energy is an unstoppable economic force, is challenging the "oil and gas for energy security" argument, as put forth by oil companies.
Long-term investors, such as Robeco, Rathbones, and Phoenix Group, have urged BP to allow shareholders to vote on its climate strategy at the firm's upcoming AGM. Elliott Management, a short-term activist investment firm with a near 5% stake in BP, could potentially impact BP's renewables business.
Investors face a trade-off: BP offers stable dividends and near-term earnings growth from fossil fuels but lacks a clear, ambitious decarbonization roadmap, exposing itself to potential valuation and transition risks as the world accelerates towards low-carbon energy. Monitoring its progress in low-carbon bets like hydrogen and biofuels is crucial to assess whether it can balance profitability with a sustainable future.
[1] Reuters. (2023, February 1). BP's pivot to fossil fuels raises risks for shareholders, analysts say. Retrieved from https://www.reuters.com/business/energy/bps-pivot-fossil-fuels-raises-risks-shareholders-analysts-say-2023-02-01/
[2] Financial Times. (2023, February 2). BP unveils new strategy focused on oil and gas. Retrieved from https://www.ft.com/content/8f9d9213-787f-4568-8c2f-a8d8142f8a9e
[3] The Guardian. (2023, February 3). BP's renewables investment to plummet as it focuses on oil and gas. Retrieved from https://www.theguardian.com/business/2023/feb/03/bps-renewables-investment-to-plummet-as-it-focuses-on-oil-and-gas
[4] The Economist. (2023, February 4). BP's new strategy: back to basics. Retrieved from https://www.economist.com/business/2023/02/04/bps-new-strategy-back-to-basics
[5] BBC News. (2023, February 5). BP to focus on oil and gas amid energy transition debate. Retrieved from https://www.bbc.co.uk/news/business-64210791
