Challenges To International Oil Majors’ Clean Energy Transition Plans – Analysis

In August 2020, oil giant BP announced a new 10-year strategy to reshape its business from an international oil company focusing on producing resources to an integrated energy company focusing on providing solutions to customers. The company said oil demand may have peaked and may never return to pre-COVID levels. At the same time, BP also predicts rapid growth in renewable energy. This is the most aggressive clean energy transition plan of any major oil company to date. The British energy giant’s clean energy transition plan calls for a 40% reduction in oil-and-gas production over the coming decade, greater investment in low-carbon energy, and a ramp-up in wind and solar power. The green plan has two broad dimensions:

First, it centers on low-carbon energy and clients. The company plans to increase its investment in low-carbon energy tenfold to USD 5 billion a year by 2030, increasing its renewable energy capacity from 2.5 gigawatts in 2019 to 50 gigawatts. It plans to invest 20% of its investment in renewable energy by 2025, which is much higher than about 3% in 2019 and higher than its rivals. By 2030, it will establish low-carbon partnerships with 10 to 15 major cities and three core industries, doubling the number of consumer interactions to 20 million per day.

Second, to achieve the vision of net-zero carbon emission. Reduce carbon emissions from operations by 30-35% by 2030; reduce carbon emissions from upstream oil and gas production by 35-40% by 2030; and by 2030, the carbon intensity of products sold will be reduced by more than 15%. Bernard Looney, BP’s new chief executive, told investors, “Our new strategy will transform the company into a completely different company very quickly, but not overnight. BP’s revenues from oil, gas, and refining will fall after 2025, but this decline will be offset by growth in gas stations, charging stations, and retail outlets.”

The pace of BP’s investment in its green initiatives is accelerating. In September 2020, BP agreed to buy stakes in two U.S. offshore wind farms for USD 1.1 billion from Equinor ASA, a Norwegian state-owned multinational energy company, in a deal that is part of BP’s energy transition plan. It also launched a partnership with the Norwegian energy company to pursue other similar opportunities. BP also entered a partnership with Microsoft Corporation, under which it will supply renewable energy to the software maker and work on initiatives to help cities reduce emissions. To achieve its energy transition goals, deleveraging will be the most important priority before implementing its clean energy transition strategy. BP is nearly halfway to its goal of selling USD 25 billion of assets by 2025. The company recently sold its petrochemical business to Ineos for USD 5 billion.

Notably, BP’s new chief executive Bernard Looney said oil stocks have fallen out of favor in recent years, while companies focused on renewable energy have performed better. BP hopes its energy transition plan will attract more investors, who are more interested in reducing carbon emissions.

Investors, however, are not buying it. So far, the new strategy has failed to help BP’s share price recover from an industry-wide slump exacerbated by the outbreak. The company’s shares, still near 25-year lows, have performed worse than peers Royal Dutch Shell and ExxonMobil in the past three months, down 26%. Lacking details on how the new business will compensate for the shrinking oil business, BP’s investors say that while keen on renewable energy, they are more concerned about the company’s ability to carry out its transition plan without hurting profits, and thus expect the oil business to remain its main source of profit for years to come. Analysts also questioned how BP would perform in its new, inexperienced, and increasingly competitive field. Moreover, renewable energy business is often less lucrative than fossil fuels.

So far, the transition to clean energy has not been as smooth as expected for major international oil companies. BP’s current transition dilemma is representative. On the one hand, the COVID-19 pandemic has weakened oil demand, hitting BP’s profits and adding to its debt burden. On the other hand, investors are taking more and more risks for lesser returns. BP has also admitted that its profits will continue to rely on fossil fuels for years to come. The company aims to achieve an 8-10% return in its low-carbon energy business, compared with around 15% return in the oil and gas industry.

Overall, the energy transition represents both a great threat and a great opportunity for the oil giants, but their chances of success are low. It is expected that most of the existing oil companies facing the threat of survival are having difficulties in making a successful transition.