BP is poised this week to reveal a set of financial results that the City believes will show a halving of profits compared with the year before – but this isn’t the oil company’s biggest problem.
BP has emerged from an embarrassing misconduct scandal with a new leadership team, but questions remain about its future strategy, and pressure is growing for the board to abandon its green commitments and increase production of fossil fuels.
Last week, it was revealed that a small London-based hedge fund, Bluebell Capital Partners, had written to the company to warn against locking itself into a future of falling fossil fuel production.
The 30-page letter was sent shortly after the activist fund acquired a small stake in BP last October, just weeks after the company’s future was thrown into doubt following the shock exit of Bernard Looney, its former chief executive.
Looney, the architect of BP’s net zero commitments, resigned after admitting last September that he had failed to fully disclose to the board a series of personal relationships with his colleagues.
In early 2020, his green commitments included a pledge to cut oil and gas production by 40% by 2030, compared with 2019 levels. Even Looney could not resist calls to water down the plan to target a 25% decline after a surge in global energy market prices in the wake of Russia’s full-scale invasion of Ukraine two years later.
But so far Looney’s successor, Murray Auchincloss, has insisted that there will be no changes to BP’s strategic direction. The company’s former chief financial officer faces a difficult decision: on the one hand, a significant number of shareholders are understood to be eager to seize the opportunity presented by a change of leadership to steer BP back towards familiar territory and away from the riskier prospect of large green energy projects.
On the other hand, BP has already sunk billions into a series of ventures – most notably some eye-wateringly expensive offshore windfarm projects – which to an extent has locked the company into a greener trajectory.
Auchincloss can no doubt be only too aware of BP’s lagging share price relative to its rivals in recent years, which many blame on the company’s green agenda. BP’s shares are trading broadly in line with pre-pandemic levels, but by contrast ExxonMobil’s share price has surged by about 40% over the period.
In setting a path for BP, Auchincloss may find it more useful to look to the future rather than the recent past. Energy market prices may have rewarded polluters in the two years since Russia’s war on Ukraine ignited a global energy crisis. But uncertainty over the future demand for fossil fuels has already triggered a rethink among some of the market’s most powerful players.
In recent weeks, the governments behind of the world’s biggest energy exporting nations have signalled big policy changes that could prove to be the beginning of the end for fossil fuel growth.
Saudi Arabia, the world’s biggest exporter of oil, ordered its state-owned oil company Saudi Aramco to halt a multibillion-dollar campaign to increase the kingdom’s maximum production capacity by 1m barrels of oil a day to 13m barrels a day by 2027.
The reason? Its full oil export potential is already underused. Saudi Arabia produced about 9m barrels of oil a day last year, well below its maximum daily capacity of 12m, in order to help prop up global market prices, which have drifted lower in the years since Russia’s war began. The faltering global economy is expected to slow the growing demand for oil from this year, before the take-up of electric vehicles in the second half of the decade causes consumption to reach a peak, according to the International Energy Agency (IEA).
The decision emerged a week after Joe Biden’s administration said it would hit the brakes on the US’s surging exports of gas. The US, the world’s biggest exporter of gas last year, announced that it was pausing all pending export permits for liquified natural gas until it could come up with an updated criteria for approving new gas export projects that consider the impact of the climate crisis.
Government officials in Washington may also be responding to the same market signals now shaping policy in Riyadh.The global gas market already has enough gas export terminals, either operating or in construction, to meet the world’s gas demand until 2050 - even if there is no increase in climate action over the decades ahead, according to the IEA.
And as renewable energy claims an ever greater share of electricity generation the need for gas-fired power is likely to fall.
Auchincloss may find that Looney’s strategy pays off in the end.
