BP’s Surprising Pivot

An oil giant decides to face the future instead of fighting it.

With all that’s going on, it’s easy to miss what would in normal times be major news. On Tuesday, BP announced it was beginning to turn away from the oil business. The most significant thing may be this: BP stock rose after the announcement.

BP has already sold its petrochemical business. It also announced that it will not begin oil and gas explorations in any new countries. By 2030, it plans to cut oil production 40% and increase annual low-carbon investments tenfold year by 2030. It also plans on a ten-fold increase in EV charging stations. operations in any new country. Other parts of the plan are vaguer, like a plan to partner with ten to fifteen other cities on their climate plans, as it has already started to do with Houston.

This is a bold move, and it remains to be seen whether any of the other major oil companies will make similar decisions. BP is not optimistic about the future of the oil industry, although it does expect oil and gas production to remain an important part of the energy mix. By BP’s estimate, if the world holds global warming to 2 °C, that would leave oil and gas production down by 50%. Presumably, less stringent climate policy would leave production higher, but it’s hard to see how oil remains a growth industry.

The stock market also lacks optimism about the oil.  From 2008-2018, the S&P 500 increased more than 223%, while Exxon Mobil slumped 4.56%. The oil business faces several problems. Prices were highly volatile even before the coronavirus hit. Oil production is highly exposed to disruption by Middle East politics and other international crises. Unexpected market falls, like the one we are seeing today, can imperil companies that are financially overstretched and turn expensive projects into white elephants.

The future of the industry is clouded due to the rapid growth of renewable energy and energy storage.  Part of the threat is from climate policy, but part of is simply from innovations that make renewable energy increasingly price-competitive. Moreover, in countries like China, public pressure to reduce air pollution also drives a move toward electric vehicles. The intense interest of the auto industry in electric vehicles is not a good sign for the oil industry.

Given these facts, BP’s move may be bold but it has a solid business rationale. That’s why the market responded favorably to BP’s decision. This provides some reason for confidence that it will carry through on its plans. It should also make some of the other major oil companies start to rethink their own strategies.

There can also be a kind of political feedback cycle that can hurt an industry. As an industry becomes less competitive, it has fewer employees and less wealth to use for political leverage. Meanwhile, competing industries increase their political clout. That can result in an adverse shift in the regulatory climate, which the industry might have been able to fight off in its heyday. That in turn weakens the industry economically, and the cycle repeats. The coal industry was strong enough to kill climate legislation in 2010, but it probably wouldn’t be today. Oil may find itself in a similar position down the road.

 

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Reader Comments

5 Replies to “BP’s Surprising Pivot”

  1. Sir John Maddox documented a very disturbing fact of life in his book “What Remains to Be Discovered” in the chapter ‘Avoidance of Calamity” that “— small armies of scientists will be required to remove persisting uncertainties and to devise effective strategies for the avoidance of calamity — The experience of recent years in rich countries is not encouraging. Research communities are everywhere under pressure to be more ‘relevant,’ usually understood to mean that they should assist with national competitiveness in the production and sale of tangible traded goods.”

    In 2007, Berkeley powers that be sold out their integrity to BP for $500 million making it almost impossible to avoid calamity by controlling global warming.

    How come you didn’t mention that fact as the Keeling Curve continues to rocket past 413 ppm, especially since “350 or Bust” was the goal set by Hansen and McKibben at that time?
    https://www.sfgate.com/bayarea/article/40-protest-UC-Berkeley-research-deal-with-BP-2499036.php

  2. BP’s announcement coincides with its $16.8 billion second quarter loss and $17.4 billion write-down of its oil and gas fields. These market driven factors are “fueling” BP’s decision to redistribute its investments and operations toward more profitable renewables.

    However, BP is not leaving the oil industry, and it will continue to supply fossil fuels to meet current and future global demand, which is projected to increase through 2050.

    Demand for current renewable technologies has been significant (28% in 2018), but limitations such as reliability, efficiency and infrastructure restrict projected demand to approximately 50% by 2050.

    This means that fossil fuels will continue to supply half of global energy demand by 2050 (which is projected to increase by 50% from today), unless new technologies can overcome the limitations of current renewables.

  3. “By BP’s estimate, if the world holds global warming to 2°C, that would leave oil and gas production down by 50%.”

    That makes no sense. If it is believed, it is highly misleading. The only way to stabilize temperatures is to ZERO emissions. That’s because the natural processes which scrub CO2 out (primarily deep oceans) only operate on scales of hundreds of years, and they are not fully effective. That’s because only 26% of human emissions make it into oceans.

    1. I haven’t seen the modeling that they’re presumably using, so its hard to know what their assumptions are. I assume they are counting on carbon capture to allow natural gas plants to keep running at midcentury. The investment they’re planning to make in EV infrastructure suggests that they’re not counting on a lot of gas cars.

  4. Dan, the fact still remains that Berkeley sold out future quality of life on earth to BP and now we are rocketing past 413 ppm with the planet in climate change chaos.

    UC powers that be forced Linus Pauling to leave UC because he won a Nobel Peace Prize for trying to save the human race while jeopardizing UC money from BP et al, and now we have an out of control pandemic that even his molecular biology Nobel Chemistry Prize genius couldn’t prevent while Berkeley produces buildings that certify his genius.

    And the Cal football program keeps producing concussions that can destroy the lives of indentured football players so pre-eminent academics can sit on their stadium thrones acting like a bunch of Pontius Pilates.

    Ad nauseum UC tributes to the Power of Money.

    Admit it Dan, LP is nothing but a fancy curtain on a UC whore house window.

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About Dan

Dan Farber

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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