Crystal Ball Series: What BP’s Moves Tell Us

BP has made some interesting moves this year – and even this week – from its net-zero pledge to its huge write-down of oil and gas asset value. What does my crystal ball tell me all this means for your oil and gas company?

Of course, BP isn’t the only oil and gas company committing to becoming a net-zero business. From Cenovus to Total, these pledges foreshadow how pressure is morphing from investors to regulators, coming to a rulemaking near you within the next 12 months.

Both of these things are true:

  • Today’s evolving pandemic challenges require all of our energy, wit, and capacity
  • If we want to lead into the energy future, we have to understand where the oil and gas majors are setting the pace.

The situation:

BP has made four particularly interesting moves in 2020:

  • First, it committed to becoming a net-zero company by 2050 or sooner — and to take an active role in helping the world get to net zero. This is the kind of ambition-sharing leadership that builds bridges with a skeptical public. It conveys the company’s seriousness about creating the decarbonized energy future. This week BP added significant specificity to its plan, committing to: halt oil and gas exploration in new countries; reduce oil and gas production by 40 percent; lower carbon emissions by 30 percent; and, increase capital spending on low-carbon energy to $5 billion a year.
  • Second, in June BP told shareholders to expect a write-down of as much as $17.5 billion of its oil and gas holdings. CEO Bernard Looney explained, “We have been reviewing our price assumptions over a longer horizon. That work has been informed by the COVID-19 pandemic, which increasingly looks as if it will have an enduring economic impact. So, we have reset our price outlook to reflect that impact and the likelihood of greater efforts to ‘build back better’ towards a Paris-consistent world. We are also reviewing our development plans. All that will result in a significant charge in our upcoming results, but I am confident that these difficult decisions — rooted in our net-zero ambition and reaffirmed by the pandemic — will better enable us to compete through the energy transition (emphasis added).” The drivers behind the write-down have been hotly debated: Some observers say it is a commodity-price-driven reality check; others say it’s a sea change recognition of an accelerating energy transition. My crystal ball says Both of these things can be true.
  • Third, this week’s announcement included a much-anticipated decision to write down the dividend amount by 50 percent.
  • Finally, in an interview on a Goldman Sachs talk series, Looney spoke about what the ongoing pandemic means for the future of fossil fuels and our eventual energy recovery — a recovery which has yet to be decided in terms of its shape or form. Looney notes that he believes the quiet roads, less-polluted skies, and clearer waterways we’ve seen during the COVID-19 lockdown will have a lasting impression on people and impact the climate conversation — in a “positive” way. He continued: “Does the pandemic crisis deepen or weaken our commitment to the ambition we set out in February? For me and the [BP] board it deepens it, and it can accelerate our transformation.”

You might reasonably ask: Do these four moves buy BP any goodwill with the skeptical public? There are, of course, activists who don’t think BP is going far enough. And some of these activists have used BP’s moves (incorrectly in my opinion) as fodder for the “stranded assets” narrative, which is well-documented nonsense given even conservative oil demand projections. For many climate activists, any exploration and production is too much. But constructive observers gave BP’s efforts significant recognition; for example, Rachel Kyte (previously the chief executive officer of Sustainable Energy for All and special representative of the United Nations Secretary-General for Sustainable Energy for All) posted the following on Twitter last month: “Bernard Looney pivots bp through the accelerated era of stranded assets. Hard to overestimate significance.” Responding to this week’s announcement, Mark van Baal of the climate-focused shareholder advocacy group Follow This said, “BP is the first oil major that walks the walk instead of just offering ambitions for 2050, like its peers.”

It matters because:

The international oil and gas majors have been foreshadowing how climate and decarbonization pressure manifests in new business strategies. Bernard Looney is arguably positioning BP to be at the front of the pack by changing the narrative around oil and gas energy leadership and how the sector can reinvent the energy future.

The critical mistakes not to make:

Oil and gas companies can expect investors and stakeholders to ask what this means for them, and leaders should be ready to speak about how their company is thinking about the energy future.

Now more than ever, you have to be ready to answer the question: Why should your project be approved  when it will be here for 30 years — and we need to get off fossil fuels today?

Seize the day: As promised, I am keeping these recommendations steady and consistent with earlier installments. Why? Because oil and gas leaders for companies of every size and location are facing the same wave of social risk, accelerated by the pandemic. I know you’ve got your hands full running your operations, which are as challenging as ever. That’s why these recommendations are both additive to your day-to-day responsibilities and holding steady to give you time to incorporate them. Leaders can and should:

  • Embrace ESG. In 2020, a pragmatic and authentic ESG program will be the price of admission to investment conversations. If you haven’t already started your three-year strategy, hit reply and let’s explore how we can help you.
  • Talk to your investors. Every class and size of investor has a different tolerance for oil and gas returns — and different levels of patience for implementation of an ESG strategy. Your company may not need to pivot to a net-zero strategy as long as it understands the expectations of today and anticipates those of tomorrow.
  • Innovate into the energy future. In a world of both diminishing capital and diminishing demand, the last companies standing will have one eye to the future. Your company needs to articulate its place in the energy future for your stakeholders and employees as well as your investors.

I’m interested to know how you and your executive team are thinking about the moves of the international majors. Reach out and let me know what you think.

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