BP will slash oil production by 40% and pour billions into green energy

BP will slash oil production by 40% and pour billions into green energy

By Hanna Ziady, CNN Business  Updated 11:59 AM ET, Tue August 4, 2020

London (CNN Business)BP is planning to slash oil and gas production and pour billions of dollars into clean energy as part of a major strategic overhaul unveiled on Tuesday, alongside a huge second quarter loss and dividend cut.

The London-based company said that it plans a 10-fold increase in annual low carbon investments to $5 billion by 2030 as it tries to deliver on its promise of net zero emissions by 2050 and prepares for a world that uses much less oil. BP shares rose as much as 8% in London.

"This coming decade is critical for the world in the fight against climate change, and to drive the necessary change in global energy systems will require action from everyone," BP said in a statement.

The company expects demand for fossil fuels to fall by 75% over the next 30 years if the increase in global temperatures is limited to 1.5 degrees celsius, or by 50% if warming is less than 2 degrees, BP head of strategy Giulia Chierchia told investors. BP said its oil and gas production will fall by at least one million barrels a day by 2030, a 40% reduction on 2019 levels. The bulk of its annual capital expenditure over the next five years will, however, still be in oil and gas.

 

"We believe that what we are setting out today offers a compelling and attractive long-term proposition for all investors," CEO Bernard Looney said in a statement.

BP's plan to pivot away from oil after a century of exploration will involve major investments into bioenergy, hydrogen and carbon capture and storage. It is also targeting 70,000 electric vehicle charging points, up from 7,500 at present. At the same time, BP will reduce its oil and gas refining portfolio and aims to raise $25 billion by selling assets over the next five years.

BP (BP) has already sold its petrochemicals unit, and announced plans to cut 10,000 jobs as it reels from a crash in oil prices and tries to pivot towards renewable energy. The company said Tuesday it expects restructuring to cost $1.5 billion in 2020.

The coronavirus pandemic has hammered demand for oil, gas and coal, with factories shut, planes grounded and motorists ordered to stay at home. The price of Brent crude fell to an 18-year low in April, dropping below $20 a barrel. It has since recovered to $44 a barrel, but remains 35% down this year.

BP reported a loss of $16.8 billion for the second quarter, as it wrote down the value of certain assets, including untapped oil and gas reserves, because of reduced forecasts for the price of oil.

It cut its dividend by 50% to 5.25 US cents and said it plans to keep payouts fixed at that level in future quarters, while promising to return 60% of surplus cash to investors via share buybacks.

 

"The board believes setting a dividend at this level takes into account the current uncertainty regarding the economic consequences of the Covid pandemic, supports BP's balance sheet and also provides the flexibility required to invest into the energy transition at scale," the company said.

Looney acknowledged that this will come at a cost to investors. "However, it is a decision that we wholeheartedly believe is in the long-term interest of our stakeholders," he added.

Greenpeace UK described the announcement as a "necessary and encouraging start," but said BP must go further. "BP has woken up the immediate need to cut carbon emissions this decade," senior climate campaigner Mel Evans said in a statement.

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Hope they are less damaging and more forthcoming, along with being more sustainable. There is nothing encouraging about BP’s record.

It looks as if BP may have turned the corner on being more forthcoming.  As to less damaging, we will have to wait and see.  The missing element in this article, and others on the topic I have read, is a distinction between "oil" and "natural gas".  That is especially of interest to royalty and working interests in BPX Haynesville drilling units.  BPX has drilled no new wells since they acquired those assets in the BHP acquisition.  Whether BPX holds or looks to sell their Haynesville stake may tell us something about how natural gas plays into their longer term plans.

What are you inclined to believe? Would you be shocked if they unloaded? I know you do not speculate, but whatever they do will tell us a lot about the future of the industry.

No, not terribly surprised if they "unloaded" their Haynesville stake.  The bottom line for my clients, and my business, is having an operator that prioritizes the Haynesville/Bossier play and treats their royalty and unleased mineral interests fairly.  It would also be helpful if the company publicly recognized climate concerns and instituted an aggressive program of reducing fugitive emissions and flaring.  There is a place for natural gas in our national energy mix for the foreseeable future but much depends on public perception/support and the natural gas portion of the O&G industry has done a poor job of reading the tea leaves and committing to operating in a manner that the public supports.  The possibility of "stranded reserves" should be on every Haynesville mineral owners mind.

An Excerpt from BP’s Q2 2020 Conference Call

Comment made by Murray Auchincloss – BP’s Chief Financial Officer

BPX (Energy) remains core to the business, continues to do really well. The reservoirs are better than we thought. We’re finding more zones than we thought originally. Synergies were at $400 million. We’ll probably get more synergies, but we’re above the $350 million target we talked about.

And obviously, the capital is deflating these days. Service rates are down. And so, when we start drilling again, service rates are going to be an awful lot lower. So, the investment case remains strong. No impairments as we went through our process. So that’s very good news. And the way we’ll think about it moving forward is it’s flexible. We have two great gas basins. We have two great liquids basins and depending on what happens on natural gas price or depending on what happens on oil price, we’ll have the ability to modulate investment into that.

Last thing I’ll say is, right now, it’s going to break even at around $3 Henry Hub, which you can see in the forward markets in December, and $35 WTI. So about right now, it’s now cash flow breakeven with about $1 billion of CapEx going in. And if prices pick up and we get activity going back in there, we should start to see growth in cash flow over time.

Personal Opinion - I believe there's still a commitment for BP to continue their natural gas development in East Texas. BP needs a natural gas source for their LNG trading, and East TX / West LA represents a readily available resource.

Thanks for the additional information.  It makes sense to tout what you are planning to keep when announcing a cessation in new exploration.  $3 gas over any extended yearly quarters still seems like wishful think without a major rebound in global economics.  Here is the forward HH strip through 2021, only two months of $3.

SEP 2020 SEP 2020 Show Price Chart 2.180 -0.013 2.193 2.178 2.261 2.163 147,795 13:12:33 CT
05 Aug 2020
OCT 2020 OCT 2020 Show Price Chart 2.319 -0.015 2.334 2.324 2.395 2.300 66,760 13:12:33 CT
05 Aug 2020
NOV 2020 NOV 2020 Show Price Chart 2.662 -0.007 2.669 2.651 2.706 2.635 35,636 13:12:33 CT
05 Aug 2020
DEC 2020 DEC 2020 Show Price Chart 2.978 +0.013 2.965 2.948 2.994 2.936 19,224 13:12:31 CT
05 Aug 2020
JAN 2021 JAN 2021 Show Price Chart 3.088 +0.023 3.065 3.051 3.099 3.045 21,501 13:11:59 CT
05 Aug 2020
FEB 2021 FEB 2021 Show Price Chart 3.045 +0.021 3.024 3.020 3.054 3.005 6,890 13:12:31 CT
05 Aug 2020
MAR 2021 MAR 2021 Show Price Chart 2.927 +0.020 2.907 2.896 2.934 2.894 10,701 13:12:33 CT
05 Aug 2020
APR 2021 APR 2021 Show Price Chart 2.644 +0.004 2.640 2.639 2.650 2.631 11,529 13:11:59 CT
05 Aug 2020
MAY 2021 MAY 2021 Show Price Chart 2.607 +0.002 2.605 2.603 2.612 2.590 5,926 13:11:59 CT
05 Aug 2020
JUN 2021 JUN 2021 Show Price Chart 2.640 +0.003 2.637 2.630 2.644 2.621 2,570 13:11:59 CT
05 Aug 2020
JUL 2021 JUL 2021 Show Price Chart 2.680 +0.004 2.676 2.668 2.682 2.666 1,961 13:11:59 CT
05 Aug 2020
AUG 2021 AUG 2021 Show Price Chart 2.685 +0.001 2.684 2.673 2.687 2.672 1,758 13:11:59 CT
05 Aug 2020
SEP 2021 SEP 2021 Show Price Chart 2.672 +0.003 2.669 2.663 2.674 2.658 2,380 13:11:59 CT
05 Aug 2020
OCT 2021 OCT 2021 Show Price Chart 2.690 +0.002 2.688 2.681 2.693 2.675 5,576 13:11:59 CT
05 Aug 2020
NOV 2021 NOV 2021 Show Price Chart 2.735 +0.003 2.732 2.729 2.737 2.720 1,253 13:11:59 CT
05 Aug 2020
DEC 2021 DEC 2021 Show Price Chart 2.860 +0.001 2.859 2.854 2.863 2.844 1,116 13:11:59 CT
05 Aug 2020

I agree that BP will continue with the assets currently being developed.  The big news here is a commitment to stop exploring.

Thanks. Appreciate the insight.

You're welcome.  I think the exploration decision is a fairly stunning pronouncement.

First comment - not the same BP (Amoco) I worked for from 1977 to 1994.

Their sale of two legacy refining properties (Texas City and Napierville) was a good move (as to getting away from OLD refining properties / probably a big liability there). Most likely part of the master plan to re shape the company for the future.

I wonder what the timing will be when BP gets swallowed up or merged with another major player????????????

As an explorationist, I have a hard time understanding how a company like BP can stop exploring? Where will future "new assets" come from? All acquisition??

The Jim Vanderbeek's of Amoco's past (Jim was President of Exploration in the old days) are spinning like a rotating head as they hear this!

BP poised to sell 'stranded assets' even if oil prices rally

The strategy was discussed at a BP executives meeting in July, the sources said, soon after the oil major lowered its long-term oil price forecast to $55 a barrel, meaning that $17.5 billion worth of its assets are no longer economically viable

  • Reuters  August 07, 2020, 06:53 IST

LONDON: BP is preparing to sell a large chunk of its oil and gas assets even if crude prices bounce back from the COVID-19 crash because it wants to invest more in renewable energy, three sources familiar with BP's thinking said.

The strategy was discussed at a BP executives meeting in July, the sources said, soon after the oil major lowered its long-term oil price forecast to $55 a barrel, meaning that $17.5 billion worth of its assets are no longer economically viable.

But even if crude prices bounce back to $65-$70 a barrel, BP is unlikely to put those assets back into its exploration plans and would instead use the better market conditions as an opportunity to sell them, the three sources said.

Major oil companies typically hold assets for the long term, even when crude prices plunge, with a view to start bringing more marginal production online when market conditions improve.

However, BP's new divestment strategy, which has not previously been reported, means there will be no way back for the British energy company once it has offloaded its so-called stranded oil and gas assets.

BP did not respond to requests for comment.

The new strategy also sheds more light on chief executive Bernard Looney's plan to reduce BP's oil and gas production by 40 per cent, or at least 1 million barrels per day, by 2030 while expanding into renewable energy.

"It is a simple calculation of natural production decline and planned divestment," said a BP source, explaining how BP became the first big oil company to pledge a large cut in its oil output.

For decades, BP and rivals such as Royal Dutch Shell and Exxon Mobil have promised investors that production would continue to rise.

But as climate activists, investors, banks and some governments raise pressure on the industry to reduce emissions to help cool the planet, European oil firms are changing tack and pledging to invest more in renewable energy sources.

U.S. rivals are under less government pressure and have not made similar commitments on renewables.

"As we look at the outlook for BP over the next few years and as we see production declining by 40 per cent it is clear we no longer need exploration to fund new growth," Looney said this week. "We will not enter new countries to explore."

He said BP would continue to explore for oil near its existing production infrastructure as those barrels would be low cost - and help boost BP's cash flow to fund its transition to cleaner energy.

FROM CANADA TO ANGOLA

BP also raised its target this week for returns from asset sales to $25 billion between 2020 and 2025, of which about $12 billion has already been lined up.

It has yet to name the other assets it wants to sell.

Sources have previously told Reuters that BP has identified Canadian oil sands assets and projects in deep water off Angola as being uneconomical under its new oil price scenario.

For a graphic of BP's stranded assets, click on https://tmsnrt.rs/3fNShQX

One of the three sources said BP's divestment targets could easily be exceeded if it sells most of its assets currently viewed as stranded.

Parul Chopra, analyst at Rystad Energy, said in addition to Angola, he expected BP to move out of Azerbaijan, Oman, the United Arab Emirates and Iraq.

"In Iraq, the rates of returns are quite low. That fits into that profile, with high greenhouse gas emissions, they would want to exit that," he said.

BP is planning a 10-fold increase in investment in low carbon energy sources to about $5 billion per year by 2030 and wants to deliver a 20-fold increase in renewables capacity to generate 50 gigawatts through new projects and acquisitions.

But with debt of close to $50 billion, BP will essentially be moving from one capital intensive business - oil - to another capital intensive business with lower margins - renewables.

At the moment, such a shift might be attractive to BP investors demanding the company move away from fossil fuels, but analysts say they should be prepared for lower margins.

Oil majors generally target a 12 per cent to 15 per cent return on their investments in oil. BP has said it is aiming for a return of 8 per cent to 12 per cent for renewables.

"Investors are pushing for a faster transition, but weak balance sheets mean the pivot is a challenge, leading companies to dismantle core businesses in order to facilitate the ramp up in capex (capital spending)," said Biraj Borkhataria at RBC Capital Markets.

Borkhataria said he expected BP to divest as much as 500,000 barrels a day of production while losing a similar amount through the natural decline in output from oilfields.

 

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