Profitability and Fossil fuel production are delinking.
Financial institutions are shifting their investments away from oil and clean power stocks are up this year by 45% (Economist). Crude prices on the other hand are no longer the jewels of the stock market. Exxon who had a 92 year history at the Dow Jones Industrial average has been kicked to the curb and today the representation of oil companies on S&P 500 has declined by 85% since 2010 (CNBC).
Other changes are also happening. In fact, a few weeks ago, another shift occurred when BP launched its reimagined future. They announced their intent to withdraw 40% of their investments from hydrocarbons.
Aims
Net zero on carbon in BP’s oil and gas production on an absolute basis by 2050 or sooner.
50% cut in the carbon intensity of products BP sells by 2050 or sooner.
Methane measurement at all BP’s major oil and gas processing sites by 2023 and reduction of methane intensity of operations by 50%.
The targets appear groundbreaking, but one remembers that this is not their first foray down a greener path. Their first attempt at reinvention started almost 20 years ago with the switch from British Petroleum to Beyond Petroleum. Their rebranding however came with stumbling blocks. It would forever be remembered for its headlines of industrial accidents, leadership scandals and divestment from renewables.
That road to green was derailed.
Alas! The story being told now is more compelling and the tone is now more resolute. The world we once knew was rooted in hydrocarbon dominion, cartel maneuverings and the politics of energy trade. It is now feverishly focused on health fragility, climate action and grasping onto economic security unscathed. Oil demand has dropped by approximately 10% (EIA) and WTI prices have dropped by more than 33% since 2019 (EIA). One could believe this is transient and put the blame at the heels of the pandemic. That however would be losing sight of the other pressures that are lurking behind the scenes.
There are thrusts from politicians, financiers, civil society and investors for a cleaner future. Renewable power stocks have grown 200% from 2010 to 2019 and are generating returns around 11.4% vs 7.0% for fossil fuel companies. Whether this is symptomatic of the future remains to be seen, but it could suggest that oil demand may soon reach its peak.
Some may view BP’s reimagination as clever public relations, but evidence suggests there is something further afoot. The value of America’s shale sector has fallen by more than 50% since January 2020 (economist) and BP has been similarly affected. They started the year achieving profits of US$800 million in Q1 2020. By Q2, there were losses at US$16.8 billion (Forbes, 2020). Rather than wade in sentiments that prices and demand will eventually alleviate. BP’s decision to pivot amidst these losses suggests that they are simply responding to a market which has become an inhospitable place.
Once production centric, BP had the typical vertically integrated model of upstream, midstream and downstream. Like any oil major, its focus was increasing hydrocarbon reserves and minimizing costs. But now, BP’s traditional oil company jacket is being discarded with surging impatience. An integrated energy company is being revealed underneath. BP’s has stated that their future is with partnering with communities, cities and people as it has recognized that “Customers and their evolved virtues will always be Kings!” From corporate community development being treated as something extracurricular. It has now become BP’s core mandate.
Businesses are being forced to come to grips with the change in global dialogue. Soon after BP’s announcement, Shell , Total and Eni followed suit with announcements of net zero carbon emissions by 2050. This signals a movement that could cross industries. Other companies will also likely find themselves in similar dilemma to BP’s . They too will need to adjust and adapt to the new imperative.
The market is disillusioned with old geopolitics. Instead it wants a more stable and less volatile climate that portends better health and environment for all. Approximately, 13% of the world’s population, do not have access to electricity and 40% of all people alive, do not have access to clean fuels for cooking. This is leading to the high health costs of indoor air pollution that kills 4 million people every year (WHO). The allure of oil appears to be entering a declining phase. International oil companies such as Exxon and Chevron may want to consider adjusting their business model as their current one seems out of place.
Climate-related investing has grown by 70% to $579 billion between 2013 and 2018. (Climate Policy Initiative). In fact, earlier this year, the CEO and founder of Black Rock, the world’s biggest asset management fund with more than $7 trillion under management, wrote in his annual letter that “climate change has become the defining factor in companies’ long-term prospects.” He signaled that such a future would be cemented as the youth protestors and environmental influencers of today grow up to be investors and CEO’s themselves (blackrock).
Effective strategy is one that ensures long term survival. It requires commitment to continuously reinvent. BP is demonstrating the art of the long view and their aggressive performance targets suggest that they are playing to win. However, change is painful and transformation is easier said than done. At the time of writing, the market showed their skepticism. BP’s share price dropped to its lowest in 25 years (worldoil).
Nevertheless, we should appreciate that BP’s attempt at redefining its purpose could enhance markets and create new value networks. As it immerses itself more with its customers and communities, it will become more aligned with market sentiments and likely disrupt and displace some old norms.
Don’t snooze just yet! BP’s "switch" signals a market disturbance and when a GIANT stomps, you never fall asleep...
THE END
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