BP, the former British Petroleum, desperately wants to be a good environmental citizen – but not just yet. Last month, the company rolled back its climate ambitions. Shareholders who love oil-soaked profits sent BP BP-N shares soaring.
Shell SHEL-N, the biggest name on the London Stock Exchange, may not be far behind. The Financial Times this week reported that Shell’s new Lebanese-Canadian boss, Wael Sawan, is considering scrapping the company’s commitment to reduce oil production by 1 per cent to 2 per cent a year. Doing so might delay Shell’s strategy to reduce emissions.
What is going on here? Is European Big Oil extending the middle finger to investors who worship at the altar of the environmental, social and governance (ESG) movement? Is the desire to keep oil production stronger for longer related to last year’s energy crisis? Have hydrocarbons become so profitable that shareholders simply will not tolerate the fuels’ slow-motion extinction?
Elements of each of those reasons may be behind BP’s decision to become slightly less green.
I have another theory. Big Oil is resisting evolving into Big Energy mostly because its CEOs and upper management – generally aging white males – do not trust themselves to compete in the fast-moving world of tech-heavy sustainable energy. It is not in their DNA, and shareholders do not trust them to stray from the core business of pumping oil and gas out of the ground. Nor should they.
BP, to its credit, realized long ago that climate change was a clear and present danger and that it had to be part of the solution. Twenty years ago, then-CEO John Browne reinvented BP as “Beyond Petroleum.” The goal was to revamp an oil company into an energy company that would see wind and solar farms join the oil portfolio.
The project was quietly scrapped a few years later, and BP essentially went back to being a pumper of hydrocarbons. Bernard Looney, the Irishman who became CEO in 2020, reversed Mr. Browne’s reversal and reinforced the company’s green credentials. He promised net-zero emissions by 2050, one of the first oil biggies to do so. To achieve that goal, BP would ramp up clean-energy investments and reduce oil production by 40 per cent by the end of the decade.
It was a nice idea that underwhelmed shareholders. BP (and Shell) have had impressive runs on the stock market since last year, but their U.S. rivals – ExxonMobil XOM-N, Chevron CVX-N and ConocoPhillips COP-N – fared much better, maybe because they devoted scant investment to renewables and stuck with what they knew. BP, Shell and France’s TotalEnergies TTE-N trade at five to seven times their expected 2023 earnings. The U.S. oil giants trade at about 11 times.
The message apparently hit Mr. Looney like an oil gusher: concentrate on hydrocarbons, not batteries, wind and solar. BP announced it would invest billions more in oil and gas development and would trim the production cuts to 25 per cent by 2030 from the 40-per-cent goal set just three years earlier.
Going back to petroleum was recognition that oil production is too rich to trade away, but also that oil companies are not equipped to compete in the renewable energy world.
Oil companies – mining companies too – are fairly simple operations at their core: find oil and gas, or copper and nickel, in the ground and pump or dig it out. The products produced by these companies are identical: oil is oil and copper is copper no matter where it is produced. Load it on a train or ship and wave goodbye, repeat.
The primary job of an oil or mining company CEO is not to reinvent a business that does not need reinventing. He or she does not even have to take much exploration risk, since the producing reserves are for the most part already in place. The goal is to keep costs under control so the company’s return on capital is respectable and not mess up a good thing by getting reckless or inattentive. Tony Hayward learned this the hard way when he was replaced as BP’s boss in 2010 after the Deepwater Horizon oil-spill catastrophe in the Gulf of Mexico.
Renewable, or clean, energy is a whole different game. Its most successful practitioners inherit nothing and take horrendous risks on new products that have to be sold in a competitive market. Elon Musk of Tesla comes to mind. He did not invent the electric car, but he turned it into a mainstream product, becoming the world’s richest man along the way after several near-fatal downturns. Microsoft co-founder Bill Gates has poured many billions into a clean-energy fund.
Guys who run oil and gas companies simply cannot compete with the young men and women with Stanford University educations – people who are plugged into Silicon Valley and Wall Street and who thrive on technology, competition and the idea of changing the world for the better. Oil and mining bosses, some of whom have trouble navigating an Excel spreadsheet, are comfortable banging away in an industry that has barely changed in the past century.
The big U.S. oil companies figured this out years ago and generally avoid tech-based climate solutions. The European oil companies traded at a discount because investors didn’t trust them not to blow themselves up trying to make the black-to-green energy transition. BP belatedly came to the same conclusion – no more Beyond Petroleum.
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