BP will draw on its expertise in the oil sector to help achieve the promised rates of return on its growing renewables portfolio, chief executive Bernard Looney told an online audience on Monday at the outset of a three-day engagement with investors.
Speaking after a BP Energy Outlook presentation that highlighted declining demand for fossil fuels and growth in renewable energy, Looney sought to address investors’ concerns about the bottom line as BP aims to become a net-zero emissions company by 2050.
In its strategy unveiled in August, BP committed to a 10-fold increase in low-carbon investment, or around $5 billion per year, and a 20-fold increase in renewable generating capacity to 50 gigawatts.
The company’s strategic commitments also included a 40% reduction in oil and gas production by 2030.
Addressing investor concerns, Looney said the streamlining of BP's oil and gas portfolio was driven by criteria that prioritise cashflow and returns, but is consistent with the transformation into an integrated energy company with deep sustainability commitments.
“At the core is a relentless focus on value over volume. It’s a difficult balance to find, but we believe we have found it ,” Looney said, stating that the company was determined to “deploy a highly skilled workforce on only the highest-margin barrels.”
Looney said the shift would also reduce the capital intensity of oil and gas.
“With our long wave of investment in new projects coming to an end – as well as our cost and efficiency drive – we expect our development costs to come down to around $9 per barrel, well below our 2019 depreciation rate of $16 per barrel ,” he said.
The other strategic aspect of this shift was the ability to redeploy capital into the low-carbon sector and capture growth in these markets.
“We decarbonise and diversify BP – and in doing so reduce risk ,” Looney said.
BP already has a $25 billion oil sector divestment programme, about half of which is underpinned by agreed transactions, but Looney said he wanted to dispel any myths about a fire sale.
“We are in no rush to sell our hydrocarbon assets ,” he stated, pointing to “a strong balance sheet, the recent $12 billion hybrid issuance and the disposal of the company’s petrochemicals business."
Looney acknowledged that investors might worry about divestments from an oil and gas portfolio that has been increasing annual pre-tax earnings by 7% in recent years.
"It is a high-quality business exposed to major growth markets and with a track record of delivering around 20% returns," he said.
“This part of our business is an engine of cashflow that is running really well, and we intend to keep it that way," Looney said.
He said the promised investments in low-carbon electricity will initially drive revenue growth, but the same investments are expected to start contributing to income in the second half of the decade.
Underlying Ebitda is expected to grow by 5% to 6% per year through to 2025 with returns in the range of 12% to 14% in 2025.
BP expects the contribution of the oil, gas and refining businesses to decline over this latter period, with 30% of capital base invested in the energy transition by 2030, but expects to sustain overall returns at 12%-14%, Looney stated.
BP’s pipeline of clean energy projects already spans solar, bio-power, onshore wind and offshore wind, adding up to 20 gigawatts of capacity.
"We will only pursue opportunities that can generate the disciplined returns we expect, and our shareholders expect," Looney added.
Listing the factors underpinning the company’s confidence in achieving 8%-10% returns from renewables, Looney mentioned the experience of the Lightsource BP venture, which has typically been achieving returns in that range.
Lightsource BP has rapidly expanded its global reach to 13 countries and has a projects pipeline with 16 gigawatts of capacity.
Looney claimed BP’s extensive experience in operations and project management add value, pointing to efficiency gains with the company’s Brazilian biofuels projects.
The company could expect early gains from the emphasis on integrated business, including access to a long-established trading department, which delivers close to a 2% return uplift and a track record of applying digital expertise to drive additional performance, Looney said.
The company also will use leverage to boost returns, he said.
“The combination of these four areas gets us to 8%-10%. Beyond this, we have the choice to optimise the portfolio – to farm down or not – and if we do, that could add a further 1% to 2% ... So yes – we are confident we can deliver the returns we are targeting ,” Looney declared.
Finally, Looney claimed that the company can use its track record to build broader competitive advantages in a new sector.
He listed experience in operations and project management among transferable technical skills, plus a focus on relationships and partnerships that already includes retail partners such as M&S, Rewe and Reliance; a partnership in electric vehicle charging with DiDi in China and Uber in the UK; and a partnership in energy provision with Amazon.
BP has also partnered with Palantir to invest in data platforms, advanced analytics and data visualisation and digitalisation.
Most recently, BP has invested in offshore wind with Equinor.
“We believe we have the skills to integrate these hugely complex ecosystems and give those customers a solution – energy when they need it, how they need it, and where they need it,” Looney said.