British Petroleum Investment: An analysis

A summative essay

Akinola Kolawole Winful

R2201D13572104
Managing Resources in an International Business Environment
Module UEL-FN-7226-33219

01 JULY 2022
Introduction
“Since carbon dioxide is the primary greenhouse gas that contributes to the global rise in
temperature, it should be the primary focus of efforts to mitigate the effects of the climate crisis.
Nonetheless, methane, the primary component of natural gas and an even more effective heat-
trapping gas, is a close second. According to a new study, the amount of methane released by fossil
fuels is now between 25% and 40% higher than previously thought. This hints that the extraction of
fossil fuels like oil and gas plays a significant role in the phenomenon of global warming.”
(CNN,2020). According to a report by CNN's Drew Kann, “the last five years and the last decade
(2010-2019) were the warmest ever recorded, and 2019 was Europe's hottest year ever. Scientists
have warned that failure to rapidly reduce human emissions of heat-trapping gases in order to keep
global warming below 1.5 degrees Celsius will result in more severe wildfires, flooding, and food
shortages affecting hundreds of millions of people. And in the normally frozen Arctic, which is
essential for regulating global temperatures, 2019 was another year of unusual warmth. Compared to
the 1981-2010 average, no other region on Earth warmed more in 2019 than the Arctic and Alaska,
according to a new report. The report is the most recent indication that the current trend of global
warming resulting from the burning of fossil fuels shows no signs of abating” (CNN,2020). The
figure below clearly shows the contribution of each sector to the global warming.

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Solar and wind power are examples of low-carbon alternatives that are becoming increasingly
popular in the field of energy production around the world. “So far, this has resulted in a sharp
decline in coal demand and worries that oil will follow. This would be a change in dynamics that has
basically never been seen before, and it would have a significant impact on the global energy sector,
which has benefited for a long time from steadily rising demand for oil and natural gas” (Brewer,
2020). Oil and gas companies started looking into alternative methods of producing clean energy as a
direct response to the numerous assertions that the contribution made by the energy sector is
enormous. This study will look at BP, one of the big oil companies, and its interest in investing in
clean energy. This will also examine the investment's financial impact on the business in addition to
sustainability.

Company and Investment

BP plc (formerly The British Petroleum Company plc and BP Amoco plc) is a British oil and gas
company headquartered in London, England. It is one of the world's seven oil and gas "supermajors”
(Bergin Tom,2008). It is a fully integrated business that participates in all stages of the oil and gas
production process, from exploration and extraction to refining, distribution and marketing, as well as
power generation and trading. BP's origins can be traced back to the Anglo-Persian Oil Company,
which was founded in 1908 as a Burmah Oil Company subsidiary to take advantage of oil discoveries
in Iran. In 1935, it became the Anglo-Iranian Oil Company, and in 1954, it became British
Petroleum. (Ishaan Tharoor, 2010). Alaska was added to the company's operations in 1959, marking
its first expansion beyond the Middle East. After acquiring Amoco in 1998 and changing its name to
BP Amoco plc, British Petroleum acquired ARCO and Burmah Castrol in 2000 and renamed itself
BP plc in 2001. BP was a member of the TNK-BP joint venture in Russia between 2003 and 2013.
(BP - Wikipedia). From 1988 to 2015, BP contributed 1.53 percent of the world's industrial
greenhouse gas emissions (Riley, 2017). “The organization has caused several major safety and
environmental incidents. The 2005 Texas City Refinery explosion killed 15 workers and resulted in a
record-setting Occupational Safety and Health Administration (OSHA) fine; Britain's largest oil spill,
the Torrey Canyon wreck in 1967; and the 2006 Prudhoe Bay oil spill, the largest on Alaska's North
Slope, resulted in a $25 million civil penalty, the largest per-barrel penalty at that time for an oil
spill” (John Roach,2006).

BP had operations in nearly 80 countries as of 31 December 2018, produced approximately 3.7

million barrels per day (590,000 m3/d) of oil equivalent, and had total proven reserves of 19.945
billion barrels (3.1710109 m3) of oil equivalent (BP - Wikipedia). BP has its primary listing on the

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London Stock Exchange, and the company is also included in the Financial Times Stock Exchange
100 Index, which is also known as the FTSE 100 Index (BP - Wikipedia).

In February 2020, BP set a goal to cut its greenhouse gas emissions to net-zero by 2050. BP is
seeking net-zero carbon emissions across its operations and the fuels the company sells, including
emissions from cars, homes, and factories (Jonathan Watts, 2020). This goal is supported by a total of
ten objectives; the first five of these objectives are geared toward bringing BP to a net-zero carbon
footprint, while the remaining five are geared toward assisting the world in reaching the net-zero
goal. According to BP’s chief executive, Bernard Looney in the Guardian cited by Jonathan Watts,
he stated that “BP will undergo a fundamental reorganization to become a more focused and more
integrated company to realize this ambition. The company will be comprised of the following four
business groups, each of which will be responsible for delivering increased performance and value:
Production and operations; Clientele and products; Natural gas and low carbon energy; Innovation
and engineering”.

Investment
The goal of BP is to reimagine energy for people and the planet by investing in net-zero emission
strategies by 2050. Over the next decade, BP will transition from an international oil company (IOC)
focused on producing resources to an integrated energy company (IEC) focused on delivering solutions
for customers – transforming from IOC to IEC, according to Bernard Looney (News and insights,
2020). According to the annual report cited in Marketscreen, the objective is net-zero operations,
production, and sales. Putting it in context; to achieve net zero emissions by 2050:
 Across our entire operations (Scope 1 and 2).
 For the carbon in our upstream oil and gas production (Scope 3).
 For the energy products we sell (full value chain) (MarketScreener, 2022).
We have also established emission reduction goals and targets for the near-term (to 2025) and long-
term (to 2030) for each of these. According to Bernard Looney, the chief executive officer in
Marketscreen, he enumerated the practical action as listed below:
 Reducing emissions from our oil and gas operations and production - for example, by
improving efficiency, switching to renewable electricity sources, eliminating flaring,
identifying, and eliminating methane leakages, focusing our hydrocarbons portfolio, and
deploying carbon capture and storage (CCS).
 Scaling up low carbon businesses in bioenergy, electric vehicle (EV) charging, renewables
and hydrogen.

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  Integrating low carbon solutions to provide reliable, affordable, clean energy for corporate
customers, regions, and cities.
 Advocating for government policies which support low carbon choices and activities over
higher carbon ones, and enable companies, cities, and countries across the world to realize
their net zero ambitions.
 Incentivizing our people by connecting remuneration to the delivery of our emissions
reductions and other transformation goals.
 Reporting our progress transparently so that it can be independently assessed and challenged
(MarketScreener, 2022).
The remarkable thing about this strategy is that it lays out a lot of goals to accomplish in this decade.
According to Amanda Doyle in “TheChemicalEngineer”, BP has stated that it plans to increase its
investment in low-carbon technologies from the current level of $500 million per year to a level of $5
billion per year by the year 2030. This will include making investments in technologies such as
renewable energy, bioenergy, hydrogen, and carbon capture and storage. It plans to increase its
capacity for renewable energy sources to 50 GW by the year 2030, up from 2.5 GW in 2019. The
production of bioenergy is expected to increase from 22,000 bbl/d to 100,000 bbl/d. Importantly, it
intends to cut oil and gas production by forty percent by the year 2030, which is equivalent to cutting
production from 2.6 million barrels of oil equivalent per day to 1.5 million boe/d. Additionally,
refining throughput will drop from 1.7 million barrels per day to 1.2 million barrels per day. It has
also committed to reducing emissions from operations by 30–35 percent and emissions from
upstream oil and gas production by 35–40 percent. These reductions will take place over the next
several years. In addition to this, by the year 2030, it intends to have cut the carbon footprints of its
product lines by 15% (Doyle, 2020).

BP has now expanded the scope of its 2050 net-zero goals to include not only production and
operations but also the lifecycle greenhouse gas emissions of the energy products it sells, "with the
exception of crude," whether they are sold on the open market or traded physically (HIS Markit,
2022). It had previously set a goal of reducing the carbon intensity of the products it sells by 50% by
2050. The production or extraction, transportation, processing, distribution, and use of the pertinent
products are all included in the lifecycle basis described. bp also expects to increase the proportion of
its capital expenditure in transition growth businesses to more than 40% by 2025 and is aiming for
around 50% by 2030 (bp update on strategic progress | News and insights | Home, 2022). It plans to
generate earnings of $9-10 billion from these businesses by the year 2030 at $60/bbl Brent (2020,
real) and bp planning assumptions. These earnings will be driven by five transition growth engines:

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bioenergy, convenience, electric vehicle (EV) charging, renewables, and hydrogen (2022). For
projects that will result in new reductions in greenhouse gas (GHG) emissions in its Upstream oil and
gas operations, BP established a $100 million fund, the new Upstream Carbon Fund will significantly
boost the efforts of BP to sustainably reduce the greenhouse gas emissions in in its operations (BP
commits $100 million to fund new emissions reductions projects | News and insights | Home, 2019).
The Upstream Carbon Fund will be in addition to BP's annual investment of $500 million in low-
carbon activities, which includes investments in both its significant alternative energy business as
well as investments in activities related to venturing and entrepreneurship (2019). The company
intend to move awaty from fossil fuels and boost its clean energy capacity.

Progress Attained
BP has significant progress towards achieving its net zero emission. In “News and insights | Home”,
the progress was highlighted as shown below.

 In resilient hydrocarbons, after a six-year program that produced 35 major projects, on average on
schedule and roughly 15% under budget, eleven new major projects have started production since
the year 2020. Even though oil and gas production is anticipated to decline by 40% from 2019 levels
by 2030, BP now projects that it will be able to sustain Earnings before interest taxes depreciation
and amortization (EBITDA) from resilient hydrocarbons at around $33 billion annually through 2025
and aims to keep it in the $30-35 billion range through 20301. Bp intends to accomplish this by
maintaining its attention on costs and performance, making disciplined investments in high margin
opportunities, and concentrating on and upgrading its portfolio.

 Bioenergy is one of BP's transition growth engines because it presents a clear opportunity for the
company to leverage its customer base and portfolio of assets as the world looks for lower carbon
fuels. This includes biogas and biofuels, such as sustainable aviation fuel. Bp plans to invest in five
significant biofuels projects, including the conversion of up to two refineries, as it expands its refinery
footprint. Additionally, it predicts that biogas will have room to grow significantly in the US, Europe,
and UK.

 In convenience & mobility, since 2019, BP has increased its margin share from convenience
and electrification from 25% to 29% due to the strength of its customer offering. During the same
time period, bp has nearly doubled the number of EV charging stations to over 13,000 worldwide.
BP is on track to achieve its goal of doubling 2019 earnings from convenience & mobility to $9-10
billion by 2030, with convenience and EV charging serving as transition growth engines.

 BP has 2,150 strategic convenience locations around the world and has increased its goal for
2030 to approximately 3,500. BP has also increased its target number of charging stations to
over 100,000 by 2030. With a focus on fast and on-the-go charging – almost half of bp's current

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 network is fast or ultra-fast – and fleets, bp aims to multiply the amount of energy sold across its
EV charging networks by a factor of 100 between 2019 and 2030.

 In low carbon energy, Since the end of 2018, BP has more than quadrupled the amount of
renewable energy capacity in its development pipeline, increasing it from 6GW to 24.5GW.
This includes the company's recent success in the ScotWind leasing round as well as its entry
into the offshore wind industry, which currently has a pipeline of 5.2GW net.

Concerns
Her and Delaporte wrote in Reclaim Finance that “BP's carbon intensity of energy products is 49.2%
higher than the maximum allowed by the 1.5°C reference scenario between 2021 and 2035. The
company's energy production until 2035 (and beyond) will emit too much GHG. BP will continue to
emit a lot of GHGs due to the continued high levels of oil and gas production. To conform with a
1.5°C carbon reduction pathway, BP must reduce emissions” (Her and Delaporte, 2022). In a Rosie
Frost article for euronews, John Sauven questioned BP's 20 percent stake in Russia's national oil
company (Rosneft), which represents a significant portion of the country's oil and gas production.
This stake in Rosneft represents one-third of BP's fossil fuel production, but the oil production
reduction figures do not include the Russian energy company (Rosie Frost| Euronews, 2020).

Her and Delaporte also explained in Reclaim Finance that BP made the announcement in 2022 that it
planned to increase its "low carbon" CAPEX by a factor of four to five by the year 2025 and by a
factor of six to seven by the year 2030 (up to $6 billion). This plan was to increase BP's "low carbon"
CAPEX by a factor of four to five by the year 2025 and by a factor of six to seven by the year 2030.
Despite the fact that this is a sizable improvement from the levels that are anticipated in 2020, it only
accounts for 27 percent of total CAPEX. As a result of this, it can be deduced that the oil and gas
industry will continue to receive more than 70 percent of the CAPEX in the year 2025. To diversify
their business, BP has decided to increase their capacity for producing renewable energy in addition
to their production of oil and gas. If the company continues to produce significant quantities of fossil
fuels, it will not be able to achieve the significant reductions in emissions that are required — 50
percent by the year 2030 — to keep climate change under control (Her and Delaporte, 2022).

Conclusion
The investment that British Petroleum (BP) is planning to make is an excellent one; however, to
achieve a return that is more in line with expectations, it will be necessary to take a more
comprehensive approach. There are a number of things that should have been put into place,

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including some definitions to clarify particular objectives and some definitions of the scope of the
project. These should have been among the things that were put into place. When evaluating the
strategy that will be improved as a result of the investment, BP did not take into account the scope
three emission, which refers to the emissions that are caused by other businesses purchasing and
selling their product. The harmful emissions that are produced by a company can be broken down
into three categories, also known as "scopes." The first two of these "scopes" cover emissions that are
produced directly and indirectly by the company, while the third, "scope three," covers emissions that
are produced by other companies that buy and use the products produced by the first company (More
questions than answers: BP's plan for net-zero emissions, 2020). In other words, "scope three" covers
emissions that are produced by other companies that buy and use the products produced by the first
company. The scope of the emission that was going to be reduced was not made abundantly clear in
the strategy. It was not specified whether it was a scope one, scope two, or scope three emission.
Another concern that could put the investment in achieving net-zero emissions at risk is performance
during the transformation process. Based on the analysis presented above, the vast majority of BP's
capital expenditures are going toward the production of oil and gas or other activities closely related
to this sector. This fact alone makes it impossible to switch from using fossil fuels to using clean
energy, which renders the investment pointless.

In conclusion, an investment of this nature ought to be carried out in stages so as to eliminate any
awkwardness or ambiguity that may arise during the process. It is recommended that the
implementation of the strategy for reaching net zero emissions take place in stages, with the first
stage involving the deactivation of the sector related to fossil fuels. When the rate of deactivation gets
closer to 40 percent, there should be a gradual introduction of the second phase, which is the
emergence of clean energy. This phase involves the transition away from oil and gas energy. After
that, the third phase should involve the establishment of clean energy output such as clean energy
power generation and charging stations for electric vehicles. When the strategy has been mapped out
in detail, the investment will have the ability to capitalize on large market share and foreign
exchange. In light of the fact that emissions of greenhouse gases from fossil fuels are what is driving
the transition to renewable energy sources, an investment of this kind will ensure the continued
viability of the business.

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