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BP shifts oil production transition plans, adds net-zero goal

14 February 2022 Cristina Brooks

BP adjusted its sustainability plans, changing its hydrocarbon divestment timeline and adding a net-zero goal, as it announced a profitable year.

The oil major announced the update to its 2020 transformation plan alongside its full-year 2021 financial report on 8 February.

BP's performance in 2021 reversed a shift into the red in COVID-blighted 2020 and saw the company post its highest profit in nearly a decade at $12.9 billion.

The group benefitted as global crude oil prices increased in 2021 amid post-pandemic demand, bringing in an influx of cash, including from "very strong" oil prices.

At the same time, BP decided to rejig goals put in place in 2020, when it pledged to transform from an integrated oil company to an integrated energy company (IEC). It broadly defined this as a company delivering solutions not resources.

Before the official publication of BP's earnings report, one-time UK opposition leader Edward Miliband called for a windfall tax on BP as the recent natural gas price crunch had also been felt by consumers and energy suppliers in the country.

BP's CEO Bernard Looney did not see a tax as the way forward. "If anything, the UK needs more gas, not less gas right now … And a windfall tax isn't probably going to incentivize more investment, number one. And number two, what we need to do is help Britain transition," said Looney in a recent call on the earnings report.

Production targets changed

Along with adjusted climate goals, BP last week said it is giving itself more time to potentially increase earnings from selected hydrocarbon activities.

Following the launch of its transformation plan in 2020, BP pledged to cut traditional hydrocarbon production and focus on "resilient hydrocarbons," which it defines as those produced by cheap and competitive major projects with improved production and lower emissions. It planned to "maximize throughput and revenue" by managing production in oil and gas assets and refinery improvement plans.

After the 2020 transformation plan's publication, the head of a new BP unit focused on delivering resilient and focused hydrocarbons, Gordon Birrell, said in a presentation that BP planned to grow resilient hydrocarbons' earnings before interest, taxes, dividends, and amortization (EBITDA) within its associated oil, gas, and refining portfolio until 2025.

The company's new plan is to either grow, sustain, or decrease such earnings for resilient hydrocarbons over a longer period. Instead of growing, earnings will remain roughly the same level they are now, "around $33 billion" a year until 2025.

Between 2025 and 2030, the earnings are expected to increase, stay the same, or decrease within the $30 billion-$35 billion range, even while BP continues pursuing cuts of 40% from 2019 levels of oil and gas production.

BP intends to hold oil and gas production levels "broadly flat through 2030" while investing $7.5 billion a year. During the earnings call, Chief Financial Officer Murray Auchincloss explained that the company had updated vague guidance on production goals for divestments versus natural decline. "What we're now saying is that decline from 2.2 [million barrels per day to 1.5 million b/d] is basically going to be gradual divestments over time and that we can hold the base business flat now, with growing margins," he said.

Speaking during the call, Looney expected EBITDA for hydrocarbons to grow even with the 2030 price of oil predicted to be "broadly flat versus 2021, $71." He explained that the EBITDA growth would be driven both by growing earnings from oil and gas and how the refining sector performs.

The company's oil price assumption for 2030 is $60/barrel adjusted for inflation, higher than in 2020. "So that's a long story short to say the energy transition could actually result in higher prices even if it's accelerating as well as obviously result in lower prices," said Looney.

Auchincloss predicted ongoing oil price volatility, with gas prices potentially following the same route.

Dev Sanyal, BP's former head of gas and low carbon energy, said in the presentation in 2020 he expected gas demand to keep growing and playing a role in the energy transition.

Early indications are that natural gas will be used in Europe's energy transition: the EU's executive body recently lent its support to proposed green finance guidelines for transitional gas-fired power.

Energy product sales added to net-zero goals

In 2020, BP set out five aims that contribute to its goal of reaching net-zero carbon emissions by 2050. It aimed to be net-zero on an absolute basis across its ‎entire operations and in its upstream oil and gas production by that year.

Now BP has extended its 2050 net-zero goals across not just production and operations but also the lifecycle GHG emissions of marketed or physically traded energy products it sells "with the exception of crude." It previously aimed for a 50% cut in the carbon intensity of products it sells by 2050. The lifecycle basis described covers production or extraction, transportation, processing, distribution, and use of the relevant products.

What's more, the new target now includes a 15-20% cut in the lifecycle carbon intensity of physically traded energy products sold.

On the earnings call, Looney said new lower-carbon products like hydrogen would be traded, and this opens opportunities for BP to become an IEC.

"The reality is, is that natural gas with renewables, of which we have both, which we can add a trading organization to, so that we can provide a customer with that predictable, reliable, affordable, cleaner supply, there's a role for a company like that," he said.

"Because people don't want to have to go to somebody for their renewable power and go to somebody else for their baseload power and go to somebody else to hedge their pricing and to do all of these things. There is a one-stop-shop here. It's called an IEC," he added.

BP also has a stricter interim, 2030 target for reducing operational emissions: 50% compared with 30-35% previously.

EV charging, hydrogen, biofuels operations to grow

In the first transformation plan, BP said by 2030 its investment in "low-carbon technologies" would increase by around $5 billion a year, with funds to be channeled to technologies including renewables, bioenergy, hydrogen, and carbon capture, utilization, and storage (CCUS).

Now it says investment in "transition growth" businesses will reach over 40% of capex by 2025 and 50% by 2030, which could see it spend slightly more, or $5.6 billion on transition growth technologies, if it keeps spending steady at its projected 2025 capex level.

Specifically, BP said this sum will be focused not just on renewables, bioenergy, and hydrogen, but now also convenience stores and electric vehicle (EV) charging. It is also looking into opportunities to use hydrogen and biofuels in the transportation sector. For example, BP expects to invest in five major biofuels projects and sees growth opportunities for biogas in the US, Europe, and UK.

"As we move from an IOC [integrated oil company] to an IEC and decarbonize our portfolio, we plan to replicate this model of integrated energy value chains, combining hydrocarbons now with electrons [from renewable energy] and hydrogen," said Looney.

Ramping up a 2030 target for EV charging points by 42%, BP will now install more than 100,000. The major is on track to double 2019's earnings from its convenience and mobility activities to $9 billion-$10 billion by 2030 and sees EV charging as a growth area.

Hydrogen, BP noted in the update to its transition plan, "enable[s] additional value creation through integration with renewables and CCS." BP is currently participating in two hydrogen projects in Teesside in northeast England: a proposed "blue" hydrogen project (H2Teesside) and HyGreen Teesside, a green hydrogen project. In Aberdeen, the company is partnering with the city to develop Scotland's first scalable green hydrogen production facility, it said in December..

"BP helped to create hydrocarbon value chains in the UK—in the North Sea, retail and convenience, and supply and trading—and now intends to help lead the creation of new electron and hydrogen value chains," said the company in its transformation plan update.

Posted 14 February 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

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