For BP, some drilling projects just don't make sense anymore. The European oil major said this week that it will write down as much as $17.5 billion from its oil and gas portfolio while baking in a new carbon price forecast of $100 per ton by 2030 — up from the $40 figure it factors in now.
Europe's oil supermajors — BP, Shell, Total and Eni — have made a series of investments across the low-carbon sector over the past half-decade. While an important trend for the renewables industry, the sums involved remain very small compared to the companies' spending in their legacy businesses.
But the calculus is rapidly changing for Europe's oil and gas giants as low demand and low returns from conventional oil projects meet a groundswell of political and public support for the fight against climate change.
Valentina Kretzschmar, Wood Mackenzie's VP of corporate research, said BP's write-down is an acknowledgment of the energy transition and the impact it will have on oil demand.
"It's an important step," she said in an interview. "BP is the first company in the sector that has recognized the potential impact of the energy transition — on demand and also on prices. To lower the future planning prices for oil and gas is extremely important, as is the increase in the price of carbon, which is the first prudent price that we have seen out there."
Kretzschmar said BP's new carbon price signals that the company expects European governments to introduce very strong carbon taxes.
As returns from oil investments drop and carbon prices rise, renewable projects start looking more financially attractive and would appear to carry much less risk. So is the time finally right for oil companies to supersize their low-carbon investments?
“The answer is yes,” Kretzschmar said. “They've had five years now. They've gone into the space, invested across a number of different themes on the renewable side, and now we are seeing which are the winners."
"Offshore wind and solar are emerging as two of the winners for all the majors," Kretzschmar noted.
BP lowers its long-term oil price forecast
BP says its new price outlook captures the growing appetite for the energy transition as part of the global response to the coronavirus outbreak’s economic impact. BP and Shell have left their low-carbon spending largely untouched during COVID-19 budget cuts.
Bernard Looney, BP's new CEO, said the oil producer has continued reviewing its long-term forecasts since it first revealed its net-zero ambition in February.
“That work has been informed by the COVID-19 pandemic, which increasingly looks as if it will have an enduring economic impact,” Looney said in a statement.
“So, we have reset our price outlook to reflect that impact and the likelihood of greater efforts to ‘build back better’ toward a Paris [Agreement]-consistent world. We are also reviewing our development plans. All that will result in a significant change in our upcoming results, but I am confident that these difficult decisions — rooted in our net-zero ambition and reaffirmed by the pandemic — will better enable us to compete through the energy transition.”
BP's long-term oil price forecast is now $55 a barrel, down from $70. Kretzschmar thinks this should be lower still; Wood Mackenzie is using a figure of $50 for its own modeling.
Time for oil companies to spin out their renewables?
As it stands, it can be hard to learn much about the low-carbon assets of BP, Shell and Total from their financial results. Projects are rarely broken out by segment, and the numbers from their ventures in the power sector are often lumped in with their gas segment.
Speculation has grown around the possibility of oil and gas companies spinning out their low-carbon efforts into separate entities.
Kretzschmar thinks it unlikely that BP is preparing to spin out its low-carbon business anytime soon. "What BP is doing is transforming the entire business, a little like the transition that Dong (now Ørsted) began 15 years ago."
Still, the spin-out idea holds some merit, Kretzschmar said.
“It has never made sense to have emerging, low-return businesses competing for capital with the legacy, high-return business. That’s not a winning formula for growth in renewables. It always made sense for these renewable businesses to be spun out into a separate [special purpose vehicle] or some kind of company with a different balance sheet and a different capital structure."
BP holds a 50 percent stake in solar developer Lightsource BP and has ambitions to follow Shell and Total into offshore wind.
For now, BP has redesigned its corporate structure under Looney, ditching the old upstream and downstream monikers in favor of organizing by function instead, including a Gas & Low Carbon unit.
Italian major Eni recently split its business down the middle, with low carbon on one side and fossil fuels on the other.
BP's net-zero announcement in February was met with a predictable tide of skepticism. Looney was making his first official appearance as CEO and clearly wanted to plant the flag for his long-term vision for the company. His lack of detail on achieving net-zero was taken by some as a sign of insincerity.
Still, much has changed since February. The oil sector faces short-term challenges after the price of oil and gas collapsed, and the long-term economic impact of the pandemic remains unclear.
“This huge dent in BP’s balance sheet suggests it has finally dawned on BP that the climate emergency is going to make oil worth less — something that smart investors have been warning for some time,” Charlie Kronick, senior climate adviser for Greenpeace U.K., said in a statement.
“This is long overdue. Accelerating the switch to renewable energy will be vital not only to the climate but to any oil company hoping to survive in a zero-carbon future,” Kronick said.