By Ron Bousso
LONDON (Reuters) – Nearly five years ago, BP embarked on an ambitious effort to transform itself from an oil company into a low-carbon energy company.
The British company is now seeking to return to its roots as a major oil and gas player with a growth story to match rivals, revive its share price and allay investor concerns about future profits.
Rivals Shell and Norway’s state-controlled Equinor are also scaling back energy transition plans drawn up earlier this decade.
Their change in direction reflects two major developments: the energy shock caused by Russia’s invasion of Ukraine and a decline in the profitability of many renewable energy projects, especially offshore wind, due to rising costs, supply chain issues and technical issues.
BP CEO Murray Auchincloss plans to pour billions into new oil and gas developments, including in the US Gulf Coast and the Middle East, as part of his drive to improve performance and boost returns.
BP has also slowed its low-carbon activities, halted 18 potential hydrogen projects early and announced plans to sell wind and solar businesses. It recently cut its hydrogen team in London by more than half to 40 employees, company sources told Reuters.
A BP spokesperson declined to comment on the layoffs.
Shell CEO Wael Sawan has vowed to take a ruthless approach to improving performance and returns and closing a yawning valuation gap with bigger US rivals Exxon Mobil and Chevron.
The company has scaled back its low-carbon activities, including floating offshore wind and hydrogen projects, withdrawn from European and Chinese energy markets, sold refineries and watered down its 2030 carbon reduction target.
Shell is looking for buyers for Select Carbon, an Australian company it acquired in 2020 that specializes in developing agricultural projects used to offset carbon emissions, sources close to the company told Reuters.
A Shell spokesperson declined to comment.
SKILLS SHORTAGE?
Some BP employees are questioning whether the company will retain enough staff with the experience and skills needed to re-establish itself as an oil and gas giant.
Employees bombarded CEO Auchincloss with questions during an online town hall meeting in early October as he laid out some of his plans for turning the ship around, according to four employees on the phone.
He told them that BP could and would develop new oil and gas production in a reversal of predecessor Bernard Looney’s strategy of building renewable energy sources, cutting emissions and slowly lowering oil and gas production targets.
Speaking to Reuters, some employees said they doubted BP has enough reservoir engineers to boost oil and gas production growth after letting go of hundreds of employees from its upstream division since 2020.
The BP spokesperson declined to comment on the town hall discussion.
Equinor, Europe’s top natural gas supplier since 2022, has launched a review of its low-carbon operations, internally called REN Adjust, with several early-stage projects scrapped to focus on more advanced offshore wind projects.
When asked for comment, Equinor said it was adapting to market realities. “The goal is to strengthen competitiveness and compete effectively as the industry recovers from the current down cycle.”
But companies haven’t completely given up on their investments in low-carbon energy. Instead, executives say they are focusing on areas like biofuels, which they trust can deliver quick profits.
Shell, BP and Equinor are also continuing to develop a number of offshore wind projects already underway, and say they could invest further if returns are competitive.
They are also developing hydrogen projects that should be used primarily to reduce the carbon footprint of their refining activities.
“What we’re finding with our transition growth companies is that we have to expect the same level of returns as our legacy companies if we want to deploy material capital over time,” Auchincloss told Reuters on October 29.
France’s TotalEnergies has become the outlier, continuously investing in low-carbon energy sources and easily exceeding the capacity of Shell and BP in renewable energy.
BALANCE ACT
The delay in companies’ energy transition plans coincides with warnings that the world will miss a U.N.-backed target to limit global warming to 1.5 degrees Celsius by the end of the century, which is needed to meet the catastrophic prevent the consequences of climate change.
It means companies will likely miss or have to adjust emissions reduction targets downwards, said Accela Research analyst Rohan Bowater.
And while industry executives focus on boosting near-term returns by spending more on oil and gas, the outlook for fossil fuel consumption is becoming increasingly uncertain.
The International Energy Agency said last month that it expects global oil demand to peak by the end of this decade as sales of electric vehicles grow.
Investors remain skeptical about the ability of Europe’s oil giants to maintain their profits. Their shares have underperformed U.S. rivals, even as climate-focused investors have lamented the shift away from renewables.
“For transition plans to take hold, companies need the right management incentives, a clear mandate from shareholders and a focus on demonstrating value,” Bowater said.
“BP, for example, is still caught in the middle, struggling to balance low-carbon investments with shareholder expectations.”
(Additional reporting by Nerijus Adomaitis. Editing by Jane Merriman)
