On Tuesday, oil and gas giant BP announced plans to slow its transition away from oil. The move sparked outrage from climate activists, but it shouldn’t have come as a surprise.
Two and a half years ago, after BP announced perhaps the most aggressive plans of any major oil and gas company yet to move away from fossil fuels, I asked Bernard Looney, the company’s CEO, about the reality that his commitment did not move fast enough to match the urgent science of climate change. His answer surprised me. Instead of defending his plans as aligned with scientific reality, he flipped the script and said that he kept hearing a bigger concern that the plans might be “too ambitious”—that they might make the company’s sustainability efforts unsustainable. At the time, many industry insiders questioned whether aggressively pursuing the energy transition would result in lower profits.
Looney told me that his vision was actually about generating more profit. “This isn’t some form of altruism or some form of charity… This is about creating sustainable value,” he said. “We can create value for our shareholders through this shift, and we would argue that we will create more value through this shift than we would if we keep doing what we’re doing.”
It was a telling exchange that foreshadowed his move this week to backtrack on some of his company’s most ambitious climate commitments. In 2020, oil prices had plummeted and it remained unclear when they would recover. An aggressive approach to the energy transition offered the opportunity to turn a big profit. In today’s environment, with oil prices high and projected to remain high, rapidly shifting away from oil production leaves money on the table. And, like any publicly traded corporation, oil and gas companies exist to make a profit.
On Tuesday, Looney told investors that BP’s new goal is to cut oil and gas production at least 20% by 2030 from 2019 levels. In 2020, the company had said it would aim to cut production by at least 35% in that same timeframe. And, if that weren’t a big enough signal that the company is doubling down on the medium-term future of oil, BP said that in 2025 alone it would target up to $11 billion in annual investment in the company’s oil and gas business. In 2021, BP spent just over $9 billion, and, last year, the company spent $13 billion. These investments will deliver big returns: the company says that in 2025 it aims to earn up to $42 billion from oil and gas. “Our oil and gas strategy is about value,” Looney said in the investor presentation. “And our focus remains on maximizing returns and cash flow.”
The particulars of this decision come at a unique time. The decline in oil demand during COVID-19 led oil companies to slow their investments in production, so there was little slack in global oil markets when Russia invaded Ukraine last year. This lack of leeway in the markets compounded when the war began and countries scrambled to get off Russian oil. The result of the commotion: oil prices rose dramatically, which in turn has meant enormous profits for the sector. ExxonMobil, Shell, and Chevron alone made more than $130 billion in profits last year. And, as the conflict continues, it seems that oil prices will remain relatively high for a while. A report from Deloitte found that oil and gas companies stand to have a total of nearly $9 trillion in cash come in by the end of the decade.
Considering those factors, it was an obvious choice to ramp up oil production. In the short time that’s followed, Wall Street has rewarded the move. BP stock has increased more than 16% since the announcement. (The company also reported strong 2022 profit on Tuesday).
Other firms are moving in the same direction. A survey of energy oil and gas companies conducted by the Dallas Fed in December found that 64% of firms planned to increase spending, a good indicator that they see money to be made.
What does this all mean for the energy transition and efforts to address climate change? The obvious answer is that more oil and gas means greater emissions, which means faster warming. But, beyond the obvious, BP’s highly publicized shift offers a good lesson about a core challenge facing efforts to decarbonize: so long as oil and gas remains hugely profitable, corporations will continue to produce it. Climate activists can tell oil executives their product is destroying the planet, but that won’t convince them so long as investing in oil represents the best return on investment.
This won’t be the case forever. The price of renewable energy has fallen rapidly and policies like the Inflation Reduction Act have encouraged companies to invest in clean technologies. To accelerate the transition, this all needs to happen faster, so that companies and investors are no longer tempted by the allure of quick oil profits.
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