Oil’s old fos­sils vow to ‘build back bet­ter’

BP and Shell are writ­ing down the value of as­sets by a com­bined $40bn, as they shift fo­cus to a sus­tain­able fu­ture, re­ports Ed Clowes

The Daily Telegraph - Business - - Business -

Through­out the Eight­ies, new traders at JP Mor­gan in New York were all told the same joke by the man­ager run­ning their in­duc­tion. As they were handed man­u­als to get them up to speed on the var­i­ous types of in­dus­tries they might be in­vest­ing in, the man­ager would re­mark that the book on oil mar­kets was the only one that hadn’t changed in over 100 years.

And there was some truth to that. The process by which oil was ex­tracted, re­fined and sold had re­mained fairly con­stant.

So when BP’s in­com­ing boss Bernard Looney took charge of the 111-year-old com­pany in Fe­bru­ary, and promised to “rein­vent” the oil ti­tan, his words car­ried some his­toric weight.

Al­beit, the ad­mis­sion that BP, in its cur­rent form, was fac­ing ex­tinc­tion came as lit­tle sur­prise to in­vestors, an­a­lysts, or the pub­lic.

In re­cent years, Europe’s oil ma­jors have pub­licly recog­nised the winds of change blow­ing through their in­dus­try.

Last Oc­to­ber BP’s chief fi­nan­cial of­fi­cer said that there was an 80pc over­lap between the stated aims of Ex­tinc­tion Re­bel­lion, the provoca­tive ac­tion group, and BP.

Pri­vately, en­ergy gi­ants such as Shell and BP have been grap­pling with the broader ex­is­ten­tial ques­tion of their pur­pose for years.

Now, with Covid-19 fur­ther ham­mer­ing oil com­pa­nies around the world, the rein­ven­tion of these busi­nesses is no longer the­o­ret­i­cal. It is hap­pen­ing in real time.

In the past two weeks, both BP and Shell have an­nounced that they are writ­ing down the value of their as­sets by a com­bined to­tal of nearly $40bn (£32bn), a sign that they be­lieve the golden days of oil are gone.

The pan­demic has cre­ated a win­dow of op­por­tu­nity, cli­mate ac­tivists say, to force through struc­tural changes to the en­ergy sec­tor. This vi­sion of a car­bon-free world leaves lit­tle room for oil com­pa­nies.

“We have re­set our price out­look to re­flect that im­pact and the like­li­hood of greater ef­forts to ‘build back bet­ter’ to­wards a Paris-con­sis­tent world,” Looney said as he an­nounced the write­down, in ref­er­ence to the 2015

Paris cli­mate agree­ment. “Build back bet­ter” has be­come the ral­ly­ing cry of those who are push­ing for a new sys­tem to be born out of the ashes of the in­dus­try. So how can BP and Shell play a part in this process of re­assem­bly?

While BP has so far re­vealed few de­tails about its strat­egy to sur­vive the move away from oil, Shell has been less cir­cum­spect. The 113-year-old com­pany be­lieves it can be­come the world’s big­gest power busi­ness by fo­cus­ing pri­mar­ily on nat­u­ral gas and re­new­able en­ergy.

The com­pany is bet­ting on the growth of elec­tric ve­hi­cles and smart homes, and on cus­tomers who de­mand that their elec­tric­ity is gen­er­ated by re­new­able sources such as so­lar and wind power. “All of these tech­nolo­gies and so­lu­tions ex­ist, but of­fer­ing all of these things as a pack­age doesn’t,” says

Tom Heg­garty, a so­lar an­a­lyst at con­sul­tant Wood Macken­zie.

“There are not many com­pa­nies with the bal­ance sheet that would make all the in­vest­ments that you need to do that, and that seems to be the way that Shell is go­ing.”

Shell be­lieves with the gov­ern­ment­man­dated

‘All of these tech­nolo­gies and so­lu­tions ex­ist, but of­fer­ing all of these things as a pack­age doesn’t’

re­struc­tur­ing of car­bon­in­ten­sive busi­nesses on the hori­zon, it can still ap­peal to in­vestors, and of­fer healthy re­turns, with a new model.

BP has also seen this tidal wave of change com­ing. The com­pany said last month that it had sharply in­creased the price it be­lieves it will be forced to pay gov­ern­ments for its car­bon diox­ide (CO2) emis­sions.

Pre­vi­ously, it es­ti­mated that it would be re­quired to pay $40 per tonne of CO2 but that has more than dou­bled to $100, as more gov­ern­ments ar­gue that higher taxes are the only way to stop the use of fos­sil fu­els.

It also said it would axe more than 10,000 jobs this year in re­sponse to low oil prices and the group’s shift to­wards clean en­ergy.

“In the longer term, this is about BP’s strate­gic shift away from oil and gas,” says Luke Parker, an­other an­a­lyst at Wood Macken­zie.

“While that will be a multi-decade af­fair, BP is al­ready get­ting to grips with the idea that its up­stream as­sets are worth less than it be­lieved as re­cently as six months ago. In­deed, some of them are worth noth­ing.”

In a bid to sig­nal how com­mit­ted both com­pa­nies are to chang­ing their busi­nesses, Shell and BP now have a slate of forth­com­ing re­new­able projects in the works.

BP has so­lar parks un­der de­vel­op­ment across the US, while Shell has wind farms in Hol­land and the UK that will come on­line over the next two years.

But not all are con­vinced. “There are clearly ar­eas within the new en­ergy sys­tem where oil com­pa­nies have an ad­van­tage and it makes sense to de­ploy cap­i­tal – but we do not think large scale re­new­able power gen­er­a­tion is one of them,” says Nick Stans­bury, a fund man­ager at Le­gal & Gen­eral.

“In our view the most share­hold­er­friendly op­tion is to make a com­mit­ment now to a man­aged de­cline.”

BP has so­lar parks un­der de­vel­op­ment across the US and has led re­search with Light­source in the UK into next-gen­er­a­tion tech­nol­ogy to make the pan­els more ef­fi­cient

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