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The re-greening of British Petroleum

The price of Brent crude has fallen by a fifth since the economy of China’s Hubei province started spluttering to a halt as the coronavirus took hold in early January. One imagines the oil price slump will be a temporary effect, like the virus itself – but you never know.

Closer to home, the number of people infected in the UK increased to nine – after four more patients tested positive for the virus in the first week of February. That probably seems reassuring – at least relative to the epicentre of the outbreak – until you realise that if the numbers of the afflicted continue to double week on week, then the entire UK population would have been infected by 20 July.

Exponential growth on this scale is not unknown, though highly unlikely. A more immediate threat to investors may be rash and intemperate investment decisions. In his Journal of the Plague Year, published in 1722, Daniel Defoe takes an early stab at behavioural finance, when he laments that “[investor] fears were predominant over all their passions, and they threw away their money in a most distracted manner upon those whimsies”.

As investors, many of our wounds are self-inflicted, rather than acts of God, but it’s quite another thing when the companies in which we invest decide to pursue strategies that could effectively destroy shareholder value.

Last week, BP (BP.) set out its stall to become a net zero-carbon company by 2050 or sooner. New chief executive Bernard Looney delivered a 10-point plan (or wish list) for the oil major, designed to “fundamentally transform its whole organisation”. Whether this implies a move away from hydrocarbons in favour of science fiction is difficult to say, but phrases like “we have to change and we want to change” make the corporation sound like a recovering alcoholic (perhaps a 12-step programme would have been more appropriate).

There is a certain amount of scepticism directed at the group because it failed to live up to its earlier Damascene conversion under the stewardship of Lord Browne. This prefigured a rebranding at the start of the millennium, highlighting efforts to move "Beyond Petroleum", including the creation of a now-defunct in-house carbon trading scheme.

BP will need to step up its efforts – judging by its environmental record in the intervening 20-year period – if it hopes to go carbon neutral by 2050, even though it has worked with numerous environmental bodies, developed bio-fuels and carbon-capture technologies, while allocating capital to renewable energy projects.

It all boils down to a question of scale. In 2019, group production increased by 2.7 per cent to 3.8m barrels of oil equivalent a day. That represents an awful lot of offsetting, although oil companies should continue to benefit from the ongoing fall in western energy intensity – CO2 emissions in the UK are 38 per cent lower than they were in 1990.

These types of pledges rarely amount to anything other than window dressing where oil companies are concerned – they’re not in the business of saving the planet. They have an overriding fiduciary duty to shareholders. Why else did BP and Royal Dutch Shell (RDSB) spend millions in legal fees to minimise financial restitution following respective oil calamities in the Gulf of Mexico and the Niger Delta?

You might reasonably argue that the zero-carbon pledge is intertwined with the interests of shareholders because of the growing preponderance of environmental, social, and governance (ESG) mandates – doing just enough to keep fund managers onside. I would counter that the interests of shareholders would be best served by pumping as much oil out of the ground as cheaply as possible.

While the group acknowledges that the “social costs” of production will have a bearing on oil prices over the foreseeable future, it also predicts that “once oil demand has peaked, consumption is unlikely to fall very sharply – the world is likely to consume significant amounts of oil for many years to come”.

BP and Shell have delivered annualised total returns of 2.76 per cent and 7.84 per cent, respectively, over the past decade, largely because of their dividend policies. Hardly astronomical returns, but fund managers may be loath to give this up. We still believe that increased volatility in oil prices will eventually shake smaller (lower-margin) producers out of the market – a similar scenario has already played out in iron ore. So, rug up, keep warm and disregard all the noise about stranded assets and energy transition – we’ll still be cooking on the black stuff.