BP unprepared for climate crunch

It’s odd then that the company should have just spent $13m (£10m) to help defeat a proposal that would have levied a $15 fee on every ton of carbon dioxide produced in the US state of Washington, a figure below BP's own internal price. Justifying its lobbying, the group argued the fee was poorly designed, and would have destroyed jobs and hurt the state’s economy. Our reading is that BP has chosen a business-as-usual approach to the defining issue for big oil over the next decade, and that this could prove symptomatic of short-sighted strategic thinking.

Still, while lobbying may hamper efforts to push society away from fossil fuels, does any of the above mean BP is a bad investment? Arguably, from a long-term view, it could. Even if carbon pricing fails to gather momentum any time soon, the energy giants know they must be part of the transition away from fossil fuels, rather than be an obstacle.

But there are several reasons why BP could be caught short in the long run if pressure continues to build on fossil fuels. The first is its assets. At the end of 2017, it had proved reserves of 18.4bn barrels of oil equivalent (boe), adding up to 14 years of production at its current rate of 3.6m boe. By comparison, Royal Dutch Shell (RDSB) has 10.2bn boe and less than eight years. As it happens, this takes it to just before the point the Mercator Research Institute thinks we will have blown the carbon budget left to prevent 1.5 degrees centigrade of warming above pre-industrial levels.

Little wonder then that BP’s chief economist, Spencer Dale, has publicly suggested that some oil reserves will never be extracted, and that a looming race to produce assets before they become stranded is likely to cause “quite significant pressures to dampen long-run prices”. That’s hardly a vote of confidence in his company’s long-term outlook, but a fair summary of the volatility inherent in oil prices and oil stocks. This volatility, we think, will only be exacerbated by the falling cost of renewable energies and their exponential adoption.

On that front, BP is ahead of its US peers, and invests $500m a year in alternative energies. But as with the Washington referendum, group-wide capital allocation remains business as usual, as demonstrated by the recent $10.5bn purchase of BHP’s (BLT) US shale portfolio – a business the latter spent years failing to profit from.  

BP has also agreed to fund the deal entirely with cash, further hitting an already stretched balance sheet, and just as oil prices are dipping. There is still little clarity on how it will plug the gap with $5bn-$6bn of disposals – all while continuing to issue scrip dividends and buy back shares at the same time. Meanwhile, payments relating to the Deepwater Horizon oil spill are tapering, but continue to chip away at operating cash flow (including $3bn in 2018).