Last checked at 
(For more Reuters Special Reports, click on)
By Ron Bousso
LONDON, Sept 20 (Reuters) - Deep in the Oman desert lies one
of BP's more lucrative projects, a mass of steel pipes and
cooling towers that showcases the British energy giant's
pioneering natural gas extraction technology.
The facility earned BP Plc more than $650 million in
profits in 2019, according to financial filings reviewed by
Reuters. Yet the oil major agreed to sell a third of its
majority stake in the project earlier this year. The deal
exemplifies a larger strategy to liquidate fossil-fuel assets to
raise cash for investments in renewable-energy projects that BP
concedes won't make money for years.
BP's big bet is emblematic of the hard choices confronting
Big Oil. All oil majors face mounting pressure from regulators
and investors worldwide to develop cleaner energy and divest
from fossil fuels, a primary source of greenhouse-gas emissions
that cause global warming. That scrutiny has increased since
early August, when the United Nations panel on climate change
warned in a landmark report https://www.reuters.com/article/us-climate-change-ipcc-report-idCAKBN2FA0JL
that rising temperatures could soon spiral out of control.
BP Chief Executive Bernard Looney, who took office in
February 2020, is gambling that BP can make the clean-energy
transition much faster than its peers. Last year, he became the
first major oil CEO to announce that he would purposely cut
future production. He aims to slash BP's output by 40%, or about
1 million barrels per day, an amount equal to the UK's entire
daily output in 2019. At the same time, BP would boost its
capacity to generate electricity from renewable sources to 50
gigawatts, a 20-fold increase and equivalent to the power
produced by 50 U.S. nuclear plants. (For a graphic on BP's
clean-energy investment plans, see https://tmsnrt.rs/3fbaCJP)
To hit those targets, Looney plans $25 billion in
fossil-fuel asset sales by 2025. That's equivalent to about 13%
of the company's total fixed assets at the end of 2019. Under
his watch, BP has already sold legacy projects worth about $15
billion. In addition to the Oman deal, Looney unloaded oil and
gas fields in Alaska and the North Sea and sold off BP's entire
petrochemical operation, which produced a $402 million profit in
2019.
Two of BP's key renewables investments, by contrast, are
losing tens of millions of dollars, according to a Reuters
review of financial filings with Companies House, Britain's
corporate registry. BP owns half of Lightsource, a solar energy
company that lost a combined 59.3 million pounds ($81.8 million)
in 2018 and 2019, the last year for which data is available. The
company's UK-based electric-vehicle charging firm, bp pulse,
lost a combined 22.3 million pounds ($30.8 million) over the two
years.
Performance figures for other assets recently bought or sold
by BP are not available because, like other oil majors, it does
not usually disclose financials of individual projects.
The performance numbers for the two renewable projects and the
Oman unit have not been previously reported. BP did not give
Reuters updated financials for those projects or others beyond
2019.
The company acknowledged that its fast-growing clean-energy
business - including its solar, EV-charging and wind ventures -
continues to lose money. BP does not expect profits from those
businesses until at least 2025.
The losses are not slowing Looney's spending on renewable
energy. He aims to boost annual investment to $5 billion by
2030, a 10-fold increase over 2019. For bp pulse, that means
operating 70,000 charging points by 2030, up from 11,000 now.
Lightsource, meanwhile, recently completed a $250 million solar
farm in rural north Texas and, separately, acquired a U.S. solar
company for $220 million. BP is also moving aggressively into
offshore wind power, and paying a high cost of entry relative to
companies who got established in the business earlier.
As he launched the transition, Looney has slashed jobs,
cutting 10,000 employees, or about 15% of the workforce he
inherited. BP's share price, meanwhile, has fallen 39% since
Looney arrived, the worst performance by any oil major during
the period. (For a graphic comparing BP share prices to other
oil majors, see https://tmsnrt.rs/3hhM0Ak)
In an interview with Reuters, BP Chief Financial Officer
Murray Auchincloss dismissed the importance of the company's
recent share performance and said BP and its investors can
weather the rapid transformation. The declining oil-and-gas
revenue this decade will be offset, in part, by higher expected
revenues from gasoline stations and their attached convenience
stores, he said. Those stations will increasingly offer electric
vehicle charging, a business Auchincloss said is growing much
faster than BP had expected, especially in Europe, because of
plans by automakers including BMW and Daimler AG, the parent
company of Mercedes-Benz, to introduce more electric models.
"Electrification is growing at a much faster pace than we
ever could have dreamed," Auchincloss said.
When BP's wind and solar investments start returning healthy
profits, Auchincloss said, the returns will be lower than BP
expects from oil and gas. But they will be far more stable, he
said, compared to the "super volatile" oil business, where
prices can rise or fall dramatically. The company also plans to
boost profits through its energy-trading operation, one of the
world's largest, which will benefit from BP's new focus on
generating electricity, Auchincloss said.
Seven current and former BP executives spoke with Reuters on
condition of anonymity and shared their views on Looney's
transition plan. The executives generally supported the
direction but expressed varying levels of concern that Looney is
moving too fast in trading high-quality oil assets for more
speculative renewable-energy investments. Some worried in
particular that selling higher-quality oil assets now could
leave BP with mostly lower-quality assets, which will become
harder to unload later as the entire industry looks to
transition to cleaner energy sources.
A recent attempted sale illustrates the increasing challenge
of selling oil assets. When BP tried to sell two stakes in North
Sea fields to Premier Oil, it slashed its price by two-thirds in
negotiations, to $205 million, only to see the deal collapse
entirely late last year when Premier hit financial difficulties.
One former senior BP executive said that Looney may have
erred in setting a specific target for renewable-power capacity
- one that would be difficult to meet while also hitting profit
targets. Meeting those two conflicting goals will become harder
as industry competition to acquire renewable assets heats up,
said the former executive, who recently left BP. Missing either
mark will not go over well with investors, the executive said.
A current senior BP executive countered that Looney, backed
by company directors, has taken a bold but reasonable strategy
to tackle the vexing challenges facing the industry. "The board
knows that you can't please everybody," this executive said,
"and the worst thing you can do is take no stand."
BP spokesman David Nicholas said the company has been
"strictly disciplined" in choosing renewable investments that
meet certain financial criteria and will allow Looney to
continue hitting corporate profit targets.
Looney faces a steep challenge in convincing shareholders to
come along on what promises to be a wild ride for BP, said Russ
Mould, the investment director for AJ Bell, one of UK's largest
consumer-investing platforms, serving 368,000 people.
"BP is still looking to sell assets, at a time when demand
for them is not great, and recycle that cash into
renewable-energy assets, where competition for them is fierce,"
Mould said in an August note to investors. "That sounds like a
potential recipe for selling low, buying high and destroying
shareholder value along the way."
'BEYOND PETROLEUM' REDUX
Looney is a 50-year-old Irishman who grew up on a family
farm in County Kerry with four siblings. He joined BP in 1991 as
a drilling engineer and rose through the ranks of its
oil-and-gas exploration and production division -- "upstream" in
industry parlance -- before becoming its head in 2016. Confident
and charismatic, Looney set his ambitions on "reinventing" BP as
a green-energy provider when he took over the CEO's job from Bob
Dudley.
Looney's transition may unnerve shareholders who recall BP's
late-1990s foray into renewables -- the ultimately abandoned
effort to rebrand BP as "Beyond Petroleum." Then-CEO John Browne
was the first oil major chief to publicly acknowledge that
fossil fuels contributed to climate change. He invested billions
of dollars in wind and solar projects, only to see most of them
fail over the next decade. Browne did not respond to a request
for comment.
This time, BP is going beyond investing in renewables; it's
unloading core oil and gas assets. The Oman project is among the
world's largest natural-gas fields, and BP reported to Companies
house that the field earned a 17% return on capital deployed in
2019.
When BP expanded the Oman project in October 2020 to boost
its gas output, Looney called it central to BP's strategy. He
has said he envisions natural gas, which has lower emissions of
atmosphere-warming carbon than crude oil or coal, as a long-term
revenue source to finance the company's metamorphosis.
Late last year, however, Looney faced rising pressure to
steady the ship amid the coronavirus crisis, which sapped global
fuel demand and crushed oil and gas prices. BP ended the year
with $39 billion in net debt, a level that concerned executives
including Looney, according to one senior BP executive with
knowledge of their internal deliberations. The debt had become
problematic because of the company's falling value, which
increased its debt-to-equity ratio and jeopardized its credit
rating. The concerns, the executive said, also stemmed from a
difficulty in convincing bankers and investors that BP's growing
renewable-energy business could make money.
In early 2021, Looney called a meeting of BP's top
leadership and told them to urgently find ways to cut debt to
below $35 billion, the executive said.
Soon after, on February 1, BP announced the agreement to
sell part of its stake in the Oman gas field for $2.6 billion to
Thailand's PTT Exploration and Production. BP gave up a third of
its 60% ownership - or 20% of the whole project - in the deal.
That sale and others helped BP cut debt to $33 billion by the
end of March. The effort was also aided by rising oil and
natural gas prices.
Three current and former BP executives told Reuters that the
company decided to sell the stake in such a profitable project
because it struggled to find buyers for other assets during the
pandemic, which left few firms with an appetite for
acquisitions.
BP spokesman Nicholas said that BP had started planning to
sell a stake in the Oman project before Looney launched the
drive to cut debt.
In a brief interview at a company announcement in April,
Looney told Reuters that he was happy with the price for the
Oman stake and didn't sell it under duress.
"We're not in a panic here," Looney said. "There is no rush;
net debt is very much under control."
Anish Kapadia, head of energy at the investor advisory
service Palissy Advisors, said the price for the Oman stake was
relatively low compared to comparable sales of natural-gas
assets. Based on the project's earnings, Kapadia said he would
have expected a value about 25% higher. BP also might have made
substantially more money, Kapadia said, by waiting until the
oil-and-gas industry rebounded.
"They're selling a profitable, long-life, long-reserve
business," Kapadia said of BP. "They're selling it and using
those proceeds to fund alternative businesses that aren't going
to generate free cash flow for the best part of this decade."
Several months before the Oman deal, in June 2020, BP sold
its petrochemicals business for $5 billion to chemicals giant
INEOS. The business generated about 4% of BP's total annual
profit in 2019.
Some other majors, by contrast, have targeted petrochemicals
as a growth area and a hedge against expected long-term declines
in oil demand. Royal Dutch Shell and Exxon Mobil
have in recent years invested heavily in petrochemicals,
which supply industries including plastics.
BP spokesperson Nicholas said the company had long ago, in
2005, sold a bigger piece of its petrochemical business to INEOS
and only retained two specialist operations that
were not integrated with the rest of BP. "We sold for a very
good price," he said, "to a company that could integrate them
into their business."
Looney has often delighted in taking a different path -
especially more recently, as the company reported strong
second-quarter profits of $2.8 billion on the strength of its
recovering oil-and-gas business. Looney has indicated, however,
that the fresh influx of cash only makes him want to sell BP's
oil assets faster - while it can fetch higher prices for them to
finance more renewable investments.
"While we understand the questions in some investors' minds,
we do see a compelling proposition to deliver competitive
returns" in renewable energy, Looney told investors on the
August earnings call.
Mould, the AJ Bell investment director, said Looney's
strategy may prove to be the "least bad option" facing BP and
other oil firms under pressure to overhaul their businesses.
Investors who buy BP shares at their current, beaten-down
prices, he said, could see strong long-term returns.
LOSS LEADERS
As BP's fossil-fuel footprint shrinks, it faces a steep
challenge in filling the financial void with profits from
clean-energy ventures.
For now, BP's renewable projects are taking losses. The firm
bought its bp pulse electric-vehicle charging firm - then named
Chargemaster - in June 2018 for 130 million pounds ($179.3
million). The oil major hopes to boost the firm's fortunes in
part by installing thousands of fast EV chargers alongside gas
pumps at its large service-station network. The stations and
their attached convenience stores have been a key profit driver,
and BP is betting that EV drivers will shop and snack more while
charging their cars, which takes longer than a gasoline fill-up.
BP announced a deal to acquire a 43% stake in Lightsource in
December 2017 for $200 million. It now owns 50% of the firm,
which operates solar farms in 15 countries and has tripled
capacity since 2017 to 20 gigawatts.
Dev Sanyal, chief of BP's natural-gas and renewables
businesses, said that solar-power businesses start delivering
profits more quickly than offshore wind, where development can
take much longer. But solar initially delivers lower returns
than wind, Lightsource BP CEO Nick Boyle said in the 2019 filing
reviewed by Reuters. The returns increase gradually, in part
because solar has lower maintenance costs than wind facilities.
BP this week announced the appointment of Anja-Isabel
Dotzenrath, a veteran renewables and power sector executive, as
its new head of natural gas and renewables, replacing Sanyal.
The move was seen as further sign of Looney's drive to diversify
away from oil and gas.
PRICEY WIND PROJECTS
BP moved aggressively into offshore wind in October 2020
when it bought a 50% stake from Norwegian energy giant Equinor
in two projects off the U.S. East Coast for about $1
billion. Offshore projects, the industry's next frontier, are
far more complex and capital-intensive than onshore projects and
use newer technology.
Many top oil companies with experience in operating
deepwater oil and gas fields have made a similar push. Some,
such as Shell and Equinor, started their offshore wind ventures
several years ago. Utilities such as Spain's Iberdrola
and Denmark's Orsted are also well established.
That stiff competition means BP is paying a hefty price of
entry, some rivals say privately. In February, BP and its
partner Energie Baden-Württemberg AG paid 900 million pounds
($1.24 billion) for the rights to build two projects in the
Irish Sea in Britain's offshore wind licensing round.
BP's Sanyal acknowledged the high costs of entry. But he
said the prospect of long-term power-supply contracts will make
the returns more reliable.
"You don't have the highs and lows of oil and gas," Sanyal
said.
It will be years before investors know the outcome of
Looney's wager on renewables. Still, even BP's relatively fast
transformation doesn't go far enough in reducing climate damage,
said Kim Fustier, an oil-and-gas analyst at HSBC bank. She
expects BP's earnings from renewables and low-carbon businesses
to represent 4% to 5% of total earnings by the middle of the
decade and 10% to 15% by 2030.
"This is nowhere near enough for investors to start thinking
of these companies as being part of the solution," Fustier said.
($1 = 0.7251 pounds)
(Reporting by Ron Bousso; editing by Simon Webb and Brian
Thevenot)
