BP faces ‘existential crisis’ after ruinous attempt to go green
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It was meant to be the moment when one of Britain’s most powerful companies broke decisively with its fossil fuel past.
Addressing journalists and executives at the Royal Lancaster Hotel overlooking Hyde Park, Bernard Looney, BP’s new chief executive, urged them to “reimagine” his company as a champion of green power.
By 2030, BP would have cut oil and gas production by 40pc, he pledged, with the lost fossil fuel income replaced by wind farms, solar parks and biofuels made from plants.
He said: “BP has been an international oil company for over a century … Now we are pivoting to become an integrated energy company.
“We believe our new strategy provides a comprehensive and coherent approach to turn our net zero ambition into action. This coming decade is critical for the world in the fight against climate change.”
Five years on from that speech in February 2020, the company is beleaguered by a ruthless activist investor, under pressure to boost its flatlining share price and considering a return to the oil and gas exploration that made it so successful to begin with.
The abrupt turn follows decades of crisis at one of Britain’s most venerable institutions. Today, its future is more uncertain than ever.
The net zero plans unveiled by Looney have hammered profits and generated intense speculation about a takeover, break up or even a merger with arch-rival Shell.
This month the fears became real with revelations that Elliott, a Florida-based hedge fund and corporate raider, has built a £3.8bn stake in BP – and is laying siege to the company.
On Wednesday, BP will face the ultimate test at its capital markets day when Murray Auchincloss, the company’s current chief executive, will seek to persuade sceptical investors that he can deliver a “fundamental reset”.
To win round doubters, he is expected to announce a major break with the last five years – shifting away from net zero and back towards its oil and gas heritage.
But many in the City are asking how a company of BP’s size and stature has found itself in this position in the first place.
“Elliott has forced BP on to the back foot and into a statement about how they ‘must do better’. It’s crazy. The company has been made to look totally reactive,” a City source said.
With rivals circling, some believe that BP’s very independence is at stake.
One dealmaker warns that the company has never looked more vulnerable: “It’s a changed world: money’s relatively cheap. There’s a lot of dry powder out there, and you’ve got an American president who is encouraging everyone to ‘drill baby drill’.
“The [US Federal Trade Commission] has had a change of leadership, the CMA [the Competition and Markets Authority] is being overhauled, so it’s probably as positive an environment for consolidation as you’re going to get in a generation.”
“For BP, this crisis is existential,” a former adviser said.
BP’s net zero pledges were backed by precise numbers.
Looney promised that by 2030 BP would boost investment in renewables tenfold from $500m (£395m) to $5bn and build windfarms and solar parks with a capacity of 50 gigawatts – roughly enough to supply the whole UK on a windy and sunny day.
Over the same period it would slash oil and gas production from the equivalent of 2.6m barrels of oil a day to 1.5m. Refining throughput would drop from 1.7m barrels a day to just 1.2m.
Looney’s vision was supported by his board of directors and chairman Helge Lund, who said: “Energy markets are fundamentally changing, shifting towards low carbon … We are confident that the decisions we have taken and the strategy we are setting out today are right for BP, for our shareholders and for wider society.”
Auchincloss, then BP’s chief finance officer, backed the idea too, as did BP’s shareholders who voted 88pc in favour of oil and gas production cuts and a shift to renewables.
“The problems really started when Bernard Looney set it on the path to becoming a renewables company,” says Ashley Kelty, research director at Panmure Liberum. “He was aided and abetted by Helge Lund who also shares the same green vision.”
It did not take long for problems to start emerging.
After Russia invaded Ukraine in February 2022, oil and gas prices spiked. The surge rained cash down on fossil fuel producers, including BP. However, it raised questions as to why the company was pulling back from such a profitable market.
In February 2023, after a blockbuster $28bn profits for 2022 linked to the global energy crisis, Looney was forced to slash his pledge to cut production by 40pc by the end of the decade to a more modest 25pc.
BP’s shareholders had realised that the green spending they supported in 2020 had halved their dividends. Total shareholder returns had underperformed Shell by 15pc, France’s TotalEnergies by 30pc, Chevron by 60pc and ExxonMobil by 100pc.
But his legacy lived on. Today, BP is still saddled with Looney’s commitment to slash oil and gas production by a quarter by 2030. Under that plan, it must cut oil and gas output from last year’s 2.4m barrels a day to just 2m within five years.
There is little sign of that happening – and there is no longer any plan to replace such a loss of production with other forms of energy. Few of Looney’s 2020 promised renewable energy projects have materialised.
Earlier this month BP used its 2024 results day to announce that those that have been built – such as its 10 US windfarms – are to be sold. Its other wind assets (mostly planning approvals, including around the UK), are to be shunted into an independent joint venture.
BP Lightsource, BP’s solar subsidiary, is still building solar farms – but these are then sold on, meaning no long-term investment or income.
Pushed by analysts, Auchincloss, Looney’s replacement, confirmed a halt to all investment in wind and solar. “We have completely decapitalised renewables,” he said.
The same results showed BP made $8.9bn in underlying profit compared with $13.8bn in 2023 – its worst annual result since 2020, the year of the pandemic.
In response, Auchincloss promised a wave of new oil and gas production, including BP’s sixth hub in the Gulf of Mexico. The Kaskida development will soon be producing 80,000 barrels of crude oil a day, with other developments planned in Iraq, India, Brazil, Egypt and the UK’s North Sea.
Overall, he has suggested BP’s oil production will rise by 2-3pc a year until 2030.
All that, say analysts, completely contradicts the “zombie” net zero strategy bequeathed by Looney – as well as offering a strong clue as to what Auchincloss’s “fundamental reset” will include – a full-blooded return to oil and gas.
Looney is a figurehead of the net zero crisis BP finds itself in, but some say the company’s problems date back to a Palladian villa on the outskirts of Venice where, in 1997 BP’s then chief executive John Browne was holidaying with his mother.
Senior executives were summoned to a meeting that would change its identity, brand and culture forever.
“We wanted our image to reflect what we believed BP now stood for,” the now ennobled Lord Browne recalled in his memoir, Beyond Business. “It was to be a competitively profitable force for good.”
At the time BP was riding high. Takeovers of US energy giants Amoco and Arco along with Burmah Castrol had turned BP into the industry’s second-largest company, behind only Exxon Mobil, with soaring profits, fat dividends and a share price to match.
BP’s shift away from fossil fuels started under Lord Browne’s leadership in the 1990s – Marina Imperi
The British Petroleum title was ditched and the company became just BP – with all fossil fuels removed from the name, and the traditional shield logo replaced with a green and yellow “Helios” design based on a sunflower.
But it was Browne’s marketing meme “Beyond Petroleum” that caused the greatest controversy – one which has echoed down the years, to the eras of Looney and Auchincloss. It suggested that BP’s future involved more than oil and gas.
Browne’s mergers also inadvertently led to some real disasters – all of which have fed into the company’s current problems.
In 2005, an explosion ripped through its Texas City refinery killing 15 people. An inquiry found that BP managers lacked a proper safety culture.
Months later, in the Gulf of Mexico BP’s new flagship Thunder Horse oil platform tipped on its side during installation. The image went round the world, further undermining BP’s reputation, along with its oil output and profits.
And in 2006, BP’s name took another hit when a corroded pipeline in Alaska’s Prudhoe Bay leaked 800,000 litres of crude oil into a wildlife reserve.
BP’s humiliations were followed by Lord Browne’s departure in 2007 under a cloud. He stepped down after misleading a court about his relationship with another man during legal efforts to prevent the Mail on Sunday publishing details of his private life.
Despite the tumultuous circumstances, Browne had prepared carefully for his succession. He created and mentored an elite cadre of young executives known internally as “turtles” – a reference to the cartoon superheroes in TV series Teenage Mutant Ninja Turtles and intended to signify their swashbuckling potential.
They included his immediate successor, Tony Hayward and Looney – both chosen partly because they bought into his vision of a greener BP.
Hayward, however, was soon grappling with the 2010 explosion on the Deepwater Horizon drilling rig that killed 11 workers and caused the worst oil spill in US history. His thoughtless remark to journalists that “I want my life back” destroyed his BP career.
For the company, the real damage was the billions of pounds in compensation it has had to pay from its profits in the years since then. Those payouts so far total about $67bn – directly contributing to BP’s continuing financial weakness.
Browne was ahead of his time when he envisioned a future beyond oil and gas in the late 1990s.
However, this idea had become mainstream by the time Looney ascended to the BP’s top job in 2020. (He succeeded Bob Dudley, an American who joined the company through the Amoco merger and helped steer the company through the Deepwater Horizon crisis.)
With the world in lockdown and the public reassessing attitudes to everything from race to the planet, Looney’s progressive plan seem to some as a reflection of the changing times.
However, to other observers, this in itself was a problem. Looney’s decision was the product of a culture that has long been too obsessed with image rather than results, according to one former BP executive.
“BP is more like a quasi-state oil company, where it is almost focused more on its role in the world than making money,” they say. “It just doesn’t have the visceral commercial hunger of Exxon or Total.”
BP’s share price has hardly changed since the year 2000, still hovering just below £5. Shell’s shares, by contrast, are worth about five times more.
A BP shareholder says the pivot to net zero was also based on muddled thinking: “It was a strategic error. All the green stocks were trading on 20-30 times earnings, and BP was on something like six so the idea was, if you switch across you can get the same high rating.
“But the catch was, you didn’t make anything like the same money in wind farms – it just wasn’t there.”
The return on capital invested by BP has declined and Dan Slater, director of research at Zeus Capital investors, says there is a direct link with its venture into renewables.
“BP has gone harder into renewables than its peers in recent years, and that has ended up denting returns. This has been most clearly highlighted in the company’s share price underperformance, particularly compared with Exxon and Chevron, which are more focused on oil and gas.”
Auchincloss is now trying to close that gap. But BP’s investors are unlikely to be satisfied with just a pledge to find more oil and gas. They will want blood too – almost certainly that of Lund, the chairman, and some of the other non-executive directors.
As one senior fund manager said: “Lund is probably under the most pressure. His name keeps coming up. He came in, pivoted as the zeitgeist went towards renewables and away from oil and now he is having to pivot back. So he might be the wrong guy to do that.”
If Auchincloss gets his reset wrong, he too will be at risk.
“Auchincloss isn’t dead in the water, but I think he will only be allowed one shot,” the fund manager says.
While Elliott’s presence on BP’s share register may be seen as raising the stakes, an argument can be made that it actually gives Auchincloss a boost.
As one former oil executive puts it: “I think Elliott’s presence gives Auchincloss cover to blow the doors off. In fact, he has to, doesn’t he?”
BP chief Murray Auchincloss risks becoming a target for investors’ ire if he botches the company’s reset – Callaghan O’Hare/REUTERS
Geopolitics could offer a route to recovery. Three years ago BP cut ties with the Kremlin-controlled energy giant Rosneft, in which it held a 20pc stake, following Russia’s attack on Ukraine.
BP took an immediate hit of $24bn, simultaneously reducing its reported oil and gas reserves by more than 50pc, oil and gas production by a third, and earnings by $2bn a year.
It has not, however, sold its shares – and this week JP Morgan suggested that could mean a windfall lay ahead if the current peace talks led to a settlement.
“Rosneft optionality makes BP a prime ceasefire beneficiary,” the bank said.
Ditching Looney’s legacy policies could pay off in the US too, especially with Donald Trump in charge. Trump’s energy secretary, Chris Wright, last week denounced net zero policies to a London conference as “sinister” while the US president has infamously denounced climate change as “a hoax”.
With its US assets producing 700,000 barrels of oil and gas a day – nearly a third of the company’s output – it would be brave of BP to cling to its net zero pretensions.
A presentation accompanying BP’s most recent financial results hinted at the company’s enthusiasm to realign itself. BP has already edited its maps to rename the Gulf of Mexico as the Gulf of America as Trump has demanded.
Whatever Auchincloss tells investors this week, it will do little to lift the threats from the likes of Elliott. The company remains fundamentally weaker than competitors and vulnerable as a result.
“Trading at levels that don’t justify the sum of its parts is as bad as it gets for a public company,” says Greg Newman, the chief executive of oil markets trader Onyx Capital, which traded 24bn barrels of oil last year.
“It’s no wonder an asset-stripper type strategy looks appealing and is gaining attention.”
Along with all other UK offshore operators, BP is effectively banned from seeking out new oil and gas under the UK’s surrounding seas by energy secretary Ed Miliband’s net zero ban on exploration.
Instead, the company is looking ever further afield. BP’s latest and riskiest venture, for example, is in the Gulf of Mexico where it is drilling more than 35,000ft into the seabed, in 6,000ft of ocean, to exploit the Kaskida field.
The oil is so hot, at 120C, and under such great pressures – 500 times greater than a lorry tyre – that no one has dared touch it until now.
Yet even formalising the move back to oil and gas has its perils. Elliott may be keen on the idea but other shareholders are fiercely resistant.
Last week a group of 48 institutional investors wrote to Lund demanding BP give shareholders a vote on any plan to invest more in fossil fuel production.
The group, including Rathbones Investment Management, Phoenix Group, Robeco and Royal London Asset Management, wrote: “Whilst we can understand the short term business case for this, in the medium term it increases investors’ potential exposure to stranded or value destructive assets as the energy transition progresses.”
This group, however, are comparatively small stakeholders in BP. Although it is headquartered in London, about 45pc of its shares are owned by American institutions or investors – compared with just 30pc held in the UK.
New York-based BlackRock alone holds nearly 10pc while the Vanguard Group, based in Malvern, Pennsylvania, has another 5pc. Norges Bank – the Bank of Norway – has another 5pc. All refused to comment, as did Elliott.
If Auchincloss is going to protect BP, then those big investors are the ones he must keep onside.
Asked for comment on its strategic pivot, BP pointed to comments made by Auchincloss earlier this month.
He said: “Building on the actions taken in the last 12 months, we now plan to fundamentally reset our strategy and drive further improvements in performance, all in service of growing cash flow and returns. It will be a new direction for BP.”
Will it be enough? Some observers still see a takeover or break-up as the most likely outcome for BP. According to another industry figure, BP needs “putting out of its misery”.
