BP’s green energy goals will be difficult to meet

LONDON (Reuters) – BP (BP.L) will have to invest tens of billions of dollars over the next decades and may have to accept lower returns than it can get from oil if it is to meet its goal of becoming one of the largest innovative power generators in the world. words.

The UK oil and gas company wants by 2030 50 gigawatts (GW) of renewable energy such as wind, solar and hydropower in its portfolio, up from now 2.5 GW and more than the total sustainable capacity in the UK at present.

European oil companies are under pressure from activists, banks, investors and some governments to switch to fossil fuels and try to find business models that offer higher margins than the entire production of renewable energy would generate.

Last week followed BP Eni (ENI.MI) in the promise to cut its oil production in the coming decades and set a greater target for reductions than the Italian company.

Analysts say large offshore wind farms are likely to provide the fastest route for BP to scale up, but because they can take years to develop, and have high start-up costs, it may have to turn to purchases – and they will not come cheap.

“Getting value for that will be hard because these properties are very attractive and sell at very high prices,” said Peter Atherton, associate at British strategy advisers Stonehaven.

BP already has $ 41 billion in debt and as investors increasingly turn away from fossil fuel producers in favor of green energy companies, their shares have halved over the past two years, reducing their market value to below $ 80 billion.

In contrast, shares in Orsted of Denmark (ORSTED.CO), one of the largest offshore wine developers in the world, increased 135% during the same period to give it a market value of $ 60 billion.

Orsted currently has 10 GW of installed wind energy capacity – still only one-fifth of BP’s target – and has promised to add another 3.8 gigawatts.

Shares in Spanish utility Iberdrola (IBE.MC), which has 33 GW of installed sustainable power and is developing several projects, has jumped 78% over the past two years, bringing its market capitalization to $ 80 billion, on a par with BP.

Global sustainable capacity is just over 2,500 GW, according to the International Agency for Renewable Energy, but it is expected to grow rapidly as countries try to meet lower emissions to meet targets set under the 2015 Paris Climate Agreement.

Data from the International Energy Agency show that sustainable, including wind, solar and hydropower, accounted for about a quarter of the electricity produced in countries in the Organization for Economic Co-operation and Development last year.

(Graph: The shares of renewed power operators outperform oil producers, here)

STRATEGY RISKS

In a strategy update on Tuesday, BP said it would cut its oil and gas production by 20% by 2030 and spend $ 5 billion a year on low-carbon projects, which it hopes will make it one of the largest producers of green power. in the world will be.

It also plans to sell oil and gas assets that are not economically viable with lower oil prices to increase $ 20 billion by 2025 to help fund the transition to cleaner energy.

With sustainable energy companies trading at high price-to-earnings ratios, analysts say BP could also build wind farms from construction, but they would come up with high upfront costs.

For example, the Iberdrola’s 3.1 GW East Anglia offshore windshield project is expected to cost around $ 8 billion, while SSE (SSE.L) and Total’s (TOTF.PA) 1.1 GW Seagreen 1 UK offshore wind project is expected to cost around $ 3.7 billion.

Biraj Borkhataria, an analyst at Royal Bank of Canada, estimates that BP will have to spend about $ 60 billion to reach its sustainable energy target, assuming there is a 50/50 split between offshore wind and solar energy production.

Assuming that 70% of that amount could be increased through project financing, BP would have to make a net capital investment of $ 18 billion in the next decade, he said.

Jason Gammel, an analyst at investment bank Jefferies, put the bill for BP at about $ 30 billion plus project financing, but said the plan still depended on renewable energy activities that were both available and offered acceptable returns.

“The capital requirements assume that there are sufficient opportunities to obtain acceptable returns, which we see as significant risks to the strategy,” he said.

(Graph: European Oil and Gas Power Objectives, here)

Large oil companies generally focus on a return on oil investment of around 15%. BP said it expects returns of 8% to 10% of its investments in low-carbon electricity, with the traditional oil and gas units pushing total returns to 12% to 14% by 2030.

BP’s two largest shareholders, BlackRock (BLK.N) and Vanguard, declined to comment on their sustainability strategy. Vanguard said it held most of its BP shares in index funds. Another Great Investor, Legal & General (LGEN.L), had no direct comment. Other fund managers, including Allianz (ALVG.DE), did not respond to requests for comment. (Graph: renewable power generation by technology, here)

LIGHT THROUGH?

BP CEO Bernard Looney said in a conference call last week that the company would only go for sustainable capacity that came with the right return – instead of chasing capacity for fun.

BP chief financial officer Murray Auchincloss made the same call, citing the company’s enormous trading capacity, its ability to extract sustainable power with natural gas to guarantee exchange rates, and its expertise in currency and hedge services could push returns “well into the double digits” range .

Some analysts are skeptical.

Borkhataria of Royal Bank of Canada expects yields on sustainable products to be around 7%.

“It’s hard to see that these are two-digit return projects,” he said. “The energy sector is not able to execute its strategy on its core business, so I am not so confident to take another leap of faith on a new company.”

Leading oil and gas analyst at Fitch rating agency, Dmitry Marinchenko, said although renewable energy may be a less profitable business now, BP bet oil and gas returns would be weaker in the future.

“The road to energy transition will be bumpy for oil mowing; they do not have much experience in sustainable and new investments will make them subject to the execution risk. Not all investments are likely to remain successful, ‘he said.

However, the ‘business as usual’ approach could be too risky in the long run. The company rediscovering that oil prices are still relatively high should be easier than in 10 years time. ”