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BP doubles profit, making oil cash grab as GHG ambitions slow

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BP (LSE:BP) announced that profits had more than doubled in its 2022 results to $27.7 billion, adding that it is slowing down the pace of its withdrawal from oil and gas.

  • BP has announced record profits due to the price of oil and gas, at £23.3 (nearly $28) billion.
  • The oil major has backtracked on its ambition to cut oil and gas production by 2030.
  • Despite its announced investment in energy transition, BP’s net zero commitment looks like smoke and mirrors – target backsliding in such a major player is a critical concern.

BP announced its annual profits had doubled, a week following Shell posting record annual net earnings of $40 billion. BP’s $27.7 billion figure for underlying replacement cost profits, a proxy for net profits, is more than double its 2021 earnings at $12.8 billion. This in turn was its largest profit since posting $13.4 billion in 2013, and $17 billion in 2012.

The news has added further fuel to the debate around the cost-of-living crisis and the UK windfall tax. Campaign group Global Witness said BP’s profits could cover nine million UK homes’ energy bills, estimated to average £2,500 in 2023. Yet the tax issue remains complicated.

Offshore Energies says BP’s global profits are misleading and new tax calls unhelpful

While a windfall tax may have immediate appeal to both politicians and voters stung by the cost of living crisis and rising energy bills, Offshore Energies UK (OEUK) argues that the numbers are misleading.

Mike Tholen, OEUK’s director of sustainability, said it was wrong to offer false hopes to hard-pressed consumers. He commented: “These calls for an increase in the UK windfall tax, linked to the global profits of energy producers, are deliberately misleading. The UK is subject to global tax agreements which say that it cannot tax profits made by companies outside of the UK. That means such a tax could never be implemented. It is irresponsible to pretend otherwise. “

BP said it incurred total taxes of $15.1 billion worldwide its highest ever total representing a tax rate of 34%. In the North Sea, which accounts for less than 10% of global profits, BP said it will pay $2.2 billion in 2022, including $700 million due to the windfall tax, or Energy Profits Levy (EPL). After an increase to the EPL in November 2022, North Sea producers now pay a 75% headline rate on their profits to the UK Government, 35% of which is the windfall tax.

Tholen said that companies operating within the UK already face a 75% windfall tax on profits made in UK waters the highest for any industry. Of course, it could be argued that the 75% tax rate comment is also misleading, as that combines Corporation Tax, Supplementary Charge and the EPL (BP claims a far lower rate of 34%), but it is true that such taxes can only apply to oil and gas extracted in UK waters.

The real concern here is the growing refocus BP is showing on the exploitation of oil and gas internationally, which could undermine wider attempts to reach net zero.

Reworking net zero ambitions

One of the key challenges in addressing the energy transition is the current energy crisis – the increase in oil and gas prices may tempt oil and gas companies to make long-term investment decisions that could cost the climate, and potentially shareholders, dearly in the long run.

BP announced a new interim goal for reducing emissions by 2030 (20-30% reduction vs 2019) that is significantly lower than its previous target (35-40% reduction). As Maeve O’Conner, associate analyst for oil, gas and mining at think tank Carbon Tracker says: “This is clearly a step in the wrong direction, and should call into question the credibility of the company’s plan to reach net zero emissions by 2050.”

Of most concern however is the newly announced strategy, and the change in expectations for how much the company plans to cut oil and gas production. While BP said its investment in “transition growth engines” had risen ten-fold, from 3% of its investment in 2019 to 30% in 2022, it plans to increase the amount of oil and gas produced.

The new strategy includes cutting production by 25% by 2030 a huge drop on the 40% reduction ambition it set out in 2019. As O’Conner points out, “this shift in strategy flies in the face of the world’s urgent need to reduce fossil fuel production, a requisite to meet the constraints of the rapidly-shrinking global carbon budget.”

It’s also worth noting that while BP claims a ten-fold investment in energy transition, it’s important to note that such investment included the $4.1 billion purchase of natural gas provider Archaea Energy. Quite how BP is defining its ‘transition growth engines” might prove to be as important as what it spends its money on.

BP has said it will invest up to $8 billion more in such “growth engines” by 2030, focusing on hydrogen and renewables and power “where BP can leverage integration”. The focus on hydrogen seems to many to be an attempt to maintain fossil fuel pathway dependence, given that the scale of electrolysers required to create a green hydrogen economy is years away.

At the same time, BP plans to invest similar amounts in transition and its core oil and gas business – $1 billion a year out to 2030. Some analysts see this as a positive move, noting BP is putting alternatives on a par with its core business. Another perspective is that BP is putting the same amount into oil and gas as the alternative energy sector which is expected to show very rapid growth.

O’Connor add: “The new announcement indicates that bp intends to exploit its lucrative oil and gas activities for as long as it can, paying little regard to the disastrous consequence these decisions will have on the climate.”

Is energy security undercutting energy transition?

The argument used for the continued exploitation of oil and gas resources is the need for ‘energy security’ but that can only be justified through one lens if you think energy security means access to fuel sources. The modern definition of energy security, however, means that energy must be affordable, accessible and acceptable as well. Renewable energy is clearly cheaper than oil and gas, it can be generated locally and its acceptability is based on low emissions and its role in addressing climate change.

When launching the BP Energy Outlook 2023, the company’s chief economist, Spencer Dale, said: “Global energy polices and discussions in recent years have been focused on the importance of decarbonising the energy system and the transition to net zero.  The events of the past year have served as a reminder to us all that the transition also needs to take account of the security and affordability of energy. Any successful and enduring energy transition needs to address all three elements of the so-called energy trilemma: secure, affordable and lower carbon.”

Yet it seems that the new strategy not only ignores the dynamics of energy security, but will continue to contribute to climate change and the increasing impacts of extreme weather. Extreme weather events in the US in 2022 cost $165 billion, while the 2022 floods cost Pakistan over $40 billion. The overall impact of devastating droughts, floods and heatwaves will continue to be loss of life and livelihoods, as well as strain on the systems that support our societies and economies.

BP’s plans are also likely to put a hole in the UK’s emissions plans. Under current targets, the sector has committed to a 50% reduction in emissions by 2030, and 90% by 2040, ahead of reaching net zero in 2050. Data from the Department for Business, Energy and Industrial Strategy released in 2022, however, showed that with existing and near-fully planned policies, the UK is projected to emit nearly double the amount of pollution as it should do under its 2030s goals.

Greenpeace UK’s head of climate justice, Kate Blagojevic warned: “BP is yet another fossil fuel giant mining gold out of the vast suffering caused by the climate and energy crisis. What’s worse, their green plans seem to have been strongly undermined by pressure from investors and governments to make even more dirty money out of oil and gas. This is precisely why we need governments to intervene to change the rules.”

Oil reserves could break the carbon budget if exploited and sold

Based on data from the Global Registry of Fossil Fuels, launched by Carbon Tracker and Global Energy Monitor, producing and using the world’s fossil fuel reserves would equal seven times the remaining carbon budget for a 1.5°C scenario. In the International Energy Agency’s Net Zero by 2050 scenario, there are no new oil and gas fields approved for development beyond the projects that had been committed at the end of 2021.

The challenge in BP’s reversal of its oil and gas strategy is that even the company’s latest Energy Outlook projects falling oil and gas consumption. The Outlook explored three scenarios: Accelerated, New Momentum and Net Zero. These explore how the energy system will evolve to achieve emissions and both Accelerated and Net Zero assume that there’s a significant tightening in climate policies. Its New Momentum sees emissions peak in the 2020s.

Whichever scenario is expected to be closest to the foreseeable future, it is possible to see BP’s strategy as a grab for cash before consumption falls. That may make short term financial sense but could be a disaster for any attempt at stabilising the system – environmental or financial.

But BP is not alone

Major European and UK banks still provide loans for oil and gas exploration and production, despite their commitment to net zero goals. Indeed, NGO Share Action found that 25 of the top European and UK banks have provided $400 billion in financing to large oil and gas expansion projects since the Paris Agreement was signed.

Carbon Tracker’s most recent update on declared oil and gas reserves, Unburnable Carbon: Ten Years On, found that over $1 trillion of oil and gas assets now risk becoming stranded as a result of policy action on climate and the rise in alternative energy sources. While oil majors are a significant problem, at least $400 billion of assets at risk are estimated to be in state hands.

Perhaps most importantly, the amount of fossil fuel reserves listed on public exchanges has also increased by 40% by volume over the last decade. This is a mounting concern, especially given that global ambition has risen from a 2-degree to a 1.5-degree target.

Back in 2011, BP estimated that existing oil, gas and coal reserves would generate more than 2.8 trillion tonnes of CO2 versus the circa 1 trillion tonnes available under the carbon budget.

It should be noted that is 1.8 trillion tonnes more than allowed even to achieve the 2-degree target and does not allow for emissions from any other source, industrial or otherwise arising from tipping points.

That makes it worth pointing out that energy transition risks apply not just to producers, but across the full oil and gas value chain (e.g. refiners) as well as a wide range of different financial services providers. This is a system-wide risk that is being ignored.

Initial results reported by Energy Voice.

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