The elephant in the room

I take my seat, ready for dinner. On my right is a civil servant and, on my left, a wealth asset manager. My friend is the host of the dinner party, and aside from her, I only know one other person. Although people would describe me as a social butterfly – able to float through most conversations – I know I’m in for a tough night. 

Throughout the first course, I manage to keep most of the discussion about them, what they do and what they enjoy. Then it’s my turn. “I work for an energy company, focussed on accelerating the energy transition”. To my surprise, my answer appears to bore them enough that the investigation ends there. We move onto new topics of conversation and I breathe a sigh of relief. 

But, it doesn’t always go this smoothly. Tonight at least, I feel that I can relax and be present. Little do they know; I work for bp – and I’m quietly proud of it.

“Little do they know; I work for bp – and I’m quietly proud of it.”

Many people that work for or with, oil and gas companies, face these situations regularly. It’s for good reason. Unarguably, climate change is the greatest challenge facing the planet, and the role that oil and gas companies play in our day to day is fundamental. It is a topic that divides opinion and can often become the headline act at a dinner party. Hence our caution. 

As a group of millennials, we wanted to share an honest and informed view on the energy landscape by co-authoring this paper. There are two things that we all have in common: firstly, we all work closely with bp and secondly, we’ve all experienced those tense dinner parties. With our focus on bp, we want to discuss: 

1. The current state of bp and the energy industry
2. A vision for the future
3. Key challenges that we must overcome 

Disclaimer: This paper represents our personal views and is our effort to open ourselves up and spark an exciting conversation.

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The current state

History 

bp is a global oil and gas company that operates in 80 countries and employs roughly 70,000 people. Since its founding in 1907, the company has built a business that discovers resources and turns them into useful products for customers. This has been historically centred around oil and gas. The company famously fuelled the British Navy during WWII and supported the global development of the 20th century. The company has been involved in the energy industry for over 100 years, an industry that is like no other, truly global and with vast impacts on the world.

“an industry that is like no other, truly global and with vast impacts on the world.“

Recent events

Extinction Rebellion, Climate Action 100+ and many others have raised the profile of climate change and driven action in some of the most powerful boardrooms around the world. These actions have continued to inspire many. Including the children of employees that work in the industry who tirelessly ask their parents why they work for a company that is “harming the planet”. These pressures have held every executive to account more than any shareholder ever could. Many of us in this group have been affected by the demonstrations, either being greeted at our offices by protests, or experiencing office closures. Although in the short term these are frustrating, we understand and agree with the motivations for these actions. Many of us joined because of the vision of Lord John Browne back in 1997 during his famous Stanford speech. 

bp’s current standing

On February 12th 2020, bp announced an ambition to become a net-zero emissions company by 2050 or sooner. It is a bold ambition, equivalent to removing the whole of the UK’s emissions. 

Currently, the company’s business model uses returns from investments in oil and gas production, refining, trading and alternative energy to fund investments back into the business, pay down debts and investor dividends. With this oil and gas centric model, bp emits 415 million tonnes of emissions (55 million from operations and 360 million from the carbon content of the oil and gas produced).  

What is happening today?

bp currently operates wind farms and has non operated joint ventures in solar, biofuels, and more recently offshore wind. However, these investments are still small when you look at what has been spent in conventional oil and gas. Why can’t the company simply divert all that capital into green investments? There are a few reasons which we will expand on in the challenges section. The business continues to work on new business models in low carbon energy, however, far more needs to and will be done. The positive news is that this transition is becoming more feasible and viable.

"To us, that means putting more back in than is taken out and having a positive impact on society.”

Above bp’s ambition to become net-zero lies its newly defined purpose. This is something that has been developed by thousands of employees looking at the company’s past, its achievements and where it feels it can have the most impact. 

The new purpose is:

Reimagining energy for people and our planet.

So what does that mean? To us, that means putting more back in than is taken out and having a positive impact on society. 

In support of bp’s purpose: the ambition to become net-zero has been divided into 5 aims helping the company become net zero and 5 aims that help the world get there too.

For the sceptics & activists

A question many of us frequently get asked from friends is: “why don’t you just stop production, just turn the taps off? What you’re doing is harmful to the environment. You know it is, so why not stop?”. 

The idealist in us agrees and wants that today. But, as we have learned in our careers so far, it isn’t that simple. We still need energy tomorrow, and currently, there is not enough clean, affordable and reliable energy to take the slack from our base load of fossil fuels. 

“A question I get asked a lot is… why don’t you just stop production, just turn the taps off?"

The world’s battle with COVID-19 is an intriguing comparison to the battle to limit climate change. Right now, we’re flattening the curve for COVID-19, and we’re looking to flatten the "curve" of our global emissions. We’re trying to minimize the virus’s impact, whilst also maintaining some standard of living. This is the same for emissions. We could prioritise economic growth and ignore the impact on the environment, however, much like for COVID-19, the consequences could be devastating for people and our planet. Equally, we could take the other extreme route, isolating completely for months (likened here to dropping all fossil fuel products tomorrow). Both scenarios in either disaster would likely affect the disadvantaged disproportionately and we have to consider more solutions. 

"The world’s battle with COVID-19 is an intriguing comparison to the battle to limit climate change"

COVID-19 has also shown us two important points; the first, is that simply grounding all forms of travel is not sufficient to achieve Paris goals, the second, is that the world is capable of pulling together, better than any of us could have imagined last year (although with some wrinkles, admittedly). We hope that our response to COVID-19 has set a precedent and that the momentum built by environmental activism will see a similar response to the challenge of climate change. 

Future vision

As a group of millennials, it is important for us that we work in an industry that has a positive vision of the future. And, importantly, a vision that is aligned with society. We see a world void of inequality, free of poverty, increased equal opportunities and importantly, it is clean. For bp and the industry, this likely means three things:

1. Not being part of the problem
2. Being a part of the solution
3. Being trusted

Not being a part of the problem means being clean. It is what bp set out in February 2020 and provided a detailed plan for in September. While it naturally includes ensuring that the environment is not polluted in any way, it is carbon emissions that we are focusing on. For those of us that work in the industry, this ambition has brought a sense of relief – after all, many of us joined to bring about this vision. 

Being a part of the solution requires us to participate in a zero-carbon energy economy. It is where the company not only gets itself to net-zero but helps society to achieve it as well. Investing in projects that lift communities living standards justly and provide a smooth transition to a reliable, clean and affordable energy source. 

bp’s reputation as a leader in the industry, the UK and globally suffered as trust in its operations and communications waned. The industry must rebuild this trust, through taking actions that demonstrate alignment with societies dreams whilst being fully transparent along the way. 

"We see a world void of inequality, free of poverty, increased equal opportunities and importantly, it is clean." 

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Key challenges to overcome

In absolute terms, this is as difficult as it gets. As we mentioned, to achieve the ambition that bp has laid out, the company will need to reduce absolute emissions equivalent to the annual carbon footprint for the whole of the UK. As a group, we find it helpful to break it down into four parts: building trust in communities, maintaining the core business, growing new business models and returning something to investors.

1. Building trust and relationships in our communities

One of the biggest challenges that bp and the industry are facing is building trust with wider society. It is easy to make statements and claims, but it is only going to be consistent actions over time that will build momentum and turn the sentiment. Transparency will be key for this. Being clear on what the aims are, how the industry plans on achieving them, any calculations and of course, being honest about the unknowns (which is a lot). 

This is crucial for customers, but it’s also essential for employees. Talent attraction and retention in an oil and gas business have never been more important. bp will struggle to achieve it’s ambition if it cannot attract the best and brightest minds. 

“bp will struggle to achieve it’s ambition if it cannot attract the best and brightest minds.”

2. Maintaining the core business 

The industry has supplied products around the world for over a century. To be part of the future solution, cash flow from oil and gas production and refining will enable capital investment into new business models. Naturally, improving the efficiency, reliability and overall competitiveness of any existing assets will be important. This will require the use of advanced analytics, digital technologies and also difficult portfolio choices. Of the conventional assets that are maintained, they will need to be some of the best in the world. Both high quality and well run.

3. Growing new business models

Core to the future of the industry and bp is a reduction in carbon emissions (Scope 1, 2 and importantly 3). bp will need to increase its investment into low carbon businesses if it is to halve its carbon intensity of products sold and to offset the gradual decline in oil and gas production. 

Simply speaking – in 30 years, a company like bp will not look the same as it does today. On average, most oil and gas companies reinvest ~10% of their market capitalisation each year. This suggests that a complete reinvention could be completed within 10 years. This is largely hypothetical bearing in mind the need to maintain investment in the conventional business as mentioned in point 2, but it provides useful context.

"...the next 5 years may represent a much smaller change compared to the last 5 years leading up to 2050"

Added to this is the discussion of technology. The improvement curve of developing technologies will likely be non-linear and so too for investments. Meaning that the next 5 years may represent a much smaller change compared to the last 5 years leading up to 2050. 

In the case of the power sector, in most parts of the world today, renewables have become the lowest-cost source of new power generation. As costs continue to fall for offshore wind and solar, thanks in part to auction and Power Purchase Agreements (PPA), these technologies will become increasingly financially competitive in a growing number of countries, accelerating their growth further.

Two examples of where bp is targeting new business are within renewable power generation and retail convenience. The company is aiming to establish 50GW of renewable power by 2030 (from 2.5GW today) and increase its number of customers touchpoints to 20 million (from 10 million today) with electric charging points rising to 70,000 (from 7,500 today).  

4. Giving back to the shareholders 

We thought this paper wouldn’t be complete without mentioning investors. 

Investors typically have a hard time of it. Whether you’re the dividend hunter, the ESG policy fund, the oil price gambler or even a bp employee – the noose of social acceptance is tightening on investing in oil and gas companies. The new term is investing in “sin stocks”.  

Dividends. The company, and the industry, have become synonymous with this form of shareholder pay-out. Firmly defined as an “income stock”, bp, in particular, has been a haven for pension funds and income focussed investors. In 2019, roughly $8bn was distributed in the form of dividends and a further $1.5bn in the form of share buybacks. This has returned a huge amount of immediate value to those investors across the world. However, investors are rethinking what it means to buy into a dividend-paying oil and gas company. 

“The immediate question is simple: can a company like bp afford to continue paying dividends, whilst it navigates the energy transition? 

The immediate question is simple: can a company like bp afford to continue paying dividends, whilst it navigates the energy transition?

The market got an answer to that question during the Q2 results announcement in August. The dividend payout was reduced by 50% and going forward will be reviewed quarterly by the board. For now, the impacts of COVID-19 seem to have encouraged a break from the norm – across the industry. Time will tell, whether investors accept the new narrative of growth or whether demand for regular income will prevail. 

Closing thoughts

For the optimists among us, the future looks bright and it looks achievable. Throughout history - companies, governments and societies have adapted to constantly evolving pressures. For those less wishful, it may seem like a stretch too far for a company like bp to reinvent itself. 

A cheerful comparison could be made to Indiana Jones; attempting to replace the “Golden Idol” with a bag of equally-weighted sand in one seamless manoeuvre.

“It won’t be easy, but it will be worth it.”

As a group of young professionals, we’re proud to work in the industry. An industry that reflects on it’s past and is determined to be part of the future. Along the way, it needs to work better with society, be utterly transparent and dream of new ways to overcome the challenges ahead. It won’t be easy, but it will be worth it.

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Dear reader,

Wherever you are in the world right now, we hope you’re safe and keeping well during these times. If you find yourself on yet another video call wishing for more human interaction – have faith that we will eventually get through this. And when we do, you can count on us to come to your next dinner party. What a brilliant idea!

All the best

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