bp has recently presented its 2023 Energy Outlook. This annual survey, and the data analysis behind it, is highly regarded.
The new perspective emphasizes the Russian war in Ukraine. This is likely to swing the pendulum away from “business as usual” and toward the Paris goal of net-zero emissions by 2050. The argument is that instability of oil and gas markets will motivate countries to develop their own renewables at a more rapid pace.
bp considers three scenarios. The scenarios are not predictions of what is likely to happen or what bp would like to happen. Rather, the scenarios are designed to span a wide range of possible outcomes to 2050. Their purpose is to help shape a strategy that is resilient to the many uncertainties of the energy transition.
The first scenario bookend is “business as usual” which it calls New Momentum (I use the acronym BusAsUs for clarity).
The second bookend is Net-Zero, which identifies with the goal of the Paris accords: that by 2050, greenhouse gas (GHG) emissions will still be generated, but an equivalent amount will be removed or stored underground.
The third scenario is called Accelerated, which builds in the war in Ukraine shifting the pendulum strongly from business as usual toward net-zero (I call this WarAccelerated for clarity).
Something like this happened after the 1973 OPEC oil embargo, when France decided to construct a large suite of nuclear reactors to supply its electricity, and the US decided to create a strategic oil reserve.
A near-term example of WarAccelerated is the act of Russia cutting off natural gas supplies to Europe in 2022 which has boosted exports of LNG from countries such as the US, Qatar, and Australia. While coal and oil are in decline in its predictions, bp says natural gas is an X-factor because of an ever-rising demand for LNG around the world.
In the longer term, bp says, the world will experience slower economic growth because the Russian war will slow globalization of economies. bp predicts a drop in global GDP of 2.7% by 2025, 3.0% by 2035 and 5.9% by 2050. This is pretty serious.
Fossil fuels versus renewables.
Fossil fuels fall over time for all three scenarios in Figure 1. They fall from about 80% now to 55% under the BusAsUs scenario. This higher level supports the current enthusiasm of the oil and gas industry in the US, because demand and prices of oil and gas were up in 2022 and led to record profits achieved by oil and gas majors.
But due to consequences of the war in Ukraine, in the WarAccelerated pathway fossil fuels may fall much faster – from 80% now to 28% by 2050. This is not much different from the Net-Zero scenario where fossils fall to 19% by 2050. Both are viewed skeptically by many in the fossil fuel industry.
In contrast to the current enthusiasm in the US oil and gas industry, bp forecasts a drastic reduction in fossil energies from 80% now to (28-55)% by 2050. Coal will fall the most, oil will fall, and natural gas may or may not fall.
Since fossil energies are responsible for about 70% of GHG emissions now, these would fall in concert to (25-48)% – a huge reduction by 2050, but not enough to get to the Net-Zero projection.
bp predicts that renewable energies, such as wind and solar and batteries, will rise from 12% now to 35% for the BusAsUs or to about 60% for the WarAccelerated/Net-Zero forecasts. In the second case, bp have built in their expectation that the war in Ukraine and global instability of oil and gas markets will motivate countries to develop their own renewables at a more rapid pace.
Russian energy takes a hit.
Crude oil production would be lower in 2022 production by about 1 million barrels per day (mbpd) and lower by 1.5 mbpd (compared with 2022) in every 5-year interval until 2045, according to bp. Since Russia produced about 10 mbpd in 2022, these 10% losses are substantial.
Just announced, Russia will cut oil production by 0.5 mbpd or 5% in March 2023.
In 2021, Russia was the world’s second- largest producer of natural gas and also the world’s largest gas exporter. In 2021 Russia produced 762 billion cubic meters (bcm) of gas, and exported roughly 210 bcm by pipeline.
bp says Russia’s production will fall by close to 50 bcm in 2023 compared with 2022. And Russia’s pipeline trade will fall by 160 bcm in 2023 compared with 2022. If compared with 2021 numbers, gas production will fall by about 7%, and pipeline trade will fall by a huge 76% presumably because of the gas flow cutoff from Russia to Europe.
Is investment in renewables a business detriment?
This is a big question. bp has been a leader in the transition to renewables. They have invested in renewables such as wind and solar and hydrogen. Their goal of a couple years ago was to be 40% in renewables by 2030. bp is established in solar and wind projects in the US. They have added 9 Gigawatts (Gw) of solar energy and anticipate financial returns of 8-10%. bp’s goal is 50 Gw of global renewables of all types by 2030.
In their new report, Energy Outlook 2023, bp have backed away from this goal, ostensibly because oil demand and price has stayed above $80/bbl in 2022 with a high of $128/bbl (Brent Crude price). The average for 2022 was close to $100/bbl.
bp is now expecting to produce 2 mboepd by 2030, reported by email@example.com. This is lower than 2019 levels by 25% as compared with older plans for a 40% cut. bp also lowered its emission targets to 20-30% as compared with a previous goal of 35-40%.
bp’s justification is encapsulated here: “bp announced it would miss its targets to reduce oil and gas production by 2030 as it said it would match investment in lower carbon projects with new investment in fossil fuels and extend the life of existing oil and gas projects.”
Investing in renewables is a tricky call for major oil and gas companies. European-based companies such as bp, Shell and TotalEnergies, have shifted more assets to renewables than other super-majors such as ExxonMobil
When Bernard Looney became CEO of bp in 2020, he shifted the direction of bp toward climate issues related to global warming. At the time, his economists were forecasting fossil fuel futures that would fall, similar to Figure 1. If a company believes such forecasts, it’s not surprising they would start shifting assets away from traditional oil and gas.
But the big question is, how far to shift? bp’s goal of 40% renewables by 2030 was a hefty shift. And it’s a big contrast to US-based companies who have largely chosen an indirect approach to climate by directing assets toward fixing gas flaring and methane leaks in wellheads, pipelines, and storage tanks, as well as CCS which captures and stores GHG deep underground.
So, has the commitment by bp to invest so much in renewables backfired? One qualified observer reported that investment payback time for a company undertaking a transition to renewables will be 7-10 years. This is too long for most companies, including many oil and gas companies, that operate for profit.
Let’s look at company profits. First, all the super-majors have made record profits in 2022, with the six top earners more than doubling profits to roughly $220 billion over the next biggest year, 2018. $220 billion is a bankful of money that could partly be invested in renewables.
Shell’s profits at $40 b are second-best after ExxonMobil at $59 b, the biggest oil and gas company, and TotalEnergies at $36 b lies equal third-best with Chevron at $37 b. So the profit picture has these Europeans up there with the US companies, and this simple comparison doesn’t support that investment in renewables has hurt the European profits.
But bp is a different story. At $28 b, its profits were the lowest of the 5 super-majors in 2022. Its stock-market returns (2/9/2023) were also the lowest, reported in firstname.lastname@example.org (2/9/2023). Shell’s returns were second-lowest and TotalEnergies were third-lowest. So it could be argued that bp’s shift to renewables has hurt company profits, compared with US-based majors. But the financial results of Shell and TotalEnergies are mixed, so this conclusion cannot be made for these companies.
These data need to be analyzed more fully because profits depend on other factors. For example, bp in 2022 lost $24 billion by walking away from its investment in Rosneft, the Russian oil and gas company. Stock market returns depend on other factors too, such as investors in traditional oil and gas who feel a bit leery about climate and renewable energies and avoid stocks like bp and Shell.
It’s clear though that bp are dialing back a little on their investment in renewables, and this makes sense if the rationale is to capitalize on higher oil and gas prices and sustain energy security during the current Russian war on Ukraine.
Postscript. But bp haven’t given up on renewables! In a bp press release issued on 16 February 2023, bp has agreed to purchase 280 TravelCenters of America for $1.3 billion in cash, and they expect attractive returns of over 15%. Over 2023-2030, plans for half of its around $60 billion investment in transition growth will go into convenience, bioenergy and EV charging, and hydrogen later.