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KICKING THE OIL CAN

BP said it will cut oil production 40% and the stock market didn’t blink

An image of a deepwater oil rig with a sunset in the background.
Reuters/China Newsphoto
Investors see a new dawn on the horizon for Big Oil.
  • Michael J. Coren
By Michael J. Coren

Climate and emerging industries editor

Published

One of the world’s largest oil companies just announced it would cut 40% of its oil production. During an investor presentation on Aug. 4, BP announced it would roll out the dramatic cuts over the next decade, while limiting future exploration for new sources of petroleum.

A few years ago, BP’s plan to pivot away from oil would been unthinkable. But it barely raised an eyebrow on Wall Street. 

BP’s shares closed up 1.6% on the news, scarcely different than rivals Exxon, Chevron, Total, and Shell. Their price rose 10% the following day. All this, despite news the company would slash its once untouchable dividend by 50%, even deeper than expected, and write off $6.5 billion in oil and gas assets.

What BP’s CEO Bernard Looney called the “toughest quarter in the industry’s history” may mark a turning point: Oil companies, and their investors, are increasingly agreeing that a low-carbon future is not just a sustainable bet, but a profitable one.

The market’s reaction was as surprising as BP’s commitment, itself unprecedented for an oil major. While falling short of ending future exploration (BP only swore off exploration in new countries) or retiring existing reserves, a production cut of 40% by 2030 makes it “unquestionably the industry leader,” says Andrew Grant at CarbonTracker, a finance and energy think tank.

“It’s first of the five oil majors to be very concrete about plans to address the energy transition and the first to say we’re cutting production,” says Kathy Hipple, a financial analyst for the Institute for Energy Economics and Financial Analysis. Until now, no announcement by oil supermajors has been compatible with a world where warming is kept well below 2 degrees C.

BP says it will invest as much as $5 billion annually in low-carbon technologies by 2030, a ten-fold increase over current levels. If implemented, the cuts put BP on track to bring oil production down to zero by 2043, according to energy engineering researcher Arvind Ravikumar of Harrisburg University of Science and Technology, well before the mid-century target established by the Paris climate accords.  

Most similar announcements from BP’s competitors have side-stepped absolute cuts in emissions, focusing instead on emission “intensity”—GHG pollution per unit of energy—of products or operations, says Cate Hight of the nonprofit Rocky Mountain Institute. Goals were on a distant timeline with net-zero “ambitions” pushed out to 2050. Offsets were often proposed at an unproven scale.

That gave investors little to act on. But the sunny response to BP’s move is suggestive of what’s to come. While America’s biggest petro-firms—ExxonMobil and Chevron—appear set on extending the life of their oil and gas reserves and protecting dividends at all costs, a number of smaller energy firms, almost all of them in Europe, have announced their intention to decarbonize in recent years. Most of them have received a warm welcome from investors.   

One of the first was former Danish state oil company Ørsted. In 2017, the former Danish Oil and Natural Gas company shed its name and history as one of Europe’s leading coal utilities. The state-owned firm aggressively divested from oil and gas, listed its shares publicly, and started building offshore wind farms. It doubled its share price in less than three years.

In September 2019, Italy’s biggest utility ENEL said it would scale back fossil fuels, cut emissions by 70% by 2030, and eliminate them by 2050. Its stock rose on the news, climbing 25% over the following months. Similarly, last December Spanish utility Repsol announced it would ”eliminate all greenhouse-gas emissions from its own operations and customers who use its products by 2050,” sending its share price up 3%.  

For now, the market appears to approve of BP’s strategy, too. Investors seem to be saying the future of oil and gas companies is no longer oil and gas, says energy economist and consultant Philip Verleger. While hydrocarbons will remain BP’s primary source of revenue for years to come, it’s choosing to forgo dividends, nearly sacrosanct in the industry, to invest in a transition from an “International Oil Company to Integrated Energy Company.

“We believe that what we are setting out today offers a compelling and attractive long-term proposition for all investors—a reset and resilient dividend with a commitment to share buybacks; profitable growth; and the opportunity to invest in the energy transition,” said Looney in a statement.

It remains to be seen if that’s a good bet. But it may be the only one BP can make. “BP’s decision was recognition of the fact that its only avenue to build is to become green,” Verleger wrote by email. “It was out of options.”  

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