BP plc, one of the first majors committed to reducing oil and natural gas production in the transition to net-zero carbon, has reversed course to ensure global energy security.
The goal to cut fossil fuels output to net-zero carbon by 2050 remains in place. However, Russia’s invasion of Ukraine and other global events have reduced the climate targets slightly.
“We need continuing near-term investment into today’s energy system, which depends on oil and gas, to meet today’s demands and to make sure the transition is an orderly one,” CEO Bernard Looney said. “We will prioritize projects where we can deliver quickly, at low cost, using our existing infrastructure, allowing us to minimize additional emissions and maximize both value and our contribution to energy security and affordability.”
Investments into “resilient” oil and natural gas projects are set to increase on average by $1 billion a year, or by $8 billion cumulatively to 2030. The additional capital would meet “near-term demand for secure supplies of oil and gas,” Looney said.
Oil and natural gas output should average around 2.3 million boe/d in 2025, about the same as in 2022. By 2030, average output is forecast at 2.0 million boe/d, around 25% lower than production in 2019.
BP in early 2020 jumped head first into the energy transition to lower carbon, setting a goal to become a net-zero carbon emissions company “by 2050 or sooner.” The strategy at the time was to reduce oil and gas production by around 40% by 2030.
The decision to produce more fossil fuels through 2030 has upended the initial carbon emissions target. The emissions are now set to decline by 20-30% in 2030 from a 2019 baseline. The previous target was a reduction of 35-40%.
“Three years ago, we announced a significant strategic change for BP, pivoting from at that time 110-year history of being an international oil company, or IOC, to becoming an integrated energy company, or IEC,” Looney said during the quarterly conference call. “I’m personally in awe of what the BP team has delivered since then, and all during the most volatile and the most uncertain times that many of us, I think, have ever experienced.”
It is “clearer than ever after the past three years that the world wants and needs energy that is secure and affordable, as well as lower carbon,” or as Looney often calls it, the energy trilemma. “It is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it’s needed today.”
As an IEC, “we have increased confidence our strategy is working…We are growing our investment into our transition and, at the same time, growing investment into today’s energy system. In doing so. We see tremendous opportunities to create value. And it’s what governments and customers are asking of companies like us.”
Said Looney, “The world is in a very different place today compared to when we began this journey just three years ago. The challenges and volatility we have seen make it clear, maybe clearer than ever, that the world wants and needs a better and a more balanced energy system…”
Forecasting Higher Commodity Prices
BP “saw a sharp decline in both spot and futures prices” for natural gas during 4Q2022, CFO Murray Auchincloss told investors. The quarterly average price for Title Transfer Facility gas prices “fell by 51% as a warm start to winter allowed Europe to maintain inventory levels. In the U.S., Henry Hub declined as storage levels recovered toward seasonal norms.
“The outlook for the first quarter remains dependent on weather in the Northern Hemisphere and the pace of Chinese demand recovery,” the CFO said.
The London-based company earlier this month presented the BP 2023 Energy Outlook. In line with the outlook, BP reviewed its price assumptions used for investment appraisal and accounting, he noted.
“To summarize, the continuing impact of the war in Ukraine and the resulting energy shortages, together with changes in the structure of energy markets post-Covid, mean we now expect oil and gas prices and refining margins to remain higher throughout much of this decade.
“Further out, we continue to expect prices to fall as the energy transition gathers pace.”
Reported production was 956,000 boe/d in 4Q2022,1.8% lower year/year. Underlying production was 2.4% lower, mainly because of base decline in Trinidad and Tobago.
Reported production for the full year averaged 957,000 boe/d, 4.9% higher than in 2021. Underlying production also was 4.9% higher than in 2021.
Natural gas production in the final three months of 2022 averaged 4.84 Bcf/d, versus 4.94 Bcf/d in 4Q2021. For 2022, gas output averaged 4.87 Bcf/d from 2021’s 4.63 Bcf/d.
Oil and natural gas production today is around 40% lower than it was in 2019, Looney noted. The lower output resulted from BP’s decision to exit Russia following the Ukraine invasion.
“Our oil and gas strategy is about value, not only volume,” Looney said. “Our hopper of resource options enables us to allocate more capital, particularly to short-cycle opportunities, to maximize value, including investing more into BPX and more into the Gulf of Mexico.” BPX is the Lower 48 arm.
“We plan to grow underlying production to 2025,” Looney said. BP expects to add around 200,000 boe/d from nine major project startups and manage base decline to between 3% and 5%.
BPX production, centered in the gassy Haynesville Shale, is set to increase by 30-40%. BP also plans to retain some assets longer than planned.
“Our resource base has the potential to sustain underlying production broadly flat to 2030 relative to 2022,” Looney said. A great example is in the Gulf of Mexico, where we expect production to increase to around 400,000 boe/d by the middle of the decade and average 350,000 boe/d through the end of the decade.”
Options also are in the queue to progress new hub opportunities, including in the Gulf of Mexico, offshore Canada, and in Australia, Brazil, Indonesia, Mauritania and Senegal.
BP’s destination on a “pathway to net zero…is unchanged with a triple net-zero ambition across operations, production and sales by 2050 or sooner,” Looney said.
Biofuels are a big target. BP last year spent $4 billion-plus to acquire Archaea Energy Inc., a leading U.S. renewable natural gas producer.
“This is a real game changer for us,” Auchincloss said, “rapidly advancing our access to feedstock and scaling our upstream participation in the biogas value chain, which is a distinct source of competitive advantage.
“We’re now focused on integrating Archaea into BP and building out the significant development pipeline. We’ve also identified opportunities to get renewable natural gas projects online faster, and we are looking at ways to improve landfill gas recovery.”
Biofuel is “a business that we are very excited about and one that we believe can deliver a significant value faster than what we had thought.”
BP plans to “materially grow biofuel production volumes” by 2030 to around 100,000 barrels a day. It also is focused on sustainable aviation fuel or SAF, Looney said. “We already produce more than 7,000 barrels per day of biofuels through co-processing, and we aim to triple this by 2030.”
The focus on the transition growth engines, or TGE, will be on delivering “nearer-term solutions,” he said, such as electric vehicle chargers and SAF. “And we will continue to build our hydrogen and renewables and power businesses for the longer term, based around projects where BP’s integrated approach can create significant additional value.”
Underlying replacement cost (RC) profit/loss, similar to U.S. net earnings metrics, in 4Q2022 were $4.8 billion ($1.59/share), compared with $4.1 billion ($1.23) in 4Q2021. For 2022, underlying RC was $146 billion ($8.74), from 2021’s $64 billion ($3.81).
During the fourth quarter, BP completed share buybacks of $3.2 billion. The company intends to execute a $2.75 billion share buyback with 1Q2023 results.