Fuel for Thought: Back to petroleum for BP as it scraps green spending plans

BP is no longer leaning into the energy transition.

Faced with intense activist shareholder pressure, and under the management of Murray Auchincloss since the start of 2024, the oil and gas major has firmly reset its sights on its traditional core fossil business in a bid to keep pace with rival international firms.

It marks a stark departure from former CEO Bernard Looney’s renewables-heavy approach.

When questioned in 2023 about the company’s green spending plans, Looney responded that the company was “leaning in” to the energy transition strategy BP launched when he became CEO in 2020.

"We've learned a lot over the last four years, and with hindsight, see that we haven't invested enough in our oil and gas businesses over that time period," executive vice president Gordon Birrell said at the company’s capital markets day in February.

But almost 25 years after BP rebranded as Beyond Petroleum -- arguably getting its timing badly wrong when the green transition was in its infancy -- has it now again mistimed its move?

With energy security considerations coming to the fore across the globe, as countries face a climate of growing protectionism and resource nationalism, there is an increasing drive toward renewables.

BP said in February it would cut energy transition investments by over $5 billion/year as it boosts upstream oil and gas spending. The new strategy also includes the sale of a stake in BP's solar development platform and a rolling back of climate targets.

The oil major now expects to spend just $1.5 billion to $2 billion per year on its transition businesses, which include EV charging, bioenergy and renewables, with less than half going to low-carbon energy.

It will make “selective” investments in biogas, biofuels and EV charging, is focusing on capital-light partnerships for renewables and a narrower remit for hydrogen and carbon capture and storage projects.

It already announced its planned exit from US onshore wind assets in 2024.

Hydrogen scale-back

Nowhere is the move away from energy transition spending clearer than in the company’s hydrogen portfolio, which is feeling the pinch again having already been slimmed as it “focused hydrogen down” under Auchincloss.

BP is now targeting just five to seven hydrogen and CCS project investments by 2030 that either decarbonize the company’s own operations or establish hubs, Auchincloss said.

This is down from five to 10 such projects prioritized as recently as July, and 30 projects the company was previously pursuing. Nearly all of the capital earmarked by BP for hydrogen and CCS investments between 2025 and 2027 has already been allocated.

BP confirmed at the start of March it had scrapped plans to develop the 80-MW HyGreen electrolytic hydrogen project in the UK, as part of the strategic pivot. The HyGreen electrolyzer project in Teesside failed to secure funding under the UK’s first electrolytic hydrogen allocation round.

The project was amongst the largest green hydrogen facilities planned in the UK, and BP had been targeting initial hydrogen production in 2026, with expansion planned to 500 MW by 2030, to supply low-carbon industry and power projects in the region.

“We have been clear in our recent strategy reset announcement that we are focused on high-graded projects in hydrogen and carbon capture,” BP told Platts. “In the UK, our focus is on the significant projects in Teesside -- NetZero Teesside Power, Northern Endurance Partnership and H2Teesside.”

The major took final investment decisions on the 742-MW carbon capture-enabled NZT Power combined cycle gas turbine and NEP -- the 4 million mt/year CO2 transport and storage infrastructure underpinning the UK’s East Coast Cluster -- in December. NZT Power is a joint venture with Equinor, which is also a partner in NEP along with TotalEnergies.

An FID on the 500-MW first phase of BP’s planned H2Teesside blue hydrogen production plant is pending, as the company awaits planning approval for the project. BP has also taken positive FID on a 100-MW electrolyzer project at its Lingen refinery in Germany and a 25-MW electrolyzer for its Castellon refinery in Spain.

"To progress, the returns must be mid-teens and underpinned by government support," Auchincloss said.

BP is also developing the 250-MW H2-Fifty green hydrogen project in Rotterdam, the Netherlands, with HyCC, though FID is pending.

The list leaves little room for other hydrogen and CCS projects previously flagged by BP, though it does have stakes in large-scale developments including the 26-GW Australian Renewable Energy Hub with InterContinental Energy.

Admittedly, the green hydrogen sector has faced significant headwinds in recent years which have delayed the market development, as the continent grappled with the fallout in energy markets of Russia’s full-scale invasion of Ukraine, disrupted supply chains and rising costs.

And the strategy to focus on the most productive, highest-return assets is sound. However, the hydrogen market in Europe now has a firm footing, underpinned by state-backed support mechanisms, a clear regulatory framework and growing demand from hard-to-abate sectors looking to decarbonize operations.

Peer pressure

BP’s hydrocarbon output has lagged that of other international oil companies, and the focus on upstream operations is an attempt to redress this.

But is BP misreading the market dynamics?

As Societe Generale’s Global Head of Commodity Strategy, Ben Hoff, pointed out, countries are increasingly looking to renewables as a central tenet of their energy strategies, particularly in light of geopolitical tensions and resource nationalism.

“That actually is quite bullish,” Hoff told Platts. “The question of energy security ultimately ends up being a positive driver in our view to the energy transition.”

Hoff said fossil fuel importing countries in particular were looking to diversify their energy sources to tap more renewables, something Europe in particular has experienced in the wake of Russia’s invasion of Ukraine.

In this context, BP’s retreat back to petroleum could be seen as another mistimed pivot. The crashing crude price might also give Auchincloss pause for thought. In the longer term, the direction of travel in energy markets is clear. The question is, does BP have enough of a foot in the green door with its slimmed-down plans to keep investors happy?