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BP's emissions pledge 'sets the pace' for Big Oil, but details still murky


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Essential Energy Insights - January 2021

BP's emissions pledge 'sets the pace' for Big Oil, but details still murky

British oil giant BP PLC has left its rivals in the dust when it comes to planned emission cuts, setting an ambition to reduce the climate impact of its own oil and gas production to net-zero by 2050 — a clear step above what other supermajors have committed to.

The targets, announced by new CEO Bernard Looney on Feb. 12, mark a substantial shift for BP. All of the majors face growing pressure from environmental groups and their own shareholders, but BP had long lagged other large integrated oil and gas companies when it comes to action on climate change.

Under its last CEO, Bob Dudley, the company maintained until recently that the carbon generated by its customers was not the company's responsibility.

Now, BP has said it will eliminate all emissions from its own operations, known as scope 1 and 2, as well as those caused by the use of its own oil and gas production, known as scope 3. Although the company has released almost no detail on how it plans to get there, analysts and investors say the ambition puts it ahead of its largest peers.

The new target is "a step-change in the company's approach to climate change and sets the pace and direction of travel for the industry at large," Steve Waygood, chief responsible investment officer at Aviva Investors, an asset manager with £457 billion under management, said in a statement.

"The onus will now be on BP to reshape its portfolio in light of a shrinking carbon budget," Waygood said.

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The math

Royal Dutch Shell PLC, TOTAL SA and Equinor ASA have already set long-term scope 3 targets but only plan to reduce the emission intensity of the products they sell.

This means they would be able to maintain or even increase oil and gas production and still hit their carbon intensity targets by adding low-carbon alternatives like solar and wind farms to their portfolio — a key point of criticism from environmental groups, who demand a cut in baseline emissions instead.

BP plans to do the same but, unlike the others, wants to also slash emissions on an absolute basis, specifically cutting out around 55 million tonnes of CO2-equivalent from its own operations, as well as 360 million tonnes released by the fuels it pumps out of the ground.

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"Does that mean we'll be producing and refining hydrocarbons in 2050? Yes, very likely," Looney said in his speech. "[But] you can expect oil and gas production to decline gradually over time."

The company still targets only a 50% cut in carbon intensity for its entire scope 3 emissions, since the net-zero ambition does not cover carbon contained in the products BP sells but does not pump itself.

Those make up a larger share of the total, thanks to the company's large supply and trading operation: BP sold 8.6 million barrels of oil equivalent per day in 2018, but its own production totaled only 3.7 million barrels.

During his speech, Looney said BP's annual scope 3 emissions amounted to around 1,000 tonnes, leaving roughly 640 million tonnes unaccounted for. Analysts say not including volumes from third-party producers makes sense.

"It is appropriate to look at those emissions as external to BP," Pavel Molchanov, an analyst at Raymond James, said in an email. "Those emissions are certainly meaningful in scale, and they should be addressed by the companies supplying those fuels."

Spain's Repsol SA, a much smaller company than BP, has gone further and pledged to fully offset its scope 3 emissions, including those from fuel it buys from third parties. The company's CEO, Josu Jon Imaz, told S&P Global Market Intelligence in January that larger oil companies would face an uphill battle in emulating that level of ambition.

Andrew Grant, head of oil and gas at Carbon Tracker Initiative, a London-based think tank, said BP's pledge was "a step ahead" of Shell and more similar to Repsol's target because, if copied by other producers, its net-zero component would decarbonize all of the oil and gas sector.

"If everyone in the world followed BP's approach, the industry would reach net zero — BP's production would be net zero, as would everyone else's that went through BP's marketing operations," Grant said in an email. "So their 50% intensity target would actually be superfluous. If everyone followed Shell's approach, the industry would lower intensity by 50% and not necessarily as much as that on an absolute basis."

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Lack of detail

Environmental groups and investors demanded more detail on the plans since BP has not said how it will get there or how much it will spend to do so. Looney said concrete measures would be provided at a capital markets day in September.

BP will likely rely on carbon sinks, such as planting trees, and carbon-capture technology to decarbonize its remaining barrels. Berenberg said in a note that it was still unclear how the company would measure its reduction, including what kind of offsets would be included.

Natasha Landell-Mills, head of stewardship at U.K. asset manager Sarasin & Partners, called BP's announcement "disappointing" because it did not include a commitment to align spending with the goals of the Paris Agreement on climate change, as many activist shareholders demand.

So far, spending on clean energy has made up only a fraction of total investment for even the most active oil companies. A spokesperson for the company reaffirmed BP's capital expenditure plan of $15 billion to $17 billion per year, presented earlier this month, suggesting that there is unlikely to be an immediate shift in spending priorities.

Some also pointed out that only time will tell how much of the ambition turns into reality.

"It remains to be seen what this implies for incremental returns or how BP chooses to act if [greenhouse gas ambition] and financial targets are contradictory," Jon Rigby, an analyst at UBS, said in a note.