Burning Capital – Exit Strategy II

Article 2 May 2008 admin

Back to Black  – This article was first published in Platform’s Carbon Web newsletter, issue 9.

John Browne is not the first head of BP to leave under a cloud. After Robert Horton, chairman & CEO from 1990-92, was ‘encouraged’ to leave his post, the corporate initiative with which he was identified – ‘Project 1990’ – was swiftly brought to a halt. David Simon, his successor, set about re-focusing BP on the core activity of extracting oil & gas. It is clear that a similar kind of shift has been taking place since the fall of Browne in May 2007.

In July 2005, timed to coincide with the G8 Summit in Gleneagles, BP relaunched its ‘Beyond Petroleum’ strapline and unveiled plans for the world’s first carbon capture and hydrogen power station at nearby Peterhead. It was a brilliantly executed PR campaign and arguably the high-water mark of Browne’s ‘green strategy’. But last May, 22 days after Browne’s resignation, BP announced that due to government subsidy not being forthcoming, the project was shelved. Whilst the effectiveness and safety of CCS are far from certain, Hayward’s dropping of the project sent a clear message of where he wanted to position the company.

The same month, Hayward employed the consulting firms Baines and McKinsey to review the company’s structure. On 10th October he announced an outline of the resulting shake-up, including the break up of one of its three divisions: Gas, Power & Renewables. Most of its assets will be merged into the remaining divisions of Exploration & Production and Refining & Marketing. What is left will be downgraded from a division to a small business unit – BP Alternative Energy. This constitutes a significant shift of emphasis away from renewables.

Then in December BP announced that it was purchasing 50% of Canada’s Sunrise tar sands field from Husky Energy. In contrast, Browne had been sceptical about tar sands. In 1999 he oversaw the sale of BP interests in Alberta and in 2004 he publicly declared that there were ‘tons of opportunities’ beyond the sector. Now, simultaneous with the Climate Conference in Bali, BP press released its acquisition.

Such a contrast to the announcement of the Peterhead Carbon Capture project during the G8 two years previously. No clearer indication could be given of the change of direction under Tony Hayward.

Accounting for Emissions 

The company assessed its “operational emissions” for 2006 to be 64.4 million tonnes of CO2 equivalent, excluding TNK-BP (effectively BP’s Russian arm, responsible for 1/3 of BP’s production). Leaving aside this qualification, the company’s operational emissions have been falling over recent years. However these constitute only a fraction of the company’s total emissions – a mere six percent.

In Spring 2005, Nick Robins, working at Henderson Global Investors in Broadgate, noticed that the total emissions reported in BP’s 2004 Sustainability Report made the company to be responsible for 5.6% of global greenhouse gas emissions: more than twice the 2.5% share of the UK, with 62 million citizens.

A year later, Nick noticed that BP had shifted the goalposts. By changing its methodology to count oil within one sector of the company (mostly refining), rather than counting the emissions from all products it sold (whether crude oil, aviation fuel, diesel etc), BP had cut its emissions to less than half.

BP no longer publishes its full emissions under the original methodology. Yet PLATFORM has calculated the company’s full annual emissions since 1997 by analyzing its production and refining & marketing data. These show that production has risen steadily over the past decade, with a slight decline since 2005 (mainly due to the high oil price) – and the company’s CO2 emissions have risen in parallel with this.

On the morning of May 19th 1997, in a lecture theatre at Stanford University, California, John Browne addressed an audience with his ‘Climate Change Speech’. In the hour that followed Browne broke ranks with his peers in the global oil industry, recognising that human activity was altering the global climate and accepting the need to take precautionary action.

Browne said “Nobody can do everything at once. Companies work by prioritising what they do. They take the easiest steps first, and then they move onto tackle the more difficult and complex problems[…]. Over time we can move towards the elimination of emissions from our own operations and a substantial reduction in the emissions which come from the use of our products”. With these words, a frisson ran through the oil industry. Browne, as BP’s bold new leader, was charting a distinctive course.

But, in Browne’s ten years at the helm after Stanford, he never moved beyond the ‘easiest step’. Instead, BP’s product emissions continued to rise. Meanwhile, renewable energy peaked at 3% of the company’s capital investment. Now, Hayward is seeking to reverse even the tiny steps Browne took.

A Change in the Political Climate

The political landscape of climate change shifted in 2007.

Between February and November, the Intergovernmental Panel on Climate Change published four reports, declaring that if temperatures went two degrees above pre-industrial levels the effects would be “irreversible and catastrophic”. In March the EU agreed to a 20% cut in CO2 emissions by 2020. In June the G8 summit draft communiqué stated that ‘beyond a temperature increase of two degrees, risks from climate change will be largely unmanageable’. In June and September the White House indicated that it was engaging in the issue. In December at Bali it was agreed to achieve a new Kyoto by 2009.

There is a growing consensus that we have to avoid exceeding 2 degrees of warming. In order to do so we need to stabilise CO2 emissions by 2015 – in less than 100 months – and thereafter reduce them radically.

Gordon Brown has talked of setting a target of 80% CO2 cuts by 2050, the Tories and Liberal Democrats likewise. US Presidential favourites, Hilary Clinton and Barack Obama, have also called for an 80% target. These all require effectively the same thing – a fossil fuel phase out over the next generation.

In these demands for striking global CO2 cuts, the direction of travel is clear – the cuts should fall heaviest on the countries of the global Global North. At Bali, the EU, Japan, Canada and Russia talked of cuts of between 20 and 45% by 2020.

For BP this poses a particular challenge. For example, if there are moves to dramatically reduce fuel consumption in Europe and the USA it will hit the company hard. 84% of the refined products it sold in 2006 were in Europe and the USA. However, The the company can adapt to such challenges. It is already directing capital to enable an expansion in the Indian and Chinese retail markets.

Similarly BP has been striving to apply technology to the challenges – by developing internal and external emissions trading systems, or carbon capture and storage projects. But the fate of Peterhead power station, illustrates that these are peripheral ventures at the mercy of financial and political pressures.

This challenge goes to the heart of BP’s core activity – the extraction of oil & gas. These are challenges to which it is far harder for the company to adapt.

2007 might be remembered as the year in which the company had to consider the threat of carbon pricing. The Stern Report concluded that the social cost of a tonne of carbon dioxide was $85. In December 07 the UK Climate Change Minister, Phil Woolas, made it clear that the government is to factor in the ‘shadow price of carbon’ for all infrastructure decisions.

If the logic of this is carried through, BP’s combined operational and product emissions in 2007 constitute a massive liability to the company. If this were set against the profit for 2007 then the company’s profitability would be severely hit, and with it the share price.

The question stands, how long is it before public pressure, driven by the rising impacts of climate change, shifts this theoretical carbon cost into an actual carbon cost? How long until the company is hit by the economic impact of climate change?

A change in the weather and a change of direction

Back in May 1997, John Browne recognised the relationship between BP’s oil & gas production and global CO2 emissions. In the intervening 10 years the company has produced 12.7 billion tonnes of carbon dioxide equivalent. Over the past decade BP’s oil & gas output has been rising most years and in the coming decade it is the company’s intention that it should grow further over the coming decade… – causing its produce emissions to rise in parallel. CO2 emissions will also grow. Especially with the development of projects such as Sunrise.

But yet this growth runs in direct contradiction to the demands of the Intergovernmental Panel on Climate Change and rising public opinion. At the very least the contradiction between the company and public opinion threatens to erode BP’s ‘social license to operate’ in key countries such as the UK, Germany and the US. An erosion of acquiescence that may lead to the demand that BP carries the cost of the carbon it sells.

What is to be done? How can BP adapt to this coming climate impact?

In the past 12 months decisions were made in BP to finance new developments in Russia, Indonesia and Norway, and to purchase exploration licenses in Colombia and the USA. And with the opportunity afforded by the $100 barrel oil price, the decision was made to purchase tar sands in Canada. We do not know exactly how much carbon these actions will bring to the world’s atmosphere, but we do know that the decisions were made by approximately 20 people.

How would it have been if those who made the decisions in the past 12 months had had at the forefront of their minds the carbon limits recommended by the Intergovernmental Panel on Climate Change? What if they had committed themselves to stabilising global CO2 emissions in less than 100 months and then to reducing emissions radically?

How might the company’s year 2007 have been different? What meetings might have taken place to plan the decarbonising of the company? What new investments in non-fossil fuel energy? Would Tony Hayward’s announcement of bringing onstream the Shah Deniz, Rosa, Dalia, Greater Plutonio, Mango and Atlantis fields in 2007 have come to be seen as marking a high-water point in BP’s oil and gas production history?

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