Oil Is Dead…but Not Forever
For many of us, BP is considered one of the most careless companies in recent memory. The Deepwater Horizon oil spill in 2010 bled tons of gallons of crude oil into the Gulf of Mexico, destroying not just the natural ecosystem, but also the livelihood and well-being of residents all along the coast. And the fallout of the oil spill continues to affect the wildlife and tourism.
Since then, BP has made a very serious commitment to their transition to renewable energy. In February 2020, incoming BP CEO Bernard Looney announced a commitment to reach net-zero carbon emissions by 2050. Then, in August, BP revealed a more detailed plan and released their energy outlook exploring various outcomes of global efforts.
Because BP knows the truth: oil is a dying industry. Nothing has made that more clear than the COVID-19 crisis. At its peak in April 2020, the demand for oil dropped as the price of Brent crude fell to less than $20 a barrel.
BP and other supermajors are smart to shift their resources to renewable energy. But whether they can successfully transition away from their bread and butter commodity is yet to be seen.
The Uncomfortable Truth about Oil
While oil is undoubtedly terrible for the environment, it’s also become a necessary evil of our daily comfort. It’s the most efficient fuel for planes, barges, and trains. And while countries like China and Germany are encouraging consumers to purchase electric vehicles, many cars on the road today still use fossil fuels.
Furthermore, plastic — a by-product of constant oil production — is a major reason why we’ve exceled and survived the coronavirus pandemic. Without single-use test kits, gloves, and even garbage bags, significantly more people would have died as a result of contracting COVID-19.
But, as many of us already know, our insatiable appetite for fossil fuels has also destroyed natural ecosystems and contributed to adverse health conditions around the world.
We’ve built our comfortable existence around consuming fossil fuels and their by-products, but COVID-19 has highlighted the ugly yet inevitable truths of the industry. As Iberdrola CEO Ignacio Galán put it recently: “The pandemic has proven how much people rely on electricity.”
The “new normal” of the coronavirus pandemic made people realize the connection between their energy consumption and climate change. But instead of an increase in natural gas usage, the world saw a spike in renewable energy use. Most notably, green energy use in the EU increased anywhere between 44 and 93 percent.
As the world attempts to correct its contribution to climate change, even Goldman Sachs expects capex on renewables to exceed spending on oil and gas exploration in the near future.
The planet is telling us we can — and must — find alternative sources for energy.
It’s All About Shareholders
Shareholder satisfaction is always a driving factor for any decision made by a multinational business. As companies spend decades fostering relationships and building trust with their shareholders, the decision to drastically change their business model can be a risk.
But shareholders are not a finite source. Jeffrey Ubben of Inclusive Capital Partners suggests that, when companies shift their messaging to prioritize climate change action, they will attract the right shareholders. In other words, companies don’t need to cater to existing shareholders who don’t share those new values. Instead, businesses need to be confident that their newfound commitment to green energy will attract new shareholders as well as retain some existing shareholders.
Before BP announced that they plan to halt all oil and gas exploration, reduce its production, and increase spending on low-carbon energy, they slashed their dividends in half. But once they revealed their plan to put capital towards low-carbon efforts, their share value increased by over 7 percent.
While industry incumbents may claim that shareholders will be disappointed and sell off their shares, new shareholders will pick up the slack and support the transition that BP wants to make. But considering that renewable energy use increased during the pandemic, and that it’s unlikely oil will ever reach $100 per barrel again, investors will be smart to support the shift to clean energy.
The Inevitable Green Leap Forward
The Green Leap Forward will happen with or without the supermajors. But whether those changes can be sustained is another question entirely.
Oil analyst Paul Sankey says, “the scale of the challenge is massively under-estimated.” He points out that developed countries have benefited from over a century of industrial development, and it’s unreasonable “to then try to constrain India and China with 1/3 or less of the per capita income.”
For a promising shift to renewable energy, the World Economic Forum suggests that sustainable capital flows can be achieved through localized energy solutions. Entrepreneurship and self-sustainability have been driving factors of growth everywhere, but especially in developing countries.
As a multinational company, BP would be smart to play a significant role in localized renewable energy around the world. Nations have the potential to convert their natural resources into reliable sources of energy, rather than relying on the handful of oil-rich countries and conglomerates that support them.
And when green entrepreneurship booms, growing markets will attract rising talent. The incoming workforce isn’t interested in working for the supermajors, or any other company that contributes to climate change. If they want to survive the green transformation, companies like BP will have to shift their focus to renewable energy in order to survive.
Don’t Be Left Behind
Our dependence on oil is coming to an end, and it’s time for the supermajors to save themselves from a dying industry. Renewable energy is the future of innovation, investment, and employment. Transitioning away from fossil fuels and embracing clean energy is the only chance that companies like BP have to survive the green leap forward.
The industry shift will be slow, and fighting climate change isn’t a single player game. But if an industry mammoth like BP can influence the value of energy, it will be smart for others to follow suit.
