BP will need to invest tens of billions of dollars and may have to accept lower returns than it can get from oil if it is to meet its target of becoming one of the world’s largest renewable power generators, Shadia Nasralla and Susanna Twidale from Reuters reported.
The British oil and gas company wants 50 gigawatts (GW) of renewables such as wind, solar and hydropower in its portfolio by 2030, up from just 2.5 GW now and more than the total renewable capacity in the United Kingdom at the moment.
BP’s first quarter profit has dived by two thirds after the global coronavirus crisis hit demand for oil. The oil giant warned it was facing an exceptional level of uncertainty after a reduction in the need for its products, CNBC reported.
The U.K.-headquartered oil and gas company said it had been reviewing its portfolio and capital development plans as part of its ambition to become a net zero company by 2050 or sooner, BBC reported.
European oil firms are under pressure from activists, banks, investors and some governments to shift away from fossil fuels and are trying to find business models that offer higher margins than the mere production of renewable energy would generate.
Last week, BP followed Eni in committing to cut its oil production over the coming decade and set a bigger target for reductions than the Italian company.
Analysts say large offshore wind farms probably offer the quickest route for BP to scale up but as they can take years to develop, and have high start-up costs, it may have to turn to acquisitions – and they won’t come cheap.
“Getting value for that will be hard because these assets are very attractive and selling at very high prices,” said Peter Atherton, associate at British strategy consultants Stonehaven.
BP already has debt of $41 billion and as investors increasingly turn away from fossil fuel producers in favour of green energy firms, its shares have halved over the past two years, slashing its market value to under $80 billion.
Denmark’s Orsted, one of the world’s biggest offshore wind developers, currently has 10 GW of installed wind power capacity – still only a fifth of BP’s target – and has committed to add another 3.8 gigawatts.
Spanish utility company Iberdrola has 33 GW of installed renewable power and is developing several projects.
Global renewable capacity is just over 2,500 GW, according to the International Renewable Energy Agency, but that is expected to grow rapidly as countries seek to lower emissions to meet targets set under the 2015 Paris Climate agreement.
International Energy Agency data shows that renewables, including wind, solar and hydropower, accounted for about a quarter of the electricity produced in countries in the Organisation of Economic Co-operation and Development last year.
BP — in a strategy update on Tuesday — said it would cut its oil and gas output by 40 percent by 2030 and spend $5 billion a year on low carbon projects that it hopes will turn it into one of the world’s biggest green power producers.
BP is also planning to sell oil and gas assets that won’t be economically viable with lower oil prices to raise $25 billion by 2025 to help fund its transition to cleaner energy.
Iberdrola’s 3.1 GW East Anglia wind hub project off the British coast is expected to cost about $8 billion while SSE and Total’s 1.1 GW Seagreen 1 British offshore wind project is expected to cost some $3.7 billion.
Biraj Borkhataria, an analyst at Royal Bank of Canada, estimates that BP will have to spend about $60 billion to achieve its renewables target, assuming a 50/50 split between offshore wind and solar power production.
On the assumption that 70 percent of that amount could be raised through project financing, BP would need to make net capital spending of $18 billion over the next decade, he said.
Jason Gammel, an analyst at investment bank Jefferies, put the bill for BP at about $30 billion plus project financing, but said the plan still depended on renewable energy assets both being available and offering acceptable returns.
Large oil firms generally target a return on oil investments of about 15 percent. BP said it expects returns of 8 percent to 10 percent from its low-carbon electricity investments, with the traditional oil and gas units pushing overall returns to 12 percent to 14 percent by 2030.
BP Chief Executive Bernard Looney said on a conference call last week that the company would only go after renewable capacity that came with the right returns – rather than chasing capacity for the sake of it.
BP’s finance chief Murray Auchincloss told the same call that the company’s huge trading business, its ability to package renewable power with natural gas to guarantee flow rates, and its expertise with currencies and hedging services can push returns “well into the double-digit range”.
Some analysts are sceptical.
Royal Bank of Canada’s Borkhataria expects the return on renewables to be about 7 percent.
“It’s difficult to see these being double-digit return projects,” he said. “The energy sector has been unable to execute its strategy on its core business, so I’m not that confident in taking another leap of faith on a new business.”
Lead oil and gas analyst at Fitch ratings agency, Dmitry Marinchenko, said while renewables might be a less profitable business now, BP was betting that returns from oil and gas would be weaker in the future.
“The energy transition road will be bumpy for oil majors; they have little experience in renewables and new investments will make them subject to the execution risk. Not all investments will probably prove to be successful,” he said.