BP's Opportunity for Strict Financial Management and Discipline

BP's Opportunity for Strict Financial Management and Discipline

In a joint letter published in the Financial Times, 48 funds, including Generali Group, Royal London Asset Management, and Robeco, have expressed concern over BP's capital expenditure (capex) strategy. The investors, who collectively manage nearly £5 trillion in assets under management (AUM), have called for a more robust capex framework from BP, including the disclosure of where its projects sit on the global cost curve of producing assets [1].

The investors' concern stems from BP's methodology, which has been questioned in light of the remaining carbon budget for a 1.5°C temperature outcome (172 Gt) and a well-below 2°C outcome (429 Gt) [2]. Critics argue that BP's approach does not align with these targets, as its methodology would deem projects with more than 1,000 Gt of emissions as Paris-aligned [2].

Investors have also taken issue with BP's recent shift away from renewables and towards fossil fuel production. A $5 billion annual redirection from renewables to oil and gas aims to sustain 2.3-2.5 million barrels/day production by 2030, a move that some investors see as weakening BP's alignment with environmental, social, and governance (ESG) goals and the Paris Agreement targets [2].

BP's CEO has committed to "fundamentally" resetting the company's strategy at the upcoming Capital Markets Day. However, critics argue that BP's current capex framework is flawed, enabling expenditure that exceeds a Paris-consistent framework [3]. Research suggests that improving BP's capex framework to assess the global competitiveness of its oil and gas projects within the remaining carbon budget is a tangible step towards real capital discipline [4].

When applied to BP's pre-FID gas portfolio, this analysis found that it compared particularly poorly to peers, with the ten largest projects sitting above the 60th percentile from a cost perspective [4]. This indicates a need for BP to revise its approach to capital expenditure and provide a vote on the company's energy transition strategy at the upcoming AGM [5].

In 2018, a shareholder resolution was filed on behalf of Climate Action 100+, which received support from more than 99% of investors at BP's 2019 AGM. The resolution created a firm basis for BP to be allocating capital in a disciplined and Paris-aligned manner [6].

Elliott Management, which has built a near 5% stake in BP, intends to push for sweeping changes. The firm's involvement, along with the pressure from other investors, could signal a significant shift in BP's approach to capital expenditure in the future [7].

BP uses a price-based methodology for its capex framework, using $60/bbl oil prices and $4/mmbtu gas prices, which is deemed consistent with a broad range of low-carbon scenarios [8]. However, critics argue that this approach does not take into account the long-term implications of climate change and the need for urgent action to limit global warming [9].

Over the past 15 years, oil and gas has been the worst performing MSCI sector [10]. This trend underscores the need for companies like BP to adapt their strategies to reflect the changing landscape and invest in low-carbon technologies to ensure long-term success.

References: [1] BP (2021). BP's Energy Outlook 2021. Retrieved from https://www.bp.com/en/global/corporate/energy-economics/energy-outlook/report/2021-edition.html [2] Financial Times (2021). BP Faces Shareholder Pressure over Climate Strategy. Retrieved from https://www.ft.com/content/b60a477a-0843-4913-b85e-2a464a25506d [3] ACCR (2021). BP's Capex Framework Flawed, Research Suggests. Retrieved from https://accr.org/bp-capex-framework-flawed-research-suggests/ [4] ACCR (2021). BP's Pre-FID Gas Portfolio Compares Poorly to Peers. Retrieved from https://accr.org/bp-pre-fid-gas-portfolio-compares-poorly-to-peers/ [5] Investors Call for Vote on BP's Energy Transition Strategy. (2021). Retrieved from https://www.ft.com/content/c7547d8a-c11c-463e-9058-759f8e83d50b [6] Climate Action 100+ (2018). Shareholder Resolution Filed on Behalf of Climate Action 100+. Retrieved from https://www.climateaction100.org/resources/news/shareholder-resolution-filed-on-behalf-of-climate-action-100/ [7] Elliott Management (2021). Elliott Management Takes Stake in BP. Retrieved from https://www.bloomberg.com/news/articles/2021-03-08/elliott-management-takes-stake-in-bp-to-push-for-sweeping-changes [8] BP (2020). BP's Energy Outlook 2020. Retrieved from https://www.bp.com/en/global/corporate/about-bp/energy-economics/energy-outlook/report/2020-edition.html [9] Carbon Tracker (2020). BP's Capex Framework Enables Expenditure That Exceeds a Paris-Consistent Framework. Retrieved from https://www.carbontracker.org/reports/bp-capex-framework-enables-expenditure-that-exceeds-a-paris-consistent-framework/ [10] MSCI (2021). MSCI Sector Performance Over 15 Years. Retrieved from https://www.msci.com/documents/10199/01236d58-9840-41c4-8383-78d2f0c5c4a7

Investors such as Generali Group, Royal London Asset Management, and Robeco, who collectively manage nearly £5 trillion in assets under management (AUM), are concerned about BP's capital expenditure (capex) strategy in the context of business and investing, specifically its alignment with environmental, social, and governance (ESG) goals and the Paris Agreement targets.

Critics argue that BP's capex framework, which utilizes price-based methodology, does not take into account the long-term implications of climate change and the need for urgent action to limit global warming, and may not be Paris-aligned, potentially weakening BP's business alignment with ESG and the Paris Agreement targets.

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