BP : After the Gas and Oil are Gone

Together with a couple of my peers, I’ve been taking a look at BP’s “sustainability”, both from a business point of view and from a Climate Change point of view.

We’ve just given a presentation, of which I offer you a couple of the slides and the script to accompany them.

The central point of issue is : what will BP do after the Gas and Oil are gone ? There may be decades of reasonable hydrocarbons left to exploit, but how will Pension Funds get their return on investment after that ? Where is the future thinking ?

And what about Climate Change ? Retreating from Alternative Energy back into its core business of Oil and Gas means that BP plc will not be able to make substantial cuts in the Greenhouse Gas Emissions of the products that they sell – which means that sooner or later, when Carbon Energy is rationed, their business will start to implode.

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BP plc : Is this a “sustainable business” ?

CLIMATE CHANGE IMPACTS

BP is directly responsible for Greenhouse Gas emissions, both from its engineering operations, and also from the kinds of products that it sells.

My estimate, based on BP’s published accounts is 1.39 Gigatonnes of Carbon Dioxide equivalent; or 1.32 Gigatonnes, if you exclude Methane and other non-CO2 Greenhouse Gases.

This is nearly 5% of the total of mankind’s annual net emissions to air of 29 Gigatonnes.

Confusingly, in the Sustainability Review of 2008, BP claimed that “Customer Emissions” amounted to only half a Gigatonne of Carbon Dioxide.

For competitors, my calculation for Royal Dutch Shell is 1.21 Gigatonnes, and for ExxonMobil, 1.33 Gigatonnes of annual emissions. (I have a sheet with the figures, if anyone is interested in seeing it.)

In February, when we spoke to Sheldon Daniel, CSR Director at BP in the UK, he emphasised that BP are an Oil and Gas company (see diagram at bottom left).

He expressed concern about Climate Change scepticism, but regarding BP’s public communications he said, “Are we going to educate people that we should go out of business ? No.”

BEYOND PSYCHOTHERAPY ?

Does BP have a consistent vision of the future for Sustainable Energy ?

*** 40 / 60

Tony Hayward, BP’s CEO, has said, “The data shows that there are around 40 years of proved oil reserves left in the ground and 60 years of natural gas, at today’s consumption rates…”

However, projections for global demand for these key Fossil Fuels show continued growth.

Hayward also said, “When it comes to meeting demand, the problems are above ground, not below it.”

However, BP are relying on output from deep and complex wells, such as in the Tiber field (which is depicted here). Despite high technology, this is still new engineering, subject to problems.

*** Peak Demand

In February, Tony Hayward said, that after 2020, there will be Peak Demand for oil. [ The Guardian newspaper 4th February 2010. ]

The International Energy Agency has a somewhat different view. They say there will be Peak Oil (see diagram bottom left) – particularly in vehicle fuel for freight and transportation. To switch to new fuels will require massive rollout of new vehicles (see pictures of an LNG bus and an electric car), and this will take time.

There are early indications that new generation Biofuels may not scale up, and BP’s partnership with companies such as Verenium may come to an unsatisfactory end.

*** Reserves replacement

There is a scramble amongst the Oil and Gas companies to demonstrate to their shareholders that they can continue to increase proven reserves of Fossil Fuels, to replace what is being used.

There are issues :-

–> “Non-conventional” Fossil Fuels such as Gas Shale have a lower quality; they are harder to mine, and dirtier to refine, so giving them a higher emissions profile.

Institutional investors are questioning Tar Sands development for these same reasons.
[ FairPensions 2010 ]

Also, the American Environmental Protection Agency is investigating the process of “fracking” Gas Shale underground, where it is possibly contaminating water supplies and causing earthquakes.

–> New discoveries are small, despite the Press hype, and although there are some large fields (or plays), there may be low production potential, and low flow rates.

The largest undeveloped oil fields are in places like Iraq, and the Oil and Gas companies have been competing to go in at surprisingly low profit margins.

–> Deep reserves are complex to bring to production. Plus, the deeper you go, the hotter it gets, and the oil degrades. Natural gas and methane disperse downwards, but concentrations of hydrocarbons in deep fields may be low.

–> For the future, BP has a choice : drill several kilometres down in the Arctic for unknown resources, or alternatively, invest in easy Renewable Energy on the surface; so it’s surprising that they don’t spend more there.

We asked Sheldon Daniel at BP if shareholders might feel concern, and he said, “We spend 5% of capex each year on Renewables…We’re not disappointing anybody…”

Signs that BP is saying one thing and doing another :-

*** Solar and Biofuels
BP’s Alternative Energy business has mostly been conducted via acquisition and partnerships, rather than in-house. The Financial Times reported this month that BP’s strategy is to increase its Natural Gas business by 5%, and de-support Mergers and Acquisitions in future.

*** Carbon Capture
After initially supporting the Carbon Capture and Storage proposals, BP pulled out of the UK competition for CCS in 2007.

*** BP America and USCAP
At the Davos World Economic Forum in 2009, Tony Hayward said, “We need the world to put a price on carbon”, and yet only a year later, BP America pulled out of the US Climate Action Partnership, am industry coalition supporting of Cap and Trade policy.

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