BP's potential for genuine financial restraint and discipline
BP's Capital Expenditure Framework Faces Criticism Over Energy Transition and ESG Commitments
BP's capital expenditure (capex) strategy has come under scrutiny for its heavy focus on traditional oil and gas projects, with critics arguing that it undermines the company's long-term sustainability, exposes it to regulatory risks, and damages its reputation among ESG-focused investors.
The concern stems from BP's apparent retreat from clean energy technologies and its lack of comprehensive ESG targets. For instance, the company has scaled back renewable projects, such as the sale of its U.S. onshore wind assets for $20 billion, while competitors like Shell and Equinor continue to expand in this area.
Moreover, BP's revised sustainability framework excludes Scope 3 emissions targets, which diminishes trust among ESG ratings agencies and investors. This omission is particularly concerning as it suggests that the company may not be fully addressing the environmental impact of its operations.
Critics also point to potential capital misallocation, with large impairments and portfolio complexity raising concerns about underperformance and financial sustainability, particularly in newer energy segments like hydrogen and biofuels.
Perhaps most significantly, continued high investment in upstream oil and gas projects risks obsolescence in a decarbonizing world, magnifying the danger of stranded assets and regulatory penalties. ACCR's analysis of BP's pre-FID gas portfolio found that pursuing these projects is unlikely to be profitable under low-carbon scenarios and poses significant risks around value destruction for investors.
To address these criticisms, proposed improvements to BP’s capital expenditure framework include rebalancing investments to increase renewables and low-carbon technologies, setting comprehensive ESG and emission reduction targets, enhancing capital allocation discipline, and improving communication and strategic clarity.
For instance, adopting a dual-track strategy like Shell or TotalEnergies that sustains fossil fuel operations while aggressively growing in renewables, hydrogen, and carbon capture could help BP stay aligned with global decarbonization trends.
In addition, committing to net-zero goals transparently and including Scope 3 emissions in reporting could rebuild investor and regulator confidence. Streamlining portfolio complexity, improving oversight on new energy ventures, and ensuring capex aligns with long-term energy transition risks and market shifts could also improve operational execution and financial sustainability.
Furthermore, addressing investor skepticism with explicit plans to reconcile short-term financial performance with medium- and long-term energy transitions, potentially involving activist shareholder engagement to drive governance improvements, could help BP regain its footing in the transitioning energy landscape.
Recently, Elliott Management has built a near 5% stake in BP, aiming to push for sweeping changes. Investors with nearly £5 trillion in AUM have also sent a letter to the Chair of BP, urging the company to update its approach to capital expenditure and provide a vote on the company's energy transition strategy at the upcoming AGM.
In conclusion, while BP’s current capital expenditure framework supports operational discipline in oil and gas, it faces valid criticism for insufficient integration of energy transition imperatives and ESG commitments. A credible, improved framework would balance fossil fuel development with accelerated renewables investment, clearer sustainability targets, and better capital allocation to safeguard BP’s long-term viability and investor trust.
[1] ACCR (2021). BP's gas portfolio: A value trap in a decarbonizing world. [online] Available at: https://accr.org/wp-content/uploads/2021/03/BP-Gas-Portfolio-A-Value-Trap-in-a-Decarbonizing-World.pdf
[2] Carbon Tracker (2020). BP's Energy Outlook 2020: A bridge too far. [online] Available at: https://www.carbontracker.org/reports/bps-energy-outlook-2020-a-bridge-too-far/
[3] LSE (2021). BP's capital allocation framework: Flawed and enabling expenditure that exceeds a Paris-consistent framework. [online] Available at: https://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2021/02/BP-Capital-Allocation-Framework.pdf
[4] LSE (2021). BP's Capital Allocation Framework: A Bridge Too Far. [online] Available at: https://www.lse.ac.uk/GranthamInstitute/news-and-events/news/2021/bp-s-capital-allocation-framework-a-bridge-too-far
- BP's critics argue that its capital expenditure strategy, with its heavy focus on traditional oil and gas projects, could distract the company from investing in renewable energy technologies and low-carbon solutions, thereby undermining its long-term sustainability and financial growth in the business of investing.
- To remain competitive and gain the trust of ESG-focused investors, BP might need to adapt its capital expenditure framework to increase investments in renewables, hydrogen, and carbon capture, while also addressing concerns about capital misallocation and net-zero emissions goals in their business operations.
