Active investment commentary & analysis

BP set themselves a difficult challenge with a range of ambitious carbon reduction targets

With much fanfare the new chief executive of BP PLC has announced a range of ambitious new carbon reduction targets for the company which, on the face of it, should also help reduce the inherent environmental risk embedded in this oil and gas behemoth.

 Unfortunately, the announcement from the company contained only very vague statements about the way in which the targets would be met with no indication of the costs nor the rate at which the change would take place. Without any such detail we can only look at the historical track record of the company to determine the likelihood of success. The company’s aim is to become net zero in carbon emissions by 2050 or sooner. Their track record on this front is not inspiring. Over the past 5 years BP have managed to reduce their Scope 1 and 2 emissions (that is the emissions from their operations, not the products they sell) from 48.7 million tons of CO2e (mtCO2e) in 2014 to 46.5mtCO2e in 2018 representing a 0.44mtCO2e annual run rate reduction. If this run rate is then applied to the company’s target of a total reduction in greenhouse gases (which includes scope 3 or the carbon produced from the combustion of their products) of 415,000 mtCO2e it would take BP 943 years to achieve their goals.

 Little wonder we seek more clarity on how they intend to achieve this. Our calculations do not include the movement in Scope 3 emissions over the past 5 years and that is because these emissions saw no decline, in fact they increased by over 7% in absolute terms. It is clear that BP have set themselves a difficult challenge but one which has the potential to not only help the environment but also boost shareholder returns. As the whole oil and gas industry shifts to a less carbon intensive future and capex makes a similar shift that incremental barrel of oil will become more valuable while at the same time the renewable and alternatives part of the business will attract a higher multiple. Many argue for the divestment from companies with exposure to hydro carbons, active stewardship on the other hand will help ensure that companies such as BP stick to the targets they have set while at the same time benefitting from the transition taking place. Should this transpire BP could become one of the most profitable ways to play the green revolution.