But over the last few days, Looney has found himself trying to defend moves by the company that have been seen as slowing down its transition away from fossil fuels.

Last week, BP said it will cut its Scope 3 emissions by only 20% to 30% by the end of the decade – a significant reversal from its original 35% to 40% target announced in 2020. The company is still committed to being net-zero by 2050, but observers say it’s a lot harder to see a pathway to reach such a goal without a stronger target for 2030.

For Looney, this move didn’t mean BP was abandoning the green transition. While yes, the company was reducing its 2030 target for Scope 3 emissions (those up and down its value chain), BP announced it would pour an additional US$1 billion per year into “transition growth,” Looney argued. He told Barron’s that the announcements didn’t mean the company was “backing away” from the energy transition – it was “leaning in,” he said.

Meanwhile, BP also announced it will spend around US$1 billion more per year on fossil fuel production.

“Shell’s ‘Energy Transition Spend’ and BP’s ‘Transition Growth’ are unclear and unverifiable smokescreens to obscure the fact that the bulk of their investments remain in fossil fuels and are even increasing in the case of BP,” Mark van Baal, the founder of activist shareholder group Follow This, said in an email.

It’s difficult for climate-focused investors to see the scaled-back targets and the increased investments in fossil fuels as anything but a betrayal of BP’s commitment to transition to a low-carbon future. Follow This plans to introduce a resolution at BP’s annual general meeting in May calling for the company to align its 2030 targets with the Paris Agreement. In order to do that, BP’s emissions would need to fall by 45% by 2030.

Other investors have said these moves also raise governance concerns, as most shareholders voted in favour of the old targets just nine months ago. Five of the company’s top 10 institutional investors are members of Climate Action 100+, an investor initiative that seeks to put pressure on emitting companies to act, reports Reuters, citing data from Refinitiv Eikon.

“In the context of a very strong financial outcome, those investors with net-zero goals, including many of our clients, will be concerned at such a material change to BP’s 2030 absolute emissions reduction target,” Bruce Duguid, the head of stewardship at investment manager Federated Hermes, told Reuters.

Looney has also pointed to past investments to argue that his company is sticking to its green commitments. In 2022, BP invested US$4 billion (or 25% of its total investments, including capital expenditures and acquisitions) in renewables. This was an increase from the 19% of BP’s investments that were classified as sustainable in 2021, according to Corporate Knights sustainable economy intelligence. But BP also invested $5.3 billion in oil and $3.2 billion in gas in 2022, according to Follow This. Activist investors and environmentalists had hoped that the record profits the company made in 2022 (BP reported a record US$27.7 billion in profits, as the Russian invasion of Ukraine pushed energy prices sky-high) might result in a more significant scaling up in renewable investments.

To climate-focused investors, the continued investment in fossil fuels and the scaling back of climate targets is shortsighted given what they see as the need for BP to decouple itself from oil and gas production or face future risks of litigation, regulation and stranded assets. Van Baal says that BP’s reversal is a “wake-up call” and that it will be up to shareholders, together with major investors, to get the company back on track.

“Investors have much more to worry about than the return on capital of oil majors. They have to worry about the returns of their entire portfolio in the global economy, and these are in great danger if the world fails to reach the goal of the Paris Accord,” he said. “They are stewards of the global economy and should realize that the only formal power they have is the power of the vote.”

BP did not respond to a request for comment.

The post BP hits the brakes on transition away from fossil fuels appeared first on Corporate Knights.

Iberdrola of Spain, Enel of Italy, Ørsted of Denmark and America’s NextEra Energy all have market values that are moving into, and sometimes beyond, the oil majors’ territory and have shareholder returns that are absolutely blowing them away. Enel, Europe’s largest utility, had a stock market value equivalent to US$110 billion in the late autumn after a 23% rise in the past year. BP’s value was US$83 billion, after losing about 40% of its value.

Italy’s ERG is also catching the new-energy wave, proving that high growth and value creation are not limited to the biggest names in the industry. Like some of its big-name rivals, the Italian company embarked on a black-to-green transformation out of necessity, not out of the goodness of its heart, but soon learned that cleaning up its act could produce compelling shareholder returns.

ERG began life as an oil refining and oil products company just before the Second World War and stayed that way until 2008, when it started to push its carbon assets out the door and moved into wind power, as Ørsted did when it shed its oil and coal businesses on its way to becoming the world’s top offshore wind-power company. Since then, ERG’s shares have gone from €7 to €25. “Now I’m fighting against climate change, and it’s paying off well,” says Luca Bettonte, the dapper accountant and auditor who became ERG’s chief executive officer in 2012.

ERG knows it will never be a “new energy major.” Its market value is €3.8 billion and it has only a small following on the Italian stock exchange in Milan because the Garrone family – the “G” in ERG – owns almost two-thirds of the shares and is giving no signs that it would relinquish control. But the company is ambitious. It’s already the top wind-power company in Italy and recently broke into the top 10 in Europe, where its expansion plans are focused.

Reaching the top five is not out of the question, and if President Joe Biden makes good on his commitment to propel the United States into clean energy, trans-Atlantic investments “might be an opportunity,” Bettonte says.
Until 2017, ERG and the French oil giant Total jointly owned TotalErg, the fourth-largest fuel marketer in Italy, with some 2,600 service stations. The collection had made ERG a brand name among motorists. Today, ERG has no retail presence – it’s a B2B company – and most Italians have no idea what it does to make money.

ERG was one of the family-owned companies that helped Italy get back into business after the Second World War, and it thrived when the country’s “economic miracle” was in full swing in the 1950s and 1960s, the era when Italy scrambled up the value chain to become an industrial and design powerhouse that would produce some of the world’s best-known brands, including Ferrari, Vespa, Alfa Romeo and Maserati.

Edoardo Garrone, ERG’s founder, was an industrialist at heart and a product of his home city, Genoa, the gritty seaport, oil terminal and transportation hub on Italy’s northwest coast. Best-known as the birthplace of Christopher Columbus, Genoa would emerge as a key player in Italy’s industrial revolution. Garrone realized that petroleum was necessary to lubricate Italy’s wealth-creation machine and launched a small oil, tar and chemicals business in 1938 but made little progress before the war started a year later. After the war, which left much of Genoa in ruins, he opened a brick factory to help Italy’s reconstruction effort. In 1947, when demand for oil products was taking off, he built the San Quirico refinery in Genoa.

In the early 1950s, he created a fuel distribution and retail business under the ERG name, which stood for Edoardo Raffinerie Garrone – “raffinerie” is Italian for refinery. BP, then British Petroleum, became the refinery’s main oil supplier in 1958 and would become a minority investor in ERG. Five years later, Edoardo died of a heart attack on a fishing trip in Norway at age 57. His son Riccardo was pushed into action, becoming chairman at age 27. The young man expanded the company, and ERG joined an investment group, called ISAB, that built an enormous refinery in southeast Sicily in the early 1970s (ERG would take control of the refinery in 1985).

When the ISAB refinery opened in 1975, the energy markets were in crisis. The 1973/74 Arab oil embargo had sent crude oil prices up fourfold, and oil-importing countries went into recession. Demand for oil products sank, and price volatility became the norm – a fatal recipe for low-margin European refineries. In Italy, a dozen refineries, including ERG’s original plant in Genoa, closed between 1975 and 1989, by which time the Garrone family had realized there was no future in being a one-trick company; ERG had to diversify to survive.

The first diversification move came in 1993, when ISAB built an electricity plant next to its Sicilian refinery. The power was generated by burning the gases extracted from the refinery’s heavy-oil products. The plant opened in 2000, and the technology proved to be a great success. At that point, it was still unthinkable for the Garrones that ERG would be anything but a hydrocarbon company – old habits die hard. But the first decade of the 2000s rocked the company yet again, and new thinking emerged.

Bettonte, who joined the company in 2007 as chief financial officer, says the Garrones were slowly taking the view that their precious Sicilian refinery was becoming uncompetitive and that the industry’s rather violent price swings eliminated any hope of financial stability.

Demand growth for refined products was shifting to soaring Asian economies. The Saudis were building dazzling new refineries, as were Asian nations, with superior technology. At the same time, the world was realizing that the science behind climate change was real. In 2004, ERG made an opportunistic move into Italian wind energy, through a partnership with a Spanish company. Two years later, it made a big wind investment through the purchase of Milan-listed EnerTAD. A year after that, EnerTAD entered the French wind market. ERG’s black-to-green transformation was in full swing.

In one of the best-timed deals of the decade, ERG sold 49% of the Sicilian refinery to Russian oil giant Lukoil just before the 2008 financial crisis. Suddenly, ERG was swimming in cash and had to decide where to invest it. On cue, the investment bankers came knocking. One of them suggested that ERG pump its new fortune into healthcare; another suggested shipping. But ERG by then was smitten with clean energy. “We had a huge amount of money and had identified a fast-growing business – renewables,” Bettonte says.

The problem was selling the idea to ERG’s managers and employees, many of whom had spent decades building an oil company. “There was a lot of resistance from their side,” he says. “They were worried because they didn’t know about the renewable-energy business. They thought we would transform the company into a financial holding company that would invest in infrastructure. They thought we would cease being an industrial company.”
But the Garrone family – by then control had passed to Edoardo’s grandson and his older brother Edoardo, who is now chairman – backed the transformation, as did the other shareholders. ERG would be a renewable-energy company, dominated by wind power, with a strong presence in hydro and solar power too. And it would not act merely as passive investor in portfolios of clean energy – it would build. “I can’t say we made the decision because we wanted to save the world,” Bettonte says. “But the idea to go green played a part in it.”

ERG’s transformation has been remarkable. In 2013, the year it sold its final piece of equity in the refinery to Lukoil, the company emerged as Italy’s biggest wind-power player with the purchase of GDF Suez’s Italian wind farms. A rapid-fire series of acquisitions saw its onshore wind business blow across Europe, where it now has a presence in the U.K., Germany, France, Poland, Romania and Bulgaria. At last count, ERG had almost 2,000 megawatts of wind capacity in Italy and elsewhere in Europe, with another 280 megawatts under construction (as a rule of thumb, 1 megawatt can power 650 homes). It also had a big hydropower business in Italy, is pushing into solar power and has an enormous electricity plant in Sicily fuelled by natural gas. It’s the last vestige of its hydrocarbon heritage but one that, for now, is essential to ERG’s diversification strategy.

In 2008, only 3% of its earnings before interest, taxes, depreciation and amortization (EBITDA, essentially operating earnings) came from renewable power. By 2014, the figure was 73%. In 2019, 87% of its reported €496 million in EBITDA came from renewables. Investors have cheered the overhaul. From the end of 2007 through September 2020, ERG’s total shareholder return, including dividends, was 250%, greatly outpacing the FTSE Italia All-Share Index. Of the nine analysts who follow the company, there is only one “sell” rating, from Citigroup, which fears that the relatively high exposure to “short-lived” electricity subsidies makes ERG shares vulnerable.

Bettonte says ERG’s goal is to be the “bigger among the smallers.” More growth in Italy will be difficult, though the company is “repowering” its wind sites – replacing old turbines with much bigger and more efficient ones, an exercise that will produce four times as much electricity from half the number of machines. The growth will come elsewhere in Europe, and even that may be difficult, since overall electricity demand is not rising and coal-burning electricity plants are hanging on longer than expected in Germany, Poland and other countries. Getting permits for new renewable-energy projects is also a hassle. “Hydrocarbon plants are like car plants – they are hard to shut down,” he says.

But ERG knows it made the right decision to go green and also knows that renewable energy’s rise is irreversible as climate change is factored into every energy decision. “We are strongly committed to grow in this industry,” Bettonte says. “I am proud that we have become a climate-change fighter.”

The post How one former oil company is leading Italy’s winds of change appeared first on Corporate Knights.

“If that doesn’t tell you a story about how the math has changed, nothing will,” says Andrew Grant, the head of Oil, Gas and Mining at Carbon Tracker, a London-based not-for-profit think tank that researches the impact of climate change on financial markets. “I think it’s become very clear that the world is different now.”

The contours of that new world were mapped out in BP’s 2020 Energy Outlook, which the company released in mid-September. Gone was its bullish scenario from the previous year’s forecast that suggested oil demand could rise to 130 million barrels per day by 2040. Instead, it thought the best that oil producers should hope for is that demand levels recover to approximately 100 million barrels per day and flatline there for the next decade or so. But in both its “rapid” and “net-zero” scenarios, where climate policy is adopted around the world to varying degrees of ambition, demand falls off much more rapidly.

BP’s net-zero scenario made headlines around the world for suggesting that demand for oil has already peaked, and the company is acting like it believes that will happen. In addition to announcing that it will reduce its oil and gas production by 40%, it also pledged to cut its refining output by 30% within 10 years, all while shifting approximately one third of its new investments to low-carbon energy.

BP isn’t the only European oil and gas company that has recently announced a shift toward a lower-carbon business model. In April, Royal Dutch Shell committed to reaching net-zero emissions by 2050, with CEO Ben van Beurden noting that “global society, overall, may have until around 2060 to reach net-zero emissions. But Shell recognizes that it stands within a section of society that needs to move faster. And so that is what we intend to do.” France’s Total SE has also pledged to eliminate greenhouse gas emissions associated with its operations by 2050, while Italy’s Eni went even further by committing to hitting that target by 2040. But BP’s pledge to reduce its actual production, rather than simply eliminate the greenhouse gas emissions associated with it, is a major step forward. “It’s been a bit of an arms race, or so it seems, over the last year or so,” Grant says. “And BP has really jumped into the lead in that race.”

“It’s been a bit of an arms race, or so it seems, over the last year or so, and BP has really jumped into the lead in that race.”

–Andrew Grant, head of Oil, Gas and Mining at Carbon Tracker

Here in Canada, though, the race has been slower to get underway. Take Enbridge, which has one of the biggest renewable energy portfolios in Canada. In a June piece in the Financial Post, CEO Al Monaco said his company would take a “gradual” approach to increasing its exposure to renewable energy, which currently makes up approximately 5% of its total assets. Large companies like Suncor, Cenovus, and Canadian Natural Resources have all signalled their intention to reach net-zero emissions by 2050, but they haven’t fleshed out how they’re actually going to do that. Instead, there’s been a lot of hand-waving toward technological innovation and the ability of the industry to rise to challenges, with a focus on things like improved extraction processes and the replacement of coke-fired boilers with higher-efficiency cogeneration units.

These are the sorts of improvements that have helped drive the per-barrel emissions associated with oil-sands production down by 21% between 2009 and 2017. But they haven’t prevented the industry’s overall emissions from rising, as soaring production has swamped these efficiency gains. For all the recent talk about low-carbon innovation, some industry watchers point out that Canadian oil companies haven’t really taken any meaningful risks yet. Suncor, for example, recently announced a $15-million investment in LanzaJet, a new venture that will make lower-carbon jet fuel and renewable diesel; the company also added $50 million to the $76.3 million it had already invested in Enerkem’s biofuels. But those figures are only a fraction of Suncor’s revised 2020 capital budget, which is expected to range between $3.6 and $4 billion.

“I think our pseudo-national oil companies are the least innovative national oil companies in the world,” says Sean Collins, founder of Terrapin Geothermics and an Energy Futures Lab fellow. “Even your Saudi Aramcos of the world are putting billions of dollars into direct renewables, and we’re nowhere to be seen.”

“I think our pseudo-national oil companies are the least innovative national oil companies in the world.”

–Sean Collins, Energy Futures Lab fellow

The idea of reducing production, rather than just the emissions associated with it, to meet net-zero goals remains largely taboo among industry leaders. When asked by the Financial Post back in February if his company would consider letting its production decline in the face of growing environmental concerns, Suncor CEO Mark Little said, “We don’t think that’s a solution.” By June, however, Little had written an op-ed in Corporate Knights stating that energy companies are “best positioned to invest in and lead energy transformation,” noting that “now is the time to take a big step forward.”

Canadian companies have yet to really take those steps – or undertake the same transformations that are proving profitable in Europe. In November 2017, for example, Italy’s ERG received €270 million for selling off its share of a joint venture that included 2,600 service stations and a minority stake in an oil refinery. That completed its transition from a company that owned refineries, pipelines and gas stations to one that invested primarily in wind, solar and hydroelectric projects – and since then, its shares are up nearly 50%. Earlier that year, Denmark’s Ørsted (formerly the Danish Oil and Gas Company) completed a similar transformation by selling its oil and gas business to petrochemical company Ineos for €$1.05 billion. Its shares have more than doubled since then. And the value of an investment in Finland’s Neste, which began as that country’s state oil company but has built a growing fleet of renewable diesel plants in recent years, has tripled over the same period. By comparison, the S&P Commodity Producers Oil & Gas Exploration & Production Index has been cut in half.

That sort of pivot would be harder to make for Canada’s oil and gas companies, which have many decades worth of reserves on their books (and nobody to sell them to). But they may not have to pivot as aggressively as their European peers. Instead, they could tap into those reserves and put them to uses other than combustion, from the creation of high-strength carbon fibre (which can displace steel) to the production of lower-carbon blue hydrogen. “That feels like a much different proposition than getting into solar or wind,” says Jamie Bonham, the director of corporate engagement at NEI Investments. “It feels like something that’s more in their wheelhouse.”

But if Canada’s oil and gas companies aren’t keeping up with the European supermajors, they’re at least ahead of their peers south of the border. The climate pledges of large integrated companies like ExxonMobil and Chevron are conspicuously modest, while the ones made by shale producers are effectively non-existent. Canadian oil companies have largely accepted the nature of the challenge and the need for tools like carbon pricing to help meet it. “The existence of this trajectory is something that’s no longer a debate,” Bonham says. “That puts the industry in a better place than its U.S. peers.”

Husky Energy, for example, recently announced that its executives will now be paid in part based on how effective the company is at achieving its target of reducing greenhouse gas emissions by 25% by 2025. “The conversation is beginning to occur in Canada,” says Janet Annesley, Husky’s senior vice-president of corporate affairs and human resources. Meanwhile, the relatively concentrated nature of Canada’s industry, both in terms of the number of companies and the geographic footprint of the assets they control, gives it an edge when it comes to deploying new technology. “When you have the world’s second-largest oil resource in one place, and projects that have a 30- to 50-year lifespan, you have the ability to focus on finding those solutions – versus some of the shale plays that are much shorter in life-span and are more dispersed and make the cost of applying those solutions so much greater,” Annesley says. “They can’t even really capture their methane down there because they don’t have the pipeline network.”

The big question now is whether those Canadian companies will take advantage of these relative strengths or squander them if and when oil prices recover. “The Canadian companies will say the words,” says Collins. “But do they believe it in their souls – that it’s the future? Because if you don’t, then as soon as prices rise again it’s back to your comfort zone.” Even if they continue moving in the right direction, Bonham worries that it’s not fast enough. “I feel like they’re on the right path, and they’re attacking some of the right issues. But it’s not entirely clear to me that the urgency of the moment is being fully embraced.”

Max Fawcett is a freelance writer and the former editor of Alberta Oil magazine.

Big Oil’s clean investments are still small fry

With oil companies committing to net-zero targets, Corporate Knights decided to follow the money to see exactly how much has been allocated to low-carbon investments so far. We tallied spending in R&D, capital expenditures, acquisitions and other investments (including joint ventures and share purchases in other companies). Here’s how it breaks down:

What % of their investments were clean in 2019?

BP: 0.77%
Chevron Corp.: 0.0%
Exxon Mobil Corp.: 0.0%
Royal Dutch Shell: 0.07%

Total SE: 0.0%

METHODOLOGY: Investments were determined to be clean if they corresponded with the Corporate Knights Clean Revenue Taxonomy. General commitments and future-oriented pledges were not included. If investments were spread over multiple years (e.g. a wind farm being built over three years) and the annual investment was not disclosed, the total investment was divided by the years the project would take to complete, determining an approximate annual expenditure. If no financial data was available, the investment value was marked as $0. All companies were contacted to verify the numbers.

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