BP’s activist challenge raises some awkward questions

Welcome back. Yesterday Saudi Aramco, the world’s biggest oil company, announced it was scrapping a major strategic commitment to increase its production capacity. That’s promising news for those who hope to see the energy sector cut its investments in fossil fuel projects. But as I explain below, private sector oil “supermajors” like BP are facing shareholder pressure to do just the opposite. Read on for more.

Energy Transition

The activist investor pushing BP to ditch green pledges

For a relatively small hedge fund, London-based Bluebell Capital Partners has got a lot of attention with its activist campaigns at big companies like Danone, Glencore and Solvay. Now, Bluebell has turned its sights on troubled oil company BP, urging it to drop green commitments and increase production of fossil fuels.

Bluebell’s 30-page letter to BP — which it sent in October shortly after acquiring a small stake in the company, but became public only this week — begins with the claim that the fund, which manages assets of $150mn, is a “passionate environmentalist”. While many will be bemused by this assertion given the nature of Bluebell’s new campaign, the letter does highlight some important questions around the economic incentives facing energy companies and their shareholders.

“I took this position because I want to follow up on how superficial this debate is sometimes,” Bluebell chief investment officer Giuseppe Bivona told me, arguing that there is too much focus on companies reducing fossil fuel supply, even as demand for oil and gas continues to rise. “The message we’re telling [BP] is: keep your flexibility to adjust to what will happen in the actual world.”

BP chair Helge Lund must feel that he is caught between a rock and a hard place. At last April’s annual meeting, he faced a rebellion over his reappointment by investors unhappy that BP had watered down its energy transition goals without seeking shareholder approval. Big investors including Amundi also backed a resolution from campaign group Follow This calling for a more ambitious decarbonisation plan.

Even after diluting its targets last year — it is now targeting a 25 per cent cut in oil and gas production from 2019 levels by 2030, instead of the 40 per cent reduction that had been announced three years earlier — BP’s strategy still looks a lot greener than those of its major rivals. And that, according to Bluebell, is the problem.

In February 2020, Bernard Looney took over as BP’s chief executive and swiftly unveiled a long-term strategy of reducing oil and gas production while making huge investments in low-carbon energy. Since then, BP’s share price has declined by 0.1 per cent as of yesterday, compared with a 34 per cent rise in the total market capitalisation of the four other “supermajors” (ExxonMobil, Chevron, Shell and TotalEnergies). Meanwhile, Bluebell notes, BP shares enjoyed a bounce last February when it announced the weakening of its green targets.

Bluebell says it is not averse to investments in renewable energy: it has previously invested in wind turbine maker Vestas and acquired a stake in RWE to bet on the German utility’s shift towards wind and solar energy.

The trouble, it says, is that BP is not set up for success in the intensely competitive renewables market. BP is targeting an internal rate of return of 6 to 8 per cent from its renewables investments — far below the 15-20 per cent returns it typically gets from its oil and gas business.

Bivona says this means the return could easily fall below BP’s cost of capital, which it estimates at 7 per cent. He also criticised the company’s strategy of pursuing clean energy growth through expensive acquisitions, and its aggressive bidding last year in a German offshore wind auction.

Other companies with a more established focus on renewable energy development are far better positioned to succeed in this space, Bivona claims. Instead of pumping billions into renewables projects that it is ill-placed to profit from, he argues, BP should return that cash to shareholders who can, if they choose, invest it in more competitive renewables companies. (Such questions are important in the wider debate around “transition finance”, as I explored here.)

BP has already been further softening its green messaging since Looney’s September departure, said Giacomo Romeo, an analyst at investment bank Jefferies. More than before, it is emphasising that the renewables strategy is primarily aimed at serving the electricity needs of its own operations, he said. It’s also putting more focus on its plans for blue hydrogen (made using natural gas) rather than green hydrogen (made by electrolysing water using renewable power), he added.

Still, Romeo said, “there is a moment of recognition that is still needed at BP — that the strategy that they have tried to adjust, in reality needs to be completely revisited. And I do agree that this is weighing on their valuation.”

Bluebell wants BP to rip up the existing strategy altogether. Instead of cutting oil and gas production, it wants BP to increase it from today’s 2.3mn barrels per day to 2.5mn per day in 2030. It wants it to halt investment in renewables and continue investing only in those low-carbon areas that tie in with its traditional business, such as bioenergy and hydrogen. That would enable a massive increase in payouts to shareholders, of a cumulative $16bn by 2030, Bluebell says.

Noting its imminent fourth-quarter results next week, BP declined to comment in detail on Bluebell’s arguments, issuing only the following statement:

BP welcomes constructive engagement with our shareholders. We have met with most of our major shareholders recently and continue to receive support for our strategy. We continue to make significant progress, remain focused on delivery, and are confident the strategy will grow the value of BP and deliver sustainable long-term value for shareholders.

Next week’s results presentation should give a hint of which way the wind is blowing inside BP’s headquarters. Murray Auchincloss, who stepped in as interim chief executive in September and was appointed on a permanent basis on January 17, has so far done nothing to signal a radical change of direction — and as Looney’s former chief financial officer, he has been a central architect of BP’s green strategy. Yet as the newly appointed boss, he still has an obvious opportunity to set a different course, as Wael Sawan did at Shell last year, watering down that company’s green goals.

Jefferies’ Romeo agrees with Bluebell’s argument that if BP does further row back its green commitments, this will have no significant negative climate impact and could even be positive. By divesting fossil fuel assets, Romeo argues, it could simply put them in the hands of less scrupulous owners who will produce just as much oil and gas but with less concern about pollution from the operations.

That debate around the wisdom of divestment continues to rage, and the argument above is fiercely contested by others. Other elements of Bluebell’s position seem more clearly problematic.

Notably, Bluebell suggests governments should admit that the goal of net zero emissions by 2050 is “unattainable”, and “pursue a more realistic and attainable target of at least 2075”. Global net zero by 2050 is indeed a highly ambitious goal, and we are currently badly off-track to achieve it. But to push that target back towards the end of this century — even as technological advances continue apace and momentum around green investment grows — would be an egregiously feeble move with potentially dire consequences.

It’s also hard to swallow Bivona’s assertion that “the technology is not there” to support a large-scale shift away from petroleum-fuelled cars in the foreseeable future. It would be difficult to make that claim with a straight face after a visit to Norway, where 82 per cent of cars sold last year were electric.

Yet the Norway example actually underscores Bluebell’s larger point in this new campaign. Norway’s auto market went electric not because companies spontaneously pledged to sell fewer petrol-powered cars, but because the government enacted policies that radically changed the economic and practical incentives for both producers and consumers.

If BP and its peers are to eliminate their massive contribution to global warming, good intentions and green epiphanies in their boardrooms might have a role to play. But the fundamental change must come through government policy, from supporting electric vehicle infrastructure to rigorous carbon pricing regimes.

Far from weakening national decarbonisation goals, governments need to take long overdue policy measures to make them feasible, by shifting economic incentives to align with a shift to green energy. As the recent record of BP and its peers — and their investors — shows, those incentives are today frighteningly insufficient.

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