By Ron Bousso

LONDON (Reuters) – Deep in the Oman desert lies one of BP (NYSE:)’s more lucrative projects, a mass of steel pipes and cooling towers that showcases the British energy giant’s pioneering extraction technology.

According to financial filings that Reuters reviewed, the facility brought in more than $650m in profits for BP Plc in 2019. However, the oil company agreed earlier in the year to let go of a third its major stake. It is part of a bigger strategy by BP to liquidate its fossil-fuel assets and raise money to fund investments in renewable-energy projects. BP acknowledges the deal won’t pay off for several years.

The big gamble by BP is a clear example of the difficult decisions Big Oil faces. Global investors and regulators are pushing all major oil producers to produce cleaner energy and get rid of fossil fuels. This is a key issue for Big Oil. That scrutiny has increased since early August, when the United Nations panel on climate change warned in a landmark report https://www.reuters.com/article/us-climate-change-ipcc-report-idCAKBN2FA0JL that rising temperatures could soon spiral out of control.

Bernard Looney is betting that BP will make the transition to clean energy faster than other companies. Looney was last year the first chief executive of major oil companies to publicly announce that he planned to cut production in future. He aims at reducing BP’s output to 40% (roughly 1,000,000 barrels per day), which would be equal to the UK’s total daily production in 2019. BP also plans to increase its power generation from renewable resources to 50 gigawatts. That’s a 20-fold boost and equal to that of 50 U.S. nuclear plants. (For a graphic on BP’s clean-energy investment plans, see https://tmsnrt.rs/3fbaCJP)

To hit those targets, Looney plans $25 billion in fossil-fuel asset sales by 2025. It’s about 13% off the company’s total assets by the end 2019. Under his direction, BP already has sold about $15 billion in legacy projects. Looney also sold off BP’s entire petrochemical business, making a profit of $402 million in 2019 and unloading oil and gas resources in Alaska and North Sea.

According to Reuters, two of BP’s most important renewables investments are in danger of losing tens or millions of dollars. This is according to a review of financial filings at Companies House (Britain’s corporate registry). BP holds half of Lightsource. This solar-energy company lost a total of 59.3million pounds ($81.8m) between 2018 and 2019. The combined loss of bp pulse (a UK-based company that charges electric vehicles) was 22.3 million pounds ($30.8million).

Since BP doesn’t usually release financial statements for specific projects, the performance figures of other assets bought or sold recently by the company aren’t available. Reuters was not provided with updated financials by BP on these projects and others after 2019.

The company confirmed that the fast-growing business in clean energy, which includes its solar and EV-charging ventures, continues to lose cash. BP doesn’t expect to make any profits in these businesses until 2025.

Looney continues to invest in renewable energy despite the loss. His goal is to double his annual investment in renewable energy to $5Billion by 2030. That’s a 10-fold increase from 2019. This would mean that by 2030 there will be 70,000 charging points, up from the current 11,000. Lightsource has also recently constructed a rural Texas solar farm for $250 million and purchased an American solar company worth $220 million. BP also aggressively pursues offshore wind power. This is a significant cost-saving measure relative to other companies that have been in business for a while.

Looney launched the transition and cut 10,000 workers, about 15% of the workforce his predecessor had. BP’s share prices have fallen by 39%, making it the worst performing oil major in this period. (For a graphic comparing BP share prices to other oil majors, see https://tmsnrt.rs/3hhM0Ak)

In an interview with Reuters, BP Chief Financial Officer Murray Auchincloss dismissed the importance of the company’s recent share performance and said BP and its investors can weather the rapid transformation. According to him, the declining revenue from oil and gas this decade will partly be offset by higher revenues from gasoline stations as well as their associated convenience stores. Those stations will increasingly offer electric vehicle charging, a business Auchincloss said is growing much faster than BP had expected, especially in Europe, because of plans by automakers including BMW and Daimler AG (DE:), the parent company of Mercedes-Benz, to introduce more electric models.

Auchincloss claimed that electric vehicles are growing at an even faster rate than what we could ever have imagined.

Auchincloss predicted that BP’s solar and wind investments will return lower profits than the oil and gas industry. However, they’ll be more stable than those in the oil and gas business which is highly volatile. Prices can change dramatically. Auchincloss stated that the company plans to increase profits from its largest energy trading operation. This will be aided by BP’s focus on generating electricity.

Seven former and current BP executives talked to Reuters under anonymity about Looney’s plan for transition. While they supported Looney’s direction, the executives expressed mixed feelings about Looney’s speed in exchanging high-quality oil assets and making more speculative investments in renewable-energy. Some were concerned that BP could be left with a lot of lower-quality oil assets if it sells now. This will make it more difficult to move later, as everyone in the industry strives to shift to cleaner energy.

Recent attempts to sell oil assets show the growing difficulty of doing so. Premier Oil bought two stakes in North Sea oil fields from BP. It lowered the price of its deal by two-thirds during negotiations to $205 million. Premier was facing financial troubles late last year, and it ended up completely.

A former senior BP executive suggested that Looney might have erred by setting a target for renewable power capacity. This would make it difficult to achieve while still meeting profit targets. According to the ex-BP executive who recently left, it will be harder for these two competing goals as more industry competition heats up. The executive stated that investors will be disappointed if either of these goals is missed.

The current senior BP executive stated that Looney was supported by the company’s directors and has taken a courageous but practical strategy to address the industry’s vexing issues. According to this senior BP executive, the board “knows that you cannot please everyone” and “the worst thing you could do is refuse to take a position.”

David Nicholas, a spokesman for BP said that the company is “strictly controlled” when choosing renewable investments. This will enable Looney to meet corporate profit targets.

Looney must convince shareholders to join him on this wild ride that promises to bring BP to life, according to Russ Mould. Russ Mould is the investment director of AJ Bell which has 368,000 users.

Mould wrote in August to investors that BP still wants to sell assets. This sounds like an opportunity to sell low and buy high, while destroying shareholder value.

‘BEYOND PETROLEUM’ REDUX

Looney is a 50-year-old Irishman who grew up on a family farm in County Kerry with four siblings. In 1991, he joined BP to work as a drilling engineer. After rising through the ranks of the company’s oil-and-gas exploration & production division (or “upstream”, in industry parlance), he became its chief executive in 2016. Looney, a confident and charismatic leader set his sights on “reinventing” BP green-energy provider. He succeeded Bob Dudley as CEO.

Looney’s move may cause concern among shareholders, who will remember BP’s 1990s venture into renewables and the abandoned attempt to rebrand BP under “Beyond Petroleum”. John Browne, then-CEO of BP was the first major oil company chief to acknowledge climate change as a result of fossil fuels. Browne invested millions of dollars into solar and wind energy projects over the following decade. Browne didn’t respond to our request for comment.

BP will now invest in renewables, but it is also selling core oil and other gas assets. Oman is one of the largest natural gas fields in the world. Companies house reported that Oman earned a 17% return for capital invested in 2019.

Looney identified the Oman project as central to BP’s strategy when BP increased its Oman project’s output in October 2020. He has said he envisions natural gas, which has lower emissions of atmosphere-warming carbon than or coal, as a long-term revenue source to finance the company’s metamorphosis.

Despite being under increasing pressure from Looney to keep the ship afloat during the last coronavirus crisis that slowed global oil demand and lowered gas prices, Looney was able to withstand the mounting demands. According to one senior BP executive who was privy to their internal discussions, BP finished the year with $39billion in net debt. This level concerned Looney. Due to the decline in company value, this debt became problematic and impacted its credit rating. Executive said that the concerns stemmed also from difficulties convincing banks and investors that BP’s rapidly growing renewable-energy division could be profitable.

Looney called BP’s top leaders in early 2021 and asked them to find urgent ways to reduce their debt below $35 billion.

Soon after Looney called a meeting of BP’s top leadership and asked them to urgently find ways to reduce debt to below $35 billion. BP then announced that it had agreed to sell a part its Oman gas field stake for $2.6 million to Thailand’s PTT Exploration and Production. BP agreed to give up a third, or 20%, of its 60% ownership in this deal. BP reduced its debt by $33 billion through this and other transactions. This was made possible by the rising price of natural gas and oil.

The company sold the stake in the profitable Oman project to three former BP executives. This was due to difficulty finding buyers during the pandemic that left very few companies with the appetite to acquire assets.

Nicholas, a spokesman for BP said that BP planned to sell a share in Oman’s project prior to Looney’s drive to reduce debt.

Looney said in a short interview that he was pleased with the Oman stake price, and that he didn’t have to sell it.

Looney explained that there is no panic in Oman. Looney said that there is not a rush and net debt is under control.

Anish Kapadia of Palissy Advisors’ energy department said that Oman was sold at a relatively cheap price compared with similar natural-gas assets. Kapadia estimated that the earnings of Oman’s project would have led to a 25% increase in value. Kapadia suggested that BP could have earned substantially more by waiting for the recovery of oil and gas.

Kapadia described BP as “a profitable, long life, long reserve business.” Kapadia said that BP is selling its business to raise funds for other ventures. However, the proceeds won’t be used to finance a free-flowing cash stream in the foreseeable future.

Several months prior to the Oman deal in June 2020, BP had sold its petrochemicals division for $5 billion, which was in addition to the sale of its business. This transaction took place at the expense of chemicals giant INEOS. It was responsible for approximately 4% BP’s 2019 total profit.

Other majors have, however, targeted petrochemicals to grow and protect against long-term drops in oil demand. Royal Dutch Shell (LON:) and Exxon Mobil (NYSE:) have in recent years invested heavily in petrochemicals, which supply industries including plastics.

Nicholas, a spokesperson for BP, stated that the company sold a larger portion of its petrochemicals business in 2005 to INEOS. Only two of the specialist operations were retained by BP. He said that they sold the assets for a good price to a company who could incorporate them in their business.

Looney enjoys taking a new path, especially since the company posted strong profits in the second quarter of 2012 of $2.8billion due to its recovery oil-and gas business. Looney stated, however that he is motivated by the new cash flow to help him sell BP’s assets more quickly, as it will be easier for investors to invest in renewable energy.

Looney said that, “While we can understand some of the investor’s questions, we see a compelling proposition in order to deliver competitive returns in renewable energy.”

Mould (AJ Bell investment director) said Looney may be the most favorable strategy for BP, and other oil companies that are under severe pressure to improve their business. He said that investors who purchase BP shares at current low prices could reap strong long-term gains.

LOSS LEADERS

As BP’s fossil-fuel footprint shrinks, it faces a steep challenge in filling the financial void with profits from clean-energy ventures.

BP’s current losses are due to its renewable projects. In June 2018, BP bought Chargemaster, a bp electric-vehicle charging company, for 130 million pounds (or $179.3 million). The large oil company plans to improve the fortunes of its EV charging business by adding thousands more fast chargers and gas pumps to its vast network of service stations. Stations and the associated convenience stores are a major profit driver. BP believes that EV drivers will shop more and eat less while charging, which is slower than a regular gasoline fill-up.

BP made a $200 million deal in December 2017 to buy a 43% share in Lightsource. The firm now holds 50%. It operates 15 solar farms worldwide and has increased its capacity by three times since 2017.

Dev Sanyal (chief of BP’s renewables and natural gas businesses) stated that the solar-power business delivers more profits than off-shore wind which can take much longer. According to Lightsource BP CEO Nick Boyle, solar has lower initial returns than wind. This was confirmed in the 2019 filing that was reviewed by Reuters. Solar facilities are more cost-effective than wind, so the return increases gradually.

BP has appointed Anja-Isabel Dotzenrath as its head of natural gas, renewables, to replace Sanyal. This was another sign that Looney is trying to diversify from oil and natural gas.

PRICEY WIND PROJECTS

BP moved aggressively into offshore wind in October 2020 when it bought a 50% stake from Norwegian energy giant Equinor in two projects off the U.S. East Coast for about $1 billion. The next frontier in the oil industry is offshore projects. They are more complicated and require more capital than traditional onshore projects.

Many of the world’s top oil companies have been involved in deepwater drilling and production. Some companies, like Equinor and Shell, began their offshore wind projects many years ago. It is also well-established utilities such as Spain’s Iberdrola and Denmark’s Orsted.

BP has to pay a high price for entry because there is so much competition. Privately, rivals also say that BP pays a steep price. In February, BP and its partner Energie Baden-Württemberg AG paid 900 million pounds ($1.24 billion) for the rights to build two projects in the Irish Sea in Britain’s offshore wind licensing round.

Sanyal from BP acknowledged the high entry costs. He said that the long-term possibility of power-supply agreements will increase the reliability of the returns.

Sanyal stated that “you don’t have highs or lows like oil and gas.”

Investors will not know for years what the result of Looney’s bet on renewables. Kim Fustier from HSBC, an oil and gas analyst, stated that even BP’s rapid transformation is not enough to reduce climate damage. She estimates that BP’s revenues from low-carbon and renewable businesses will be 4% to 5% and 10% to 15% of overall earnings by 2030.

Fustier stated that this is not enough to convince investors to consider these businesses as part of the solution.

($1 = 0.7251 pounds)