BP’s big challenge in funding its transition to renewable energy
Oil major BP (BP.) has nailed its colours to the mast: it wants to become a cleaner and greener company over time. However, the problem is that it still derives nearly all of its profit and cash flow from its oil and gas assets.
The company’s latest full year results showed output at a four-year low and as more assets are sold off and investment in them dries up, this figure is likely to fall further.
The company’s reserves replacement ratio, measuring the extent to which the year’s production has been replaced by proven reserves added to the reserve base, came in at 78% and the longer this number is below 100% the larger the medium-term impact on production.
Some of this relates to what BP will hope is a short-term collapse in demand for oil and products refined from oil in the wake of the pandemic, however it could take some time for consumption of jet fuel, in particular, to recover.
Another challenge facing BP is competition and rising prices as it looks to deploy capital into alternative energy projects, particularly as it is aiming to reduce debt, maintain dividends and even introduce share buybacks. Ultimately it feels like something will have to give.