There was a fair degree of scepticism four months ago when Bernard Looney, BP’s new chief executive, unveiled plans for the oil major to go net zero carbon by 2050.
Investors were concerned at the lack of detail – something BP promised to flesh out later this year.
Campaigners on climate change, meanwhile, said the company was not going far enough.
Charlie Kronick, oil adviser at Greenpeace UK, said: “How will they reach net zero? Will it be through offsetting? When will they stop wasting billions on drilling for new oil and gas we can’t burn?”
Rachel Kennerley, of Friends of the Earth, added: “The world is burning, and they want to carry on supplying the fuel. Governments must call time on dirty gas, coal and oil, and on those companies wanting to keep the fossil fuel addiction alive and kicking.”
It would appear that Mr Looney is, to an extent, in agreement.
While the headlines have naturally been grabbed by the huge write-downs announced by BP on Monday, the most interesting aspect to these impairment charges is not their sheer size, but the reason for them.
The company clearly believes that the COVID-19 pandemic will change the world forever and that one of those changes will be an acceleration in the transition to a lower carbon world.
That means a hit to demand for oil and, accordingly, lower oil and gas prices.
And that, in turn, means that not all of the projects in which BP has been investing will be economic at an average Brent crude price of $55 a barrel instead of the $75 a barrel previously assumed.
It was all summed up in this crucial paragraph in BP’s statement today: “BP is… reviewing its intent to develop some of its exploration prospects.”
Put another way, in the words beloved of climate change campaigners, some of the oil BP was previously planning to pump until today will now be “left in the ground”.
It is a big moment in the history of Big Oil. The announcement is the first public acknowledgement from a major oil and gas producer that the pandemic could result in the energy transition – and the accompanying fall in oil and gas prices – being more rapid than expected.
Shares of BP fell by as much as 6.5% at one point on the news but, arguably, investors ought to have seen this coming after Mr Looney told the Financial Times last month: “I can only see COVID-19 adding to the challenges of oil in the years ahead. We don’t know how it’s all going to play out. But it’s gotten more likely to have oil be less in demand.”
The big question for investors now is whether BP is likely to cut its dividend in the way its rival Shell did last month.
This would have huge implications for millions of savers because, following the Shell cut, BP is now the biggest single payer of dividends to UK pension funds.
Most analysts suggest it would be logical for BP to now cut its payout in view of the fact that, with oil and gas prices set to fall, oil and gas production likely to be lower and heavy investment likely to be needed in low carbon investments, the company will be looking to save cash.
Biraj Borkhataria, an analyst at RBC Capital Markets, said: “BP’s balance sheet was stretched even without this impairment and is likely to look even more stretched following it. The dividend will need to be right-sized to suit the environment and BP’s longer-term plans.”
Allen Good, equity analyst at investment research firm Morningstar, said: “While BP didn’t comment on the dividend, the implications from the announcement don’t support a continuation at current levels, in our view.
“A dividend cut was already a possibility after the sharp drop in oil prices in March, given BP’s high debt load, and the probability increased after Shell cut its dividend.
“Now BP management is signalling continued uncertainty, lower oil prices, and a desire to invest outside of the oil and gas business, all factors cited by Shell’s management in its decision.”
Jason Gammel, oil and gas analyst at broker Jefferies International, added: “The Shell dividend cut does give it some cover. BP is currently yielding 11.0% vs Shell at 3.8%; if the stocks should trade at similar yields then BP is pricing in a 65% cut.”
BP’s dividend aside, another big question is whether other oil and gas majors, having seen what BP has done, decide to step up the pace of transition themselves. Shell, too, has published proposals on how it intends to become a net zero emissions energy business by 2050 and other European majors, such as Total of France and Repsol of Spain, also have ambitions to transition into low or zero carbon companies.
Yet that puts extra strain on the balance sheet at a time of weakening oil and gas prices and makes dividend cuts likely there too. Total and Repsol have yet to cut their payouts.
The bigger difference is with the US majors, ExxonMobil and Chevron, both of which are furiously cutting costs in order to be able to maintain their dividends.
Both are also dragging their feet in terms of a transition to a world capable of meeting the Paris climate goals.