It will be difficult to meet BP’s green energy target

London (Reuters) – BP (BP.L) Would need to invest tens of billions of dollars over the next decade and accept lower returns than oil, if it were to meet its goal of becoming one of the world’s largest renewable energy generators.

The British Oil and Gas Company renews 20 gigawatts (GW), such as wind, solar and hydroelectricity in its portfolio by 2030. It currently exceeds 2.5 GW and currently exceeds the total renewable capacity in the United Kingdom.

European oil firms are under pressure from activists, banks, investors and some governments to move away from fossil fuels and are trying to find a business model that offers more than just the production of renewable energy.

Last week, BP followed Annie (ENI.MI) Is committed to cutting its oil production in the coming decade and has set a larger target for cuts than the Italian company.

Analysts say large offshore wind farms probably provide the fastest route to increasing BP, but as they may take years to develop, and have high start-up costs, it may have to turn to acquisitions – And they won’t come cheap.

Peter Atherton, an associate of British strategy consultant Stonehaven, said, “It will be difficult to get value because these assets are very attractive and selling at very high prices.”

BP already has a $ 41 billion debt and as investors have increasingly moved from fossil fuel producers to green energy firms, its shares have been halved in the past two years, raising its market value to $ 80. Billion.

In contrast, shares in Orsted, Denmark (ORSTED.CO), One of the world’s largest offshore wind developers, has grown 135% to give a market value of $ 60 billion over the same period.

Orsted currently has 10 GW of installed wind power capacity – still only a fifth of BP’s target – and is committed to adding another 3.8 GW.

Spanish utility company Iberdrola (shares inIBE.MC), Which has a renewable power of 33 GW and is developing several projects, has jumped 78% in the last two years, bringing its market capitalization to $ 80 billion with BP.

According to the International Renewable Energy Agency, the global renewable capacity exceeds 2,500 GW, but it is expected to reduce emissions to meet the targets set under the 2015 Paris Climate Agreement.

Data from the International Energy Agency show that in the Organization for Economic Cooperation and Development last year, about a quarter of the electricity produced in countries was renewable, including wind, solar and hydropower.

(Graphic: Shares of renewable energy operators have better oil producers’ shares, here)

Strategy RISKS

In a strategy update on Tuesday, BP said it would cut its oil and gas production by 40% by 2030 and spend $ 5 billion per year on low-carbon projects that it expects to be the world’s largest green Power will turn into one of the producers.

It also plans to sell oil and gas assets, which would not be economically viable with lower oil prices to raise $ 25 billion dollars by 2025, to fund its transition to cleaner energy.

While trading with renewable energy companies at a high price-to-income ratio, analysts say BP may also build wind farms from scratch, but they will come with higher upfront costs.

For example, Iberdrola’s 3.1 GW East Anglia Wind Hub project off the British coast is expected to cost SSE ($) about $ 8 billionSSE.L) And totalTOTF.PA) 1.1 GW Seagreen 1 British offshore wind project costs approximately $ 3.7 billion.

Biraj Borkhataria, an analyst at Royal Bank of Canada, estimates that BP will have to spend around $ 60 billion to achieve its renewable target, and a 50/50 split between offshore wind and solar power generation.

On the assumption that 70% of the project could be raised through financing, BP would need to incur a net capital expenditure of $ 18 billion over the next decade, he said.

Jason Gammell, an analyst at investment bank Jefferies, put the bill for BP to project financing of more than $ 30 billion, but said the plan still relies on renewable energy assets, which are available and offering acceptable returns Has been

“Capital requirements recognize that there are sufficient opportunities available with acceptable rates of return, which we see as significant risks to the strategy,” he said.

(Graphic: Power targets of European oil and gas majors, here)

Large oil companies typically aim for a return on oil investment of around 15%. BP said it expected returns of 8% to 10% from its low-carbon electricity investment, with traditional oil and gas units pushing total returns from 12% to 14% by 2030.

Two of BP’s largest shareholders, BlackRock (BLK.N) And Vanguard, declined to comment on its renewal strategy. Mohra said it held most of its BP shares in index funds. Another big investor, Legal and General (LGEN.L), There was no immediate comment. Allianz and other fund managers (ALVG.DE), Did not respond to requests for comment. (Graphic: Renewable electricity generation by technology, here)

leap of faith?

BP chief executive Bernard Loney said last week on a conference call that the company would only go after renewable capacity that came with the right returns – rather than chasing capacity for it.

BP’s finance head Murai Auchincloss said in a single call that the company’s huge trading business, its ability to package renewable energy with natural gas to guarantee flow rates, and its expertise with currencies and hedging services “well In the double digit range “. .

Some analysts are skeptical.

Royal Bank of Canada’s Borkharia expects returns on renewal to be around 7%.

He said, “It is difficult to see them as double-digit return projects.” “The energy sector has been unable to execute its strategy on its core business, so I am not convinced to take another leap of faith on a new business.”

Head of oil and gas analyst at Fitch rating agency Dmitry Marinchenko said the renewal could now be a less profitable business, with BP betting that future oil and gas returns would be weak.

“Energy transition will be bumpy for road oil majors; He has little experience in renewables and new investments will subject him to performance risk. Not all investments will prove to be successful, ”he said.

“However, the ‘business as usual’ approach can be extremely risky in the long term. Resuming the business now that oil prices are relatively high should be easier than in 10 years’ time.”

    .