BP profits come from fossil fuels – can they be replaced by renewables?

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BP PLC (LSE:BP.) is angering environmental groups with its attendance at COP26 in Glasgow while at the same time posting huge levels of cash flow in the latest quarterly update.


The oil giant has been accused of greenwashing several times, even though it plans to become a more sustainable business.


READ: BP shows how to make a convenient loss


Its renewables pipeline is currently sitting at 23GW, including 3.7GW of offshore wind and 19.6GW of solar developments.


Meanwhile, full-year production of fossil fuels is expected to be lower compared to last year as the FTSE 100 group continues its divestment programme, which is expected to generate US$6-7bn over the course of 2021. The total target is US$25bn by 2025.


However, upstream underlying production will be “slightly higher” than 2020 with the ramp-up of major projects, primarily in gas regions, partly offset by the impacts of reduced capital investment and decline in lower-margin gas assets.


Production from both oil operations and gas and ‘low carbon’ is forecast to be higher too.


Oil prices have continued to increase, and inventories have reduced back towards pre-pandemic levels, so BP expects oil prices to be supported by continued inventory draw-down, with the potential for additional demand from gas to oil switching.


“To give an idea of how much of a good thing the rise in oil and gas prices is for BP is that almost all of BP’s profit comes from its oil and gas operations and productions businesses, which is great news while prices remain high,” noted Michael Hewson, chief market analyst at CMC Markets.


“Demand is likely to hold up into the winter months, however management needs to have a plan other than returning cash to shareholders. The company can talk about ‘Performing while Transforming’ all it likes but it needs to prove to shareholders and the markets as a whole that it can transition to renewables in a way that doesn’t hammer its margins, and the jury is likely to remain out on that.”


Russ Mould, investment director at AJ Bell, gave somewhat optimistic commentary as he reckons BP will speed up change in the wake of events in Glasgow, even if there is no new landmark agreement.


“The company’s balance sheet also continued to improve for a sixth consecutive quarter which is encouraging given the need to invest in a transition away from fossil fuels,” he said.


“There is no suggestion that BP will respond to higher oil and gas prices by investing in lots of new fossil fuel projects, however the temptation to keep fields running a bit longer when they are generating such high levels of cash could creep in, particularly given the long-term nature of its net zero targets and the much shorter typical tenures of the people in charge.”


According to environmental group ClientEarth, claiming that natural gas is clean or needed as backup for renewable energy is often a greenwashing weapon used by oil companies, alongside boasting the benefits of carbon offsetting or carbon capture.


Natural gas producers may have an increasingly harder time after US President Joe Biden will restore rules to better control methane leaks from oil and gas wells in the country.


BP shed 3% to 344.99p on Tuesday before close.

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