Are Total and BP preparing to survive in a low-carbon world?

by Justine Mossé

Key Messages

• Oil and natural gas companies are ill-prepared for the emergence of a low-carbon world. On average, they allocate less than 1% of their capital expenditures to low-carbon projects.
• Total and BP recently unveiled their investment diversification strategies for 2030: How should we interpret these announcements?

Note: This analysis focuses solely on the forward-looking information highlighted by the two companies and not on the efforts they may have made to date.

• BP is moving toward a gradual withdrawal from its “exploration and production” segment: the British major plans to reduce its hydrocarbon production by 27% between 2019 and 2030^[1], a goal consistent with the Paris Agreement in this regard.
• Nevertheless, BP is focusing on diversifying its business lines, including in the field of fossils. The capacity of its LNG portfolio will double by 2030, and the group aims to become a more integrated player in the downstream gas markets
• Based on the information currently available, it is not possible to assess whether BP’s investment strategy is aligned with the Paris Agreement. Greater transparency in the breakdown of investments would be necessary to determine the proportion that is truly low-carbon.
• Total plans to increase its oil and gas production by about 15% in energy terms, even though it would need to decrease by about 8% to limit the rise in temperatures to below 2°C. Its production plan is therefore not in line with the Paris Agreement.
• Unlike BP, the French energy giant plans to keep its LNG portfolio at a stable level. Renewables and electricity are set to play an increasingly important role in its investments.
• To align its investment strategy with the recommendations of the International Energy Agency, Total will have to go a step further than the “minimum” target it has set.

Some background information: an oil and gas sector that remains largely undiversified

In January 2020, in a special report on the oil and gas industry^[2] The International Energy Agency (IEA) emphasized that “ capital allocation [invested by the sector] should evolve much more significantly to accelerate the energy transitions ". In fact, on average and worldwide, The oil and gas sector allocates a ridiculously small portion of its capital to transition energy sources : Large companies in the sector spend, on average, less than 1%of their capital expenditures for low-carbon projects^[3]. The distribution of these diversification investments demonstrates a strong commitment to production renewable electricity with a clear preference for the solar photovoltaics. Biofuels and carbon capture for storage or reuse (CCUS^[4]) account for a minority of investments—barely 10% in 2019. This provided the IEA with an opportunity to emphasize that Electricity cannot be the sole driver of diversification (and decarbonization) for oil and natural gas companies : “ It is also vital that companies commit to producing low-carbon hydrogen, biomethane, and so-called “advanced” biofuels^[5] ". Indeed, in a low-carbon world, Not all uses can be electrified : For example, modes of long-distance transportation for which a battery would be too heavy (air, sea, truck, etc.) will need to find other low-carbon energy sources.

Source: IEA, “The Oil and Gas Industry in Energy Transitions,” World Energy Outlook Special Report, January 2020

 If oil and natural gas companies invest the majority of their “transition” funds in renewable electricity projects, They are far from holding a dominant share of investments in this sector. In other words, it was not the traditional energy producers who made the boom in renewable electricity possible. On the other hand, These companies are heavily involved in CCUS : They accounted for 37% of investments in this sector during the 2015–2018 period.

Source: IEA, “The Oil and Gas Industry in Energy Transitions,” World Energy Outlook Special Report, January 2020

On average, oil and natural gas companies are therefore ill-prepared for the emergence of a low-carbon world, which poses a twofold problem:

• a problem for all of humanity: a slowdown in efforts to mitigate climate change (with extremely serious collective consequences);
• a challenge for the companies themselves: the exposure of companies and their shareholders to transition risks—a set of risks associated with the transition to an economic model aligned with the Paris Agreement^[6].

Are things set to change in Europe, especially following the announcements by BP and Total?

BP's Advertisements

In August 2020, BP announced an unprecedented goal of an absolute reduction in its hydrocarbon production : It is expected to decline by 42% between 2019 and 2030. Rosneft, in which BP holds a nearly 20% stake, is not included in the calculation of the commitment, however. When Rosneft is included, the reduction is less ambitious: it amounts to -27%^[7] between 2019 and 2030, assuming that Rosneft’s production remains stable over time. In its Paris Agreement-compatible scenario, the Sustainable Development Scenario (SDS), the IEA forecasts a reduction in fossil gas production by 2030 (-2% compared to 2019) and a reduction in oil production (-12% compared to 2019)^[8]. This translates to an overall 8% reduction in energy production from oil and gas between 2019 and 2030. BP’s fossil fuel production targets would therefore be largely consistent with the Paris Agreement for the period 2019–2030. In addition, BP has unveiled someinvestment projections whose proportions are apparently out of stock compared to past trends. The company plans to reduce its investments in hydrocarbons (exploration, production, refining, and trading of fossil fuels) in favor of two other growth drivers.

• First growth driver: “low-carbon energy”", which includes low-carbon electricity, bioenergy, CCS, and hydrogen. Please note that this category also includes a segment called “integrated gas and electricity.”, which includes, among other things, BP's liquefied natural gas (LNG) operations and its gas sales^[9].

Oil companies rarely resist the temptation to portray natural gas—even when it comes from fossil sources—as “low-carbon”. BP's investments in "low-carbon" energy are set to rise from 0.5 billion in 2019 to 5 billion in 2030, a tenfold increase, since the share of truly low-carbon investments (excluding natural gas) is not specified.

BP’s “Low-Carbon” Portfolio: Composition and Goals for 2030 Source: BP, 2020 Second-Quarter Earnings Presentation, August 2020

• Second growth driver: “convenience and mobility”, a category that includes, among other things, retail fuel sales and the exploration of future mobility solutions and the electrification of transportation.

  These two categories of activities will account for "40% or more" (~45% according to charts released by BP) of investments of BP by 2030. Assuming that BP’s capital expenditures remain stable over time—which is indeed projected for 2025—this means that BP’s historical business is set to be gradually replaced by new occupations.

*Launchpad is BP’s incubator. Note: The proportions shown in this chart are indicative of the 2025 and 2030 milestones; they are taken directly from a BP chart in which the boundaries between categories are blurred.

Source: BP, 2020 Second-Quarter Earnings Presentation, August 2020

  Despite the undeniable shift in BP’s capital allocation over the coming decade, It is difficult to determine exactly how much of it is truly low-carbon. For example, the company plans to double the capacity of its LNG portfolio, rising from 15 million metric tons produced in 2019 to 30 million in 2030, yet this portfolio is an integral part of the investments labeled “low-carbon.” Furthermore, efforts to “green” natural gas, while mentioned, are not detailed or quantified. The IEA’s SDS makes compliance with the Paris Agreement contingent on a 14% reduction in our annual capital expenditures on fossil fuels (liquids and gas) between 2017 and 2028.^[10]. Despite a reduction in capital expenditures allocated to its traditional hydrocarbon operations, estimated at ~35% between 2017 and 2028, It is not possible to conclude that BP’s investment strategy is aligned with the Paris Agreement:

• The big picture is missing, with Rosneft included in capital expenditures;
• We should take into account the increase in capital expenditures in the downstream gas sector.

Total's Announcements

Total’s Investor Day in September 2020 provided an opportunity for several significant announcements. The first major development, Total expects its oil production to remain flat or even decline slightly between 2019 and 2030. Gas production, meanwhile, continues to rise (+20%). In short, gas and oil production is increasing by about 15%, even though it was expected to decline by about 8%^[11] to limit the rise in temperatures to below 2°C. Total's production plan is therefore not in line with the Paris Agreement.

Note: It is surprising to see electricity listed here, as it is an energy carrier and not a primary form of energy. Total plans to generate its electricity from renewable sources and natural gas.

Sources: Total, “From Net Zero Ambition to Total Strategy,” September 2020

As for its investments, Total is projecting a slight absolute and relative decline in its investments in fossil fuel production and processing: The hydrocarbons and LNG categories listed below will decrease byat least $2 billion, or a 10% decrease, between the 2015–2020 period and the 2026–2030 period. The minimum targets for Total’s commitment are the only quantitative information provided^[12] and thus the only tangible evidence of its commitment: this “floor” target will need to be raised slightly to be compatible with the Paris Agreement^[13]. The segment "renewables and electricity" ...would rise from 10% of capital expenditures to 20% by the end of the decade. This last category will be only partially low-carbon Since Total intends to promote electricity generation from natural gas—which is set to increase 2.5-fold between 2020 and 2030—it will account for only 20% of Total’s generation mix in 2030, down from 75% today.

Sources: Total, “From Net Zero Ambition to Total Strategy,” September 2020; calculations by Carbone 4

Be careful not to conclude from this chart that Total is less ambitious than BP in terms of reallocating its investments. The green-shaded areas in the two charts are not comparable: as we noted above, BP included its downstream gas operations in a category labeled “low-carbon,” whereas Total treated them separately. Total's communication is therefore more transparent in this regard. However, neither of the two companies provides a detailed breakdown of its investments that would make it possible to determine the proportion that is truly low-carbon (non-fossil).

In conclusion, it is safe to say:

• that BP is moving toward a greater divestment of its “exploration and production” segment than Total: The British oil major plans to reduce its hydrocarbon production by 27% between 2019 and 2030, while Total is banking on an increase in production driven by natural gas.
• BP is therefore banking on greater diversification of its business lines, including in the fossil fuel sector. The capacity of its LNG portfolio is set to double by 2030, and the group aims to become a more integrated player in the downstream gas markets. Based on the information currently available, It is not possible to assess whether BP's investment strategy is aligned with the Paris Agreement. Greater transparency in the segmentation of investments would be necessary to identify the portion that is truly low-carbon.
• Total is moving toward a increase in its fossil fuel production driven by natural gas. Its oil production will remain flat or decline slightly by 2030.
• Unlike BP, the French oil major plans to keep its LNG portfolio at a stable level. These are renewable energy and electricity, which are set to play an increasingly important role in its investments.
• To align its investment strategy with the recommendations of the International Energy Agency, Total will have to go a step further than the “minimum” target it has set.

Focus - Renewable Electricity: BP vs. Total—Which Is More Ambitious?

• Total stands out significantly in terms of capacity (GW) in 2025 and 2030.
• However, capacity does not indicate how much electricity will be actually produced by each of the two players, as this depends on the technologies installed and their load factors: the TWh generated by each must be compared.
• Assuming that the generation mix remains the same as it is today for Total and BP, respectively, Total’s lead in this area is confirmed (and it would still hold true even if the share of solar power were higher—for example, under BP’s projected mix for 2030).

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Sources: Total, “From Net Zero Ambition to Total Strategy,” September 2020; Total, “Factbook 2019”; BP, “Second-Quarter 2020 Earnings Presentation,” August 2020; calculations and assumptions by Carbone 4

Thank you to Aurélien Schuller, Alexandre Joly, Nicolas Meunier, and Alain Grandjean for proofreading this text; and to Aida Tazi and Théophile Anquetin for their insights.

^[1] Estimate including Rosneft, source: Oil Change International, “Big Oil Reality Check: Assessing Oil and Gas Companies’ Climate Plans,” September 2020.

^[2] The Oil and Gas Industry in Energy Transitions, World Energy Outlook Special Report, IEA, January 2020.

^[3] This figure is provided by the IEA in its special report The Oil and Gas Industry in Energy Transitions: WEO Special Report as of January 2020. The oil and natural gas companies included in the calculation are international companies and the largest domestic companies. They account for 50% of current global oil production. ^[4] Carbon Capture, Utilization, and Storage.

^[5] Advanced biofuels include second-generation biofuels (produced from non-food feedstocks, such as agricultural residues) and third-generation biofuels (produced using photosynthetic microorganisms).

^[6] The Task Force on Climate-related Financial Disclosures defines four categories of transition risks: regulatory/legal risks, technological risks, market risks, and reputational risks.

^[7] Source: Oil Change International, “Big Oil Reality Check: Assessing Oil and Gas Companies’ Climate Plans,” September 2020.

^[8] Source: The Oil and Gas Industry in Energy Transitions, World Energy Outlook Special Report, IEA, January 2020. ^[9] BP's stated goal is to become an integrated player in the downstream gas markets by expanding into transportation, distribution, and electricity generation.

^[10] Source: The Oil and Gas Industry in Energy Transitions, World Energy Outlook Special Report, IEA, January 2020.

^[11] Source: The Oil and Gas Industry in Energy Transitions, World Energy Outlook Special Report, IEA, January 2020.

^[12] See page 10 of the document “From Net Zero Ambition to Total Strategy,” published last September.

^[13] As a reminder: The IEA’s Sustainable Development Scenario (SDS) states that compliance with the Paris Agreement requires a 14% reduction in our annual capital expenditures on fossil fuels (liquids and gas) between 2017 and 2028. Source: The Oil and Gas Industry in Energy Transitions, World Energy Outlook Special Report, IEA, January 2020.