Sep 19, 2020
Earlier this year, BP joined other oil majors in pledging to emissions reductions and even aiming to reach net-zero emissions. The announcement was met with a mix of praise and skepticism--including from UCS. But then, just last week, BP invested $1.1 billion to buy a 50% stake in a U.S. offshore wind project. And this week, it announced in its annual energy forecasting that we may have already hit peak oil, or will hit it within the next decade.
Now, I don't talk about oil and gas very often, but it is an industry I'm all too familiar with. My first job out of college was working as a consultant to oil and gas (O&G) companies. In that capacity, I visited oil refineries across the U.S. conducting environmental surveys and conducting engineering studies.
Jigar Shah is perhaps best known as the founder of SunEdison, co-founder/president of Generate Capital, and co-host of the Energy Gang. Now known as the "Kanye West of Solar," he too got his start in O&G. For 4 years, Jigar worked as an analyst for BP Solar working on solar, wind, hydrogen, and natural gas for the company.
I sat down with Jigar to discuss what the future holds for BP and other major oil and gas companies that are looking to transition from being an O&G company into an energy company of the future.
Joe: So, what are your thoughts on these recent pledges? Do you think oil companies like BP are well poised at this time to transition to clean resources?
Jigar: This has always been a question of dedication and therefore motivation. The oil companies are really some of the best engineering and risk management companies in the world. From regulatory affairs and changing popular opinion, they work in some of the toughest environments on the planet. Those same skills have always been needed in decarbonization--it was just never a priority for shareholders. Now the shareholders are demanding a shift.
Joe: So, this is being driven by shareholders. I can't help but wonder what roles advocates, including UCS, have had in that. After all, advocates have campaigned to influence shareholders, particularly institutional shareholders like Norgis, Blackrock, and Vanguard. Any thoughts on that?
Jigar: To be honest, advocates are useful, but this has largely been about resource availability. The U.K. transitioned from coal right around the time coal production was falling and coal imports were rising. The late Matt Simmons wrote a prescient book in 2005 predicting peak conventional oil production and he was right. According to the International Energy Agency, conventional crude oil production peaked in 2006. And what BP said is that unconventional oil has largely been a bust resulting in an overall return of just 8.5% for them overall. All of the oil majors have stated goals of 15% returns on oil explorations and have dramatically underperformed because the economy can't handle a sustained oil price of $100/bbl.
Joe: It's probably worth noting that this would not be the first time BP tried to market itself as being "Beyond Petroleum." Are the circumstances today any different?
Jigar: I would say the circumstances are the same. John Browne realized that conventional oil was peaking in the 2000s and that the future of their business was natural gas and clean energy. The reason was that all of their investments required profits at $30/bbl oil and that wasn't possible in conventional fields available to BP. So he went after the one frontier that was left which was Russia and started transitioning the company to gas and clean energy. He was ousted from the company by folks that didn't want to make that transition. Today, the reality he saw in 2000s has come fully true such that everyone sees the reality--including shareholders. Bernard Looney will be given a chance to continue Lord Browne's legacy but if he is slow or unsuccessful, then my sense is that BP will be cut up into pieces and sold off.
Joe: BP has been at the center of some major disasters including the Deepwater Horizon oil spill and the Texas City refinery explosion. Plus, there are the emissions at refineries that disproportionately affect low income and communities of color; not to mention the pollution from burning refined products... Do companies like BP need to make amends for their past before they move forward?
Jigar: I think we all need to take some responsibility for their actions. Any actions they took to mislead the public through false advertising and financing of climate deniers is fair game. But the siting of plants in frontline communities and the extraordinary growth in their markets came from consistent consumer demand for their products. In fact, for the entire 20th century, great use of petroleum was synonymous with a better standard of living. It is only in the last few years that we have dedicated ourselves to decouple growth from increased fossil fuel consumption. Shell did try to apologize for its previous sins and I do think that atonement is important, but let's not make ourselves feel better by putting 100% of the blame on oil and gas companies.
Joe: I'm not sure it's fair to blame us, as consumers, for BP's lax safety standards that led to the major accidents and loss of human life associated with BP Texas City and Deepwater Horizon. Speaking from my own experiences at refineries, I've seen companies turn down proposals that would reduce the amount of pollution they release into the communities where they operate in order to preserve profit margins. Do you really think that consumers should be blamed for those decisions?
Jigar: I agree that the oil companies have a legacy of pollution and bad behavior around the world. Some of the most egregious are the safety violations you cite. There are also examples of human rights violations in Ecuador and Nigeria. One of the worst violations was the Exxon Valdez spill off the State of Alaska. But I do think that consumers should take some responsibility for their "see no evil, hear no evil" approach to conspicuous consumptions. People never ask how energy prices can be so low and how we can afford to waste resources at scale with the creation of suburbs.
Joe: You also mention the role of these companies in misleading the public--is it really fair to blame the public when they've been willfully misled?
Jigar: There were 20 million people that marched or expressed protest on the first Earth Day. That was almost 10% of the U.S. population. Fifty years later, that number is far smaller in the USA. People have gotten lazy. They register their protest on social media instead of demanding action from their elected officials, utility companies and other pressure points. I am glad to see the passion in the divestment movement, but we can't expect large corporations to sit by while their core product/shareholders are under siege. I don't condone their behavior but all people that are losing their right to make money fight like hell to keep up their standing.
Joe: When I was working at oil refineries, BP's corporate culture seemed to promote "profits over all else" and its reputation for cutting corners on health safety and environment were well known. Recently there have been more conscious movements to reform organizations to detoxify their internal culture, including addressing gender and racial injustices. Do organizations need to detoxify their internal culture prior to detoxifying their business model, or can it be done at the same time?
Jigar: This is the reason that Environmental, Social, Governance (ESG) movements have been so important. This is not something that we are doing/imposing to make people feel good. Companies that truly care about safety, the well-being of their employees, and their environment have better financial performance. Companies that are good corporate citizens and hold themselves to high standards on governance makes less mistakes and find that they save themselves from their worst excesses. BP should detoxify as should everyone else because it is good business and leads to a more productive workforce.
Joe: And what can BP specifically do to accomplish those reforms?
Jigar: This generally starts with changing out the people. It is pretty hard to make these types of reforms without new people. Once you have new people dedicated to changing then you have to really be in folks' faces about it. You have to make people practice. But more importantly, you have to have a culture of responsibility at the top where people are modelling good behavior. People ultimately watch more than they listen.
Joe: Where are the pitfalls, where could a company like BP screw this all up?
Jigar: Companies like BP are likely to screw this up. This is why companies that do make the transition are heralded. I think BP has new leadership and their heart is in the right place. I worry they will go after solar and wind because it is familiar and not go after the truly innovative stuff where their expertise can differentiate them. They should do solar and wind in emerging markets. In the OECD they should be doing advanced liquid fuels, green hydrogen, waste-to-value, renewable natural gas, and geothermal energy. Be bold or slowly decay.
Joe: Okay, so do you think this will happen? I mean, what betting odds would you give BP's chances to make this transition? And, do you think other oil majors will follow?
Jigar: Let's be honest, this kind of transition really has no precedent. To be a Supermajor in one sector and transition to another is almost impossible. I think that BP has been working to change their culture in this area since Lord John Browne. So I think they have a shot and many of us will have to help them make the transition. But this will be hard. I think if BP does this fast, they will attract followers from their peer group. But if this goes slowly, then their peer group will likely not follow and their own chances of success will be next to impossible.
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