Bernard answers five key questions

Some people think it is not enough – it should be 100%.  Others think 40% is too much.

This is what we believe:

First, we have worked hard to find a balance that enables growth in cashflow and returns – or EBIDA and ROACE as we define them – at the same time as transforming the company. At the core is a relentless focus on value over volume. It’s a difficult balance to find, but we believe we have found it. 

What does that enable? 

• We can deploy our highly skilled workforce on only the highest margin barrels.
  
• We will reduce capital intensity. With our long wave of investment in new projects coming to an end – as well as our cost and efficiency drive – we expect our development costs to come down to around $9 per barrel, well below our 2019 depreciation rate of $16 per barrel. 
  
• And we can maximize value by divesting assets where they are worth more to others.
  

Second, in redeploying capital into low carbon and capturing growth in these markets, we decarbonize and diversify bp – and, in doing so, reduce risk.

And third, a 40% reduction by 2030 puts us well on the way towards becoming a net zero company by 2050 or sooner.

This is a clear source of differentiation for us – and one that we believe is right for where we want to take bp and for the energy transition.

And to dispel any myths about a fire sale – we are in no rush to sell our hydrocarbon assets.

We have a strong balance sheet underpinned by a wall of cash and reinforced by our recent $12 billion hybrid issuance and the disposal of our Petrochemicals business.

The $25 billion divestment programme is already 50% underpinned by agreed transactions with a suite of options being developed for the other half.

So, the decisions we take over the coming years will be thoughtful, value-driven and disciplined – and will continue to enable us to high-grade our portfolio:

• Building resilience to low prices while remaining leveraged to higher prices.
• Reducing operational emissions.
• And, allowing us to achieve higher margins overall.
  

Fundamentally, this question gets at how we will maintain the necessary cashflows from hydrocarbons while we scale our low carbon and transition businesses.

I will provide more detail on how we expect each of the three vertical focus areas to contribute – and start, quite deliberately, with convenience and mobility, which is a business driving rateable growth over the period.

• It has grown pre-tax earnings by 7% each year since 2014.
  
• It is a high-quality business exposed to major growth markets and with a track record of delivering around 20% returns.
  
• And we expect our strong brands and partnerships to contribute towards a near doubling in earnings through to 2030, while maintaining these strong returns.

Turning next to resilient hydrocarbons.

Firstly, this is not about turning off one tap and turning on a different one. This is about adjusting the flows.

This part of our business is an engine of cashflow that is running really well and we intend to keep it that way.

• In oil and gas, we have 25 major projects online – eight due to come online before the end of 2021 – and 11 more in the next few years, adding to a wave of higher margin production.
  
• We have improved plant reliability by 1% over the past five years – adding almost $200 million in gross margin last year, compared with 2014 – and we are planning for another 1.6% improvement by the middle of this decade.
  
• We are holding our base decline to between 3 and 5%. We have a resilient and high-graded refining business with strong availability and top-quartile refining margins.
  
• And we are rolling out more efficient ways of working – like agile, centralization and digital technologies – that have had remarkable impacts where they’ve already been introduced, like in Azerbaijan.
  

And finally, to low carbon electricity and energy, where we will initially invest to grow, being disciplined in our choices, and expect it to make more of a contribution in the second half of the decade.

When put together, we see all this contributing to growing cashflow over the next five years.

• Taken together, underlying EBIDA is expected to grow by 5 to 6% per year through to 2025 with returns in the range of 12 to 14% in 2025 – up from around 9% today.
  
• And after allowing for the impact of divestments, and reflecting the expected share buyback commitment, EBIDA per share is expected to grow by 7 to 9% per year through to 2025.
  
• And then from 2025, the transition really begins as we head towards 30% of our capital base being invested in the energy transition by 2030. We do expect the contribution from our oil, gas and refining businesses to decline over this latter period.
  

But we expect this decline to be more than offset by rateable growth in convenience and mobility.

And in low carbon electricity and energy where we expect EBITDA growth to accelerate as the capital we are investing matures and we begin to see the benefit of scale across the business.

We also expect to sustain returns at 12-14%.

We are aiming to have developed 50 gigawatts of net renewable generating capacity by 2030.

In answer to the question, we think this is realistic and it is achievable – and we think so for the following three reasons:

• One – it represents between 1 and 4% of total global capacity that we see being developed over this period across the scenarios that our chief economist Spencer Dale introduced in the Energy Outlook.
  
• Two – our track record, which EVP for gas and low carbon energy Dev Sanyal will describe in detail.
  
• Three – the pipeline we are building.

Now, starting first with the capacity being developed, it is really important to put the 50 gigawatts into context. We expect the market to grow dramatically – in the Rapid scenario it triples in size, from around 1,400 gigawatts today to around 4,700 by 2030.

But even in the Business As Usual scenario, there is substantial growth, with the market more than doubling in size.

In terms of pipeline – across solar, biopower, onshore wind and now offshore wind we already have a pipeline of projects at different stages of maturity that add up to about 20 gigawatts of capacity.

Lightsourcebp alone has 16 gigawatts in its pipeline – up from 9.8 gigawatts this time last year and just 1.6 gigawatts in 2018.

And, of course, we are now entering the offshore wind sector, which is growing faster than any other form of renewable energy.

I am really excited about the partnership we have agreed to create with Equinor. They are a world-class offshore wind company and we look forward to growing with them.

But let me be clear. We know what happens when volume becomes more important than value.

And, therefore, we will only pursue opportunities that we believe can generate the disciplined returns we expect, and our shareholders expect.

And that links to the fourth question.

The answer is very simply – yes.

We actually believe we can do better, and these returns could turn out to be conservative.

But let me take you through why we have absolute confidence in our plan. It is firstly based on experience – specifically, with Lightsourcebp.

Since we formed the partnership at the start of 2018, Lightsourcebp has expanded its presence from five to 13 countries.

As I mentioned, it has grown its project pipeline from 1.6 gigawatts to 16.

And it has delivered 17 projects since 2018. They typically achieve returns in the 8 to 10% range.

So, how do we get to 8 to 10% across our renewables portfolio as a whole?

•  First, we know returns start at around 5 to 6% on an equity basis in a competitive auction.
• Second, we believe that through our extensive experience in operations and project management, we can add value through applying our processes. We have track record here. For example, in biofuels – where we have, and more recently through bp Bunge joint venture, increased the efficiency in harvesting by 50% since 2016.
• Third, we’ll integrate with the rest of bp. Through trading, where we have a long track record – more than 30 years – of delivering close to a 2% return uplift.
  • Or through the application of our digital expertise to drive additional performance.
  • Or by bundling our renewables offer with different forms of energy along with our natural climate solutions and offsets portfolio, to give customers what they want – clean, low-cost and firm energy.
    
• Fourth, we will use leverage, which is typical in this industry. The combination of these four areas gets us to 8-10%.
  
  Beyond this, we have the choice to optimize the portfolio – to farm down or not – and if we do, that could add a further 1 to 2%.

So, yes – we are confident we can deliver the returns we are targeting.

Especially in this new world. And there are four reasons:

• First – our strong track record in operations and project management.
• Second – our focus on relationships and partnerships around the world.
• Third – our approach to digital and how we are using it to drive cost benefits and generate incremental value.
• Fourth – integration and, specifically, our ability to integrate at a global level and across energy vectors.

Starting with operations and project management. Today, we are strong in oil and gas, strong in refining and have demonstrated how many of these technical skills are transferable.

• We have an exceptional global project management organization – top-quartile in four out of five assessments of project teams made by the leading analysts for the oil and gas sector, the IPA. We will apply this to low carbon energy and electricity.
• We have a track record of improving oil and gas plant and wells reliability over the past five years.
• And in refining we have delivered two consecutive years of record throughput benefiting from sustained high levels of availability – and we are bringing that focus on operational excellence to our new businesses.
• In terms of relationships and partnerships, we are privileged to be working with many of the world’s best companies.
• We like to team up with those who have strengths that we don’t – and we will continue to do so. In the convenience sector, we are partners with M&S, Rewe and Reliance.
• In EV charging, we are partnering with DiDi in China, and now Uber in the UK.
• In energy provision,we are partnering with Amazon and have another big corporate partnership to announce this week, so stay tuned. In data science, we are partnering with Palantir and Beyond Limits.  

Where we lack capability – such as in solar development – we formed a joint venture in Lightsourcebp – and we now have a deep execution capability to prosecute our solar buildout. We bought Chargemaster to do the same in EV charging. And the partnership we have agreed to create with Equinor takes us into offshore wind.

Everyone talks about being good at partnerships, but we genuinely embrace them. We believe in the power of working together – where one plus one makes more than two.

But what we really like is where partnerships can take you. As an example, who would have thought that when we first worked with Reliance in India 10 years ago, that this would result in a compelling partnership in retail with Jio –  one of the world’s fastest-growing brands – to establish 5,500 service stations by 2025 in one of the great growth markets of the world?

Thirdly, digital.

We believe digital is a real source of differentiation for us.

• It has a central integrating role in enabling value creation across bp. It is an area we have invested in and will continue to – doubling our investment over the coming years.
  
• And we believe we are creating a track record of success. For example, in our oil and gas business, where we believe we are one of the leading digital oil and gas companies.
  

This is due in large part to the collaboration with Palantir – where we have invested in data platforms, advanced analytics and data visualization, delivering significant value over the past three years.

And it is this approach to collaboration and partnerships, and our own mindset around innovation, that are key to challenging our thinking, to building capability and, importantly, in enabling us to access new opportunities and new markets.

And, fourthly, integration:

As we said earlier, customers are demanding integrated solutions that give them firm, cheap and cleaner energy.

Very few companies can do this. We believe we have the skills to integrate these hugely complex ecosystems and give those customers a solution – energy when they need it, how they need it, and where they need it.

That could be electricity for their fleets, their cars; biojet for air travel; or hydrogen for heavy transport. Providing these multi-energy solutions is a lot more complicated than it has been in the past, with complexity creating barriers to entry that only a few companies can overcome.

And this is where bp can thrive. As Murray said in August – we love complexity like this. And it is why we have elevated our trading function to the leadership table – to help enable this, connecting all our businesses and assets, and optimizing them at scale – across geographies and across commodities.

And let me finish with a final reason as to ‘why bp’. It is something you can’t put into a spreadsheet – but, in my opinion, probably matters more than anything else.

We have a massive determination to make this work and deliver what we laid out. We need to deliver for our employees. And they want to deliver. For them – executing our new strategy is not just about coming to work to do a job. It is about coming to work to reimagine energy for people and our planet.

And bp is a company of people who are motivated by that – and who really want to help the world reach net zero and improve people’s lives.

As well as for our employees – we need to deliver for our shareholders and for society. And we want to. And we will.