Energy Musings - March 3, 2025
The U.S. Export-Import Bank financing a foreign LNG project that competes with domestic exports is questionable. Will BP's new strategy succeed? We trace its shifting strategy history.
Misguided Policies: BP and Export-Import Bank
Last week, the oil and gas news was dominated by the BP plc “new” strategy unveiling and the revelation that the U.S. Export-Import Bank was financing a foreign liquefied natural gas (LNG) project.
Last Friday, the Wall Street Journal (WSJ) wrote an editorial about the Export-Import (Exim) Bank’s $4.7 billion loan to France’s TotalEnergies, equal to roughly a quarter of the cost of its $20 billion Mozambique LNG export project. The East African country has been beset by conflict and instability for years but has massive natural gas reserves off its coast. The political instability and violence have kept private investors away, making government financing the only option. The Exim Bank’s 2020 approval of the loan was based on fear China or Russia would fund the project otherwise.
However, as the WSJ editors wrote: “The ExIm Bank’s putative purpose is to finance purchases of U.S. exports and make American products more globally competitive. In practice, the agency finances investments by big businesses that primarily benefit foreign companies and governments, much like the U.S. Agency for International Development.”
The editors wanted to know why the U.S. taxpayers should be financing a project that competes with our LNG export industry and does not rely on government support. Moreover, during the final year of the Biden administration, it “paused” approvals for LNG exports to countries with which the United States does not have free trade agreements. Their rationale was that the economic and environmental analyses the Department of Energy uses to evaluate projects are five years old. They said the analyses “no longer adequately account for considerations like potential energy cost increases for American consumers and manufacturers beyond current authorizations or the latest assessment of the impact of greenhouse gas emissions.”
Although TotalEnergies has said it planned to increase its investment in U.S. LNG, the editors noted that France increased Russian LNG imports by 81% in 2024. Moreover, TotalEnergies did not withdraw from Russia following its invasion of Ukraine. It owns stakes in three Russian LNG export projects. The company also signed “a strategic cooperation agreement to deepen their collaboration” with China Petroleum and Chemical Corporation, a state-owned company.
The editors speculated that TotalEnergies was leveraging its Russia and China partnerships to pressure the U.S. to help finance the Mozambique project. They said the Exim Bank used a similar rationale to approve a $1.6 billion loan guarantee for an Angola solar and battery project. The WSJ noted that Congressional Republicans could let the Exim’s authorization lapse next year and “claim victory for shutting down at least one agency.” That would be a victory since it seems it will be difficult to derail Exim’s loan. Speeding up LNG terminal approvals after the pause would be another victory.
BP’s New Strategy
Last week, the other big news about the oil and gas industry was BP’s Investor Day presentation, in which its CEO, Murray Auchincloss, introduced the company’s new strategy. This is the latest BP strategy shift in the past quarter century. We count four strategy shifts. They include a focus on renewable energy, followed by a strong focus and investment in Russia’s oil and gas industry, and then a quick divestment after the outbreak of the Ukraine war. Renewable energy became the core of the new strategy, only to be de-emphasized with an increased commitment to boosting oil and gas production.
Lord John Browne, BP’s CEO from 1995 to 2007, initiated the company’s move into renewable energy and described the strategy as “Beyond Petroleum.” He was also the architect of possibly BP’s most successful oil and gas venture, but more later.
In 1997, Browne embraced the climate change movement in a speech at Stanford University, where he broke ranks with other leading oil company CEOs. He was a friend of newly elected prime minister Tony Blair, who was interested in climate issues and initiated policies putting the U.K. into the lead for cutting emissions and moving the nation’s energy system away from fossil fuels. He lobbied other Western governments to join the U.K. in this mission.
Browne referenced the recently published UN Intergovernmental Panel on Climate Change report in his speech. “There is now an effective consensus among the world’s leading scientists and serious and well-informed people outside the scientific community that there is a discernible human influence on the climate and a link between the concentration of carbon dioxide and the increase in temperature … it would be unwise and potentially dangerous to ignore the mounting concern,” he said. He added: “If we are to take responsibility for the future of our planet, then it falls to us to begin to take precautionary action now.”
Interestingly, Browne warned against “dramatic, sudden” action that sought “at a stroke” to drastically restrict the emission of carbon through the use of fossil fuels because of the impact on economic growth and the developing world. However, he simultaneously committed BP to the Rio Earth Summit climate agreements.
“What we propose to do is substantial, real, and measurable,” he told the audience. “I believe it will make a difference.”
Browne committed BP to “five steps” to tackle climate change. These included reducing operational greenhouse emissions, funding research and development, jointly developing new technologies, investing in alternative fuels, and “contribut[ing] to the public policy debate in the search for wider global solutions.” One tangible step Browne took was investing $1 billion in solar energy, an action that Shell shortly followed with a $500 million solar investment. His actions won the backing of Greenpeace UK.
Browne’s speech and BP’s actions ensured the demise of the Global Climate Coalition, which was formed by businesses opposed to immediate action to reduce greenhouse gas emissions. It also drove a wedge between senior political advisors within BP. The speech split the environmental movement into those remaining distrustful of BP and others who wanted to capitalize on it to divide the oil industry’s anti-climate change unity.
Surprisingly, BP’s share price rose after Browne’s speech. Between the May 1997 speech and 2000, BP announced a series of acquisitions and operational savings. During that period, BP merged with AMOCO in the then-largest industrial merger. That was followed by the acquisition of ARCO and Burmah Castrol, creating a global supermajor. During this wave of acquisitions, BP planned to power 200 of its service stations using solar panels. BP also spent $45 million for controlling interest in solar panel manufacturer Solarex.
These actions nearly doubled BP’s share price, which went from 359.5 pence to 655.4 pence. While this was faster growth than its fellow international oil companies, the industry was in the midst of a consolidation phase that ended with the 1998 merger announcement of Exxon and Mobil, a $75.3 billion deal. Furthermore, the global oil industry was entering a bull market driven by China’s insatiable demand as it entered the World Trade Organization and became the world’s low-cost manufacturing center.
Browne was also instrumental in laying the foundation for BP’s success in Russia, even after losing nearly $200 million of the company’s $517 million 1997 investment in Russian oil company Sidanco, owned by oligarch Vladimir Potanin. Browne had begun seeking investment opportunities in Russia in the 1990s as the Soviet Union was imploding. In the 1980s, BP lost control of its premier Middle East crude oil assets, which had put it in the top echelon of the global oil industry. Therefore, it needed another growth market.
Russia possessed world-class oil and natural gas resources, but its petroleum industry had little understanding of its potential because of mismanagement. Moreover, the equipment the Russian petroleum industry was using was old and rusting, and it had limited access to new oilfield technology. There were challenges as BP led the way into the Russian oil and gas industry. A BP executive executing the Russian strategy described the political landscape to a Financial Times (FT) reporter, “At the time, if you wanted to be in Russia in a big existing resource play you were working with an oligarch — choose your oligarch.”
The Sidanco investment was made in 1997, but the relationship soon troubled. However, the world oil industry was in a different environment. Global oil demand was growing and was about to explode. China was welcomed onto the world’s economic stage, and hydrocarbon energy was prized for its dispatchable nature and high energy density.
In Russia, it was an era of the oligarchs, often friends but then rivals to Vladimir Putin. Oligarchs were stealing or at least buying Russian assets dirt cheap. These businessmen became billionaires overnight. They used their newfound wealth to purchase world-class European soccer franchises, multi-hundred-foot yachts parked worldwide, and trophy homes in leading cities throughout Europe. They were protected by personal security forces and traveled on top-of-the-line private jets. It was Russia’s version of America’s Gilded Age.
The BP-Sidanco joint venture began falling apart almost immediately after it was formed. The most profitable asset was declared bankrupt by a Siberian court, and it was sold to Tyumen Oil Company, known as TNK, which was controlled by another oligarch, Mikhail Fridman. After losing half his investment, Browne, now BP’s CEO, doubled down and bought a further 15% of Sidanco. Four years of brinksmanship led to a 50:50 joint venture involving Sidanco’s assets, BP’s chain of Russian gasoline stations, and TNK in return for BP’s $8 billion investment commitment.
Putin had been elected Russia’s president in 2000. U.K. premier Tony Blair wanted to curry favor with Putin and Russia, which led to a state visit in 2003 and the two political leaders witnessing the signing of the TNK-BP deal. This marked the most significant Western investment in Russia at the time. At the time, Putin was not seen as a future dictator but rather “the new broom who would sweep everything out, the big reformer,” according to Browne. History would prove that observation to be wrong.
The TNK-BP partnership led the parade of Western oil company involvement in Russia. ExxonMobil and Shell followed BP. However, the relationship between the oligarchs controlling TNK and the executives at BP was fraught with tension. BP saw the venture as its Russian subsidiary. Fridman wanted more control.
A contentious development occurred in 2008 when Bob Dudley, the BP executive in charge of the venture, fled Russia over “sustained harassment.” He was so fearful for his life that his departure was kept a secret until he was airborne.
In 2011, BP signed an Arctic exploration agreement and a share swap with Rosneft, a Russian oil company headed by a close friend of Putin. TNK objected, claiming it was the exclusive operator for BP in Russia. It challenged the agreement in an international court, and Russian special forces raided BP’s Moscow offices. It was clear that Putin did not like that the TNK-BP deal was a 50:50 venture and disliked Fridman. Putin wanted Rosneft to be the vehicle to roll up all of Russia’s oil and gas interests.
In 2013, Putin got what he wanted when BP swapped its 50% of TNK for $12 billion in cash and 18.5% of Rosneft. Coupled with the $19 billion in dividends BP had received from its decade-long partnership with TNK, “It was probably the best investment BP has ever made,” an executive involved in the original TNK-BP deal told the FT. The cash from Rosneft came at a critical time for BP, wrestling with the cost of the Macondo well accident in the Gulf of Mexico. That event, and how BP mishandled it, cost it its CEO. Tony Hayward was unable to represent the interests of BP and deal with the PR strain of the oil spill’s aftermath, as well as the human cost in 11 lives lost and 17 injured.
From 2013 to 2022, the Rosneft investment earned BP another $5 billion in dividends, and the company reported increased production, which earned additional profits. The Rosneft venture ended in three days after Russian tanks rolled across the Ukraine border. A 30-year venture went out the door. However, then-CEO Bernard Looney was already taking BP toward renewable energy and announced plans to pare the company’s oil and gas production and investments. His reset was announced in a two-hour press conference in February 2020. During his presentation, Looney told investors that future BP dividends might not grow as in the past because renewable energy was less profitable than oil and gas—this upset BP pensioners who depended on rising dividends for retirement income.
When Looney was ousted as CEO for failing to disclose inappropriate relations with fellow employees, the BP Board of Directors conducted an extended search inside and outside the company for his successor. In the end, it elevated Murray Auchincloss, BP’s CFO. Initially, Auchincloss embraced Looney’s strategy, which called for cutting oil and gas production by 25% by 2030 and investing heavily in renewable energy. He aimed to grow BP’s renewable generating capacity 20-fold by 2030, reaching 50 gigawatts (GW). Today, BP’s capacity is 8.2 GW.
As the chart showing weekly stock price performance for the past decade demonstrates, before the COVID-19 global shutdown, BP’s shares performed in line with those of ExxonMobil, Chevron, and Shell. Chevron separated itself from the others in 2020. After the Russia-Ukraine war, BP’s stock began to lag. Was it because of the company’s heavy involvement in Russia or investor dissatisfaction with its renewable energy strategy?
After the spring 2024 peak in oil prices, BP’s stock began a serious slide. It likely reflected the unsettled leadership situation following the ousting of Looney and the ongoing search for his successor. Furthermore, the economic problems of renewables became more evident. At the same time, the increasing realization that more oil and gas would be needed grew, but BP was on the road to cutting its output.
BP’s share price weakness attracted an activist; will fireworks follow?
BP’s new strategy is based on two key principles: energy is a growth market, and oil and gas will be needed for decades to come. While not abandoning its interest in the energy transition, it will scale back its investments by selling interests in existing producing assets.
The message Auchincloss delivered was in response to activist investor Elliott Investment Management, which disclosed that it owns under 5% of BP’s shares and is pushing for corporate changes to boost investor returns. Auchincloss said BP management has adopted the following financial goals.
1. Grow adjusted free cash flow at a compound annual growth rate of over 20% to 2027, from around $8 billion price adjusted in 2024.
2. Grow return on average capital employed to over 16% by 2027, from around 12% price adjusted in 2024.
The BP strategy was poorly received as the share price is lower than before the meeting. Furthermore, Elliott says the company should abandon its renewable energy investments and concentrate on oil and gas. History shows oil and gas have earned the company greater profits.
It will be interesting to watch BP’s management act to fulfill its pledge to return more to shareholders in the future. The problem is shareholders may suffer lower returns in the near term. Will shareholders vote with their feet? If so, could we be witnessing the beginning of the end of an independent BP? Events in the oil patch are always interesting, so stay tuned.