BP-Rosneft: Oil money has its place in the quest for a greener future

(MENAFN- MENAFN.COM)

Like most companies around the world, particularly in the hard-hit energy sector, 2020 was an annus horribilis for BP. The British oil giant released its full 2020 results on February 2^nd, revealing losses of $5.7 billion after the coronavirus pandemic axed demand for transport fuels and sent oil prices through the floor. To compound the company’s challenges, critics took Bernard Looney, BP’s newly-minted chief executive, to task for not going far enough to push Rosneft – in which the British company holds 20% - to reduce its emissions more aggressively.

But a recent sustainability and carbon management agreement between BP and Rosneft, unveiled on February 4^th, should take some of the wind out of these critics’ sails—and might also hold important lessons for MENA oil producers seeking to reduce CO₂ emissions without endangering government revenues.

The Great Oil Paradigm Shift

Climate change is increasingly dominating both public and political discourse, but until recently, major oil and gas companies had shied away from announcing wide-ranging plans to pursue green energy solutions. That changed in February 2020, when Looney took the energy world by storm, astonishing energy insiders with the ambitious nature of BP’s commitment and the relatively short timeframe for implementing its plan.

The company not only pledged to become a net-zero company by 2050, but also brought forward several shorter-term plans, such as reducing its oil and gas production by 40% by 2030. BP’s concrete commitment to nearly halve fossil fuel production in less than a decade makes a remarkable statement at a time when other top oil companies are still pussyfooting around with half-baked green strategies. 

“The world’s carbon budget is finite and running out fast. We need a rapid transition to net zero”, Looney said at the time the plan was announced. The rest of 2020 proved his decision right, as the Covid-19 pandemic laid bare the dangers of relying exclusively on oil. In August, BP strengthened its commitment to the energy transition still further, pledging to increase its investment in clean energy ten-fold to an eye-popping $5 billion per year.

Despite BP’s green efforts, however, climate campaigners were quick to point the finger at the oil giant’s stake in Rosneft, fulminating against the Russian company’s flagship Vostok oil project. A mammoth undertaking, the project is expected to create 15 new towns to house the 400,000 people required to both build and operate the wells and infrastructure tapping into an oil reservoir estimated at 6 billion tonnes of crude.  It is also likely to prove extremely profitable, with Rosneft expecting to export 100 million tonnes a year after the project becomes fully operational. What’s more, such a substantial new project, complete with the latest advanced technologies to monitor and capture emissions, would allow older, less efficient oil fields to be phased out.

Rosneft and BP’s February 4 ‘green pledge’ throws a further spanner in campaigners’ assertions that the Russian and British companies are incompatible partners. Despite the expected increase in production brought about by the Vostok oil project, Rosneft, according to its recently announced carbon management plan, is planning to cut the intensity of its upstream emissions by 30%, as well as slashing emissions by 20 million tons overall by 2035.

Rosneft’s greenhouse gas intensity per barrel of oil produced is already low relative to other producers; the recently announced targets would see it pull still further away from the pack. Despite climate campaigners’ knee jerk reaction, the Vostok project may illustrate how increasing production and revenues while also reducing emissions might very well be possible.

But recently announced by Rosneft initiatives in ESG and carbon management areas are not sole ones towards our green future. The Russian company was the first one in Russia who joined the UN Global Compact more than a decade ago, thus confirming its commitment to the highest principles of sustainable development. Since 2007, Rosneft has been publishing sustainability reports in accordance with the international standards of the Global Reporting Initiative and in 2019 has signed signed “The Guidelines for Methane Emission Reduction in Natural Gas Supply Chain”, thus showing its commitment to reduce methane emissions at all stages of the supply chain.

Rosneft’s activities are already highly praised by the global investment community that considers socially responsible investments a long-term trend. In late 2020, FTSE Russell, a unit of the London Stock Exchange, verified Rosneft’s entering the global FTSE4Good Index Series. Rosneft has been recognised as the leading oil and gas company in Russia by several international ESG ratings, such as Refinitiv, Bloomberg, Corporate Human Rights Benchmark, and has been ranked among leaders in the Climate and Water Resources international ratings of CDP.

The Rosneft ace in the hole

What’s more, the Russian energy firm has been a major financial boon to BP at a critical time. The global coronavirus pandemic has crippled many of the world’s largest oil companies and BP has felt the brunt of the downturn, making the British company’s reliance on Rosneft’s profits the cornerstone of its green energy shift. In an apparently paradoxical turn of events, BP desperately needs the Rosneft money if it wants to achieve its goal of obtaining net zero by 2050.

Without BP earning $785m in dividends from its Rosneft stake in 2019 and booking $2.3bn of pre-tax profit arising from that investment, it is difficult to see how the company’s ambitious plans for a greener future would still be possible.

As such, the BP-Rosneft partnership represents the delicate balance that needs to be struck in order to achieve a financially and ecologically sustainable energy future.

The Transition Paradox

The same balance is also sought by producers in the traditionally petro-dollar Middle East and North Africa region. Oil-rich countries like the UAE and Saudi Arabia are increasingly investing in both fossil and low-carbon fuels, using the profits from oil production to increase green energy capabilities, particularly the so-called “green hydrogen”. 

This promising renewable source of energy can be a game-changer for the region, but it is also expensive, and has yet to become cost-competitive with traditional sources of energy. The emirates of Dubai and Abu Dhabi, long among the world’s most important players in the fossil fuel market, are at the forefront of the transition towards cutting-edge clean energy, while also increasing oil production. Saudi Arabia, the world’s biggest oil exporter, plans to become the largest shipper of hydrogen. 

As contradictory as investing in both fronts of the energy market might appear on the surface, major investment funds such as Mubadala Investment Co. and ADQ are backing the region’s energy companies. This contradiction is what lies at the heart of this apparent paradox. The transition towards renewable and clean energy will be the most important shift in the industry since the discovery of electricity. Without oil money to kickstart this shift and make it viable, however, it will perpetually remain a dream for the future.

The use of a hybrid market to fund the green energy transition has seen clear success in both the Middle East and the Rosneft-BP tandem. Bankrolling renewable investments with oil money should not be seen as a departure from plans to move away from oil, but a critical step on the long road ahead to a net-zero world.

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