The last two years have been turbulent ones for the oil industry, with the BP share price falling to levels last seen in 1995 in the wake of the Covid lockdowns back in 2020. During that year the company lost $20.3bn, as it sought to cut its debt levels as well as right-size its business model for the challenges in diversifying away from its legacy business model of fossil fuels.
BP shares rise as calls for windfall tax grow
This was followed by a profit of $12.8bn last year, which prompted calls from some politicians for a windfall tax amid accusations that oil companies were profiteering. Putting that accusation to one side, that still means over a two-year period BP lost $8bn, and that's before you include today’s $29bn writedown of its Rosneft assets, something that politicians tend to conveniently forget.
Last year BP laid out a 10-year plan to reduce its oil and gas production by 40%, and boost spending on low carbon energy to $5bn a year, in order to try and meet its climate goals, as the industry continues to come under pressure to help with the energy transition process. With oil and gas prices at elevated levels, and energy companies enjoying an unexpected windfall in terms of higher profits, politicians have been responding to populist pressure to impose windfall taxes to help ease the rising cost of living.
The Italian government decided to go down this route yesterday by imposing a 25% windfall tax on its own energy companies, in an action that is likely to ramp up demands for politicians here in the UK to do something similar. We’ve already heard chancellor of the exchequer Rishi Sunak suggest that he is looking at doing this unless the energy companies commit to more spending than they currently are in this area.
There is a valid argument that oil companies could commit to more spending in this area, and governments have been encouraging this in the form of tax incentives since 2016 for the likes of BP and Shell to wind down their most polluting assets in the North Sea, which both have been doing. Unfortunately, in the absence of a transition strategy this has had the effect of exacerbating the current supply crunch, with little sign that global demand is slowing.
Putting to one side the economic illiteracy of implementing a windfall tax, the move, while politically popular, will only serve to discourage investment, not speed it up. As things stand, BP has said that it will invest a further $22.5bn in the UK by 2030 in order to help the renewables transition. Furthermore, the notion that governments can somehow spend money more efficiently than the company that generates the profits comes across as pretty risible if the last few years are any guide.
BP takes $29.3bn Rosneft writedown
Today’s Q1 numbers from BP certainly serve to reinforce the argument that the industry has done well from the sharp moves higher in oil and gas prices, however this is just as well given that BP has had to take a $29.3bn writedown in respect of its exposure to the Rosneft business, which has seen the company slide to an attributable loss to shareholders of $20.38bn, compared to a $4.67bn profit a year ago.
Replacement cost losses came in at $23bn, although underlying profit rose from $2.63bn a year ago to $6.25bn. Adjusted oil and gas production and operations profit-before-tax and interest beat expectations of $4.5bn, coming in at $4.68bn. Despite the better-than-expected return, BP has said it is sticking to its capex target of $14bn to $15bn for this year, with $5bn of that a year going into low carbon energy.
This number suggests that renewables still only make up around a third of its total capex, although it says it expects energy transition spending to increase to around 40% by 2025. This still seems low if BP is to meet its target of generating 50GW of renewable energy by 2030.
In more welcome news for shareholders, BP has said it will buy back another $2.5bn in shares, as well as announcing a further reduction in its net debt to $27.5bn, down from $33.3bn a year ago. The BP share price is up over 2% to 401.10p in early trading on Tuesday morning.