Will carbon capture fuel a rise in BP shares?

Hydrogen and carbon capture are expected to play key roles in helping the UK achieve its net-zero ambitions. The UK government has thrown its support behind BP, offering state support for low-carbon projects in which the oil giant is involved. 

- BP wants to be a global leader in carbon capture and storage as well as green and blue hydrogen.

- Carbon capture has its critics, who argue that it simply enables further oil and gas development.

- BP is the top holding in the KraneShares Global Carbon Transformation ETF, which is up 4% year-to-date.

The UK government has selected three carbon capture projects led by BP [BP.L] for funding support.

The Department for Energy Security and Net Zero has pledged £20bn in total for eight projects, including a joint venture between the oil giant and Equinor [EQNR] to build a gas power plant with carbon capture and storage (CCS) in Teesside. It’s part of the UK’s future energy plans, as laid out in the Powering Up Britain reports published on 30 March, which aim to create jobs, boost the economy and help meet climate goals.

“Teesside represents the transformation we can create as a company for both industries and communities,” Anja Dotzenrath, BP’s executive vice-president of gas and low carbon, said in a statement. 

“It underpins our ambition to be a global leader in low carbon energy, including green and blue hydrogen as well as CCS.”

The BP share price is up 13.1% year-to-date and up 1.8% in the past month. 

BP expands carbon capture

Away from the UK, BP and Chubu Electric [9502.T] are currently carrying out a feasibility study for a CCS project that would help reduce emissions in and around the Nagoya port in Japan.

In January, Japan announced a target for CO2 storage capacity of six to 12 million tonnes by 2030. It estimates that storage will grow between 120 million and 240 million tonnes per year by 2050.

BP has also had a CCS facility in West Papua approved by Indonesian authorities. Earlier this year, Indonesia, one of the world’s biggest greenhouse gas emitters, introduced legislation encouraging other oil and gas majors to follow suit.

The country’s energy ministry has issued new regulations targeted at lowering emissions and guiding the development of new CCS facilities.

BP’s push into low-carbon energy comes as it pares back its climate pledge, and after annual profits doubled in 2022. When announcing full-year earnings, the company said it would be targeting “short-cycle fast-payback opportunities” in oil and gas as well as “transition growth engines”.

Carbon capture attracts criticism

Earlier this year, the UK government set out guidance asking businesses seeking permits for blue hydrogen facilities to aim for a minimum 95% carbon capture rate.

The UK’s energy security strategy is targeting a low-carbon hydrogen production capacity of at least 10 GW by 2030. At least half of this will be electrolytic (green) hydrogen, which is made by splitting water using renewables-powered electrolysis. Blue hydrogen, which splits natural gas into hydrogen and carbon dioxide and stores the latter, will produce the rest.

Despite the UK’s blue hydrogen ambitions, CCS has its critics. In an analysis of subpoenaed industry communications, climate website DeSmog argued that CCS actually enables further oil and gas development.

“Although the oil giant publicly touts carbon capture as a ‘proven’ climate solution, its own early foray reveals just how flimsy of a fix the technology really is—and how expensive, both for taxpayers and the climate,” wrote Dana Drugmand for the website in February.

Funds in Focus: KraneShares Global Carbon Transformation ETF

BP is the top holding in the KraneShares Global Carbon Transformation ETF [KRBN], which offers exposure to low-carbon leaders, as of 10 April. The fund is up 4.3% year-to-date and up 2.8% in the past month.

The Direxion Hydrogen ETF [HJEN] has BP as its tenth-biggest holding, with a weighting of 4.59%. The fund, which tracks the Indxx Hydrogen Economy Index, is up 2.1% year-to-date and down 3.8% in the past month.

The stock has also been allocated 0.60% of the V-Shares MSCI World ESG Materiality and Carbon Transition ETF [VMAT]. The fund, which offers exposure to sector leaders in the global transition to low carbon, is up 10.6% year-to-date and up 6.6% in the past month.