Thursday, 4 April 2013
No longer Beyond Petroleum?
BP has indicated that it is looking to sell its US wind farms, at a possible loss of over $2 billion. With this move, BP will once again be focused almost exclusively on petroleum ending the ground-breaking diversification into alternative energy under the leadership of Lord (John) Browne. The vision of forming a company that provided the energy its customers needed to power their lives, but from a mix of increasingly low carbon sources encapsulated in the "Beyond Petroleum" slogan has long disappeared. Of course, the strapline hadn't really been used for several years, and was being downplayed even before Lord Browne left the company in 2007.
Just over a decade ago, around the time of the BP-Amoco merger, BP looked as if it might become the first of the oil majors to diversify away from fossil fuels, and address the need to create a lower carbon economy. Throughout the 1990s, BP was one of the leaders in solar cells and Amoco – through its Solarex subsidiary – was a large player in the growing US market. BP exemplified this by adding solar panels to the canopies of many of its Connect filling stations and prominently displaying the amount of carbon-free energy generated. After the merger with Amoco, in 2000 the company also adopted a new "helios" logo to replace the shield that had been used for over 60 years: this could be seen as signifying solar energy, or crops such as sunflowers.
So what went wrong and why were the wind farms such a poor investment? BP's investment in US wind has suffered from two factors outside its control and largely unpredictable. The first is that despite high oil prices, other energy prices have not risen as much as anticipated, most recently due to the discovery of how to extract vast quantities of cheap gas from US shale formations. This has had a knock-on effect on electricity prices, making renewable energy even less competitive on purely financial grounds. And though Lord Browne knew that climate change should have led to an effective carbon tax, this has never been introduced into the US, keeping conventional electricity more competitive. Despite the low prices for renewably generated energy, the cost of new wind turbines has fallen faster than anyone foresaw due to over-capacity among Chinese manufacturers. This has had a knock-on effect on asset valuations for existing wind farms; it is often cheaper to build a new one than it would be to take on an old one at its depreciated value. (A similar Chinese effect has affected solar, contributing to BP's exit from that renewable after more than 40 years at the end of 2011.)
BP has a third factor, unique to the company – a need to raise capital to fund the clean up and fines after the Macondo disaster. Inevitably this has made it focus on non-core assets that can be sold – and wind farms, often held in joint ventures – were an obvious candidate.
Despite this, BP has not totally abandoned alternative energy. For the time being it remains a major player in liquid biofuels, especially in the USA where it is still named by Biofuels Digest (alongside Shell, but no other petroleum companies) as one of the 10 leaders in the field. Of course this is an area much closer to BP's traditional road fuels business, and one where its lower cost of capital than smaller start-ups can still give it a competitive advantage.
But I for one will be sad to see the end of the idea of BP as a truly integrated energy company, investing in new cleaner forms of energy, with the hope that it might in our lifetimes achieve what we all find so hard to do: it might really have moved Beyond Petroleum.