Energy Transition Now Podcast – Episode 8 with Dominic Emery

DL:   Hello, everyone. I’m your host, David Linden, the head of Energy Transition for Westwood Global Energy Group, and you’re listening to Energy Transition Now where we discuss what the transition really means for the oil and gas and the broader energy industry. In today’s podcast, we’ll be focussing on bp, an international oil company whose strategy is all about transformation to an international energy company. And I’m really pleased to have Dominic Emery, the Chief of Staff to bp CEO, with me today to speak about that transformation. Dominic is a geology graduate and has worked for bp since 1986. He has had several positions in bp’s E&P division in Asia, the Middle East and the UK North Sea. He has also led gas and power business development in Europe and has run power and utility assets at bp’s industrial sites. Dominic then joined bp’s alternative energy arm in 2007 and ran  emerging business and corporate ventures in 2012. And in 2013, he moved to the role of VP Group Strategic Planning, where he was responsible for strategy development, long term planning and policy. And he was appointed to his current role as Chief of Staff in February last year. In addition to this, Dominic was the founding CEO of OGCI Climate Investments, and he’s also on the board of the EITI, which is the Extractive Industries Transparency Initiative. Dominic that’s quite a background, thanks for coming onto the podcast.

DE:  David, thank you very much indeed. A real pleasure to be here. And when you said I started at bp in 1986, it does make me feel rather old, but anyway, I’ve been through many changes over the course of my career at bp, but I have to say this current transition feels like the most  monumental of all. So, I look forward to the conversation with you.

DL:   Perfect. Absolutely. I’m looking forward to it, too. I think if you’ve had a chance to listen to some of the other podcasts in the series, normally what I would do is I’d ask you, what’s your business doing, which direction you are taking, etc. But I think this time I’d like to do something slightly different to start off with. And I guess the reason behind that is, is that bp also publishes its own statistical review, its own view of the energy world, both past and future in terms of scenarios and you most recently published your latest statistical review. I think is now in its seventieth year. And last week, at least at time of recording. And because 2020 was ultimately labelled, I guess, as a year of real change and pivotal in many senses, I think it’s useful just to unpack that a little bit. So, Dominic I think maybe just to get us started, can you maybe talk us through what you see some of the key energy trends or highlights that you saw coming through in 2020?

DE:  Yes, absolutely. And credit to Spencer Dale, our Chief Economist and team for, for developing the stats review, as you say,  70 years and counting. And as you rightly say, 2020 was an extraordinary  dramatic and tragic year with the pandemic having a dramatic impact on energy markets with both primary energy and carbon emissions both falling at their fastest rate since the Second World War. On the other side of the equation, we also saw renewable energy continuing to grow with, particularly solar power recording its largest ever increase. So just a few stats that I think are worth bearing in mind. Firstly, primary energy consumption fell by four and a half percent in 2020, which is the largest decline since 1945. And actually, most of that drop in energy consumption was driven by oil, which contribute probably about three quarters of the of the net decline, although we also saw a decline in natural gas and coal. I think the other big point is the carbon emissions from energy use fell by six point three percent to their lowest level since 2011. And again, as with primary energy, this is the largest decline since the end of the Second World War. So, I think they’re the two big, big numbers. And just dwelling on that six point three percent fall in carbon emissions. Given the dramatic change that we saw in 2020 in terms of the world coming, if not to a complete then to a considerable standstill, I think that gives us pause to think about the emissions reductions that will be required to meet the Paris goals. Roughly, roughly will require emissions of that order of magnitude every year between now and 2050 in order to approach net zero. So, it’s quite a salutary lesson in that regard. I’ll quickly just dwell on sort of renewables as well. So renewable energy, which includes biofuels but excludes hydro into the bp’s definition, rose by nine point seven percent, which was slower than the 10 year average, which has been about thirteen point four percent per annum. But the increment in energy terms is similar to the increase we’ve seen in the last in the last three years. And as I mentioned earlier, solar rose by a record one point three exajoules, you know, 20 percent growth, which was pretty, pretty dramatic. So, if you like, we are seeing the beginnings of the transition. But I think another point that Spencer and team did make when  they went through the stats review is that we are seeing a dramatic uptick in energy use in 2021. Unsurprisingly, as we start to come out of the pandemic and commensurate with that, we’re seeing emissions rising as well. So, we’re certainly not on track to see that steady and dramatic fall in emissions that we saw in 2020.

DL:   OK, there’s a lot of good stats and we could always unpack each one of these, but I guess the overall theme here is interesting because, as you say, it’s you know, we were forced into a situation where this would happen. And it almost sounds like we have to be forced into it every year for us to reach the Paris goals. And what we see now is, is that the rise is back up in emissions in 2021. And so, is this a temporary blip? Is this a nice OK, this is what we could achieve or is this a is this a structural change? So, there might be similar to the oil price, an uptick in the short term, but actually structurally things have changed. And so, this is this this is a turning point as such for us to get towards Paris.

DE:  I think it will be seen as a pivot point because we are seeing significant growth in the renewable energy technologies globally as well. So, it has acted as a kind of spur, but we will simply not see the kind of reductions that we saw, we saw last year. And I think in large part last year was a matter of dramatic demand destruction for obvious reasons, particularly for liquid fuels, with people not travelling around either light duty transport, either on road heavy duty and of course, airlines. There, they were the sectors which saw the most dramatic decline in liquid fuel consumption, which is why oil, if you like, took a disproportionate share of that, of that reduction. But we are seeing that demand coming back very strongly, and that’s reflected both in the demand side of the equation, particularly for on road, less so for airlines, that that’s a much slower build back up again. So, I think the other challenge is that, you know, as we come out of the pandemic, there is a, if you like, a tendency for people to want to use their own form of transport rather than necessarily using public transport. So that has a sort of countervailing effect. Now, having said all of that, I do think alongside the pandemic challenges, we also saw a number of countries making some pretty dramatic moves towards net zero particular, particularly China. China’s announcement around 2060 and also the US rejoining the Paris accord. So, I think we’re now seeing more governments putting the kind of net zero very much at the heart of their transition agenda. That’s a really good thing. And then I think secondarily, and Spencer and the team go do talk about this in the stats review report, we’re now seeing many thousands of companies committing to net zero as well. So, I think we are seeing the signs of a real change. We won’t see the same decline in emissions as we saw between 2019 and 2020 as a result as a result of the pandemic, for reasons to think that a pretty clear.

DL:   Absolutely. And very interesting I mean, I think you can see that the commitments that governments and companies have made are clearly, you know, probably the clearest signal of change that has come out of 2020. I certainly can see that. The difficulty, of course, though, is turning those commitments into reality. And bp has its own forecasts and scenarios as to how it thinks some of this can be achieved. How do you achieve net zero? Can you maybe just talk us through a little bit around your own scenarios and specifically, I guess, net zero scenario? And how is that maybe different to some of the other scenarios out there that have been published, maybe some of the more recent ones, such as the one from the IEA and how they compare?

DE:  Yes, certainly. And the stats review is kind of, if you like, backward looking that has some kind of sense of near-term momentum. But the energy outlook that we publish every year now, we’ve done that now for some years. I would say a few years ago, we tended to produce just one view of the world, which was our most likely view. But then in the last few years, Spencer and team have been published more in the way of different scenarios. And so, what we publish is a scenario that is more, if you like, a business as usual scenario then what we call a rapid transition, which is more akin to well below two degrees. And then this year, we published our net zero scenario. It is actually strikingly similar to the IEA’s net zero emission scenario. I think the, a couple of things that I would point out is that the requirement for large scale scalable electrification, wind and solar power, et cetera, alongside the need for investments in energy infrastructure, the role of hydrogen and CCS, they are very similar between the different scenarios. I think if you look at the investment, for example, required in oil and gas between our scenario and that of the IEA, they are actually quite similar. Both of them roughly, roughly, they are anticipating investments in oil and gas of around 170 to 200 billion per year. So, again, quite similar levels of investment required to maintain oil and gas, albeit on a declining trend as we head towards mid-century. And again, I think we also identified that OPEC share of production because, of course, it will be the lowest cost production that will be the kind of, the last oil that remains in the system, will increase to roughly 50 percent from about 30, 35 percent today. So, there are some quite similar features of the two outlooks. We think it’s important to have these, a range of different scenarios, because what we want to enable is our strategy to be robust to a range of scenarios rather than pin it on one in particular. But in fact, the way we’re configuring our strategy and our plans is very much to be, to sit within the Paris goals, that are consistent with Paris, well below two degrees with an ambition towards being a net zero by 2050.

DL:   Absolutely. What I found difficult, I think, is as an external looking at all the different scenarios that are available in the market and the IPCC in itself, trying to remember, 90 plus or so in themselves, when they look at their own one point five view. The complexity and the range of drivers and outcomes is hugely wide ranging. And it’s interesting how you say there’s quite a few similarities between the bp and the IEA one, and I couldn’t agree more, it was quite fascinating to see what oil demand actually look like in 2050, it was pretty much the same in that sense. The one thing I did notice, though, was there was quite a bit of difference in both overall energy demand and in gas demand as well. So, there was more gas demand, I think, in the bp scenario and more overall energy demand. Now, I see that as maybe as a way to say, actually, that’s a bit more of a reality check around that the world is going to demand more energy going forward. And I think the IEA relies a lot more on energy efficiency. How do you see that in terms of near-term, mid-term and longer term energy demand playing out? Are we going to have to have a scenario where everyone’s going to have to reduce their intake or is this something we are going to have to see growing? Because ultimately, you know, the world is still going to have to grow and GDP requires energy, at the end of the day.

DE:  It does, and the long term trends are clearly that the amount of GDP for any given unit of energy is growing. So, for any unit of energy, you put in GDP grows a little bit more or vice versa. So, you don’t have to put so much energy in. And of course, the carbon emissions intensity of that unit growth of GDP is also coming down, on average. That’s a good thing. I think you’re quite right, the IEA have been pretty consistent in their expectations for energy efficiency. I think the reality is that the big energy efficiency opportunities, particularly the kind of the, if you like, the kind of the retail consumer level, haven’t materialised perhaps in the way we might have expected. And that then, if you like, creates an onus on the supply side to decarbonise more rapidly. So, if you take the pandemic year as an example of where we’ve seen massive demand destruction, so six, more than six percent emissions reductions, we simply can’t expect that demand side reduction to happened year on year on year and kind of, if you like, put it all on the demand side in energy efficiency. So, in a sense, it’s a lesson to us on the supply side, which is to say we have to decarbonise the supply side actually really, really rapidly. Your point on gas is a good one. We’ve been consistently, I think, more bullish about sort of gas, in part because we do see the opportunity for gas to be decarbonised more readily through carbon capture and storage post combustion or potentially to the creation of hydrogen and blue hydrogen into the into the sort of medium and medium long term, again, alongside green hydrogen, which will be very competitive as well. So, I think they are the two primary reasons for that, kind for those differences. I mean, I think we all hope that energy efficiency will be a very big deal, both of the kind of retail level and of the kind of industrial, and industrial business level. But there’s some hard yards to go with that yet.

DL:   Absolutely, thank you, I mean, that’s an interesting perspective there, actually, on the supply versus demand side that people forget as to where does the onus lie? How can you actually make change happen and who’s responsible ultimately for it? So, it’s a very good, good thought there.

DE:  If I could just say I think it actually, it lies across the value chains. So we, I mean, we all have to play our part across these value chains. And one of the ideas that’s kind of, I think, gathering quite big sort of currency, particularly through the World Economic Forum and their Mission Possible Partnerships, is to develop these sectoral decarbonisation opportunities, be it for aviation, be it for marine, be it for on road heavy duty, the so-called hard to abate sectors, and that then includes kind of straight stationary sources. So big industrial kind of emitters such as steel and cement. So, I think creating these sort of handshake’s up and down the up and down value chains will be enormously important as we as we seek to decarbonise these tougher to abate sectors.

DL:   OK, very interesting, I’m sure we’ll come back to that point in a minute, because I think what I’d like to turn to now is to talk a little bit more about bp’s actual strategy, because, of course, 2020 was a year of change for the global economy and global energy system as such. But it was also a year of change for bp as well. You know, turning into a very, well looking to turn to a very different energy company in the next decade. Would it be possible for you just to start off with, you know, explaining who is bp now and what does it stand for?

DE:  Yes. Back in, so this was a kind of a series of in 2020, a series of quite significant events that we wanted to lay out to, let’s say, a wider stakeholders and to the investor community. So clearly, it started with Bernard taking over as chief executive the very beginning of February and really prior to that, spending time with both broader stakeholder groups, but also a kind of critics so people who were going to say, well, you guys are simply not moving fast enough. Let’s really understand where that kind of the deep challenges are coming from vis a vis what our intentions were. So, if you like a quite a deep listening process with those who would seek for us to go faster and those who would criticise us more dramatically. So that was quite important. And I think the second thing was, and then in listening to those critics, also understanding the opportunity of the energy transition. So, seeing this as essentially an optimistic exercise and if you look at the, be they IEA numbers be they IRENA numbers, others, the amount of investment that’s going to be required to replumb and rewire the world’s energy system is phenomenal. So, between now and 2050, it’s of the order of 100 trillion dollars. So, you’re looking 30 years. You know, you’re looking at three trillion a year. So, if you’re an investor into that opportunity of saying, well, bring it on, this is wonderful. So, you take an optimistic perspective that this transition creates business opportunities and decarbonise, decarbonisation opportunities hand in hand. So, I think understanding the criticism and understanding the opportunity and taking an optimistic disposition towards the opportunity was these are two big starting points. I think the second thing was really about trying to define the kind of the purpose of the organisation. And so, we spent a lot of time with our executive board and various kind of various focus groups trying to get a clearer and sharper purpose laid out for the company. And so, we did that and that was reimagining energy for people and planet. And that’s a big deal. It sounds quite sort of grand, but then that allowed us to layer up our ambition around net zero by 2050 or sooner. And then a series of aims that we laid out again back in February last year. So optimistic disposition can have a new sense of purpose. And then net zero ambition, supported by aims to decarbonise the company and also to support the world decarbonising. And then that’s, if you like, set out a kind of a stall for us. And then we committed to come back in August, September with a revised and a sharper definition of what the strategy, the new organisation, et cetera, et cetera, which we then, which we did. And of course, the kind of within a few weeks of laying that stall out in February, the pandemic became the big and challenging and difficult kind of story for everybody, which and as we know, oil prices plummeted to levels that we hadn’t seen kind of ever, negative in for a couple of days. And we had to take a deep breath and determine, do we continue or do we pause? But we felt that we wanted to continue with the kind of transformation exercise. And then in August, we came back with a, probably slightly earlier than we were planning, we were going to come back with a more deeper perspective on our strategy in September. In August, we came back with a high level strategy. We came back with a new financial framework that was very important. We also halved our dividend in the circumstances of the of the pandemic. We felt that it was going to be very challenging to continue with the dividend payout. That was that was as it was. And we recreated a kind of a new financial framework for investors. So that was that was the kind of the big deal in August. And at that time, we also started using, as you used at the start of the of the podcast, the transition from international oil company to integrated energy company. So that’s become the an important mantra for the company, which then allows us to start to talk about the way we’ve now organised bp into our business groups, into our integrators and into enablers, along three big strategic themes, one on low carbon electricity and energy, one on convenience and mobility, and then one on resilience and focus hydrocarbons. So, they’re the big strategic themes, then crosscutting, those integrating energy systems. And so that is, if you like, physical integration, virtual financial integration, partnering with countries, cities and industries. And we’ve created a new team called Regions Cities and Solutions to do that, and that a lot of that underpinned by digital innovation, both at the level of efficiency internally and the level of customer innovation. And then finally, the big wrap around that was essentially the kind of the purpose our new set of sustainability aims, which was the, if you like, the final piece of the puzzle that we laid out back in April this year. So that’s the, that’s the kind of the essence of it. That was the motivation, you know, a series of set piece presentations on purpose aims and ambitions, then all strategy, financial framework. And then to be frank with you, subsequent to that, it’s all been about strategic delivery, achieving strategic milestones to demonstrate progress, and also maintaining performance as we make this transition.

DL:   Super interesting, thanks. That’s a good summary, actually, of a lot of things that have happened in the space of, well, just a year, I guess, almost slightly more. What’s interesting, of course we have a bit of hindsight now, we can sort of look back what’s happened over the last year and sort of having listened to you now and listen to how, you know, Bernard Looney has talked about the strategy etcetera. You know, he’s often used words like de risking bp or balancing or words like that. Is it fair in that sense, is that’s what you’re doing here as well? You’re, you’re sure you’re seeing there’s an opportunity and it is an optimistic scenario, but it’s also about de risking the business and trying to set it up for the future, because ultimately, you know, the belief is that there is a decline in in the core and opportunity elsewhere. So, you need to de-risk that effectively.

DE:  That’s exactly right. So, I think the two things come as kind of a package, the opportunity in the new and the de risking of the of the core. We believe deeply the world is serious about the Paris goals and therefore emissions becomes a risk. And the extent to which you can reduce emissions over time in a kind of a measured and systematic way means you can de-risk your portfolio over time. So having that a more balanced portfolio, which is weighted towards low and zero carbon versus, versus carbon intensive is clearly the trajectory we want to be on.

DL:   Interesting, I think the one thing that stood out for a lot of people, again, with hindsight, you look back and I think you are looking at 50 percent of CapEx is related to transition by 2030. You know, all the talk about CCS and hydrogen, I think when the strategy initially came out, it looked quite new and fresh. And actually, if you look at what everyone else has done, it’s kind of similar, if different. You know, they’ve all chosen their own sort of specialisms or sort of created their own targets. But in essence, it’s similar-ish in one way or another. But there are a few nuances or differences that I think I’d like to just pick up on. And I guess that the initial sort of clearest one is that 40 percent reduction in oil and gas production and that you’re looking to achieve in the next decade. Can you maybe just talk us through the rationale for that and you know how you justify that relative to the need to invest elsewhere? So, I know you were quite clear as a business to set out the financial justification of doing this. And I say this again, just with hindsight as well, of course, because, you know, a number of your competitors in this space or partners, of course, you’re partnering a lot with them. You know, they’re saying, no, actually, our portfolio is increasing in production in the next few years. So, you know, we don’t believe that’s necessary. Well, of course, you, you do. So, we just need to hear your rationale for that.

DE:  Yes. I think there’s probably two components to that. One is about wanting to have a resilient and focussed hydrocarbon portfolio. And so, what we’re seeking to do is continue to high grade the portfolio. And there are a couple of things that we did, one, which was that we, if you like, raise the bar in terms of returns and quality expectations from those resilient and focussed hydrocarbons. So, for new projects, it’s going to be tougher. And then secondly, we made it tougher still because we reduced, as you may recall, last year, we changed our long dated price assumptions for investments. And of course, we review these on an annual basis. We are seeing the oil price move in very different ways clearly at the moment. But I think it’s fair to say that as a result of that, we made it even more difficult for those resilient and focussed hydrocarbons, to chin the bar in terms of returns because of the way we reduced price expectations. And that also resulted in some substantial write downs, again, that the market saw last year. So that means there are certain projects that we will no longer do that we had anticipated we would do because of those write downs and because of, if you like, raising the bar in terms of the quality of investment expectations. So, we’re really driving, trying to drive quality through that portfolio. And that means that we will still we still anticipate producing oil and gas, you know, for decades to come. But there will be less of it and the quality will be higher. So that’s a kind of proposition that we we’ve put out there. I think the second thing is we’ve chosen a particular kind of metric, which is for those emissions, which is an absolute emissions metric. And really that’s fundamentally based on the fact that the carbon budget is finite, and it is based around absolute emissions of CO2 to atmosphere, not around intensity. So, we can track intensity as well. But our kind of preference, which was to set a series of fairly stringent, certainly for operational emissions and for the equity emissions from the combustion of our production be it gas or be it oil, to actually set absolute kind of some absolute targets and also some absolute aims because of the finite nature of the carbon budget. And, you know, bringing new carbon, if you like, into the atmosphere from the subsurface, we felt was probably even like not in the spirit of the, of getting to getting to Paris. So, they’re the fundamental reasons why we’ve chosen that particular that particular target, I think. And so, they’re sort of emissions and if you like, strategy related. But there’s also the kind of financial component you described earlier, the switching of capital investment from those kind of capital intensive hydrocarbon investments into also capital intensive renewable energy investments, which is what we have. That’s how we’re switching our capital out at the moment.

DL:   OK, yes, that makes, it makes a lot of sense, I mean, the thing I’d just like to sort of touch on there’s a follow up, though, is around those emissions and the concept of the de risking. We’ve talked to both of about your equity, and this is where I think unless you want to spend a whole podcast talking about emissions, we will keep it to a couple of questions, because I think it’s a really big area, which is very difficult for a lot of people to understand, because you’ve talked about absolute, and you talked about intensity, and we talk about equity. And then we talked about other volumes that the folks trade or sell on behalf of somebody else, et cetera, et cetera. So, it becomes quite complicated. And you almost need to read the detail behind all of the different calculations to make sure you fully understand it. But I think there’s two points around emissions. I just want to understand. I think the first one is, you know, clearly bp was one of the first companies, if not the first from the super majors to include scope three in its target. But that, of course, only includes what we call the equity share side of things, and it excludes Rosneft as well as such. Because and I guess the question that most naturally is, is why is it like that? Rather than saying it includes everything, will be interesting to hear your response to that, please.

DE:  Yes. So our preference was to include, if not the emissions we had control over but emissions where we could insfluence. So, I think the influence point is very important. I think with Rosneft, again, we have a less than 20 percent share, but nevertheless, we work very closely with our partner. And Rosneft’s portfolio is actually, if one sort of stands back, looks at it from that kind of resilience and focus hydrocarbons perspective, the lifting costs are very, very low amongst the lowest in the world. And actually, the greenhouse gas intensity is better than us. They’re better than bp’s and actually better than many other international companies. And Rosneft does care very deeply about its emissions, about its environmental performance, as does the Russian people. So I think in that respect, our continued participation alongside Rosneft, we can learn from each other and helped drive this down. That’s the that’s the kind of the rationale is more around partnership and influence as opposed to having a greater degree of control. On the other, on the scope three emissions as a result of customer products. Now, that’s a very different a much more challenging matter because the scope three emissions from customers is much greater than the scope three emissions from the combustion of our own products, so we’re talking about 350 odd million tonnes from the combustion of our production versus over gigaton from customers. And of course, we’re looking to reduce the intensity of that by 50 percent by 2050. And as you rightly say, after we published our what we thought was some big, bold aims and ambitions back in early last year, a lot of our European peers are now very much on the same track or ahead in terms of ambition. And we have to understand that. Nobody’s laid out that 40 percent reduction of production. So that’s a specific thing for ourselves because it becomes more of a transition play from carbon intensive to low carbon, whereas a number of competitors they are seeking to reduce intensity rather than absolute at the production level. So, there are some important, I think they, one might say nuances, but there are some quite fundamental differences in strategic approaches here. But nevertheless, you know, as soon as you, there is no doubt that competitive positioning over emissions and emissions pathways is precisely that. It’s a sort of competitive thing that will either attract investors in or repel investors. So, it’s a, it’s a very big deal and of course, we’ll keep the our ambitions and our aims around emissions, which frankly are, which then translates straight back through to strategy, under review, so that we can be seen to be progressing commensurate with the Paris goals.

DL:   Again, thank you. Thank you. You’re absolutely right. It’s everyone’s got a choice of how to present their own strategy, how to reduce their own emissions. And then they have to get a stakeholder, not just investor, I guess, but stakeholder buy in with that and, you know, are they believable, acceptable, etc. whichever word you choose and depending on the stakeholder you are, and you go from there. So, all these things are developed in combination with that in mind. Maybe you know, another area that, and this is not just, you know, exclusive to bp, but also, I think the industry as a whole as well. You know, a lot of folks initially when all this kicked off year two years ago, even though even before then, a lot of the discussion was around, why would an industry go from high return, although, of course, high risk, oil and gas production, exploration and production and refining, it’s the whole value chain you’ve got to consider here, to doing something which ultimately is, you know, a solar panel in a field, let’s just say, as an alternative, which, of course, is a much lower risk opportunity, but then also naturally a lower return opportunity as well. Now, that has gone on and on and people have given different reasons as to why that is. It might be good. Just to hear a little bit from yourself, Dominic, as to why bp is doing that. And I know you do a lot through Lightsource, for example, as well. So, it’s the opportunity there. But I think in particular, the question that people who are longer term in the industry and newer are saying at the moment, look, my returns are maybe not quite what I expected, you know, there’s a few sort of headwinds to the industry as subsidies are reduced, et cetera, et cetera. Are some of these returns at risk or is there something that someone like bp has that can help secure some of these returns? So, I’m asking you two questions. Unfortunately, in one go Dominic, so apologies.

DE:  So if I pass the two questions apart, let’s perhaps just dwell on the returns aspect. And one is corporate returns, total shareholder returns. And if you look at that over the last several years, it’s pretty clear that those who are investing in renewables and if you like, growth stocks have seen far better total shareholder returns, even if you include the dividend that’s that materialises from oil and gas companies. So corporate returns have been quite disappointing in the oil and gas sector. So that’s but of course, that’s a very different kind of project returns, which I think is what you’re getting at, which is clearly historic returns on a kind of project by project basis in some cases have been extremely high. And there was a period of time. There’s a sort of very sweet spot for the oil and gas industry when we were actually seeing corporate returns on capital in excess of 20 percent. Now, I think those days are rather behind us. And they were they were supernormal returns. But having said that, the project by project returns, you know, will still be higher in oil and gas in general. But they are associated with cash flow risk and variable cash flows associated with oil price movements. And we’re seeing some dramatic oil price swings just in the last year or so. So, the kind of stability of kind of returns is challenging. With the pivot into renewables and alternatives, the cash flow returns are much more stable. The IRRs will tend to be lower, they’ll tend to be high single digit into low double digit. But what we’ve said, and this comes back to that basic point around transitioning from international companies to integrated energy company, we believe that what we can bring to those kind of projects is the operational project expertise, say, offshore wind that we’ve learnt in offshore oil and gas, the integration opportunities. So, take, for example, offshore wind and hydrogen. So, these are the kind of things that we believe as big energy players over decades and decades. We think we can do, we think we can do very well. And then on top of that sort of balance sheet strength structured financing that we can bring to actually improve the returns. And then depending on how one wants to hold an asset, if you want to hold it for the long term, you get long term stable cash flows. Of course, there’s a farm down and sell down options as well. And we’ve seen that pretty, you know, happening quite successfully for a number of our competitors. And of course, that’s very much the, you mentioned Lightsource bp. That tends to be the kind of Lightsource bp business model. So, we do recognise we may be swapping out, let’s say, supernormal returns on oil and gas projects, that may be for an instant when the oil price is very high, look fantastic. But we do like the kind of a more stable, if you like, bulwark of returns from renewable investments that we would anticipate over the coming over the coming decades. So, it’s a basically it’s a tradeoff of sort of quality of cash flow versus kind of a versus returns.

DL:   Interesting, and is it also fair to say that it’s also, if I go back to of the original discussion we had around de risking a business a little bit, is it part of that as well? So now you’re reducing part of the pie, which is riskier and replacing it with something a little less risky, a little bit more certain, as you say, on the cash flow side of things, but therefore the de risking the business a bit.

 

DE: I think it’s fair to say it is exactly that, it will come, so you’re de risking the volatility of cash flows point to point forward. The one other thing I would say is that the opportunity for integration is something that obviously is quite nascent, but we believe very deeply in that and what that may bring to bear. So, we think that can add sort of percentage points to returns and indeed some of the new businesses like hydrogen and CCS I mean, CCS kind of the reverse of oil and gas exploration, it still has quite a lot of challenging hair or it in terms of reservoir risk, as many petroleum engineer, reservoir engineers, geologists listen to this will know. So, we wouldn’t expect to get, if you like, modest rates of returns for CCS. We would expect that to be reflective of the risk particularly inherent in the subsurface and the engineering that would go into a big CCS project.

DL:   Super, thanks. Thanks, Dominic. That is very interesting indeed. And I agree that the integration side is interesting. And I guess also it requires you to partner with a lot of people to make that happen. And I’ve seen bp’s done that at an early stage through your listening exercises, but also as you get into different projects itself. But I think despite all of that, despite, you know, all the questions you’re getting around the structure, the changes you’ve made, it’s only been a year and a bit, etc. There is still a sense and you know that the different financial groups or NGOs or others, they continue to say, well, that’s all very nice, but can you please go faster, harder, et cetera, et cetera? Do you get that sense that there’s pressure to do more or this is now you’ve done a lot, let’s just stick to the plan and see how it goes.

DE:  It’s a great question. And, of course, there will be pressure to do more, and we will continue to determine how much faster we would want to go, subject to that kind of pressure. But I think there’s one really fundamental point here, which is around the nature of the transition, the nature of our company and many others in the transition and the nature of investors. Fundamentally, we need to bring emissions down. So, we would say it’s important for investors to invest in companies that are chasing emissions down. Energy represents something like 70 percent of emissions. And so, investing in companies that are making real commitments and setting targets to that transition, the so-called greening companies that are seeking to move from, if you like, brown to green is really important. There are lots of brilliant solar and pure play wind companies that are out there that have already green and get big scores on the ESG metrics and such like, and that’s great. But the reality is emissions won’t, we won’t solve the emissions challenge, we won’t get to the Paris goals unless we support those companies that are committing to make the transition, the so-called greening companies. So, we think that’s an important thesis that we want to get out there, that we’re sharing with our investors and other stakeholders. It’s, you know support greening companies, support making it happen, because without that, we simply won’t reach the Paris goals. So, I think I’ll probably end on that. There will be pressures to do more. But we also see this as a bigger ecosystem of companies, investors and wider stakeholders driving that greening agenda for companies that are prepared and committed to make the transition.

DL:   Wonderful. OK, thank you. I think that’s a really interesting point, and sometimes people swing from one side to the other and actually it’s a bit of both. And going through the process, as you say, it is a transition. But thank you. Thank you, Dominic. I really appreciate you taking us through that. First of all, looking through 2020 and the year of change we’ve had there both in the energy industry and also for bp, and also walking us through your strategy and ultimately what it means and just looking under the hood a little bit and some of the features that we should pay attention to. So, it’s been a really good discussion. Thank you very much.

DE:  My pleasure. Thanks a lot, David.

DL:   Perfect. And thanks everyone else for listening as well. Hope you enjoyed it. Please make sure you subscribe. Give us a good rating and share with your friends, and talk to you next time.

 

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