COLUMN | It’s happening all over again: BP and McDermott – Part 1 [Offshore Accounts]

Readers with long memories (i.e. old ones) will recall that in 2000, the CEO of BP, John Browne, now Baron Browne of Madingley, vowed that the company’s initials would henceforth stand for “Beyond Petroleum”, as he launched a $200 million advertising and publicity campaign to highlight its diversification away from hydrocarbons.

Having acquired Amoco, Arco and Burmah Castrol in the preceding five years to create one of the largest oil and gas companies in the world, the good baron unveiled a new sunflower logo for BP, and announced an array of investments in solar and wind power, declaring that the planet needed energy companies to becomes cleaner and greener.

Unfortunately, Baron Browne resigned as CEO in 2007 after lying about his personal life in court, and the company’s drive to invest in renewables quickly petered out, as it faced tens of billions of dollars of fines and claims following the Deepwater Horizon disaster in the Gulf of Mexico, and poor returns from its alternative energy investments.

In 2013, BP sold off its wind power assets, as part of what the company described at the time as its, “continuing effort to become a more focused oil and gas company and re-position the company for sustainable growth into the future.” The decision to exit wind in 2013 followed BP’s exit from the solar power business in 2011, after forty years of trying to grow a viable business there.

New Leader, Old Strategy

Now, it is a case of New Leader, Old Strategy. Earlier this month, BP’s new chief executive Bernard Looney, who boasts that he owns no car and uses Instagram (here), announced a decision to cut its greenhouse gas emissions to so-called “net zero” by 2050.

“Net zero” means that any emissions produced by the company would be offset by taking an equivalent amount out of the atmosphere through technologies such as carbon capture, or through reforestation projects. By BP’s definition of net zero, the company’s own operations will produce no net carbon dioxide emissions in 2050, and BP has also stated that it will also cut by half the amount of carbon in the products it sells by 2050.

Given that BP produces over three million barrels of oil equivalent a day, this is quite a goal, and will inevitably involve an increased focus on gas in the company’s production mix. Which is good news for contractors working on its massive offshore Senegalese gas project, and less good news for those in Alaska on its large onshore oil projects there.

Mr Looney declared that BP had to reinvent itself as the global climate crisis intensified. “The world’s carbon budget is finite and running out fast,” he said, “We need a rapid transition to net zero.”

Such a transition will come at a massive cost to the company and its shareholders. Spanish oil company Repsol had previously announced a similar initiative to become net zero by 2050, and has shown how this commitment came with a heavy financial hit to the balance sheet.

On February 20 Repsol posted a huge loss for the fourth quarter of 2019, due almost entirely to the one-off costs related to its net zero goal. Repsol published a loss of €5.28 billion (US$5.69 billion) for the period including a nearly €4.85 billion impairment on production assets, mainly onshore in North America, after Repsol’s management assumed a lower oil and gas price scenario, which the company declared was, “consistent with the foresight to the energy transition and with the Paris Agreement’s climate goals.” You can read the full announcement here.

BP has not yet announced how it will hit its net zero target in any detail, and it is important to note that BP is six times larger than Repsol in market capitalisation, so the potential impairments it faces from stranded assets is likely to be much greater than the mere five billion euros reported by Repsol this month.

Analysis in The Financial Times in the UK determined that if global temperature rises are restricted to two degrees Celsius above pre-industrial levels, in line with the Paris agreement, oil majors will have to write off half their assets, whilst if the temperature cap is set lower at only 1.5 degrees from the pre-industrial baseline, then four-fifths of hydrocarbon assets could be worthless. Repsol has taken the first step. Expect more write downs.

“Where is the cash going to come from?”

At the moment, BP’s investment in renewables is frankly pathetic, falling far behind its rival Shell. In 2019 BP spent only US$500 million to US$750 million on its renewables businesses, which, predictably, once again, now include wind farms, solar power, biofuels and what the company describes as “low-carbon start-ups”.

However, BP still has US$14 billion of annual capital expenditure on the oil and gas businesses, and pays a dividend of US$8.5 billion. Mr Looney said himself last week, that to keep to a two-degree temperature rise, spending on renewables must rise from US$300bn to one trillion US dollars.

To keep the rise to 1.5 degrees, he estimated that the investment required increases to a hefty US$2.5 trillion. Where is the cash going to come from? BP’s shareholders have indicated that they see the dividend as sacrosanct.

For suppliers, BP’s public goals are likely to mean more bureaucracy as the company seeks to measure the carbon its suppliers generate, whether in fuel burned on vessels, flights for crew, and even the carbon inputs for spare parts used on their vessels. Having spent two decades ignoring the strategy first set by Baron Browne, expect BP’s bureaucrats to demand more from their long-suffering suppliers.

Expect pressure from BP headquarters in Sunbury for hybrid battery powered supply vessels, or hydrogen or ammonia powered vessels, as the company seeks to make up for lost time. For boat owners, one piece of upside may be to see further moves by BP to replace helicopters with fast crew vessels, even at the expense of the comfort of its offshore workers.

Déjà vu at McDermott

If it has taken twenty years for it to happen all over again at BP, it has taken only three weeks for McDermott to rinse and repeat its flawed strategy regarding executive compensation. A case of Bad Leader, Bad Strategy. Even readers or goldfish with very short memories will recall how McDermott International’s board is hellbent on paying its president and chief executive David Dickson and his cronies huge bonuses, over and over again, as here, despite their role in mismanaging the heavily indebted company and driving it into Chapter Eleven bankruptcy protection. So, it comes as no surprise to learn here that McDermott’s management is once again seeking additional bonuses, as documented here.

McDermott has now requested court approval to pay out as much as US$105.4 million in yet more bonuses for its deadbeat senior executives and other employees that the failed enterprise believes are key to its survival.

The company has filed a plan with the bankruptcy judge, David R. Jones, in Houston, which would see Mr Dickson receive a bonus worth up to US$12.6 million this year, as part of US$26.8 million in incentives for thirteen members of the leadership team.

The other twelve apostles in the McDermott senior management are potentially in line for bonuses of up to US$2.6 million each, presumably paid in units of thirty silver shekels for their betrayal of shareholders and sound management principles.

Please can Subsea7 step in now, take over the company, and fire the lot of them? To cap it all, McDermott asked the bankruptcy court to set aside as much as US$79.4 million in additional retention bonus payments for another 1,112 allegedly key employees. Failure clearly has rich rewards.

A hearing on the proposal is set for Monday February 24. In the words of Nancy Reagan to teenagers thinking of taking drugs, Judge Jones should just say no to the proposed bonuses. Readers, McDermott’s lenders, and the judge, can see the official BBC Just Say No video here for inspiration.