Opportunity for BP to demonstrate financial restraint in practice
In the world of energy, BP has been making waves lately, with its capital expenditure (capex) strategy coming under scrutiny from investors and ESG critics.
According to recent reports, BP's capex framework is set at around $14.5 billion for 2025, with a stable capital frame of $13 to $15 billion per year through 2026 and 2027. Approximately 60% of this capex is directed towards high-return oil and gas projects, while the remaining 40% is allocated towards low-carbon energy initiatives.
However, this strategy has sparked concern among some investors and ESG observers, as BP has significantly reduced its annual energy transition spending from previous targets of $5–6 billion per year down to about $1.5–2 billion. This reduction reflects BP's focus on avoiding overcommitment to unproven technologies, but critics argue that this shift risks weakening ESG alignment and increasing stranded asset risk, given the urgency of decarbonization.
BP's pivot to increased oil and gas spending, redirecting about $5 billion per year from renewable investment back into fossil fuels, has raised eyebrows. This move, aimed at boosting production to 2.3–2.5 million barrels/day by 2030, contrasts with peers like Shell and TotalEnergies, who are pursuing more balanced approaches between fossil fuels and clean energy.
From an investor perspective, BP's 2025 capital allocation strategy signals a trade-off between short-term financial discipline and long-term sustainability. The company has increased shareholder returns via dividends and buybacks, reflecting a focus on financial strength amid energy transition uncertainties.
This tension between immediate profitability and long-term climate goals is not new for oil majors like BP. In 2018, a shareholder resolution was filed on behalf of Climate Action 100+, which received support from over 99% of investors at BP's 2019 AGM. The resolution called for BP to review and disclose a strategy consistent with the Paris Goals and the consistency of each new material capex investment with the Paris Goals.
The retreat from capital discipline by BP without consulting shareholders is concerning for investors, as it may increase their potential exposure to stranded or value-destructive assets as the energy transition progresses.
Moreover, BP's capex framework uses a price-based methodology, but there is no meaningful correlation between modelled oil and gas prices and temperature outcomes. This flawed methodology enables expenditure that exceeds a Paris-consistent framework.
In response to these concerns, BP's CEO has committed to "fundamentally" resetting its strategy at the upcoming Capital Markets Day. Investors are hoping for a more robust capex framework, including disclosure of where projects sit on the global cost curve of producing assets.
Recently, investors with nearly £5 trillion in assets under management (AUM) have sent a letter to the Chair of BP, calling for an update on the company's approach to capital expenditure and a vote on the company's energy transition strategy at the upcoming AGM. The letter emphasises the need for BP to align its capital expenditure with the goals of the Paris Agreement.
In summary, BP's current capital expenditure framework prioritises financial stability by focusing more on traditional oil and gas investments while maintaining a reduced but targeted low-carbon energy investment profile. This approach generates tension with investor expectations tied to the company's commitments under the Paris Agreement, illustrating the ongoing challenge for oil majors to reconcile immediate profitability with long-term climate goals.
Businesses and investors are closely watching BP's financial strategy, as its capital expenditure framework for 2025 is mainly directed towards high-return oil and gas projects, with a significant reduction in annual energy transition spending. This investing approach has sparked concerns among ESG critics and investors, who argue that it risks weakening ESG alignment and increasing stranded asset risk, given the urgency of decarbonization.
