BP to miss key climate target as annual profits hit record £23bn
BP has revealed it is to miss a key climate goal while announcing record annual profits.
The London-based firm said its main measure, underlying replacement cost profit, came in at $27.7bn (£23bn) for 2022 – more than double the previous year’s sum despite weaker oil and gas costs knocking its performance in the final quarter.
BP admitted, alongside the figures, that it now expected carbon emissions from its oil and gas production to fall by between 20-30% by 2030 when compared to 2019 levels.
Its previous target had been a 35-40% drop in emissions.
It blamed the shift on anticipated higher levels of output to meet global needs – a decision that was slammed by climate campaigners including Greenpeace which called for government intervention.
Chief executive Bernard Looney revealed £6.6bn of additional investment in energy transition projects and a further £6.6bn for oil and gas to meet energy security demands.
The earnings figures will also further inflame the debate on whether big oil and gas firms should be handing more back through windfall taxes amid the energy-driven cost of living crisis.
It comes just days after Shell’s reported profits of £32.2bn.
Both firms suffered big losses during 2020 as the COVID pandemic hammered energy costs due to a lack of demand.
But the recovery in oil and gas prices since – latterly guided by Russia’s war in Ukraine – has prompted national governments including the UK to impose windfall taxes on the sector.
Domestic critics, including Labour, want additional clawbacks.
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‘These are the windfalls of war’
They argue energy firms’ earnings have been gained at the expense of wider society because wholesale prices have caused decades-high inflation and left households and businesses nursing record bills on many fronts.
Chancellor Jeremy Hunt’s autumn statement last November had raised the energy profits levy on UK extraction activities to 35% from 25%, as the government sought to recover more on the back of its continuing energy bill support.
It left the effective tax rate at 75% because of the 40% corporation tax charge already applied though some investment relief is granted under the levy.
Despite that hit, energy company dividends have continued to rise on the wider, more substantial earnings. BP raised its award by 10% helping its share price rise by 4%.
That is all welcome news for pension values as the vast majority of funds are obliged to hold top tier stocks.
Shareholders have been further rewarded through share buy-backs. BP said it would repurchase $2.75bn of shares over the next three months after buying $11.7bn in 2022.
Shell said last week that it expected to pay around £100m under the levy’s rules for its UK offshore activities last year – taking its global windfall tax bill to almost £2bn.
Its total global tax contribution was £10.8bn.
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BP had earlier forecast a 2022 UK windfall tax sum of around £678m but its results statement suggested a tax effect of £1.8bn.
The UK’s largest producer of oil and gas in the North Sea, Harbour Energy, blamed the impact of the levy for a decision last month to cut jobs.
It is expected to reveal the figure payable to the Treasury next month having warned investors in January that the sum would be materially higher than expected at the time of its half year results.
Harbour has said that the increase to the levy had forced it to review its North Sea activities at a time when the country badly needed domestic supplies to bolster energy security.
Responding to BP’s figures, Labour’s Ed Miliband demanded the government go further.
“In just eight weeks’ time, the government plans to allow the energy price cap to rise to £3,000. Labour would use a proper windfall tax to stop prices going up in April.
“When it comes to oil and gas interests, Rishi Sunak is too weak to stand up for the British people. Only Labour is on your side – with a plan to tackle the cost of living crisis now, and a long term plan to cut bills for good and make Britain a clean energy superpower.”
The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.
Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.
Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.
An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.
Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.
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On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.
“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.
His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.
Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.
A spokesman for the Department for Business and Trade declined to comment ahead of Monday’s call.
First things first: don’t panic.
What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.
The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.
That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.
In hindsight, perhaps we shouldn’t be surprised.
After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.
But those financial markets are now reassessing how keen they are to lend to the UK.
The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.
This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.
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Chancellor challenged over gilt yield spike
But the falls in the pound and the rises in the bond yields accelerated today.
This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.
Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.
That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.
The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.
But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.
Rachel Reeves leaving 11 Downing Street before the budget. Pic: PA
And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.
And this is where things get particularly sticky for Ms Reeves.
In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.
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In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.
Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?
Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.
Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.
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Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.
The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.
A Halloween nightmare for any chancellor.
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