While BP’s decision to cancel its plans to drill in the pristine Great Australian Bight ends a public relations nightmare for the company, questions remain about BP’s and its peers’ growth-led and frontier-dependent business model.
BP’s announcement binning its Bight ambitions suggests that the project is no longer competitive or aligned with corporate strategy (it’s not entirely clear whether the company believed it to be one, the other, or both).
Taken at face value, one could applaud BP’s decision to finally pull the plug on the project rather than stubbornly struggle on. But dig a little deeper and this rationale isn’t supported by BP’s decision making to date, nor by its business model.
The high-cost nature of the Bight and its resulting economic flaws were blindingly obvious from the start. It was only after BP attracted investor scrutiny, failed (three times) to negotiate a friendly regulatory process, and courted significant public controversy, that they bowed to what now looks to have been the inevitable.
So while BP may wish to dress this decision up as a reallocation of capital in the face of a move to “refresh” its upstream strategy, the reality is that there are fundamental structural problems with BP’s and other oil majors’ growth-led business model, that go beyond the cyclical oil price crash of the past 18 months.
Despite words to the contrary, there is no evidence of International Oil Companies (IOCs) developing new strategies to address those problems.
Oil majors’ market valuations — not to mention executive pay — depend on maintaining and increasing reserves, which drives IOCs to compete for market share against more accessible, cheaper oil under the control of national oil companies.
This high-cost strategy depends on continuing growth in oil demand and sustained high oil prices — market conditions that now appear unlikely to return any time soon.
From 2000 to 2014 exploration expenditure increased fourfold,…