BP's Latest Move Highlights Dilemma for Oil Companies

Last Wednesday, British oil giant BP (NYSE: BP  ) announced that it had put its U.S. wind power assets up for sale, as the company continues its strategy of focusing on more profitable oil and gas operations.

If it receives a favorable offer, the company thinks it can create more value for shareholders by divesting the wind assets, which are estimated to be worth some $1.5 billion. 

Not only does the decision highlight BP's overarching focus on profitability, especially in the wake of the infamous 2010 Gulf of Mexico oil spill, it also underscores a major dilemma that energy companies face – choosing between the need for immediate profits and the option to invest in renewable energy sources over the long term. Let's take a look.

Beyond petroleum?
BP's move to sell its wind power assets may come as a surprise to some, especially considering that the company once referred to itself as "Beyond Petroleum," reflecting its determination to expand beyond its core oil and gas businesses.

But now, the need to remain profitable appears to be overpowering its prior focus on renewable energy, which began in earnest under Lord Browne's leadership from 1995 to 2007.

If the company sells its wind power assets, its biofuels business, which consists primarily of ethanol production facilities in Brazil, would be the last remaining artifact of its earlier push into alternative energy.

More like "Back to Petroleum"
Though a company spokesman denied that the recent move signals a departure from alternative energy, BP's decisions over the past few years suggest otherwise.

BP's CEO Bob Dudley recently announced that the company has given up on solar, after more than three decades of unprofitable attempts. The company has also ditched plans to develop carbon capture and storage technology, after it threw in the towel on a $500 million Scotland plant in 2007. And last year, it abandoned plans to construct a cellulosic biofuel plant in Florida, a facility that would have turned biological materials, such as wood, grasses, and plants, into ethanol.

Since the infamous 2010 Deepwater Horizon incident, the company has embarked on a highly publicized downsizing effort. Since it sold its Texas City refinery and related inventory to Marathon Petroleum (NYSE: MPC  ) last fall, it has parted with some $38 billion of assets. To date, the company has divested half its pipelines and upstream installations, as well as a third of its producing wells.  

The bigger picture
BP's decision to part with its wind power assets highlights an important trend among energy companies. Many are struggling to strike a balance between investing in projects with immediate payoffs, such as drilling for oil, and investing in those with longer-term payoffs, such as renewable energy.

Consider Royal Dutch Shell (NYSE: RDS-A  ) , for instance. After having invested millions of dollars into a major wind project over the course of eight years, it recently gave up. Citing "unfavorable market conditions" and issues related to "transportation logistics," the company announced last year that it was pulling the plug on a proposed wind turbine project in Humboldt County, Calif.

Other integrated oil companies have also voiced their frustration in developing alternative energy sources. Speaking at an IHS CERAWeek conference last month, ExxonMobil's (NYSE: XOM  ) Senior Vice President Michael Dolan discussed the company's progress in producing fuel from algae, saying: "I think we learned in the first few years it's probably harder than we had all hoped."

In the end, shareholders prefer decent profits now, as opposed to the promise of greater profits in the future. Unfortunately, this very logical preference means that renewable energy development among oil and gas companies may have to be placed on the back burner for some time.

One company that's squarely focused on ramping up its oil production, with no desire to pursue renewable energy, is Chesapeake Energy. While debt-related challenges continue to cast a dark cloud of uncertainty over the company's future, few would question the superb quality of Chesapeake's remaining oil and gas assets. For many investors, the important question is whether Chesapeake's current share price reflects the true value of its assets. To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.


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  • Report this Comment On April 08, 2013, at 1:50 PM, yupppie wrote:

    US Government - "WE NEED RENEWABLE ENERGY"

    US Government - "LETS MAKE SURE WE SQUEEZE EVERY CENT OUT OF THIS COMPANY THAT AT ONE POINT WAS POISED TO BECOME A LEADER IN RENEWABLE ENERGY"

  • Report this Comment On April 08, 2013, at 8:49 PM, fightingfinn wrote:

    Only a mindless sheep would have even bought into the whole "Beyond Petroleum" BS to begin with. It was a PR move. All of these alternative/renewable energy plays that oil companies make are PR moves. Why else would the company spend 30 years pursuing solar while it remained unprofitable? The hope is to score some good will from the leftists and the hippies. However, when after the Deepwater Horizon incident, these same people demanded the company be tarred and feathered, it became obvious that money spent on hippie good will is money wasted. Congrats to BP for making the logical and rational decision to stop wasting money in an attempt to kiss up to people who want to put you out of business. Wasting money in an effort to be more hip or popular is just that, a waste of money.

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