“Political risk is everywhere in the oil and gas business”

In this exclusive Q&A with Critical Resource, former CEO of BP Lord Browne discusses political risk in the oil business, warns about mounting stakeholder pressures and constraints on renewables, and calls for a stronger stance on LGBT rights from corporate leaders.

Lord Browne was CEO of BP between 1995 and 2007. A crossbench peer of the House of Lords, Lord Browne is a respected authority on strategy as well as diversity and inclusion in business. He is a former member of the Critical Resource Senior Advisory Panel, and is the author of four books, including The Glass Closet, about the inclusion of LGBT people in business.

Please note that as with all our interviews, the views expressed here do not necessarily reflect Critical Resource’s opinion.

Demand for oil and gas is strong and resilient – notwithstanding shifts to renewables

Lord Browne

“Demand for oil and gas is strong at present. It is primarily coming from emerging economies, which reminds us that access to energy goes hand-in-hand with population growth. The rate of growth in the demand for oil will certainly slow as the world switches towards gas and renewable sources of energy, but this change will take time, because existing infrastructure and capital investments have very long lives. Political statements are being made and legislation is being introduced covering the production of environmentally-friendly technologies or products, such as electric cars, and I applaud them. However, their impact is likely to be constrained by economic and technical reality, at least for the next decade.”

The ‘Beyond Petroleum’ campaign did great things for BP, but may have been too early

“Supermajor oil and gas companies, such as Shell, Total and BP, have the large balance sheets required to expand their portfolio to include renewables. They also have the technical capabilities and experience managing the political and social risks associated with large-scale projects to do it right. When I was at BP, we began the push into this space with the ‘Beyond Petroleum’ campaign. It was probably premature, but it allowed us to do some extraordinary things – buying renewable assets, changing attitudes internally and externally, and attracting some great people to work for the company. The investments we made in wind survive with BP to this day, and many synthetic biofuels were developed under that banner.

While at BP, I always said that ‘Beyond Petroleum’ was a frame of mind, not a literal statement. Supermajors will and should continue to produce oil and a growing proportion of lower-carbon gas alongside newer investments in renewable technologies. However, I would not expect smaller independent oil and gas companies to be involved in anything other than producing oil and gas. They can work on controlling internal emissions and sealing methane leaks, but they tend not to have the strategic capabilities needed to expand into the renewables sector.”

Political and social pressures on renewable companies will rise with changing attitudes

“When the oil business began, there was widespread support for its unbridled development – nobody thought anything of building spindle top derricks in the backyard of a family home. People then saw the impacts of oil production on the local environment, and they began resisting unchecked expansion. The renewables sector is following a similar trajectory of rapid growth, which means that we are starting to see some political and social pushback.

For example, countries do not currently charge royalties for the use of sun or wind resources, but this is a question that may arise in the future. The DESERTEC project, which proposed covering portions of the Sahara with solar panels to generate electricity for Europe, failed partly because the states involved questioned whether unfair rent was being extracted. It was their sun, and they wanted to benefit from it. Renewable energy operators will also have to contend with challenges around land usage. In Oaxaca, Mexico, for example, the population pushed back against the development of giant wind turbines and curtailed the project. This is not to discount the idea that there will be technical breakthroughs in decreasing the footprint of solar panels and wind turbines. Nevertheless, this kind of local opposition will become more common and companies in the renewables space will have to be wary of this.”

Political risk is everywhere in the oil and gas business

“It is extremely common to encounter sentiments of resource nationalism from host countries. Operators must be aware that they are guests who have been invited to a country to deliver a service. While companies may have comparative advantages in developing resources, due to stronger financing and technical capabilities, they must be aware that they are dealing with a country’s patrimony, rather than what might appear to them as a ‘sweet shop’ of resources.

There are differing risks in differing jurisdictions. Companies encounter physical risks in places like Algeria, on the border with Libya. They may also deal with governments that want a larger share of profits when production is flourishing and decide to change the tax regime – we have seen this in OECD countries like the UK and the US (Alaska). There is risk everywhere, so the only security is through diversification.”

Corporate leaders need to take a stronger stand on LGBT and other diversity issues

“When you look at the companies in the S&P 500, to the best of my knowledge, there is only one openly gay CEO. Something is clearly going wrong. In the business world, I have seen a trend, even amongst millennials, for men and women who are ‘out’ at university to go back ‘into the closet’ when they join financial institutions. At this point, I would say the glass of diversity and inclusion is half full rather than half empty, but it is not filling up further.

There are many arguments to be made for inclusion. For example, when people are included, they feel more engaged as part of a team at a company, which means that they pull in the same direction and profits go up. There is a direct correlation between engagement and extraordinary returns. Leaders also need to be more conscientious of the impact they can have by serving as role models, showing that it is acceptable to be yourself in the workplace. This means that leaders need to set an example, by demonstrating that they themselves have the courage to come out. It also means that companies should consider voluntary disclosure of sexuality at board level, in the same way that membership of other minority groups is disclosed. As business leaders, we need to ensure that we are constantly vigilant about encouraging diversity – it is just as easy to go backwards as forwards.”