BP Takes a Step Closer to its Net-Zero Aim by Selling off its Petrochemical Business

Summary

• BP has sold the petrochemical business worth $5 billion to Ineos owned by Sir Jim Ratcliff
• The deal includes the acquisition of BP's aromatic division and the acetyls business by Ineos
• BP has met its agreed divestment target of $15 billion for a full year ahead of schedule

The oil industry has been under severe strain during the past couple of months; the global oil demand tumbled to steep low due to the lockdowns imposed by different nations to curb the spread of Coronavirus, which resulted into minimum consumption of transport fuels and a sharp decline in economic activity. Worldwide oil prices collapsed on lowering demand and rising supply, as well as soaring uncertainty about the economic future, resulting in a crash in financial markets as well. Amid all this, BP Plc, a leading oil and gas company, operating in 79 countries. Employing over 70,100 staffs and focusing on providing its customers with diverse energy products and services, announced that it is going to sell its petrochemical business to Sir Jim Ratcliffe's Ineos for $5 billion (GBP 4.1 billion) with the intention that it would reduce the pressure on the company's balance sheet. Also, it marks the largest deal by an oil major since the coronavirus outbreak hit the nations all across the globe.

Ineos is a budding chemical group, established in 1998. It manufactures petrochemical, speciality chemicals and oil products globally. Operating in 26 countries, it has its headquarters in the UK. It comprises of 34 businesses spread across 183 sites. Sir Jim Ratcliff is the founder and CEO of Ineos; recently he reportedly became Britain's fifth- richest person.

What is the deal all about?

Ineos has agreed to pay $5 billion in three instalments. The first instalment would be of $400 million, followed by $3.6 billion on the completion of the deal. The last and final instalment of $1 billion to be paid by June 2021 has been further put under three separate instalments of $100 million each in March, April and May and $700 million finally in June 2021.

BP's aromatic division produces chemicals for polyester used in clothing, films and packaging, along with BP's acetyls business, which produces products used in food flavourings, paints and glues will be acquired by Ineos as per the deal entered between the two parties. The petrochemicals business of the company produced 9.7 million tons of petrochemical. The deal includes stakes in manufacturing plants in the UK, the US, Trinidad and Tobago, China, Malaysia, Indonesia and Belgium.

The Covid-19 pandemic had a destructive effect on the oil prices, which plunged drastically, in turn creating financial pressure on the oil-producing companies. Selling off the petrochemical business would accelerate BP's need to reduce cost and restructure its finances, though it came as a surprise for many.

Cutting Costs and Jobs

According to BP's own estimates and forecast, oil prices have fallen by almost one-third due to the outbreak of Covid-19, and it will affect the demand for oil globally over the next 30 years. The oil company will slash up to $17.5 billion from the value of its oil and gas assets. BP may be forced to leave some of its oil and gas discoveries on the ground if the project proves to be uneconomical because of the cut in the oil price to an average of $55 a barrel between 2020 and 20250.

The company has been trying to reduce a debt pile of more than $60 billion standing at the end of the first quarter. The completion of this deal would result in BP meeting target of divesting $15 billion in the year.

In Q1 of the year 2020, Ineos reported that their sales and profits had reduced, but in April, it remained unaffected from the pandemic. Inoes has set up two factories for producing hand sanitiser in order to meet the growing demand for it during the Covid-9 crisis. Ineos initiated the buyout of BP's chemicals business well back in 1992. In another deal with BP in 2005, Ineos had acquired Innovene, a subsidiary company of BP, holding a majority of its chemical assets and two refineries, worth $9 billion.

Ratcliffe said they were glad to acquire the business from BP, which would help them in further expansion of their petrochemical position globally and integration with their existing business.

In the first week of June, BP announced its plan to cut 10,000 jobs, comprising of 15% of its workforce of approximately 70,000 employees by the end of the year. So far, this deal is concerned, the company’s this business currently employs over 1,700 staff worldwide, and as per the deal, these staffs are expected to move to INEOS on close of the sale.

Green Era - A move that could help BP become a lower carbon firm

Environmental campaign group Greenpeace acknowledged that it was essential for BP to invest in renewable energy. To free up some cash, the oil company sold its business, but it remains a question as to how BP will invest this money.

Bernard Looney, BP's Chief Executive, expressed its belief that the climate would be adversely affected by the burning of oil and gas. Hence, in order to save the environment, BP must invest in a transition to renewable energy.

In February 2020, BP had set a target to reduce its carbon footprints to net-zero by 2050. This is supposed to be done by cutting the emission of greenhouse gases produced by the UK every year. Measures such as tree-plantation and carbon capture technologies could help in offsetting 360 million tons of greenhouse gases. The aim to achieve the net-zero target is a right move in the direction to save the society as well as the business of BP.

Stock Performance

BP PLC (LON: BP.) stock traded at GBX 308.15 on 1 July 2020, at 13:43 AM, up by 0.28 per cent from its previous close of GBX 307.20. It was having a market capitalisation (Mcap) of GBP 62,239.37 million. The volume traded at the time of reporting was 2,065,325. The company recorded a negative return on the price of 36.11 per cent on a YTD (Year to Date) basis.

BP with this deal has met its agreed divestment target of $15 billion for a full year ahead of schedule. The deal is going to serve two purposes for the company, on the one hand, it will help the company reduce a debt pile, while on the other it would bolster its plan to sharply cut carbon emissions by 2050.