Economist on BP petrochem sale: Sign of changing energy market

BP's decision to sell its petrochemicals business is "major," said energy economist Gregory McGuire, and a response to the changing global energy environment. "What has happened with them is going to happen with a lot of other companies," he told Newsday. In times like these, he said, people tend to focus on core business.

BP is essentially an energy company and while petrochemicals is/was a viable extension of vertical integration of the natural gas business, it has never been their core business. "This in my mind is primarily a response in the way covid19 has created a new landscape (regarding) oil demand. These companies are bleeding and if you can get new capital by selling non-core assets, that can ease the hurt on shareholders."

The energy giant announced on Monday it has agreed to sell its global petrochemical business to INEOS, a UK chemicals company, for US$5 billion. Subject to regulatory and other approvals, the transaction is expected to be complete by the end of 2020.

The sale, BP said in a release, is the “next strategic step in reinventing BP, will further strengthen BP’s balance sheet and delivers its target for agreed divestments a year earlier than originally scheduled.” BP has previously announced its intentions to be a net-zero (carbon neutral) company by 2050 – monumental for the hydrocarbon industry, one of the biggest contributors to greenhouse gases and global warming.

The company, via a consortium including Shell, was recently awarded the tender for a renewable energy project in TT. "BP has for several years been moving towards greater investments in alternative energy and will continue (to do so) but I think this move has more to do with mitigating the effects of covid19 on the balance sheet," McGuire said.

The sale will include BP’s 36.9 per cent interest in the Atlas Methanol plant in Point Lisas.

The majority owner of Atlas is Canadian petrochemicals giant Methanex (63.1 per cent), which in March announced it was shuttering Atlas’ sister plant, Titan, because of dampened international commodity markets and prices, exacerbated by the covid19 pandemic and global lockdown.

"It’s a continuation of what has been going on. (Companies) are facing a turbulent market for petrochemicals and it has grown worse since covid19. The easy answer is to diversify but diversification is not a short term process. It’s unfortunate that we haven’t pursued it more aggressively and more urgently," McGuire said.

The country has been in a cycle since the 1980s when there’s an economic downturn, diversification comes to the top of the agenda and when there’s an energy boom, less so, he said. But, he added, diversification is not only a government problem, but the private sector also has a huge role to play.

"The private sector is the one generating the money and so it need to make choices that are more developmental and less about trying to make the fastest dollar. Government would have the responsibility regarding incentives and ease of doing business. "I think, if we say the government is failing to diversify then the private sector is equally failing. They've invested in commercial trading activity, not new in industry or production. Where they choose to put their money does not foster further development and diversification," McGuire said.