Green energy is the rage these days. Tesla has a higher market cap than BP (LSE: BP) and Royal Dutch Shell combined. Given its position as a leading energy provider, BP is joining the movement and trying to go green as well. BP recently decided to further invest in this practically limitless energy sector. Here’s more on the oil giant’s move and what I think it could mean for BP share price.
Nearly limitless energy
BP recently participated in a $40m investment round for a startup named Eavor Technologies. Eavor has an ambitious plan to generate enough power to meet the needs of around 10m homes by 2030 using geothermal technology.
Geothermal takes heat from under Earth’s surface and converts it into electricity. Given that the heat under the Earth is so huge, it’s practically limitless and thus considered ‘renewable’. If done correctly, geothermal generation emits very little to no greenhouse gases as well. Unlike wind turbines or solar, which don’t produce energy if there is no wind or sun respectively, geothermal can also always be on if done correctly.
Many analysts think geothermal energy has a lot of growth potential given the right tech improvements, which could make the process of finding, accessing, and managing geothermal resources more economical. In an optimistic case scenario, for example, the US Department of Energy estimated that US geothermal power generation could increase almost 26-fold from 2019 levels to 60 gigawatts-electric capacity by 2050. Under a ‘business as usual’ scenario, US geothermal power generation could increase to around 6 GW of capacity by 2050.
By investing in Eavor through its venture arm, BP is in effect giving the company more resources to potentially make technological breakthroughs that could promote more geothermal adoption in the future.
BP Share price: what I’d do
Given that it isn’t investing very much into Eavor, I don’t think the investment will matter much for the BP share price in the near term. But given how much geothermal energy can grow in the future, there is the chance that BP can make a substantial profit from its investment if the right tech breakthroughs occur.
I think it could be a good thing that management is investing in other energy companies with potentially promising technology. Although it has a world-class R&D operation and immense financial resources, BP doesn’t have a monopoly on energy innovation. Sometimes startups and smaller companies make meaningful innovations that BP or other supermajors have missed. By investing in promising energy startups, BP can in effect diversify its exposure to energy technology more. (Although it may or may not happen, I’d personally like to see the oil giant invest more into fusion startups as well).
As a whole, I am optimistic about BP’s potential in the green sector. I think there are many opportunities to create value and I reckon the company will successfully transition into a greener future. Given the current BP share price, I’d buy and hold the company’s shares.
With this said, BP shares also have risk. Many believe oil production will decline over time, making BP’s green transition more urgent. If BP management were to invest in the wrong green areas or not deliver the results the market expects, the stock could decline. If oil prices fall meaningfully as well, BP might not make as much profit as some expect.
