The extent of oil companies’ fast-growing involvement in the offshore wind energy industry is laid bare in analysis of the market by Wood Mackenzie
Introducing a 16 March 2021 webinar, Big Oil’s impact on the transformation of offshore wind, Wood Mackenzie vice president corporate research Valentina Kretzschmar said the company’s analysis clearly demonstrates that ‘Big Oil’ is becoming ‘Big Energy’ as more oil companies become involved in the renewables sector and in offshore wind in particular.
An analysis presented by Wood Mackenzie head of offshore wind research Soren Lassen indicated that oil companies accounted for 30% of the record 8.7 GW of offshore wind final investment decisions (FIDs) in 2020.
“The FIDs in 2020 clearly show the impact the majors are having in the offshore wind sector,” Mr Lassen said. “They are clearly here to stay too. The majors also won half of the tenders for offshore wind projects in 2019-2020.
“And it’s not just a small number of oil majors who are involved. In addition to Equinor and Shell, Total, BP and Eni are all now also involved and are forming alliances, agreeing joint ventures and signing MoUs in the offshore wind space, working collaboratively to help them enter new markets.”
As Mr Lassen noted, European oil companies’ pipeline is not just growing either, it is also maturing, with projects at different stages. It is also diversifying across geographies and technologies, and the ‘Euro Majors’ are already pushing into the floating wind market.
Ms Kretzschmar said oil companies have also set significant capacity targets for renewables. “Renewables will undoubtedly be a big growth areas for oil companies,” she said. Analysis by Wood Mackenzie indicates that the Euro Majors, excluding Shell, which has not announced a target, have a target for renewables – including solar and onshore wind – of 125 GW by 2030. That is six times their present offshore wind pipeline exposure. If they maintain their recent market share of 30% in new projects, then that would give them 60 GW, based on forecasts for installed offshore wind capacity in 2029 of 200 GW.
Wood Mackenzie director corporate research Norman Valentine said there are ‘obvious overlaps’ between offshore oil and gas and offshore wind that oil majors are exploiting. Apart from operational experience and understanding of the offshore environment, these include supply chain power and project management skills. “These overlaps allow the oil majors to create value in offshore wind,” he said. “They also have expertise which they can apply in related areas, such as renewable hydrogen.”
Mr Valentine said he also expects oil majors to assume diverse roles in the offshore wind space. At the moment, their offshore wind portfolios see them heavily involved in the early life of projects, with only a small amount of capacity operational. Over time, they will become exposed to a range of market maturities, he explained, and to emerging and ‘pre-emerging’ markets. They will play an ever-greater role in the floating wind segment, and some, such as Shell will also become purchasers of electricity from offshore wind as well as developers. Mr Valentine said that, led by Shell, which has lengthy experience as an energy trader, more Energy Majors will become buyers and traders.
Wood Mackenzie said the outlook for oil majors in offshore wind is one of “substantial growth,” although as Mr Lassen noted, for the time being, compared with capex allocated oil and gas, oil majors only allocate a relatively small amount of capital to offshore wind. That is expected to change, however, as development spend on the offshore wind pipeline ramps up.
Early-stage projects in which they are now involved will only begin to generate positive cash flow in the 2030s, but when they do, the lifetime of an offshore wind project of 30 years or more will ensure that is generated over a long period with relatively low levels of risk, Mr Valentine said. Emerging energy majors will also be able to enhance returns on projects they have developed by selling them down.
However, Wood Mackenzie has expressed concern that given the oil major’s appetite for offshore wind, there may not be enough supply to meet the demand fuelled by the arrival of the Euro Majors in the market.
As Wood Mackenzie chairman and chief analyst Simon Flowers noted recently, the UK Round 4 lease auction showed how aggressive Big Oil can be. Wood Mackenzie said a host of factors made Round 4 highly attractive, not least that the UK is the leading offshore wind market and project scale is among the biggest. The terms all offered 60-year leases, long enough for two turbine life cycles and much longer than the longest-life accessible oil and gas projects, alongside low risk, government-backed contracts-for-difference.
Analysis by Wood Mackenzie published in February also highlighted the effect of the huge option fees companies have paid in recent auctions. It suggests that paying a big option fee upfront will make it harder to achieve the double-digit returns the Euro Majors aim for from renewables.
To claw back the 300 bp to 500 bp effective cost in option fees, Wood Mackenzie said developers will have to ensure discipline on project delivery, execution, capital and operating expenditure, and ensure that any synergies such as trading, finance or tax are maximised. The good news for emerging Energy Majors is that its modelling suggests project returns in high single digits are still achievable.
“As with any acquisition or diversification into a new activity, Big Oil will need to continuously and clearly articulate the value proposition as it commits increasingly large amounts of capital into new energy, including offshore wind,” Wood Mackenzie said.
“There will be fewer FIDs in 2021 compared to 2020,” Mr Lassen concluded, “but many more tenders this year and in subsequent years. 2021 offers opportunities of the oil majors to extend their 2020 momentum in the offshore wind industry.”
Riviera Maritime Media’s Offshore Wind Journal Conference will be held on 25 March 2021 - use this link for more details and to register for this virtual conference