Majors Embrace Offshore Wind

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• European majors with aggressive renewables growth targets are putting proven low-carbon wind power at the core of their transition strategies. • The majors see offshore wind as particularly attractive due to its scalability, operational synergies with offshore oil and gas, and its suitability for use in growing emerging technologies such as green hydrogen. • The majors will leverage their financial firepower, partnerships, retail and commodity trading expertise, and global reach as they seek to maximize profit from wind power investments. The Issue Since 2015, Big Oil has invested more in wind energy than in any other low-carbon technology. Offshore wind, in particular, is evolving rapidly, with several auctions and tenders planned to take place around the world this year. The Global Wind Energy Council (GWEC) sees offshore capacity growing by 31.5% annually over the 2021-25 period -- or 70 gigawatts in total compared to an annual growth rate of 0.3% for onshore wind. Still, offshore wind remains a niche sector that represents just 4.8%, or 35 GW, of total capacity today. GWEC sees 94 GW annually of new wind capacity installations coming over the five-year period, with offshore accounting for about 15% of that. Further out, the immature floating wind sector is seen by some companies as a potential source of growth as costs come down (NE Feb.11'21). Reasonable Returns European majors interested in offshore wind reckon they can achieve reasonable internal rates of return (IRRs) in the 8%-12% range with the help of their trading desks. Companies that successfully bid for offshore wind projects around the world say they can make suitable returns to satisfy their boards and shareholders. However, these companies don’t highlight IRR numbers for each specific project they are involved in. Energy Intelligence understands that typical IRRs are under 10% and can be competitive with hydrocarbon projects near the bottom of oil and gas price cycles -- such as during the height of the pandemic last year. Leading offshore utility Orsted says it typically gets a 7%-8% unlevered lifecycle IRR for its offshore wind farms in Northwest Europe. But offshore wind costs are dropping fast in mature markets. This is reflected by lower strike prices, or a fixed payment rate for every megawatt-hour generated, in the developed markets of Northwest Europe. Some projects are described as subsidy-free, which means the oil major/developer consortium has merchant risk for its output unless it inks a power purchase agreement (PPA) or bilateral power contract for output. Boosting Expertise Given the scale of the European majors’ renewable targets, there is scope to enhance returns on wind projects through partnerships where companies bring complementary capabilities and capacity. In the case of the Equinor and BP partnership, for example, the Norwegian major farmed down a 50% stake in two phased offshore wind projects -- Empire Wind and Beacon Wind -- in the emerging US East Coast play (WGI Sep.16'20). Equinor did the same at its giant Dogger Bank project in the UK, offloading 10% to Eni in the Italian company’s first foray into offshore wind. For Equinor, this frees capital to help meet its bold ambition to grow its installed wind generation capacity by more than 30% annually to 4 GW-6 GW by 2026, and then to 16 GW by 2035 (PIW Jul.3'20). The divestment of non-operated stakes in the US and UK will generate a $1.2 billion accounting gain this year. Equinor CEO Anders Opedal said that this clearly demonstrates the company’s ability to create value and that it would “leverage the toolbox” further to increase equity returns from Equinor’s Dogger Bank A and B wind farms. The partnership with BP also creates a platform for growth for Equinor, leveraging the UK major’s trading expertise and onshore wind experience in the US. But that growth will also be disciplined, according to Opedal. “We will always seek to move into projects where we can use our capabilities, our experience and seek a return of 6%-10%,” he said. Offshore Advantage BP joined the offshore wind party late but its partnership with Equinor has specific advantages as it builds out its renewables portfolio. The UK major will seek to tap Equinor’s experience and technical capabilities in offshore wind development and operation while sharing the bill and leveraging its own experience in offshore oil and gas and power markets. “Project execution is key as we build out new projects,” Dev Sanyal, head of BP’s Gas & Low-Carbon Energy unit, said. BP also views the partnership as a potential way to speed up growth in the fixed offshore wind and fledgling floating wind markets in the US and other territories over time. Equinor finalized plans last year to proceed with the floating Hywind Tampen project -- the world’s first commercial scheme -- to power five Norwegian offshore platforms from 88 MW of floating turbines by end-2022. Over half the project's costs will be covered by government funds -- a significant advantage for the state-run company as investors question returns from renewables. European Majors' Key Wind Projects/Transactions Company Fixed Bottom Offshore Floating Offshore Wind Green Hydrogen/Wind Equinor - Farm-down of 10% stake UK

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