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Offshore Wind To Be The Next Bet For Oil Majors

Date:2022-10-24 15:41:16

 Offshore Wind To Be The Next Bet For Oil Majors

Annual spending on offshore wind will rise from less than $20 billion in 2020 to almost $120 billion in 2030 and it will be the next bet for oil majors, Wood Mackenzie said.

According to Woodmac, majors can achieve the scale they need but it will take time. Utilities, including Ørsted, RWE, and Iberdrola, have locked in much of the offshore wind pipeline through 2026.

But the UK, Europe, the US, and Japan are among a host of governments accelerating lease auctions and centralized tenders in the push for net zero. The majors are paying up for lease options, often partnering with incumbents and positioning to participate in the next wave of big projects later this decade.

Woodmac chose operating cash flow per gigajoule equivalent (GJe) as a common metric to benchmark energy companies producing both oil and gas and power. As electrons replace hydrocarbon molecules in Big Energy production portfolios, converting power and oil and gas into units of primary energy equivalent allows a direct comparison.

Offshore wind’s operating cash margins are 25 percent higher than those of future upstream oil and gas developments. They even trump deepwater projects, E&P’s highest margin asset class. The long life of offshore wind projects also sets them apart from most deepwater and conventional upstream developments. Project lives are typically estimated at 30 years, delivering steady output with little decline in power generation. Only domestic gas and LNG projects come close to having a similar profile.

This combination of higher margins and long life means superior cash flow generation through the project’s life. An offshore wind portfolio will deliver an average operating cash flow margin of $4 per GJe from 2025 to 2040. For a giant 3.6 GW project such as the UK’s Dogger Bank, that equates to around $9 billion of cash flow generation in real terms over 15 years.

Deepwater, LNG, and conventional projects of comparable scale would generate $8 billion, $6 billion, and $5 billion, respectively, over the same period, assuming $60 per bbl.

To compete for capital against alternative investment options, we think the majors need to deliver IRRs above 10 percent. The trick will be to get the balance right between the stability of cash flows and higher risk.

Using leverage and asset rotation, the baseline numbers can be boosted to around 10 percent. Higher merchant price exposure, building power-to-x projects – such as green hydrogen, power trading, and an integrated approach with retail all offer further upsides.

TotalEnergies, for example, is guiding for a 70 percent power purchase agreement and 30 percent merchant exposure in its renewable portfolio going forward. Most legacy contracts have tended to lock in prices for 15 years, leaving only the ‘tail’ – and more recently the nose – exposed to wholesale prices.

Woodmac analysis suggests that if the majors capture 25 percent of offshore wind demand, those electrons could replace about a third of the oil and gas molecules they lose by 2050 in the push to net zero. Solar and onshore wind might fill the rest of the gap but the contribution from offshore wind could be even higher in an accelerated energy transition.

As the majors morph from Big Oil to Big Energy, a well-curated and diversified offshore wind portfolio holds the promise of the full package, Woodmac claimed, but they will need to convince investors they can navigate the “pay to play” strategy in offshore wind. That’s often ended badly in upstream, killing returns, and destroying value.

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