Oil majors' offshore wind buy-ins set to accelerate opex reductions

The growing involvement of Oil and gas groups in offshore wind projects will generate significant cost savings in installation logistics and along the full operational lifespan, industry experts told Wind Energy Update.

Oil operators are set to bring supply and services synergies to the offshore wind market. (Image credit: Kanoke 46)

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The offshore wind sector is seeing rising interest from Oil and Gas majors as learnings in the maturing European offshore market cut project costs.

Norway's Statoil and Royal Dutch Shell are increasing investments in offshore wind projects and these firms bring decades of operational efficiencies in offshore installation and maintenance practices.

Statoil recently bid a record-low price of $535 per acre to win a New York offshore wind lease and last month the group submitted an unsolicited request for a previously-unleased area offshore Massachusetts. By 2030, Statoil could spend as much as 15-20% of total capex on "new energy,” according to the company’s latest outlook.

Shell is a shareholder in the Blauwind II consortium which recently bid a record-low Dutch offshore price of 54.5 euros/MWh to build the 680 MW Borssele 3&4 windfarm.

In June 2016, Shell confirmed it had created a New Energies division to group together activities in wind, solar, biofuels, carbon capture storage and distributed energy. The New Energies business will spend around $200 million euros per year on new projects, it said.

"Our focus will largely be on capital-light plays, in areas that share aspects with our core businesses, such as location and ease of fit with existing infrastructure," Shell said.

         Major offshore wind equity investors in 2016 by capacity

Data source: WindEurope

Improved technology, faster installation and closer cooperation between developers and suppliers has driven offshore wind prices towards wholesale power market levels.

Vattenfall bid a record low price of 49.9 euros/MWh to win the Danish 600 MW Kriegers Flak offshore wind tender in November.

Renewable energy consultants BVG Associates predict the average levelized cost of energy (LCOE) European offshore wind projects will drop by 37% between 2014 and 2030 and "incremental innovations" by Oil and Gas groups will play a key role, Alan Duncan, Oil & Gas (O&G) Diversification Lead at BVG, told Wind Energy Update.

BVG predicts around half of the cost reductions will come from the deployment of larger capacity turbines but Oil and Gas sector expertise on offshore installation, logistics, and operations and maintenance will accelerate efficiencies, he said.

“The key point to emphasize is that while Oil and Gas companies will not provide the silver bullet for cost reduction, they will bring the finesse required to shave off that extra 1 to 2%...that is where Oil and Gas in offshore wind will come into its own,” Duncan said.

Power players

Denmark's DONG Energy has already transitioned from national Oil and Gas company to become the world's largest offshore wind power developer and a major driver of cost reductions.

DONG Energy’s winning bid price of 72.7 euros/MWh for the Dutch 700 MW Borssele 1&2 project in July 2016 was, at the time, the lowest ever offshore price. The Danish company is also developing the world's largest offshore wind project, the 1.2 GW Hornsea Project One, off the coast of Yorkshire, England.

DONG Energy expects to exceed its offshore wind installation target of 6.5 GW by 2020 and expects installed capacity to rise to as much as 12 GW by 2025, CEO Henrik Poulsen said at the company's annual results presentation on February 2.

                      Owners' share of installed offshore capacity

Large offshore wind developers such as DONG and Sweden's Vattenfall are assuming more Engineering-Procurement-Contractor (EPC) responsibilities, exerting more control over the development supply chain, more effectively managing risks and building margins.

DONG Energy's wind power operating profits almost doubled in 2016, although this will reflect some older long-term offtake contracts signed at relatively attractive strike prices.

Poulsen believes the offshore wind sector will “be flooded by competition” as oil giants increasingly move into the sector, he told the Wall Street Journal in May 2016.

“We’re talking about huge companies with significant capital and execution power,” he said.

Specific skills

Oil and Gas groups will be able to transfer to wind projects decades of operational experience in health and safety, vessel logistics, installation efficiency, and operations and maintenance practices.

Experience of transporting offshore staff safety and efficiency will help lower operations and maintenance costs and improve turbine availability, Jim Lanard, CEO of US offshore wind firm Magellan Wind, said.

“Oil and Gas is very strong in this area and given that an offshore wind facility covers a far larger geographical spread with many more assets, we should expect a lot of Oil and gas expertise to come over here,” he said.

Oil and Gas groups can also transfer long-running supply and service partnerships which should boost efficiency and mitigate project risks, Duncan said.

“Oil and Gas has very strong Approved Vendor Lists (AVLs) and established supply-chains, a massive play for big Oil and Gas will be bringing over that supply chain which all offshore wind will benefit from,” he said.

Vessel supply and logistics is a key project risk for offshore wind sector. In the nascent U.S. offshore industry, gaps in infrastructure and vessel supply continue to put upward pressure on capex.

The presence of Oil and Gas majors at this early stage of US development should help  reduce project risks, Lanard said.

"They know better than anybody the risks associated with working in harsh marine environments...there is a lot of knowledge there and we need to tap it," he said.

Oil and Gas supply firms will have to adjust to the high number of individual units and components involved in offshore wind projects, Lanard said.

"We have heard from some companies who have already moved over that they need to now focus on establishing standardization workflows on the shop floor to produce in the hundreds required by offshore wind,” he said.

DONG Energy-- the former oil and Gas company--has understood the benefits of standardization "better than anybody," Lanard noted.

“Their standard foundation design approach significantly [cut] the cost of offshore wind power production," he said.

Rising influence

Duncan and Lanard both predict more Oil and Gas firms will continue to move into the offshore wind sector in the coming years, as oil groups diversify assets amid a low oil price environment.

“There is a little bit of a perfect storm,” Duncan said. The cost reduction [offshore wind] has managed to achieve ahead of schedule means it is becoming commercially viable. Coupled with the Oil and Gas downturn the stars have aligned almost," he said.

The improving risk-reward profile of offshore wind is prompting major energy groups to review spending priorities, Lanard said.

“The voices for the new revenue centres are going to be heard more clearly now because the industry has matured and proven itself at the time the need for diversification is strong,” he said.

By Kerry Chamberlain