Big Oil To Go Deep Into Trillion-Dollar Offshore Wind Industry

Big Oil To Go Deep Into Trillion-Dollar Offshore Wind Industry
Over the next decade, the offshore wind industry will attract almost $1 trillion in new investment and Big Oil will be a massive part of it.

No longer in its infancy, offshore wind is a proven technology on course to play a key role in the decarbonization of the global economy. Over the next decade, the industry will attract almost $1 trillion in new investment, Wood Mackenzie said.

According to Woodmac, a growing number of competitors are flocking to take advantage of the massive opportunities that will be created by the boom. The Majors – notably the European Majors – are no exception. Right now, their share of the market is small, but ambition is ramping up as they bet bigger with their investments in the zero-carbon value chain.

The upstream sector has long analyzed cash margins on a per barrel of oil equivalent (boe) basis. This well-understood metric reveals how much operating cashflow upstream oil and gas assets generate per unit of production. It’s especially useful for articulating cash generation capacity and benchmarking portfolios.

Conventional analysis of renewables pitted against oil and gas investment usually focuses on relative risk and returns. But Woodmac claims that the comparison with the legacy business needs new metrics. The new cash margin metric used by the analytics firm – operating cash flow per gigajoule equivalent (GJe) – goes beyond traditional comparisons, and it reveals that offshore wind comes up trumps.

Tracking asset-by-asset data, offshore wind will deliver 25 percent higher unit operating cash margins for Big Oil in comparison to new field oil and gas projects. Even the lowest offshore wind portfolio average operating cash margin is above the upstream average. And the renewable technology’s margins trump deepwater – Big Oil’s highest margin asset class.

Offshore wind’s strong operating cash margin performance shows that the financial prize is more than simply long-term and steady cash flows. Such a cash wedge within a business is a good way to support other portfolio areas or, indeed, a significant dividend commitment, and to hedge exposure to carbon and hydrocarbon prices.

Returns do matter. Falling IRRs from offshore wind projects will not be sustainable if the sector is to attract the capital required for it to play its part in meeting global climate goals. Woodmac believes that mid-single digit returns will not be acceptable.

Companies have already been leaning on traditional tools of debt-financing and asset rotation to lift IRRs. As the sector matures other levers, such as increasing merchant exposure, power trading, and building power-to-x projects, will also come into play to boost returns.

Wood Mackenzie also said in its report that the Majors could play the long game with offshore wind as the industry is not without challenges. Dark clouds of supply-led cost inflation and the rising cost of debt are looming large over offshore wind and the industry is currently grappling with oversupply, while the demands of next-generation technology mean that massive investment will be needed to back new tower production facilities.

But after years of managing volatility in oil and gas, the Majors are equipped to get the balance between risk and return right. And they are flush with deep pockets of cash to take advantage of the huge upcoming opportunities.  Helped by recent record prices of oil and gas as well as record quarterly profits, they are certainly well posed to do so.

To contact the author, email bojan.lepic@rigzone.com



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