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Big Oil ‘perfect match’ for UK’s latest offshore wind round

Analysts expect more industry players to chase projects as ‘decarbonisation makes business sense’ amid low prices

A “perfect match-making opportunity” is on the horizon for oil and gas players with the opening of the UK’s Round 4 offshore wind tenders, which analysts believe will draw in many industry names as the bar for offshore wind development is raised for the benefit of companies with large balance sheets.

The country’s seabed landlord, Crown Estate, said the tender will run from this month to autumn next year, and opens the potential for at least 7GW of new seabed rights, up to a maximum of 8.5GW.

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The UK is the world leader in offshore wind, with around 8.5GW of capacity installed - more than anywhere else in the world – and its Round 4 is central to its efforts to keep a pipeline of clean energy projects.

Italian player Eni, with a pure play renewables partner in Mainstream Renewable Power, have already announced they plan to join the Round 4 race, prompting analysts to expect more interest from oil and gas companies.

“I don’t know if it’s the intention of the UK government or not, but it’s a perfect match-making opportunity to bridge the renewables sector and the oil and gas industry,” Gero Farruggio, head of Rystad Energy’s renewable energy team.

“Some of these proposed projects are mega offshore wind projects, absolutely huge, $11 billion developments. This could potentially attract companies with deep pockets, like a lot of the oil and gas companies, which can stomach these projects,” Farruggio said.

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Industry interest

Industry players have previously said their interest in offshore wind will grow once the projects got large enough.

Outgoing BP chief executive Bob Dudley said last year the supermajor was “more interested” in taking a position in the offshore wind sector thanks to improvements in the sector’s technology and cost levels.

Any entry to the offshore wind sector would see BP join its fellow oil giants Equinor and Shell, which have stakes in European projects and a footprint in the US.

In addition, last month, Equinor agreed to develop the world’s biggest offshore wind farm (3.6GW) in the Dogger Bank region of the UK North Sea, in partnership with UK utility SSE.

The projects are estimated to trigger a total capital investment of approximately £9 billion ($11.3 billion) between 2020 and 2026.

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“Oil and gas companies are attracted by opportunities of scale - oil-and-gas-scale-opportunities,” Farruggio said. “The Dogger Bank project is the most expensive development that Equinor will develop over the next five years. You would think, the company’s most expensive project would be an ultra-deepwater oil and gas project, and not an offshore wind project,” Farruggio said.

Round 4 tender

Dogger Bank is one of the four bidding areas up for grabs in the Round 4 tender, alongside the eastern regions bidding area, the south-east bidding area, and the Northern Wales and Irish Sea bidding area.

Crown Estate, which hosted the Bidders Info Day on Wednesday, is preparing for the launch of the re-qualification (PQQ) and invitation to tender (ITT) stages.

It said, the appetite for the offshore industry was “evident” following the info day, which saw more than 130 attend.

“Welcoming so many delegates demonstrates the really positive interest we have seen in Round 4 leasing in the waters around England and Wales. This is a great opportunity to get involved in the largest offshore wind market in the world and we look forward to formally opening the tender process later this month,” a statement from the Crown Estate said.

The PQQ stage will assess potential bidders’ financial strength and technical competence, while the ITT, which is the main tender assessment stage, assesses the project bids submitted.

The PQQ will run to January 2020, and the projects that pass will then be eligible to take part in a two-stage ITT process, essentially becoming eligible bidders with eligible projects.

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Following a period of regulatory and environmental permits assessment, by Autumn 2021, the Crown Estate expects to enter into a wind farm agreement for leases with successful bidders.

Deeper pockets

However, some changes have been made to the tender process in preparation for the upcoming period, one which has been hailed by some as a “sign of maturity for the offshore wind market”, and by others as “pushing out the smaller pioneers in offshore wind”.

The Crown Estate now demands that bidders must have balance sheets worth at least £600 million ($735 million) over the past three years.

Mainstream Renewable Power, with almost 3.5GW of offshore wind developed in the UK alone, was able to comply with the new rules - solely by having Eni on board.

“The round almost forces these (oil and gas companies) to come in. These companies that have enough financial backing to, not just deliver these projects, but comfortably deliver and manage them for the next 20 years,” Farruggio said.

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“It is unfortunate that the smaller renewable companies, which have probably been the pioneers in renewables and responsible for the first wind farms, will not be able to compete (alone),” he said, however, the changes will lead to “more collaborations”, Farruggio said.

“Eni needs Mainstream more than probably Mainstream needs Eni, because an oil and gas company does not necessarily have experience in developing these offshore wind projects in terms of time frames, logistics, which are different compared to an oil and gas project. So, you need the proficiency these smaller companies can bring,” he said.

dac3ed22d5ad259f2fa27903b3cc99cc Blocks on offer: the Crown Estate Round 4 Photo: Crown Estate UK

Future partnerships

The partnership model was used last year in the US offshore wind auction off Connecticut, where supermajor Shell, in partnership with Madrid-based EDPR, a subsidiary of Portuguese utility Energias de Portugal, lodged a plan with the state to develop over 1GW of wind.

Another large winner in last year’s US auctions was Danish player Orsted, a major player which exited the fossil fuel sector to focus on renewables around two years ago.

“Decarbonisation is being driven by economics…as the cost of offshore wind have dropped so much that it makes business sense…because it’s not decarbonising for the sake of decarbonising,” Farruggio said.

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“Soon, it will no longer be a luxury but a necessity for these companies to evolve and to survive in tomorrow’s society.”

Industry majors have already been downgraded by one group of analysts for growing oil output whilst making limited investments in renewables.

Amid an energy transition from fossil fuels to lower carbon alternatives, ExxonMobil, Eni, BP, OMV, Shell and Repsol are no longer expected to perform financially to the high levels seen in the past, with Total, Equinor and Chevron also lagging behind, according to research by equities broker Redburn.

The downgrade comes as these companies continue to, in Redburn analysts' opinion, over-invest in oil instead of cleaner energy alternatives.

Redburn said investments into renewable energy by most majors remain low when compared with fossil fuel investments, with the consultancy estimating current spending on renewables is just around $8 billion per year, equivalent to around 6% of total capital expenditure.

The Crown Estate’s Bidders' Information Day on Wednesday provided potential leasing round participants and their advisors with a detailed overview of the Round 4 process.

The PQQ has not yet opened. The date for this has yet to be announced, but Crown Estate said it will be towards the middle of October.

Story updated to correct the size of the offshore wind portfolio of Mainstream Renewable Power in the UK, which is not 1GW, but 3.45GW.

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