COLUMN | BP buys big in offshore wind — Part One [Offshore Accounts]

The Queen of England emerged as the unlikely big winner from the latest auction of offshore windfarm acreage in the UK, potentially raking in over eight billion pounds (US$11 billion) in option rights from bidders keen to rent six pieces of the seabed for future windfarm usage. At first glance, Danish wind giant Ørsted and Dutch energy company Shell might seem the big losers – both were outbid on all the British blocks and walked away with nothing.

BP paid fifteen times more than what was bid in comparable auctions for windfarm acreage in the US in 2018 to win two of the UK blocks. Among the other successful bidders were German utility RWE, which won two blocks; Australian infrastructure player Macquarie’s Green Investment Group, which bid and won a block in partnership with French energy company Total; and a joint venture between a British company called Flotation Energy and its Spanish partner Cobra Instalaciones y Servicios. The full financial details are here.

The winner’s curse?

BP now faces the “winner’s curse” (here). In essence, BP’s chief executive, Bernard Looney, has paid a high price to buy a large position in the next phase of windfarm development off the UK, far higher than other players in the industry were willing to pay; around £100 million (US$140 million) a year more than RWE for each 1.5 GW permit. As we shall see in Part Two of this piece, the boss of French rival Total is not happy. Nor was Shell, which told Reuters that its offer for the blocks was “nowhere close” to BP’s.

“For BP in particular this looks like a very expensive ticket for admission into the offshore-wind game,” the chief sustainability strategist at BNP Paribas Asset Management told journalists Nathalie Thomas and Anjli Raval (here).

BP’s bold move

BP won sites off Cumbria and Wales in the auction, representing a total of three GW future wind energy capacity. BP bid jointly with the German regional utility company EnBW. BP and its partner will each pay around £1 billion (US$1.4 billion) in option fees to the Crown Estate for the two leases before the final investment decision (FID) is confirmed.

After the wind farm is finished, the operators must pay two per cent of the revenue to the Crown. The option fees were an innovation in the 2021 auction and are designed to compel seabed lease holders to move quickly to install their generation capacity, or to pay if they don’t. Each bidder had to make a proposal on how large its annual option fees would be. BP offered 65 per cent more than the second placed bidder on its blocks — 65 per cent more!

However, analysts at Jefferies said that the new British awards would now enable BP to “leapfrog Royal Dutch Shell to become the second-largest player among the oil majors in offshore wind.”

Penny-wise, Pound foolish?

Anyone who has had to deal with BP’s supply chain team knows what a bunch of penny-pinching miseries they are — unattractive people working for an unattractive company run by a hypocritical leader (see our previous commentary here regarding #inthistogether). These are people who will spend hours arguing over a few hundred dollars a day of charter hire with rig and vessel owners teetering on the brink of bankruptcy, happy to force the ship owners to cut seafarers’ wages in a savage drive to the bottom. Wind farm turbine installers of the world, beware; BP is going hit you soon.

BP negotiates hard over every penny on even profitable oil and gas developments, but the same company was willing to overpay its rivals by 65 per cent in this UK windfarm auction. This suggests that perhaps BP’s leaders are not very good at doing their sums or estimating their competitors’ capabilities. Or perhaps they plan aggressive supply chain management to recoup the overpayment.

“Location, location, location”

“These are highly advanced assets… it’s location, location, location,” Dev Sanyal, BP’s chief executive of alternative energy, told Reuters (here). I am not sure that anyone else would describe a piece of sand and mud in the Irish Sea as a “highly advanced asset”. However, Sanyal highlighted the fact that one of the leases was in shallow water just 30 kilometres from the coast, which he claimed would “lower transmission costs”, and, bizarrely, “reduce the environmental impact” without explaining how. Surely, a wind turbine is a wind turbine wherever it lies?

How much exactly?

BP and EnBW expected to make the FID on the windfarms in 2025, but, “it was too early to say how much the development would cost,” Sanyal told the wire service.

Call me a cynic, but after paying hundreds of millions for two empty pieces of seabed, you might expect BP to know approximately how much the three GW of installed wind turbines it plans to build there might actually cost.

The construction of the 2.4GW Dogger Bank wind farm off the UK, which is in progress, was reported to have cost its owners Equinor and SSE Renewables a total of £6 billion (US$8.4 billion), and they paid no option fees for the seabed rights to the Crown in the earlier round.

BP’s 50GW plans

But BP is a company in a hurry, with a self-imposed target to increase renewable power generation to 50 GW by 2030 from its current 3.3 GW capacity. BP’s CEO Bernard Looney has promised his shareholders returns of eight to ten per cent on these renewable investments.

Looney has also promised to dramatically reduce BP’s oil output, planning to sell (“divest” in BP’s lingo) around US$25 billion of “non-core” assets, including a share in an Omani gas and condensate field to PTTEP, which was sold for US$2.6 billion earlier this month (here). BP has kept 40 per cent and operatorship, however.

Bigger than the whole of the UK’s 2030 wind capacity

To put BP’s ambitions into context, its target of 50 GW of renewables in 2030 will exceed the expected offshore wind capacity of the entire UK in that year. According to Rystad Energy (here) the UK’s current offshore wind capacity was 10.5 GW at the end of 2020, and, with many new turbines coming on stream, will rise to 27.5 GW in 2026.

Rystad noted that UK “offshore wind capacity will continue to rise after 2026 and reach nearly 40 GW by the end of the decade”. So, BP plans to have more renewables capacity than the entire of the UK in less than a decade, a decade in which the UK will nearly quadruple its own capacity.

But every major wants a piece too

Such massive planned capacity expansion by BP can only be achieved by outspending its rivals, many of whom, like Ørsted and Iberdrola, have much more experience than BP in wind farm development and operations. Now every European oil and gas company wants a piece of offshore wind action, as they race to decarbonise. The targets they have set mean that the next round of tendering in Europe is going to get brutal, as each one struggles to buy seabed from governments to build capacity. This implies prices are going to rise, as competition results in windfalls for the governments selling seabed.

Total plans to take Thor

In January, Total announced it would be partnering with Iberdrola (press release here) to bid on the one GW capacity Thor windfarm off Denmark, which is due for award at the end of this year, in Ørsted’s home market. Competition on Thor will be intense, as the Danish government has shortlisted six developers to battle it out. The bidders are Ørsted, Vattenfall, the aforementioned consortium of Total and Iberdrola, RWE, a combination of SSE Renewables, Copenhagen Infrastructure and Andel Holdings, and, finally, Swan Wind, which is a joint venture between Eneco Wind and European Energy.

ENI buys into Dogger Bank, 54 GW to go

In December Eni announced it had entered into agreements with Equinor and SSE Renewables to acquire a 10 per cent stake from each in the Dogger Bank wind farm off the UK. Eni agreed to pay £405 million (US$ 567 million) for this 20 per cent stake in the first two phases of what will become the world’s biggest offshore wind farm.

Eni has set itself a target of five GW of installed capacity from renewable sources by 2025, followed by a target of 25 GW in 2035, and a very ambitious 55 GW in 2050.

The future’s Vårgrønn?

Eni has also set up a joint venture company named Vårgrønn with HitecVision, the private equity company that claims to be the largest private sector investor in the Norwegian oil and gas industry. Vårgrønn will be participating in the upcoming offshore wind tenders in Norway in direct competition with Norwegian state oil company Equinor.

These very high targets for renewable generation capacity from the European majors seem to exceed the available wind farm capacity due on line, but perhaps the Biden administration will enable them to enrich the coffers of the American government too. Expect competition to heat up in Japan and Korea, and every other country where offshore acreage is auctioned in a fair and transparent process.

“Deeply sceptical” of profits

The Financial Times has reported, unsurprisingly, that “analysts have questioned how bidders will make money given the large cost of constructing offshore wind farms.”

“I am deeply sceptical,” the newspaper reported one analyst as saying. He described the prices paid by BP and EnBW as simply “staggering”.

Offshore wind is not a sophisticated business, unlike the difficult mission of finding oil and gas kilometres down in solid rocks often under thousands of metres of sea water and then bringing it to production without spilling it. All you need to be an offshore wind player is rights to some seabed where the wind blows, turbines, a cable to connect to the electricity grid, and a contract to sell power to the wholesale electricity market. Simple!

This simplicity creates low barriers to entry into offshore wind at a time of cheap capital, and activism across the developed world to reduce greenhouse gas emissions and “decarbonise”.

As lease rates shoot up, someone’s got to pay. In Part Two, we look at who that may be…

Background reading

The winner’s curse is well described for the telecoms business here. In 2000, on the back of the technology bubble, telecoms companies bid over US$30 billion in both Germany and the UK to obtain rights for 3G mobile spectrum from the two governments. The winners ended up crippled by debt for a decade to come. British Chancellor Gordon Browne had a lovely time spending the money.

Biography of BP’s Dev Sanyal is here.

Our previous three part series on the offshore wind bubble can be read here, here and here.