COLUMN | Blowing a giant bubble? – Part Two [Offshore Accounts]

“Last year 29 gigawatts of offshore wind capacity was connected to electricity grids around the world. In 2029 Wood Mackenzie forecasts that number will hit 180 gigawatts.”

BBC News 13^th August (here)

That’s all you need to know to forecast that offshore wind turbine installation is going to become the next wild west of the offshore industry – with a boom, followed by the inevitable bust, as the supply of vessels to install windfarm installation capacity increases to meet the huge increase in demand. Last week (here) we covered the current state of play of the industry – ever larger, more powerful turbines being installed in ever deeper water by jackups with ever larger cranes, with installations starting to surge in Asia, and new projects on the Atlantic coast of the USA to add to burgeoning demand in Northern Europe.

Here’s a hot new investment pitch

Now, everyone is waking up to the potential, not just the dredging companies in the Lowlands, who have invested aggressively to build bigger and better wind turbine installation vessels (WTIVs) in recent years. Now, everyone wants a piece of the action, especially the brokers and finance houses with compelling PowerPoints to sell investments to institutional investors, the same people who poured into the cablelay business in the 1990s, leading to a surfeit of cable-lay vessels, and the inevitable bankruptcy of the industry leader Global Crossings; and the same people who urged investment in deep-water drilling and PSVs in the early 2010s, which led to the bankruptcy of just about every major offshore drillship owner (see Valaris’ Chapter 11 announcement last week here).

Speculation: Build it and they will charter

Speculative newbuild WTIVs are the order of the day. There’s a reason for this. Analysts have identified a massive shortfall in capacity for newbuild jackup windfarm installation vessels. The brokers foresee a supply crunch, which will send day rates higher, as windfarm operators like Ørsted and Total clamour to charter vessels to install the turbines they have ordered.

Suddenly, jackup WTIVs look as if they are the critical path item for many new windfarms. Current forecasts suggest that not enough vessels will be available, as the number of installed turbines increases from just over seven thousand this year to close to 27,000 in 2030.

Scorpio signs with Daewoo

The business case was made in a compelling fashion by Scorpio Bulkers, when it announced on August 3, 2020, that it had signed a letter of intent to construct a WTIV at Daewoo in Korea, along with three option vessels. Scorpio helpfully posted the PowerPoint justification online here. If you only read one PowerPoint on the offshore wind industry, read that one, and just focus on this one graph here, on page 7:

The Scorpio WTIV is a GustoMSC NG 16000X design with a 1,500-tonne leg encircling crane from Huisman. Since windfarms are all about the green energy, Scorpio has been at pains to show how the vessel has “strong eco credentials” with hybrid battery power and is designed to be “fuel cell ready,” whenever anyone builds a sufficiently compact fuel cell to place onboard a jackup without jeopardising its deck load capacity or stability (Where are you, Elon Musk?).

Scorpio highlighted that total cost of the new build project is expected to be “approximately US$265 – US$290 million.” Given that Scorpio Bulkers has a market capitalisation of only US$175 million and reported a net loss of US$45 million in the second quarter (here) financing four such units may be a stretch…

However, the business case seems strong. Those helpful people at Clarksons-Platou claim that the world needs at least ten more WTIVs simply to meet 2024 demand for turbine installation:

Ulstein Design has made the same argument here.

Scorpio argues that current contract rates of US$220,000 per day “imply attractive cash flow and return on capital” and, the kicker, “potential for rates to improve as the market tightens over the next three to four years”. This business case looks infallible, surely – even if our summary of windfarm vessels last week seemed to show considerably more than just five high-specification WTIVs already existing and on order in the world.

So, what could go wrong?

Triumph has spotted the treasure, too

Such low hanging fruit has unfortunately not escaped the greedy eyes of others. On August 11, Triumph Subsea Services announced that it had signed a letter of intent for a pair of new build WTIVs, to be built to the GustoMSC NG-14000XL design at Brodosplit shipyard in Croatia.

Triumph’s press release managed to check every “green hype” buzzword, declaring, “In-line with our core values of green, our ethos of technology, and our mission to be net zero by 2035 or sooner, the vessels have been designed from the onset to be future proofed, and will be DNV GL classed with numerous green notations, including Fuel Cell (Power). The FC (Power) notation, along with the installation of the latest advanced hybrid technology, energy recovery and autonomous systems reduce fuel consumption and carbon emissions by up to 50 per cent compared to similar vessels. Once the fuel cell technology is ready for installation, it will be short duration dry-docking to then reconfigure the vessel into a 100 per cent net zero emissions vessel.”

Triumph of the will? Billion dollar newbuild plans

Questions hang over who is funding Triumph, and how it will pay the half a billion US dollars required to build its WTIVs in Croatia. The answer?

I don’t know… but since the company has also announced another letter of intent with the same Croatian shipyard to build a pair of field development vessels plus two option vessels of the same design, each 200 metres long with two 600-tonne fibre rope cranes, as well as “commitment” to build a Jones Act-compliant floating wind farm installation vessel for the American market, Triumph will need very deep pockets – like billions of dollars deep.

The announcements are here – there is also a “collaborative partnership” to invest in Norwegian Eelume autonomous underwater vehicles, which look like giant, robotic eels, and which Triumph says will be deployed from its field development vessels. Watch out, Ocean Infinity and Fugro; you have a potential, new rival in the vicious, subsea robot war (here)!

For those of you too lazy to click on the link, Triumph says that the expected steel-cutting date of the first hull is in February 2021, with the cutting of steel for the second hull being six months later. The company estimates that the build time from contract signing is 30-32 months for the first vessel.

Perhaps there will be some state or EU funding, as Triumph claims that “this new contract will ensure the sustainability of the Croatian shipbuilding industry and will create numerous employment opportunities and supply chain revenues for local and EU regions.”

So that is six newbuilds to plug the gap. But wait, there are more, as you would expect in a gold rush.

Norwegians jump in with newbuilds, too

No offshore bubble is ever complete without Norwegian involvement, so it was no surprise to find that Offshore Heavy Transport was entering the turbine installation market, when it announced (here) that it had entered into a binding heads of agreement with China Merchants Heavy Industry in Jiangsu, China, for the construction of two WTIVs with options for a further two units.

Guess what? The vessels will be jackups of GustoMSC design, with a telescopic crane with maximum capacity of 2,500-tonnes and a maximum lifting height of around 165 metres.

Readers will not be surprised to learn that “special emphasis has been placed on providing a class-leading environmental footprint by way of energy and heat recovery, battery hybrid solutions as well as a sophisticated electrical and control system, reducing CO2 emissions by 20 per cent compared to similar units… As a future option, the vessels have been prepared for fuel cells powered by hydrogen to be installed to cut emissions even further.”

OHT says that the first unit will be delivered in early 2023, whilst the delivery structure for the second unit is flexible. Which is usually the case at Chinese shipyards, anyway…

OHT offers integration through the supply chain

What differentiates OHT from Scorpio and Triumph is that it is already an established player in the heavy lift market, albeit usually transporting jackup and semi-sub rigs and offshore modules around the world on its fleet of five semi-submersible heavy lift vessels (here). In 2018, OHT announced a contract to build what the company claimed was “the world’s largest and most efficient wind turbine foundation installation vessel” named Alfa Lift, also at China Merchants.

Alfa Lift will be delivered next year, and is designed to install monopiles and jackets from a floating vessel in dynamic positioning mode “to achieve higher efficiencies and lower cost” the company states.

Dogger Bank in the bag

As turbine and monopile production is standardised and becomes a centralised production line, OHT reckons its heavy lift vessels can provide the transport leg from factory to offshore, and then its installation vessels will complete the work in a seamless chain. It already boasts that for the Moray East windfarm off Scotland, it is transporting 48 jacket foundations from the UAE.

OHT has also announced that Alfa Lift has been awarded the transport and installation contract for the foundations of the Dogger Bank A and B windfarms in the North Sea. This is the world’s largest offshore wind farm and Alfa Lift will commence the work from 2022 onwards, with Dutch owner Jan De Nul’s new build WTIV Voltaire, contracted to install the massive 12MW turbines there.

OHT’s entry means DEME, Van Oord, Boskalis, and Jan de Nul now have serious Norwegian competition.

Japan becomes the next battleground

With three new players battling to supply the European market against the seven incumbents, there’s also a turf war breaking out in Asia, where nationalism means that each country prefers to use nationally built and flagged vessels, if available. So, Japanese construction company Shimizu has announced it will make an investment of 50 billion Japanese yen, (about US$477 million) to build, guess what, a newbuild WTIV in Japan for the Japanese market.

This unit will be equipped with a crane with a maximum lift capacity of 2,500 tonnes and a maximum lift height of 158 metres. It is designed to be able to transport and install seven 8MW wind turbines in a single voyage in water depths of up to 65 metres.

The unit’s crane offers both a combination of high hoisting capability for turbine installation (1,250 tonnes at 158 metres) and a heavy load capability for foundation installation (2,500 tonnes at 121 metres).

Japan Marine United Corporation will build the vessel, and it will be designed by GustoMSC again (see announcement here). To ensure maximum local content in the operations, Fukada Salvage will provide crew and will technically manage the unit.

Then, in March this year, PaxOcean Group of Singapore and Penta-Ocean Construction of Japan announced that they would co-operate to build a WTIV at a PaxOcean yard, again to target the Japanese market. They claimed that the jack up would be fitted with a 1,600-tonne crane, a 3,800-square-metre deck and built to a GustoMSC design for delivery in the second half of 2022. Baird coverage here.

NYK ties up with Van Oord

The old proverb says that good things come in threes. So, at the same time, Japanese ship owning giant NYK also announced that it and Dutch contractor Van Oord plan to own and operate Japanese-flagged offshore wind installation vessels (here) as well.

It’s not clear whether they will reflag an existing Van Oord asset, or build a new one, but NYK said that the WTIV will “be suitable to install the latest generation of wind turbines” when it announced the memorandum of understanding with its Dutch partner. The two players will also “explore opportunities to collaborate on other types of vessels required for the construction and operation of offshore wind farms.”

To cover the day to day windfarm personnel and light cargo operations after the electricity is flowing, NYK also announced an agreement to co-operate on the ownership and operation of windfarm crew transfer vessels with Sweden’s Northern Offshore Group, which already operates 35 such vessels in Northern Europe (see here).

China also building

Enough! But August also saw China’s OuYang Offshore announce it would be building two newbuild WTIVs. The vessels, OuYang 003 and OuYang 004, will be constructed at the Dayang Offshore Equipment’s shipyard in China and AqualisBraemar’s will provide the newbuilding supervision.

OuYang already operates two WTIVs – OuYang 001 and OuYang 002.

The newbuilds are self-propelled, with an operational water depth of up to 50 metres and accommodation for up to 68 persons. They are smaller units, well suited for China’s shallow water, smaller turbine, domestic market.

OuYang 003 and OuYang 004 will be equipped with one 600-tonne leg fitted crane with a lifting height of 140 metres from sea level. The WTIVs are capable of the lifting installation of 10MW wind turbines in China, AqualisBraemar said in its release here.

America joins in

Then in May, Dominion Energy touted that in addition to building America’s largest commercial offshore windfarm, it would also participate in a consortium to build America’s first domestic WTIV. Because the world needs more, clearly, and the Jones Act would give such a vessel a commercial edge in US waters.

The company’s CEO Thomas Farrell announced the move during Dominion’s first quarter conference call. During the call with analysts, Mr Farrell explained that funding needs to be finalised among consortium participants for the WTIV, and that he hoped the WTIV would enter service in 2023. Watch this space.

Conclusion: Too much of a good thing

We can see now that a bubble is building in the wind farm sector. The new building announcements covered here total billions of dollars of additional capital entering the sector. Demand is going to rise sharply in the short term, but supply risks overshooting in the medium term, as we see in every single shipping bubble. The same analysts are touting the same business case to a dozen ship owners and investors, just as they did in the deepwater drilling frenzy from 2008 onwards.

The early movers may well make a mint and profit handsomely, but it is hard to avoid the conclusion that there is a serious risk of an excess of new WTIVs leading to a calamitous collapse in the US$220,000 per day rates Scorpio identified.

In Part 3 next week, we’ll look at other factors which may burst the WTIV bubble in the medium term.