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In Big Oil's push into green power, offshore wind seen as natural 1st step

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Denmark's Ørsted, the operator of the 367-MW Walney wind farm in the U.K., pictured here, has transitioned from an oil company into the largest owner of offshore wind globally.
Source: Ørsted

Sections of the U.K. seabed are set to be sold off for new offshore wind development. Not too long ago, these auctions would have been dominated by utilities and independent developers, but now the pool of bidders is widening to include some of Europe's largest oil and gas companies.

Industry players have long heralded the synergies between offshore wind and the legacy upstream oil and gas business. At their core, both involve large-scale, capital-intensive projects in challenging marine environments, so executives say offshore wind makes for a natural first step in Big Oil's push in the power sector.

"It makes sense because we're an oil and gas company. We've been working offshore for 50 or 60 years so far," Luca Cosentino, executive vice president for energy solutions at Italy's Eni SpA, said in an interview on the sidelines of the Oil & Money conference in London on Oct. 8.

Eni became the latest oil company to target offshore wind recently when it joined forces with Mainstream Renewable Power Ltd. to bid for a share of the U.K. seabed, but the company is late to the game compared with some of its peers. Ørsted A/S, formerly Denmark's national oil and gas company, has entirely transitioned into the world's largest offshore wind developer, while Norway's Equinor ASA is another with a large offshore wind presence.

The other majors, however, remain some way behind. Royal Dutch Shell PLC has stakes in two Dutch projects and owns seabed leases in the U.S. The company is now looking to the U.K.'s seabed leasing round for new development opportunities, according to a Reuters report in February.

Shell's French rival TOTAL SA is also watching the sector closely, with a spokesperson confirming that the company intends to participate in a dedicated Scottish seabed lease auction, "given its strong industrial positions in Aberdeen and [the] synergies between [oil and gas] and floating offshore wind." Meanwhile, website Recharge reported in June that BP PLC had held talks to enter the sector in the U.S.

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'Not just a balance sheet'

The seabed leasing round run by the U.K. Crown Estate represents the first time in a decade that the U.K. has opened its doors to new areas of offshore wind development. At least 7 GW of new capacity, to begin operating in the late 2020s, will be awarded across four designated zones in waters off England and Wales, with a separate auction also planned for Scottish projects.

Three previous rounds since the early 2000s have been dominated by the large electric utilities, including Ørsted, Britain's SSE PLC and Centrica PLC, Germany's E.ON SE, France's Electricité de France SA and Sweden's Vattenfall AB. For any new entrant, dislodging these experienced incumbents on their own will be a tough ask.

"The process is very much geared towards technical and financial competence so [oil companies will] have to partner with people," said Munir Hassan, head of the energy group at law firm CMS Cameron McKenna Nabarro Olswang LLP. "They might have the financial muscle but they haven't done this before."

Shell and Total have already adopted this strategy in other markets, forming consortia with utilities, contractors and strategic investors to bid for offshore wind projects in the U.S., Netherlands and France. But the oil companies are keen to emphasize that they bring more to the table than just broad shoulders.

"[We are] trying to convince our partners we are not just a balance sheet; we also have differentiating features," Julien Pouget, senior vice president in Total's renewables division, said at a green energy conference in London hosted by Macquarie Group Ltd. on Oct. 3.

These features, Pouget explained, include Total's strong brand and presence in 130 countries, as well as its electricity marketing capabilities and relationships with authorities in the markets where it has exploration activities. "[Incumbent players] might see us as a threat; I don't think we are a threat," he said. "I think we are a potential good partner."

Cultural, financial shift

While synergies do exist, some market players say a cultural change is required for the oil giants to succeed in offshore wind.

"They've tended to get their own way in the past," said Gareth Phillips, partner at law firm Pinsent Masons LLP. "I think they're going to find it ... culturally difficult to understand that every aspect of what they do will be publicly scrutinized and they can't just hide behind commercial confidentiality."

Then there's the issue of satisfying their shareholder base. The oil majors are used to returns well into the double-digits for their upstream activities, numbers which are hard to come by in the fragmented and highly competitive renewables market.

"From a pure project economics [perspective], there's going to have to be a meeting of minds in the middle commercially, because the returns [in renewables] are being driven downwards," said Pinsent Masons Partner Ian McCarlie.

Because of this, some in the market argue that despite the synergies between oil exploration and offshore wind, this doesn't necessarily mean it makes sense for the majors to enter the sector.

"It's an illusion that [oil companies] have anything to offer to offshore wind," said Jérôme Guillet, managing director at financial advisory firm Green Giraffe BV. "It's large-scale but most of the capital deployed ... is cheap capital, and they cannot compete with the current investors in operational projects."

The long game

But at least one of the majors thinks it can continue making good money by investing in and operating low-carbon power projects.

At the Macquarie event, Total's Pouget spoke of the company's "capital light" approach to renewables investment: leaning on its strong balance sheet to get favorable financing terms from banks and selling stakes in its assets to enhance its equity returns.

Using this strategy, "we can reach returns which are actually above what ... we are getting in the oil and gas space," he said.

Ultimately, success in offshore wind may not come immediately for Big Oil. "They'll have to go through the same pain as everyone else," said Hassan of CMS. "They will get there, but the path is not going to be a leap; it's more of a walk."