Market forces |
Jeremy Wilcox is managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm 8/27 Sukhumvit Soi 8, Klongtoey, Bangkok 10110, Thailand | T: +66 2 653 1263 | Mobile: +66 860993375 | S: energypartnership
Where the wind blows
Oil majors started moving into renewable energy over two decades ago, with the strategic shift from conventional to unconventional energy driven by the need to diversify energy portfolios and the acceptance that oil and gas development opportunities are finite. Environmental considerations also sweetened the transition with renewables presenting the opportunity for oil companies to reduce their carbon footprint and enhance corporate social responsibility. From a strategic business development perspective, moving from oil and gas into renewables appeared a proverbial no-brainer. Since the start of this century oil companies have joined consortiums to invest in new renewable projects, and particularly offshore wind. Shell has been proactive in its renewable energy initiatives, with substantial investments in wind, solar, and electric vehicle infrastructure. The company aims to transform its energy portfolio and reduce its carbon footprint. Shell’s approach highlights the strategic importance of renewable energy in ensuring long-term sustainability and profitability. BP has also made significant strides in its renewable energy investments, particularly in solar and wind power. The company has committed to becoming a net-zero carbon emitter by 2050 and has set ambitious targets to increase its renewable energy capacity. BP’s investments in renewable energy have been driven by a combination of economic, environmental, and social factors, reflecting the broader trends in the industry. Last October BP announced plans to sell its onshore wind business, BP Wind Energy, and followed that with the news that it plans to increase its fossil fuel output, despite its stated commitment to advancing a transition away from fossil fuels. The planned sale of BP’s onshore wind assets follows a $1.1 billion reduction of its offshore wind portfolio value in 2023. Yet just two months later BP announced that it had agreed a deal worth up to £4.5 billion to build offshore windfarms with JERA, Japan’s biggest power producer, with the companies creating
From an economic
perspective there is more present value in black gold than in green.
BP and Shell … present a growing ambiguity in the oil-wind partnership that is being directed by profitability or, in the case of offshore wind, a lack of profits.
a 50-50 joint-venture to combine their offshore wind assets.
In December Shell announced it will cease investments in new offshore wind developments and will focus on maximising the value of its existing renewable generation platforms. While the company said it will retain an interest in offtakes where commercial terms are acceptable, and that it will be cautiously open to equity positions if there is a compelling investment case, Shell is effectively exiting wind.
The future renewable approaches of BP and Shell may differ, but they present a growing ambiguity in the oil-wind partnership that is being directed by profitability or, in the case of offshore wind, a lack of profits.
The conventional wisdom at the start of the ‘wind era’ was that as the technology commercialized, the cost of developing wind farms would reduce and the profits would roll in on the assumption that gas-fired generation would continue setting the system marginal price of power. For oil companies battling the rise of net zero politics, tighter regulations on new oil and gas projects, and even windfall taxes, the allure of the fast-developing renewable sector could not be ignored.
Oil companies, with their substantial financial resources and technical expertise, were also well-positioned to capitalise on technological advancements made in renewable energy and drive further innovation in the sector. The oil companies could leverage their existing infrastructure and expertise to facilitate the integration of renewable energy into their operations. Offshore oil platforms nearing the end their production lifetime could be repurposed for offshore wind farms, and pipelines e adapted for the transport of biofuels. Such synergies potentially enable a smooth and cost-effective transition from oil and gas to renewable energy. But there are two problems with this vision. First, as offshore wind farms moved further offshore into deeper waters to gain from the stronger winds the life cycle cost of these farms
8 | January/February 2025 |
www.modernpowersystems.com
has increased, unlike onshore wind where life cycle costs have reduced with technological efficiencies. And second, flushed with ready cash from the oil business, and keen to ensure success at wind capacity auctions, the oil companies have driven down the strike price for Contracts for Difference. In the UK auctions the strike price fell from around GBP 150/MWh in 2015 to around GBP 40/MWh in 2019 (in 2012 GBP terms). Ironically, as the offshore wind sector becomes less profitable the oil and gas sector is set for a resurgence with the return of Donald Trump to the White House. The next four years could be golden for oil companies with new exploration licences and production supported by an oil price that is only going one way. Up. The surging global demand for LNG, driven by environmental pressure to phase out coal plant and accelerating decarbonisation that is increasing power demand, is also profitable for the oil and gas sector From an economic perspective there is more present value in black gold than in green. Renewable projects are still reliant on subsidy or support mechanisms, while delays to new transmission capacity to accommodate the new renewable capacity, and particularly wind, means the full economic value of new renewable capacity is not being realised. Longer-term the economic balance will undoubtedly shift toward renewables when life cycle costs of renewable projects reduce and advances in the development of battery storage obviate the need for back-up gas plant, but the timeline is uncertain.
In the short to medium-term, extant cost of living concerns and sluggish economic growth could fuel the opposition to accelerated decarbonisation in Europe, while Trump will relegate renewables to the sidelines and prioritise extracting the maximum economic value from US fossil fuel reserves. In this scenario Shell’s approach to maximise the value of its existing renewable generation and retain an interest in offtakes where commercial terms are acceptable appears a prudent business strategy. Other oil companies could, and indeed should, follow.
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