Energy Transition: From Oil 🔜 Wind

It is often touted as a truism, that in the effort to migrate our energy production from fossil fuels to renewables, we will have to use natural gas (controversially argued to be the *least* polluting fossil fuel, out of coal and oil) as a bridge transition energy source as we develop the green infrastructure necessary to satisfy our consumption.

Be that as it may, I see a trend run in parallel to this. While cheap and abundant gas is readily available, oil companies are starting to challenge the biggest wind developers in the race to build off-shore wind turbines in the North Sea.

North Sea: Wind is Eating into the Energy Market Share

Shell, Statoil, and Eni are three giants who are moving into multi-billion-dollar offshore wind farms in the North Sea. They’re starting to score victories against leading power suppliers including Dong Energy (I wrote about them branching out of conventional oil exploration into offshore wind here) and Vattenfall in competitive auctions for power purchase agreements (PPA).

The idea seems to be to leverage the know how they used from off-shore oil, into offshore wind. Irene Rummelhoff, EVP for New Energy Solutions at Statoil (see here) said she was convinced global warming was a very serious problem and her company wanted to help find a solution. “We strongly believe oil and gas will still be needed in future but we also know we have to do things differently and are working to reduce the carbon footprint of these operations,” she said.

“It makes sense to utilize our project-management skills from oil and gas to offshore wind which is why we are operating Sheringham Shoals and Dudgeon Sands off the UK. We are also looking at more carbon capture schemes and at solar worldwide.”

Even Exxon Mobil, in spite of having a conservative reputation, has recently unveiled plans to investigate CCS more fully in a new partnership with a fuel cell company. They also have pledged million of dollars to developing photosynthetic algae for transportation fuels.

Italian oil and gas major, Eni has signed an agreement with General Electric (GE) to develop renewable energy projects and hybrid solutions with a focus on energy efficiency. Their objective is to jointly identify and develop large-scale power generation projects from renewable energy sources, covering innovative technologies such as, onshore and offshore wind generation, solar power, hybrid gas-renewable projects, electrification of new and existing assets, waste-to-energy projects, the ‘green’ conversion of mature or decommissioned industrial assets and the deployment of technologies developed by Eni’s R&D department.

Luca Cosentino, VP of energy solutions, had this to say, “It is certainly an area of interest for us because there are obvious synergies with the traditional oil and gas business…As the oil and gas industry we know, we cannot get stuck where we are and wait for someone else to take this leap.”

This shift in business can be attributed to many factors. Firstly, large oil companies have spent millions in R&D for building oil projects offshore, and now that that business is on its way in some areas where older fields have drained, it makes sense to shift from off-shore oil to off-shore wind. Returns from wind farms are predictable because producers enter into long-term PPA which reduce risk by pinning down government-regulated electricity prices, unlike volatile oil prices, as the dramatic fall in the oil price from 2014 powerfully showed, the value of oil and gas assets is variable and uncertain.

Secondly, even as oil production is declining in the North Sea over the last 15 years, economic activity has been buoyed by offshore windmills. The notorious North Sea winds which threatened oil platforms have become a godsend for the new workers to install and maintain turbines popped into the Northern seabed.  According to Bloomberg New Energy Finance, about $99 billion will be invested in North Sea wind projects from 2000 to 2017. A decade ago, the industry had projects only a fraction of that size.

Circling the drain: The terminal decline of North Sea Oil

There is an evident trend going on in the North Sea, in spite of a slight resurgence we’ve seen in the last year.

Data from EIA, taken from Investopedia

Energy consultancy Wood Mackenzie said oil companies were likely to stop output at 140 offshore UK fields during the next five years, even if crude rebounded from $35 to $85 a barrel. According to the Financial Times, this compares with just 38 new fields that are expected to be brought on stream during the same period. Industry execs believe that this will be good news for the decommissioning industry, still in its nascent phase. Shell is preparing to take apart the first of four platforms in its Brent field, while Riverstone-owned Fairfield is to abandon Dunlin. As the sector oil declines, service providers anticipate that decommissioning may help them plug the revenue gap left by diminishing exploration.

Oil Decommissioning Frenzy?

Thirty years ago, North Sea production helped shape the UK’s energy landscape in a way similar to what the shale boom has done for the United States. In the 1980s, offshore production propelled the UK  to become a net crude exporter of oil and then of gas. But today, it’s a net importer of both oil and gas as the North Sea matured and their productivity declined.

As assets reach the end of their useful lives, company resources will become increasingly drawn into the expensive and at times technically complex activities required to cease production, safely remove subsea and surface infrastructure, and ensure that wells are permanently and safely abandoned.

According to a 2017 KPMG report,

The decommissioning era has now dawned in mature oil and gas provinces such as the North Sea – worsening economics, deteriorating infrastructure, technical limits on further recovery and regulatory pressure will make change inevitable. Industry forecasts suggest an unprecedented scale and pace of decommissioning activity in the years ahead.

The North Sea strategy seemed to be to delay the decommissioning of many offshore platforms, preferring to continue squeezing out increasingly small amounts of oil and gas rather than incurring the massive costs of decommissioning and bringing that equipment back onshore.

But those decommissioning delays mean only that oil companies have been kicking the can down the road and set up a more dramatic decline in North Sea production which will still be true even if prices increase.

This makes the shift into offshore wind all the more interesting.