Despite a 29% decline in average global capex per megawatt (MW) – a measure of the investment per megawatt generated – Wood Mackenzie forecasts that more than US$200Bn in capex will be deployed in offshore wind between 2020 and 2025.
Where will investors in offshore oil and gas look as the energy transition starts to take hold? While the oil and gas sectors remain the largest for the offshore supply chain, we expect the offshore wind market to grow more attractive for traditional oil and gas players.
There is limited crossover today, but first movers have gone with the wind and more will soon follow.
How do offshore oil and gas and offshore wind compare for investors? Here are three factors to consider.
Firstly, offshore wind investment offers greater certainty and transparency.
The transparency and certainty of offshore wind is high because deployment is largely tied to government incentives. In fact, 82% of the forecast offshore capacity to 2025 has been awarded a support scheme or is in more advanced stages of development.
Compare that to global offshore upstream oil and gas capex, where the current trend for short-cycle projects lowers the visibility and certainty of investment outlooks beyond 2022.
Secondly, the offshore wind supply chain is entering a period of transformative growth. Offshore wind projects are changing and the offshore wind supply chain will have to change with it.
The number of project interfaces – the supply deals associated with a project – is broadening and decreasing, while the size of projects and contracts is growing.
Project sizes and clusters of projects will increase by 63% by 2025. To win these larger deals, smaller supply chain players are being consolidated in order to create companies capable of capturing the larger work packages. Moreover, larger work packages are also attracting larger oil and gas players to the offshore wind industry.
And changes in project characteristics – such as scale, complexity, water depth and distance from shore change the way in which capex is distributed along the value chain and intensifies requirements placed on equipment and production capabilities.
Thirdly, offshore wind offers lower risk and lower returns. Investors follow the money. That was the lure of US tight oil, with average project returns of around 30%. And even at US$55-60/barrel, most new offshore oil and gas projects are making double-digit returns. Why would an investor choose an offshore wind project with single-digit returns instead?
There is more work to do to make renewables projects attractive to mainstream investors, but investment in oil and gas is subject to an ‘energy transition risk,’ which includes falling demand for oil, the potential cost of the carbon intensity of assets, and more.
There is also a real possibility that upstream project returns and renewables project returns will evolve, taking into account the changing cost of capital, government subsidies and technology development.
In the context of the energy transition, we expect offshore wind to become an attractive low-risk investment, particularly to carbon-heavy portfolios.
Offshore wind is not a deepwater game – yet. Today most activity is clustered on continental shelves around Europe, China and south Asia, with North America catching up. But what has got the attention of many oil and gas investors is the large potential of offshore wind and the fact that the wind developments are sited in the mature, well-established upstream areas they already know well.
As a result, it is conceivable there will be a point of convergence in those regions in the 2020s, where offshore wind investment will match oil and gas.