Where will investors in offshore oil and gas look as the energy transition starts to take hold?
While the oil and gas sector remains the largest component of the offshore supply chain, we expect the offshore wind market to become 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. As interest and investment in offshore wind grow, investment in offshore oil and gas is likely to stabilize, narrowing the gap between the two sectors. Despite a 29 percentdrop in the average global capex per megawatt a measure of the investment per megawatt generated we forecast in a new reportthat more than $200 billion in capex will be deployed in offshore wind between 2020 and 2025.
How do offshore oil and gas and offshore wind compare for investors? Here are three factors to consider.
The transparency and certainty of offshore wind arehigh because deployment is largely tied to government incentives. In fact, 82 percentof the forecast offshore capacity to 2025 has been awarded funding under a support scheme or is in the 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.
Offshore wind projects are changing; the offshore wind supply chain will have to change with it. The number of project interfaces the supply deals associated with a project is both broadening and decreasing, while the size of projects and contracts is growing.
Project sizes and clusters of projects will increase by 63 percentby 2025. To win these larger deals, smaller supply chain players are consolidated to create companies capable of capturing the larger work packages. Moreover, the larger work packages are also attracting the larger O&G players to the offshore wind industry.
Meanwhile, changes in project characteristics (scale, complexity, water depth and distance from shore) impactthe way capex is distributed along the value chain and intensifyrequirements forequipment and production capabilities.
Investors follow the money. That was the lure of U.S. tight oil, which offeredaverage project returns of around 30 percent. And even at $55-$60per barrel of oil, most new offshore oil and gas projects are making double-digit-percentreturns. Sowhy would an investor instead choose an offshore wind project with single-digit returns?
Theres more work to do to make renewables projects attractive, even economic, to mainstream investors. Butany investment in the oil and gas sector is now subject to what's termed energy transition risk,which encompasses falling demand for oil, the potential cost of the carbon intensity of assetsand other variables.
Theres also a real possibility that both 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 isnt a deepwater game yet. Today most activity is clustered on the offshore shelves around Europe, China and South Asia, with North America catching up.
Whats attractedthe attention of many oil and gas investors is the large potential of offshore wind and the fact that the wind developments are sited in mature, well-established upstream areas they already know well.
Its conceivable that there will be a point of convergence in those regions in the 2020s where offshore wind investment will match oil and gas.
Sren Lassen is asenior offshore wind analystandMhairidh Evans isa principal upstream supply chain analyst at Wood Mackenzie.
Lassen's latest report,The 200bn prize in offshore wind, is available here.
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