The role of offshore wind in oil and gas company low-carbon strategies

Offshore wind is seen by many as an emerging low-carbon opportunity, where oil and gas firms can leverage competitive advantages of their already established expertise in offshore projects. In fact, Norway-based Equinor has been leading the upstream industry by exploiting their offshore advantages in this space. The company has reported recently that it's achieved 40 to 70% cost reductions in similar sized projects from 2012 through 2017, and now has a wind portfolio of seven projects in various stages of development across the UK, Norway and United States. Does this strategy pose long-term opportunities in an upstream portfolio? Two of our experts - Max Cohen, a research analyst from our power and renewables team and Chris DeLucia, who leads our research on upstream low-carbon strategies discuss on this episode of Upstream in Perspective.

Jessica Nelson:

So, Max, let's start with a little background. We know you recently published research that falling costs and offshore wind installations have been pretty aggressive over the past several years and generated about three gigawatts per year of new installed capacity. Can you give us a quick overview of the market?

Max Cohen:

Yeah, absolutely. And, thank you so much for inviting me on to this podcast. This is great. The market has been growing. Right now, as of year-end 2018, there are about 22 gigawatts of offshore wind power capacity installed. And, that's mostly in Europe. The two big markets to-date have really been the United Kingdom and Germany. But, there are some other markets in Europe, as well as in Asia. And, in fact, 30 megawatts installed in the United States. That's just five turbines, six megawatts each. So, very small projects, but it does exist in the United States. As we're thinking about our outlook, IHS Markit does forecasting and we have an outlook for offshore wind just like we do for oil production and oil prices and everything else. Our outlook is that 22 gigawatts is going to grow about 10% per year and end up being over 500 Gigawatts by 2050.

Max Cohen:

And using really kind of rough back-of-the-envelope calculation, that's about a trillion dollars in investment in the offshore wind industry. That's around the globe. For context though, 500 gigawatts, while a big number, 10% per year is huge growth. But, in the end, for comparison, that's only about 3- 4% of what we think the installed capacity of all power generation in the world is going to be. And, onshore wind will be an order of magnitude bigger as about 13% of capacity and solar will be even higher at about 24% capacity. So, a lot of renewables, offshore wind being a little bit significant slice of that.

Hill Vaden:

I'm sorry to interrupt Max. Is that 3- 4% of installed capacity by 2050?

Max Cohen:

So by the year 2050, it will be 3- 4% of total installed capacity around the world. Right now, we're starting from less than that. By the time we get to 2050, lots of different power generation technologies will be increasing. Gas is on the rise. We even have some markets where they're still building on coal. There are still projects building in nuclear. But there's a rapid deployment of renewables around the world—and that includes offshore wind.

Of course, when you have everything growing, the exact percent can vary from year-to-year. But in general, renewables are growing faster than conventional technologies. And so, by 2050, will be getting up to about 3- 4% of installed capacity being offshore wind capacity.

In the US specifically, which is my area that I focus on, we've got states really leading the way with a bunch of targets for how much offshore they would like to have built. States from as far north as Massachusetts and down to Maryland have targets collectively of about 20 gigawatts by the year 2035. So our outlook by 2050 is 35 gigawatts in the United States. And again, that's just going to be about, from the US perspective, about 2% of capacity, and maybe 3% of megawatt hours generated. For some regions, it's going to be much more important than others. Obviously, you're not going to have offshore wind in Kansas—there's no coast.

It's to say that it really is concentrated mostly in the northeast because of these state targets and because of some conditions in the northeast that are favorable to offshore wind. In New England, and New York specifically, offshore wind will be about 15% of what's installed, and the amount that it gets used will be even greater. It will have a pretty high capacity factor, as we call it. The actual megawatt hours generated in New England, we're actually looking at a third of the electricity used by people in New England by 2050 coming from offshore wind. That's really quite significant for that market, and has a lot of impacts for grid reliability. It cuts into the amount of natural gas being burned.

Hill Vaden:

As offshore wind comes into the Northeast, is it pushing out natural gas?

Max Cohen:

Yeah, so in the northeast, gas is the fuel that it mostly pushes out. We do have in our outlook that some nuclear power plants will eventually retire over that time period. And you would sort of think that would provide some uplift for natural gas, but in fact, the renewables in the outlook just kind of keep filling in that drop. We do see the amount of gas generation going down over this time period as offshore wind and other renewables go up.

Hill Vaden:

You mentioned at the beginning of your talk that Northern Europe and China were more aggressive than other parts of the world with offshore wind. If the Atlantic side of the US is coming in perhaps a distant third. What about the West Coast or Gulf Coast or even Florida Coast? At the state level, is there something unique about the New England area? Or, is the wind different up there?

Max Cohen:

That's a great question. The wind is strongest in the northeast and the further south you go, the wind gets a little bit less strong. So, the economics cannot look quite so great the further south you go, by the time you're down to Florida, it's not a great wind resource. It's also to some extent a political decision. You have these blue states in the northeast that are looking to decarbonize their grid. They don't have a lot of great onshore resources. If you're in the southeast, like Georgia, there's a lot of good solar. But, if you're in the northeast, you're land constrained, maybe transmission constrained, and you have these winter peak hours where there's a lot of demand and actually the wind offshore happens to blow really strongly during those winter peak hours. You can have these offshore wind projects that are close to demand centers like Boston and New York right off shore, generating power during those areas of peak demand, helping to decarbonize the grid.

How are upstream oil and gas companies leveraging their existing assets and knowledge to take advantage of offshore wind? And, is it a sustainable model for them? Listen to the full podcast for additional insights.

Posted 29 October 2019

This excerpt has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.