In the news this week-end
Saipem to launch 2 bln euro cash call and sell assets in rescue plan (25 March 2022)
Saipem (SPMI.MI) will launch a 2 billion euro ($2.2 billion) capital increase this year and sell assets to help fund a turnaround plan to bring the troubled Italian energy services group back into the black.
The company stunned investors in January when it downgraded earnings by a billion euros due to a significant deterioration of margins on contracts including offshore wind.
Coming after earlier news:
Offshore wind woes hit Saipem (28 October 2021)
Losses narrow but ‘specific problems’ on unnamed projects cost marine giant €170m
Losses at Italian marine giant Saipem narrowed in the third quarter but could not stop the company recording almost €300m in losses for the first nine months of the year.
(…) Saipem said higher costs on offshore wind farm activities of €170m compared to those previously acknowledged was mainly to blame.
(…) Difficulties on foundation contract at the 450MW Neart na Gaoithe wind farm off Scotland is understood to be part of the issues facing Saipem.
This reminded me of earlier stock market stories a few years ago:
Fluor revenue short of estimates, has loss on ruling (21 February 2013)
Engineering company Fluor Corp FLR.N on Wednesday reported slower-than-expected revenue growth and a quarterly loss due to a $265 million charge for the Greater Gabbard wind project off the coast of Britain.
(…) At Greater Gabbard, Fluor had a long-running dispute with project owner SSE Plc SSE.L over welding quality, and Fluor disclosed an adverse arbitration ruling in that case in November. Before taxes, the charge had totaled $416 million.
Fluor exited the market after that project.
It’s harder to find links for events 15+ years in the past, but Halliburton affiliate KBR’s attempt to enter the offshore wind market in 2004, via an EPC contract jointly with Vestas to build the 90 MW Barrow project in the UK, also ended up in tears, and KBR also left the offshore wind market.
So what makes offshore wind so complicated for oil & gas contractors? After all, they are used to managing complex projects, they are familiar with project finance, they have all the relevant equipment to work at sea, and they know especially well the main area where offshore wind has started: the North Sea.
Some of it may be hubris, coming from two separate strands of thought. One is that it should not be too difficult to handle objects that weigh 500 tons (turbine nacelles) when you are used to deal with platforms that weigh upwards of 10,000 tons. The other is that the marine contractors who are the main potential competitors to the oil & gas contractors in offshore wind are rather smaller companies than such contractors. Only two companies have regularly performed quasi-EPC work for offshore wind, Van Oord and DEME, and their total turnover is closer to 1-2 billion euros per year, compared to tens of billions for the big oil & gas contractors.
So the big guys coming from “real industry” should be able to do those small jobs better than the local/hippie amateurs… But it would seem both the seriousness and difficulty of the job and the competition have been underestimated. In particular, the serial nature of the work requires quite different skills and discipline: moving 50,000 tons once is not the same as moving 500 tons one hundred times, especially if you need to do it with a precision of under a centimeter and 100 meters above the sea each time. The bespoke nature of each foundation is often ignored: look how people blissfully suggest to use old oil platforms, or any other random offshore equipment, to erect offshore wind turbines, as if any available surface would do. Foundations need to bear the massive forces that exert on a wind turbine, and are specifically designed for each location and each turbine. The specific wind-industry driven expertise required has been underestimated.
But most importantly maybe, the economics of oil and wind are completely different. For oil, there is every incentive to produce as quickly as possible, or to solve issues as soon as possible, in order to generate more revenue, so it makes sense to spend more to sort problems or to bring facilities online faster. This is especially true in periods of high oil prices - and when prices go down investment activity is massively reduced and projects are delayed or cancelled. Offshore wind, conversely, has largely fixed and capped revenues. Unless you are planning to go merchant and are ready to bet on high power prices (and except if current sky-high prices remain for a while, this was not seen as a viable way to do offshore wind, for reasons I will discuss on this blog soon), you tend to rely on fixed prices - whether under regulated CfDs (contracts for difference)s or corporate PPAs (power purchase agreements). That means that revenues are fixed, as production is also capped by the available wind resource, which is somewhat variable from year to year but is largely stable over the long term. So: you cannot solve construction problems in offshore wind by throwing money at them, as this will have a direct impact on the profitability of your project, long term. It can (sometimes) work in oil & gas, but it certainly does not in offshore wind. Cost discipline is essential, at all times, and this is not something that the oil & gas industry is the best at.
A few oil & gas contractors have done well by focusing on specialized tasks that they do well (things like cable-laying, or providing heavy lift vessels for very narrow tasks (like installing the offshore sub-station) or, at a smaller scale, helicopter services, health & safety services, divers, etc… but they tend to be relatively discreet about what they do.
The same question mark will apply to the oil&gas majors who try to develop and build projects. Right now they have made a splash in two markets in particular, the UK and the US, with multi-billion bids for projects. In these two markets, there is an in-built advantage for players with large balance sheets as you need to bid a first time for the site, and a second time for the tariff (CfD in the UK, PPA in the US). Only players with permits sites can get a tariff, which means that tariffs will reflect the upfront amounts paid to secure sites and allow to recoup the amounts paid for the leases during the development phase. This limits competition and ensures that only parties who can park billions of euros for years on site leases get to play - this favors the oil & gas majors but hardly incentivises them to do offshore wind cheaply - it also ensures that offshore wind tariffs in these jurisdictions will end up being far more expensive than elsewhere.
As I pointed out in Part 1 of my series on financing wind, offshore wind has an excellent track record in keeping costs within budget and meeting deadlines, and it is important for its long term competitiveness that it stays that way. Participants that are too casual about cost or doing things right the first time will definitely not help, and the track record to date of oil & gas players is not encouraging.