The offshore wind industry is no longer in its infancy, it is a proven technology that will play a key role in decarbonizing the global economy. Wood Mackenzie said the offshore wind industry will attract nearly $1 trillion in new investment over the next decade.
More and more competitors are flocking to take advantage of the huge opportunities the boom will create. Oil majors — especially in Europe — have a small share of this offshore wind market right now, but their ambitions are growing as they make bigger bets on a zero-carbon value chain.
The upstream industry has long analyzed cash margins on a barrel of oil equivalent (boe) basis. This easy-to-understand metric reveals the operating cash flow generated by upstream oil and gas properties per unit of production. This is especially useful for clarifying cash-generating capacity and benchmarking portfolios.
Traditional renewable energy investment analysis typically focuses on relative risk and return compared to oil and gas investment. But Wood Mackenzie claims that comparisons with traditional businesses require new metrics. The new cash margin metric used by the analyst firm - operating cash flow in gigajoule equivalent (GJe) - goes beyond traditional comparisons and reveals the strengths of the offshore wind industry.
By tracking asset data, the offshore wind industry will provide oil majors with 25% higher unit operating cash margins than new oil and gas projects. The average operating cash margin for even the lowest offshore wind portfolio is higher than the upstream average. And, renewable energy technologies outperform deepwater — the oil majors’ most profitable asset class.
Offshore wind's strong operating cash margin performance suggests that its financial rewards go beyond long-term stable cash flow. Such cash income can well support other portfolio areas and, in fact, provide a substantial dividend and hedge against carbon and hydrocarbon price risk.
The declining IRR of offshore wind projects will not be sustainable if the offshore wind industry is to attract the capital it needs to play a role in meeting global climate goals. The median rate of return is unacceptable, according to Woodmacks.
Companies have come to rely on traditional debt financing and asset recycling tools to improve their internal rate of return. As the industry matures, other means will come into play to improve returns, such as increasing commercial exposure, power trading and building Power-X projects.
Wood Mackenzie also said in the report that the oil majors may have a long-term foray into offshore wind, as the industry is not without challenges. A dark cloud of rising supply-induced costs and rising debt costs hangs over offshore wind as the industry grapples with a supply glut, while the need for next-generation technology means massive investment will be required to support new tower production facilities.
But after years of managing oil and gas volatility, oil majors have developed the ability to balance risk and reward. Oil majors are well-positioned to take advantage of the enormous opportunities that lie ahead. Oil majors are certainly ready to do just that, aided by recent record oil and gas prices and record quarterly profits
