‘We didn’t pay a premium’ – BP
Discover more from Energy Flux
‘We didn’t pay a premium’ – BP
CEO Bernard Looney denies overpaying for Irish Sea offshore wind leases
BP CEO Bernard Looney has rejected accusations that the company paid a hefty premium to secure coveted offshore wind licences in the Irish Sea. The sites are located in a privileged region that will reduce installation and maintenance costs, he said. But other bidders paid a lot less for nearby acreage.
Speaking at Reuters’ Global Energy Transition 2021 conference on Tuesday, Looney gave a forthright defence of BP’s bidding strategy in the Crown Estate’s fourth offshore wind leasing round in February.
“We didn’t pay a premium, we paid a good price for a good asset,” the BP CEO said. “It sounds like a premium because we paid more than we would have paid on the east coast in the North Sea... [but that’s like comparing] apples and oranges.”
BP picked up two 60-year Irish Sea leases of 1.5 GW each in 50:50 joint venture with German utility EnBW. One is located off the northern Welsh coast; the other is due west of Morecambe Bay.
The BP/EnBW partnership agreed to make four annual payments of £231 million on each lease before projects reach final investment decision (FID). That rate equates to £154,000 per MW installed, which represents a sizeable mark-up on all the other bids.
RWE Renewables agreed to pay £76,203 per MW and £88,900 per MW for its two North Sea projects, while TotalEnergies and Macquarie bid £83,049 per MW for a sole North Sea site – around half of the price bid by BP/EnBW in the Irish Sea.
“We believe the Irish Sea is a better resource in a better location,” Looney said, adding that BP sought North Sea acreage but was outbid by others.
The BP CEO cited the cost benefits of installing turbines in shallower waters, proximity to shore and avoidance of migratory bird patterns – which should facilitate project permitting.
These are all valid points. The Irish Sea sites’ near-shore locations – around 30 km off the coast and close to urban demand centres in Liverpool and Manchester – should allow for cheaper, more reliable HVAC cables that work best over shorter distances.
Shoreline proximity reduces turbine downtime and saves on operations and maintenance costs, which can account for around one-third of typical offshore wind project costs according to Catapult ORE.
The Irish Sea’s shallow water depths of 35-40 metres allow the use of monopile foundations rather than more costly jacket structures. Turbine foundations typically account for around 8% of offshore wind farm costs, while foundation installation equates to 3.2%.
But a closer look at the Round 4 results suggests BP could have bid a lower price for similar acreage.
Offshore Wind Limited, a Scottish-Spanish JV, agreed to pay £93,233 per MW for a nearby 480 MW site off the Lancashire Coast. That project is located even closer to shore, so should benefit from the same cost savings and a comparable wind resource as the BP/EnBW sites.
Looney pointed to the fact that BP didn’t bid alone but rather in partnership with EnBW, an experienced player and pioneer of offshore wind in Germany.
“We reached that conclusion (on price) together,” he said. “It makes good headlines to talk about overpaying and premium, and I understand the sentiment. But I feel really good about it.”
The Energy Flux view
Oil majors are making a belated entry to the offshore wind party. The punch bowl is half empty and all the meaty finger food has already been gobbled up by early arrivals.
BP is now competing with rivals Shell, TotalEnergies, Equinor and others for the leftovers. They all want to deploy renewables at scale while satisfying investor demands for above-market returns. The law of averages suggests they won’t all be successful.
The Round 4 auction was by all accounts highly competitive, underscoring the heightened demand for acreage in the world’s most mature offshore wind market.
Conspicuous by its absence from the list of winners was Denmark’s Ørsted, a highly experienced player in this space – and one that knows the value of UK maritime acreage rights.
BP has pledged to install 50 GW of renewable power generation capacity by 2030 as part of its wider ‘reimagining energy’ campaign to turn itself into a diversified international energy major.
Achieving that goal doesn’t give BP much margin of error on competitive pricing. Paying over the odds to secure projects at the scale required and in the time available is probably preferable to losing out altogether.
The Irish Sea licences could yet turn out to be a good investment, if BP can farm out a large chunk at a premium post-FID and leverage project finance. BP maintains that all of its renewables investments will deliver internal rates of returns in the region of 8-10% “at a minimum”, which may or may not transpire.
We might never know for sure. Oil majors don’t tend to reveal individual project IRRs, so investors and analysts will be keeping an eye out for write-downs on renewable asset valuations – which would be published in quarterly financial results statements.
Energy Flux will be watching too.
Related news: BP will continue producing hydrocarbons for decades to come and will benefit from rising oil prices even as it reduces output as part of its shift to low-carbon energy. “There's a very strong possibility that these prices will sustain over the coming years, and if they do, that's very good for our strategy,” CEO Bernard Looney said.