Oil and gas majors may benefit from investments in offshore wind energy, and the resulting synergies with their offshore hydrocarbon production, Fitch Ratings said.
Despite a growing presence in the renewables sector, the majors’ share of such operations is still small compared to their overall scale and is likely to remain so within the rating horizon, Kallanish Energy learns.
“We are therefore unlikely to review our business risk assessments and leverage sensitivities for the majors until renewables’ contribution in revenue and cash flows becomes more significant,” the ratings agency said.
European oil majors jumping into renewables
“Oil majors, particularly those based in Europe, have intensified their investments to secure positions in the fast-growing renewable energy sector and, under global regulatory and public pressure, to lower carbon emissions.”
Investing in offshore wind farms could be especially beneficial, as it provides a material scope for synergies with majors’ hydrocarbon offshore production, according to Fitch.
Roughly 40% of the full lifetime costs of a standard offshore wind project have significant synergies with the offshore oil and gas sector, according to the International Energy Agency (IEA), particularly if wind and hydrocarbon assets are in close proximity.
Foundations and subsea structures
The main areas where synergies could be achieved during wind, oil and gas project installations are in the construction of foundations and subsea structures, cabling, substation structures, floating platforms and overall project management.
Oil companies could transfer skills from their offshore hydrocarbon development and save on equipment and services from combined procurement, according to Fitch.
Maintenance, defect detection and assets repairs in the two sectors also have similarities. Offshore oil and gas platforms are energy intensive and are often supplied by gas turbines or diesel engines. In-house wind energy supply could cut costs and carbon emissions.
Equinor, Total bidding for offshore wind farms
Several oil companies, including Equinor and Total, have acquired or proposed to bid for offshore wind farms, expecting to realize synergies with their oil and gas assets. An increasing share of renewables in revenue and cash flows may theoretically improve an oil company’s business risk profile.
As most renewable projects in Europe benefit from incentives or fixed-price long-term contracts for electricity output, price risk is eliminated or greatly reduced, unlike oil business, which is usually exposed to price risk.
An oil company that invests in renewables could therefore benefit from a combination of more stable cash flows, increased business diversification, and also from synergies of its offshore hydrocarbon and wind operations, if those are applicable.
Exposure to volume risk
“However, we do not consider renewables as fully regulated businesses due to their inherent exposure to volume risk,” Fitch said. “As the renewables sector continues to mature, we expect to see more merchant projects that fully rely on market prices, reducing the potential benefits of investing in renewables for oil majors.”
Fitch doesn’t expect renewables to become a meaningful contributor to the majors’ cash flow generation within the rating horizon of up to five years. Equinor, Shell and Total, the most active in alternative energy among their peers, spent less than 5% of its organic capex on renewables and generated a negligible share of revenue from them in 2018.
“While oil companies plan to increase investments in renewables, their capex programs will continue to be dominated by traditional oil and gas projects, and we are unlikely to reassess their business risk profiles and leverage sensitivities in the medium term,” Fitch said.
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