Despite lower returns than offshore oil and gas, offshore wind will become an increasingly attractive investment destination in the energy transition.
Global investments in offshore wind are expected to total US$211 billion between 2020 and 2025, and the offshore wind market will become more attractive to oil and gas companies, Wood Mackenzie said in a new report this month.
Over the next five years, growing investments in offshore wind are set to narrow the gap with offshore oil and gas investments as capital expenditure in offshore upstream is set to stabilize until 2022 and then drop through 2025, said Søren Lassen, senior offshore wind analyst, and Mhairidh Evans, principal upstream supply chain analyst at WoodMac.
In some mature well-established upstream areas offshore Europe, China, and South Asia there could be “a point of convergence in those regions in the 2020s where offshore wind investment will match oil and gas,” WoodMac’s analysts said.
Offshore oil and gas is now competing with the current trend of shorter-cycle investments in other oil and gas projects, and this trend lowers the visibility and certainty of investment outlooks beyond 2022.
In offshore wind, investments mostly hinge on government incentives. A total of 82 percent of the forecast offshore capacity to 2025 has been awarded a support scheme or is in more advanced stages of development, WoodMac’s analysts say, noting that the deployment tied to government incentives provides high certainty and transparency in investment outlooks.
Another point for offshore wind is that the size of the projects is set to jump by 63 percent through 2025, and those large offshore work scope and packages attract Big Oil to the offshore wind market, WoodMac said.
Case in point: Norway’s Equinor, which has huge experience offshore Norway and elsewhere in the world, unveiled last month its new strategy to grow profitably within its renewables business and become a global offshore wind major.
Equinor and other majors now face the energy transition risk of stranded oil and gas assets as investors and shareholders demand climate action from Big Oil. Although returns from renewables are still playing catch-up with returns from oil and gas, Wood Mackenzie expects the energy transition theme to make offshore wind an attractive low-risk investment for companies with carbon-intensive portfolios.
However, lower offshore wind returns than oil and gas and lack of policy frameworks to support offshore wind development could be a drag on the industry in the 2020s, Rolf Kragelund, Wood Mackenzie Director of Global Offshore Wind, said last month.
Despite these concerns, offshore wind is set for exponential growth this decade.
In the United States, annual investments in the industry could exceed US$15 billion by the middle of the 2020s, likely surpassing investments in U.S. offshore oil and gas over the next five years, Rystad Energy said earlier this year.
In 2019, the U.S. wind power industry recorded its third record-breaking installation year in a row, with new wind capacity hitting 9.14 GW.
“Assuming continued support from the regulators, many more projects will be sanctioned in the coming years and we expect to see yearly investments in the sector exceed $15 billion by the middle of the decade,” said Tim Bjerkelund, Head of Consulting New York at Rystad Energy.
“US suppliers should take note – this new industry could outgrow offshore oil and gas in only a few years’ time, providing lots of new opportunities,” Bjerkelund added.
Globally, offshore wind power is expected to “expand impressively” over the next two decades, the International Energy Agency (IEA) said in its outlook on the sector in October 2019.
Declining costs, government incentives, and remarkable technology advances are set to boost the world’s offshore wind capacity 15-fold and help it attract around US$1 trillion of cumulative investment by 2040, according to the IEA.