Monday, December 6, 2021

Net Zero Watch: Japan quietly abandons Net Zero agenda


In this newsletter:

1) Japan plans to nearly double oil and gas production by 2040 

Bloomberg, 2 December 2021

Japan's energy strategy calls for the share of oil and natural gas produced either domestically or under the control of Japanese enterprises overseas to increase from 34.7% in fiscal year 2019 to more than 60% in 2040.

It’s been less than a month since world leaders pledged to combat climate change at the COP26 summit in Glasgow, yet Japan is already showing signs of putting the brakes on divestment from fossil fuels.
Government officials have been quietly urging trading houses, refiners and utilities to slow down their move away from fossil fuels, and even encouraging new investments in oil-and-gas projects, according to people within the Japanese government and industry, who requested anonymity as the talks are private.

The officials are concerned about the long-term supply of traditional fuels as the world doubles down on renewable energy, the people said. The import-dependent nation wants to avoid a potential shortage of fuel this winter, as well as during future cold spells, after a deficit last year sparked fears of nationwide blackouts.

Japan joined almost 200 countries last month in a pledge to step up the fight against climate change, including phasing down coal power and tackling emissions. However, the moves by the officials show the struggle to turn those pledges into reality, especially for countries like Japan which relies on imports for nearly 90% of its energy needs, with prices spiking partly because of the world’s shift away from fossil fuel investments.

The nation has been slow to make any concrete commitments to phase out coal in the near term, and has often been criticized for its funding of overseas power plants that use the dirtiest burning fossil fuel. The government has also avoided joining efforts by developed nations to reduce consumption of natural gas.

Japan’s Ministry of Economy, Trade and Industry declined to comment directly on whether it is encouraging industries to boost investment in upstream energy supply, and instead pointed to a strategic energy plan approved by Prime Minister Fumio Kishida’s cabinet on October 22. That plan says “no compromise is acceptable to ensure energy security, and it is the obligation of a nation to continue securing necessary resources.”
That latest strategy calls for the share of oil and natural gas produced either domestically or under the control of Japanese enterprises overseas to increase from 34.7% in fiscal year 2019 to more than 60% in 2040.
Japanese officials plan to convey to other nations the importance attached to continued investments in upstream supply, the people added. 

While Japan will likely avoid rolling blackouts or gasoline rationing this winter when demand for energy peaks in the region, the global energy crisis is leaving many within the government thinking about how to prepare for the future. Japan is still expected to be highly dependent on fossil fuels for the next decade as there is limited available space to significantly expand solar power, and the nation’s wind sector is developing slowly. It’s also struggling to restart nuclear reactors in the wake of the Fukushima disaster.
To achieve net-zero emissions by 2050, the world needs to stop developing new gas, oil and coal fields, the International Energy Agency said in May. Japanese officials are echoing concerns highlighted by Australia last month, which said Europe’s gas supply squeeze is proof that nations need to continue to add more production.
Japan’s trading houses, including Sumitomo Corp. and Marubeni Corp., are aggressively divesting from fossil fuels amid an uncertain future for the energy sources and pressure from shareholders. These companies, formally known as “Sogo Shosha,” have traditionally been among the biggest investors in oil and natural gas assets in order to bring the fuel to resource-poor Japan.

Oil prices had surged to the highest level since 2014 in October, which many Japanese government officials believe was exacerbated by a lack of investment in new supply, the people said. Meanwhile, liquefied natural gas prices have jumped to a record on the back of a global shortage, helping to push Japan’s wholesale power rate to the highest level for this time of year.
2) China is mining much more coal again and that's boosting its factories
CNN Business, 1 December 2021

Hong Kong (CNN Business) China's economy is finally getting some good news: Its big factories are staging a recovery as a power crunch that held back production starts to ease because of a big jump in coal supply.

A government survey of manufacturing activity increased to 50.1 in November from 49.2 in October, according to data released by the National Bureau of Statistics (NBS) on Tuesday. It was the first reading above 50 — indicating expansion rather than contraction — in three months. It was also the first time since March that the index increased over the prior month.

Beijing on Tuesday attributed the improvement to "recent policy measures" that have strengthened energy supply and stabilized soaring costs.

"In November, power shortages eased and prices of some raw materials dropped significantly," said Zhao Qinghe, senior statistician for NBS, in a statement.

But while the official numbers are promising, data from a private survey this week does not paint a robust picture.
The Caixin PMI survey said Wednesday that China's manufacturing industry for November slipped into contraction territory, falling to 49.9 from October's 50.6. A reading below 50 indicates contraction rather than expansion.
The discrepancy between the two surveys can be attributed to methodology — Caixin looked at small and private companies, whereas the government focused on larger ones.
Wang Zhe, senior economist at Caixin Insight Group, highlighted the problems facing smaller businesses in China, including deteriorating employment and high raw material costs. He added in a statement accompanying the data that policymakers "should still focus on supporting small and midsize enterprises."

Even so, the surveys taken together "still suggest that industrial output rebounded in November as power shortages abated," according to a report from Sheana Yue, assistant economist for Capital Economics.

China has grappled with the power crunch for months, as extreme weather, surging demand for energy and strict limits on coal usage delivered a triple blow to the nation's electricity grid.

The problem came to a head in September, when companies were told to limit their energy consumption in order to reduce demand for power. Supply was cut to some homes, reportedly even trapping people in elevators.

The energy crunch, along with surging raw material costs, resulted in a sharp drop in industrial output for September and October. To combat the problem, authorities have relaxed their efforts to cut carbon emissions and ordered coal mines to ramp up production.

The result was notable. China — which uses more than half the world's coal supply and is already the largest emitter of carbon — set a new daily record for coal production in mid-November, according to statistics from the National Development and Reform Commission (NDRC).

The agency's "strong interventions" mitigated the "overall power shortage" and eased cost pressures on some industries, analysts from Citi wrote in a Tuesday research report. The power woes had pushed up the cost of aluminum, steel and other raw materials, rippling through industries like carmaking and construction.
Full story
3) Britain's energy security at risk as domestic oil and gas exploration faces extinction 
The Daily Telegraph, 3 December 2021

One of the North Sea oil industry's most respected figures has warned Nicola Sturgeon's government against scaring off investment and jobs after one of her ministers said it was "great that the Cambo project looks like it's on the skids".
Sir Ian Wood hit out at politicians who have failed to support the proposed oil field off the Shetlands after Shell decided to walk away from the project, warning it will create an “adverse investment environment”.

The intervention by the former Wood Group chief executive came after Ms Sturgeon stated last month that she was opposed to the development of any new oil fields, including Cambo. The Telegraph understands that the "political climate" contributed to Shell's decision to pull out.
Sir Ian’s warning came as Patrick Harvie, one of two Green ministers in the Scottish government, warmly welcomed Shell’s decision.

He claimed the oil industry was trying to "slow down the changes that we need to make" from fossil fuels to renewables and argued that its pleas should be ignored.
However, his comments were rejected by the Aberdeen and Grampian Chamber of Commerce, which warned that such "knee-jerk reactions" were jeopardising the funding needed for the transition to renewables.
Russell Borthwick, the trade body's chief executive, said: "If we get this wrong, all of those people in organisations demanding a premature end to domestic oil and gas production might want to be able to reflect back on their role in scripting a repeat of what happened to our mining communities in the 1980s."

The Scottish Tories called on Ms Sturgeon to distance herself from Mr Harvie's "shameful" comments, saying they insulted thousands of North Sea oil workers.

The First Minister tweeted about a visit to the Port of Nigg on the Cromarty Firth, where the UK's largest offshore wind tower factory is to be built, saying it was "an example of a just climate transition in action".
The row broke out amid growing doubts about the future of Cambo and the entire North Sea industry following Shell's decision. The oil giant had a 30pc stake in the field, with the rest owned by Siccar Point Energy.

Shell said that the “economic case for investment in this project is not strong enough at this time" and also cited the "potential for delays” amid a lack of political support.
For weeks, Ms Sturgeon urged Boris Johnson to review the drilling licence for the Cambo field, while repeatedly refusing to state whether she personally opposed the development.
An exploration licence was granted for the field in 2001 and the Oil and Gas Authority is now considering whether to give its approval.

Last month Ms Sturgeon came off the fence and said that she did not think that Cambo “should get the green light”. She later went further by stating: “I don’t think we can go and continue to give the go-ahead to new oil fields.”

Full story
4) Six more energy firms to go bust this month with 400,000 households at risk
The Sun, 3 December 2021

HUNDREDS of thousands of households are on the brink of losing their energy supplier before Christmas as six more firms could collapse this month, warns Energyhelpline.

The stark prediction would see misery heaped on up to 400,000 customers this December.

It's predicted that another six energy firms could collapse by the end of the month
It comes as Zog Energy became the latest victim of the energy crisis.

The provider collapsed yesterday - the 26th supplier to cease trading this year.

Energyhelpline warned that the string of collapses mean household bills are likely to rise further.

It predicts that the energy price cap could be hiked by an eye-watering £475 in February, taking the average bill up to £1,750.

Already this year some 3.8 million customers have seen their energy provider go under, causing disruption and a spike in bills.

Many households are already struggling to cope, with many facing the choice between heating and eating this winter.

Full story
5) UK household gas bills predicted to increase by £467
Energy Live News, 3 December 2021

Domestic energy bills have already soared by £230 per customer, a fuel poverty charity has warned

Customers could see their household gas bills soar increase by £467 compared to October 2020, a charity has warned today.
Fuel poverty charity National Energy Action (NEA) has warned today that the average household gas bill could jump from £466 a year in October last year to £944 in April next year.

That means that billpayers will have to pay almost double the amount of money they spend currently to heat their homes.

The NEA also estimates that domestic energy bills have already soared by over £230 per customer compared to last winter.

Adam Scorer, Chief Executive of NEA, commented: “Bills have increased by well over £230 since last winter and millions now face a daily heat or eat dilemma. We estimate energy bills will rocket again in April, doubling the average householders’ heating bills since last year.

“Over the same period, those on the lowest incomes have seen their income plummet by over £1,000 per year. Just think about that. For people already on a budgetary knife-edge, the cost of keeping a family warm has exploded while budgets have collapsed.”
6) EU revolt as France and Germany go head-to-head over energy crisis
Daily Express, 3 December 2021
CRACKS are starting to show in the European Union's united front as Germany and France go head-to-head over the bloc's deepening energy crisis.

Member states including France and Spain have called on the European Union to reform its energy market in a bid to save it from collapse.
The global energy crunch has already caused gas prices to rise more than 600 percent this year and experts fear the EU will experience a full-blown crisis this winter. However, European ministers clashed on Thursday when a coalition of member states, including Germany, opposed calls to reform the bloc's market rules.

Coming out of the pandemic, the world has experienced an increased demand for energy and raw resources, including gas and oil.

As supplies dwindled and suppliers struggled to keep up with demand, consumers across the continent faced exorbitant energy bills and the dreaded possibility of fuel poverty this winter.

After reaching record highs in October, gas prices have stabilised somewhat but rolling blackouts could still cripple the bloc if winter proves to be particularly bitter.

The crisis has also touched the UK where nearly 30 energy suppliers have gone bust, leaving millions of customers in a state of uncertainty.

Despite this, the EU's 27 member states have failed to find a unilateral way out of the chaos.

Earlier this year the EU released its "toolbox" for member states to access.

It included powers that would allow countries to implement short- and medium-term measures, such as reducing tax and incentivising the adoption of green energy purchase agreements.

Energy Commissioner Kadri Simson said: "As we emerge from the pandemic and begin our economic recovery, it is important to protect vulnerable consumers and support European companies."

Energy prices soar and EU poses 'joint gas purchase'

Many states, however, feel not enough has been done to address the situation and have called for widespread reforms to the EU's energy market.

The move was openly opposed in a joint statement signed by Germany, Austria, Denmark, Ireland, the Netherlands, Luxembourg, Latvia, Estonia and Finland.

The nine member states said: "We cannot support any measure that would represent a departure from the competitive principles of our electricity and gas market design.

"Deviating from these principles would undermine the cost-effective decarbonisation of our energy system, jeopardise affordability and risk security of supply."

The statement was countered by France, Italy, Spain, Greece and Romania who urged the EU to protect consumers from wild price swings.

The five member states have also called on the EU to adopt joint gas purchases in a bid to form strategic gas reserves.

Ms Simson has since said the European Commission will propose a framework by which member states could purchase strategic gas stocks.

But this is not the first time member states have broken ranks with the EU's big hitters.

The nations pleaded the case for nuclear power as an "affordable, stable and independent" source of energy that could strengthen the bloc's market.

Germany has a long history of opposing nuclear power, particularly after the 2011 Fukushima nuclear disaster in Japan.

Mr Macron's alliance wrote in an open letter: "We need nuclear energy. This is for all of us a key and only means for a low-carbon future."
7) Benny Peiser: “We are entering a new phase in the climate debate”
CLINTEL, 2 December 2021
Benny Peiser, director of the Global Warming Policy Foundation, gave a talk for the Irish Climate Science Forum and CLINTEL. His online presentation was titled: After COP26, with a looming energy crisis, is there a realistic alternative to Net Zero?
The GWPF recently rebranded the name of their campaigning arm to Net Zero Watch. So it was not surprising the focus of his talk was the obsession current western leaders, like Biden and Johnson have with Net Zero.

The reason of this obsession is the 1.5 target that was now the main focus of the COP26 conference in Glasgow. Remember, in 2015 in Paris countries agreed they would try to stay below 2 degrees Celsius compared to preindustrial and preferably even below 1.5 degrees.
The IPCC then published a special report in 2018 about this 1.5 C threshold. In this report they calculated the remaining carbon budget to stay below 1.5 and 2 degrees.
Since then these carbon budgets play a key role in international climate negotiations. You get messages like “we have only 12 years to save the planet”.
In practice staying below 1.5 C means Net Zero for the whole world in 2050. Peiser showed with graphs from the recent past and projections from the EIA that such ambitious goals are totally unrealistic.

At the top what is needed (according to models) to stay below certain targets. Under projections by the EIA. From the presentation by Benny Peiser.
The US Energy Information Administration projects that the energy production from renewables will increase in the coming decades but so will the contributions from coal, oil and gas. Peiser called a quick change to Net Zero totally unrealistic and an “utopian change”.
He reminded us though that groups like Extinction Rebellion really seem to believe that we will go extinct if we cross the magic 1.5 C barrier. He showed a google search term for “climate emergency” indicating the term came up pretty quickly in 2019 when governments around the world were announcing this “climate emergency”. We live in an era of climate hysteria.
Boris Johnson and Biden wanted countries to accelerate the phase-out of coal altogether. However during the conference they had to water down the formulation until at the end a meaningless promise by countries like India and China remained. Peiser showed the different formulations.

Literally minutes before closing the conference China forced the western countries to water it down to the “phase down” of coal power (whatever that means) and even make it conditional to “targeted support” which means in practice that India is asking for one trillion dollar if the west really wants India to quit coal any time soon. So as the skeptics predicted the conference ended in a huge deception. Targets are not binding and remain conditional on a huge wealth transfer.

Issue Attention Cycle

Peiser called this 1972 figure about the issue attention cycle the key graph of his presentation. According to him we are just entering – at least in the UK – phase 3 of this cycle in which people start to realise the cost of the policies.
In phase 1 scientists try to get the issue on the agenda. This was the fifties to the eighties. Since the start of the IPCC we are in phase two in which there is “alarmed discovery and euphoric enthusiasm”. The media is helping a lot to hype the issue. Peiser told that in this phase public discussion is all about the science (is it really CO2? Is it really bad?) leading to the science is settled and we have to do something. On the policy side people were told climate policies will improve the climate and the environment and at the same time it will benefit the economy (green jobs).

However now mitigation policies are implemented people are starting to feel it in their pocket. And this hurts. In England this winter, especially when it will be a cold one, lots of people will literally sit in the dark and cold in their houses, unable to pay the bills.
People begin to realise climate policies make them poorer and colder. Peiser sees a new movement coming up, including tenths of MP’s who want to scrutinize the costs of going to Net Zero. Peiser also noticed that he is approached much more by the media than a few years ago. The media is picking it up, they have to.

How long the third phase of the issue attention cycle will last is impossible to predict. It could definitely take ten years at least. So skeptics who hope for a sudden change in the atmosphere surrounding climate change will need to be patient.

Peiser’s focus with Net Zero Watch and the GWPF will remain the same for the coming years. “Show that there is really no climate crisis and there is ample time for a slow decarbonisation, first towards gas and later towards nuclear in combination with adaptation.” They recently published a paper documenting this more realistic climate approach.

Peiser has become well-known for his CCNet newsletter which he started in 1997. Their current newsletter (several times a week) is still a must follow if you want to keep up to date with the news about climate change and climate policy. Please subscribe here.
8) Big Oil’s painful offshore wind pivot
Energy Flux, 3 December 2021
Seb Kennedy
DEEP-DIVE: European oil majors throw caution to the wind by embracing razor-thin margins

European oil majors are jostling to become offshore wind heavyweights. Building capital-intensive projects at scale in familiar offshore environments, underpinned by guaranteed returns, has proved alluring. But cost inflation and aggressive bidding at cut-throat ‘subsidy-free’ auctions have eviscerated margins. Energy Flux takes a critical look at new research into the sketchy economics of offshore wind for the likes of Equinor, Shell, BP and ENI.
Offshore wind is the new darling of the European oil industry. The biggest names in petroleum have amassed gigawatt-scale development pipelines and frequently scrap it out for seabed acreage in premium markets in western Europe and North America. Several are also entering emerging Asian markets via local joint ventures.
Barely a week goes by without some sort of announcement from a European oil major about its deepening involvement in the sector. They all hope to emulate the metamorphosis of Denmark’s state oil company DONG Energy into Ørsted, an offshore wind pioneer. Shell sees its ~6 GW pipeline as a “key growth area”. BP says wind will play a “vital role” in achieving its 2050 ‘net zero’ target. TotalEnergies and ENI are similarly zealous.

Equinor is leading the pack. The Norwegian oil major expects offshore wind to account for two-thirds of its 12-16 GW renewables capacity by 2030, and is “determined to be a global offshore wind energy major”.

That determination to scale up quickly is driving European IOCs into a tight corner. Once-cautious companies that weighed high risk, high-return global investments on cold-blooded financial metrics appear to be making exuberant ‘green’ bets that could land them in hot water.

Competition for prime acreage is rife, resulting in some questionable bids. BP faced accusations that it overpaid in the UK’s latest leasing round. There is a similar scramble to secure 15-year fixed returns enshrined in a Contract for Difference (CfD) or similarly bankable support instrument. Revenues are under pressure.

CfD auctions frequently clear at the minimum price, as occurred at a recent 1 GW Danish tender that saw companies draw lots in a tie-break. This result was hailed as historic, which it undoubtedly is, since the (un)lucky winner – RWE – will pay the Danish state DKK 2.8 billion (€376 million) by 2028 and pick up the tab for export cables and grid connection. Supply chain margins must be under immense pressure to keep the project economics in the black.

With clearing prices falling more rapidly than costs, major turbine supplier Siemens-Gamesa recently warned that margins have been squeezed “too far”, hobbling reinvestment in factories and technology improvements. These can’t be deferred forever, which means turbine costs can’t keep falling forever either. Materials inflation and labour constraints are an aggravating factor.

Throwing caution to the wind
As Energy Flux asserted more than a year ago, any attempt to emulate oil-sized profits from renewables is destined to fail. European majors now tacitly admit this by imposing less stringent investment metrics on offshore wind projects than oil.

Shell says future upstream projects must be profitable at $30/barrel, deliver an internal rate of return (IRR) of 20-25% and pay back capital within seven years. Integrated gas projects must deliver IRRs of 14-18%. As global oil and gas demand returns to pre-pandemic levels, investments made on this basis have a big safety margin.

The bar is set much lower in the renewables segment, where Shell is investing $2-3 billion each year. The company is targeting an “unlevered” IRR (i.e. pure equity, no debt) of “more than 10%”, which it says is made possible by its integrated business model. Conventional wisdom holds that leveraging up the asset with cheap debt improves returns (more on this below).

A higher margin requirement for oil investments reflects exploration risk and crude demand uncertainty stemming from decarbonisation policies. Wind might not carry these risks, but much lower margins mean investments carry less ‘fat’ to absorb contingencies. Shell’s twin-track approach, which is not unique, raises some questions:

Can renewable investments reliably generate double-digit returns?

Will returns come quickly enough to support a high rate of reinvestment in new projects and sustain dividends at levels sufficient to compete in capital markets?

Can IOCs release value by spinning off their ‘green’ investments into stand-alone listed companies?
New research by academics in Norway suggests the answer to all of the above will be a resounding nei. This might not matter while wind accounts for a tiny proportion of IOC capital expenditure, but that is set to change: Equinor expects renewables to account for 50% of its capital expenditure by 2030. Big wind could drain Big Oil of liquidity.

The decarbonisation megatrend has skewed the investment thesis in favour of strategic objectives. The calculus seems to be that taking on projects with poor economics is a price worth paying for polluting companies desperate to burnish their ESG credentials and renew their social licence to operate.

An alternative theory holds that the move into low-rent clean power production is a strategic hedge against ‘green’ hydrogen — produced from renewables via electrolysis — outcompeting the gas-derived blue variety to become a significant energy vector in the UK and Europe. Big Oil’s intense pro-hydrogen lobbying gives credence to this view.

Massaging the numbers
Researchers from the University of Stavanger ran the rule over Equinor’s investment in the 3.6 GW Dogger Bank wind farm in the UK’s southern North Sea. Dogger Bank is the world’s largest offshore wind farm, an order of magnitude greater than the 317 MW Sheringham Shoal and 402 MW Dudgeon projects that Equinor tackled previously.

The site is so big it is being developed, financed and built in three separate 1.2 GW special purpose vehicles – Dogger Bank A, B and C – that will be co-owned by Equinor (40%), SSE Renewables (40%) and Italy’s ENI (20%). Each phase will cost a cool £3 billion.

Phases A and B achieved financial close a year ago after securing senior and ancillary debt facilities of £5.5 billion, with gearing of 65-70% on the generation assets and 90% on transmission infrastructure. Phase C reached this milestone yesterday on similar terms with many of the same lenders.

Equinor executive vice president of renewables Pål Eitrheim said the project will achieve a “nominal equity return” of 12-16%. This figure includes profits from the sale of 10% project equity to ENI. Speaking at Equinor’s capital markets day in June, Eitrheim said:

“[W]e expect [wind] project-based returns between 4% and 8%… these are unlevered real-life cycle returns, excluding farm-downs. Add 2% for inflation and you get to the expected nominal return range… Farm-downs would typically add 1 to 2 percentage points to the unlevered project IRRs.

“We expect significantly higher nominal equity returns when we are using project finance. If you look at our projects in the US and the UK that are secured offtake, they have nominal equity returns between 12% and 16%. These returns reflect a business with a very different risk profile than our legacy oil and gas business: no exploration risk, no oil price volatility exposure nor production decline rates, stable revenues.”

Big wind = big unknowns
Eitrheim’s figures paint a much rosier picture than the Stavanger researchers, who said Equinor can expect an IRR of 5.6% after tax in their “best estimate” central case for Dogger Bank. On a net present value (NPV) basis, the wind farm comes in at negative £907 million – meaning the investment is not worth making for Equinor.

“Our estimation, based on the project economics of the Dogger Bank project, is that this activity will be cash negative for a very long time,” say researchers Petter Osmundsen, Magne Emhjellen-Stendal and Sindre Lorentzen.

Osmundsen told Energy Flux the figures are not comparable because Equinor is referring to its entire portfolio, while his study considers Dogger Bank in isolation. Also, he challenges the notion that leveraging up a project squeezes more value from the equity portion:
“By gearing up a project you may have higher expected return, but at the same time higher risk and thereby higher rate of return requirement, so the value of your project does not change. This is confirmed by sensitivity calculations we have done for the project. By increasing the debt to 70%, you get a high variability in equity return.” — Petter Osmundsen, via email
Osmundsen’s study assessed key economic inputs such as Equinor’s cost of capital, capital and operational costs (capex/opex) of each phase, operations and maintenance (O&M) costs, plant capacity factor, asset lifespan, future power prices and many other variables. Some of these are difficult to pin down.

Dogger Bank is anomalous in that it is much bigger and further from shore than any wind farm in operation today – 130-190 km – but the site lies in relatively shallow waters. Distance from shore increases installation and O&M costs, cabling costs and plant downtime, since it might not make economic sense to journey out to fix individual turbine outages. Transmission losses also rise with distance.

These downsides are (partially) offset by the lower capital cost of building and installing turbine foundations in shallower waters, the economies of scale achievable in a multi-gigawatt development, and the stronger and steadier wind speeds to be harvested further out to sea.

Dogger Bank will boast 190 GE Haliade-X wind turbines each rated at 13 MW in its first two phases. The use of a smaller number of larger turbines improves power yield while decreasing unit costs since fewer blades, towers, nacelles and foundations will need to be manufactured, installed and maintained at the remote site.

Equinor’s equity will be tied up in Dogger Bank for 16 or 17 years before it is paid off by electricity revenues. This is a year or two after the CfD’s fixed revenue support period ends, and much longer than the average of six years for Norwegian oil investments. The research paper claims lenders will require loans be paid off during the 15-year CfD, not after — a view not shared by everyone in the wind industry.

The assumptions used in the financial modelling deserve scrutiny. There is a lot of uncertainty around the overall economic life of the asset, and the price risk it will face after the 15-year CfD expires. Osmundsen et al assume lots of price cannibalisation and low/negative wholesale prices after a rapid ramp-up of UK wind power generation in the 2030s. They also assume the turbines will be dismantled after 25 years.

There is reason for caution here. Energy Flux understands that Dogger Bank is being developed as a 30-year asset, and sources in the offshore wind industry say 35 years is starting to be viewed as the norm as technologies improve. The extra O&M costs of keeping ageing offshore turbines spinning for another five years will be vastly outweighed by the additional revenue from a fully amortised asset, wind advocates say. That holds true regardless of price volatility in a wind-dominated power market, some claim.

The Norwegian researchers modelled one scenario for Dogger Bank as a 30-year asset. With three decades of revenue the IRR rises to 7.3%, while optimistic sensitivities modelled around costs (-15%) and prices (+20%) could boost that figure as high as 8.5%.

Another five years of operations might conceivably nose the IRR into low double digits, but we can’t be sure unless the financial model is re-run over 35 years. (Osmundsen declined to do this. A spokesperson for Equinor did not respond by the time of publication.)

Turbulent headwinds
Does this mean Equinor’s wind pivot will be plain sailing? Far from it. Government officials in Oslo will need to get comfortable with their national energy champion spending more on wind projects in overseas jurisdictions and less at home. This has negative implications for Norway’s fiscal revenue and supply chain investment.

There is also the question of “hard money”, as a source close to Equinor put it to Energy Flux. Oil investments are made in US dollars and produce a globally traded commodity to repay those dollars and cover taxes, royalties and dividends. Further upside can be gleaned from trading equity volumes and leveraging Equinor’s global footprint.

Oil companies book wind investments in US dollars but revenues and taxes are paid in local currency because electricity markets are localised. Arbitrage opportunities, and hence upside, are limited by transmission infrastructure. This is a structural challenge that green hydrogen/ammonia might one day resolve — but don’t hold your breath.

In the meantime, Equinor’s balance sheet could deteriorate. Dogger Bank’s total capital outlay of £9 billion will be 70% debt-funded. Equinor’s 40% project share, minus the £276.4 million farm-out payment from ENI, implies an equity commitment of £800 million for 1.44 GW. This equates to $555 million per gigawatt installed.

If we take that as a rough benchmark, Equinor’s target of 12-16 GW installed capacity this decade implies an equity outlay of £6.7-8.9 billion. This capital won’t be recouped for well over a decade, so there won’t be much free cash flow to cover dividends or invest in new growth opportunities without hefty farm-outs.

Aggressively selling down large chunks of project equity pre- and post-construction might keep Equinor’s renewables investments above water, but those buying in face dismal returns. ENI’s two Dogger Bank farm-in deals (see here and here) will achieve IRRs of just 2.7% and 2.9%, according to the Stavanger researchers. Equinor and SSE will enjoy higher overall margins at ENI’s expense, which the paper describes as a “zero-sum game”:

“Newspapers have commented that this means that the project and offshore wind in general has become more profitable. This is not the case. ENI have been willing to [accept] a lower rate [of] return … to learn the business and to move against their target of offshore wind production of 25 GW by 2035. The transaction is merely a redistribution of profit among private companies, a zero-sum game. The socio-economic value of the project has not changed. The expected NPV of the project is the same, irrespective of equity transaction.”

As Energy Flux readers will recall, ENI harbours ambitions to spin off its green arm to release unrealised value and alleviate the renewables investment burden on current shareholders. ENI believes capital markets are discounting renewables investments and opportunities on its balance sheet. But if those investments yield such low returns, who in their right mind will buy in?

The bottom line
There is only so much economic value to go around from investments in ‘cheap’ offshore wind. Spectacular reductions in auction prices have spawned a misleading narrative that this sector is becoming an attractive investment proposition for oil companies scrambling for a means to reduce emissions, remain relevant and keep ESG investors onside.

Moving early pays off. Sadly, the macro conditions that led to Ørsted’s successful green reincarnation no longer exist. Equinor is a laggard by comparison but arrived just in time to cream off value from initial UK investments via its farm-outs to ENI.

If Dogger Bank is representative of its plans to squeeze shareholder value from wind, the Italian oil company faces big problems. The same might hold true for Shell, BP and TotalEnergies; time will tell. For now, their collective push into offshore wind is still gathering steam. Don’t be surprised if a few big projects are quietly erased from portfolios along the way.

The London-based Net Zero Watch is a campaign group set up to highlight and discuss the serious implications of expensive and poorly considered climate change policies. The Net Zero Watch newsletter is prepared by Director Dr Benny Peiser - for more information, please visit the website at

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