BP’s Desperate Stroke

Times change, and what was once a perfectly respectable product becomes widely reviled and the target of banning campaigns. What does a successful company do in such a situation? Well, a rational plan would be to move operations into unimpeachable products: thus we have cigaretteer Philip Morris this July splashing a cool billion on buying the asthma inhaler company Vectura.

Oil is presently an unpopular substance (although unlike cigarettes, it is a vital part of modern civilisation). For oil companies, watching the ratchet turn against them must have been quite alarming. One surmises that potential responses to this crisis were discussed at many a board meeting, and that top on the list of solutions was: let’s shift our focus from oil to renewables. This is a no-brainer. For a business focussed on an unpopular (still necessary, mind) product subject to increasingly onerous restrictions, there is obvious appeal in switching to an acclaimed product with large public subsidies pushing it.

Among the first to notice which way the wind was blowing was Dansk Olie og Naturgas – DONG. DONG was involved in the first round of the Crown Estate’s leasing of seabed assets in 2001, with the windfarms Barrow (90 MW); Burbo Bank (90 MW); and Gunfleet Sands I and II (173 MW). It has since got out of oil and gas altogether and renamed itself Ørsted. In September 2020 someone noticed that Ørsted’s market cap had exceeded BP’s (although the situation has since reversed).

Which brings us to to the recent fourth leasing round of the Crown Estate’s seabed assets. Six leases were auctioned:

Lot Power Winner Option fee deposit
paid (exc. VAT)
1 1.5 GW RWE-renewables £114,304,500.00
2 1.5 GW RWE-renewables £133,350,000.00
3 1.5 GW Green Investment Group – Total £124,573,000.00
4 1.5 GW BP – EnBW £231,000,000.00
5 0.48 GW Offshore Wind Limited £44,751,840.00
6 1.5 GW BP – EnBW £231,000,000.00

You will note that BP and its partner En-BW (Energie Baden-Württemberg) paid twice as much for sites with the same capacity as RWE paid for lot 1. (Lot 1 is on the Dogger Bank, whereas the BP-EnBW lots are in the Irish Sea: see featured image.)

The Crown Estate’s announcement included these platitudinous inanities:

Energy Minister, Anne-Marie Trevelyan said: “The UK is a world leader in offshore wind energy, with the Prime Minister’s Ten Point Plan laying out a bold ambition to produce enough offshore wind to power every home in the UK.”

And

Dan Labbad, Chief Executive of The Crown Estate, said: [“Blah blah blah…” Then:] “With a net zero goal, some of the best offshore wind resources in the world, and clear commitment from Government and industry to continue investing in the low carbon economy, the UK stands ready to play its part in addressing the global climate crisis.”

Among many things wrong with that sentence, this minor tweak comes to mind:

“…clear commitment from Government and industry to continue investing in forcing households to waste money on the low carbon economy…”

‘s a bit better. The gov’t are not investing here. They are raking in money from the auction for doing jack. And if they were investing, it is not their money to invest, but ours. The monumentally grotesque subsidies, as we have seen, come straight out of bill-payers’ pockets, and may well be flowing to persons many of us would prefer not to send our money to. Etc etc.

Of BP’s winning bids, Reuters said:

BP and German utility EnBW jointly bid 154,000 pounds/MW/year ($211,400/MW/yr) for each of two 1.5 GW leases, some 65% higher than the next successful bidder.

There are 8766 ish hours in a year. So, if each of your £154,000 megawatts worked flat out at 100% of its capacity all year, it would generate 8766 MWh. So for each MWh, BP are paying £154,000/8766 = £17.57.

You might think that’s not so bad. After all, the present lot of wind farms are getting well over £100/MWh in CfDs. Yes, but the latest bids for CfDs are offering to supply leccy at under £40/MWh at 2012 prices (after all, “wind is the cheapest form of electricity”). Let’s call that £50/MWh at 2021 prices.

And we must note at this stage that the figure of 17 and a half quid per MWh is based on 100% capacity factor and availability. Let’s say the new BP windfarms achieve 50% capacity factor (high, but not impossible), which would make the lease cost £35/MWh.

Reuters again:

BP and EnBW plant [sic] to take a final investment decision (FID) on their windfarms in 2025, BP’s low carbon energy chief Dev Sanyal told Reuters last month, which implies the companies will each pay around 1 billion pounds in lease fees before then.

The present author, mumbling to himself:

Dev Sanyal seems to have committed BP to burning a billion quid before they have even sent an ecologist out on a trawler to count how many birds their new windfarms are going to kill.

According to BEIS (same Reuters story), offshore wind is going to be costing as little as £47/MWh by 2030. That seems to be a tad optimistic. Especially as it looks like BP are going to be paying £35/MWh JUST TO LEASE THE SEABED. And they have to somehow recoup the billion quid they’ve paid merely to get in the game.

Despite the high lease fees, CFD prices could continue to fall as developers combine the latest technology and supply chain savings with economies of scale, and if the cost of capital continues to drop, Duncan Clark, Head of UK Region at Orsted, told Reuters Events.

If the cost of capital continues to drop? It’s basically free now, so unless he thinks people are going to pay him to hold their money, I don’t see it getting cheaper. I predict that CfD prices will stay low, but that windfarm owners will back out of them tout de suite because the wholesale leccy prices will by then be into arm/leg territory. (As mentioned previously, I do not know what the break clauses are like re: CfD contracts. One suspects that as soon as wholesale > strike price, the owners will drop them like a handful of bees.)

The European Union aims to install almost 50 GW of new offshore wind capacity by 2030 to reach a total capacity of 60 GW.

Gawd help our feathered friends (more on which anon).

Now over to Sky (who can afford a subscription to The Times, seemingly) who noted that BP’s hoped-for profits might not entirely materialise:

An un-named executive at another established offshore wind operator told The Times that the price BP and its partner were paying was “ridiculous” and raised doubts that the 8-10% return on the investment promised by Mr Looney [BP’s sane Chief Executive] was achievable. The executive told The Times: “They will be lucky if they can even make 2%.”

(Aside: Remember the net profit we saw with Dudgeon at >30%?)

Sky also observed that:

In total, the Crown Estate will receive just under £879m a year for the next four years for the leases, a total of £3.515bn.

A quarter of the Crown Estate’s money will be sent to Liz to spend on corgis etc (about £220 million a year). This arrangement has a nicely historical feel about it. BP spends an astronomical sum on a seabed lease. HRH gets a quarter of it. In order to make the promised 8-10% return on its investment, BP will have to suck vast quantities of money out of the poorest in the UK via their leccy bills. We like our Queen: just as well, really. (I hope she mentions it at COP 26.) When King Charles III is the recipient of all this dosh, he will stop banging on about climate change, recognising the bad taste of this apparent conflict of interest.

Overall, to the untrained eye, it all looks a lot like BP is taking a desperate gamble in order to get some sort of position in the energy of the future, or the past, or the energy of never that is nevertheless the energy of now because of a tidal wave of free cash, hoping that the flood will continue for the next half century or so.

Unfortunately, if BP’s gamble comes off, it would seem to be bad news for the UK’s electricity bill payers.

Earlier pieces in this occasional series:

The Saudi Arabia of Wind

In High Dudgeon

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September 1, 2021 at 12:00PM

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