September 2023

New Technologies and

the Future of Individuals,
Organisations and Society
ESCP Impact Papers
Fourth Edition

Edited by
Pramuan BUNKANWANICHA
Régis COEURDEROY
Daniele BATTAGLIA
Lorena BLASCO-ARCAS
Petros CHAMAKIOTIS
Alessandro LANTERI
Yannick MEILLER
Sonia BEN SLIMANE

ESCP RESEARCH INSTITUTE OF MANAGEMENT (ERIM)

ESCP Impact Paper No.2023-12-EN

Offshore wind power:

Threat or opportunity for offshore oil and gas incumbents?

George Horsington *

ESCP Business School

Abstract

Offshore wind power is an emerging renewable energy technology that is being

implemented rapidly. The annual installation of new offshore wind capacity is expected to
more than double from 21 Gigawatts (GW) in 2021 to around 55GW in 2031, according to the
Global Wind Energy Council (2022), as new wind farms are developed with bigger turbines
in deeper water in more countries. To put that figure in context, only 2 GW per year were
added in the period 2013-2016. Even in a modest scenario of the gradual energy transition,
compound annual growth in offshore wind is expected to exceed 14% between 2022-2050,
taking it from a mere 0.3% share of the total 2022 global energy mix from all sources to over
6% in 2050. The rapid deployment of this technology has seen many leading European oil
and gas producers, including Shell, BP, Total, Eni, and Equinor, bid to develop and operate
offshore wind farms themselves. However, the transition for oil and gas incumbents is not
easy – and resurgent oil and gas prices now threaten the financial and operational
assumptions of these new wind operators.

Keywords: offshore, wind, oil and gas, supermajors, net zero

*PhD Candidate, ESCP Business School

ESCP Impact Papers are in draft form. This paper is circulated for the purposes of comment and discussion only. Hence, it
does not preclude simultaneous or subsequent publication elsewhere. ESCP Impact Papers are not refereed. The form and
content of papers are the responsibility of individual authors. ESCP Business School does not bear any responsibility for the
views expressed in the articles. Copyright for the paper is held by the individual authors.

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 Offshore Wind Power:
threat or opportunity for offshore oil and gas incumbents?

9-fold growth in offshore wind capacity projected by 2035

The global energy transition has begun. Investment in offshore wind has surged, spurred by
both the decrease in European imports of Russian oil and gas after the invasion of Ukraine
in 2022, and by the binding international commitments made at the 2015 Paris Agreement.

In the coastal waters of Europe and Asia, a revolution in the global energy supply is taking
place, as an aggressive investment in ever larger wind turbines is creating maritime
renewable power generation capacity on an unprecedented scale. Total installed offshore
wind capacity worldwide reached 57.6GW at the end of last year, up from just 6.85GW in 2013.
The installed capacity of offshore wind farms is forecast to further grow at a nine-fold rate
by 2035, to reach 519GW, according to World Forum Offshore Wind (2022).

Fast-paced technological change in offshore wind turbines has driven this expansion: there
are not just more turbines – the turbines themselves are getting larger and more powerful.
In 2009, Vestas and Siemens launched new offshore turbine products with nameplate
capacity of 3 megawatt (MW) and 3.6MW capacity respectively, which were significant
capacity improvements on earlier offshore turbines (Renewable Energy World, 2009). Since
then, however, technological innovation has accelerated, as turbines have grown ever
larger. Individual turbines capable of delivering 10MW of capacity were first launched in 2018.
In 2021, Vestas unveiled a 15MW turbine that stood 255m high from sea level to blade tip
height. The hub alone stood 143m above the surface of the sea, a 623-ton nacelle, which
houses the generator and gearbox, mounted on a steel monopile weighing 2,000 tons.

These engineering feats permit each turbine to generate more power and have driven
down unit costs. GWEC (2022) found that although a larger wind turbine is more expensive
to buy than a smaller one, it is cheaper to purchase and install per MW of power output.
Wind farm operators also benefit from lower operations and maintenance (O&M) expenses
per unit of installed capacity when using larger turbines. This is because fewer turbines are
required, and therefore fewer components need to be inspected and changed, which in
turn means fewer technician visits and fewer expensive vessel movements offshore are
needed. O&M costs account for approximately 25-30% of total project life-cycle costs for an
offshore wind farm.

These factors have helped continuously reduce offshore wind costs since the first 0.46MW
turbines were installed in Denmark in 1991. The levelised cost of electricity (LCOE) from new
offshore wind projects in the North Sea was around €150 per megawatt-hour (MWH) in 2015.
This is projected to fall to less than €50 per MWH by 2024 when the UK installations built
under the 2019 bidding round for wind farm allocation rights will come online. Up until 2017,
offshore wind farms required government subsidies to be economically viable. Today nearly
all Western European offshore wind projects are based on selling power at the wholesale
price at the time it is generated.

Even in a modest scenario of the gradual energy transition, compound annual growth in
offshore wind is expected to exceed 14% between 2022-2050, taking it from a mere 0.3%
share of the total 2022 global energy mix from all sources to over 6% in 2050. In a scenario
of rapid international decarbonisation, offshore wind could account for more than 8%,
surpassing the share of even offshore gas less than three decades from now.

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More countries are recognising the potential of offshore wind generation as a key means of
achieving their long-term climate goals. The United States, Australia, and Korea are building
their first offshore wind projects, joined by countries in the Mediterranean, the Baltic Sea,
and the Black Sea. China currently has the largest installed base of offshore wind capacity,
facilitated by a largely closed ecosystem of domestic suppliers, followed by the United
Kingdom and other North Sea littoral countries. European governments, in particular, have
recognised the importance of offshore wind to both energy security and the battle against
climate change. In the aftermath of the invasion of Ukraine, European states increased their
2030 targets for offshore wind to 165 GW. In March 2022, the Netherlands doubled its 2030
target capacity to 21GW; in April the UK increased its target to 50GW from 40GW; in June,
Denmark upped its goal to 12.9GW from 8.9GW; and in August the Baltic states set a
combined 20GW objective for wind energy production from that region (Matthews, 2022).
The Russian-Ukrainian war has thus acted as a catalyst for further investment in a sector
that was already growing rapidly.

The maturation of floating wind technology, which is currently in the pre-commercial,

demonstration phase, provides additional opportunities to develop new wind farm sites in
waters deeper than 80m, where conventional fixed-foundation installations on the seabed
are technically unfeasible today. Indeed, in December 2022, the first American federal
auction of floating offshore wind farm acreage in the Pacific Ocean raised $757m in bids on
five separate lease areas, all more than 30km offshore, that could host turbines with the
capacity to produce more than 4.5GW. At the same time, the commercialisation of green
hydrogen provides another potential source of demand for electricity from offshore wind,
creating a solution for generating a storable source of energy from periods of peak
generation when wind farms produce an excess of power.

Despite its explosive growth in the 2010s and obvious potential, it was only when the Covid
pandemic struck that push factors caused the largest oil and gas companies in Europe to
commit to ramping up their investment in offshore wind. Before 2020, offshore wind
projects had largely been developed by electrical utilities including Ørsted, Iberdrola, and
RWE.

European majors saw oil profits slump in 2020

The collapse in oil prices in the first phase of the Covid pandemic in 2020 led to the major
European oil companies facing increasing investor and social pressure to change their
business models away from hydrocarbons to renewables. When the price of Brent crude fell
below $30 per barrel in March 2020 – a level not seen since 2002 – the economics of oil
production were hard hit. Pickl (2021) noted that this created an impossible trilemma for the
oil companies, which had to decide whether to continue investing in new oil and gas
projects, continue paying dividends, or continue spending on the energy transition.

Within three months of the oil price rout, four leading European oil producers (BP, Shell,
Total, and Eni) had announced net-zero strategies for 2050, and in November, Equinor
followed suit. The CEOs of both Shell and BP publicly questioned whether demand for oil
would ever return to pre-pandemic levels and Shell’s CEO stated that the company would
never again produce as much oil as it had in 2019, preferring to focus on “value not volume.”
BP predicted that in 2030 it would be producing 40% less oil than it had in 2019. Equinor
announced its oil production would peak in 2026 and then fall year-on-year thereafter. Shell
and BP also both slashed their dividends in 2020.

The cause of this Damascene conversion was the impact of the pandemic-related oil price
slump on the balance sheets and profit and loss accounts of the European majors. Total

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recorded a $7.2bn net loss in 2020, driven by asset write-downs. It even announced it was
changing its name to TotalEnergies “anchoring its strategic transformation into a broad
energy company in its identity,” as per its press release of May 2021. Equinor reported a net
loss of $5.5bn in 2020, whilst committing to building renewables capacity of 4-6GW by 2026,
and 12-16GW by 2030. Eni reported an adjusted net loss of €742m for the year, compared
with a net profit of €2.9bn in 2019, and announced it was purchasing a 20% stake in the
2.4GW Dogger Bank wind farm in the UK sector of the North Sea. BP’s full-year losses for
2020 hit $5.7bn, down from a $10bn profit in 2019, and it too claimed it would become what
its CEO described as “an integrated energy company” rather than an oil major. Shell
reported an annual loss of $21.7bn, mainly due to the impairment of oil and gas assets.
Additionally, in May 2021, a Dutch court ruled in favour of environmental activists that Shell
must have a credible plan to reduce its greenhouse gas emissions by 45% by 2030, from
2019 levels.

Repurposing for renewables

From a strategic point of view, it seemed logical to take the offshore engineering and
project management skills and the experience of bidding in governmental licensing rounds
that the European oil and gas companies had gained over decades of operating complex
and highly capital-intensive hydrocarbons projects and apply them to offshore wind. Large
offshore wind projects have comparable capital requirements to oil and gas developments
and require similar manufacturing, transportation, installation and commissioning skills.
Cole (2016) had already identified that the European majors would need to base their future
strategies on their knowledge-based resources, as the world moved to decarbonise. So,
faced with these social, economic, and political pressures, the companies moved as a herd
to invest in the new technology, as they had done in the 1990s when they all moved to
drilling in deepwater and aggressively bid up the prices of deepwater oil and gas acreage,
discovering massive new sources of offshore fossil fuels (Black Book, 2004).

What Greta Thunberg and other activists had failed to achieve during years of campaigning,
a fall in crude oil prices appeared to have achieved within weeks. Wood Mackenzie
estimated in 2021 that annual spending on offshore wind by the Shell, BP, Total, and Equinor
(before project financing) would increase to around US$8bn a year in 2025 — more than 18
times the levels of investment made by the companies in 2020. This caught many industry
observers completely off-guard. Consultancy McKinsey & Company published a report in
2022, which ignored all the wind projects from Shell, BP, Total, and Eni in its summary of
future capacity up to 2030. Likewise, academics Kenner and Heede (2021) believed that it
was unlikely that the leadership of Shell and BP would stop the exploration and extraction
of oil and gas in line with the Paris Agreement to maintain a 1.5° Celsius temperature rise of
their own accord, or that they would invest aggressively in renewables to reach net zero by
2050.

However, BP immediately set about putting its money behind its net-zero claims, buying a
50% stake in Equinor’s 4.4GW Empire Wind and Beacon Wind projects in the Atlantic off the
USA, then bidding £900m with a German utility partner to win two 60-year offshore wind
leases in a UK government wind farm tender in the Irish Sea. In 2022 BP paid over £87m to
win block 1 in the Scotwind offshore wind bidding process off Scotland. These moves were
the first part of BP’s plan to increase its yearly renewables investment 10-fold to circa $5bn
over this decade and to increase its total renewable generating capacity 20-fold to 50GW in
2030.

Shell and TotalEnergies also won the rights to operate multi-GW capacity offshore wind
farm projects in the Scotwind process, even as TotalEnergies’ CEO Patrick Pouyanne

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warned of a bubble in renewable energy, leading to what he described as “crazy prices” for
new projects in the sector.

Hangover hits when oil prices recover and wind costs surge

The intense interest by the European majors in developing their offshore wind portfolios
had a predictable consequence: prices for new offshore wind acreage went up, and prices
for stakes in existing projects increased. The situation worsened in 2022 due to a spike in
steel prices after the Russian invasion of Ukraine, and persistently high-cost inflation across
the offshore wind supply chain. These inflationary factors included higher energy prices,
higher shipping costs in the wake of the Covid disruptions, and higher labour costs. This
rush to spend at a time of rising costs had the predictable consequence of driving down the
return on invested capital for new wind projects.

Norway’s Equinor, as an early mover in the sector with several projects already under
development before the oil price crash, was the first to be hit. In November 2021, a group of
Norwegian researchers announced that their calculations showed that the company’s
Dogger Bank wind farm project had a net present value (NPV) of minus £970m.

The study was widely publicised in the Norwegian and international energy press. It
estimated that the expected internal rate of return (IRR) for the Dogger Bank project was
only 3.6%, in real terms, with a payback period of 17 years. “In our estimate, Dogger Bank is
unprofitable,” University of Stavanger professor Petter Osmundsen told Upstream
magazine. In June 2021, Equinor revised down its expected rate of return for offshore wind
to between 4-8% (excluding returns from selling stakes in the projects to other companies),
from previous expectations of a 6-10% return.

By April 2022, Equinor was telling investors that its aim of owning 12-16GW of offshore wind
capacity by 2030 was not a goal, but merely an ambition, as it reported a $136m loss for its
renewables division in 2021. The contrast was even starker in its next full-year results after
the Russian invasion and the hydrocarbon price squeeze of 2022. Equinor’s net income for
that year was $28.7bn, but its renewables business division incurred a loss of $184m.

This cost pressure had an immediate negative impact on pureplay wind and renewables
operators. In its 2021 annual report, Denmark’s Ørsted boasted that it had developed
approximately 30% of the world’s offshore wind power capacity (excluding mainland China)
and had just installed its 1,000th turbine. Unfortunately, profits in 2021 were 35% lower than
in 2020. Shares in Ørsted, which had doubled between 2019-2021 when the net-zero
narrative had gained momentum, subsequently fell 50% in early 2023, back to the level they
had been in 2019, as the reality of increasing project costs, rising debt, and higher interest
rates hit home. Over the same period, the MSCI World Oil and Gas index more than doubled,
as the Russian invasion of Ukraine led to steep increases in fossil fuel prices.

In February 2023, BP announced record results for 2022, with $40bn of free cash flow and a
return on average capital employed of over 30%, driven by high oil and gas prices. It raised
its dividends and announced higher buybacks. The following month, the company told
analysts that the reduction of its hydrocarbon production would fall more slowly than it had
projected in 2020 — rather than 40%, BP now expected a 25% fall in oil output in 2030, from
the 2019 baseline. Within two days of this update, BP shares had rallied 10%.

BP’s record cash flows enabled it to make additional investments in both hydrocarbons and
renewables, with plans for an extra $8bn of capex each year, it claimed. However, BP also
highlighted a shift away from standalone renewables projects, such as offshore wind, and

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toward bioenergy, services for electric vehicles, and what it described as “integrated green
hydrogen projects.”

Eni, Shell, and TotalEnergies also reported record profits for the full year of 2022, driven by
their fossil fuel businesses. TotalEnergies posted a net profit of $36bn in 2022, double that of
the previous year.

On 21 March 2023, Reuters reported that TotalEnergies was now forecasting that its overall
carbon emissions in 2030 would not actually decrease much, as the company wanted to
grow its gas business. CEO Patrick Pouyanne commented that TotalEnergies “should not
be held accountable for its customers' combustion of fuels it sells” and added that when the
company sold natural gas, this was beneficial to the climate if it replaced coal, which
pollutes more. TotalEnergies planned to boost its liquefied natural gas (LNG) output by 40%
this decade. Meanwhile, Shell warned in its Energy Transition Progress Report in early 2023
that “if society is not net zero in 2050, as of today, there would be a significant risk that Shell
may not meet this target [either].”

The spike in hydrocarbon prices in 2022 certainly changed the climate: the climate of
investors towards the European oil majors as their profits, dividends, and buybacks from oil
and gas soared, and the climate of the leadership of those companies towards renewables
and net-zero targets.

Conclusion

In March 2002, Lord Browne, the CEO of BP, famously rebranded his company as Beyond
Petroleum, but then surging oil prices saw Brent crude increase in price from $20 in 2002
to $140 in 2008. The Beyond Petroleum rebrand and the investment in renewables were
quickly junked by Browne’s successors. In 2020, as oil prices once again fell to $20 a barrel,
BP CEO Bernard Looney returned to Lord Browne’s strategic vision, and all four other
European majors followed suit.

When oil prices were low in 2020, investors and activists demanded that the European oil
and gas companies demonstrate a clear commitment to a net zero strategy, and the
companies vastly increased their planned investments in offshore wind. However, when oil
prices recovered sharply in 2022 after the Russian invasion of Ukraine, the oil companies
performed an abrupt strategic U-turn. Suddenly, shareholders once again enjoyed the
buybacks and dividends that oil at an average price of $100 per barrel afforded them. Their
desire for strategic change and the implementation of green technology diminished, again.

This stop/go on the part of incumbent oil and gas companies is harmful to the development
of the new renewable energy industries in the short run, but it also leaves the credibility of
the European majors in green energy an open question. It transmits the destructive boom
and bust cycles of the oil and gas industry into the renewables sector by bidding up asset
prices and increasing supply chain pressures.

However, the development of offshore wind technology has now reached a tipping point
where the technology is economically viable without the need for government subsidies.
Consultancy Wood Mackenzie has calculated that renewables can compete with oil and gas
projects at an oil price of $35 per barrel and deliver similar or superior returns. Therefore,
offshore wind will continue to take market share from fossil fuels in the power generation
market in Europe in coming decades, whilst the increased adoption of electric vehicles will
diminish European transport demand for petrol and diesel.

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The flip-flop and cynically opportunistic approach to renewables from the oil and gas
incumbents is thus self-defeating. Investment in renewables to meet the Paris Agreement
will not depend on the volatile price of oil and gas, nor on the geopolitics of Eurasia and the
Middle East. Instead, the technology has matured to a point where offshore wind should be
part of the long-term portfolios of the incumbent oil and gas operators. They need to grow
their investments in the segment, or risk holding stranded assets of hydrocarbons left in the
ground and losing their entire economic viability in the energy transition.

BP, Shell, Equinor, Total, and Eni’s expertise pushed the frontiers of fossil fuel exploration:
the water depth from which oil and gas could be produced increased from 10m in the 1950s
to more than 3,000m in the 2000s. Now offshore wind is seeing similar technological
changes as bigger turbines move into deeper waters further offshore. The same cycle of
iterative learning through experience and the benefits of widespread adoption will drive
improved economies of scale in wind today, as it did in deepwater oil and gas then.

The wind genie is out of the bottle. The European oil majors should see wind technology as
an opportunity for profitable diversification and organisational learning, not as a threat. They
should not lose sight of the long-term, structural changes in the European energy mix on
account of short-term, tactical considerations about oil prices and the war in Ukraine.

References

‘Global Integrated Oils: Is the Deepwater Dead and Buried?’ (2004). Black Book - The Long
View: 2004 Edition - European Perspectives, 113–122.

Cole, O. (2016) ‘How can the major European oil and gas companies continue to be
competitive? A comparative analysis between 2000 and 2008’, Int. J. Competitiveness, Vol.
1, 53-70

Global Wind Energy Council (2022) ‘GWEC Global Offshore Wind Report 2022’ retrieved
from https://gwec.net/wp-content/uploads/2022/06/GWEC-Offshore-2022_update.pdf
accessed on 19 March 2023

Helgesen, O. K., (2021) “World's largest offshore wind farm 'unprofitable' Upstream
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largest-offshore-wind-farm-unprofitable-for-equinor-say-government-funded-
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Pickl, M. J. (2021). ‘The trilemma of oil companies.’ The Extractive Industries and Society,
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https://www.renewableenergyworld.com/wind-power/vestas-siemens-launch-new-
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