Money in the Wind
(Article originally published in Nov/Dec 2020 edition.)
In November 1947, the world's first real offshore oil well entered service off the coast of Louisiana, ushering in an entirely new industry. It was a line of business that hadn't been seen before, and it created a new fleet of offshore vessels and thousands of seagoing jobs in the decades that followed. The techniques and technologies developed in the U.S. Gulf of Mexico spread around the world, bringing economic opportunity and jobs to the North Sea, the Persian Gulf and beyond.
Seven decades later, America's offshore energy industry is on the verge of another new opportunity. The leases have been purchased. The oil majors have committed billions of dollars. American shipbuilders hold firm orders for the first support vessels, and the first steel jackets should go in the water in about two years. This time, though, there won't be any drilling – the money is in the wind.
Green Energy, Green Money
It’s been a long time coming in the U.S., and it got off to a bumpy start. In the early 2000s, a group of private investors launched the Cape Wind project between Cape Cod and Nantucket. Though polling showed that Cape Wind was overwhelmingly popular with inland populations, it encountered determined opposition from many coastal residents. After a decade of delays and more than two dozen lawsuits, Cape Wind's utility customers backed out, and it folded in 2015.
This time is different. The turbines have gotten bigger. The costs have come down. The developers are experienced European companies and – the most important factor – the political will is there.
State governments from New England to the Middle Atlantic have staked out a policy commitment to offshore wind development, and they've put it into law. Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Delaware and Virginia have all enacted legislation requiring their electrical utilities to buy renewable energy in the years ahead. The amount, the bidding system and the incentive structure vary by state, but the bottom line is there's a pot of billions of dollars in legally guaranteed revenue.
That's the kind of money that can cover interest for bondholders, profits for developers, contracts for suppliers and wages for an estimated 80,000 to 100,000 workers and mariners.
“There’s a big difference between having a few projects and having a market for those projects,” says Professor Jeremy Firestone, Director of the University of Delaware’s Center for Research in Wind. “When you have a market for offshore wind projects as we do today, that brings in investment capital. That brings in the supply chain. That brings in experienced players. The developers are completely different from who they were just three to five years ago.”
Those developers include some of the biggest names in the energy business, and not just the green energy business. Norwegian giant Equinor (formerly Statoil) has purchased two lease areas off New York and Massachusetts for roughly $180 million, and this year it sold a 50 percent stake in the two projects to BP for $1.1 billion. Royal Dutch Shell owns half of a $135 million lease area off Massachusetts, and European renewables giant Ørsted is involved in half a dozen projects up and down the Eastern Seaboard.
"It's still in its infancy, but a confluence of factors makes offshore wind an extremely attractive investment opportunity," says Erik Milito, President of the National Ocean Industries Association (NOIA), the industry body representing America's offshore oil, gas and wind supply chain. "You're looking at $68 billion in investment through 2030 including $30 billion for the turbines and another $30 billion for jackets and installation. Much of that work involves offshore vessel companies."
This is good news for America’s offshore energy industry, which now has an opportunity to expand into a new line of business. “We’re seeing a period of intense change with our oil and gas clients,” says Matt Tremblay, Senior Vice President of Global Offshore at ABS, “and many oil majors’ announcements are focused on expanding and transitioning their business portfolios into the clean energy or renewable energy sectors, including offshore wind. Traditional OSV owners are also entering wind support services. We see this continuing into 2021 and beyond.”
New Industry, New Ships
If wind developers are going to install 1,700 turbines off the U.S. East Coast within ten years, as NOIA expects, they're going to need a lot of vessels.
First come the survey ships to map the bottom for site planning and permitting. Then come wind turbine installation vessels (WTIVs) – massive, self-propelled jackups with heavy cranes to hoist jackets, towers, turbines and blades into place. Cable-layers follow to connect the wind farm to shore.
Once the installation is done, the turbines need regular service. So developers will have to build or charter a fleet of vessels to carry technicians to and from the towers – smaller crew transfer vessels (CTVs) for one-day trips in calmer conditions and bigger service operation vessels (SOVs) suited to less favorable weather. SOVs are 300-foot floating hotels for 80 people, equipped with storage holds, workspaces and a stabilized walk-to-work gangway for technicians to cross between the vessel and the tower base.
"The vessel positions near the wind turbine and the technician can walk directly from the vessel to the tower at a deck located 60 feet above the water, keeping well clear of waves," says Wijnand van Aalst, CEO of Netherlands-based gangway builder Safeway B.V. This arrangement means that SOVs can deliver technicians and parts during higher sea states. In the case of Safeway's design, the service limit is about the same as the vessel's DP station-keeping ability.
Due to the coastwise nature of their work, CTVs and SOVs will have to be Jones Act vessels – built, owned and crewed in America. The Business Network for Offshore Wind (BNOW) expects that the industry will need about 50 CTVs and eight SOVs to serve installed turbines by the middle of the decade, and that number could increase dramatically by 2030. The checkbooks have already opened: Edison Chouest recently announced it will be building and operating an SOV for Ørsted, the first deal of its kind in the U.S.
The outlook for Jones Act WTIVs is less certain since they will be exceptionally costly to build. Utility giant Dominion Energy recently ordered the first-ever American WTIV from the Keppel AmFELS yard in Texas. At $450 million, it will rank among the most expensive U.S. commercial vessels in recent memory.
Foreign-flag WTIVs can be used in U.S. waters instead if the components are ferried out aboard Jones Act feeder vessels, so a hybrid solution is also possible. Crowley Maritime is proposing a tug-and-tow feeder solution using a deck barge and a DP-enabled tug, which would pair with an existing WTIV to complete installations.
At present, a feeder arrangement is the only way to install full-size offshore turbines in the U.S., and it was trialed successfully at the five-turbine Block Island Wind Farm in 2016. Since the European operators who are leading the charge in the U.S. are used to working with foreign-flag WTIVs and the cost structure is more favorable, many expect that this combination is likely to prevail in the medium term.
“What I think you’ll see is purpose-built American lift boats and feeder solutions that are optimized for handling towers, nacelles and blades in an efficient manner,” says Nick Prokopuk, Business Development Manager, Special Ships & Offshore Wind at DNV GL.
As the industry develops over the next decade, the Shipbuilding Council of America expects orders for hundreds of new vessels for wind farm site survey, installation and service. There are differing views about how that pie should be sliced, but one thing appears certain: The pieces will be big. "I firmly believe it's going to bring shipbuilding back to the U.S. in a way that we haven't seen for years," says Liz Burdock, President of BNOW.
Small Port Opportunities
In addition to chartering activity and vessel orders, the new industry will bring big money for small ports. WTIVs and feeders are incredibly tall when loaded up with towers for installation, which means that air draft restrictions at large seaports are a nonstarter.
Smaller coastal and riverine ports have an advantage here, but they need investment. Turbine components are heavy for their size – the largest nacelles weigh about 600 tons each – so quays and laydown areas have to be purpose-built or reinforced to take the load. Add in logistics, assembly and supply chain facilities and the dollar figure rises quickly.
Here again, political will is key. New York State has announced $200 million in grant funding to upgrade small seaports for offshore wind support, and New Jersey plans to underwrite a $300-400 million purpose-built wind port on the Delaware River.
“Even before the first monopile or jacket for a commercial wind farm touches the seafloor,” says Adron Allen, Business Manager-Offshore Services at ships’ agency GAC, “we’re seeing significant infrastructure investment from private enterprise, cities and states committed to redeveloping derelict or long-abandoned port terminals, and that means jobs. U.S.-built CTVs and SOVs are putting shipyards to work. U.S.-flagged survey vessels are putting mariners to work, and terminal developments and improvements are putting engineers, surveyors, architects, construction crews and more to work.”
If there’s so much opportunity and money on the table, what’s the catch? Why aren't turbines going up today?
The short answer is permitting. As of November 2020, the U.S. Department of the Interior's Bureau of Ocean Energy Management (BOEM) has yet to finish the Environmental Impact Statement (EIS) review for the first full-scale offshore wind farm in federal waters, Vineyard Wind. The EIS process for this pace-setting project was originally scheduled to end in August 2019, but the scope of the review has expanded and the deadline has slipped to January 2021. A positive decision is widely expected. But until it’s finalized and published, the industry can only watch and hope.
The tone at the top also matters. The White House in recent years showed only limited interest in offshore wind, and it's fair to say that developers are excited about the incoming administration. President Joe Biden included offshore wind development in his campaign platform, and the overt support sends a message to investors.
State-level support has been invaluable for the industry, but there are elements of the long-term buildout that could use federal backing – more staffing at BOEM, for example, renewed federal tax credits, West Coast lease auctions, investments in workforce training and expansion of coastal power transmission capacity. Since Biden intends to rejoin the Paris Climate Agreement and set a course for net-zero carbon emissions by midcentury, federal support (or at least permission) for development appears likelier than ever before.
"To use a hydropower analogy, the dam has broken," says the University of Delaware’s Firestone.
There’s another political factor that weighs in offshore wind’s favor. The investors involved in today’s projects are not mom-and-pop shops – they’re supermajors. Firms like BP and Shell are sophisticated global companies with a firm understanding of the U.S. regulatory process and strong connections on Capitol Hill, and they know how to move things along. “These guys have put down billions of dollars, and they’re going to want their money back,” says one insider. “If Shell phones the White House, someone is going to take the call.”
The U.S. is a relative newcomer in this industry. Offshore wind grew to maturity in European waters, supported by state backing, and the E.U. and U.K. now lead the globe in installed capacity. That lead appears set to continue: The European Commission has announced plans to increase Europe’s offshore wind capacity to 60 GW by 2030 – a five-fold expansion in ten years – and then to 300 GW by midcentury.
The E.C. intends to clarify and standardize legal requirements, enable cross-border project development and promote “hybrid” undersea grid connections to carry power between E.U. member states. The commission will also “mobilize all relevant funds” to underwrite the endeavor, which is expected to cost nearly $1 trillion in public and private investment – most of which is for grid improvements, not offshore wind installations.
The U.K. also has an ambitious target: Prime Minister Boris Johnson recently laid out a plan to install 40 GW of capacity by 2030, enough to power “every home in the country.”
The market outside of Europe is poised to expand as well. Assuming adequate interest from investors and governments, global capacity could approach 600 GW by 2035, according to a recent study by consultancy IntelStor.
The real overseas market to watch is Asia, where IntelStor tallies about 40 GW of committed projects and another 200 GW of proposed capacity. Off China alone, completed projects could total more than 50 GW by the end of this decade, according to the Global Wind Energy Council, twice the amount expected in U.S. waters.
For shipowners, the whole arrangement is a potential windfall. There aren’t enough WTIVs in the world to install all of these projects, and there are even fewer that are big enough to handle the next generation of turbines. Heavylift ships will also be in short supply when developers begin to order blades and nacelles in volume.
This opportunity is tempting to owners like NYSE-listed bulk carrier Scorpio Bulkers, which recently announced plans to leave the dry bulk sector and buy South Korean-built WTIVs instead. Scorpio pointed its shareholders to the segment’s $200,000-per-day charter rates and “more predictable, higher and better-quality returns.” That’s the sound of money in the wind.
Paul Benecki is News Editor for The Maritime Executive.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.