Shell Setting Up ‘New Energies’ Unit. Oil & Gas Companies to Cause Clash of Giants in Offshore Wind?

Shell has created a new division called New Energies, through which the oil and gas giant will invest in wind energy, along with its hydrogen, biofuels and electrical activities, according to The Guardian. Even though Shell has not yet officially confirmed this, it is expected that the new unit will be unveiled in early June.

Last week, it was announced that the company, together with major Dutch offshore wind players – Eneco and Van Oord – submitted a bid to build first two offshore wind farms in Dutch Borssele Zone. They are competing with RWE-Macquarie Capital consortium, Vattenfall and, according to some media, DONG Energy.

Big competition era in offshore wind is approaching as oil and gas companies are searching for their place under the Sun within the sector, DONG Energy’s CEO Henrik Poulsen said. “We’re talking about huge companies with significant capital and execution power. We need to just keep sharpening our sword,” Poulsen told The Wall Street Journal.

They’ve got what it takes

“We expect to be able to put our broader experience and capabilities to use in making the Borssele project a success,” Shell’s spokesperson said in a statement after being contacted by Offshore WIND regarding the bid for Borssele I and II sites.

Large-scale wind farms at sea should not be much of an issue for such businesses, since they are good in dealing with big, technologically complex projects, and they know how to deal with governments, according to Aad Correljé, an energy expert from the Technical University of Delft.

For Shell, the engagement in new offshore wind projects means investing relatively small amounts, given that the company’s budget for 2016 is USD 30 billion. Even if Shell invested in several large offshore wind lots in the Netherlands, it would ultimately be a matter of hundreds of millions of dollars for Shell’s potential stake, the company’s CFO Simon Henry said.

In addition, oil and gas companies working offshore could also have an advantage by already having a supply chain familiar with working on large-scale projects at sea.

For example, entering the offshore wind sector went smoothly for Seajacks, one of the biggest offshore construction vessel owners, since the company had been working in the oil and gas sector for 20 years when it started with offshore wind operations.

“We are an offshore construction and offshore contracting organisation, so we were fully prepared for the environment, because we know it extremely well,” Blair Ainslie, Seajacks’ CEO, said in an interview for the latest edition of the Offshore WIND Magazine.

A ray of light in a struggling oil & gas market

There are many companies doing business in both oil and gas and offshore wind markets and, judging by their 2015 annual and Q1 2016 financial results, offshore wind “cushioned the blow” for many of them.

A continued period of low oil prices has led Harkand, an owner of vessels that support offshore oil and gas operations, into administration. The market conditions have impacted, among others, companies such as Repsol, Maersk Oil, and Shell.

Shell’s Q1 2016 results were affected by challenging conditions in its main market and forced it to reduce its spending in 2016 to USD 30 billion. “We continue to reduce our spending levels, to capture cost opportunities and manage the financial framework in today’s lower oil price environment,” Offshore Energy Today quoted Shell’s CEO Ben van Beurden as saying.

Moreover, the company recently gave up on three floating liquefied natural gas (FLNG) vessels ordered from Samsung Heavy Industries, according to World Maritime News.

On the other hand, offshore wind has brought peace of mind to companies such as RWE and DONG Energy, while Fugro, Boskalis, Van Oord and Aqualis highlighted their work in the sector as a bright spot in their results and business outlooks.

(Offshore) wind of change

“The future’s in the air, (…) blowing with the wind of change,” Scorpions sang. Although new energy technologies were not the topic of the famous rock band’s song, the verse certainly fits to describe the shift from fossil fuels to clean energy that could affect oil and gas companies, as the world is embarking on a global quest to change the future energy landscape. Especially after the Paris Agreement was signed, which led governments worldwide to prioritise energy transition.

“The energy transition presents great opportunities for oil and gas companies to develop new forms of energy and gradually move away from fossil fuels,” Jeroen van der Veer, former CEO and Chairman of Shell, said in an interview for World Energy Focus, a monthly publication of the World Energy Council produced by Energy Post“It is the first time that everybody agrees about the problem and has committed to tackle it,” he further said.

The direction is not a question anymore, but the speed of the change, van der Veer said and added that, while politicians are too optimistic on the matter, businessmen are too pessimistic.

Being a member of World Economic Forum’s working group that will soon release the results of its scenarios on the energy industry in relation to climate change, he said that the share of oil in the global energy mix will drop from the current 31% to under 20% in 2050, while gas will account for a little over 20%.

The effect that this future setup might have on oil and gas players has created “two schools”, van der Veer said. “The first is that as the new global business environment changes, this will offer opportunities for big energy companies to develop new forms of energy. Then you won’t produce fossil fuels anymore at some point in the future. The second school says the mission of oil and gas companies is to produce oil and gas, and if this mission ends, then the companies end too. Then you pay out the dividend to the shareholders and stop,” he explained.

The effect of the change in the global energy business environment on major oil companies has been thematised in a recently published research paper called “International Oil Companies: The Death of the Old Business Model” by Paul Stevens, a fellow at Chatham House, the Royal Institute of International Affairs.

According to Stevens, the major international oil companies such as BP, Chevron, ExxonMobil, Shell and Total are about to face not so bright future, as the business model on which they have been relying “is no longer fit for purpose”.

“The oil market is going through fundamental structural changes driven by a technological revolution and geopolitical shifts. The old cycle of lower prices followed by higher prices is no longer applicable,” Stevens said in the research paper.

One of the options that might allow the international oil companies to improve their situation is diversification. “An apparently obvious area in which to diversify is renewables and green energy,” he said.

Joining DONG Energy and Statoil on the “green side”

Even though Shell parted ways with alternative energy sources in recent years and invested mainly in biofules, the company owns interest in nine operating wind projects in North America and Europe, including a 50% stake in Noordzeewind, the owner of the Egmond aan Zee wind farm built off the Dutch North Sea coast. Shell is also one of the main shareholders of 2-B Energy, a Dutch developer of a two-bladed turbine. Last year, the oil company became Principle Power’s technology partner for a floating wind energy project off Portugal.

Shell revealed its intention to invest in large-scale renewables in its financial results for 2015: “Reflecting the long-term trend in demand growth for lower-carbon energy, we intend to make investments in large-scale and commercial forms of lower-carbon technology and energy, such as natural gas, carbon capture and storage, biofuels, wind and solar energy.”

Furthermore, the company sent its “Election Manifesto” to the Dutch government on 5 April, urging the next cabinet – to be elected in 2017 – to push for more offshore wind, stressing the importance of developing large-scale offshore wind potential in the Netherlands, which would benefit both the Dutch economy and the country’s energy transition.

Companies such as DONG Energy and Statoil that were, or still are, primarily operating in the oil and gas sector, have already established themselves as big offshore wind players.

DONG (Dansk Olie og Naturgas/ Danish Oil and Natural Gas) became DONG Energy in 2006 with the merger of six Danish energy companies: DONG, Elsam, Energi E2, Nesa, Københavns Energi and Frederiksberg Forsyning. “Since DONG Energy was formed in 2006, we have changed from one of the most coal-intensive utilities in Europe to a global leader in renewable energy,” the company states on its website.

The company now has over 20 offshore wind projects in its portfolio, including those in operation, under construction or in development.

In January 2016, DONG Energy revealed it had decided to keep its Exploration & Production (E&P) business to help fund further investments in renewable energy.

As for Statoil, the oil and gas company is a stakeholder of three offshore wind farms in the UK, with the Sheringham Shoal wind farm, operational since 2012, representing the first full-scale commercial offshore wind investment for Statoil.

The company is also involved in floating offshore wind technology and is behind Norwegian Hywind Demo project, the world’s first full-scale floating wind turbine. In 2009, Statoil invested around NOK 400 million (approx. EUR 43 million) in R&D, construction and further development of the pilot, with Enova SF granting additional NOK 59 million (approx. EUR 6 million) in support of the project.

The concept has been verified through the first two years of testing, and Statoil is now gearing up to build the world’s largest floating wind farm off the coast of Aberdeenshire. The Hywind Scotland pilot project, aiming to demonstrate cost-efficient and low-risk solutions for commercial scale parks, will feature five 6MW floating turbines operating in water depths over 100 metres. Electricity production is expected to start in late 2017.

And that is not all when it comes to the Hywind Scotland project. Namely, Statoil will install a 1MWh Lithium battery-based storage system – Batwind – in late 2018, to demonstrate technological and commercial capabilities of the system in full-scale offshore wind farms.

Written by Adrijana Buljan

For this article, contact Adrijana Buljan and Adnan Duraković, Offshore WIND Staff.