Breakingviews - BP's German wind option risks multiple blowbacks - Reuters

BP’s German wind option risks multiple blowbacks | Reuters

BP’s German wind option risks multiple blowbacks

LONDON, July 13 (Reuters Breakingviews) - Bernard Looney is going green again. After putting his retreat from oil on a slower trajectory earlier this year, the boss of $105 billion BP (BP.L) has reaffirmed his renewable power credentials by winning part of a 12.6 billion euros ($14 billion) auction to build 7 gigawatts of offshore wind off the coast of Germany. Yet the nature of the deal between Berlin, BP and fellow winning bidder TotalEnergies (TTEF.PA) raises the risk of blowback.

Germany, Looney and TotalEnergies’ boss Patrick Pouyanné all want to hike their zero-carbon generation capacity – Berlin seeks 30 GW of offshore wind by 2030, while BP envisages 50 GW of renewable power – around two-thirds of the UK’s overall electricity-generating capacity. But Germany also aims to raise as much cash as possible from selling wind power development rights. The oil majors want sceptical shareholders eying easy profits from fossil fuel to know they are not exacerbating renewable power’s lower returns by overpaying for green projects.

On that basis, Berlin has the better of the new deal. The headline cost of the auction works out as $2 billion per gigawatt – miles above the $600 million per GW cost of a string of UK seabed sales in 2021, according to Bernstein Research, and the $400 million per GW level that a U.S. equivalent fetched last year. And that doesn’t cover the multi-billion-dollar cost of actually building the projects, nor feature a UK-style state-guaranteed price at which to sell power to customers after that.

Looney and Pouyanné haven’t entirely taken leave of their senses, though. They only have to stump up 10% of the project’s price tag – respectively, 678 million euros and 582 million euros over the next year – the rest is only due in installments from when the project produces power, likely around 2030. Discounted back at a 5.5% cost of capital, Bernstein reckons the cost is more like $1 billion per GW. From the oil majors’ perspective, the whole thing looks more like a financial option.

Looney may still choose to exercise this option and build the project: if electricity prices stay high it might be lucrative to do so, and he could use the power to produce green hydrogen. But wind projects around the world have been hit by turbine makers like Siemens Gamesa and Vestas (VWS.CO) hiking prices in 2022 by 30%. If cost pressures like these don’t recede then BP might find it harder to hit its 6% to 8% return objectives – increasing the chances it writes off its 678 million euros and walks away.

Berlin may yet get its money, and its wind capacity. But the fact that sector veterans Orsted (ORSTED.CO) and RWE (RWEG.DE) quit the bidding process at an earlier stage should give cause for concern. Shaking down the private sector is fine, but not if you’re left with no wind projects.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Oil majors BP and TotalEnergies have won a 7 gigawatt (GW) offshore wind site auction in Germany worth 12.6 billion euros ($13.96 billion).

Three sites in the tender for building 2 GW of offshore turbine capacity are located around 120 km (75 miles) northwest of the island of Heligoland in the North Sea and one with 1 GW lies in the Baltic Sea, some 25 km away from the island of Ruegen.

BP won the rights to develop two projects, marking its entry into offshore wind in continental Europe and representing 4 GW out of the total, it said in a separate statement.

Awards for the other two sites, which include rights to develop, build and operate the plants and to receive network connections, went to TotalEnergies, the French company said in a statement.

BP said the move was fully aligned with its integrated energy strategy and disciplined capital allocation, adding it expected returns from the project of between 6% and 8%.

BP’s initial payments totaling 678 million euros, equivalent to 10% of the bid amount, will be paid by July 2024. The remaining 90% will be paid over a 20-year period when the projects become operational.

TotalEnergies said it will pay the German Federal government 582 million euros, adding an annual contribution would also be paid to the electricity transmission system operators in charge of connecting the projects for 20 years from the sites’ commissioning.

BP shares rose 0.9% to 471 pence in early trading on July 13. TotalEnergies’ shares rose 0.4% to 52.7 euros.

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