Sometimes it seems that nothing makes sense when it comes to energy transition. Global warming induces more coal to be burnt, Saudi Aramco reports record profits as wind farm operators struggle against heavy cost pressures, and a new LNG project remains on hold whilst France's largest energy company tries to squeeze its contractors.
Your country is the world's largest polluter and will shortly surpass the entire European Union as the second largest cumulative emitter of carbon dioxide over human history. You are facing a heatwave, which many scientists attribute to the climate change caused by your prolific pollution. So, what do you do?
If you are China's president Xi Jinping, you burn more coal!
Beijing experienced its hottest June day since records began, as temperatures surpassed 41.1 degrees Celsius on June 22, and Shanghai reported its hottest day in May in more than one hundred years.
John Kemp of Reuters has a great piece on how the heat wave and drought that have gripped China this year have led to increased coal burning there. Year to date, power generation from thermal coal in China has increased eight per cent, and the share of coal for electricity generation increased from 69 per cent last year to 71 per cent.
This is great news for Australian and Indonesian miners, and terrible news for the environment.
China's problem is two-fold. Sizzling temperatures across the country have led to increased demand for air conditioning. In the north-east port of Tianjin, demand for electricity was up 23 per cent compared to last year, as millions of people ran their air-conditioning at record levels when the city reported an all-time high temperature of over 41 degrees Celsius on June 23.
This is a reminder that whilst global heating reduces demand for heating in the winter, which arguably spared Europe from Russian President Vladimir Putin's efforts to impose hardship last winter, hotter summers increase electricity demand and thus increase carbon emissions, as most electricity worldwide continues to be generated from coal and gas.
The second problem is that hotter, drier weather reduced electricity generation from hydro-electric projects in the south of China. In the first six months of this year, China's hydro-generation slumped by 23 per cent (132 billion kWh). Reuters found that China's hydro-electric output was at its lowest level for eight years, as a protracted drought hit reservoir levels and reduced throughput. Almost half of China's hydropower comes from the southwestern provinces of Sichuan and Yunnan, which have experienced less than half of their usual rainfall so far this year, Mr Kemp found.
As a result, China turned to coal, both from its domestic mines and from overseas. China's own coal production increased by 107 million tonnes, between January and June of this year, up five per cent compared with the same period last year. Additionally, in a boom for dry bulk carrier owners, China's coal imports also rose by 107 million tonnes, a massive 92 per cent increase year on year.
These depressing statistics from China remind us that coal is not dead at all, and that higher temperatures can increase carbon emissions by increasing electricity demand.
China has not been alone in experiencing a hotter summer. Southern Europe has been gripped by a heat wave, too, with mass evacuations from forest fires on the island of Rhodes, and Phoenix in the US state of Arizona has seen a record run of 23 consecutive days of temperatures over 43 degrees Celsius.
Given that scientists and governments have agreed that the share of renewable energy worldwide needs to increase, it was surprising to read that Swedish utility Vattenfall announced last Thursday that it was suspending work on its 1.4GW Norfolk Boreas offshore wind farm project in the British sector of the North Sea. The company said that it would take an impairment of US$537 million on costs already incurred and would not proceed to go ahead and purchase and install the 140 turbines required for the project.
Norfolk Boreas was intended as the first of three UK wind farms in which Vattenfall would invest, with a total capital spend of about US$13 billion.
"We have decided to stop the development of Norfolk Boreas in its current form and not take an investment decision now," the company said, citing a 40 per cent cost increase.
The UK has planned to more than triple its offshore wind capacity from about 14 GW to 50 GW in 2030 as part of its commitment to achieve "Net Zero" carbon emissions in 2050. Unfortunately, Vattenfall's decision not to approve the investment in Norfolk Boreas reflects the cost difficulties that the offshore wind sector faces.
Major turbine manufacturers like Siemens Gamesa and GE have lost money in their wind sales in recent years. Earlier this month, shares in Siemens Gamesa fell more than 18 per cent on a single day (July 15) after the wind turbine maker issued its second profit warning in less than three months due to soaring raw materials prices and increased costs of delivering its new products. As a result, prices for new turbines are rising, up by 30 per cent since 2021, at the same time that wind turbine installation vessel (WTIV) operators such as Cadeler and Eneti bring expensive new vessels to market, requiring higher prices to install new and bigger turbines offshore.
Operators like Vattenfall and industry leader Ørsted have found themselves trapped between these rising investment costs and fixed electricity prices on the projects they bid in the UK in recent years. Ørsted CEO Mads Nipper wrote his sentiments via Linkedin last week:
"In a time of extreme heat in many places, it is painfully obvious that investments in transforming the world's energy systems are more needed than ever. And unfortunately, this happens at a period where costs of capital (the 'fuel' of renewable energy) and price inflation on turbines, cables, etc. have gone up sharply. And this means that the price of renewable energy regrettably must come up temporarily after years of steep decline driven by pioneers like Ørsted. Otherwise, the necessary investments of trillions of US$/€ simply will not happen."
So, the inexorable decline in the cost of offshore wind has stalled, at least for now. Whereas oil and gas companies, which experience cost blow-outs, can hope that higher oil and gas prices can salvage their returns, windfarm operators in the UK (and elsewhere) typically agree to sell their output based on fixed electricity prices. The British government had guaranteed the Norfolk Boreas project's inflation-linked prices for sales of its electricity over a 15-year period, based on a formula going back to 2012 prices. But these prices now appear too low in the face of the cost increases. As a result, UK wind farm operators had been requesting tax breaks or government subsidies in order to proceed with new projects.
Someone is going to have to pay for the new wind farms, and it looks like British electricity users will be on the hook to compensate the wind farm operators for the higher-than-expected costs they incur to build and install the new wind farms. "Investment decisions will always be based on profitability," Vattenfall stressed in its announcement on the suspension of Norfolk Boreas.
Similar problems have been reported in the US, which, unlike the UK, doesn't even have any major offshore wind farms yet in production. Additionally in the US, the Jones Act cabotage law means that WTIVs are either extremely expensive if built domestically, or they have to be used more inefficiently than in Europe if they are foreign-flagged and foreign-built.
Last week, The Boston Globe reported that Rhode Island Energy would not be moving forward on a power-purchase agreement for a joint Ørsted and Eversource proposal to build a major offshore wind project named Revolution Wind 2 in the waters off the state, in part because it would be too expensive for customers. The utility found that the Ørsted and Eversource proposal didn't meet the requirements under state law "to reduce energy costs."
Two Massachusetts offshore wind projects, the SouthCoast 1.2GW project operated by a Shell joint venture and Iberdrola's Commonwealth project, recently terminated their power purchasing agreements with power companies there, citing high building costs. Last week, Iberdrola's Commonwealth Wind project agreed to pay roughly US$48 million to dissolve its previous agreements to sell power to a trio of Massachusetts utility companies, as these agreements were no longer economically viable for the subsidiary of the Spanish windfarm operator, according to local news sources.
These contract cancellations were widely covered by Bloomberg, CNN, and Fortune magazine and brought out many commentators saying that they showed that wind would never work. I disagree. These problems don't mean that the offshore wind projects will necessarily be cancelled; they do mean that they may be delayed, and that ultimately consumers may end up paying more, or that their developers will have to accept lower returns. But offshore wind is not going to disappear.
As Saudi Aramco reported a US$48 billion (with a "b") quarterly profit – more than the combined quarterly income of Tesla, Meta, Apple, and Microsoft – the problems of the world's wind industry come into focus. Oil and gas continue to power the planet, and probably heat it, and governments and consumers struggle to break their addiction to hydrocarbons even as heat waves ravage areas of the globe, and Antarctic sea ice stands at the lowest level ever recorded.
If there is no justice for renewable energy developers in the US, perhaps there may be some justice for Manuel Chang, the former finance minister of Mozambique. He was finally flown on a US Government-chartered private jet from Johannesburg to stand trial over the so-called Tuna Bond scandal earlier this month. We stress that Mr Chang denies any wrongdoing, and now he will have his day in court.
The Mozambican attorney general's office had attempted to extradite Mr Chang back to Maputo to stand trial there. The Mozambican ruling party Frelimo would prefer to avoid any embarrassing revelations emerging in an American courtroom over the corruption charges. It used its long-standing connections with the ruling ANC party in South Africa to try and get Mr Chang back to his homeland. He is the first ever minister to be extradited abroad since the country's independence from Portugal in 1975.
Mr Chang had been in jail in South Africa since December 2018 accused of wire fraud, securities fraud, and money laundering by the US Government after gas-rich Mozambique provided government guarantees to more than US$2 billion in unauthorised borrowing by state companies in 2013 and 2014. The money, however, was supposed to be spent on security vessels and a tuna factory. Unfortunately, some US$500 million in funds from the bonds, which were issued by scandal-ridden Swiss bank Credit Suisse and Russia's VTB Bank, appear to have gone astray, according to auditors. Senior government officials appear to have been the main beneficiaries.
News that the government of one of the world's poorest countries was on the hook for the debt led to a crash in the Mozambican currency in 2016, a surge in inflation, and an investigation into the circumstances of the Tuna Bond issue. In 2022, eleven people – including Ndambi Guebuza, the son of former president Armando Guebuza, also of the Frelimo party – were convicted of embezzlement and money laundering in Mozambique as part of the Tuna Bond scheme. The trial had to be held in a tent within the grounds of a high-security prison in Maputo, because none of the country's courtrooms were big enough.
Credit Suisse ended up paying out US$475 million in fines and penalties in a settlement with UK, Swiss, and US regulators, and three of the company's bankers pleaded guilty to American charges of money laundering over the case.
Surprisingly, Russia took no action against VTB Bank, the co-issuer of the Tuna Bonds. Strange, that.
Mozambique desperately needs investment, not plunder by corrupt officials and their relatives. The country continues to battle an insurgency by a local branch of the Islamic State in the northern regions. Last week, Zitamar News reported that insurgents attacked a position of the Mozambican armed forces in Macomia district in troubled Cabo Delgado province, killing at least one member of the country's armed forces, on the same day as an improvised explosive device damaged an army armoured car in the same area. Earlier in July, Islamic State guerrillas claimed to have killed at least ten government soldiers in an ambush, also in Macomia district. Several were beheaded and their corpses and identity documents were displayed on social media.
The ongoing violence in the north of the country continues to jeopardise the re-start of the construction of the US$20 billion LNG project headed by TotalEnergies. The project will take gas from deepwater offshore fields and will be the country's single largest investment ever. The project in Cabo Delgado was suspended in April 2021 after a devastating attack by Islamist terrorists on the town of Palma that killed dozens of locals and expatriates alike just ten kilometres away from the construction site of the LNG plant. The violence in the province has driven nearly a million people into refugee camps.
A recent report for TotalEnergies called for the establishment of a foundation called Pamoja Tunaweza, with a multi-year budget of US$200 million, to raise the standard of living for ordinary people in Cabo Delgado, and a revised resettlement and compensation plan for people affected by the development of the LNG plant at Afungi. In February, TotalEnergies' chief executive Patrick Pouyanne visited the construction site, spurring hope that a restart would be announced.
TotalEnergies has said that it will only restart the project when the security situation makes it safe to do so. Additionally, Mr Pouyanne has also tried to cap cost increases on the project, even though rates for key elements in the project such as drilling rigs and supply boats doubled since it was first approved in 2019.
Speaking at an analysts' briefing reported in Upstream, Mr Pouyanne gave an update after his visit to the site:
"We have to re-engage with the contractors," said Mr Pouyanne, "but one key condition to restart is to maintain the costs we have." He added that the LNG project, "would not be held hostage by contractors and would not proceed at any cost. If I see the costs going up and up, we will wait. We have already waited and we can continue to wait. I am not in a hurry to restart."
The chances of getting 2019 prices in 2023 are zero. TotalEnergies has missed the boat. The Mozambique LNG project may cost more, but LNG prices in 2022 and 2023 have been at record highs, so the project should still be economic, and its location is attractive to buyers in India, East Asia, and Europe.
Mr Pouyanne's company is making record profits and Mozambique needs the funds that the LNG project will generate. It seems small-minded and petty to hold the project hostage to unrealistic efforts to cap costs.
But there are no hypocrites like oil and gas company leaders when it comes to costs.
Someone else has missed the boat on offshore, too. One of the most amusing developments of last week was reading Edward Finley-Richardson's late conversion to interest in buying shares in the offshore sector. The veteran shipping investor, tanker stock cheerleader, and prodigious Twitterer wrote a piece titled PSV Porn on his Substack blog.
Wow. He's suddenly been alerted to the low orderbook and high charter rates in the offshore sector.
"Most of you have never heard of PSVs. They're kind of like the pickup trucks of the open seas…" he begins, most inauspiciously.
If you really know so little about a sector, you probably shouldn't be investing in it. Unfortunately, those like Mr Finley-Richardson who have only just woken up to the offshore revival have already missed out. Shares in Tidewater are up 1,200 per cent since their 2020 lows, shares in Transocean are up 1,000 per cent since then, and the stock of Borr Drilling has achieved a 900 per cent gain over the last three years.
Whilst the offshore sector is buoyant again after years of pain and multiple bankruptcies, it is hard to see similar rises being sustained in the near future. The doubling and tripling of stocks is maybe possible in a two-year timeframe, but the rate of increase is likely to be much lower than it has been after the sector flirted with complete extinction in the dark days of negative oil prices and Covid restrictions. Hell, Noble Corporation has even capped the offshore recovery by declaring that it will be paying dividends of 30 US cents per share quarterly from September onwards, having already bought back US$70 million of its own shares, and taken over Maersk Drilling and Pacific Drilling in the last two years. This tells us that it lacks new projects on which to spend its large free cash flow.
Those who bought in the dark days of 2020 have been richly rewarded. Those who turn up late like Mr Finley-Richardson can expect lower returns. The last offshore boom of 2005 to 2014 turned to bust when dumb money flooded in, and every investment fund and speculator piled in to order new rigs and boats because the returns were simply too good to resist.
Flush with cash, shipyards were taking ten per cent down payments against new orders, and flipping rigs for profit was a Norwegian competitive sport. This resulted in a massive overhang of new capacity, which struggled to find work when oil prices fell in 2014.
Our 2021 coverage of Keppel's legacy rig orderbook shows how the last boom was accompanied by a collapse in credit quality for rig buyers as speculators moved in. Eight years later, many older rigs and boats have been laid-up then scrapped, the newbuildings have largely been delivered, and now the market is short of rigs and boats. The cycle is beginning anew.
Please, Edward, stick to your tanker stocks, to touting American offshore wind vessels to your followers (see above), and to blocking people who disagree with you. Offshore doesn't need any more dumb money, ever again.
Background Reading
See Bloomberg's coverage of China's heatwave.
The BBC has the background to the Tuna Bond scandal.
Follow Zitamar News on Twitter.