![COLUMN | Wind wobbles – follow the money: Ørsted and BP make write-offs; Siemens Energy seeks aid; MingYang gets massive; Fredriksen’s Edda and ex-Havila hedges; Rickmers and Diana Shipping enter wind [Offshore Accounts]](http://media.assettype.com/bairdmaritime%2Fimport%2Fwp-content%2Fuploads%2F231106-Offshore-Accounts.jpg?w=480&auto=format%2Ccompress&fit=max)
"Our wind industry, for instance, is a European success story," European Commission President Ursula von der Leyen recently said. "But it is currently facing a unique mix of challenges."
We're no fan of Ms von der Leyen, a nepo-baby whose incompetence as German Defence Minister was rewarded not with the sacking she so richly deserved, but promotion to Brussels. However, on this occasion she has spoken truth.
The European wind industry has had a shocking month. Unfortunately, in a world riven by partisan politics, many will view the events through the lens of culture war, arguing that wind is never going to work on a large scale, that melting glaciers and ice caps have nothing to do with fossil fuel, and that renewables are an expensive luxury. Let's park the politics and focus on the events themselves.
This week, we attempt to unpick what's happened, why some companies have been harder hit than others, why some very smart and very rich people continue to invest in the sector, and whether this month's news is a blip or the start of a structural change in energy against wind.
The highest profile loser in the wind woes has been Ørsted. On November 1, the Danish company announced that it was cancelling the development of its American projects Ocean Wind 1 and Ocean Wind 2 in the Atlantic. This meant that Ørsted incurred total impairment losses of DKK28.4 billion (US$4.08 billion). This is basically the value of the work performed in the past on these projects before they were cancelled. Ouch.
"Due to adverse impacts relating to supply chain delays, increased interest rates, and the lack of an Offshore Wind Renewable Energy Certificates adjustment [a type of government subsidy] on Sunrise Wind, we have recognised impairment losses of DKK 28.4 billion in the first nine months of 2023," Ørsted CEO Mads Nipper said. "The majority of these (DKK19.9 billion/US$2.86 billion) relate to our US offshore project Ocean Wind 1."
Ørsted thus joins Tesco (groceries), Mercedes Benz (cars), and Credit Suisse (banking) as yet another European company that badly misjudged the American market and paid a very high price. America may be the home of capitalisation, but too many European companies are naïve about the strength of vested interests there, the need for strong political support, and the naked power of lobbying.
Ørsted's shares plunged 20 per cent in a single day (shades of Solstad) last week, and are now cheaper than they were in 2018. Five years of gains have been erased from the company, and its market capitalisation is now down to US$16.6 billion. Standard and Poors, the ratings agency, announced that it was considering a downgrade of the company's credit. Ørsted has US$6 billion of net debt, but its total borrowings fell over the first nine months of 2023.
The company announced operating profit for the first nine months of the year at DKK19.4 billion (US$2.8 billion). Excluding new partnerships, the operating cash flow was DKK1 billion (US$140 million) higher than in the same period last year. This is a company with a portfolio of profitable existing wind farms, which is not especially leveraged, and is still generating decent cash from its assets in operations.
And offshore wind was actually very positive, except for the two disastrous American projects. I imagine cynics will now be telling me that White Star Line had a great 1912, if only you excluded the Titanic from the picture, but bear with me.
Ørsted reported that earnings from offshore sites amounted to DKK13 billion (US$1.87 billion), which was DKK6.8 billion (US$978 million) higher than in the same period last year, as the Hornsea 2 project in the UK ramped up, and Taiwan's Greater Changhua 1 and 2a wind farms came into operation.
Strip out the losses on the shambles of Ocean Wind and you find Ørsted achieved a return on capital employed of 13 per cent. The company also took the final investment decision on Revolution Wind, another US project.
Key to understanding Ørsted is the fact that the Danish government holds 50.1 per cent of the company. Ørsted has a state guarantee from one of Europe's richest governments and is an integral part of Denmark's domestic energy supply. It is not going to fail.
In any other situation like this where a company stumbles and its shares crash, I would anticipate a bidder lurking. Ørsted is valued very cheaply due to management missteps in the United States. It would actually make a beautiful fit to ENI or TotalEnergies or BP or Shell, all European majors busy diversifying into renewables.
But would the Danish state let Shell or the others make a bid for Ørsted?
No, I doubt it. Even when Scandinavian airline SAS went spectacularly bust earlier this year, Copenhagen was on hand to assist in a recapitalisation and took a 26 per cent stake in the restructured carrier alongside AirFranceKLM and private equity interests. One can argue that Ørsted is far more strategic to Danish national interests than SAS.
So, we can expect more caution from Ørsted in its American ventures. The company had already flagged discipline in wind auctions in the UK, Germany, and Taiwan, saying the prices for new acreage were too high and the returns too low. Its caution may mean slower growth in future, but probably fewer blow ups.
Ørsted is a public company and has been quick to make the write-offs, take the pain, and move on. It is not clear to me whether other private players in the sector are as transparent. Other large offshore wind investors such as Copenhagen Infrastructure Partners and Australian fund manager Macquarie may have similar dud projects lurking in their privately managed portfolios, but because they are private, we simply don't know.
We've said it once, and we'll say it again: electricity prices are going to rise, and this is not the fault of offshore wind. If Europe moves from powering the approximately 250 million private cars on its roads from petrol and diesel to electricity, then the demand for electricity will rise and prices will go up, regardless of the supply.
That is basic economics, not wishy-washy green thinking. It applies to the rest of the world, too.
Additionally, the events in Russia have shown that it makes sense not to be reliant on foreign supplies of gas. In 2022, Russia struck a deadly blow to European energy security by cutting off gas supplies.
If Iran was ever to close the Straits of Hormuz, all the gas from Qatar would be unavailable, and ten million barrels per day of oil exports from Saudi Arabia plus another ten million from the UAE, Qatar, and Kuwait would also be in jeopardy. Stating that wind and renewables have a valuable part to play in energy security seems obvious in this context, and should not be contentious.
If Ørsted already has a powerful sugar daddy in the shape of a state owner, troubled Siemens Energy indicated last week that its woes with turbine manufacturing were so bad that it might need German state aid.
Siemens' turbine subsidiary formerly known as Siemens Gamesa has been a badly run company in a structurally troubled industry for several years. It has bled money, its has had big warranty problems on its equipment, and its delusional German owners told the world that installing a strong German leader as CEO would turn the company around in early 2022. Around 18 months on, that looks like pure folly.
Last week, the company's shares plunged 40 per cent (forty!) as it was revealed that it was in talks with the German government about securing as much as €16 billion (US$16.9 billion) in state guarantees. The problems at its wind turbine unit have jeopardised the entire business and its major shareholder and former parent company Siemens indicated it was no longer willing to bail out the troubled company. Siemens' shares fell by five per cent when news of its former subsidiary's problems came to light.
Let's be clear that there is no way on earth that the German government is going to let Siemens Energy go bust. And with Ms von der Leyen running the European Commission, there is no way the European authorities are going to block a state bailout. Europe's position in wind energy is too strategic and involves too many jobs to let that happen.
As McDermott discovered in Saudi Arabia, bidding big contracts requires a strong balance sheet to provide guarantees to customers. Siemens Energy says it needs up to US$15 billion in guarantees to win profitable new contracts to build transmission networks and gas turbines in the other components of its business, according to the German press.
It will get those guarantees, I foresee. It may even get a forced marriage with struggling onshore German turbine maker Nordex in the coming year to rationalise the sector.
Unfortunately, the pressure is not letting up for wind turbine manufacturers.
"So, you wanna go large?" is a question often heard in fast food restaurants. Upsizing is increasingly also being heard in wind turbine discussions.
So, with its European rivals in disarray and bleeding money, what does Chinese turbine manufacturer Ming Yang Smart Energy do?
It throws down the gauntlet by announcing it is developing a new offshore wind turbine model with a rated capacity of 22 MW, almost 50 per cent bigger than the largest turbines currently manufactured by Vestas, GE, and Siemens Energy – indeed, almost 50 per cent bigger than any turbine actually manufactured anywhere else in the world.
The Chinese were already boasting they would produce the biggest turbines in the world. In January of this year, Chinese wind manufacturer CSSC Haizhuang announced it was building an 18MW offshore wind turbine. Three days later, Ming Yang unveiled the MySE 18.X-28X turbine. This featured 140-metre-long blades and a rotor diameter of over 280 metres. None of these turbines has actually been built, but before the MySE 18.X-28X is even in testing, the company unveiled the 22MW machine.
To put that into context, Vestas only recently tested its new 15MW V236 turbine at its home testing facility in Denmark, and has won orders for over 500 units of the turbine. Siemens Gamesa's largest offering is a 14MW turbine that can be boosted to up to 15 MW with mods. The third western manufacturer GE has a prototype of its 14MW Haliade-X turbine already in service and in March GE announced it was developing a 17-18MW enhanced version of the Haliade-X offshore wind turbine.
The financial significance of the MySE 22MW turbine to the industry and the operational reality of when it will actually be installed is perhaps less important than what the announcement symbolises. It shows that the Chinese manufacturers are not backing off. Ming Yang is showing no mercy to Siemens, Vestas, and GE.
The announcement demonstrates that competition in the sector is going to be relentless in the next decade. It tells us that all the investment in fancy new wind turbine installation vessels (WTIVs), which is ongoing, could be obsolete in six or seven years if these mega-turbines roll out, for which no installation currently exists.
Cadeler is already expensively refitting its two existing WTIVs Wind Orca and Wind Osprey in the Netherlands to be able to install the 14MW and 15MW turbines. The ships will each be able to lift 1,600 tonnes at a radius of 40 metres once the crane is changed, a major boost from the 2012-built 1,200-tonne cranes with a radius of only 31 metres. Clearly, whoever is first to build installation vessels for the new, monster 18MW and 22MW turbines will have the ability to command a premium price for the ship. It is not clear who that will be, or what the new WTIVs will cost compared to the existing US$330 million vessels on order by Maersk Supply Service, Eneti, Cadeler, and Havfram Wind.
Ming Yang says that the MySE 22MW model would be the most powerful wind turbine in the world and would feature a 310-metre rotor. This compares to the 220-metre rotor size of the GE Haliade-X 14MW turbine. Ming Yang said that its 22MW wind turbine would be typhoon-resistant, intelligent (whatever that means), and suitable for both fixed-bottom and floating applications. The company claims that the new turbine is set for development between 2024 and 2025.
Ming Yang says that the bigger turbines provide economies of scale, which brings down the unit cost of electricity produced, while critics argue that the drive for ever bigger, ever newer stresses the supply chain and increases execution risk and the potential of large warranty claims for equipment not sufficiently tested and proven in service.
The most vocal and arguably well qualified of the critics is Lars Bondo Krogsgaard, former onshore CEO at Siemens Gamesa. In a very insightful Linkedin post last week, he set out why the race for size is a mistake. It is worth quoting his piece at length – because he says what many of us have been thinking, and he says it more clearly than I could:
"To become profitable turbine manufacturers, will also need to reduce the crazy race to introduce still larger turbines. A race, which – unless stopped – will block the expansion of wind energy. The innovation race has been fuelled by cutthroat competition for volume in an industry without niche positions. All manufacturers took the fast path to improving the levelised cost of energy by hurling still larger machines onto the market rather than by costing out on existing platforms or improving processes. In doing so, turbine manufacturers facilitated an impressive expansion of wind energy… and managed to shoot themselves in the foot thrice:
"Firstly, by loading more development costs onto already struggling businesses, they engaged in an impossible race.
"Secondly, by churning out bigger and bigger machines manufacturers diluted the volume benefits, which they had set out to achieve in the first place. Why? Because scale benefits stem from unit number increases and not megawatt growth.
"Thirdly, by constantly introducing new products, manufacturers exposed themselves to technology risks and costly quality problems."
This is an economically rational position, but in a highly competitive market, nobody wants to be left behind – and the western manufacturers cannot afford not to match the Chinese in case this gives the latter an entry into European markets. Unfortunately, this pits private western companies against state-owned Chinese entities subject to very different economic and political forces.
It would be logical for turbine manufacturers to stop what Lars Bondo Krogsgaard described as "the nonsensical race to the bottom" and, yes, more stable production environments for longer lived products will have big cost benefits for the turbine makers.
But until there is a spectacular failure of a massive new turbine, it is likely that the rush for size will continue, with deleterious impacts on the bottom line of every player in the industry.
Shareholders in Siemens Energy and Vestas should be guided accordingly.
Shipping is packed with momentum investors who want to copy industry leaders. Recent evidence suggests that some key figures in the industry have not lost the faith in wind.
We observed in our 2021 story "Diet teas, influencers, John Fredriksen, Idan Ofer and the Edda Wind IPO" how shipping titans John Fredriksen and Idan Ofer had entered the US$100 million Edda Wind initial public offering on the Oslo stock exchange as "cornerstone investors". Edda Wind is the largest owner and operator of windfarm support vessels with six in service and another eight on order (fleet list).
Last month, Mr Fredriksen's private-held Geveran Trading bought two million more shares in Edda Wind to take his stake above 20 per cent, valuing his holding at around US$46 million.
But at the same time as increasing his stake in Edda Wind, Mr Fredriksen also purchased two large 280-tonne anchor handlers of Havyard 845 design from the lenders of troubled Norwegian offshore company Havila Shipping in addition to the subsea vessels he owns.
The 2009-built Havila Venus and 2010-built Havila Jupiter were trading the North Sea spot market, and the return of confidence in the offshore market saw the banks seize the opportunity to cut and run, and sell the duo to Mr Fredriksen for a price rumoured to be around US$28 million each. Mr Fredriksen promptly placed the two anchor handlers under the technical and commercial management of DOF. He made a US$23.7 million investment in DOF in March just before the company relisted on the Oslo stock exchange after a brutal restructuring, and has been richly rewarded. DOF is up 80 per cent to NOK54 (US$4.89) per share from an initial listing price of NOK35 (US$3.17) in June.
Havila's lenders proved their lack of resolve when they sold the laid-up platform supply vessel (PSV) Havila Crusader in 2021, only for the buyer to flip it 18 months later for twice the price. Last week, the lenders also sold the PSV Havila Commander to Arne Blystad, who already owns the 2021 built, UT 717 CDX design PSV Songa Discoverer.
Mr Fredriksen's investment shows that you don't have to choose between wind and oil and gas. You can hold both, and increasingly others are doing the same.
The Sohmen-Pao family of BW Offshore and BW Energy fame is already a major investor in WTIV operator Cadeler, whilst the Laure family of Scorpio Tankers fame is the largest shareholder in WTIV player Eneti, which is expected to merge with Cadeler shortly.
The Maersk family also has a position in the WTIV market through Maersk Supply Service, which also services the oil and gas sector with its fleet of construction vessels and anchor handlers.
Now the famous Rickmers family have entered the windfarm support space through a joint venture with Diana Shipping and others, called Windward Offshore. Diana Shipping is a New York-listed operator of 41 dry bulk carriers and two methanol dual-fuel newbuilding Kamsarmax dry bulk vessels, which have not yet delivered.
Windward has ordered two commissioning service operation vessels (CSOVs) from Norwegian builder Vard, joining the very long list of investors in this tonnage (seemingly oblivious to the short-term and seasonal nature of most CSOV contracts, as opposed to long term SOV charters in day-to-day operations). The player says that this order establishes "a sturdy basis for its maritime asset services focusing on bolstering the burgeoning offshore wind industry" as the world enters an "accelerating transition towards a carbon-neutral economy" where "offshore wind farms are acknowledged as key players in accomplishing decarbonization objectives."
Windward Offshore sees the vessels as part of an integrated strategy whereby the ships will support integrated solutions while the CSOVs assist SeaRenergy's engineering, maintenance, and operation services. This does provide a degree of differentiation.
The Rickmers family last exited offshore in 2018 when ER Offshore sold its two 2010-built, 200-tonne bollard pull anchor handlers E.R. Luisa and E.R. Vittoria to Hayfin Capital, which renamed them GH Atlantis and GH Endurance, respectively, and subsequently sold one to the Icelandic Coast Guard for US$14 million in 2021. Two other anchor handlers ordered by ER Offshore but abandoned in a Korean yard ended up in the Tidewater fleet via Swire Pacific Offshore.
Before that, the single-ship companies managed by Rickmers affiliates, Nordmoon Schiffahrts and Nordlight Schiffahrts, ordered two PSVs from Vard in Vietnam and defaulted when the owning entities filed for insolvency in the industry downturn in 2015.
Vard has been hoovering up orders for CSOVs. Let's hope that its customers stay the course this time.
Last week we gave the floor to Aker for our closing remarks. This week, we close with Clasen Rickmers, the owner of SeaRenergy:
"The Rickmers family has now decided to – again – actively support the Energy Transition and be a first mover (Surely a typo?, ed.) to ensure availability of attractive vessel capacity in 2025 and beyond, when the wind farm projects currently under planning and permitting will be installed and commissioned. I am proud to be able to manage the transition of our fleet together with the partners in Windward Offshore. I am convinced of the potential of this investment and cannot emphasize enough that this strategic move enables us to provide customers and partners with state-of-the-art and future-proof offshore wind tonnage."
It's touching that Mr Rickmers believes he is a first mover in a market with about twenty newbuild CSOVs already on order.
Investing in ships is about faith and he has put his money where his mouth is. Time will tell how future-proof this investment really is. Good luck to him.
Background reading
Offshore wind is very complicated in the US, where federal and state level rules and tax regulations create a word salad of acronyms and jargon. This guide by The National Renewable Energy Laboratory covers the details.
If you wish to learn more on the strategic importance of the Straits of Hormuz, visit the Energy Information Administration site
Here is an overview of Havila Venus, one of the first hybrid propulsion anchor handlers.
