It's been two months since we last covered the investment frenzy that is the offshore wind industry (here). And those two months have been packed with news, as competition heats up in the sector, which is tipped for exponential growth in the next decade.
Last week (here) that Norwegian listed player OHT announced it was merging with Seaway 7, the offshore renewables division of construction leviathan Subsea 7. This highlights the trend of the market for wind farm installation being dominated by fewer, more integrated players, rather than niche specialists. We had already noted that the Big Four players from the Benelux had emerged as leaders in the field, levering their dredging and project management experience to offer packages including everything from surveys, unexploded ordnance removal, monopile transportation and installation, to turbine commissioning, trenching, cable-lay and the heavy lifting of electrical substations.
The merged entity will be renamed Seaway 7 and will initially retain OHT's listing on Oslo's Euronext Growth market, with a view to a future listing on Oslo Børs. This creates the opportunity to raise fresh equity for new buildings and further acquisitions. Like Seaway 7, the Big Four also offer service operations vessels to provide ongoing maintenance to existing wind farms offshore (see our coverage of DEME's Groene Wind here). After the merger with OHT, Seaway 7 will be a credible fifth player in this space. The Big Five is born!
Seaway 7 says it will be a "listed, pure-play renewables company, headquartered in Oslo and focused on offshore fixed wind." The combined business will employ around 600 people, with an active fleet of ten vessels and two further high-specification vessels under construction. The two newbuildings are foundation and turbine installation vessels which will be delivered in 2022 and 2023. They were provisionally, if not imaginatively, named Vind 1 and Vind 2, and are under construction at China Merchants Heavy Industry.
Subsea 7 will own 72 per cent of the new Seaway 7, and OHT's shareholders 28 per cent. Songa Corporation currently owns 51.1 per cent of OHT, and Lotus Marine 25.6 per cent. The Board of Seaway 7 will comprise four directors nominated by Subsea 7 and one nominated by Songa as OHT's largest shareholder. It will be chaired by Rune Magnus Lundetræ, the press release confirms.
Subsea 7 says it will consolidate Seaway 7 in its financial statements and Seaway 7 "will benefit from financial, operational, administrative and strategic support from the Subsea 7 group."
OHT brings a fleet of existing five heavy transportation vessels, in addition to its new builds, so Seaway7's range of services is going to become significantly wider. Subsea 7 is no stranger to major acquisitions having previously merged with offshore construction rival Acergy in 2011 in what was then a US$5 billion deal (here).
On Friday July 9, more wind consolidation. Integrated Wind Solutions, the parent company of SOV owner Awind, announced (here) that it has spent around US$10 million to become the majority shareholder in a Danish provider of electrical and technical service to the wind energy industry, ProCon.
IWS listed in March on the Olso Stock Exchange to capitalise on investor interest in green energy, raising around NOK750 million (around US$86 million) in gross proceeds through the share placement. Since then, flush with cash, Awind has been on something of a roll, announcing that same month that it had signed newbuild contracts for two purpose-built, walk-to-work commissioning SOVs at the China Merchants Industry shipyard. These two newbuilds are scheduled for delivery in 2023. Awind has also secured options at the same Chinese yard for up to four additional SOVs.
In June, Awind announced (here) that it had won a contract with Dogger Bank Wind Farm in the North Sea for the first of these walk-to-work CSOVs. Dogger Bank spread the love (or hedged its risk) by awarding a second CSOV contract to Edda Wind, which has four CSOVs under construction at Gondan shipyard in Spain. Edda's contract is for two years plus one year option, Awind's runs for the first two phases of the wind farm development from 2023 to 2025 – the press release seems to imply that the firm period is two years, but is not explicit on this.
Anyway, these wins seem to have vindicated the speculative newbuild model of both players. When the market is sizzling you need to order ships and the contracts will follow, right?
ProCon says that it "provides installation, service, maintenance, troubleshooting, and retro-fit of windfarm and turbine marking, corrosion systems, crane systems, and lightning protection and monitoring systems," so this would seem to be a logical extension of the portfolio of services that Awind can provide to its wind farm owner customers, using its CSOVs as platforms. ProCon also offers medium and high voltage installation, commissioning, troubleshooting, service, maintenance and retro-fit up to 72 kV on switchgears, cables and transformers. ProCon recently started the electrical testing and commissioning of the monopiles and transition pieces at the Saint-Nazaire offshore wind farm in France, and will continue with the work until estimated completion by end of 2022, which gives Awind a track and work history which it has hitherto lacked.
ProCon's wind division has also worked at several offshore wind projects worldwide over the past couple of years, including the Yunlin offshore wind farm in Taiwan and the Coastal Virginia Offshore Wind pilot project in the US.
Cadeler finally ordered two new wind turbine installation vessels (WTIVs) of its new X-class design at Cosco Shipping Heavy Industry in Qidong, China at the end of June (press release here). Cadeler said that the contract value for the two units will be US$651 million in total. The company's earlier units Wind Orca and Wind Osprey had been built at Samsung's Geoje yard in Korea, delivering in 2012, and were designed by Knud E. Hansen, but this time, Cadeler has gone with GustoMSC.
By choosing Cosco, Cadeler is following in the footsteps of Jan De Nul Group, which has already ordered Voltaire, its third jack-up WTIV, at the same yard (here). Jan de Nul says that their new building offers "unrivalled crane capacity of over 3,000 tonnes." Voltaire is set to be delivered in 2022, the two Cadeler vessels in the second half of 2024 and the first quarter of 2025, respectively.
Rather alarmingly, after the contract signature Cadeler then went on Linkedin to advertise for the newbuilding team to manage the project (here and here). You would have thought that if you were spending US$651 million on your business' largest ever investment, you might have the expertise already in-house to execute the new buildings, especially given the difficulties of getting foreign staff into China due to the Covid crisis. If you do respond to the adverts, don't forget to mention Baird as the introducer, so we can claim our recruitment fee.
With the crane upgrades to its existing duo of WTIVs also scheduled in the coming years, it is clear that Cadeler will be stretched technically. The crane replacement on Wind Orca is expected to be initiated in October 2023 with completion in March 2024, Cadeler said in December (here).
"Both vessels represent the future of our business and will be state-of-the-art in all aspects, definitely setting new industry standards," Cadeler's CEO said of the X-class. The company added that the first unit will be put to work in the 1.4GW Sofia offshore wind power park on the Dogger Bank in the North Sea, which is owned by RWE. Cadeler's X-class will assist Siemens Gamesa with the transport and installation of one hundred 14MW wind turbines.
Interestingly, when the company announced the upgrade to the Wind Orca crane so that the WTIV could handle 14MW turbines, it stated that it already had one such project in its pipeline, so it is not clear whether Cadeler has simply shifted the execution of the work from an existing vessel to a newbuilding for investor and lender presentation purposes, or whether there is a genuinely new contract award for the X-class WTIV there.
The 14MW turbines are expected be the largest wind turbines in the world at the time of installation, Cadeler said, although a week later EnBW announced that it had selected Vestas to supply its V236-15.0 MW offshore turbines for the 900MW He Dreiht project in the German North Sea, so that record won't last long.
With a deck space of 5,600 square metres, a payload of over 17,600 tonnes and main crane capacity of above 2,000 tonnes at 53 metres, the two new hybrid, X-class WTIVs are certainly impressive, and Cadeler says that they will be able to transport and install seven complete 15MW turbine sets per load or five sets of 20+ MW turbines. The cranes appear to be lower specification than on Jan De Nul's Voltaire, but with crane capacity, the devil is always in the details, and Cadeler didn't release the final specification in its update, nor does it share the X-class final specifications on its website. So, comparison is not possible.
As ever with Cadeler, there were some humorous touches to the release, as the company boasted that the new jackups would be "cyber-secure," which definitely throws down a gauntlet to the hacker community.
The order price is also more than the "total capex" of US$300 million per vessel, which the company forecast in its investor presentation in just November (here).
What's a cost overrun before you have even started the project?
In additional to the OHT and Eneti speculative orders, OIM Wind of Norway also has a speculative, uncontracted WTIV on order in China (specifications here), built to the BT220 IU design with a 2,600-tonne capacity Huisman crane. This unit is due for delivery in late 2022.
Even before Cadeler announced its order, Chinese owners were also ordering high capacity WTIVs at domestic shipyards. There's a possibility that these units could then be deployed internationally once the surge in activity in the domestic cools down after a rush to meet installation before a critical renewable energy subsidy is withdrawn at the end of this year by the Chinese government.
On March 12, CIMC Raffles, Huadian Heavy Industries and Shanghai Boqiang Heavy Industries held a "signing ceremony of offshore wind power cooperation agreement" in Beijing (here). Then, three months ago, Boqiang announced it was ordering a series of 3060 design WTIV jackups, with the first to deliver in the first quarter of 2023. Dutch equipment supplier Huisman is again providing the main crane, with a lifting capacity of 2,200 tonnes. The ship is designed with a rack and pinion jacking system that will enable the vessel to operate in wave heights of 2.5 metres, the Chinese media reported (here).
CIMC Raffles said that the first vessel costs just 1.2 billion yuan (around US$185 million), considerably less than the Cadeler and Eneti units, let alone the Jones Act-compliant Charybdis which is being built in the USA at Keppel AmFELS.
Upstream reported that Boqiang is marketing the 3060 design WTIV for potential employment in Europe (here), so Cadeler faces potential competition from a unit with similar operating characteristics, but 40 per cent less newbuilding cost. Of course, Cadeler has an unrivalled track record, but cheaper is cheaper when operators are looking to save on costs.
Cosco Shipping Heavy Industry has also announced that it will be converting the abandoned Octabuoy floating production unit as an offshore wind installation vessel for service in the domestic Chinese market. The Octabuoy had originally been ordered in 2008 by ATP Oil and Gas for deployment in the North Sea. Cosco completed the unit in 2013, but by then ATP had gone bust and the hull and nobody wanted to buy the unusual semi-submersible design, so the hull has languished at the yard since then.
For equipment suppliers to the WTIV business, like Kongsberg, NOV, Huisman and Liebherr, the rise in newbuild orders offers a welcome boom after the fall in orders from offshore drilling and subsea. That units like the Octabuoy and various jackup rigs and barges (here) are being repurposed for wind turbine installations shows how hot the market is becoming, and how elastic supply may prove to be demand surges.
However, one company that won't be pushing ahead with one particular newbuild wind farm installation vessel for now is Triumph Subsea Services. We first highlighted this mysterious company last August (here).
Last week, InfraStrata put out a strongly worded press release (here) stating that the letter of intent (LOI) it had signed with Triumph amid much ballyhoo in December had lapsed, by default. This LOI was to have seen Triumph invest £360 million (US$500 million) to build a 200-metre-long, multi-purpose vessel at InfraStrata's Harland and Wolff yard in Belfast.
Readers are free to investigate the different accounts of who said what from the links above. We note that the shipyard cited its due diligence as the reason behind the decision not to extend the LOI:
"For a shipbuilding project to proceed, there are several key components required such as, inter alia, a credible counterparty with a proven management team, detailed technical specifications with equipment and a detailed design that has classification society approval along with equity and a credible route to debt funding. As part of the company's corporate governance process, prior to progressing from a rough order of magnitude price to a fixed price tender, it was established, in our opinion, that Triumph had achieved none of the above milestones. Therefore, a decision was made to pursue other projects that had a far great probability of converting into credible vessel construction contracts. Further, Triumph's aspiration that the UK government would step in and provide the equity was an interesting concept, but we were unable to find any evidence of this being a reality."
If only Triumph had managed a public listing in Norway, it could probably have overcome these issues.
What's more curious to us is the position of Brodosplit, the Croatian shipyard where Triumph claims to have another newbuilding programme, which the company announced had been finalised with a firm newbuilding contract last December (here). We quote:
"Triumph Subsea Services is pleased to announce that it has formally entered into contract with Brodosplit JSC for the building of our ST designed Field Development Vessels. The contract is for one initial vessel and three optional vessels, options will be executed upon completion of the detailed engineering drawings and upon cutting of steel of initial hull. The initial vessel has been assigned hull number 495 and named FDV Chronos with expected steel cutting in March/April 2021, with delivery due Q4 2023. The vessels will be built and outfitted entirely at DIV Shipbuilding Group's owned Brodosplit facility in Split, Croatia."
Brodosplit has an excellent website (here) that documents the main activities and achievements of the yard, from its incredible new square rigger and corvette order for the Croatian Navy, right down to the cute children's book one of its firefighters has written for charity (here). Strangely, there is no mention of any work starting on FDV Chronos on the yard's website.
When the owner of the yard, Tomislav Debeljak, was interviewed by the local business press in Croatia (here), he also made no mention of Triumph's order, although he did discuss much of the rest of the yard's orderbook, anti-dumping rules with China, payroll timing policy, and a bridge the yard is fabricating.
What is going on?
Whilst the vessel owners are cashing up and building vessels fast, their customers are suffering. The lesson from oil and gas is that when the end user energy company's margins are squeezed, pressure is inevitably placed on contractors and suppliers to drop their rates and share the suffering.
At its investor day last October (see here for PDF), Equinor was forecasting a six to 10 per cent real internal rate of return (IRR) from its renewables portfolio, boasting that it had already achieved a 10 per cent return on the US$3 billion it has already invested in wind.
Then in June came a shock. Equinor revised its return estimate for its wind and renewables business down to between four and eight per cent. Reuters reported (here) that Equinor's lower expected returns from offshore wind are related to increased competition for wind leases, and higher costs of wind farm developments. We have already highlighted in February how BP and the other oil majors have been aggressively bidding for the limited newsupply of wind leases (here and here). Increased competition for wind leases means higher costs and squeezed margins for operators.
At the same time, Ørsted issued a profit warning (here) that it faced a US$489 million charge up to 2023 for the costs of remedial action on damaged cables within up to ten of its offshore wind farms in Europe. The electrical cables linking the turbines have been damaged because the cable protection systems have suffered from abrasion from movement across rocks dumped on the seabed around the foundations as scour protection to avoid erosion. Intervention by divers and a subsea vessel was required on the Walney Extension offshore wind farm for the cable protection system repair work.
How the operators respond to the restricted supply of offshore wind licences and the higher costs of winning wind farm permits is going to be critical to the success of the industry. Nearly every major publicly listed oil and gas company in Western Europe has made offshore wind their main renewable target. Every major country in Europe now has a 2050 target zero and a commitment to increased investment in renewables. Growth in turbine installation over the next decade looks as if it is going to be exponential, but this carries the risk of an unsustainable investment boom in vessels and equipment as speculative investment flows into a sector that has historically been small-scale.
There's also an interesting arbitrage opening up with unpopular, unsexy, environmentally unfriendly oil and gas. At the same time that it was warning that its wind returns would fall to four or six per cent, Equinor also told investors that its new oil and gas projects offered a 30 per cent return, and a payback of just 18 months.
Being popular and being profitable are two very different things.
Background reading
The Global Wind Energy Council's 2021 report giving forecasts and data on the explosive growth of offshore wind can be downloaded here.
The website for ProCon Wind Services is here.
The website for speculative TWIV builder OIM is here.
The Scottish media covered the close of the latest, hotly contested windfarm acreage round here.
