Does Offshore Drilling Constrain the Renewables Supply Chain?

The possibility of Congress granting oil companies rights to develop offshore reserves in previously protected areas is one of the hottest topics going these days. The U.S. Energy Information Administration estimates there may be as much as 18 billion barrels lying under protected areas and 80 billion barrels total offshore, though the EIA isn’t exactly known for its accuracy. While there’s virtually no potential for oil drilled offshore in the U.S. to have both a direct or immediate impact on domestic prices - the government can’t tell oil companies where to sell, how much, or at what price - both presidential candidates support it. John McCain was against it before he was for it, and even Obama is saying Yes We Can to some limited proposals. And then there are these jokers, whose press conferences have replaced the Daily Show as my daily fix of political humor.

For the energy majors, increased access to offshore sites represents a far greater prize than any good PR associated with low gas prices. Proved and probable reserves are a widely accepted way of determining an oil company’s value and expanding access for these companies will benefit their share prices and revenue forecasts. This is good for companies like BP who are finding it harder to do business in places like Russia and Nigeria these days and risk losing booked reserves in those areas. It’s likely, however, that much of the newly granted reserves won’t be developed or produced - American companies currently produce from about 15 percent of their offshore sites.

While this controversy rages in the U.S., an offshore oil boom in Brazil and India may create some problems for the development of the offshore renewables industry in Europe and North America. Supply chain conflicts may prove a significant limiting factor for growth in that sector and may have ramifications for the evolution of the energy sector generally. The wind industry, ocean power industry, and offshore oil and gas industry draw their installation, monitoring, and maintenance vessels from the same companies and same limited inventory. Anchor handling vessels, jack-up barges, and seismographic monitoring are in particularly high demand these days. According to Baker Hughers, in the last few months Brazil has deployed 29 additional offshore rights, while India has deployed two and ordered another 28, drawing much of the world’s installation vessels to those projects. Competition for inventory among these industries isn’t strong however, with the well-capitalized oil projects winning out nearly every time and low return renewables project often getting shuttered as a result. The high risk and low returns of installing wind turbines and ocean power devices offshore oftentimes do not justify the cost of hiring these vessels at market rates.

The surge in offshore drilling has been a boon for the relatively small offshore oil services industry. In a market where vessel charters go for a minimum of $60,000 per day, an onset of new entrants is not unexpected. India’s Varun Shipping recently raised $300 million to expand into the business with a focus on deep-water and ultra-deep water operations. But the rush to serve the expanding offshore oil industry may put a crimp on construction of offshore wind farms and the development of the nascent ocean power industry. Larger service opportunities in the offshore oil industry will draw installation vessels to oil faster than they’ll go to wind and ocean power, while wind and ocean power installers may not be willing to pay the high rates the installation vessels command. Lower installation costs and higher margins may keep wind turbines on dry land for longer than most expected, while the shortage of installations vessels may make it difficult to keep the ocean power industry afloat. Already, one major marine turbine installation was delayed by several months because the jack-up barge intended for the installation was called away to service an oil rig.

European offshore wind installers were expecting to soak up surplus capacity from depleted North Sea natural gas fields, but those vessels are now in service in India and Brazil. Short supply and high prices add to the already outsize installation costs for offshore wind, which have caused a number of major developers to put some big projects on hold. This has sent investment return opportunities tumbling, making offshore renewables projects even less attractive than before. Shell stepped out of the 1 GW London Array, citing equipment shortages and spiraling construction costs. Both Vestas and General Electric have slowed production of their offshore units because of shrinking sales. Vestas, for example, hasn’t sold an offshore turbine since late 2006. There are currently $120 billion of offshore wind projects in Europe that are stalled because of high construction costs and installation vessel shortages. As long as costs remain high and vessel availability remains uncertain, it is unlikely most offshore renewables projects will get built. This will certainly impact the EU’s goal of meeting 20 percent of its electricity demand from renewables by 2020. However, lessons from Europe should give American renewables developers and drilling opponents another kind of ammunition in their fight to expand renewables capacity and limit the future development of fossil fuels.