Oil major BP gives a taste of how it will go green
A deal to buy into wind farms off the coast of New York and Massachusetts showcases the British firm’s ambitions in the clean-energy sector.
Last month oil and gas giant BP laid out the theory of how it aims to become a clean-energy company. Now it has served up a taste of what that might mean in practice.
On Thursday, the U.K.-listed supermajor said it was buying into two undeveloped wind farms in the waters off New York and Massachusetts, its first foray into the booming offshore wind sector. BP will pay $1.1 billion to its Norwegian peer Equinor for half of its Beacon and Empire wind projects, which are expected to start producing power by the mid-2020s. The companies will also form a partnership to “pursue other offshore opportunities together in the fast-growing U.S. market.”
The move is a signal of intent for BP’s low-carbon plans, coming just before the group’s (three!) capital markets days next week. It gives a real-life example of how the company plans to fulfill its ambition to sell integrated low-carbon power packages to companies and cities—one of the two green businesses it wants to develop.
It is no surprise that BP is buying into a shared megaproject. Many big oil and gas exploration projects are group undertakings, an approach that spreads the risks. A partnership to pool skills—trading from BP, offshore wind from Equinor—is more unusual. It has similarities to BP’s arrangements with its solar-energy partner, Lightsource BP. A key difference is that BP holds a 50% stake in Lightsource, while there aren’t cross-shareholdings in the Equinor deal.
BP also needs the scale: It has a very ambitious target to grow its renewable generating capacity from 2.5 gigawatts (GW) to 50 GW by 2030. The wind farms in the Equinor deal will have 4.4 GW total capacity across the two projects when completed.
Many more deals will be required to fulfil BP’s ambition. With green investments, including wind, becoming increasingly popular, this could be costly. BP paid up for its share of Equinor’s assets, but the deal isn’t a huge chunk of its annual capital spend. Assuming the $1.1 billion is equally apportioned across both wind farms, the BP buy-in raises Equinor’s return on equity from the Empire project from 11% to 16%, including project finance, according to Citi. BP’s return is closer to 9%.
Equinor, formerly known as Statoil, was an early mover in the transition to low-carbon energy, while BP was a laggard by European standards. Rival supermajors Total and Royal Dutch Shell have been at it for a few years. The British group’s need to move quickly now may cost it, though it might also gain from a fraction more clarity about what the shift could look like.
There are no easy answers to the conundrum of energy transition for the oil majors or their investors: Business as usual risks sinking cash into finding new oil and gas reserves that might eventually prove worthless, while green-energy investments could be spent on things that turn out to offer paltry returns.
Still, BP’s experience offers one lesson for U.S. majors Exxon and Chevron, which for now are sticking to oil and gas: If they do decide to join the green revolution at a later date, they might find it even more expensive.