Equinor's Dogger Bank project — the world's largest offshore wind farm under construction — has challenging economics, but that is only a warning sign of worse challenges to come for oil companies seeking to invest in offshore wind, said Norwegian School of Economics (NHH) finance professor Thore Johnsen.

Johnsen has reviewed several studies about offshore wind profitability in Europe and has watched it decline.

“The profitability of Dogger Bank for Equinor depends on the required rate of return one bases the calculations on, but the project is definitely not convincingly profitable,” he said, warning: “It will be even worse for new offshore wind projects.”

Desperate oil companies under pressure from investors and politicians to transition to clean energy projects could engage in bidding wars in auctions over the lowest-possible strike prices — government-guaranteed prices for electricity generated from offshore wind projects.

“A lot of money wants to come into this market, and that is something the environmentalists don’t understand," Johnsen said. "The high profits from oil and gas enable the companies to make huge investments in wind power projects with questionable profitability.”

Companies that entered the market early, negotiating good fixed-price agreements and subsidies, have solid returns, Johnsen said.

“And the profitability has been fantastic when they have managed to farm down to later arriving companies desperate to enter the business,” he said.

"However, that model no longer works. Even the successful wind power company Orsted is now reporting that increased competition threatens the profitability of new projects,” said Johnsen.

Oil companies today still have low price-to-earnings multiples, but this will have to change when many of them spend a steady share of their capital expenditure on offshore wind, said analyst Teodor Sveen-Nilsen at Norwegian Sparebank 1 Markets.

“Over several decades, I think earnings multiples will reflect the fact that cash flow from renewables probably has lower risk," he said. "However, in the short-term, E&P majors will probably still be valued as oil companies, since oil and gas still represent the vast majority of their assets.”

Sveen-Nilsen added that he does not have an opinion on whether this will increase or decrease the companies' value.

Equinor had excellent returns from farm downs in earlier projects like Empire Wind off New York and Dudgeon in the UK, Sveen-Nilsen said.

That strategy now appears more challenging, however, and the last sale of Dogger Bank phase C probably was a soft data point for the valuation of the offshore wind portfolio, Sveen-Nilsen said.

Offshore wind has some risk and virtually no upside potential, yet it is here to stay, the analyst said.

“But it is obvious that the business needs to be profitable,” he said.

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