Norway's Equinor has come under fire for what critics say is a failure to address a large amount of debt related to offshore wind investments that does not appear on its balance sheet.

The company's off-balance sheet debt could increase to Nkr55 billion ($6.5 billion) by the end of 2025 and possibly much higher by 2035, given Equinor's stated renewable energy ambitions.

The rising debt and modest returns on big offshore wind projects have raised concerns among some analysts.

Off-balance sheet debt is associated with project financing in which the risks and rewards of a specific project are fenced off from other corporate assets.

Teodor Sveen-Nilsen, an analyst with Norway's Sparebank 1 Markets, told Upstream that he expects Equinor’s off-balance sheet debt to be Nkr55 billion in 2025.


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“This corresponds to close to 50% of our end-2020 net debt estimate for the company,” he said.

“We are sure the market at some point in time will start focusing on this off-balance sheet debt. Historically, huge off-balance sheet debt has not been a great success for publicly traded companies.” Sveen-Nilsen said.

An Equinor spokesman told Upstream that the project finance model is common practice in renewable energy development.

“Equinor can choose to either finance over the balance sheet or through project financing,” he said.

“It is correct that there is a different method for reporting investments in associated companies and joint ventures.

"The equity method means that debt raised by the underlying company is not shown as part of Equinor's investment in the company.”

Equinor will report results from renewable energy as a separate segment in quarterly results beginning this year.

The spokesman said the first-quarter 2021 results would provide details about reporting, adding that Equinor has an overview of renewable projects and how they are consolidated in its balance sheet on the company's website.

Sveen-Nilsen agreed that project financing is appropriate for big renewable projects.

“Cash flow from these projects will be stable, have low risk and long lifetime,” he said.

Other offshore wind players such as Orsted and BP also have significant off-balance sheet debt.

However, there is concern about lower returns for offshore wind as competition increases.

For example, Sparebank 1 Markets has calculated the expected internal rate of return (IRR) from the world’s largest offshore wind development, the UK's Dogger Bank, at 5.7% — a sum that could be considerably lower when decommissioning costs are factored in.

The estimate also assumes the project by Equinor and Scotland's SSE will see similar prices for power generated after the expiration of Dogger Bank's 15-year purchase agreement.

Equinor has said that it expects 6% to 10% IRR from its offshore wind projects.

Dogger Bank reached financial close in November last year, with total senior debt facilities of £4.8 billion ($6.7 billion). The first two phases are being project financed with gearing of 65% to 70% for the generation assets.

Upstream has been told by sources with direct knowledge of large wind power projects that decommissioning could represent about 20% of project costs, and that the proliferation of wind power capacity in the North Sea basin could keep power prices low.

“These factors could reduce the project’s internal rate of return significantly,” said Sveen-Nilsen.

Professor in finance at NHH Norwegian School of Economics Thore Johnsen said he agrees with Sveen-Nilsen’s concern and criticism.

“It surprises me that Equinor gets away with significantly limited market information about profitability and risk in relation with its giant wind power ambitions,” he said.

Johnsen explained that US company Enron managed to hide risk related to large debt and investments by using the project financing model with claimed risk transferred to external investors.

“Enron had a significant residual risk, which led to the company’s tragic bankruptcy,” he said.

“In Equinor’s case, investors need not only information about the hidden project debt, but also the projects’ profitability and how it is affected by this debt.”

Also helpful, he added, would be more information about the price risk related to the expiration of a project's power-purchase agreement.

The Equinor spokesperson said more information about returns from its portfolio and its financing strategy would be disclosed at its Capital Markets Update in June.