Energized

Oil roars back as offshore wind battles inflation and growing pains.

By Jim Redden, Correspondent

The trajectories of the long-suffering offshore oil industry and its nascent wind counterpart have taken markedly different paths over the past year. The former is enjoying a rebound, while U.S. offshore wind developers struggle to build a new industry amid severe inflationary pressure.

Having recovered from its Covid funk, offshore oil and gas has bounced back strongly, with the Gulf of Mexico seeing increased demand and day rates throughout the food chain, from deepwater rigs to support vessels.

“The fundamental setup for our industry is arguably the best that it has looked in the past 20 years based on a confluence of macro supply and demand factors,” said Robert Eifler, president and CEO of drilling rig contractor Noble Corp., Sugar Land, Texas. He sees “a sustained multiyear upturn in offshore investment and rig demand.”

Noble owns four of the 21 deepwater drilling rigs that S&P Global’s MarineBase report as active in the Gulf.

To the northeast, project viability has become the operative phrase within the offshore wind sector as soaring costs and in- frastructure limitations have rendered some earlier rate agreements and timelines unsustainable. While two offshore wind farms remain on track to begin producing a combined 954 megawatts (MW) of power this year, a Massachusetts project has been scrapped for now as the owners hope to negotiate a better deal in the next lease offering.

Compounding the economic picture, the National Renewable Energy Laboratory (NREL) concluded in a recent analysis that limited domestic port, vessel and manufacturing infrastructure threatens to delay half of the planned developments beyond the 2030 timeline that the Biden administration set to have 30 GW of offshore wind power flowing through the national grid.

Given the worldwide expansion of offshore wind, U.S. developers also are finding it difficult to source components from leading international suppliers. “It’s a tough time to bring on any new kind of global program as the rest of the world is doing the same,” said Jeff Bukoski, president of St. Johns Shipbuilding, which has seven crew transfer vessels (CTVs) in the hopper at its Palatka, Fla., shipyard. “The global resources, whether on the material side or the vessel side, is going to continue to be tight.”

In what has been described as a “modest short-term course correction,” BP, for one, plans to tighten near-term renewable investments to exploit the appreciably higher returns from core oil and gas assets. “As we grow the new energy business, we need to keep a relentless focus on hydrocarbons,” Gio Cristofoli, senior vice president of BP Solutions, said in a Feb. 13 Reuters webinar.

The company’s new energy business includes a 50% stake in the Beacon Wind and two-phase Empire Wind farms off New York, where it and partner Equinor submitted a bid in January to acquire a third state offshore wind lease.

Forecast Highlights

Gulf Surges

For now, the Hornsea One off the UK is the world’s largest offshore wind farm with 174 turbines delivering 1.2 GW of power. As currently engineered, the Coastal Virginia Offshore Wind (CVOW) project would take the crown with 176 turbines and 2.6 GW capacity.

is expected to begin flowing from the Argos floating production system (FPS), the nucleus of the $9 billion Mad Dog 2 development that covers three Green Canyon blocks. The field will produce up to 140,000 bbl/d from 14 wells in roughly 4,500' of water.

The BOEM, Gulf of Mexico Region (GOMR) Oil and Gas Forecast 2022-2031 is shown in Figure 1 (historical oil and gas production are also shown for reference). During the forecast period, GOMR oil production is expected to experience continued growth and multiple record years of total oil production, despite off-trend production levels in 2020 and 2021. Gas production is expected to experience moderate increases but is not expected to rebound near previous highs. The growth in annual oil production predicted in the following years is supported by a strong project queue (as deferred projects will now be executed) for the Whale production system, which is expected to begin production next year in Alaminos Canyon.

In the Gulf of Mexico, cash-flush operators collectively are expected to increase oil production by 120,000 bbl/d this year, according to the U.S. Energy Information Administration (EIA). The Gulf closed out 2022 with production averaging 1.78 million bbl/d.

The off-trend production seen in 2020 and 2021 is attributed to the impact of hurricanes in both years, as well as the financial impact of COVID-19 which resulted in the deferral of several offshore projects. The hurricane impacts of these two years are historically abnormal. As such, this forecast assumes that the large hurricane production impacts of 2020 and 2021 will not be representative of the years to come.

Though U.S. oil prices remain volatile, settling at $75.68/bbl on March 31, the Gulf’s penchant toward lower-cost, and lower-emission, tiebacks to existing production hubs, help deliver attractive returns.

“We plan to invest up to $8 billion more this decade in our transition growth engines and about $1 billion more each year in today’s energy system, which depends on oil and gas,” said BP CEO Bernard Looney.

The transition to renewable sources of energy is underway. Renewable energy sources and increases in energy efficiency have begun to decrease demand for oil production and this trend will continue. While these impacts are not explicitly forecasted in this report, they are inherently included in the forecast. The transition to renewable energy sources has already affected the various inputs and data sources on which this forecast is based, and therefore, this transition is integral to the BOEM, GOMR Oil and Gas Forecast 2022-2031

Shell also holds interests in the developing northeast offshore wind sector. But like BP, Shell is in no rush for a wholesale switch to renewable energy. “By 2040, I’m still convinced you’re going to need oil and you’re going to need gas and you’re going to need a lot more renewables,” said CEO Wael Sawan.

BP expects Gulf production to increase by 400,000 boe/d (barrels of oil equivalent) by the middle of the decade, up from the average 269,000 boe/d produced last year. By midyear, first oil

Among the other most active operators, Shell Offshore kicked off 2023 with the oft-delayed start-up of the Vito FPS in Mississippi Canyon, which at its peak will produce an estimated 100,000 boe/d from four blocks in 4,000' of water. Vito serves as the design standard

This forecast demonstrates that for the next ten years, the Gulf of Mexico can and will continue to support America’s energy demands and economic development as needed - even as the United States continues to make strides toward sustainable energy sources.

Shell holds 21 of the 52 new well drilling permits the Bureau of Safety and Environmental Enforcement (BSEE) approved between March 6, 2022, and March 6, 2023, for waters deeper than 1,000'. BSEE authorized 31 new Gulf deepwater wells for the same 2021-2022 period.

Along with interests in the Mad Dog 2 and Whale developments, Chevron operates the Anchor high-pressure deepwater field in Green Canyon, which is projected to come online next year in keeping with the major’s objective to grow Gulf production to 300,000 bbl/d by 2026. Chevron holdings also include the recently sanctioned 75,000 bbl/d Ballymore deepwater project, which comprises a three-mile tieback to the existing Blind Faith platform.

Independent Murphy Oil Corp., meanwhile, has a three-well drilling campaign on tap this year and expects to increase production by 89,000 boe/d in 2023, a 20% jump over last year.

RIGS, BOATS COSTLIER

Not surprisingly, operators must pay more to acquire suitable deepwater rigs and support vessels. According to its latest quarterly fleet status report, contractor Transocean has 11 ultradeepwater drillships at work in the Gulf at an average day rate of $439,000/day and as high as $480,000/day. Noble’s four active floaters are commanding an average of $377,500/day, according to its February status report.

“The Gulf of Mexico is expected to remain relatively tight with local supply and demand keeping in relative balance. This region typically demands the highest specification rigs with the highest hook loads, which currently are all under contract,” said Transocean CEO Jeremy Thigpen. “Additionally, based on our direct negotiations, we believe that there is sufficient future demand

Companies Aim To Use Wind To Power Oil Developments

Aproposalthat could have significant implications for the Gulf of Mexico has floating wind projects electrifying offshore oil and gas assets.

The Norwegian subsidiary of Houston’s Oceaneering International signed an agreement in January with Kontiki Winds AS to combine their expertise to develop “remote microgrid renewable power generation to electrify oil and gas production and smaller opportunities in island states using fossil fuels to produce electricity.”

The agreement focuses on the Gulf of Mexico, Brazil, and Northern Europe.

Kontiki Winds is a subsidiary of Norwegian offshore wind company Havfram AS, which is currently building a wind turbine installa- to bring one or two more rigs into the region on long-term programs.”

Day rates for the latest generation platform supply vessels (PSVs) and drilling support vessels (OSVs), likewise, remain on the high end, said S&P Global Senior Marine Analyst Richard

Sanchez. Available tonnage, however, has increased, he said, as vessels complete long-term charters and go on the spot market where 320' PSVs up to 6,000 dwt are getting from $30,000 to $55,000/day. “Even your smaller 280foot PSVs are easily making $45,000 a day or more,” he said.

As of March, the marketed utilization rate for PSVs of 4,000 dwt and greater was at 86% in the Gulf, Sanchez said, with the only limiting factor being the persistent shortage of mariners. “There’s a lot more competition for mariners and that’s where the real cost increases are coming from. There’s a feeding frenzy for dynamic positioning officers and high-tonnage captains,” he said.

With the focus on leaner operations, oil companies refrain from keeping extra boats in reserve, forcing reliance on the higher-cost spot market, rather than long-term charters, that range from $40,000 to $47,000/day, Sanchez said.

Leading deepwater OSV operator Tidewater Inc. believes contract rates will not be declining anytime soon. “Average day rates improved over $2,400 per day for the full year (2022), a pace of improvement we have not seen during the past 20 years, and we expect that 2023 will reflect a full year improvement of over $3,000 per day,” said President and CEO Quintin Kneen. “To put this in perspective, historical up-cycle, year-over-year day rate improvements were approximately $1,500 per day.”

OIL, WIND TO INTERSECT

tion vessel (WTIV), the first in a planned fleet of new offshore wind vessels. The hybrid NG20000X WTIV is under construction at the CIMC Raffles Offshore Ltd. shipyard in Yantai, China, with commissioning in August 2025.

– J. Redden

Meanwhile, the Bureau of Ocean Energy Management (BOEM) will set a date for the first offshore wind lease sale in the Gulf of Mexico, following the 60-day public comment period that began on Feb. 22.

The groundwork is already being laid. In February, Crowley Wind Services took the first step toward acquiring a lease at southern Louisiana’s Port Fourchon deepwater oil and gas service and supply base. The proposed lease would be used to “serve wind installations in the Gulf,” said a spokesman for parent Crowley Maritime Corp., Jacksonville, Fla.

Danish offshore wind developer Ørsted A/S, which holds stakes in nine Northeast wind projects, will open an 80-person office in Houston before year-end. While a spokesman declined comment on whether the company intends to be a player in the upcoming lease sale, he noted the extensive oil and gas infrastructure, and expertise gives the area a leg up.

“For us, this is the offshore wind industry tapping into the talent the Gulf has developed in servicing offshore energy projects,” he said.

Cloudy Economics

Due to historic costs increases that made an earlier negotiated power purchase agreement (PPA) “unfinanceable,” the Commonwealth Wind farm, planned for about 20 miles south of Martha’s Vineyard, will not be delivering 1,232 MW of power to the Bay State anytime soon. After pushing the original start-up date to 2028, developer Avangrid Inc. scrapped the project in January, but intends to rebid at this month’s lease sale in hopes of signing a more favorable off-take agreement with the Massachusetts utility commission.

“While we are terminating our PPAs for Commonwealth Wind, we remain fully committed to our offshore business,” said CEO Pedro Azagra. “This is not a question of commitment or capabilities, but rather of a unique economic situation.”

The future of the 1,200-MW SouthCoast Wind Energy project (formerly Mayflower Wind) off Massachusetts also hangs in the balance. While partners Shell New Energies US LLC and Ocean Winds North America have not threatened to ditch the project, they had requested final approval be slowed to allow time to further evaluate the current “microeconomic and supply chain” situation.

Elsewhere, operating under rate agreements finalized with New York regulators in 2022, the Empire Wind and Beacon Wind farms so far appear on track for initial startup in 2026 and 2028, respectively. The Empire and two-phase Beacon wind projects are designed to deliver a cumulative 3.3 GW of generating capacity.

Offsetting the Commonwealth Wind setback, Avangrid and partner Copenhagen Infrastructure Partners are set to deliver first power from the Vineyard Wind 1 project off Massachusetts before year-end.

“With supply fully contracted and manufacturing of all components underway, labor costs fixed or capped, and financing secured with interest rate hedge and no foreign exchange risk, Vineyard Wind 1 is protected from the inflation and supply chain pressures we currently see in the market,” said Azagra.

The farm will have 62 turbines, generating 806 MW. “Midyear, we plan to begin installation of our foundations and turbines. And by the end of the year, we expect to have delivered the first power from Avangrid Vineyard Wind 1,” Azagra said.

Ørsted and Massachusetts utility Eversource Energy also intend to begin generating power by year-end from the New York South Fork Wind farm. South Fork will comprise 12 turbines delivering 132 MW. “We expect South Fork to be fully operational by the end of this year,” an Ørsted spokesperson said, adding “we haven’t had similar (fiscal) issues in New York,” referring to the Massachusetts PPA quarrels.