OGV Energy’s May European Energy Review - May 2020

The spreading coronavirus pandemic was the underlying theme in Europe’s energy sector this past month. European oil and gas companies, as well as associations of the renewable energy industry, scrambled to assess the impact of COVID-19 on their operations, cash flows, and future projects.

Oil supermajors slashed capital expenditures as oil prices plunged by 50% in one month amid continuous demand destruction in the pandemic and the more-than-a-month-long price war between Saudi Arabia and Russia. The pandemic did not spare the clean energy sector, either. Associations and analysts now see wind and solar installations slowing down this year, compared to earlier projections of another bumper year in 2020.

Despite a more pessimistic outlook on renewables, some major projects in alternative energy in Europe have moved forward in recent weeks.

Europe-based Oil Majors Slash Spending as Prices Crash

Following the oil price crash in early March, the oil and gas supermajors based in Europe rushed to announce capital spending cuts to protect balance sheets and dividends.

Royal Dutch Shell announced reduction of its 2020 cash capital expenditure (CapEx) to US$20 billion or below from a previously projected level of around US$25 billion. Shell also targets to cut its underlying operating costs by US$3-4 billion annually over the next 12 months compared to 2019 levels. The group also warned it would book post-tax impairment charges in the range of US$400-800 million in Q1, as a result of changes to its oil price outlook for this year.

BP is cutting 2020 organic CapEx to US$12 billion, which is 25% below its prior full-year guidance. The supermajor is cutting US$1 billion in the upstream sector, mainly in short-cycle onshore activity in the U.S. shale patch. BP expects to take a non-cash, non-operating charge of around $1 billion in Q1. While BP is responding to the new ‘lower-for-longer’ oil prices with CapEx and cost cuts, the company’s response “will not include making any bp staff redundant over the next 3 months,’’ chief executive Bernard Looney said in a LinkedIn post at the end of March.

Italy’s Eni responds to the sharp drop in commodity prices and the pandemic by reducing CapEx for 2020 by around 2 billion euros (US$2.19 billion / £1.74 billion), equal to 25% of the previously planned CapEx. In 2021, Eni expects to cut CapEx by 30-35% compared to previous guidance.

Aker BP updated its investment programme, cutting exploration spending by 20% in 2020, with further significant reductions planned for 2021-22. The company operating mainly offshore Norway put on hold non-sanctioned field development projects. For 2020, this would be CapEx reduction of 20% compared to previous guidance, while for 2021-22 the initial estimate is a reduction in capital spend of US$1-2 billion.

Norway’s Equinor suspended it share buyback programme until further notice, cut its 2020 organic CapEx by 20% from US$10-11 billion to around US$8.5 billion, reduced exploration activity this year from US$1.4 billion to around US$1 billion, and cut operating costs for 2020 by around US$700 million compared to original estimates.

France’s Total cut organic CapEx by more than 20%, to less than US$15 billion this year and suspended its share repurchase programme.

Norway’s Oil & Gas Exploration Activity Slows Down

Due to the oil price collapse and low natural gas prices, exploration activity offshore Norway will not be as high as companies had prepared for just a couple of months ago, the Norwegian Petroleum Directorate (NPD) said in an update in early April.

In January 2020, companies operating on the Norwegian Continental Shelf (NCS) planned to drill 50 exploration wells, but at least 10 wells have been postponed due to the uncertainty in the industry and the cuts in exploration spending across the board.

“What we’re seeing now, is both exploration wells being postponed and delays/cancellations of geophysical mapping. As of today, it appears that around 10 exploration wells will be postponed, meaning that there will be about 40 exploration wells in 2020. However, we can’t rule out further changes in this area in the future,” said NPD Director General Ingrid Sølvberg.

Referring to fields in operation, Sølvberg noted that wells were being postponed because of the price crash and/or because staffing offshore is reduced due to the coronavirus pandemic.

“There is a risk of several of these wells not being drilled later, which could mean a risk of losing resources,” Sølvberg says.

Production offshore Norway is being maintained for now, but fewer wells drilled, both exploration and on fields in operation, could impact future oil and gas production in Norway if oil prices stay lower for longer, NPD warned.

Renewable Projects Go Ahead As Industry Assesses Virus Impact

Companies, including oil and gas majors, announced projects in alternative energies despite the high uncertainty about the impact of the COVID-19 pandemic on the global energy sector and its supply chain.

France’s Total, for example, signed an agreement with developer Simply Blue Energy to buy 80% in the pioneering floating wind project Erebus in the Celtic Sea, in Wales. This makes Total one of the first movers in this technology in the UK, the world’s largest offshore wind market, the French group said.

“With its entry into floating offshore wind, Total confirms its ambition to contribute to the development of renewable energy worldwide. Floating offshore wind is an extremely promising and technical segment where Total brings its extensive expertise in offshore operations & maintenance,” Total’s chairman and chief executive Patrick Pouyanné said.

Another major, Equinor, will work to develop a floating solar project together with Italian oilfield services and engineering group Saipem. The companies have recently signed a cooperation agreement to develop a floating solar panel park technological solution for near-coastal applications.

In Belgium, offshore wind energy generation set a new record in the winter, between November 2019 and March 2020, said the Belgian Offshore Platform (BOP), a non-profit association of investors and owners of wind farms in the Belgian part of the North Sea. This past winter, the six wind farms in the Belgian section of the North Sea produced an average of 639 gigawatt-hours (GWh) of electricity per month, which is 45% higher than the average for the rest of the year, the association said.

In Germany, RWE plans to add more than 4 GW of wind and solar power by 2022, thanks to net investments of 5 billion euro (US$5.47 billion / £4.36 billion).

“As one of the world’s leading producers of electricity from renewables, we have an ambitious goal: we want to be carbon neutral by 2040. We are making very good progress,” said Dr Rolf Martin Schmitz, chief executive of RWE AG.

Uniper and Siemens Gas and Power entered into a cooperation agreement to develop projects on the decarbonisation of power generation and promoting sector coupling. One focus of the planned cooperation is the production and use of green hydrogen, that is, hydrogen produced from renewable energy sources.

Energy company innogy took the final investment decision (FID) for the construction of a 342 megawatt (MW) wind farm 35 kilometres north of the island of Heligoland, paving the way for its third German offshore project Kaskasi.

“Offshore wind is an important pillar to reach Germany’s climate protection goals by supplying green electricity from a reliable source,” said Christoph Radke, COO Renewables at innogy.

Europe as a whole remains the world’s largest market for offshore wind, accounting for 59% of new installations globally in 2019, the Global Wind Energy Council (GWEC) said in a report at the end of March. Despite a decline in Germany’s wind market, Europe still saw 30% annual growth in its onshore wind market, driven by strong growth in Spain, Sweden, and Greece, according to the report.

Europe continues to be a global leader in tidal energy installations, with European tidal stream projects generating 50% more electricity in 2019 than the year before, statistics released by Ocean Energy Europe showed. European tidal stream capacity continued to increase in 2019, reaching 27.7 MW cumulatively – almost four times as much as the rest of the world, according to the statistics.

In Scotland, two consortia have recently won £1 million for projects that aim to bring down the cost of wave power, Wave Energy Scotland said at the end of March. The two teams – one led by consultant engineers Arup and the other by rope and mooring specialists Tension Technology International – have each secured funding from Wave Energy Scotland (WES) to demonstrate the potential of new applications of materials to bring down the cost of wave power.

While projects are being announced, associations and analysts are trying to estimate how the coronavirus pandemic will impact the alternative energies supply chains.

According to a Rystad Energy analysis, the growth in newly commissioned solar and wind projects globally expected before the coronavirus pandemic will now be wiped out for 2020 and cut by a further 10% in 2021.

In Europe, over 20 GW of solar capacity was expected before the coronacrisis, and while foreign exchange issues for projects in Europe are less of an immediate concern, they could take centre stage if the Euro falls further. Strict travel restrictions across Europe have halted some projects under construction, Rystad Energy said.

The association WindEurope warned of delays in new project development.

“With COVID-19 we are likely to see delays in the development of new wind farm projects which could cause developers to miss the deployment deadlines in countries’ auction systems and face financial penalties. Governments should be flexible on how they apply their rules. And if ongoing auctions are undersubscribed because developers can’t bid in time, governments should award what they can and auction the non-awarded volumes at a later stage,” WindEurope CEO Giles Dickson said.

Major European wind markets, such as Spain, France, and Italy, could be hit harder than the rest of Europe because of the strict lockdown measures in these countries severely affected by the coronavirus pandemic, Dan Shreve, Head of Global Wind Energy Research at Wood Mackenzie, said at the end of March.

WoodMac now expects total global wind power additions at 73 GW this year, down by 4.9 GW compared to its previous projections.

In the longer term, however, the global wind power market will rebound, Wood Mackenzie said in a report. Global wind power capacity additions are expected at an annual average of 77 GW between 2020 and 2029—or growth of 112% in installed capacity, according to WoodMac.

In Europe, compliance with the EU’s energy and climate targets for 2030 is set to drive the addition of 225 GW in Europe through 2029.

“Land constraints in mature countries will push a quarter of Europe’s growth offshore, where the sector will comprise 32% of additions in Western Europe and 43% of additions in Northern Europe from 2020 to 2029,” said Luke Lewandowski, Wood Mackenzie Research Director.

Read the latest issue of the OGV Energy magazine HERE.

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