BP chief Looney defends German spree as bullseye for 'evolved' offshore wind strategy

BP’s acquisition of 4GW of offshore wind leasing capacity in last month’s German wind lease sale was an emphatic demonstration of how the company’s strategy for the sector has evolved over the last two years, according to its chief executive.

Engaging with analysts shortly after the UK oil and gas giant had presented its quarterly earnings, CEO Bernard Looney was bullish about a bidding strategy that some industry peers — including BP’s partner on US offshore wind projects Equinor — described as out of their range.

“We are confident, as you would expect… very confident I would say… in achieving 6 to 8% unlevered returns… and that’s before integration benefits. We will enhance these returns further through integrating across the value chain leveraging shipping and trading business to optimise value,” Looney said of the German offshore wind projects.

The tender grabbed the headlines because BP and French peer TotalEnergies will eventually pay a total €12.6bn for their four sites – three in the North Sea and one in the Baltic Sea – with a potential 7 GW of generation capacity.

In a single tender, BP increased its offshore wind development pipeline by 75% to 9.2GW.

Light touch

Looney stressed that BP aims to bring in a partner around the point of final investment decision and to leverage the project with financing in order to achieve what he called “a very capital-light delivery approach."

Looney also reminded listeners that German lease sale are structured to limit financial exposure as only 10% of the bid is paid up front – about €678m ($744m) in BP's case – with the rest payable over a 20-year period beginning when projects become operational.

Another plus, he said, is that German rules mean grid connections are provided by transmission systems operator with compensation to developer for any delays.

“We believe our bid benchmarked positively compared to other lease auctions acknowledging importance of timing of payments and other factors like the delivery of the offshore grid connection,” Looney argued.

“We are delighted and very excited, as this is fully aligned with [our] integrated energy strategy and in a core market for BP where we intend to continue to grow our business.”

Looney was similarly adamant that BP’s approach to the energy transition was not one of treating the prevailing and future energy systems as a two entirely different roads.

'And' not 'Or'

“We believe the world needs both and our shareholders are best served by us investing in both,” he said, pointing to the extra $16bn in capital expenditure earmarked in exactly equal proportions last February for “resilient” higher-return hydrocarbons projects and for the company’s transition businesses.

He acknowledged that oil and gas production grew in the first half of 2023, with underlying production expected to continue this trend through mid-decade, before flattening in the final years of the decade.

In the case of offshore wind, Looney said the decision by BP and partner Equinor to request a renegotiation of their contracts in the US east coast projects reflected the impact of inflation.

“In areas where not the PPAs are not inflation or index linked and we don’t see an integration benefit then those projects are challenged," he said.

"I can tell you categorically that the return threshold is sacrosanct, meaning we won’t develop projects that don’t meet [it]," Looney stated.

BP has repeated this message in recent months, promising to do offshore only where the company sees integration benefits, and Looney argued that the German projects tick all boxes.

“We don’t want to generate electrons just for electrons... we want to add value to the electrons like we do today with the oil and gas molecule" he said.

"Our expectation for offshore wind is just like we did it in Germany. Where there is a direct integrated link to our business. So we can take the electron, and we can high-grade it, convert to a molecule, convert it to power a car, give it to our trading business or whatever.

"This is the evolution of our offshore wind strategy and is, in part, based on learnings of last two or three years," Looney stated.

Molecule hunt

The BP boss has predicted that demand for "green" molecules will outstrip supply in regions such as Europe, but transcends climate change.

"The fundamentals are strong for what we are trying to do in Germany's case. You look at what Germany is doing and the ambitions that it has around offshore wind and hydrogen, and how much it will develop at home and how much it will import.

"Yes of course it is influenced by climate change but it probably influenced most today by energy security. It is what the country needs," he said, pointing out that population density placed limits on solar in what is densely populated country.

When TotalEnergies held its own conference call last Thursday, CEO Patrick Pouyanne formulated a similar argument around Germany's rejection of nuclear power.