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A case for offshore wind by oil companies in Brazil

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Ali El Hage Filho
Veirano Advogados, Rio de Janeiro
ali.hage@veirano.com.br

Tito Rosa
Veirano Advogados, Rio de Janeiro
tito.rosa@veirano.com.br

 

Introduction

In 2020, it’s not necessary to expand on the threat of climate change, the viability of renewable energy and the consequent decline of fossil fuels. It is evident how imperative it is for oil companies to diversify their energy delivery capabilities, respond to societal demands and regulatory challenges, but also to continue to thrive as profitable businesses, remaining an important sector of countries’ economies.

Oil companies have been proficient at delivering fuels that form the bedrock of today’s energy system and change is not only necessary for ensuring their own future but also to secure successful energy transition efforts, especially in the face of projections stating that the world’s energy consumption will grow by 50 per cent by the year 2050.[1]

It is therefore necessary to consider short and medium-term solutions that can be implemented within the current context of oil companies’ operations. A good starting point is finding synergies and even integrate new and existing upstream developments with renewables. There is also a strategical need to stay ahead of new regulations and competitors and be prepared for sharper decreases in demand for fossil fuels as renewables’ technology advances, showing exponential improvements in terms of efficiency and cost

The offshore wind generation model represents a powerful example of how reductions in project costs and new technologies, such as the installation of floating turbines in deeper waters, can rapidly change an entire market landscape and create competition from unexpected places.

As recently as 2016, most of the sector thought that offshore wind generation would never be price competitive. In the summer of 2017, however, bids for offshore wind in the German market started to prove that it is as competitive and extremely relevant to the future of wind power, and set to play a key role in energy transition.[2]

A 2020 Wood Mackenzie report states:[3] ‘the possibility for offshore wind to become cheaper than coal, gas and nuclear in most major countries no longer seems to be a question of if anymore, but rather of when, while it also forecasts an increase in cumulative offshore wind capacity by more than seven-fold to 2028.

This article provides a brief analysis of the increasingly widespread offshore wind power generating model, shedding light on data and facts to demonstrate the synergy of these projects with the offshore oil and gas exploration and production industry, as well as an insight on the remarkable potential to build offshore wind farms along Brazil’s coastline.

Offshore wind and the oil and gas sector

Although the implementation costs are higher than that of conventional onshore projects, offshore wind generation tends to be highly attractive to investors and developers, since at sea winds are more likely to have a greater velocity and be more perennial, as well as offering a lower level of turbulence, reducing wear and tear on equipment.[4]

Both offshore exploration and production of offshore wind projects involve: the anchoring of heavy equipment to the seabed or stabilisation through fluctuations; the installation of cables or pipelines on the seabed for production outflow; and the need for specialised vessels to carry materials and people to offshore sites. In addition, developers require experience in environmental conservation and licensing relating to offshore activities, as well as the decommissioning of large structures. Accordingly, oil and gas companies can find their experiences, capabilities and resources well placed for offshore wind farm developments.

Scotland Enterprise[5] published a report aimed at the oil and gas sector addressing how technical similarities between exploration and production of offshore wind generation projects could generate new business opportunities. Areas such as project management, cable installation and maintenance, substation structures, turbine foundations, secondary steel structures, installation equipment and installation support services and maintenance and inspection services were pointed out as great examples of synergies.

Another interesting angle is to explore the connection between fossil and renewables as the primary use of offshore wind to power exploration and production installations with high electrical consumption, such as rigs and platforms. This is because electricity from offshore oil and gas platforms is normally supplied by gas turbines located on the platforms themselves. Such operational methods are expensive and still emit significant amounts of greenhouse gases. Considering the growing trend towards carbon pricing among governments, this solution helps to cut back both direct and indirect costs, while playing an important role in neutralising emissions from core exploration and production activity.

There have been case studies which prove the use of this alternative in medium-sized offshore exploration and production projects could generate fuel savings and emission reductions between 25 and 30 per cent,[6] generating significant efficiency immediately after the wind turbines go into operation.

Nevertheless, given the relative novelty of offshore wind developments around the world, the biggest points of uncertainty regarding the implementation of this power generating model are the overall lack of regulatory clarity, stability and adequate incentives. This is mainly because the regulatory regimes of several countries which have started or are considering offshore wind developments are deemed to be insufficient. In an ideal scenario, governments should move quickly to provide a clearer and stable route to market, with an appropriate regulatory framework.

These themes are particularly important to the subject of regulatory licensing, where in many cases existing framework, designed to regulate other activities, such as oil and gas or shipping, has also been applied to offshore wind developments.

However, while the practice of ‘borrowing’ regulation not precisely suited to offshore wind may become complex and uncertain, one must balance the practicalities of full implementation of a specific regulatory regime, which are likely to require the passing of new laws and regulations that can be time-consuming and even just as uncertain to a project developer. Accordingly, oil companies may have an advantage to operate in this less than perfect scenario, getting results more efficiently than other players.

Developing offshore wind projects in Brazil

Brazil is currently among the five most attractive emerging markets for investments in renewable energy. Between 2009 and 2018 it attracted almost US$56bn in new investments for clean energy projects, totalling 28GW of renewable energy into the country’s energy grid.[7]

The government has been taking action to assess the country’s real potential for offshore wind projects, as well as areas for improvement in the current legal and regulatory landscape, to provide better support for new projects and interested investors.

A recent study from the Brazilian Ministry of Mines and Energy (MME) concluded that Brazil’s shallow waters alone (those up to 50m in depth) hold potential for 700GW of offshore wind generation.[8] Brazil’s northeast region holds 68 per cent of this potential for harnessing offshore wind power. The southern and southeast regions also have positive potentials.

Brazil’s first pilot project for an offshore wind farm was launched by its National Oil Company, Petrobras in 2018, and is being developed in collaboration with the Ubarana oil field, in the shallow waters of the Potiguar Basin, Rio Grande do Norte.[9] It is worth noting that the northeast region has a mature offshore oil exploration market, with extensive shallow waters activities in the Potiguar and Sergipe-Alagoas basins.

Five other projects are in the preliminary environmental licensing phase with the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA), among which three show potential for generating 3GW each. These are: Complex Maritime Wind Jangadas, in Ceará; the Maravilha Wind Complex, in Rio de Janeiro; and the Águas Claras Maritime Wind Complex, in Rio Grande do Sul. All are owned by Neoenergia, which is not an exploration and production company. Perhaps this signals opportunities to other such companies, counting on their vast experience in building and managing successful partnerships, to join forces and collaborate with power sector players, such as Neoenergia, as well as developing their own projects.

Specific aspects and challenges

Regulatory licensing

The lack of a defined regulatory framework for offshore wind projects and the consequent lack of legal certainty for project implementation is a major challenge. Securing rights of way and interconnection can require complex permitting and approvals processes that involve multiple stakeholders, including the independent system operator (ONS); the National Agency of Petroleum, Natural Gas and Biofuels (ANP); National Electricity Regulatory Agency (ANEEL); as well as states and municipalities.

Nonetheless, since 2018, plans to regulate specific energy auctions for offshore wind farms have been on the agenda in Congress. The Bill of Law No 232/2017[10] seeks to regulate power auctions for offshore wind and solar farms in Brazil. It was approved in the Senate in February 2019 and is now being discussed in the House of Representatives. The MME has also published a plan of action to tackle the main regulatory issues facing offshore wind projects.[11]

In respect of environmental licensing, four of the offshore wind projects started in Brazil are undergoing a ‘complex’ licensing procedure with IBAMA, which is usually intricate, demanding multiple environmental impact assessments. This type of licensing is identical in multiple aspects to the licensing procedures applicable to offshore exploration and production activities.

Nevertheless, seeking to tackle possible inefficiencies in the licensing, IBAMA has implemented an official regulatory agenda for the development of offshore wind project licensing rules and recently held an international workshop aimed at developing standard terms of reference for environmental assessments.[12]

Infrastructure projects can be hindered or delayed by Brazil’s complex environmental licensing system. Exploration and production companies' prior knowledge on the system’s specifics can optimise implementation and mitigate more significant risks.

While uncertainties remain, holders of exploration and production concession rights to oil fields may find it easier to obtain special authorisations to build and implement wind farms within their own licensed areas, as surface usage rights of exploration and production areas are duly granted to them by law.[13]

Port infrastructure

When it comes to offshore wind facilities, the existence of a port infrastructure to support the construction, assembly and transport to the development of projects is essential. Such infrastructure can be supplied by the existing port facilities originally set up to serve the oil and gas sector.

It is important to note that the Brazilian offshore exploration and production sector is among the most developed in the world[14] and would not have reached this position without the support of relevant port infrastructure. According to Ministry of Infrastructure data,[15] there are 37 organised public ports, 19 of which are administered by the federal government, and 18 with administration delegated to municipalities, states or public consortia.

Furthermore, the federal government has recently launched an initiative to assess fully the necessary improvements and investments to Brazil’s existing ports (mainly those in the northeast region) to better and more cost efficiently serve an offshore wind sector.[16]

Financing

Offshore wind projects are capital intensive. According to the MME,[17] the estimated costs for installing wind farms at sea off Brazil, considering (among other factors) distance, depth and type of foundation, vary between BRL8,700 (approximately US$1,940) and BRL15,800 per kilowatt, based on the international benchmarks. The cost of setting up a wind farm on land is BRL4,000 per kw.

Nonetheless, long-term power purchase agreements (PPAs), as those awarded in Brazilian energy auctions, carbon credits and tax incentives may help lower project risk and increase investor appetite, as verified in other countries with more advanced offshore wind sectors, such as the United States.[18]

On the regulatory perspective, the financing regulation for exploration and production projects in Brazil has recently undergone considerable improvements, now allowing for the proper establishment of reserve-based lending (RBL) operations (ie, a lending secured by the oil reserves on the relevant field). Exploration and production operators could, accordingly, consider structuring financing operations for their conventional projects to be integrated with offshore wind ventures using RBL.

Conclusion

Energy transition without the oil and gas sector would be considerably more difficult and expensive. Regardless of the pathway we take to a greener future, the oil and gas sector should undertake a central role in the advancement of key capital-intensive clean energy technologies, using resources and skills inherent to their core activities.

Brazil already has a robust exploration and production sector, which is set to grow significantly in the next few years. It will be a massive challenge for sector players developing and operating exploration and production projects in the country to stay protected against unpredictable changes that will derive from energy transition. Balancing their portfolio with cleaner energy projects, while integrating their operations, capitalising on synergies and tapping the huge potential in Brazil for renewable energy projects, including offshore wind, would appear the sensible way forward.



Notes

[1] US Energy Information Administration (EIA), ‘International Energy Outlook 2019’, 24 September 2019, available at: www.eia.gov/outlooks/ieo, last accessed 28 February 2020.

[2] David Milborrow, ‘Windeconomics: Putting German bids into perspective’, 3 July 2017, available at: www.windpowermonthly.com/Article/1437296/windeconomics-putting-german-bids-perspective, last accessed 28 February 2020.

[3] Wood Mackenzie, Foresight 20/20: WIND Onshore & Offshore, 6 February 2020, available at: www.woodmac.com/our-expertise/focus/Power--Renewables/wind-foresight-2020/, last accessed 28 February 2020.

[4] Universidade Federal do Ceará, O potencial de geração de energia elétrica de fonte éolica onshore e offshore no Estado do Ceará: uma análise financeira, social e ambiental, 2012.

[5] Scottish Enterprise, ‘Offshore Wind’, Oil and Gas ‘Seize the Opportunity’ Guides, May 2016, available at: www.offshorewindscotland.org.uk/media/1116/sesdi-oil-and-gas-div-guide-offshore-wind.pdf, last accessed 28 February 2020.

[6] Magnus Korpås, Leif Warland, Wei He and John Olav Giæver Tande, ‘A Case-Study on Offshore Wind Power Supply to Oil and Gas Rigs’, Science Direct, 10 August 2012, available at: www.sciencedirect.com/science/Article/pii/S1876610212011228, last accessed 28 February 2020.

[7] ‘Which emerging market is the most attractive for clean energy investment?’, Climatescope 2019, BloombergNEF, available at: http://global-climatescope.org, last accessed 28 February 2020.

[8] Empresa de Pesquisa Energética (EPE), Roadmap – Eólica Offshore, 2020.

[9] Petrobras, Estamos Desenvolvendo o Primeiro Projeto Piloto de Energia Eólica Offshore do Brasil, 2018.

[10] Brazilian Senate Bill No 232/2017, https://www25.senado.leg.br (search 'PLS 232/2017').

[11] Ibid, n8.

[12] Câmara de Comércio e Indústria Brasil-Alemanha, Energia Eólica Offshore e a busca pela regulamentação no Brasil, 2019.

[13] Article 7, Law No 9478/87 (the Petroleum Law).

[14] ‘Top 10 offshore producing countries in 2018’, Offshore Magazine, 2019.

[15] ‘WebPortos’, Ministry of Infrastructure, http://webportos.labtrans.ufsc.br.

[16] Ibid, n8.

[17] Ibid.

[18] Nicolas Lefevre-Marton, Richard Sellschop, Humayun Tai, and Amy Tsui, ‘Building an offshore wind industry along the US East Coast: The role of state collaboration’, Kinsery & Company, June 2019, available at: www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/building-an-offshore-wind-industry-along-the-us-east-coast-the-role-of-state-collaboration, last accessed 28 February 2020.

 

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