As sustainability takes on a bigger momentum, companies previously plugged into the oil and gas markets have pivoted, literally hoping to catch some wind as a new growth area

Since the mid-2014 crash in crude oil prices, many Singapore-listed offshore and marine (O&M) companies that provide services to the oil and gas industry have hit rock bottom. Some have been taken over by other companies, while others have been placed under judicial management. Now, some of the survivors are pivoting towards the wind energy sector and are looking for more opportunities there.

As part of its Vision 2030, Keppel Corporation (Keppel Corp) is actively pursuing offshore wind projects through its wholly owned subsidiary Keppel Offshore & Marine (Keppel O&M). Last year, Keppel O&M secured a $600 million contract to build a wind turbine installation vessel (WTIV) for Dominion Energy. The WTIV is scheduled for delivery in 2023 and will be available for charter hire.

Keppel also has exposure to a 42 MW wind park called MET Black Sea Wind Parks in Bulgaria. The company’s wholly owned subsidiary Keppel Infrastructure had acquired a 20% stake in MET Holding (MET Group) in 2019. MET Group is an integrated energy company headquartered in Switzerland with operations across Central and Eastern Europe regions.

Sembcorp Marine (Sembmarine) — which had ceased to be the O&M arm of Sembcorp Industries (Sembcorp) last year — has been building ships, equipment and platforms for wind farms over the past few years. For instance, the company had built offshore wind farm jacket foundations for Ørsted’s Hornsea 2 wind farm in the UK North Sea. It is currently building two substation topsides for the Hornsea 2 wind farm.

Last July, the company and its consortium partner GE Grid Solutions were selected by RWE Renewables as its “preferred supplier” for its Sofia Offshore Wind Farm. Sembmarine will design, construct, install and commission the wind farm’s high voltage direct current electrical transmission system. The company has also commenced basic design work for a WTIV for one of its clients.

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Sembcorp — though it no longer has exposure to offshore wind via Sembmarine — has been building and operating onshore wind farms in India over the past few years. The company had fully commissioned its SECI 2 and SECI 3 wind projects last year, bringing its total Indian wind capacity to 1,694 MW. Including SECI 1, the company became the first independent power producer to deliver on its projects and commission full capacity from the first three wind tenders there.

Sembcorp also operates a 725 MW wind farm in China through its 49% joint venture company Guohua AES (Huanghua) Wind Power. The wind farm is located in Huanghua, which is in the Bohai Gulf coastal region of China’s Hebei province.

The small-cap players, too, are having their slice of the action. Kim Heng, previously known as Kim Heng Offshore & Marine, had provided submarine cable installation works for an offshore wind farm project in Taiwan last year. Its wholly owned subsidiary Mazu Land & Marine Works (MLM) was awarded the contract to install horizontal directional drilling (HDD) conduits.

Kim Heng had also provided undisclosed services to several offshore wind farms in Taiwan via Thaitan International. The latter is a 50:50 joint venture (JV) company established with Thailand-based Thaitan Drilling in October last year. Apart from servicing offshore wind projects in the region, Thaitan International also aims to conduct the installation of marine construction projects.

That aside, Marco Polo Marine — which had successfully undergone a restructuring exercise — had secured offshore support vessel (OSV) contracts for wind farm projects in Taiwan last year. The company says about 20% of its currently utilised OSVs are working on wind farm projects, according to its March corporate update.

At Penguin International, the company has been building crew transfer vessels for offshore wind farms since 2018. The company had delivered its first wind farm support vessel to a Taiwanese operator in 2019. Penguin International had also delivered a liveaboard service accommodation and transfer vessel (SATV) to a Taiwanese client. The SATV — unlike traditional crew transfer vessels — is designed to allow wind farm technicians to live comfortably aboard while shuttling daily to the wind turbines.

Teras Offshore, a subsidiary of Ezion Holdings, last December announced a US$83.4 million ($111.1 million) contract from Foxwell Energy Corp to transport and install 31 9.5 megawatt (MW) offshore wind turbines. Foxwel, linked to renewable energy firm Shinfox Corp, won a US$2.11 billion tender from government-linked Taiwan Power Co to develop the second phase of its offshore wind farm.

However, shareholders of the troubled offshore services provider hoping for some reprieve will have their patience tested. The contract, to last one year, is to commence in September 2024, and thus not going to have a material impact on the group’s earnings per share or net tangible assets for the financial year ending Dec 31 last year.

Redeploying assets

The diversification by O&M companies into the wind energy industry is understandable. After seven years of low crude oil prices, the oil and oil-related industries have yet to embark on a strong, sustainable recovery.

Notably, oil majors are no longer making substantial investments into exploration and production projects. The demand for oil rigs has fallen and the supply of OSVs has remained a glut. As a result, the rig day rates and charter rates have stayed low. Even after the exit of many O&M companies, those that have survived have to compete for a dwindling pie of contracts.

The decarbonisation trend, which has gathered pace in recent years, has only made things worse. Under the Paris Agreement, governments are aiming to keep temperature rise this century to “well below” 2 degree Celsius above pre-industrial levels. Pressure from sustainability-conscious stakeholders has led fund managers to stay away and/or reduce their exposure to fossil fuel assets.

Kim Heng’s CEO and executive chairman Thomas Tan says the company cannot afford to ignore the decarbonisation trend, especially given the prolonged oil downturn. “When oil is down, you just have to look for another sector to continue the business. So that is why we went into [offshore wind],” he tells The Edge Singapore in an interview.

The same can be said of other O&M companies. Marco Polo reckons the renewable sector presents huge opportunities as countries and organisations increasingly turn to green energy sources. Citing an estimate by the International Energy Agency (IEA), the company says the full lifetime costs of an offshore wind project including construction has significant synergies with the offshore oil and gas sectors.

“The group believes it is able to tap the [sustainability] sector to diversify and add another revenue stream, in particular from offshore wind farms,” Marco Polo says in its March corporate update.

Fortunately, O&M companies pivoting towards the offshore wind segment do not necessarily have to acquire new skill sets as they are able to leverage most of their existing skill sets. This, however, varies from company to company. Tan notes that many O&M contractors are able to redeploy their assets into the offshore wind segment.

In the case of Kim Heng, Tan believes the skills required for offshore wind are largely the same, except for “some changes” that require “some reskilling”. “But [otherwise] we’re able to adjust very quickly because we have deep understanding and experience in the offshore space,” he says.

The obvious change is the company’s name, though. At its extra general meeting on April 23, the company garnered unanimous approval from shareholders to drop ‘Offshore & Marine’ from its name. Tan says the change is to reflect the company’s expansion of its business segments beyond the O&M industry, in particular the wind offshore segment.

Accelerating growth

As O&M companies pivot towards the wind energy sector, the accelerating growth in this space in terms of global capacity should bode well for them. Wind energy was the second-largest driver of the expansion in the global renewable energy capacity last year, according to the International Renewable Energy Agency (IRENA).

Wind capacity almost doubled to 111 GW in 2020 compared to 58 GW in 2019, according to IRENA. China added 72 GW of new capacity, followed by the US with 14 GW. Ten other countries increased wind capacity by more than 1 GW last year. Offshore wind increased to reach around 5% of total wind capacity in 2020.

More wind capacity is likely to be added ahead. On March 31, US President Joe Biden proposed a massive US$2 trillion infrastructure plan to put the country on a path to net-zero carbon emissions by 2050. This included a proposal to invest US$35 billion in research and development for climate change mitigation projects and job creations, such as for offshore wind.

The Global Wind Energy Council (GWEC) has forecast that over 469 GW of new onshore and offshore wind capacity will be added in the next five years. This is nearly 94 GW of new installations annually until 2025, based on present policies and pipelines, it says.

“We hope and expect that governments will significantly increase their ambitions and targets following COP26, and for that reason we are upwardly revising our forecasts for the GWR2022,” Feng Zhao, head of strategy and market intelligence of GWEC, writes in the Global Wind Report 2021.

Offshore wind is expected to grow faster than onshore wind, only because the former has a lower base. GWEC has forecast offshore wind to grow at a compounded annual rate of 31.5% over the next five years. The total installations are likely to amount to 70 GW by 2025 from 6.1 GW last year, it says. This will bring offshore wind’s market share in global new installations to 21% by 2025 from 6.5% today, it adds.

On the other hand, GWEC has forecast onshore wind to grow at a compounded annual rate of 0.3% over the same period. In total, 399 GW is likely to be built from 2021 to 2025.

“Onshore is [a] mature market, offshore is [an] emerging sector,” Wood Mackenzie principal analyst Robert Liew tells The Edge Singapore.

As exciting as the growth for wind energy is, these opportunities will be constrained by the challenges unique to harvesting wind energy.

Like solar energy, harvesting wind energy is ideal only in certain locations around the world. Determining such locations will require a wind power density map. Offshore locations typically have more wind compared to onshore locations, Rystad Energy’s vice president of renewable energy Vegard Vollset tells The Edge Singapore.

Even then, wind patterns may change. For instance, Sembcorp notes that contribution from China wind assets was lower due to lower wind resources in Huanghua. Contribution from its India renewables arm was also lower due to poor wind resource, the company adds.

Closeness to demand is also a crucial element, Vollset says. For example, strong wind density may be located off the Western coast of Africa. But if there is no strong demand for energy in that region, the wind farm may not be commercially viable, he says.

Infrastructure is another crucial element. For offshore wind, the further the floating wind farm is from the substation, the more costly it is to transmit power, he explains. For onshore wind, noise and aesthetics pollution have caused community backlash. “People don’t want them in their area,” says Vollset.

Bringing these factors together, there may not be as many locations that are ideal for harvesting wind energy. That also means the number of jobs available to O&M companies may not be abundant as compared to that for oil assets, what more the competition.

‘Decent’ and ‘comfortable’ margins

Nevertheless, O&M companies are optimistic. Marco Polo says offshore wind farms are extremely popular in the region. The company sees several opportunities for the construction and installation of such infrastructure in countries such as Taiwan, South Korea, Japan and Vietnam.

“We infer that Sembmarine’s competition for roles on projects such as the Sofia Offshore Wind Farm was less intense than what it typically faces for newbuild drilling rigs and production platforms,” writes UBS analyst Cheryl Lee in her May 12 note following a call hosted by the company for investors.

While Kim Heng’s Tan acknowledges that many O&M contractors are redeploying their assets to the offshore wind segment, he does not think it is overcrowded as barriers to entry are getting higher.

Cabotage laws of respective countries also prevent foreign companies from entering the market easily. Getting around that requires finding a local partner, which Kim Heng fortunately was able to do so.

Apart from Taiwan, Tan also says the company is bidding for contracts in Vietnam, South Korea and Japan. “So, we will have a similar structure of looking for partnership to expand our capabilities.”

Keppel says it has a wide range of international customers. “Right now, in the yard, we have a substation for Taiwan, we have a HVDC (high voltage direct current) platform for Germany, and the team is working hard for green energy solutions in different parts of the world,” Keppel O&M CEO Chris Ong says at Keppel’s 1FY2021 business update briefing on April 22.

As for Sembcorp, the company reckons that as economies move towards urbanisation, electrification and decarbonisation, the demand for renewable energy, including offshore wind projects, will only increase. “Currently, we still see a lot of onshore wind opportunities that we can pursue. We are also keeping an eye on offshore wind for the right opportunity to present itself,” Sembcorp group president and CEO Wong Kim Yin tells The Edge Singapore.

Still, how has diversification into the wind energy industry translated to the financial performance of O&M companies?

Things have not been entirely smooth sailing for Sembcorp thus far. In 2019, the company said it had reviewed the economics of two of the wind power projects under development in India and found that they were impacted by the “changes in the renewables market dynamics”.

As a result, the value-in-use of the related development costs was estimated to be $0 as at Dec 31, 2019. Accordingly, the company was forced to make an impairment loss of $6 million in cost of sales for FY2019 ended Dec 31.

Other companies involved in this market are seemingly more upbeat. Kim Heng’s Tan says the wind offshore projects have contributed about 30% of the company’s revenue for FY2020 ended Dec 31. The margins for wind offshore projects have been “decent”, he says.

Keppel O&M’s Ong also declines to reveal the margins, except to say that they are “comfortable”. “We are quite firm with the cost. We would only take on projects that add value for us at the end of the day,” he adds.