Hywind wind farm concept. Five turbines will be placed off the east coast of Scotland, near Peterhead. They will each be anchored with three suction anchors and linked together to send electricity to shore to power 22,000 households. Source: Statoil.
Seeking Alpha contributor Michael Fitzsimmons has summarized Statoil's (NYSE:STO) Q2 results, which he suggests show that the company is undervalued and operating successfully with oil at $50/bbl or less. With net income of $0.44/share, Q2 dividend of $0.22/share and 8.1% debt ratio reduction, things looks sweet even in these challenging times. However, there is more good news to the Statoil story. Here I have a look at what Statoil is doing about growing a future beyond oil.
It is worth refreshing Statoil's mission that is found upfront on their website:
Our industry is experiencing fundamental challenges. From climate change and geopolitics to the energy markets, we are facing new realities. Some see them as threats. In Statoil, we believe our job is to turn them into opportunities. That's why we're looking for new ways to utilize our expertise in the energy industry, exploring opportunities in new energy as well as driving innovation in oil and gas around the world. We know that the future has to be low carbon. Our ambition is to be the world's most carbon-efficient oil and gas producer, as well as driving innovation in offshore wind. We're a company driven by solving tomorrow's energy challenges, today.
The big oil and gas scene
Statoil is an oil and gas company that not only acknowledges the changes happening in the energy industry, but also one which is leveraging its skills base to make the transition to a low carbon future. I've been critical of other oil and gas majors, such as BP (NYSE:BP) and Exxon Mobil (NYSE:XOM), which talk about the need to transition to a low carbon economy, while expanding their oil and gas businesses, with little indication of becoming part of a low carbon energy future. It is getting to be too late to sit on the sides, indicating that "when the time is right" investment in a low carbon future will become part of the company strategy.
I've written about Total's (NYSE:TOT) substantial investment and intentions in solar exploitation. Shell's (NYSE:RDS.A)(NYSE:RDS.B) CEO Ben Van Beurden is acknowledging that the electrification of transport could happen much sooner than most envisage. His next car, a Mercedes s500e, is touted as an electric car, but it is a hybrid with a small battery (33km range). He isn't ready for a Tesla yet, but he is acknowledging that electrification of transport is happening and that this has consequences for Shell that are probably near term.
Statoil has begun to curtail some investments in fossil fuel projects such as dropping assets in Canadian Oil Sands. Harvesting oil offshore involves a lot of technological knowledge concerning operating in a tough environment. This offshore environment happens to be a fine resource for offshore wind farms and Statoil has been addressing how to exploit its skills in developing wind assets since 2009. It is a significant player in this emerging technology area and floating turbines foreshadow major opportunities that have not been accessible.
Statoil plans to allocate 15-20% of its annual investments towards new energy solutions in 2030. This is a significant financial commitment to the switch that is hard to see among other oil and gas majors other than Total.
Floating turbines, big new business opportunity for offshore wind
The existing fleet of wind turbines in Scotland provided 57% of its electricity needs for January to June 2017. Wind power is already a major contributor to Britain's power needs.
It is also clear that offshore wind is attractive for several reasons, notably its reliability and strength. The cost structure of offshore wind is in significant decline; indeed, recently an offshore wind farm was financed without subsidy. However offshore wind has been limited to turbines that can be anchored and hence they are located in shallow water (less than 50 meters deep). This has limited the placement and quality of the offshore wind locations. Clearly the ability to locate turbines further out to sea and in deep water (up to 1000 meters) would significantly expand the scale of offshore wind opportunities and make them even higher quality assets.
Floating turbines have other valuable attributes. For example, they can be assembled onshore and floated into position. They can also be towed back to port for heavy maintenance operations.
The progression from onshore, to shallow offshore, to deep water, tracks the development of oil industry platforms. The difference between the oil and gas industry and wind is that oil and gas facilities rely mostly on a small number of large platforms, while for offshore wind, there are many smaller platforms, although the scale of the offshore turbines isn't small (3000 tons for steel designs and 12,000 tons for concrete designs).
The actual turbines used in fixed bottom and floating structures are similar. It is early days and there are some technical issues to be resolved before scale up, including development of dynamic electric cabling, mooring and anchoring systems and floating substations. However these are all just technical issues that will be resolved. Cost is the major barrier currently, but dramatic falls in the cost of fixed offshore wind is encouraging and floating technology is expected to follow a fast cost reduction path.
Statoil began thinking about floating turbines in 2001 and in 2009 they set up a 2.3 MW demonstration facility off the coast of Norway to learn about the technology. This period of design optimization led to tripling of the power output of the turbine.
Now Statoil is establishing a 30 MW five turbine wind farm, Hywind, off the east coast of Northern Scotland which will consist of 5 turbines over 4 square kilometers in water from 95-129 meters deep. The turbines are 253 meters tall (with 175 meters above the water and 78 meters below). The average wind speed at the site is 10 meters/sec. This remains a demonstration project although it will provide sufficient power to run 22,000 homes. The turbines have been assembled in Norway and are currently being towed to the Scottish coast.
In this article, the assembly of one of the Hywind turbines onto the floating platform is shown. This was done in port. Power generation will begin later this year. The Hywind project is subsidized under a UK scheme at 160 pounds/MWh (plus wholesale price of electricity) so it isn't a cheap option, but Statoil suggests that projects like this will decrease in price by 40-50% by 2030. This will probably make it cheaper than the Hinkley Point C nuclear facility, which is currently undergoing further cost escalation and completion delays.
Hywind is another step along a path toward building floating offshore facilities with a capacity of 0.5-1.0 GW. Expect this to happen sooner rather than later.
Statoil Energy Ventures
The commitment to leveraging its skills into offshore wind is a major shift, but it isn't all that Statoil is doing to address the changing energy environment. It is also seeking out emerging technologies that have the ability to scale up to major business opportunities for Statoil.
Statoil Energy Ventures is a venture fund established in February 2016 as part of its New Energy Solutions division. With $200 million investment capital and plans to invest $1-20 million/company, this fund is to explore investments in renewable energy and low carbon solutions to complement Statoil's oil and gas portfolio.
Four investments are reported between March and December 2016 :
1) United Wind: United Wind claims to be the only company offering small scale wind turbine leases in the U.S. This business has a similar model to the solar rooftop leasing model and is relevant to rural property owners who wish to access wind power without upfront costs.
2)ChargePoint: ChargePoint, which commenced operations in 2007, claims to have the world's largest and most open electric vehicle charging network, although it seems to be almost entirely a U.S. operation -- sometimes U.S. companies equate the U.S. with the world. Notwithstanding the status of ChargePoint's network and the fact that it doesn't have Tesla as a partner, it does have considerable reach and is partnered with BMW, Cadillac, Chevrolet, Daimler, Energica, Fiat, Hyundai, Nissan, Mercedes-Benz, Smart USA, Toyota and Volkswagen. It claims 38,000 charging spots and 569 Express DC fast locations and to have delivered more than 26 million charges. The company raised $164 million to grow its U.S. operations. Recently with a new round of Series G funding led by Daimler (OTCPK:OTCPK:DMLRY), which has closed at $125 million, early investor Siemen's Energy Management (OTCPK:OTCPK:SIEGY) is helping drive ChargePoint's technology into Europe. The role of Statoil isn't clear as Statoil is not mentioned in the May 2016 press release, which Statoil references concerning its investment; in a recent tweet Statoil also indicated that it has participated in a 2017 funding round. Perhaps Daimler and Siemens are taking bigger roles in growing this company in Europe?
3) Convergent Energy + Power: This company is focused on providing energy storage to utilities and end users to reduce electricity costs, help ensure power quality and stability, and to help solve infrastructure problems. Its markets include the U.S. and Canada. Its projects are MW scale, with the biggest being in Orange County California (35 MW/140 MWh lithium ion battery storage). It implements a wide variety of energy storage systems, mostly lithium ion batteries, but also including advanced lead acid and hybrid zinc batteries and flywheel storage. Statoil sees the investment in energy storage as keeping the company ahead of the curve in the transition to low carbon energy.
5) Oxford PV: This company has leading perovskite solar cell technology, which is rapidly advancing as a major technology for improved solar conversion efficiency (now more than 22%). This technology efficiency combined with low production costs indicates that this could become revolutionary technology for solar PV. The key work of the Oxford PV team is to achieve high efficiency combined with stability to allow 25 year operational life. This is Statoil's first solar PV investment.
While the funds invested are small for a major oil company, each of these investments is highly strategic and could lead to interesting opportunities for Statoil as it builds its low carbon portfolio.
The Norwegian Government is Statoil's major shareholder
With a 67% stake, the Norwegian Government is a major shareholder in Statoil. It is perhaps relevant to remember that the Norwegian Sovereign Fund is a significant supporter of the Paris Climate agreement and the need to exit fossil fuel investment. Norway is also the earliest adopter of BEV and it is entrenched with 42% of new car sales in June being electric in Norway. In 2016, Norway's parliament passed legislation to make the country carbon neutral by 2030 and to ban sales of ICE cars by 2025.
While most of the oil and gas majors see only fossil fuels as their business, Statoil is clearly looking beyond this and I suspect that its major shareholder is helping with a bigger vision of the energy and transport market. The companies that Statoil Ventures is backing (see above), if successful, could become part of a low carbon future and Statoil is well positioned to be the group that takes them there.
Michael Fitzsimmons has laid out the case for Statoil outperformance due to its oil and gas activities for this year and next. Here I've addressed its future opportunities as oil and gas confront challenges with electrification of transport and competition with solar and wind for electricity generation. To date, Statoil's wind power services just 650,000 British households. This is a very small slice of Statoil's impact on 170 million people. However, Statoil is at the beginning of major expansion of offshore wind and well positioned to be a major contributor. It is the leader in floating offshore wind projects. This could become big business quite soon, especially if, as seems likely, the UK nuclear program falters.
In my view, now is the time to look closely at the oil and gas majors as change is coming from many directions and it could be much faster than most analysts predict. It is not a bad thing to be invested with a group that has already started down the path of a low carbon future. Statoil is such a company.
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