Karl Erik Navestad
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On April 8 this year, the Norwegian Government by the Ministry of Petroleum and Energy (MPE) formally sanctioned the approval of the development of the Hywind Tampen floating offshore wind electrification project on the Norwegian continental shelf (NCS), fuelling prospects for re-energising the Norwegian offshore wind sector. The project, spearheaded by Equinor and partners, with an estimated cost of NOK 4.8 billion, has enjoyed an attractive financing scheme for its development, with the Norwegian Government ultimately carrying the major load of the cost burden through existing financing grants and tax schemes. Floating offshore wind power may yet prove to be a unique opportunity for investors that have confidence in the future of renewable power generation in some of the most consistently windblown waters in relative proximity of continental Europe.
The project is by far the biggest floating offshore wind project in the world, with 11 wind turbines with a capacity of 8MW each, dedicated to and covering an estimated 35 percent of the annual consumption at the Snorre A and B and Gullfaks A, B and C petroleum production platforms. Commissioning and start-up is expected in 2022.
The MPE's sanctioning of the Hywind Tampen project is in the form of approval of an updated plan for development and operation (PDO) dedicated to the wind farm project as submitted by Equinor and partners last year. The PDO approval is granted under the Petroleum Act (1996) and Regulations as the main legal framework for the development and operation.
The development of the project under the upstream petroleum legal framework, the Petroleum Act and the Petroleum Tax Act, has crucial bearings on the financing of the wind farm, most vital being the 78-percent tax depreciation opportunity for upstream oil and gas developments, more on this see below.
The Equinor and partners' project exploits an attractive financing scheme for the development of the project, with the Norwegian Government contributing with a substantial lifting of the costs both upfront and after-tax. The NOK 4.8 billion projected cost is financed upfront through a NOK 2.3 billion grant from the Government's Enova Green Fund and a NOK 566 million grant from the Norwegian offshore industry's NOX-tax Green Fund. The remainder is to be financed by the Snorre and Gullfaks licensees. The 2.3 billion NOK Enova subsidy to Hywind Tampen is the largest single project grant approved by Enova. It is also held to comply with applicable state aid rules by the European Surveillance Authority (ESA).
The project costs incurred will be tax deductible against upstream petroleum income for which the marginal tax rate is 78 percent, cf. the Petroleum Tax Act (1975). Investments are subject to a linear depreciation over 6 years, i.e. 16 2/3 per cent annually. In addition, the basis for special petroleum tax is to be reduced with uplift (an “additional depreciation”) at 5.2 percent annually for four years based on the investment costs incurred for production factors subject to said linear depreciation.
The electrification project is expected to reduce CO2 emissions from the Snorre and Gullfaks installations by an estimated 200 000 tons per annum. Thus the licensees will each year save a corresponding amount that without the electrification would have been payable as carbon tax for upstream petroleum fuel-gas energy consumption, currently at a rate of NOK 491 per tonne CO2. In addition, purchase of CO2 quotas under the EU cap and trade ETS scheme would likely be saved.
Offshore oil and gas production, powered mainly by gas turbines, is the biggest contributor to Norway's greenhouse gas emissions (GGE), contributing roughly a quarter of the national emissions. The Norwegian Government wishes to honour its international commitments to reduce GGE. Thus, the Norwegian Parliament (Storting) in 2014 adopted a firm policy for “full clean energy electrification” of oil and gas production for a significant part of the NCS (the Utsira area).
A number of oil and gas installations on the NCS are already powered from shore through subsea transmission cables. The Johan Sverdrup field is one such example, with CO2 emissions of 0.67 kg per barrel, compared to the NCS average of 9 kg and a global average of 18 kg. The Hywind Tampen project will be the first such electrification supplied from a floating offshore wind farm, but similar technology has been in operation since 2017 at the Hywind Scotland wind farm on the UKCS.
Equinor and several other oil companies in Norway have recently declared a commitment to a reduction of GGE. In January 2020, Equinor announced ambitions to reduce absolute greenhouse gas emissions from its operated offshore fields and onshore plants in Norway by 40 per cent by 2030, 70 per cent by 2040 and towards near 100 per cent by 2050. Equinor claims that the ambition can be realised through electrification projects, energy efficiency measures and new value chains such as carbon capture and storage and hydrogen production.
The recently appointed Minister of Petroleum and Energy, Ms Tina Bru describes Hywind Tampen as a big step for the Norwegian offshore wind industry, touting it is as "a start for a new era for Norwegian industry".
The Norwegian offshore contractors are hoping that the Hywind Tampen development may be a catalyst for further floating wind projects on the NCS, thus reversing the current negative trend. Notably, Equinor and partners have already awarded Hywind Tampen contracts worth NOK 3.3 billion to Norwegian and international contractors.
However, it is fair to note that even though electrification of oil and gas production provides a window of opportunity for floating offshore wind in Norway, ambitions of the wind power sector reach much further.
Linking up additional floating wind farms placed near other petroleum production platforms and gas compression installations by high-voltage sub-sea cables may be a next step. Further along, perhaps stretching power cables from such sub-sea networks on to the UK or Danish CS or all the way to foreign shores, enabling exports of wind power to the UK or continental Europe. Such big moves, as touted by the industry, would depend on the Government adopting effective enabling policies in order to accelerate the scaling up of floating offshore wind. This probably requires more comprehensive sector regulation than that for which the Government has so far indicated support.
But the stage seems set for the typical Norwegian public-private cooperative effort in finding the crucial enablers for a sustainable new export industry for Norway based on floating offshore wind power as the oil and gas era gradually recedes. When these enablers fall into place, allowing floating offshore wind to take off, much funding will be required. This may be a very interesting opportunity for foreign investors and PE funds interested in renewable electricity generation on the high seas.