Equinor sets out its renewables vision
The Norwegian oil and gas firm gives its New Energy Solutions division significant CMD airtime
Norway’s Equinor fielded the usual line-up of CEO and CFO at its fourth quarter and full year results and capital markets day (CMD) in London on Thursday. But it also put up a third speaker, Pal Eitrheim, executive vice-president, New Energy Solutions, as the firm outlined its ambitions in the renewables sector.
“I think it is a strong signal about the strategic importance and potential of this business for Equinor”, Eitrheim told the audience, noting that “2019 was a game changer” for the business due to winning offtake contracts for the Dogger Bank offshore windfarm in the UK—slated to be the largest such facility globally—and Empire Wind off the coast of New York state.
The firm plans to spend $0.5-1bn pa gross capex in renewables in 2020-21, rising to $2-3bn pa in 2022-23, as it grows its installed renewables capacity, dominated by offshore wind, from 0.5GW currently in production to over 3GW by 2023. Equinor’s electricity production is expected to rise by 30pc pa over the 2019-2026 period, and it has secured acreage to take its capacity to almost 9GW by 2029.
Through strong project management, operational excellence and trading optimisation, it expects its investments in renewables to deliver 6-10pc return on capital. And through portfolio optimisation and project financing, it aims to boost those returns into double figures.
“For us, offshore wind is very much an extension, not a step out, from our traditional business. We have world class technical expertise; we are financially robust; we are competitive on costs; and now we have the scale and the capabilities necessary to create value,” says Eitrheim.
The equity analyst community in the CMD audience seemed appreciably more receptive to Equinor’s message on its renewables strategy this year—in contrast to the previous year’s event where it was almost dismissed as a distraction to the firm delivering higher returns from low-cost oil. Petroleum Economist spoke to Eitrheim on this shift in perception.
“For us, offshore wind is very much an extension, not a step out, from our traditional business" Pal Eitrheim
Do you think that the greater audience receptiveness was because there has been a much more significant ESG awakening within the oil and gas investor community, or is it more to do with having a transformational year for the renewables business in 2019?
Eitrheim: I think it's probably a combination of the two. If you take a step back, I think what we presented today is a very forward-looking industrial plan to develop renewables in a profitable way. We have given some very specific guidance in terms of returns, and in terms of growth and outlook.
It also reflects that 2019 was very much a breakthrough year for us. We managed to put in place a couple of really good building blocks, which are going to keep us busy for the next few years. And then we are going to build the next generation.
So, yes, it is a combination of a growing awareness in the investment community and the fact that we are scaling up significantly in the years to come.
How do you counter the argument from sceptics that, while the growth trajectory is impressive, it is from a low base and the capex commitments still look modest relative to the overall size of Equinor?
Eitrheim: The part of the business that I am responsible for will be the fastest growing part of Equinor. We will grow tenfold to 2026 and we will grow 30 times bigger by 2035. But growth is just one part of it. We have to make sure that these are profitable electrons that we are producing.
While 2019 was very much a year of milestones with wins in auctions, now it is about delivery, execution, capital discipline and actually capturing the value that we have been communicating. So I am not too worried about what people think around this, my concern is to make sure that we are executing our business in accordance with the plans that we have set out, in order to capture that value.
On the subject of value, can you explain a little bit more about what you mean when you talk about the portfolio optimisation and project financing that could push the 6-10pc return on renewables investment higher?
Eitrheim: With these assets, you have to work from the moment you access and win the auction all the way through to the end of the project. [Over that cycle] there are always things to optimise and you do not have the margins to leave any pocket of value unexplored. What we presented today was a mix of what we think we can bring to the table in terms of the levers we can pull as Equinor; our technical and project execution capability; our ability to operate assets to maintain maximum uptime and reduce costs. We can also point to trading and the symbiotic relationship we now have with [power trading specialist] Danske Commodities, which we acquired a couple of years ago.
But there is clearly huge interest out there in terms of acquiring the types of assets that we are talking about. We also see possibilities in project financing—sometimes we might want to do that, sometimes we might not. We might also have partners who are dependent on project financing to be able to participate. Thus, we have a pretty flexible approach to financing.
You talked about becoming an ‘offshore wind major’. Your focus appears to be strongly on production, and perhaps less high-profile than some of your European peers on other energy transition options such as mobility or battery storage sectors. Is that fair?
Eitrheim: One of our main messages today was that we will play to our strengths. We have 50 years of offshore oil and gas experience, and that is what we bring to bear in [the renewables] industry. And we see offshore wind very much as an extension of the capabilities we have. That is the starting point.
Equinor plans to spend $0.5-1bn pa gross capex in renewables in 2020-21, rising to $2-3bn pa in 2022-23
The second thing is that you are going to see different companies take different approaches and that reflects the portfolio and some of the legacies firms have. For instance, we sold out of fuel retail a few years ago, we no longer have gasoline stations in our portfolio. Therefore, retail is not a natural place for us to play. There might be value to be created there as well, but it is probably not for us. We need to position in the value chain where we think we can create value. I think that explains the differences.
Having said that, we are using our ventures arm and are investing in storage and in batteries among other technologies. It is an opportunity to create value but also a good way of putting out a radar to get a read-out on what is happening in these start-ups.