Continued growth for U.S. onshore wind energy projects

Executing on a strategic decision to focus on the U.S. onshore wind energy market, BP has exiting from other countries.  It has just sold 100 MW of wind energy capacity in India to Green Infra Limited, an independent power producer backed by India’s infrastructure-focused private equity group, IDFC.

BP’s decision mirrors those of Shell and other investors who have exited from Asia and Europe to focus on the U.S. onshore wind energy market.  Most European markets are saturated or lack competitive incentives.  In comparison, the U.S. has vast tracts of unexploited wind energy potential with excellent Renewable Portfolio Standard-driven incentives.  As a result, one can expect continued growth of the U.S. onshore wind energy market and slower development of global offshore wind energy projects.

Offshore wind will, in principle, leverage the project engineering and execution talents of the oil majors but is fraught with high cost, regulatory uncertainty, and technological complexity.  Offshore wind costs anywhere from two to three times the cost of onshore wind.  Regulatory and renewable certification policies for offshore wind are currently undefined.  Finally, no single technology platform has evolved as an industry leader for massive adoption — a strategy oil majors have found successful in their wind investments.

Sensing a long-term opportunity in this flux, GE has purchased ScanWind, a Norwegian wind turbine company.

BP’s Tiber underscores difficulty of finding oil

Last week, BP announced a major oil discovery — Tiber — in the Gulf of Mexico.  This discovery strengthens BP’s leadership in the Gulf of Mexico where it already produces more than 400,000 barrels per day and operates two of the largest fields, Atlantis and Thunderhorse.  BP has exceeded its reserve replacement ratio by 100% for the past 15 years and Tiber will certainly help it continue the trend.

Another winner is the Gulf of Mexico.  Tiber strengthen’s the region, which produces a quarter of U.S. oil production and 15% of the nation’s natural gas output.  Lower tax rates and government take, political stability, easy access to talent, and improving technology have enabled the region to go from being perceived as a “dead sea” to the hotbed of exploration and production activity.

Pending appraisal, Tiber is anticipated to hold at least 3 billion barrels of oil.  Even if only 500 million are recoverable with existing technology, it is a big find given that new large oil fields have become increasingly infrequent and difficult.  For example, the annual worldwide growth in proven reserves was 34 billion barrels in the 1980s but fell to 19 billion barrels this decade.

That finding oil these days is increasingly difficult (and, therefore, expensive) is also reflected in this discovery.  Tiber was found by drilling a well six miles deep (likely the industry’s deepest) and is located in the Gulf’s lower tertiary where drilling a well costs about $200 million.