Norway’s majority-state-owned oil and gas giant used to be called Statoil, a good name for a good business. Embarrassed by what it had been doing so well, the company has poured vast sums into renewable energy, and some years ago changed its name to Equinor. Equinor?
The former CEO provided this emetic explanation for the first part of the new name:
The Equinor name is divided in two: The first part originates from words such as “equal”, “equality”, and “equilibrium”. This reflects values such as equality and balance. The second part signals a company proud of its Norwegian origins that wants to use this actively in its positioning.
Turn to an issue of the company’s magazine to find this from the CFO:
“We have big ambitions. Equinor is increasing the pace of change to be a leading company in the green transition. By 2030, we will be a leading supplier of energy and low-carbon solutions, a global leader in offshore wind, and a European leader in carbon capture and storage,”
While this diversification is unlikely to create shareholder value or do much for the climate, the company’s management makes the rational “green” case for not shutting down its oil and gas operations: It can use a good portion of its profits to invest in the renewables that will allegedly help blow away the climate crisis/catastrophe/chaos.
Equinor’s solid financial muscle gives us flexibility in financing large renewable developments. That, combined with technology and experience from large and complex energy projects, enables us to undertake large projects and contribute to changing the energy systems.
Well, at one level, that’s rational, at another not so much.
Statoil Equinor would do better to split the company in two, one focused on oil and gas, the other on renewables. Given renewables’ glorious future, and the outperformance and low risk that would come with an inevitable high ESG rating, the spin-off would surely be able to attract the capital it needed, especially if the state retained a pro rata stake in the spin-off (the Norwegian state owns 67 percent of Equinor’s shares). Meanwhile the stand-alone oil and gas company could be run as, well, an oil and gas company, investing or returning capital in accordance with its view of those markets, rather than ploughing some of its earnings (which ultimately belong to its shareholders) into very different businesses with very different rates of return.
But that’s not going to happen, and, in this case the largest shareholder (the state) is just fine with that. Sorry, taxpayers! But the argument is worth remembering when reading about other more straightforwardly private fossil-fuel companies diversifying into renewable energy, at least partly to satisfy ideologically driven shareholders (mainly playing with other people’s money) and various self-appointed and self-important “stakeholders.”
Completely unexpectedly, Equinor’s adventure in diversification has been going through a rough patch.
Equinor . . . saw the loss in its renewables segment double in the second quarter of 2023 as higher project activity impacted cost levels.
The unit recorded an adjusted loss of USD 84 million (EUR 76m), compared to a loss of USD 42 million a year ago, Equinor’s results showed on Wednesday.
At USD 91 million, the net operating loss expanded from USD 42 million a year before when the renewables business recognised investment gains of USD 87 million from the Dogger Bank C wind farm project. Meanwhile, the higher project activity levels in the UK and Asia led to a major increase in operating and administrative expenses and brought the unit’s total operating expenses to USD 95 million, up 66% on the year.
The renewables unit suffered a 72% year-on-year drop in revenues and other income to USD 4 million.
But help is on the way (via Reuters, November 21):
Recent decisions in the United States and Britain to accept higher prices for offshore wind developments are a welcome sign that authorities are adjusting to higher costs in the industry, Equinor’s head [of] renewables said on Tuesday.
“I believe that politics and markets will adjust, and that is also necessary in order to keep up the pace of offshore wind developments,” Paal Eitrheim told Reuters on the sideline of the Norwegian company’s autumn conference in Oslo.
The offshore wind industry has found itself in a perfect storm of rising inflation, interest rate hikes and supply chain bottlenecks, in some cases leading to project cancellations as support schemes failed to adjust.
“Politics and markets.”
Hmmm . . .
The offshore wind industry has very little to do with markets in any real sense but owes almost everything to political or regulatory distortions of the energy market, specifically the imposed replacement of reliable energy sources with one that (until a solution can be found for the intermittency problem — the wind doesn’t always blow) is not only intrinsically unreliable, but will not do much for the climate, and comes with a steep opportunity cost. Moreover, it seems as if the economic viability of some of these projects rested on, among other flawed assumptions, ultra-low interest rates. Who could have thought they might revert somewhat closer to the mean, or that the money-printing of the last decade or so might have inflationary consequences?
Reuters:
Earlier this year, Equinor and partner BP unsuccessfully petitioned for an average 54% increase to previously agreed power sales terms for three New York projects with a combined capacity of 3,300 megawatts (MW).
Since then, a third offshore wind auction in New York cleared at rates above those of Equinor and BP’s current deals, and the state, which aims for 9,000 MW of offshore capacity in 2035, announced a new tender also open to previously awarded projects.
“I think it is encouraging to see that the New York 3 awards have been made on a price level that are closer to the cost level in this industry now,” Eitrheim said, but added Equinor had not decided yet on whether to re-bid projects in the new auction.
Similarly, Britain has adjusted the price for next year’s renewables auction higher by 66%, after failing to attract offshore wind bids in the previous round.
Such adjustments will be painful for consumers, taxpayers or both.
Reuters:
Equinor is considering extensions to existing offshore wind farms in Britain that could qualify for auctions in future, and Eitrheim defended higher prices in the near term after over a decade of cost reductions.
“Although it’s dramatic right now, I think, as we are building this supply chain, we are going to come back to a price level for offshore wind that is competitive for governments, for companies and also consumers.”
We’ll see. After all, pushing fossil fuels out of the market will reduce the extent to which competitive forces are able to do their thing. And, for obvious reasons, solar is never likely to do too well in Britain. Nuclear energy could be used resolve major parts of this puzzle, but that would take years even if the will to go ahead with it is there. That leaves turning to interconnectors to import electricity abroad, assuming that there will be enough to spare after decarbonization there.
Oh yes (via the London Times):
Power cables long enough to reach from the Earth to the Moon 200 times over will need to be built globally by 2040 to hit countries’ climate goals, according to a new analysis.
The International Energy Agency warned that a failure to deliver the approximately 50 million miles of new and replacement electricity grids that will be needed in the next two decades could jeopardise the transition to clean energy.
Investment in power networks would need to more than double to $600 billion a year by 2030 alone to achieve this, the IEA said. It warned that grid constraints were becoming a bottleneck in some areas and called for policymakers and companies to “quickly take action” to address the issue. “We must invest in grids today or face gridlock tomorrow,” Fatih Birol, executive director of the agency, said.
And looking specifically at Britain (via the Daily Telegraph):
National Grid is to spend up to £19bn on new pylons and transmission systems across the countryside as it “rewires the nation” for the net zero era, the company has said.
John Pettigrew, National Grid’s chief executive, said the money would be spent upgrading and expanding the UK’s creaking power transmission system to ensure it is ready for the surge in demand as the country shifts to net zero.
National Grid predicts its wires will carry up to 80pc of the total energy used by UK households by 2050, compared with just 20pc now.
The huge increase will come as gas for heating homes and petrol or diesel for transport will be almost entirely replaced by electricity. . . .
He acknowledged that many people would have their homes and landscapes impacted by new pylons and cables and proposed offering “community benefits” to mollify them.
I suppose a lump of coal would be inappropriate, or worse. The desperate recipients might actually use it for a minute or two’s warmth.