The great expectations placed on offshore wind power to contribute to the UK’s energy security and net zero ambitions in the short-medium term is admirable – but the scale is unrealistic today. Many practical and regulatory challenges remain to be solved, but a skeletal supply chain created by years of archaic bottom-dollar procurement strategies is now laid bare. The system has failed the industry. New contracting models are desperately needed to significantly reduce costs through better contract design – a concept that is already attracting the attention of key stakeholders.
The offshore energy supply chain has suffered unacceptably high losses due to the offloading of risk from utility developers and their financiers onto contractors eager to keep their people, ships, and equipment in work. This is no longer sustainable, not least given the degree to which the market supply and demand equation has changed in the last 12 months.
Rising demand in wind and a strong recovery in the oil & gas market has left the industry well short of capacity - capacity which is unlikely to be expanded until contractors can see the reasonable likelihood of normal investment returns. The investment in a high-end heavy construction vessel today can be upwards of $1bn, and according to Clarksons, the world’s largest ship broker, and $25bn in new vessels is needed by 2028. This shows the scale of the problem.
Projects are at risk due to cost inflation – the harbingers can be seen in the price of steel, copper, rare earths, fuel, and skilled labour
Future projects are clearly at risk due to cost inflation – the harbingers can already be seen in the price of steel, copper, rare earth elements, fuel, and skilled labour. We must look ahead to mitigate the aggregation of multiple layers of inflation, risk premium, and cost contingencies. But this can only be achieved by a new project model to actually cut costs by managing the allocation of risk and performance expectations in a smart and intelligent way.
This situation is not exactly new, and solutions are readily available. The offshore oil & gas indusgtry’s CRINE (cost reduction in the new era) initiative in the mid-1990s set out to cut 20-30% of capital expenditure budgets for field developments at a time of low oil price, an onerous industrial cost base, and high interest rates. It worked very successfully in getting projects off the drawing board and into production. There is no reason why this approach won’t work in offshore wind.
The LOWIC (leading offshore wind industry competitiveness) programme is based on the CRINE model, targeting fully transparent collaboration between developers and contractors to create serious cost saving synergies in project design, specifications, and schedules – and allocating risk to the party best able to manage it and take responsibility for it. This can create the transparency and motivation to de-risk schedules and budgets where all parties will share in the potential upside of successful projects that are delivered ahead of schedule and below budget.
Today’s inflection point of supply chain shortages will drive the offshore wind industry to experiment with new contracting arrangements. The old model is not working, nor fit for purpose. Get it right and we have a successful and sustainable industry, get it wrong and we certainly won’t.
· Allen Leatt is CEO of the International Marine Contractors Association