The latest lease auction in the Gulf of Mexico comes at an interesting moment for the industry when dedicated offshore wind development companies and even their oil & gas focused counterparts have been pulling out of project commitments due to inflationary pressures on CapEx costs, as well as a perceived lack of profitability due to low power purchase contract prices.
With oil prices continuing to rise again and profitability from offshore wind looking limited at the moment, this could indicate that oil & gas companies may still participate in the offshore lease auction in the Gulf of Mexico, but not drive the outcome of the auction with their deep pockets and desire to own as much of the sea as they can.
The pure-play offshore wind developers have a chance to win in the Gulf of Mexico auctions if the oil & gas companies decide to largely sit out or restrain themselves from influencing the prices.
This drive to ensure profitability before undertaking the project build-out may provide an opportunity for the pure-play offshore wind developers to win at least one of the three lease areas on offer in the first round of the Gulf of Mexico tender. The oil & gas companies have been keenly interested in many of the offshore wind lease rights in the US, and they have had success in the previously held Northeast, California and the Carolina Long Bay auctions.
Signals from Germany
The recent results of the German offshore wind tenders for the N-11.1, N-12.1, N-12.2 and O-2.2 sites has once again renewed the global debate about the impact that oil & gas companies can have on offshore wind lease auctions. Their domination is thanks to an appetite for lease rights at prices which still pale in comparison to what was paid for oil and gas rights on an inflation adjusted basis in many cases.
While the tender rules in Germany have created an obligation to ensure the projects are online by 2030, the same type of bidding rules have not been universally adopted in all markets where lease rights are tendered. In the US, leaseholders may be able to sit on their rights for years with little progress on advancing projects, while they claim to lack sufficient environmental permitting approvals or lack of suitable power offtake.
This would indicate that many lease auctions in the US have been premature because they have lacked sufficient consideration for commercial factors such as electricity demand, port infrastructure, maturity of the localised supply chain, as well as grid connection to facilitate offtake.
While the California lease auctions were seen as underperforming the results of the tender for the New York Bight, or other previous auctions in the US Northeast, the prices underscored the reality of the market. California lease auction prices were commensurate with the available wind resource, the complexity of deploying floating offshore wind, the market demand for electricity, the limited commitments to upgrade port infrastructure, as well as the currently non-existent plan for grid infrastructure to support power offtake in California or the cost recovery mechanism for building it.
California’s lease auctions resulted in a range of cost per developable acre between $1,624 and $2,518. By comparison, lease auctions in the New York Bight were in excess of $8,000 per developable acre. Now that these price thresholds have been established, it is unlikely that lease rights will go for less than what was seen in California or the Carolina Long Bay.
Additionally, the Gulf Region has lower average wind speeds and softer soil conditions which are likely to result in bids towards the lower end of the price range which was previously seen. While the electrical infrastructure is available for the power offtake, the market demand in ERCOT and the Southwest Power Pool (SPP) makes for a challenging market environment to secure merchant, utility or corporate power offtake deals when compared to an over-abundance of less expensive onshore wind and solar.
As for the Gulf of Mexico’s first round of lease auctions, price expectations are for ~$2,500-3,000 per acre if the oil & gas companies are not going to get too heavily involved and drive the auction prices through the roof. That’s approximately $754m-905m in additional revenue to the US government. IntelStor expects prices could go as high as $4,000 per acre if the oil & gas companies do decide these lease rights are important to them and want to shut out the pure-play offshore wind development companies.
The Gulf of Mexico has some different market dynamics at play and should make for one of the more compelling auctions to watch, given the current state of all players involved.
Philip Totaro is founder and CEO of renewables market intelligence consultancy IntelStor