Lost in Translation: Transitioning into the Renewables Space

Lost in Translation: Transitioning into the Renewables Space

Traditional oil and gas companies are transitioning into the renewables space. One might presume they would be particularly well suited for offshore wind development after a half century or more spent developing offshore oil and gas. Indeed, there are a number of ways those decades of oil and gas experience translate into useful skills and knowledge for the renewable energy industry. But while the physical structures providing the foundation of offshore wind and oil and gas development may be quite similar, these traditional energy companies are finding that, commercially, oil and gas experience does not so easily translate to all facets of offshore wind. Unique challenges and a steep learning curve remain in some areas, particularly on the Outer Continental Shelf (OCS), where wind development is still in its infancy.

Old Dogs, New Tricks?

These decades of oil and gas experience provide useful skills and knowledge that can be transferred to renewable energy development, serving to flatten (somewhat) the steep learning curve experienced by most new entrants. Supply chain management skills and complex offshore construction project experience provide a foundation of processes and controls that can be leveraged to improve efficiency in offshore wind and other renewables projects. Indeed, the existing supply chain for oil and gas construction, operations and maintenance is actively pursuing offshore wind work. Respected industry associations that support oil and gas operations are leveraging that experience to facilitate the foray into wind energy development, as efforts are underway to create safety management systems for offshore wind applications akin to the Safety and Environmental Management Systems for offshore oil and gas operations.[1]

Offshore oil and gas faces the same regulators as offshore wind, with the Bureau of Ocean Energy Management (BOEM) managing leases, rights-of-way and easements for both under regulations that are substantially similar, although developed decades apart.[2] Irrespective of the industry, leaseholders must qualify with BOEM Adjudication to hold an interest on the OCS. Likewise, lessees in both oil and gas and renewables must meet financial assurance requirements for owning/operating facilities and decommissioning upon lease termination. Operationally, oil spill response plans are required from companies in both the exploration and production (E&P) and wind spaces. Surprisingly, however, the Bureau of Safety and Environmental Enforcement (BSEE), which is responsible for ensuring safety and environmental compliance on the OCS, does not currently fulfill that role for renewables. BOEM does. BSEE anticipates that BOEM will transfer certain safety and environmental compliance regulations in preparation for large-scale wind energy development on the OCS,[3] but precisely when such a transfer may occur is unknown. While BSEE’s practices and standards (developed primarily under 30 C.F.R. Part 250) for oil and gas are well established, they are still being developed for renewables. Although there are similarities, some differences arise between the oil and gas and wind industries in the federal regulatory space.

Substantial differences arise in the boardroom as well. Renewable energy operates under a different business model, presenting different hurdles than oil and gas. Revenue generation models based on geological finds and E&P are not transferable commercial models for projecting revenue based on a long-term offtake power purchase agreement or similar nuanced renewables contracts. The economics and multiples used to determine stock value are not identical and therefore not immediately/easily transferable. The economic differences affect the supply chain developed in oil and gas. Some service companies have encountered these challenges firsthand, experiencing significant deterioration in margins when trying to manage the transition to servicing renewable energy products.[4]

The oil and gas industry has experience dealing with the complex interplay of laws applicable offshore, including the general maritime law, the Jones Act, and the Outer Continental Shelf Lands Act (OCSLA). While interpretations of the Jones Act in oil and gas operations will provide guidance to offshore wind development, the differing installation and construction methodologies in wind has and will create the need for further clarity from the Customs and Border Protection. The industry and its standard contract terms developed around the dictates of those statutes and the risk inherent in oil and gas. While the knowledge of these complex laws is a valuable asset to bring into offshore wind, expectations of typical oil and gas terms should be tempered. Typically, oil and gas operators elect general maritime law to govern their contracts with service companies and impose a knock-for-knock indemnity scheme.

Wind developers, largely European companies with a different view on contractual risk allocation, most often do not.[5] Moreover, as most OCS wind development to date has occurred in regions without offshore oil and gas operations, navigating adjacent state law issues applied under the OCSLA, regardless of the parties’ choice of law, can quickly place developers and contractors in uncharted waters. Operators and contractors serving the Gulf of Mexico are skilled at navigating the enforceability of indemnities and work-arounds allowed by relevant state laws, but the Louisiana and Texas experience is not the norm. In fact, most states outside the Gulf region, where the lion’s share of offshore wind development is occurring, have laws rendering knock-for-knock indemnity unenforceable.

In the wind space, large component manufacturers and OEMs have considerable leverage due to scarcity of supply and can dictate terms in ways unfamiliar to oil and gas. Some are even insisting that contracts be governed by the law of England and Wales, with arbitration in London. This is largely due to familiarity with the English system and concern about the litigious nature of the U.S. market. Granted, this may change over time as the OEMs establish relationships in the U.S. and gain experience that allows them to quantify and manage risk. But it will certainly take time to get there.

For those and many other reasons, not all oil and gas majors see offshore wind as the first obvious step to net zero. Other carbon management steps in the energy transition may be closer to the traditional oil and gas skill set and knowledge, such as carbon capture and sequestration and green hydrogen as a fuel source. Nevertheless, the push for domestic offshore wind development continues, in part fueled by the Biden administration’s stated goal of 30 gigawatts of power from offshore wind by the year 2030 and the recent incentives and credit passed in the Inflation Reduction Act. Capitalizing on offshore oil and gas experience may be the best hope for accomplishing this lofty goal.

While the transition to renewables is well underway, it will likely occur over the course of several decades given the challenges of launching this nascent industry – and fossil fuels will play a crucial role in making the transition possible.[6] The dual challenges of supplying the world with affordable energy sources and reducing the carbon footprint of the energy supply warrant an “all of the above” strategy, with companies choosing initiatives that play to their strengths and core competencies.

Sources

[1] American Petroleum Institute, “API and Offshore Operators Committee to Develop Standards for Offshore Wind Energy,” September 14, 2022, available at https://www.api.org/news-policy-and-issues/news/2022/09/14/api-and-ooc-to-develop-offshore-wind-standards.

[2] Oil and gas leasing and bonding requirements on the OCS are regulated by 30 C.F.R. Part 556, while regulations governing operations supporting production and transmission of renewable energy are governed by 30 C.F.R. Part 585. This renewable energy program includes offshore wind, ocean wave energy, and ocean current energy according to the BOEM Fact Sheet for the Wind Energy Commercial Leasing Process, revised May 2021, available at https://www.boem.gov/sites/default/files/documents/about-boem/Wind-Energy-Comm-Leasing-Process-FS-01242017Text-052121Branding.pdf.

[3] BSEE Renewable Energy Fact Sheet, January 2022, available at https://www.bsee.gov/sites/bsee.gov/files/bsee-fact-sheet-renewable-energy.pdf.

[4] S. Jewkes, “Italy’s Saipem to rethink green drive after profit warning, sources say,” Reuters, February 16, 2022, available at https://www.reuters.com/business/sustainable-business/italys-saipem-rethink-green-drive-after-profit-warning-sources-say-2022-02-16/.

[5] C. Muller and J. Amy, “Not Always a Breeze: Considerations in Contracting for Offshore Wind Projects,” Jones Walker, October 2020, available at https://sites-communications.joneswalker.com/36/1613/landing-pages/not-always-a-breeze–considerations-in-contracting-for-offshore-wind-projects—lp.asp.

[6] R. Khandelwal, “These 2 Oil Companies Are Investing Heavily in Renewable Energy,” The Motley Fool, June 28, 2022, available at https://www.fool.com/investing/2022/06/28/these-2-oil-companies-are-investing-heavily-in-ren/.

Author profile
Co-chair - Jones Walker LLP

Cindy M. Muller is co-chair of the offshore wind initiative at Jones Walker LLP in Houston, Texas.

Author profile
Jones Walker

Addie L. Danos is a partner on the Energy, Environmental & Natural Resources Industry Team at Jones Walker in New Orleans, Louisiana.

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