BP/renewables: German breeze wheeze saves face — and capital

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Chief executive Bernard Looney dearly wants to shift BP’s narrative away from hydrocarbons to renewables. That word “dearly” is apt. The UK oil major’s latest deal ranks as the most expensive large wind project ever by one metric.

BP has won an auction to develop 4 gigawatts of offshore wind projects in northern Germany. The headline cost of $1.9bn per gigawatt equates to €6.8bn in total.

Green critics belaboured BP in February when it softened its target for upstream oil output cuts from two-fifths to one quarter. So they should applaud the group for bolstering prospective wind energy capacity to 9.2GW, nearly meeting its 10GW target for 2030.

Penny-pinching investors may do a double take. BP is set to pay 2.5 times the previous record price per gigawatt set in a US auction last year, says Citi. This is incongruous, given that Looney has spoken of allocating less capital to offshore wind tenders.

One justification is that BP and Germany will desperately need “green electrons” in coming decades. BP’s wind power will help supply electric vehicle charging stations and the production of hydrogen for heavy industry. BP alone will require 10GW of renewable power of all kinds for the German market in the 2030s.

BP will pay only a tenth of the cost of its new German licences and nothing else for another seven years. This is a more generous arrangement than in the UK, where annual payments are due to the Crown throughout the development period. Guaranteed German grid connections will help too.

A smallish upfront payment means the deal is more of an option than a commitment. If BP sours on the transaction, it should be able to escape at the cost of a stiff write-off.

The company would have to lock in long-term power sales at around today’s spot price of €93 per MW hour to make the project economic, say Bernstein’s power analysts.

Looney may have gone some way to appeasing both moderate environmentalists and flinty investors. This deal is a clever way to put BP on track to hit green targets without tying up too much capital.