Published on 27 July 2022
The International Marine Contractors’ (IMCA’s) CEO Allen Leatt explores the role marine contracting plays in the global offshore wind market and reveals a solution to a crucial challenge.
Global expenditure in offshore wind is estimated to be $44 billion1 in 2022 growing to $84 billion1 in 2026..This creates considerable opportunities for our industry, but the market’s sustainability is threatened by the financial health of the supply chain and inflationary cost pressures.
IMCA’s mission is to improve marine contracting performance. We exist for the benefit of our members by promoting areas of common interest – health, safety, quality, environment, and technical standards. As OSJ readers know, our large and well-respected library of technical and operating best practices is developed with our members for the benefit of the industry.
IMCA’s members have been heavily engaged in building pretty much all the major offshore wind farms installed in the western world. However, the sector is facing challenges which risk market sustainability, namely: poor economics created by uncovered contract risks and cost inflation. Put simply, the supply chain is largely unprofitable today.
The interchange for experienced contractors in switching part of their portfolio from oil and gas projects to offshore wind (OSW) projects has been straightforward thanks to commonality of engineering skill sets and construction asset sets. However, the current operational and financial risk distribution is one-sided, and endangers the sustainability of the whole OSW market.
As the global market continues to grow and project scopes become much larger, the demands on the supply chain will be significant in terms of assets, resources, and capital. The industry needs new and larger equipment, new ports and harbour facilities, and large numbers of qualified, competent people. We already see inflationary pressures on costs – a further challenge on investment returns.
The market forecasts of potential global OSW projects look considerable. Unlike the internationally traded oil and gas market, these are in national markets for domestic electricity supply,. The supply chain can be expected to trade in countries and markets offering the best risk adjusted returns.
The market structure in OSW largely mirrors oil and gas developments. The offshore construction phase is relatively short, but the ongoing operation and maintenance (O&M) of offshore facilities lasts for decades – even more so with OSW, as there is no depleting wind reservoir. The upside in long-term job creation for offshore workers and local economic value added is far greater in the O&M market and should be an obvious area of focus for countries and states.
The offshore construction market is no stranger to the twin challenges of risk allocation and cost inflation. These have been addressed during many cycles in oil price over the last 50 years. Even during the most challenging of times, many projects have been successfully taken off the drawing board by developers and contractors working collaboratively to agree new frameworks of contractual terms, risk allocation, and pragmatic specifications that are safe and effective.
The same principles should apply in OSW. Our Legal, Contracts, Insurance & Compliance Committee, having developed ‘general contracting principles’ followed by dedicated versions for marine construction, ROV services and survey work is developing OSW contracting principles that will be rolled out later this year.. .
We understand the cost sensitivity of the electricity industry and feel the OSW market would strongly benefit in finding new ways to de-risk project budgets and schedules. Clearly, the supply chain cannot subsidise the capital projects of developers indefinitely, and the current imbalance in economics needs to be addressed to ensure a competitive, healthy, and sustainable industry. Our solution takes all this onboard.
Offshore contracting is not for the feint hearted. The risks are varied and can be fatal. Success requires mutual trust and respect between the contacting parties together with the maturity to successfully navigate risks and deliver huge projects on-time and on-budget. IMCA welcomes this dialogue to contribute to the future success of the OSW market.
1Source: Rystad Energy Offshore Wind Report 1Q 2022