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Developers Challenge In US OSW: Managing Risks & Uncertainties in Front-End

image credit: Tariq Siddiqui:Upstream EP Advisors
Tariq Siddiqui's picture
COO Upstream EP Advisors LLC

Oil & Energy | Business Development | Capital Projects | Offshore Wind -  Proven leader in offshore development and operations, with 25+ years’ expertise in managing business through cycles...

  • Member since 2021
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  • Feb 16, 2021
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The Challenge

The offshore wind in US is nascent and emerging industry, with 34 projects in the development pipeline adding tremendous ~28 GW by 2030. Offshore wind (OSW) projects, like their cousin’s oil & gas projects are capital intensive and carry significant but manageable uncertainty and risk upfront ) due to lack of data in the early phase of the project (front-end), especially in the emerging markets like US offshore, where industry is still immature. The success of such projects is measured by the value delivered during its operation life-cycle in comparison to the value that is promised at the front-end space prior to the final investment decision (FID). This brings front-end activities and developers to the center of focus rather than construction and implementation phase.

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Insights from Offshore Capital Projects

One of my key learning from twenty years working in offshore oil & gas capital project is that some projects fail to deliver the expected value not because of their poor execution, but through poor decisions and failure to act in the front-end space (before construction). In the OSW industry, the investors are, especially wary of the unpredictability of revenues, levels of returns and value erosion. This requires front-end developers to have rigorous process for for making high quality decisions.

So how do complex capital projects like OSW and O&G make high quality decisions? The best way is to understand that, the capital projects are exercise in decisions making under uncertainty. The best way to manage uncertainties and risks in these projects is to use a decision-driven, stage gated process (reference slide is my adaption of front-end process for OSW from O&G). Risk management is central to the value creation and preservation. The risks can be internal and external and must be managed through entire spectrum; technical, economic, commercial, organizational and political.

What Are the Uncertainties & Risks in OSW?

The US OSW projects, unlike their European counterparts, are especially prone to more severe meteorological conditions (ex: hurricanes). Given the emerging nature of industry, the uncertainties and risk concerns investors, developers and operators alike. Some high level risks in front-end are;

  • Technical risks (lack of data, wind speed, cost, schedule, technology, others), impacts revenue
  • Predictability and levels of return (some onshore wind-farms froze in Texas on Feb 15, 2021 from unexpected snowstorm from polar vortex shift)
  • Stability/predictability of regulatory environment and government support
  • Environmental impacts
  • Limited market experience and capabilities
  • Shifting political priorities

How Uncertainties & Risks Are Managed?: Practices Worth Replicating

The earlier phases of the project are marked by large uncertainty due lack of data. Therefore, Project Design Envelope (PDE) and Survey, Deploy, Monitor (SDM) strategy are used

  • In the feasibility/assessment stage for example, a range of scenarios (PDE) are developed; based on for example, various site conditions (wind speed, wave height, capacity factors etc.) against various development options (foundation type, wind turbine size etc.).
  • As more data is collected through (SDM) strategy; uncertainty and risks are reduced, therefore in subsequent phases, a tighter and better estimate of cost, schedule and value is obtained and effective execution strategy can be adopted later in the construction phase.

Dialogue Driven Decision Process Improves Integration

Stage gated, capital value process facilitates, a dialogue driven process, between decision makers and the development team. Resources needed in a given phase are decisions driven rather than activity driven. An earlier project framing, allows for the integration and managing of interfaces, which are many in capital projects. It provides clarity on; objectives, value drivers, critical success factors, risk management, stakeholder management, road-map and deliver robust decisions.

Value Is Identified & Created in Front-End; Realized in Execution & Operation

The front-end developers/managers identify and create/maximize value in the project, project execution managers preserve and realize this value in the execution phase. The benchmarking insights for example from offshore capital projects in oil & gas industry and UK offshore wind projects, clearly establishes that higher the front-end loading (i.e. acquisition of data in early phase to manage uncertainty/risk), the better will be the concurrence between front-end estimates and actual value of revenue stream, cost, schedule and hence realized value of the project in the operation phase.

Bottom line; Robust Decision Making Process

The OSW industry in US is an emerging industry. It is on a learning curve, collaborating rightly with experienced international OSW developers. However, there is a need for the US developers to develop their own robust decision making process in front-end space, suited to their needs, to manage a pipeline of +30 projects, that are currently in planning. This will make projects; auditable, low cost and profitable, improving investor confidence and further investments

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