United Kingdom

United Kingdom

Oil giant retrenches to America -- BP drops wind in three countries

The global financial meltdown is steering BP Alternative Energy to exclusively concentrate its wind efforts on the booming US market. Last month, the London-based oil giant's renewable energy arm said it is ceasing wind operations in the UK and India and is pulling out of talks in China to collaborate with Goldwind, the country's largest wind turbine manufacturer. In Britain, BP operates just six wind turbines at the site of its Isle of Grain oil refinery on the River Thames, east of London. In India it is involved in two projects with a combined capacity of 120 MW in partnership with turbine maker Suzlon.

"We're focusing our wind business efforts now entirely on the US," says BP's Bob Lukefahr. "That's what we've decided to do as a result of rethinking our strategy and understanding where to focus. But there were no projects that we pulled out of." BP's wind development in the US is on track to pass 1000 MW by the end of this year and it plans to spend $8 billion at a yearly $1.5 billion clip, adding another 750 MW in 2009 (Windpower Monthly, September 2008).

Despite BP shuttering what Lukefahr describes as "a very small development office in Beijing," he believes the Chinese wind market is strong and its onshore resources are significant. He also sees a government making positive moves toward policy that will allow wind to thrive. "But it just is the case with ours and every other company that you have to select where you're going to put your strategic focus," Lukefahr says. "And, given that we've got what amounts to about $1.5 billion a year of new wind facilities, we want to put into the US, there's a limit to how much you can do."

BP's fundamental shift is driven by economics. The US market offers vast opportunity for companies able to use wind's federal production tax credit (PTC), now extended through the end of 2009. BP's fossil fuel operations provide enough profit in the US for it to be able to make good use of the PTC to bring down its tax bills.

A strong balance sheet and a portfolio of high quality US wind projects gives BP a good foothold, whether specific developments operate with long term purchase power agreements or as merchant projects without price stability. "There's no question that for companies that have weak balance sheets or highly leveraged balance sheets, and companies that don't have tax appetite, it's a tremendously difficult market," Lukefahr says. "But the best projects find funding in any market and marginal projects fall off first, especially in merchant markets, where you're going to have a terrible time building them."

While BP owns a turbine stockpile that covers its US projects for next year and much of 2010, Lukefahr believes equipment prices will drop along with the cost of steel and copper. He also foresees after-market turbines become increasingly available due to project collapses in the current climate. "We are certainly seeing additional equipment come onto the market and become available as projects are starting to fall away," Lukefahr says.

Despite such shaky ground for component makers, Lukefahr remains convinced the US is still on the front end of a huge growth wave. But he does not downplay the enormity of the current conditions. "We shouldn't kid ourselves," Lukefahr says. "The financial challenges in the market are significant. And it would be tragic if the industry went off track as a result of what I believe is going to be a short-term financial crisis."

He is somewhat encouraged by the promise of an upcoming Barack Obama administration. "I'm not so bold as to guess what the US Congress is going to do next week, much less next year," he says. "But what I'll say is that to the extent that the themes of the campaign carry forward, I think that will be very, very good for the wind industry."

In the long term, BP's US development portfolio stretches towards 20 GW. While Lukefahr says BP continues to see robust returns on wind that surpass internal thresholds, he notes the increasing challenges if the cost of debt rises substantially. And while the company is not actively pursuing the purchase of smaller developers or their project portfolios, such steps are not out of the question.

"If we see high quality, early stage development projects, we absolutely talk to people. We always have." Ultimately, Lukefahr expects the fundamentals of the wind business to remain strong. Lower fossil fuel prices mean better logistics costs for moving turbines to projects. And natural gas prices still translate to high power prices overall, making wind a good bet over the two decade life of a project.

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