MARKET ENVIRONMENT

Offshore wind farms globally

Offshore wind power as an energy generation technology has been rapidly developing over the last decade and is likely to become one of the leading energy sources in the future. This is largely due to zero CO₂ emissions, technological progress and lower electricity production costs.

The first commercial large-capacity offshore wind farms were built around 2010 and the industry has been continuously developing since then. The development is mainly seen in the growing unit capacity of turbines (up from approximately 3.6 MW to 14 MW in the case of turbines offered by market leaders), and thus larger capacities of entire offshore wind farms and increasing depths at which the turbines are installed. And this creates demand for larger and larger foundations, installation vessels etc.

At the beginning of 2020, offshore wind farms all over the world had installed capacity of 28.3 GW, of which 22 GW was located in Europe. The leaders of the European market are the United Kingdom (approximately 10.4 GW), Germany (7.7 GW), Denmark and the Netherlands. In Asia, most offshore wind farm capacities are situated in China. However, it should be noted that further projects are being developed and that at the end of 2028 the installed capacity of all offshore wind farms is expected to exceed 160 GW. By region, Europe will have the largest share of this capacity (84 GW), followed by Asia (67 GW) and North America (16 GW). Further development of the industry in these countries will be accompanied by growth on new markets, including the US, France, Taiwan and Poland. European countries (the UK and Germany) will certainly remain the market leaders with the largest number of completed farms, and this group will be joined by the US, being a new player, which is currently developing a number of new projects and investing extensively in its own supply chain.

The development of offshore wind power generation is supported by the energy policy of individual countries and organisations, such as the European Union. In November 2020, the European Commission presented the Marine Renewable Energy Strategy, which provides for the support for offshore wind farms necessary to expand the capacity installed in the EU (excluding the UK) to 60 GW in 2030 and 300 GW in 2050.

Uncertainty on oil and fuel markets

• The effects of the pandemic led to a decline in demand for fuels from transport, and refineries responded with a sharp reduction of their crude oil purchases. The current balance on the oil market has been restored through major production cuts, which pushed up oil prices. Price growth is under pressure from existing crude oil and fuel stocks (limiting current production growth), as well as increased reserves in hydrocarbon fields (ready for immediate production by OPEC countries and Russia).

• Refineries have reduced their fuel output in line with current demand, but have not yet adjusted their production capabilities to the permanent decrease in fuel demand from the transport sector. The high share of idle refining capacities is weighing on fuel prices, as well as product and refining margins. It is estimated that the global refining industry’s production capacities should be reduced by 3.8 mbd by the end of 2024. This estimate takes into account the new refineries that are to be placed in service during that period, mainly in the Middle East and Asia, whose potential is estimated at 5.7 mbd. In 2020, just over 2.2 mbd of refining capacity was decommissioned globally. For a more significant reduction to materialise, refining margins need to remain low, below the profitability threshold for many refineries. Independent European refineries that sell fuels to seaports are most exposed to the capacity reduction risk, as they compete directly with fuel supplies from refineries in the Middle East and Asia. Integrated inland refineries, which are links in longer value chains, are least exposed.

• Demand for liquid fuels is weakening in the long term due to structural reasons. The efficiency of combustion in ICE engines and performance per 100 km (due to hybridisation) are improving, the share of biofuels and alternative fuels produced outside refineries is increasing, as is the share of electric cars in the total number of passenger vehicles, and demand forecasts take into account the development of alternative drives, including ones using hydrogen. The shrinking market means deteriorating prospects for hydrocarbon production, which discourages investment although crude oil will still be needed in transport. This situation makes oil prices more susceptible to changes and generates price cycles.

• Crude oil production activity in the US is currently dictated by Saudi Arabia and Russia, as these two countries have regained control over oil prices, which determine production levels in the US.

• An economic rebound in the US and increase in fuel demand after the pandemic will cause the US position to change from that of net oil exporter to net oil importer. Crude oil production in the US declined sharply in 2020 (by nearly 3 mbd). A recovery is made difficult by market sentiments turned against investing in oil production and the Joe Biden administration’s new US Energy Strategy, which assumes acceleration of energy transition. Brent oil prices are expected to range from USD 50/bbl to USD 80/bbl in the coming years. China is the largest oil consumer. In 2020, China took advantage of the low prices and purchased crude oil on a huge scale. Its oil imports were record high, up 7.3% year on year, despite the impact of the pandemic in China at the beginning of 2020 and no import data for January and February 2020. The highest volumes of Chinese crude oil imports were seen in the period May−September 2020. With its existing oil reserves China can maintain an active procurement policy. It is estimated that China ceases to buy oil and uses its stocks when the prices reach USD 80/bbl, while this is a price level that encourages investment in production in the US. With prices at USD 50/bbl, China rebuilds its stocks and OPEC and Russia cut supplies.

• The likely underinvestment in production will result (through asset cycles) in a large susceptibility of oil prices to changes, which, given the overcapacity of refineries and the difficulty in passing oil price hikes onto fuel prices, will be reflected in increased dependence of refining margins on changes in oil prices.