Danish Energy Company Is Turning the Page on Oil and Gas

By Sarah Kent Features Dow Jones Newswires

A company whose name stands for Danish Oil and Natural Gas is getting out of both businesses.

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Dong Energy AS, Denmark's majority state-owned energy company, is selling off its last oil and natural-gas fields in a deal expected to close this month or next. The billion-dollar-plus sale is part of a broader plan to significantly reduce its exposure to fossil fuels and produce energy primarily from renewable sources.

With the help of a sizable infusion of cash from Goldman Sachs Group Inc., Dong Energy over the past few years has transformed itself from one of Europe's most coal-intensive utilities and a small regional oil player into the world's biggest producer of offshore wind power.

Dong's wind turbines off the coasts of Europe have almost triple the windpower-generating capacity of Sweden's Vattenfal, the company's nearest competitor. Now Dong has set its sights on helping to establish the U.S. offshore wind industry, looking at three new projects off the East Coast.

On the outskirts of Denmark's capital, the company's largest power plant is now burning wood pellets -- a renewable energy source despite some concerns over their environmental credentials. By 2023 the company intends to go completely coal free, though some of its power plants will continue to burn natural gas.

Dong's transformation comes as global oil-and-gas giants wrestle with the prospect of oil demand plateauing amid a push to tackle climate change. Companies like Royal Dutch Shell PLC, Norway's Statoil ASA and France's Total SA are also building their renewable businesses and betting billions on an energy future where oil plays a diminished role.

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"The world needs to change the way it produces energy," Dong Chief Executive Henrik Poulsen said.

Shell and other bigger oil companies say they have no plans to abandon their core oil and gas business, despite pressure from some shareholders.

"Tying the company's hands down to a renewables-only mandate, I think, would be strategically and commercially unwise," Shell Chief Executive Ben van Beurden told investors at the company's annual meeting last year.

Dong began forming a strategy shift its focus from fossil fuels around 2008, as the conventional-power industry in Europe flailed and the European Union set new targets for renewable energy in the bloc's power mix.

At the time, 85% of the company's power production was based on fossil fuels. Offshore wind was one of the most expensive energy sources in the world and only a handful of ocean-bound wind farms had been built.

Goldman saw an opportunity when the company was seeking money to help it through a financial rocky patch. In 2014, the bank paid 8 billion kroner ($1.29 billion) for an 18% stake in the company, which remains 50% owned by the Danish government.

It is the biggest investment Goldman has made to date in renewable energy, and one of its largest investments in a single company outside the U.S.

"We did a lot of analysis and concluded offshore wind would be one of the prevailing technologies in the long term," said Michael Bruun, a Goldman partner who helped run the deal.

There are risks. Most offshore wind projects rely on government support to compete with coal and gas, but for the technology to become widely used it will need to be commercially viable without subsidies. Offshore wind still represents a fraction of the energy market, and biomass -- which includes wood pellets -- is only able to compete with coal thanks to combinations of subsidies and taxes.

Dong has bet billions that its business model can succeed. Since 2011, it has spent 61.5 billion kroner on wind farms and has so far spent around 4 billion kroner on converting its power plants for biomass use.

But so far, the investment has paid off. Dong's IPO last year was one of the biggest in Europe. The company's shares have risen another 31% since it went public. The company said its annual earnings before interest, tax, depreciation and amortization more than doubled from 2011 to 2016 to $19.1 billion kroner.

The cost of offshore wind projects has come down much faster than the industry expected. Earlier this year, Dong said it would build two wind projects in the German North Sea with no government subsidies -- a milestone few expected to come so soon.

Dong's plan to abandon investment in fossil fuels has accelerated. Over the next six years it intends to finish converting its remaining coal-fired power plants to biomass, completely phasing coal out of its operations by 2023.

At the Avedøre power plant just outside Copenhagen, the expansive open-air coal yard sits mostly empty. The boilers inside the futuristic building are now primarily fed from silos housing piles of wooden pellets.

Biomass power -- generated mainly by burning wood and other plant debris -- isn't without its critics. Environmentalists say it is still polluting and the demand for wood fuel poses a threat to forests, but Dong believes it can be burned sustainably. The company reduced its annual emissions by around 70% between 2006 and 2016.

The ultracompetitive U.S. market presents an important test for Dong's future. The company wants to build wind farms off the coasts of New Jersey, Virginia and Massachusetts.

"They live in a country where people will literally pay more for electricity if it's sourced green, "said Joseph Bower, a Harvard Business School professor who has written a case study on Dong. "And they're coming to a country where the only thing that counts is price."

--Erin Ailworth in Houston contributed to this article.

Write to Sarah Kent at sarah.kent@wsj.com

(END) Dow Jones Newswires

August 31, 2017 05:44 ET (09:44 GMT)