Offshore Farming - will we make it through the valley of death?

Salmar's Ocean Farm 1

I’ve been yapping on for years about the potential for offshore aquaculture as the next phase for development in salmon farming. Here’s a link to an article I wrote in 2018 when I was still a fresh-faced, salmon farmer with dreams of global domination.

On a planet that is 72% ocean, that has reached its limit in terms of fish capture, and with a need to produce food with systems that aren’t the leading cause of environmental impacts, offshore farming should be an international priority. I’ll spare you a lengthy recap of that article, but it essentially investigates the justification and need for offshore farming.

The valley of death

This term is used in studies of innovation and entrepreneurship to describe the cash demands on a business pursuing innovation – the period between when investments have been made and the business starts generating revenue. With a salmon farming project, it is likely defined by the period after the facility has been commissioned and before the first commercial crops have been harvested and sold. (The valley of death may be considerably longer than that if your system doesn’t work as designed)

At least that was the premise when I sat down to start writing. As I reflected on the term and how I might be able to use it to describe the challenge of creating an innovation that could lead to successfully farming on the high seas, the reality for most offshore projects is that getting to the valley of death is a distant dream.

Proof-of-concept

Most offshore salmon farming projects struggle to get to the proof-of-concept stage, let alone a stage where an operation must weather the period between investment and revenue generation. (There are a few exceptions – I’ll get to those later). A few things make offshore projects incredibly difficult to initiate:

Scale – Unlike nearshore net pens and land-based farms, there is no way to approach this with baby steps. Cooke Aqua (one of the world’s most successful salmon farming companies) started with a home-made farm of 5,000 fish in a protected inlet in Charlotte County on Canada’s east coast by Glenn, Mike and Gifford Cooke. They used small vessels, wooden cages, homemade nets, fed the fish by hand and harvested into totes on the deck of a small skiff. The investment required to start production was within reach of a modest Canadian family.

To survive in the open ocean, a farming system must be engineered to withstand an incredibly harsh environment. The early cages used by salmon farmers wouldn’t last 5 minutes in the open ocean and there is no option to operate safely with small vessels, feed manually, or harvest by hand. When I was at NZKS, we were in the process of licensing an offshore farm. The conditions on that farm were considerably less harsh than most open ocean sites but, on a good day, wave heights averaged 2 meters. That site demands big cages, heavy moorings and massive investment.

Vessels and logistics – if you assume that an offshore technology will essentially be a beefier replica of a nearshore net pen (Ocean Farm 1, Havfarm), servicing those farms will require an entirely new fleet of service vessels. (Norway thanks to oil and gas, and the scale of their salmon farming industry, may have an advantage). Travel distances will be long, conditions may be foul for many days of the year, particularly in northern waters, and most vessels will need dynamic positioning systems to avoid bashing against the farm. This applies to almost every farm activity – smolt and feed delivery, crew transport, net cleaning, mortality removal and harvesting. In most regions, none of the vessels currently used will be suitable for operating in the open ocean.

Permitting – going back to the Cooke Aqua example, securing the first permit was a relatively simple process. The province had a history of nearshore herring weirs and a process for permitting and siting them. I’m a bit uncertain about some of the history, but the bottom-line is that the province believed in promoting the industry and was prepared to foster its growth – or at least not stand in its way.

Transport yourself to 2024, the reality of attempting to permit an open ocean farm could not be more different. Permitting a nearshore farm in a region that is pro aquaculture will take years and likely run into costs approaching $200,000 to $300,000 US. In a region where there is significant opposition, those costs can be higher by several orders of magnitude. I don’t know the final number but the cost to NZKS of permitting their first offshore site was many times that number. In Norway, purchasing a production license in the 2024 auction was $22.8 million USD per standard production license of 780 metric tonnes - not expenses a typical start-up can manage.

Setting aside the massive costs, the reality is that most regions do not have a clue as to how they will process, monitor, adjudicate user-conflicts, and issue offshore licenses. Regulators lack vessels, scientific resources are already stretched thin, and legal structures likely don’t exist for considering an application. Iceland released a policy document in 2023 which has some good information, and lord I love my Icelandic homies, but in terms of offshore aquaculture, it reads like an ode to bureaucratic delay with not a hint of urgency.

Generating investor interest

So how do you thread the needle of massive costs, significant risks and uncertainty, and the likelihood of a steep learning curve when you are trying to market a project or concept that has most investors fleeing like they are running from the cops? Most offshore projects I am familiar with contain elements that are poison to investors:

Extremely long pre-revenue and development periods – fish generally have a long grow-out periods, which doesn’t help but if permitting costs run into the millions and take years, and construction of an offshore structure can take another couple of years, you can easily run into 6 – 10 years without seeing any cash coming into the business.

Large ticket sizes – if I am correct in my statement that there are no “baby step” approaches to offshore farming, you are going to be looking for a lot of money just to get started. Investors love early-stage technology but prefer a model where big investments are made in companies with an operational track-record. Pre-revenue investments tend to be much smaller or in areas where risks are low, and primary challenges are around scaling up.

Stranded asset risk – I think this term is usually used to reference oil and gas equipment that has become obsolete or unprofitable and for which there is no alternative use – like an oil rig when the oil runs out. The term applies perfectly to structures like Ocean Farm 1 and Havfarm – if they don’t work as fish farms and have no other uses, the funds invested have zero value and they may represent a significant disposal cost. (I don’t think this is the case for either, just illustrating a point). A stranded asset risk is one thing when you are developing a technology where the unit cost is measured in thousands or hundreds of thousands of dollars, but entirely different when measured in millions and billions.

Pioneers die of scurvy and disease, being a settler is where it’s at – investors are very uncomfortable with the idea of investing in what they consider a new or developmental process when the ticket size is large. They want someone else to open the territory and then invest when the proof is in.

What is the secret to making it happen?

To be clear, I am not writing from the perspective of someone who has done it. I’m in the process of trying to find investors for an offshore project that, I think, threads the needle on these risks but it’s too early stage to know if we will have success.

I can think of three broad categories of offshore projects where investments have been made and fish produced:

China – this article describes several projects underway in China to develop offshore aquaculture. A colleague who has worked in China for many years described the Chinese approach as one where profits and costs are secondary considerations while food security is a key national priority. As the largest fisheries and aquaculture producer in the world, I’m guessing they see the limits of current farming and fishing practices clearly, and are investing in the future.

Norway – both Havfarm and Ocean Farm 1 have taken advantage of Norway’s research license system – they were issued research licenses as part of their offshore research efforts. In this system, the company is required to invest in research on that site. At the end of the project, if they have satisfied the project objectives, the research license can be converted into a standard production license. In the case of Ocean Farm 1, the site they are using is effectively a nearshore site in a very exposed location. It could likely be farmed with heavy duty traditional systems if they wanted to. As mentioned above, a standard production license on that scale has enormous value. I wrote an article recently about the Norway ground rent tax which has excluded offshore sites from the tax. The impacts of that are too complicated to go into here but that exclusion seems to have stalled further investment in offshore systems.

The tropics – this is a super clumsy way to describe a wide variety of projects. Two projects, Blue Ocean Mariculture in Hawaii and Open Blue in Panama have been operating offshore farms for years. Aquaculture is a small industry, and it is well known that both have struggled to juggle the challenges of a novel farming species while operating in a high-cost open ocean environment despite the valiant efforts of their teams and investors. They’ve managed to attract significant investor support but have yet to truly thrive.

Conclusion

I think it’s imperative we crack the code on securing investment and producing fish in the open ocean. The world needs low carbon footprint food production and offshore farming can be a big part of the solution. On a very high level, it will require innovators who can develop plans that can be implemented affordably, avoid stranded asset risks, and take the greatest possible advantage of existing infrastructure.

From investors, it will require a willingness to deeply consider projects that don’t fit neatly into their existing investment categories and ultimately, be visionary enough to invest in an industry with massive scaling potential.

As always, thanks for reading. If you have made it to this point. I salute you. Feedback/questions welcome via Info@AlanWCook.com or LinkedIn.