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<\/figure>\n\n\n\nTruls Olsen, Head of Research for Fearnley Securities, remembers the last time \u201cmoney rained\u201d onto the drilling sector. At times during that period from roughly 2004 to 2014, risk aversion was effectively zero, with companies financing newbuilds speculatively without contracts \u201cleft, right and center,\u201d he said. Could the galloping oil price growth in 2022 trigger a similar \u201cparty money\u201d investment environment for the industry?
\u201cToday, that\u2019s not going to happen,\u201d Mr Olsen said during a panel discussion on attracting capital at the 2022 IADC World Drilling Conference in Paris on 22 June. The industry has always had a simple mission \u2013 to deliver affordable and reliable energy to the world. Over the past few years, however, that mission has expanded to include the requirement for this energy to be cleaner, he said. \u201cCapital is available, but the risk aversion is completely different.\u201d
Meeting energy demand
However, while the oil and gas industry is perceived by many to be a sunset industry, Mr Olsen said, that sunset is still years away, and more people are beginning to understand that oil and gas will be a part of the energy transition for a long time to come. Demand for energy continues to grow globally, driven by rising standards of living and population growth.
While oil\u2019s share of global energy consumption dropped from 45% in 1970 to 32% today, actual usage consumption doubled over the same period, Mr Olsen said. Moreover, OPEC\u2019s 2020 World Energy Outlook predicted oil will still account for 28% of global energy demand even in 2045.
Dissecting the components of oil consumption, Mr Olsen noted that 65% of a barrel of oil relates to transportation, with the rest going to resins and petrochemicals to manufacture products such as asphalts, lubricants and consumer goods. Switching from oil to something else will be \u201cquite difficult\u201d in some applications, he said.
Gaining traction in capital markets
There are signs that energy is regaining traction in the investment world, even if its popularity can\u2019t match was it was back in 2012. While energy made up only 2% of the US equity market in 2020 during the height of the pandemic, that number has now risen to around 5%, Mr Olsen said.
\u201cThe simple matter is energy is back in fashion again. It\u2019s all about returns,\u201d he commented, and pointed to the energy sector of the S&P 500 Index showing growing returns this year while the overall index is down.
There are sources of financing, such as debt, equity and government grants and subsidies, but to an investor, it\u2019s all about pricing the risk. Companies seeking financing must be able to meet an investor\u2019s risk criteria and should also be prepared to acknowledge the energy transition and show they are steering their ship in the right direction, he said.
The drilling sector will need to ensure that contractors who invest in new technology and major rig upgrades are able to generate a return, Simon Drew, President \u2013 Land Drilling for KCA Deutag Drilling, said during a panel session at the 2022 IADC World Drilling Conference in Paris on 22 June.
Financing new rigs
There has been little activity in new-build rigs since 2014, but the energy squeeze triggered by the war in Ukraine has left the industry wondering whether large-scale capital investment in new rigs will be required. If so, who will pay for it? Simon Drew, President \u2013 Land Drilling for KCA Deutag Drilling, said during the panel discussion that while there have been previous experiments with operator-owned rigs, some of which have gone very well, in most cases drilling contractors and their financial backers pay for rigs, and he doesn\u2019t see that fundamentally changing.
\u201cI don\u2019t think operators at the moment are going to be interested in investing capital in rigs. We\u2019ve seen the service sector is also more interested in focusing on capital-light opportunities rather than owning expensive hardware,\u201d he said.
What will be critical for the drilling sector is ensuring that contractors who invest in new technology and major rig upgrades get their fair share of the barrel of oil they\u2019re helping to produce \u2013 and over a sufficiently long period of time \u2013 in order to generate a return, Mr Drew said. The parties involved must also recognize that downturn-level dayrates don\u2019t support new investment.
Given where dayrates are today and uncertainty about how high oil prices and inflation will go, \u201cit doesn\u2019t feel to me like we\u2019re quite on the cusp of another great new rig-building cycle just yet,\u201d Mr Drew said. \u201cBut that doesn\u2019t mean there\u2019s not a lot to be done. I believe there are plenty of other areas in our industry where there\u2019s much requirement and opportunity for investment.\u201d
Some of those opportunities lie in the areas of specialization, redeployment, retrofitting and sustainability. For the first, Mr Drew said there are still good prospects for investment in newbuild rigs for bespoke tasks or particular markets, such as the ultra-heavy rigs in Kuwait that have been deployed in the last couple of years. KCA Deutag and others have also deployed highly mobile, fast-moving, automated rigs in Oman.
The industry could also optimize its use of the existing rig fleet by redeploying rigs to high-demand markets like the Middle Eastern, Mr Drew said. Further investment opportunities could be found in upgrading the existing fleet with new technologies to enhance safety and environmental performance.
Mr Drew cited as an example an automated rig that KCA Deutag developed that keeps personnel off the rig floor. \u201cIt\u2019s a brilliant machine. Are we going to build another 50 of those? Unlikely, but there are certainly elements of that we can take to the existing rig fleet the hundreds of rigs out there, and deploy.\u201d
Growing interest in sustainability creates opportunities as well, he said, pointing to companies running rigs off grid power or employing hybrid engines to reduce diesel use.
\u201cWe used to talk about our license to operate in terms of safety and major environmental incidents, the major spills. It\u2019s clear now that our licence to operate is rapidly becoming focused not just on these but on all the other issues we\u2019ve heard about: climate issues, waste management, water management and other such topics.\u201d
The good news, Mr Drew said, is that the industry has readily available solutions to most of these issues. What\u2019s needed is for industry to develop a collective commitment and shared incentives to move beyond pilots. These solutions need to be deployed at scale before they can really make a difference. If the industry does not proactively deploy these technologies to enhance environmental performance, it will be forced to do so by society \u2013 and will then have much less choice in how to deliver those improvements, Mr Drew said.
\u201cThese investments can still be financed and made by industry. We may have to think a little differently on sources of capital, but they\u2019re still out there. It\u2019s still possible to finance good projects.\u201d
Projects whose technical cost come in above certain breakeven thresholds will not be validated by TotalEnergies as the company has become \u201cextremely selective,\u201d said Andr\u00e9 Glowacz, Vice President Technology & Field Development Americas, for TotalEnergies, at the 2022 World Drilling Conference.
Partnering with operators
Panel member Andr\u00e9 Glowacz, Vice President Technology & Field Development Americas, for TotalEnergies, described how his company has partnered with drilling contractors on technology investments that support ESG objectives. In Block 17 in Angola, for example, the company and its contractors implemented zero-discharge technology on four drillships in which cuttings were treated and dried before being brought onshore for landfill disposal.
With a goal to achieve carbon neutrality by 2050 while also growing production, TotalEnergies is \u201cextremely selective in the projects that we are doing,\u201d Mr Glowacz said. The company incorporates ESG elements into its qualification processes in addition to traditional safety, technical and commercial evaluation.
In terms of project cost parameters, Mr Glowacz said the company applies a threshold for technical costs of below $20 per barrel equivalent and a threshold for breakeven cost after taxes of below $30 per barrel equivalent. If a project comes in above those numbers, it will not be validated, he said.
\u201cAs drilling contractors, you have a major role to play because the drillers today are representing between 25% to 50% of our CAPEX.\u201d
He acknowledged that it can be hard for the sector to attract money when the US government is \u201coil and gas bashing 24 hours a day, 365 days a year.\u201d The industry needs to emphasize that \u201coil and gas are part of the energy mix not only today and not only tomorrow but also in the medium and long terms,\u201d he said. \u201cOn top of that, oil and gas is becoming cleaner and cleaner and cleaner. Operators and drilling and service contractors should be proud of what they are achieving together, because it is \u201ctogether that we will be progressing.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
Truls Olsen, Head of Research for Fearnley Securities, remembers the last time \u201cmoney rained\u201d onto the drilling sector. At times during that period from roughly 2004 to 2014, risk aversion was effectively zero, with companies financing newbuilds speculatively without contracts \u201cleft, right and center,\u201d he said. Could the galloping oil price growth in 2022 trigger …<\/p>\n