Panel: Oil and gas must show sufficient returns, ESG performance to attract capital

By Jessica Whiteside, Contributor

Truls Olsen, Head of Research for Fearnley Securities, remembers the last time “money rained” 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 “left, right and center,” he said. Could the galloping oil price growth in 2022 trigger a similar “party money” investment environment for the industry?

“Today, that’s not going to happen,” 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 – 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. “Capital is available, but the risk aversion is completely different.”

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’s 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’s 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 “quite difficult” 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’t 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.

“The simple matter is energy is back in fashion again. It’s all about returns,” 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’s all about pricing the risk. Companies seeking financing must be able to meet an investor’s 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.

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 – 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’t see that fundamentally changing.

“I don’t think operators at the moment are going to be interested in investing capital in rigs. We’ve seen the service sector is also more interested in focusing on capital-light opportunities rather than owning expensive hardware,” 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’re helping to produce – and over a sufficiently long period of time – in order to generate a return, Mr Drew said. The parties involved must also recognize that downturn-level dayrates don’t support new investment.

Given where dayrates are today and uncertainty about how high oil prices and inflation will go, “it doesn’t feel to me like we’re quite on the cusp of another great new rig-building cycle just yet,” Mr Drew said. “But that doesn’t mean there’s not a lot to be done. I believe there are plenty of other areas in our industry where there’s much requirement and opportunity for investment.”

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. “It’s 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.”

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.

“We used to talk about our license to operate in terms of safety and major environmental incidents, the major spills. It’s clear now that our licence to operate is rapidly becoming focused not just on these but on all the other issues we’ve heard about: climate issues, waste management, water management and other such topics.”

The good news, Mr Drew said, is that the industry has readily available solutions to most of these issues. What’s 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 – and will then have much less choice in how to deliver those improvements, Mr Drew said.

“These investments can still be financed and made by industry. We may have to think a little differently on sources of capital, but they’re still out there. It’s still possible to finance good projects.”

Partnering with operators

Panel member André 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 “extremely selective in the projects that we are doing,” 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.

“As drilling contractors, you have a major role to play because the drillers today are representing between 25% to 50% of our CAPEX.”

He acknowledged that it can be hard for the sector to attract money when the US government is “oil and gas bashing 24 hours a day, 365 days a year.” The industry needs to emphasize that “oil and gas are part of the energy mix not only today and not only tomorrow but also in the medium and long terms,” he said. “On 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 “together that we will be progressing.”