DECARBONIZING DRILLING
New contracting models needed
to finance decarbonization
programs, drive new solutions
Contractual incentives for fuel savings, earlier
collaboration between operator/contractor, and
long-term contracts among potential strategies
Sustainable contract models
BY JESSICA WHITESIDE, CONTRIBUTOR
While there is agreement within the drill-
ing industry that emissions reductions
must be prioritized, there is no consen-
sus on who should pay for the technolo-
gies and tactics required to achieve those
reductions. “We have a responsibility to
have an open debate about how we go for-
ward,” Darren Sutherland, Vice President
– Europe & Africa at Borr Drilling, said at
the 2023 IADC World Drilling Conference
in London. Mr Sutherland was among
several participants on a panel session
focused on how the upstream industry
should finance its decarbonization efforts.
He noted that drilling contractors
face distinct challenges in accessing the
resources needed to finance decarboniza-
tion initiatives, such as more limited bank
lending options and higher debt costs for
bond issues. “We don’t have easy access to
money. We’re going to have to earn it and
use our own cash if we need to.”
There’s also a stark contrast in finan-
cial backdrop between the operator and
offshore drilling contractor sides of the
business. For operators: relatively consis-
tent dividend payouts, share buybacks and
debt reduction. For drillers: no dividends
for several years, few share buybacks
except as part of a transaction, and operat-
ing cash flow that has gone consistently
downhill the past few years, at times drop-
ping below CAPEX.
At the same time, they’re also still deal-
ing with “discount” trends on dayrates.
“That’s the trend even now as the markets
are on the way up. There’s a continual
pressure: reduce your costs, reduce your
costs. And it can’t continue because it’s not
sustainable,” Mr Sutherland said.
It can also be challenging for drillers to
justify investing in emissions reduction
when the benefits go to the operator, said
Darrel Pelley, Managing Director Technical
The panel featured (from left) Brage Johannessen, Parker Wellbore (moderator);
Darren Sutherland, Borr Drilling; Ian Ferguson, Shell; Ellen Hald, Equinor; Darrel Pel-
ley, Transocean; and Michael Strauss, Ensign Energy (moderator)
34 Marketing at Transocean. For example,
cost savings achieved when reducing fuel
use on the rig typically accrues to the oper-
ator, not the contractor. “Typically fuels are
furnished by our customers. As a result,
every drop that we save, the fuel savings
flow straight back to them,” he said. “They
control the well design. They set the order
of activities. In some cases, they even
dictate the way our power plant is con-
figured, which further limits our ability to
optimize power plants and maximize our
fuel efficiency.”
To combat some of these challenges,
Mr Sutherland called for the industry to
adopt more sustainable contracting strat-
egies. Such strategies would give drill-
ers “contracts that we can hang our hat
on,” which can be taken to the bank for
financing, or can help give confidence to
shareholders and banks that investments
in newbuilds or equipment upgrades will
generate returns.
“It’s really important that we have a look
at the contracting model in the context
of anything to do with decarbonization
performance and efficiencies in our busi-
ness,” he said.
Under traditional dayrate arrangements,
finding ways to cut days off the well –
which reduces emissions by requiring less
diesel to be burned – can mean savings for
the operator. For the contractor, however,
that translates to a reduction in forecasted
revenue, Mr Sutherland said. “How do we
get that balance back whereby if I’m sav-
ing you a significant amount of money, I
get a significant amount of money back?”
Rather than slipping into the age-old
discussion of how big the bonus should be,
the industry has to step back and look at
contracts differently, urged Ian Ferguson,
General Manager Wells Operations – UK
& Norway at Shell. To incentivize pursuit
of higher-cost decarbonization options,
contractors and operators will need to
figure out arrangements that are mutually
beneficial. He added that there’s “probably
a discussion to be had on longer-term
deals” that enable design and equipment
spec choices that consider decarboniza-
tion efforts into account.
“Maybe in that new base contract we’re
saying, ‘Actually, it should also include
SEPTEMBER/OCTOBER 2023 • DRILLING CONTRACTOR