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




DECARBONIZING DRILLING
greenhouse gas emissions and efficiency.’
And there’s various ways you can get that,”
Mr Ferguson said. “You get it by drilling a
quicker well, by managing energy use, by
choosing the fuel supply.”
Because the bulk of emissions from
drilling operations comes from the burn-
ing of diesel fuel, decarbonization efforts
have focused on initiatives such as rig
electrification, alternative fuels, or fuel and
energy efficiency approaches. Some opera-
tors are looking at incentive arrangements
to share the benefits of fuel savings with
contractors. Equinor, for one, has included
fuel incentives in its rig contracts.

“It’s vital that drilling rigs perform effi-
ciently and have as low a fuel consump-
tion as possible,” said Ellen Hald, Manager,
Lower Carbon Solutions in Drilling and
Wells at Equinor. Existing solutions like
engine management systems, exhaust
heat recovery and hybrid solutions will not
be sufficient to close the gap toward emis-
sions goals, she said. “This emphasizes
the need for both smart energy usage on
our rigs and that we need new solutions
in our toolbox,” she said. “Strong collabo-
ration between operators and suppliers
have been essential for development of our
industry in the past and will be important
for safe and sustainable energy transition
going forward.”
Shell, too, has begun bolting incentiviza-
tion for decarbonization performance onto
its contracts while incorporating language
around aligned values, including decar-
bonization, into its sustainability clauses,
Mr Ferguson said. “We have made cleaner
well operations one of our five key pil-
lars for how we want to improve how we
deliver our wells activities between 2020
and 2050.”
He pointed to Shell’s partnership with
Diamond Offshore on an engine manage-
ment system on the Ocean Endeavor semi-
submersible as a “role model” for this sort
of approach.

“What we’ve done is said, ‘Where we
save diesel, we will pass that benefit on
to you in the form of an incentive,’” Mr
Ferguson said, describing this decision
as “a natural thing to walk into once we
understood it… Why not just make that the
norm?” For contractors, they see earlier involve-
ment with their customers’ drilling pro-
grams as a cost-effective way to increase
collaboration and, therefore, efficiency. For
example, at what Mr Pelley called the
tactical level, he noted that contractors
can reduce fuel consumption during rig
moves simply by adjusting the transit
speed. “There’s a diminishing value once
your engine load is getting up to 70-80%.”
At a more strategic level, the operator
and contractor can also better collaborate
to identify decarbonization technologies
that give maximize value, with an under-
standing of the time and costs associ-
ated with first piloting and then deploying
those technologies at scale, Mr Pelley said.

For some larger decarbonization proj-
ects where upgrade costs can run into
the millions, contractors need significant
terms on their contracts to pay that back.

“We cannot invest unilaterally,” Mr Pelley
said. “Commercially, operator participation
is absolutely critical right now.” DC