Go back to drawing boards, oil companies need to counter ESG and COP26?Nov 14, 2021 by Energy Connects
Cyril Widdershoven, Founder of Verocy, discusses how oil companies will need to counter ESG and COP26 demands for lower emissions and possible production decreases.
The next two weeks upstream oil and gas companies will be in the crossfire of Western governments, investors and activists, mainly to commit to renewed calls for lower emissions and possible production decreases.
As several national oils (NOCs) and independents (IOCs) have already started to counter the hydrocarbon divestment call by presenting major new Net Zero targets, more however is to be expected from ESG requirements very soon. A combination of COP26 and ESG regulations is currently seen as a major threat by most, but looking at technology options and real requirements of ESG, and SDG or COP26, major steps are easy to be put in place.
Based on research done on offshore maritime oil and gas projects, it has become clear that until now the main constraint to all is not available technology options or willingness of upstream offshore operators, but economics. Most offshore operators are still having a major conservative view on their own sector, not easily being moved by new technology availability, but mainly by financial constraints. At present the immense amount of offshore production facilities, mainly offshore jackup rigs, are seen as assets based on long term investments, as rigs are equipped and build for a 30+ years life span. Off the total fleet of 538 offshore jackups in place globally, the average age is 21.5 years, while of jackups working in <300 meters water, the average age is 32.8 years. Middle East operations are all <300 meters water depth.
When addressing offshore maritime operations, the current offshore jackup rig volume in place is characterised by age and low cost operational assessment. When addressing however the changing environment in which offshore operations will need to find a new license-to-operate (LTO), requirements are changing dramatically. ESG, climate change and activists, are calling for a more stringent framework, resulting almost in 2x cleaner, 2x faster but ½ the costs. These factors will not only change the future oil and gas playing field, but definitely will be affecting offshore operations much faster.
A new set up of skills and technology is needed, in which rig efficiencies will find a balance between a triangle of design performance and functionality, achieved logistics and equipment integration. Looking at the present offshore jackup rig market, main aspects under consideration by most oil and gas companies worldwide are however still looking at low costs/per hour or barrel, not having much room to improve the overall setup of designs, operationability, safety and costs/h or barrel. The latter is very strange, as challenges in the market, political and societal angles, but also in offshore fields themselves, call for new designs and technology integration. The latter is also needed to counter ESG related pressure mounting up at present, or to support the call for a LTO offshore maritime for the next 30 years. Experts in offshore maritime oil and gas production are stating a long list of issues to be countered: cleaner power generation and regeneration, new designs of offshore (jackup) rigs, which will not only look at CAPEX costs, but also on OPEX and ESG factors. Possible new rig designs and performance is needed, taking into account new technology available and integration of drilling tools and equipment. Questions currently being assessed are issues like what will be the impact of longer drill-pipes in the rig.
Other potential options are already higher hook-loads, which will save money on well construction. Developments such as CHELA, a product developed by Dutch offshore design engineering group GustoMSC, not only improves the operationability on an offshore jackup rig, as it can reach below the cantilever as well as elevate towards the main deck, but it also reduces the total well construction time. It doesn’t only improving efficiency and uptime but also has a significant impact on the (carbon) footprint of operations for an oil and gas company and oilfield services provider. By improving total well construction time, less movements need to be made to increase or sustain production on an offshore field, having major (ESG) impacts as it reduces total time in place, overall supply movements of ships etc. Other designs of offshore jackup rigs also have these effects, if total deck space is improved, decreasing total ship movements for example to deliver drilling mud. A major other issue to be redesigned and put in place is to counter overall energy efficiency, as the latter is an ESG factor too. Increasing efficiency overall, but especially energy, is a quick win. Integrating new options, such as full electrification of operations or introduction of new fuels (hydrogen) also will need different designs in future.
Digitalisation of the overall offshore oil and gas production or exploration vessels also has a direct and major impact, not only on production and financial margins, but at the same on safety of operations, safety of personnel and the environmental risks of the total. Projects such as the “Rig of the Future”, in which the options of a fully unmanned digitalised offshore rig are being developed and assessed, also improve ESG related factors. Less offshore movements, or even helicopter trips, not only increase safety, but also remove an immense amount of emissions related factors in one go.
New designs are available, technology is available, now operators and investors needed to be convinced to put all in place. For most offshore operators, the LTO is clear. The next 30-40 years more emphasis will be put on ESG issues of operations, pushing a major shift very soon. Only very prudent operators and services companies will be able not only to put in place a sustainable future-proof strategy, but also willing to make a shift from keeping old vessels in place, as costs are regarded very low, to revamping the sector with new ESG COP proof offshore jackups. New innovative designs are available, or can be put in place in close cooperation with IOCs and NOCs. A major opportunity is clearly to redesign rigs based on less weight/less footprint. Both will have an immediate positive effect, especially if looking at resources/emissions during construction. Integration of Alpha (social, environment, economics) and Beta (technology) approaches is not a threat, but an opportunity for the parties willing to take the jump to the future. The next couple of years, ESG and Climate Change pressure will feel like a new version of Back to the Future movies for offshore operators. What NOCs and IOCs should understand is that the vehicle to see and come back from the future is already in place. Offshore drilling and production costs for oil and gas are steep, revamps of old vessels still considered to be attractive. However, ESG related pressure could remove the cost advantage of old offshore rigs with a major bang as requirements to comply to ESG is not only for financial sector parties (investors and banks) but also for the respective giants such as Shell, Aramco, ADNOC, or offshore jackup owners such as Maersk, Noble and others.
At the same time, questions to be asked, which fall in line with ESG requirements expected, should be “why not designing a modular rig with integrated equipment that can be upgraded along the changing requirements? Enabling to embrace the newest technologies?” experts stated. At the same time, changing operational and financial environments also should force oil and gas companies and services to become less conservative. The willingness to pay for new technologies and upgrades should increase, not only to keep up competitive position (main driver) but also to have the LTO to stay afloat.
When looking at the Offshore Jackup Middle East (OJME) conference Dubai, companies were aware of the ongoing energy transition and its potential risks to their own sustainability. To keep their own LTO in place, while supporting energy security at the same time, changes need to be made. If operators and service companies are willing to play a pivotal role in the next decades, new designs are needed, as the older ones will not suffice anymore. At the same time, immense new investments are needed to keep not only oil and gas volumes and reserves at levels needed, but also push changes. ESG, COP26 and other outside factors will force a total rethinking inside of the management of NOCs (Aramco, ADNOC, Gazprom etc) or the Shell/Exxon’s of this world.
To be able to fund all, a new conversation between investors and operators is needed, in which new designs could be the bridge to find funding needed. The next 10 years investments are needed to replace approx. 65 percent of current produced oil and gas capacity. Even that oil companies are increasing their requests to improve drilling efficiency and emission reduction in operations, the latter are still not willing to put money were their mouth is. NOCs could be leading the way, as they are currently being asked by their owners (governments) to set in place a NetZero 2050 or 2060 strategy. Redesigning offshore jackups could be a major step forward, including implementation of new technology while integrating options to update the next decades. In case of another ESG requirement, localisation and education, several Arab NOCs could be having already the instruments in place.
Now it is time to act, get back to the drawing boards and change the set up.