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The drilling industry at a crossroads

Keynote speech by Jørn Madsen, CEO of Maersk Drilling, at the IADC World Drilling conference, 16 June 2021.

The drilling industry at a crossroads

The drilling industry at a crossroads

It is a great honour to be here today to address the very unusual situation that we're in right now.

The drilling industry is at a crossroads. We face a number of pressing issues in a combination we have never seen before. Issues that present challenges, but also opportunities if we react responsibly and wisely.

We’ve been through a year of upheaval. The global pandemic took all of us by surprise, and the entire world has been operating in crisis mode. We’ve gotten used to daily concerns about social distancing, masks, contact tracing, and all the hassle that our people and their families have had to cope with.

I’ve learned an important lesson the past year. Or rather, I’ve re-confirmed something that I knew already: Our industry has a second-to-none ability to manage crises. I think it’s related to our history. For decades, drillers have been able to adapt to restrictions and business environments that kept changing. And we’ve always managed to safeguard operations and keep a stern focus on the safety of our people. We should all take pride in this. It’s not something that should be taken for granted.

The crisis has certainly also accelerated the structural issues that the industry was already facing. And let’s be honest, our industry wasn't in a great shape before this. Today, the need to act to secure the long-term viability of the industry is even more urgent.

Let me explain what I mean by that. There are basically three main issues we need to address. Firstly, our industry’s long-term financial durability. Secondly, our response to the climate challenge. And thirdly, our ability to significantly increase the profitability of our customer’s drilling projects.

The good news is that I’m absolutely confident that our industry possesses the foresight and determination that will be needed to confront these issues!

Long-term financial durability

In the beginning of 2020, we were coming out of a prolonged downturn, and there were clear signs of a market recovery in offshore drilling. Then the pandemic hit us and the oil price shock followed. Understandably, our customers reacted by holding back on investments. Contracts were terminated and new projects postponed or cancelled.

The market recovery we had hoped for in early 2020 didn't materialise and the industry kept bleeding cash. Supply and demand were completely thrown off balance by the sudden dip in activity levels, again leaving us with rates that don’t support enough cash generation. And it happened at a time when many offshore drilling companies were already struggling with high debt and liquidity problems.

A year later, things are now looking brighter. Many players are coming out of Chapter 11 processes with healthier balance sheets. However, it’s important to keep in mind that this doesn't in itself remove the risk of continued cash burn. The fundamental issue here isn't the balance sheets; it‘s the supply and demand imbalance.

There are simply too many rigs and too many players in our industry. It’s my hope and firm belief that the ongoing restructuring will make the industry capable of making the rational choices and create a much healthier business environment. After all, drillers, but also customers, have an interest in keeping the drilling industry alive and healthy.

It’s important to remember that it’s not only about securing long-term profitability. That’s obviously important, but profitability and cash will also be needed to support investments that are crucial if we are to address the other two key issues our industry is facing.

The industry's response to the climate challenge

Climate change has been on the global agenda for decades, but within the last year, the attention has really taken off. And this is indeed a good thing. Recently, we’ve seen some radical scenarios for how to reach net-zero emissions in 2050, and activist investors have won seats on the board of ExxonMobil. The climate debate is all around us in society.

I think that the energy transition will be deep, fundamental and change many aspects of modern life. But it will also be a long transition. There will be a very significant need for hydrocarbons for decades to come, and therefore also for drilling services.

There’s cause for optimism, but we need to tackle the climate issue head-on. Our customers are reacting to this, and especially the European majors are now re-defining their identity and purpose as energy companies with a much-increased focus on green energy. Still, oil and gas will remain a big part of their businesses. Oil and gas investments are needed to fund new investments outside oil and gas. But it requires that our customers increase the profitability of their projects and lower the carbon footprint from production.

This means that we in the drilling industry have a shared interest in developing solutions and sharing learnings on how to reduce our carbon footprint to meet customer demands. Much like within safety – through decades we‘ve overcome commercial interests and competitive agendas in the pursuit of a safer working environment. The climate challenge ought to inspire us to take a similar approach. And for two simple reasons:

First and foremost, it’s the right thing to do. 

And secondly, it’s commercially sound.

If we fail to address the climate challenge, we will fail to safeguard our continued existence. It’s as simple as that. Industries, governments, investors and citizens across the world are demanding accountability and action, and the ability to contribute to emissions reductions will become part of our licence to operate in many parts of the world.

To put it short, we’re on a mission to provide affordable energy in a sustainable way.

In Maersk Drilling, we’re ready to play an active role in the transition towards a low-carbon society. Sustainability has been an integral part of our identity and our operating model for many years.

In 2020, we strengthened our efforts with the launch of a very ambitious sustainability strategy. This included the first concrete climate target in the offshore drilling industry, as we’ve committed to cutting the carbon intensity of our operations by 50% by 2030.

I’ve been pleased to see that others in the industry have followed suit by announcing similar targets. As mentioned, we should inspire each other.

We believe that it’s both practically feasible and financially viable to reach our target. Over the past three years, we’ve invested heavily in innovation. We have more than 20 people in our Innovation function including process and technology experts. Combined with our engineering capabilities, this unique function will play a key role in developing and adapting climate-friendly solutions.

Our presence in Norway is an excellent starting point for this. Norway is a world leader with an ambition to drive down the overall footprint of the Norwegian Continental Shelf. An offshore market with a conducive incentive structure is certainly something to take inspiration from in other parts of the world.

In Norway, we’ve launched two low-emission rigs with support from our customers Equinor and Aker BP. The rigs use hybrid energy solutions with batteries supplying power during tripping operations so the main engines can avoid peak loads. Our current data show that this, combined with real-time digital monitoring and control of energy use, provides a reduction of energy consumption in the range of 20-25%.

We’re exploring other types of solutions as well. For example, we installed energy-optimising software on most of our floater rigs earlier this year – from Trinidad to Angola and Australia. We expect this to lead to solid emissions reductions.

I mentioned earlier that our customers need to significantly increase the profitability of their drilling projects. And fortunately, profitability, efficiency and emissions reductions go hand in hand. Efficiency has been high on the agenda for years for commercial reasons, but it also comes with a better carbon footprint. We’ve analysed campaigns where the numbers showed around a one-to-one relationship between time saved and CO2 saved.

What we have here is actually a potential win-win situation. If we can work smarter and faster, we’ll help the customers reduce their costs and at the same time improve the climate impact for both ourselves and the operators.

Increasing value creation through efficiency gains

The drive for increased efficiency has come even more to the forefront since the pandemic. There’s an increased focus on projects with low break-even prices because of the need to de-risk projects. Our customers are increasingly targeting the considerable amounts of wasted time, money and resources that many well campaigns still suffer from.

We’ve all made significant efficiency gains in recent years, but there’s a lot more to be gained if we do it right. That’s why it’s been a central strategic ambition for Maersk Drilling for some time now. We have a fundamental desire to reduce time, emissions and costs for our customers. We call it ‘Smarter Drilling for Better Value’.

It requires that we accelerate technology development, improve planning, execution and orchestration, and that we introduce new commercial models that are based on shared incentives. We need to motivate all parties involved to deliver on speed and quality. And this isn't possible if we insist on maintaining the simple day-rate structure.  Only if we engage in closer collaboration with our customers and other partners on the projects can we make the needed step changes.

We can point to several cases that have demonstrated the significant potential of this approach. Recently, Maersk Invincible completed a 30-well plug and abandonment campaign for Aker BP at the Valhall field offshore Norway which achieved a reduction of more than thirty percent of time spent per well. This meant that the work was finished years ahead of schedule, saving Aker BP costs in the order of 600 million dollars.

There are many dimensions to this type of optimisation, but we believe that digitalisation will continue to play a crucial role. Last year, we piloted our ground-breaking Drilling Process Platform which is now being implemented on more rigs. The platform significantly improves the information flow between the well design and the offshore rig operations, providing transparency and driving efficiency.

Our alliance with Aker BP and Halliburton in Norway has been a key component in developing this technology. But we are seeing an increasing level of interest from other operators, too. It’s becoming more and more obvious that instead of competing for the biggest slice of the pie, we can make the pie bigger for everyone to share!

Structural issues must be addressed

So, to summarise: Even though we’re now coming out of a state of pandemic, we’re still in a situation where strong forces are putting pressure on our industry. This is unlike anything we have seen before. We’re facing structural issues that must be addressed.

The first main issue concerns long-term financial durability. There are too many rigs and too many players. This must be addressed through consolidation that leads to rational choices and a healthier industry.

The second issue is the energy transition that’s becoming more present in nearly all aspects of society. We have to embrace the fact that our stakeholders will expect us to contribute to the transition, and we must dare to be ambitious, challenge ourselves to develop solutions, and share thought leadership in this space.

And thirdly, we must address the need for project certainty and lower break-even prices in an increasingly volatile market where oil and gas is being challenged by other energy sources. We can address this by targeting the significant efficiency gains that are still waiting to be realised.

The drilling industry is at a crossroads. But we can still make the right turn if we put our best efforts to it.

Contact

Kristoffer Apollo
Kristoffer Apollo
Head of Media Relations