Graeme Johannessen, Esgian

What does the new year hold for offshore wind, shipping, drilling rigs and environmental targets? The team at Esgian give their thoughts on what the year ahead will bring...

“Predictions of the future are never anything but projections of present automatic processes and procedures, that is, of occurrences that are likely to come to pass if men do not act and if nothing unexpected happens. Every action, for better or worse and every accident necessarily destroys the whole pattern in whose frame the prediction moves and where it finds its evidence” - Hannah Arendt 

With these words the German Philosopher  swipes the rug out from under anyone trying to offer insight into the future.  

What we think about the future is based almost exclusively on what we observe today. That’s why things like interest-rate raises or stock market collapses generally take people by surprise. With that in mind, we won’t try to offer any predictions of the future, instead we acknowledge that our thoughts are based on assumptions generated by the state of the world right now.  

2022 will be a year of negotiation and realism for environmental optimists

After the heady days of COP26 and the setting of Net-zero targets by governments and private companies alike, 2022 will bring a dose of realism and hard negotiation to the environmental movement. Following the energy price crisis of the 2021-2022 winter, expect general elections in Sweden, Hungary, France, Serbia and Portugal to be contentious affairs. In the UK, the elections to the Northern Ireland assembly could provide a distraction from the job of getting to net-zero. Meanwhile, the EU will be putting the “Fit for 55” proposals to the sword. We can expect serious debate around the impact of the proposals on energy and transport prices.  

2021 was about promises and intentions, and 2022 will be about negotiations and carving good intentions into actionable items. 

Awards of new wind projects will put further strain on an already overcommitted offshore wind supply chain

On the 18th of January 2022, the Scotwind auction results were announced. The resulting developments will, if implemented fully, result in 25GW of extra capacity over an area of 7,000SqKm. Developments and contracts of this magnitude will require an almost total rethinking of the offshore wind supply chain in Europe. The total number of turbines to be installed will approach 1,500 out of a total of 2,500 in the rest of Europe during that time. The total investment will approach GBP 24bn, over five times the budget for the Scottish government.  With more announcements due and projects to go ahead, the future looks bright – if the supply chain can develop quickly enough.  

Figure 1: Offshore wind capacity (MW) (2010-2030). Source: Esgian Wind Analytics

There will be a significant uptick in sustainability-linked contracts for shipping 

On the 5th of January 2022, KCC Chartering and South32 signed a six-year contract of affreightment (COA) for shipments of caustic soda. What’s special about that? Well, the contract includes ambitious reporting standards for CO2 emissions with an overall goal of getting to operational net-zero carbon emissions by 2050. With pressure to reduce emissions and to increase transparency intensifying, we expect to see more stringent sustainability clauses working their way not only into COA’s but also into charter party clauses.  

In combination with new fuels and more efficient engines, we expect the shipping industry to take real steps towards their goals in the coming years.  

The number of offshore drilling rigs with energy-saving equipment will more than double

Over the last few years, we’ve seen a real move towards energy saving equipment on drilling rigs. Just four years ago such equipment on board was practically unheard of, today, according to Greenpact Rigs, that number is 33 and rising monthly. We expect a faster rate of adoption for a number of reasons:  

• governments and regulators focus on emissions as part of their environmental strategy
• operators aim to reach their emissions goals in line with the Paris climate agreement
• new ways of doing business will to a greater extent push the cost of fuel over to the drilling companies, giving them incentives to reduce consumption 

Deepwater will continue to lead the recovery in the offshore rig market 

One of the most encouraging developments in 2021, was just how quickly and fully the ultra-deepwater drillship market recovered following the challenges of Covid and low oil prices in 2020 (with competitive utilisation rising from 52% in January to 77% by December). We believe that this momentum will only continue this year, with utilisation set to reach the mid-to-high 80% range. Esgian Rig Values (ERV) adjusted market values for drillships during 2021 with transaction levels confirming estimates and overall increase in values of 17% for the year. Given utilisation above 80% and dayrates could reach the $300,000 mark in some regions, values for newer 7th Gen. drillships may move above $250 million, currently ERV values 7th Gen. drillships in the range of $200-$225 million. 

Meanwhile, our hopes are not as high for the shallow-water jackup segment this year as we still see this segment as being oversupplied, highly localised and fragmented. We expect to see utilisation improvements but not enough to see meaningful increases in jackup dayrates, which are likely to struggle past the $80,000 mark in 2022.  Esgian Rig Values estimates a modern premium jackup to be worth $50-60 million, but with several transactions going on in the distressed segment, values could recover further anticipating a longer-term improvement in dayrates for jackups. 

Figure 2: Ultra-deepwater drillship demand and utilisation forecast (2022 – 2023). Source: Esgian Rig Analytics

KeyFacts Energy Industry Directory: Esgian