Dutch Oil & Gas Conference 2012

Dutch Oil & Gas Conference 2012 Trends and what they mean for contractors

Inside: Samir Awad Frans den Houter Hugo Heerema Vincent Oomes Pieter van Oord Frank Verhoeven Maarten Wetselaar Pacelli Zitha Ruud Zoon

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On June 26th, 2012 Deloitte organised its annual Oil & Gas Conference in the Cruise Terminal in Rotterdam. The Deloitte Oil & Gas Conference is a well-established event in the Dutch energy community. As in prior years the conference featured top speakers. This years programme centered around the developments in Exploration & Production (E&P) of Oil & Gas across the globe and what they mean for the collaboration between E&P companies and Oil Field Service (OFS) providers. We have asked our speakers to reflect on these developments. This magazine features the highlights of their reflections.

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Dutch Oil & Gas Conference 2012 Trends and what they mean for contractors

Inside: Samir Awad Frans den Houter Hugo Heerema Vincent Oomes Pieter van Oord Frank Verhoeven Maarten Wetselaar Pacelli Zitha Ruud Zoon

Introduction Driven by a growing demand for energy, the outlook for the oil & gas industry remains strong. Global energy capital expenditure is expected to return to peak 2008 levels of $700 billion. The favourable outlook for the O&G industry comes with challenges, however. To keep up with growing demand, O&G companies are moving into large and complex projects involving LNG, oil sands, deep-water recovery, GTL, unconventional gas and more. And they are moving into ever harsher environments.

These projects require greater technical expertise and new engineering and construction solutions. The huge investments - especially in Canadian oil sands, deep-water recovery in the Americas, and Australian LNG – are also tightening the labour market and widening the gap between the necessary skills and the available talent. This has led to longer development timelines and increased costs to develop the necessary technology and get projects operational.

As the capital expenditure of O&G companies grows, the Oil Field Services sector will benefit from the increasing number, size and complexity of projects, and will be signing larger contracts leading to growing backlogs. This will drive up their backlog, however. They provide the assets and staff across various points of the life cycle of oil & gas.

Amid the surge of interest in developing large and complex projects, the OFS industry has already been grappling to keep up with demand. Every segment of the life cycle requires a certain level of capital intensity and often relies heavily on skilled personnel. This is typically a combination of staff from the operator(s) and service contractors. The relationship

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Magazine about the Dutch Oil & Gas Conference 2012 Contact: Walter Wijnhoven P.O. Box 2031 3000 CA Rotterdam The Netherlands wwijnhoven@deloitte.nl

between operator and service contractor is multilayered and very complex. It is therefore essential for all involved to understand the developments in the exploration and production of oil & gas across the globe and what they mean for the collaboration between O&G companies and Oil Field Services providers.

This was the central theme of the Dutch Oil & Gas Conference 2012 held in Rotterdam on 26 June 2012. For this magazine, we conducted interviews with our keynote speakers, as well as with Professor Pacelli Zitha of Delft University of Technology. We also give the reader an impression of the panel discussion at the conference, which, as in other years, was a resounding success.

Editorial board: Marcus van den Hoek Leonie van der Meer Walter Wijnhoven Copywriting and editing: Carla Bakkum, Back2Back Language Services Photography: Eric Bakker, overall photography Jaap Oldenkamp, photo page 33 I-stockphoto, photo page 22 Design: Marco Dobbelmann, Communications at Deloitte, Rotterdam Printing:

I hope you will find this magazine interesting reading.

Marcus van den Hoek Energy & Resources leader Deloitte Netherlands and Conference Chairman

Groen Media, Leiden No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, without the prior written permission of the publisher.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/ about for a detailed description of te legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Š 2012 Deloitte The Netherlands

Dutch Oil & Gas Conference 2012

Contents 06 The owner-contractor relationship: for better or for worse Pieter van Oord

22 Managing Brazil’s oil rush Samir Awad

34 ‘The emphasis is on quality’ Ruud Zoon

10 Global opportunities, local approaches Maarten Wetselaar

26 ‘The world is our workplace’ Hugo Heerema Frans den Houter Frank Verhoeven

38 Panel discussion highlights

16 Oil & Gas trends and what they mean for contractors Vincent Oomes

32 ‘Small OFS companies are hotbeds of innovation’ Pacelli Zitha

42 In Conclusion

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The owner-contractor relationship:

for better or for worse In recent years, and especially since the Macondo oil spill in 2010, the relationship between oil & gas companies and OFS firms has come under severe strain. Pieter van Oord, CEO of the family marine and offshore contractor by that name and chairman of the IRO, helps us analyse various aspects of this relationship and makes suggestions how it can be improved.

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The tendering phase PvO: Traditionally, oil companies chose their partners based on tenders. The contractor who offered the lowest price got the job. In the new post-Macondo world, however, quality issues will become more important. This requires a change in mindset for both parties.

The owner must focus not so much on price, but on whether the contractor has the right resources – and in particular human resources. To find this out, they will have to perform a very stringent due diligence exercise.

They need to know who is going to do the work, and actually talk to the prospective project leader. IOCs like Exxon and Shell have already made the switch and are leading the way. As projects become increasingly complex, there is no alternative for IOCs and NOCs than to do business with high-end contractors.

Contractors need to bear in mind that their reputation is their main selling point. And they can destroy it by chasing ambitious sales growth targets and tendering for too many projects at irresponsibly low prices. The essence of being a competent contractor is, when a

project comes your way that you don’t have the people to service at that point in time, being able to say no. This is a hard commercial choice to make. Though the major OFS players have some difficult years behind them, their margins are now good. But if contractors make costly mistakes, those margins will evaporate – and even worse, so will their reputation.

The essence of being a competent contractor is being able to say no Sharing responsibilities PvO: Contractors are struggling with this issue, and so are owners. After all, when things go wrong in our business, the consequences are huge. And contractors have a crucial role when it comes to safety. It may be too early for final conclusions on the Macondo accident, 7

Some owners have very little inhouse expertise left on the issues that their contractors are struggling with but it has identified corporate culture issues as a factor in what went wrong. While the people on the rig were competent, they were cutting corners. And this was partly because they were under pressure to keep costs low.

Since the Macondo spill, thoughts about what can go wrong technically are at the very, very top of the owner’s mind. IOCs have launched rigorous risk analyses.

They would prefer to have everything not checked, not double-checked, but triple-checked, with not just one backup system, but multiple ones. We use ships with dynamic positioning systems alongside rigs, nowadays we have DPS-2 systems. Some of our clients recently insisted on us using a DPS-2 vessel with a tugboat standing by. ‘Over’specification is rife at the moment, and it is driven by fear. Every eventuality has to be hedged against in advance. This places heavy demands on the resources of OFS providers. They have to be sure to price these extra safety precautions into the contract.

Risks need to be allocated to the party best able to manage them. And in some cases, that is not the contractor. Liaising with local governments, licensing, the environment and NGO relations are typical issues that require owner involvement.

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From different planets PvO: In the past decade, the trend among oil companies to outsource more and more operational activities to OFS companies has gone so far that some owners have very little inhouse expertise left on the issues that their contractors are struggling with. This is a problem for owners, because they may have difficulty distinguishing between realistic and unrealistic tenders. But it’s problematic for contractors, too. What happens when operational problems arise? Will they be able to explain it to the client? Will the client be understanding and give them more time/budget to solve the problem?

What owners are looking for is competence. And there just isn’t enough of it around Finance is another area where owners and contractors are far apart. While big oil companies can easily finance their investments from their cash flow, there are scores of small contractors who can’t get loans to build their equipment from today’s ailing banks.

The next generation PvO: What owners are looking for is competence.

And there just isn’t enough of it around. When I talk to CEOs in the oil business, all of them name this as their main worry. The first generation of offshore specialists started their careers in the 1970s. In the nineties, low

If oil companies and oil field service providers cannot solve their competence issues, they will have to tone down their growth ambitions oil prices meant the industry did very little investing or hiring. In the past ten years, with the oil price recovering, the industry has had to attract a new generation of offshore staff. A terrific challenge. There are too few engineers, and those we have are young and relatively inexperienced. For example, on a major project of ours off the coast of Sakhalin recently, our project leader was only 37 years old. He’s been with us for ten years and has done the necessary training, but this would have been unthinkable not so long ago. Of course, when the offshore industry first began in the seventies, project leaders were even younger – in the new industry that we then were, there just wasn’t anybody with thirty years of experience. But the industry has gone high-tech in the meantime.

The obvious solution is to train people. But there are only so many we can train. A contractor with a workforce of a few hundred can accommodate a few dozen trainees, but not hundreds. And once a contractor has invested in these people, they can job-hop to a competitor or a big oil company. That’s a huge disincentive. An issue on this scale calls for cooperation between owners and contractors, and that’s why our respective organisations NOGEPA and IRO have recently appointed a special joint representative for education.

in Australia, but Australian legislation forbids them to bring along their own staff and obliges them to work with Australian marine crew. And there is simply no experienced marine crew there! Localisation also makes it hard to maintain continuity in human resource development. Take again the example of contractors who have been working in Australia for several years, and gone to the trouble of training local staff. When the project is done, they can’t just take these people with them to the next job in Brazil. In Brazil, they’re back where they started. They’re obliged to take on inexperienced Brazilian staff and train them. Contractors are trapped in an endless cycle of training inexperienced people and facing competence issues in their daily operations.

Localisation rules exist in various parts of the world. Oil companies have to date been telling contractors that it’s their problem. But the only solution is for both parties to accept that it’s a joint problem and to work together constructively.

Happily ever after?

PvO: All the problems we’ve discussed ultimately boil down to competence. The big dilemma is that if oil companies and oil field service providers cannot solve their competence issues, they will have to tone down their growth ambitions. Without competent people, some projects just won’t happen.

Pieter van Oord hails from a dynasty of dredgers.

Having earned a degree in economics from the Free University of Amsterdam, he started his career as a management trainee in the US with the Dutch shipping company Van Ommeren, and held various positions in the UK and Dubai before joining the family marine contracting firm in 1994. He joined the board of Van Oord in 2007 and became CEO in 2008. He was recently appointed chairman of IRO, the Association of Dutch Suppliers in the Oil and Gas Industry.

Localisation woes PvO: A contractor can take on a billion-dollar project 9

local approaches

Shell Pernis, Europe’s largest oil refinery

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In his keynote speech at our Oil & Gas Conference last June, Shell’s Maarten Wetselaar identified the opportunities and challenges that the current market presents to oil companies and the OFS industry, and called upon OFS players to join his company in addressing not just the technical, but also the non-technical risks involved.

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‘This is an interesting and challenging time for our industry, but also one that is full of opportunities for those who are far-sighted and bold enough to get after them. I want today to talk about the energy landscape and Shell’s approach to it, and to some of the opportunities this brings. I also want to outline the challenges and why we think they require changing approaches by our industry, whether an International Oil Company, or the oil field service companies with whom we partner throughout the world.

The key will be to be innovative and competitive.

Innovative, not just in the technological sense, but also in approach. Of course, we have already seen oilfield service providers restructuring their businesses and taking new approaches in a variety of ways over the past decade, as they take into consideration what it will take to capture a sizeable share of these new opportunities. But we think they will have to go further in order to confront the technical risks – and perhaps more importantly – the non-technical risks, as the new industry landscape develops.

Investing $100bn in three years Shell is currently in the midst of one of the most ambitious investment plans in industry history. We’re investing more than 100 billion dollars between this year and 2014. We have key investment themes, including more than 60 new projects and options, which should unlock oil & gas resources potential of over 20 billion boe.

Addressing up front and early the non-technical risks We continue to balance exploration drilling in established basins, selectively expanding into frontier acreage, with new plays such as liquids-rich shales. This year we expect to invest some $5 billion in exploration. At the same time, we are developing technologies to get more oil and gas from existing sites – our heartlands - and to go into deeper and more challenging locations to deliver more energy in the future.

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EOR One example of a brownfield site we are revisiting is here in the Netherlands, at Schoonebeek – the largest onshore field in north-west Europe. The old familiar nodding donkeys on the Drenthe landscape have gone, making way for horizontal wells and low-pressure steam injection. And we expect to produce another 100 to 120 million barrels from one part of the field over the coming 25 years or so. In terms of efficiency and sustainability, it is fair to say that the whole project is one of the most advanced oil production ventures in Europe.

In Oman, we see cutting-edge Enhanced Oil Recovery techniques being used both to increase recovery rates from old, existing fields and to bring on stream new ones. In Qarn Alam in Oman we have one of the world’s largest scale steam injection projects into a fractured carbonate reservoir, which aims to increase field recovery from 4% to approximately 32%. At Harweel we are deploying Miscible Gas Flood that will increase the ultimate recovery factor from around 10% to something like 30%. And finally at Marmul, polymer flooding is being used and could increase oil recovery from the reservoir to about 30% of oil in place.

FLNG a game-changer So making the most from existing assets will be a developing trend. As will getting at resources that were previously uneconomic to recover, either because they were in remote locations or because the technology simply did not exist to develop them.

Take Floating Liquefied Natural Gas, for example. FLNG is an innovative game-changer for the industry that combines all of the steps necessary to recover and chill natural gas to liquid, and places them on a single, floating facility. The Prelude FLNG facility will monetise the Prelude gas field in the Browse basin approximately 475 kilometres north-northeast of Broome, Western Australia, and over 200 kilometres from the nearest point on the mainland. It will be the largest floating object in the world, containing around 260,000 tonnes of steel.

So rather than taking gas recovered offshore to onshore locations for various stages of processing, FLNG will allow Shell to go where the gas is. It means the company will be more able than ever to reach and recover gas from offshore fields that otherwise would be too costly or difficult to develop. And one point to note is that as well

as larger fields, fields as small as two to three tcf could be made economically feasible.

Non-technical risks EOR and FLNG are just two examples of the technological areas into which Shell is becoming more involved. I could cite many others, which will be well known to you. The Arctic and Alaska, where we plan to begin exploration drilling this summer. Deepwater, where post-Macondo we are seeing ever more stringent regulation and scrutiny of operations.

And shale gas, which as you know has boomed in the United States and Canada, and is in the process of being developed – or at any rate attempts are being made to develop it – in many other countries, from the UK to New Zealand and South Africa.

Shale gas neatly highlights what is perhaps our biggest challenge in this energy-hungry world: not the technical risks associated with our operations, which are of course huge, but the non-technical risks. Just a couple of years ago, hardly anyone outside our industry would have heard of fracking. Now it seems just about everyone has an opinion on it. And most of it negative. How do we overcome this? How do we try to shift opinions and attitudes so that projects that we want to develop – that the world needs if it is to meet its energy demands – can go ahead? The answer does not lie in explanations of the science, sound though they may be. Shell discovered that years ago with Brent Spar in the North Sea. We had all the science on our side, but it didn’t matter one bit. The answer lies in addressing up front and early the non-technical risks: the issues of competition for resources, such as water, the question of local content and building local capacity, community development, community engagement.

The key will be to be innovative and competitive Competition for resources I came across a good example of this recently in Shell.

At our Fushun tight gas project, southern Sichuan, China there was an issue over water use. A drought threatened the May crop planting season. Farmers desperately needed water, while at the same time, Shell was in need of water for hydraulic fracturing of a well.

We had seen villagers in Fushun repeatedly blocking road access to Shell trucks. After protracted negotiations, a simple act of good neighbourliness turned the situation around to the point that Shell is now receiving thank you banners from the very villagers who once viewed us with cynicism. The turning point came when Shell in Fushun agreed to use its pumps and pipes to water the dry village fields. Within two days, around ten hectares of dry fields were irrigated. The prospect of a bleak season was dispelled, but so too was the initial reticence to welcome Shell. Villagers have approved Shell’s use of reservoir water for the fracking process, allowed pipes to traverse fields and let us use local roads.

What this recent example demonstrates is that the non-technical risks associated with community interactions are significant, and poor performance in this area will show up quickly in overall project performance.

Even so, hard work over a long period of time by Community Liaison Officers is required to prevent issues from developing into disputes with a risk of physical confrontation or impact on cost and schedule. This, of course, requires a local approach. Not something that can be achieved from a remote, global headquarters.

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Local content Local content and capacity building, too, is high on the agenda and is often driven by national or local requirements. Even where regulation does not play a part, the creation of sustainable local capacity is paramount. And it should be part every company’s programme. Shell always promotes local partnerships in countries where we operate; it is simply good for business. The idea of local content development is not new to us – rather it’s something which started quite early on in a number of our global operations.

Making the most from existing assets will be a developing trend For example, Shell-run companies in Nigeria awarded contracts worth more than $900 million to local Nigerian companies in 2008. This represented more than 90% of the overall number of contracts in the country. Just last month Shell sponsored an event which brought together a delegation of local contractors from Iraq and Oman to meet with international service providers based in the UK. Some of you may have been there.

We think that encouraging local content makes even more sense in locations such as Shell’s Majnoon oil field in Iraq - where a young population and historically high unemployment rate exist. At present 1400 Iraqi

Maarten Wetselaar studied business economics in Groningen and controlling at the Free University of Amsterdam. He joined Shell in 1995 and held three Vice President positions from 2000 to 2009, with responsibilities ranging from Finance to IT and Business Develoment and geographically from Africa and the Middle East to the former Soviet Union, before being appointed Executive Vice President Finance Upstream International, his current position.

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contractors are employed to work on the project, while US$ 56 million worth of contracts were awarded by Shell to local companies in the first quarter of 2012 alone.

We worked closely with these Iraqi contractors prior to awarding their contracts and conducted extensive training to upgrade their skills in order to meet HSE requirements.

In Oman, PDO recently awarded a single source US$ 38 million pipeline contract to a local company and is providing skill training to more than 400 workmen on welding, scaffolding and electrical and mechanical maintenance. The decision was deliberately made to award the contract to an Omani company in order to transfer knowledge to the local population and benefit the community in the long run.

In general, of course, a large number of local companies, such as those from Iraq and Oman, face difficulty in resources and technical capabilities to provide services that meet Shell standards. But by giving them an opportunity to work with international service providers, both companies stand to gain new insight into project best practices, specifically in technical knowledge sharing and on-ground know-how.

OFS must help us Let me sum up. As you know, Shell expects and requires it oil field service partners to meet our global standards.

Many have adopted our Goal Zero approach to safety, for instance. To underline our commitment to safe operations and environmental prudence, we say: “If you choose to break the rules, you choose not to work for Shell.” I know that attitude is well known to your community.

But just as with safety, we believe that the capacity of companies to play a part in helping us develop the opportunities I have spoken about requires them to take the same approach to non-technical risk as we do. Yes, the technological capability is important. Yes, the contracting strategies need to be right. But being committed to addressing non-technical issues - the jobs, the communities, the competition for resources – is just as important. Because if we don’t take them seriously, those opportunities may well just stay on the drawing board.’

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Oil

Gas trends

and what they mean for contractors

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Oil & Gas offshore reserves and the Golden Triangle

Oil Gas

Source: Offshore Magazine, Deloitte analysis

In a world hungry for energy, oil & gas will continue to enjoy strong demand. And there are plenty of reserves - but few that can be termed easy to recover. So today’s market is a paradise for the OFS industry, right? Not quite. There are still challenges and risks to be dealt with. Deloitte’s Vincent Oomes makes sense of the datastream.

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Oil production by water depth

600

35

500

30 Barrels of oil per day (m)

Cumulative oil discovered (bn barrels)

Cumulative oil from offshore well exploration

400 300 200

25

Deep

20 15 10

Shallow

100 5 0 0

5,000

10,000

15,000

20,000

Cumulative number of wells explored

0 ’60 ’65 ’70 ’75 ’80’85’90 ’95’00 ’05 ’10 ’15 ’20

Source: Douglas Westwood; ABN Amro; Deloitte analysis

Offshore oil & gas coming from deeper water and smaller fields It is becoming increasingly clear (see figures above) that while discoveries are keeping up with production, the days of “easy oil” are over. The average contribution of each new well to cumulative discoveries is getting smaller and smaller. Producing smaller finds is viable, however, with oil prices trending upwards. What is also becoming financially worthwhile is using enhanced oil recovery to increase the percentage of recovered oil per well – both new ones and ones previously abandoned.

Offshore oil production has been rising steadily in the past fifty years, and should continue to do so for a few years more before levelling off around 2020. In traditional shallow water locations, overall and per-well production figures are likely to decline going forward, but as exploration and production moves increasingly into deep water, total production per well is likely to become higher again. This is because in deepwater locations there is still plenty to explore, with the potential of big finds, and large fields recently discovered in Brazil and West Africa have yet to be produced. The Golden Triangle stretching from the Gulf of Mexico to Brazil and across the Atlantic Ocean to Western Africa is already home to the world’s 18

richest known offshore reserves of oil and gas (see figure on previous page).

The Arctic reserves look small in comparison, and production costs vary from high for shallow locations near the coast to extremely high for remoter deepwater locations. Still, there are strategic considerations underlying the drive to explore and produce there anyway. The Middle East still has enough oil to last the world another fifty years, and Brazil’s reserves are also incredibly large. Oil importing countries, however, prefer not to be too dependent on just a few suppliers, who then have too much control over the price. Moreover, political unrest or, in the case of Brazil, the operational challenges pose significant risks. Problems in either of these regions will cause strong upward pressure on oil prices. All this makes a compelling argument for oil importing countries to seek a more diverse supply base and derive oil from their own or from hitherto unclaimed territory.

Australia, meanwhile, is set to play a significant role with its massive offshore gas reserves. Japan and China will be keen to buy closer to home and be less dependent on the US.

Authority For Expenditure (Index for Land per BOE = 100)

Oil & Gas CapEx vs. oil price development CapEx ($bn) 800 CapEx Oil price

Oil price ($/barrel) +43% 140

600

120 100 80

400

60 40

200

20 0 Conventional Shallow land water

Deep water

Hostile deep water

Source: Halliburton Investor Presentation

Double whammy The oil industry is in for a double whammy – in the most positive sense conceivable! First of all, as explained, the volume of oil & gas being produced is steadily growing.

But on top of that, the industry’s move offshore means money. Developing an offshore well costs between five and thirteen times as much as developing a conventional land well (see figure above). The deeper the water, the remoter the location, the more the oil & gas companies will need to invest in exploration and production. In spite of the global economic slowdown, the O&G industry as a whole is expanding and much of the extra business will fall to contractors.

In 2011, experts projected overall capex (both onshore and offshore) to increase by a whopping 43% between then and 2015. This figure was based on the assumption that oil prices would steadily rise, but the current global economic slowdown has caused a second, modest oil price dip following the one in 2009. Much depends on whether China can sustain its strong economic growth.

If not, demand for commodities will wane and oil prices will stabilise at a lower level.

’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13 ’15

0

Source: Barclays Capital, World bank, Douglas Westwood, Infield, Deloitte analysis

Offshore more vulnerable to price movements The impact of lower oil prices is particularly strong in the offshore sector, where the oil price needed to break even is relatively high. The cost of producing oil can vary from $30 dollars for the least demanding fields to over $90 for the most challenging ones. Offshore fields are predominantly the more challenging ones. A modest decline in oil prices can make a vast difference in the number of fields/the total volume of oil that is worth producing.

A similar pattern can be seen for natural gas. Due to transport constraints, however, the gas market is not a global market with one global price. In the US, the gas price is now around $5, so American projects involving higher unit production costs than $5 threaten to remain on the shelf. The Australian projects are much costlier to produce, but in that part of the world could still be viable thanks to the local upward price effect of strong demand from neighbouring countries China and Japan.

If intercontinental LNG shipping gathers momentum, gas prices worldwide will converge and this will have vast consequences for the more expensive gas projects currently on the drawing board.

All in all, even in the current booming market there is a considerable degree of uncertainty as to which projects 19

Level of risk by Oil & Gas source Environment/Geography/ Climate

Technology dependence and infrastructure

Conventional onshore

Relatively fewer environmental concerns

Relatively less complex and proven technology

Other (GTL, regasification)

Relatively fewer environmental and geographic issues

Dependence on complex and nascent technologies

Shale gas

Environmental concerns in fracturing

High dependence on hydraulic fracturing

LNG

Safety concerns in large projects

Complex infrastructure

Oil sands

Water contamination and green house gas emission

Relatively larger processing infrastructure requirement

Conventional Arctic

Harsh icy conditions, remoteness, territorial disputes, climate concerns

Extended reach drilling, artificial islands, ice resistant GBSs, FPSOs

Deep water

High water depth, complex geography and environmental concerns

Complex infrastructure and subsea technology

Overall Risk

Source: Goldman Sachs, “330 projects to change the world”; Deloitte analysis

will actually materialise. Price falls triggered by economic stagnation can even lead to projects already underway being discontinued.

New technologies mean more risk Besides commercial risk, the industry also faces higher risks relating to nature and the technology needed to overcome the challenges that nature presents. The risks on conventional onshore projects – and shallow offshore ones - are known and manageable, but they scale up as activity moves into remoter areas and tougher reservoirs and technology gets more complex. If a contractor takes on a job for a lump-sum price, risks like these can lead to serious budget overruns. The financial position and the very existence of the contractor can come under threat.

Cost side developments More and higher-tech wells also require more and higher-educated staff. The talent shortage is most acute in Australia, but even in the North Sea, where offshore E&P is past its peak, demand for personnel will continue to be strong. This is due in part to decommissioning of platforms, which has already begun in Norway. The shortage of talent is likely to lead to higher personnel costs for contractors going forward. A factor that may mitigate the overall increase in costs is the decline of the price of steel, which also has a substantial impact on contractors’ spending.

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Does the boom spell bigger profits for contractors?

As explained, stronger demand for oil & gas plus sourcing from more expensive wells together add up to a major increase in the volume of business for contractors. On the other hand, they face higher risk levels on account of the greater technical complexity of OFS projects and higher staffing costs. Contractors need to increase their margins if they are to absorb the financial setbacks when things go wrong, otherwise they may end up working more, but earning less. Oil & gas companies, however, may not be ready at this stage to accept a higher bill.

In a buyer’s market, the dominant contract form is the lump-sum contract, where all the risks are borne by the contractor. In an expanding market, however, sellers of services call the shots. In a cost-plus contract they can specify that the oil & gas company gets charged for every penny of unexpected costs along the way. Until 2007, cost-plus contracts were the norm, but since the global financial crisis in 2008 and the ensuing oil price fall, power has shifted towards the oil & gas companies and lump-sum contracts have become common.

Now, however, the pendulum seems about to be swinging back. It is debatable whether lump-sum contracts can work in the current higher-risk business environment. Risks need to be shared more fairly, in the

If there are problems under a fixed price contract, the contractors will slow down the project hampering its profitability

Risk Allocation as a Function of Compensation

FixedPrice Lump Sum

Fixed price/ lump sum

Don Voelte, ex-chief of Woodside Petroleum Risk sharing offers an option to equally distribute the risks and return between owner and contractor

FixedPrice Measured Fixed-Price Incentive

Cost plus

Cost Plus Incentive Fees Cost Plus Fixed Fees

Source: Adapted from Dunlop, J. et al. “Impact of Risk Allocation and Equity in Construction Contracts,” Construction Industry Institute Source Document 44, March 1989

interest of both parties. If risks for contractors become so high that many go bankrupt, oil & gas companies will end up sourcing in an OFS playing field with less competition.

And where competition is stifled, prices go up.

Lump-sum contracts have another downside for oil & gas companies, too. In the face of mounting costs, the contractor may choose to use cheaper equipment, hire less/lower quality staff or even slow down the work to avoid financial problems. Once the contractor is losing money on the contract, even threatening to cancel the contract will not help – that would be doing the contractor a favour! This is a lose-lose situation that needs to be avoided.

The solution is for parties to meet each other halfway, and that is increasingly happening. New contract forms are emerging that combine the characteristics of lump sum and cost plus, leading to a better balance of risks between contractors and oil & gas companies. These contracts have an incentive element: milestones are specified where bonuses can be given for exceeding expectations and penalties for failure to meet targets.

Conclusion With global energy demand steadily growing, the market holds great promise for both oil & gas companies and their contractors. At the same time, as recovery becomes more technologically challenging and labour-intensive, the risks involved are becoming too high for contractors to shoulder alone. The sharing of risks needs to be laid down in new kinds of contracts. Contracts like these, which align the interests of oil & gas companies and their contractors, are our best hope if the oil & gas industry is to meet the challenge of delivering enough energy for tomorrow’s world.

Vincent Oomes is an applied mathematics graduate from Twente University, with an MBA from Erasmus University. He worked for KWW Management Consultants, which became a part of Deloitte in 1997. He is a partner in Deloitte’s Strategy & Operatons Practice.

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Oil drilling rig off the coast of Brazil, working for Petrobras. 2010

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Managing Brazil’s rush

oil

This summer, Petrobras presented a revised five-year business plan, with toned-down production growth figures. But Samir Awad, CEO of Petrobras Netherlands, assures us that the outlook for Brazil’s presalt assets is as bright as ever.

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When massive oil reserves were discovered deep in the seabed, under a layer of salt, off Brazil’s coast, statecontrolled oil company Petrobras saw an opportunity to catapult itself into the global oil industry’s major league.

To develop these assets, plans were made in 2009 to invest a mind-boggling 186.6 billion dollars in five years – putting Petrobras’ capex above that of oil giant Shell.

Brazil is an attractive destination for investors The timing looked good. When the credit crisis swept the globe in 2008, oil prices collapsed and global spending on oil exploration was cut short. By 2009, the order books of oil service companies were starting to look empty. In the Gulf of Mexico, later on, the Macondo spill had led to a moratorium on drilling. So there seemed to be plenty of OFS capacity for developing Brazil’s newly found oil riches.

Stretched OFS market Since then, however, drilling has resumed in the Gulf of Mexico. In West Africa, new oil finds have come under development and are competing for OFS capacity with Brazil. Unrest in the Middle East and mounting oil prices have spurred increased interest in developing technologically more challenging oil & gas reserves elsewhere in the world. Japan’s and Germany’s decision to phase out nuclear power is fuelling demand for fossil fuels. As a result, the OFS and offshore construction markets have become extremely tight.

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Meeting the company’s colossal needs in terms of hardware, services and human resources in this stretched market is challenging, in more ways than one. Though Petrobras is committed to buy and hire Brazilian wherever possible, contracts with partners overseas are inevitably part of this great effort. To be in charge of its procurement of floating platforms and subsea hardware, Petrobras established a company in the Netherlands in 2001, now employing several hundred people around the globe. Its CEO Samir Awad calls himself ‘a facilitator for those who want to work for Petrobras.’

And there are many Dutch companies keen to do just that. To show them the scale of opportunities in the Brazilian market, Samir Awad has plans in November to accompany the biggest Dutch trade delegation ever to Brazil, which will also include Prince Willem-Alexander and Princess Máxima. ‘The Dutch already rank among the biggest foreign investors in Brazil,’ says Awad, ‘and with the euro crisis still unresolved, Brazil is an attractive destination for investors.’

Delays Petrobras, Awad knows, has been labelled by some industry watchers as ‘too agressive’ for the unprecedented scale of its plans, building nineteen production platforms, with a production capacity of over 1.7 million barrels a day, at the same time. Some of these platforms are being initially built in shipyards in China and Singapore, but most in Brazil itself. ‘Brazilian shipyards that have lain idle since the nineties, when all but one of them were closed, are now being revived. They’re taking slices of the huge contracts Petrobras is offering.

And we have to manage all these interfaces and ensure that they’re delivering quality work on schedule and on budget. So it’s not so surprising that we’re seeing more delays than before. It is a lot of work, but the prize is big.’

Contrary to Petrobras’ earlier guidance, production is not growing. The schedules are slipping. The problem, Awad believes, is that the global oil field services and offshore construction industry in Brazil simply cannot cope. ‘The international contractors who have been in Brazil for many years have doubled or even tripled their facilities in the area to cope with Petrobras’ demand. Even so, their order books are overflowing and they can hardly take any more.’

aggressive business plan was based on the assumption that production from the recently installed platforms would generate enough cash flow to help cover the production expansion’s funding needs. ‘It will certainly happen, ‘ says Awad, ‘but now this cash flow is taking longer to materialise.’ Meanwhile, however, he assures us that Petrobras is still enjoying reasonably good access to financial markets worldwide, supported by its excellent prospects.

To help fight the delays, Petrobras has been forging longer-term relationships with contractors and vendors.

‘They are slowly delivering what we have contracted.

From an operational point of view, Petrobras has secured most of the resources it needs for at least the next five years.’

In the revised, more realistic five-year business plan, the production growth curve will be somewhat flatter but the total amount of capex will slightly increase to 236.5 billion dollars from the previous plan’s 224 billion dollars. ‘In a worst-case scenario, a global credit crunch in the near future, Petrobras might have to consider putting part of its investment plan on hold. Building the contracted production and refinery facilities will not stop, but we have some flexibility to postpone other projects still in their initial phases, if necessary. That’s the beauty of the process. Once everything is contracted out it will be difficult to break the speed of our expansion. There’s no way back.’

The human factor But that still leaves the problem of human resources.

Contractors operating in Brazil’s offshore sector, struggling with the crewing of their vessels, have descended to the level of poaching each other’s staff, Awad observes. Even Petrobras itself, which never had trouble attracting brilliant minds in the region, is finding it hard to find and retain young engineers. ‘The industry relies on grey heads, it is indeed a global problem in the oil industry and certainly not limited to Petrobras in Brazil.’

Petrobras has been responding to this cyclical trend through a comprehensive hiring and training programme ‘hothousing’ bright engineers of other disciplines in its own training centre. In a compressed course of less than a year, they are trained into petroleum engineers, ready to go to the field. Thanks to modern ICT, however, a mentoring team of ‘grey heads’ is looking over their shoulder 24/7 from Rio de Janeiro. In this setup, Petrobras remains a match for the increasing complexity of deepwater exploration and production.

Credit squeeze By no means the least of the challenges Petrobras faces are adverse credit conditions. The euro crisis has made money tight around the globe. ‘In the eighties and nineties Petrobras offered five-year contracts to its contractors, who could then easily get bank credit to fund their operations,’ Awad explains, ‘but now even a ten-year contract might not induce a bank to provide cheaper funding.’ Meanwhile, the company’s own

Samir Awad studied Mechanical and Subsea Engineering in Brazil and the UK. He joined Petrobras in 1983, dedicating 14 years of his career to Campos Basin deepwater operations. Since the mid-nineties he has held management-level positions. He was Country Manager in Nigeria from 1999 to 2006, and subsequently led international activities in 14 countries from the company’s Rio de Janeiro headquarters. He was appointed CEO of Petrobras Netherlands in 2009.

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Good old oil & gas will be...

‘The is our workplace’

world

As the quest for oil and gas moves into remoter corners of the world, deeper water and more challenging rock formations, E&P projects are becoming increasingly complex. What does this mean for Dutch OFS providers and the way they interact with their clients? An inside view from Frans den Houter of HMC, Hugo Heerema of Bluewater and Frank Verhoeven of Boskalis.

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...more in demand than ever What has changed in scope of the contracts you sign with E&P players?

Frank Verhoeven: It has been our strategy to move away from simpler projects like chartering, where cost leadership is the key to success, towards more complex projects where we can add value with our people, know-how and assets. In the past, the market was dominated by single-activity contracts. Clients did their own design work, and we fitted our working methods to their design. These days, EPIC turnkey contracts are the norm. The design is often our own, and we can fit it to our working method. That prevents problems in the interface. We often do the interface management for the client. Most recent contracts comprise not just design and construction, but also extra features ranging from maintenance and finance all the way to operation.

Frans den Houter: Whereas our core business is the transport and installation of offshore structures, from production platforms to deepwater pipe lines, in recent years we’ve seen a shift towards more complex projects that have made it necessary to gear up our entire organisation.

Frank Verhoeven: We have had a number of experiences with alliance contracts, all of them positive leading to lagging investment power. The risks FPSO contractors run are large: effectively the daily lease rate we offer is a fixed price quoted today, after which design, procurement and construction take up the following three years.

On top of this, we indirectly run the reservoir risk: our clients succeed in contracting us with a minimum time guarantee that coincides with their most conservative estimate of the field’s life. Thus the contractor is at risk of having an idle unit return much earlier than planned – a unit that normally needs investments of over 100 million

EPCI (Engineering, Procurement, Construction and Installation) contracts require us not only to adapt to new ways of working, but also to stay vigilant in order to maintain a responsible level of liabilities. Activities such as design and procurement carry higher exposure to risks which must be continuously monitored and mitigated.

These changes have consequences for pricing.

Are contractors making more money?

Hugo Heerema: Our industry segment (building, owning, operating and leasing of FPSOs) is structurally not making enough return on investment to stay healthy in the long term. There’s a shortsighted competition on price going on between players that are too hungry for sales growth and ignore the quality of that growth.

This is particularly true in listed companies, which need growth to impress their shareholders and analysts. These companies become monsters that need to be fed, even if it is with underpriced projects.

An underbudgeted project can undermine a company’s profitability for a very long time, and this is what has been happening to the FPSO business for many years,

Frank Verhoeven joined Boskalis in 1976, right after earning his civil engineering degree from Delft University. He held various operational and technical positions before becoming managing director of Boskalis Netherlands. Following the merger with Smit in 2010, he became Chairman of Smit, managing the merger and further integration of Smit and Boskalis. In May this year he was appointed a member of the management board of Royal Boskalis Westminster N.V. 27

dollars to prepare it for a next assignment. That is why I say that OFS players need more wisdom and self-discipline to contract on the basis of a sound budget and risk analysis and with a decent margin, and that it is prudent business to be prepared to lose a contract to somebody else if these criteria are not met.

FdH: Over the years we’ve seen many parties accepting risks, beyond reasonable levels, only to score a reward.

Needless to say this often turned sour for those involved.

Our industry needs to achieve a sustainable balance between risks and rewards. The goal is not to make more money but to establish an environment where contractors have the financial capabilities to invest in the future. To move forward not only the contractors but the entire industry calls for innovation and new assets.

Do you foresee a turnaround in this race to the bottom?

FV: In the past, the contractor offered a lump-sum price based on the design specifications provided by the client, but more and more new contract forms are emerging.

The most recent new contract types are the alliance contract and the early contractor involvement type. These innovations came from the Anglo Saxon countries. What is the key to successful partnering? Focusing on project outcomes, open communication, and a fair risk/reward balance that aligns the commercial interests of the parties. To date, we have had a number of experiences with alliance contracts, all of them positive.

HH: Recently we’ve been seeing more tendering the way it should be, both for FPSO lease contracts and for turnkey supply contracts. Owners invite a group of three or four contractors to prequalify, and in the first round narrow that down to two. With these two the company runs a FEED study that ends with a price or a pricing mechanism. If the technical uncertainties involved are very high, the oil company can opt for a reimbursable model or another financial structure in which the contractor does not have to factor these into his price. So the owner still maintains some control and the risk is shared. In respect of the very large and frequent investments FPSO contractors are faced with, I foresee that owners will in the future have to co-invest

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with contractors in some way or other. If not, the floating production industry won’t be able to service its clients.

FdH: Although our industry is also exposed to external factors, we still see the right conditions to provide growth in demand. Clients are aware of the need to secure the availability of highly specialised assets and services, like the ones under HMC control, and that can be noticed in the trend towards different types of long-term agreements being discussed and agreed. We see this as a positive development for both parties.

OFS is a very fragmented sector, with a few large players and a great number of relatively small ones. Is size an issue?

FV: In the past, technology developments were most of all production driven. More production means that the assets need less time and the cost price goes down.

Nowadays, technology developments are product driven.

There is a focus on quality, the environment, higher accuracies, the ability to operate in deepwater and arctic conditions. A company needs to have a certain scale to be able to make these high investments in assets. Our company’s strategy is to make acquisitions that offer

Frans den Houter was originally trained as a hydrographical surveyor. He subsequently earned degrees in financial management and controlling from the University of Amsterdam. He started as a controller for Exxon Mobil in 2000. In 2005 he moved to Shell, where he worked as a controller, project manager and finance manager. He joined Heerema Marine Contractors in 2010 as a Finance Manager. In September 2012 he became CFO.

synergy with our existing activities. But we’ve found that there’s a limit to the amount of people and assets that you can integrate into your organisation.

HH: Bigger is better, but consolidation is often not the answer. Putting two weak companies together does not create one strong company. In 2008 we saw a shakeout in which newer, highly leveraged speculative players were wiped out, but companies with twenty years of experience got swallowed up by competitors, too. I don’t always see the rationale of all these takeovers. Why buy more of the same? What’s the added value? OK, it reduces a company’s vulnerability when a project goes wrong, but what you don’t create is market clout. Consolidation only really starts making sense when it provides access to different technology or new geographic areas. Bluewater has been wooed over the years, too, and the suitors always claimed that together we would have a stronger position in relation to our clients. But what I see is that the bigger companies have to tender for projects just as we do. And the envelope with the lowest bid gets the job.

FdH: Size is only an issue when it doesn’t match the company’s commitments. At HMC growth is functional and correctly serves our project executions. It’s not a goal in itself. We focus on our unique assets, so our size is a consequence of the challenges we have to face and a response to mitigate the risks involved. We’re a niche player.

Do joint ventures offer a solution?

FdH:Sometimes we work with another party, getting a slice of the contract. An alternative would be to bring in a shareholder, but that would mean giving them a say in our operational decisions. HMC is currently involved in a joint venture in Angola, and has been a partner in JVs in the past as well. In these joint ventures, it has always been important to us to maintain our identity and operational standards.

HH: In theory, we could develop an FPSO in a joint venture. But it just won’t happen. Our competitors would laugh at the idea, and apart from that parties don’t like being joint and severally liable for each other’s scope of services. What you do see occasionally is a joint venture between a cash-rich Asian upstart who lacks the expertise for a project and a seasoned European contractor who lacks the finance for it. It’s more a financing operation than a real joint venture.

Frans den Houter: Size is only an issue when it doesn’t match the company’s commitments The North Sea offshore industry, they say, is in its sunset. Do you agree?

HH: I challenge that view. For example only recently, the Johan Svedrup field, containing upward of 3 billion barrels of recoverable oil, was discovered in a heavily explored area off the Norwegian coast. New technologies for locating oil and gas and recovering more from existing wells guarantee continued E&P there for many years to come.

FdH: In the past, the North Sea has seen an enormous level of investments. So relatively speaking, what is happening now is just a fraction of that. However we still expect new developments, going forward, and the decommissioning market should also offer an interesting source of income.

What does that mean for Dutch OFS companies?

FV: We’re based in Papendrecht, the Netherlands, but we’re active in 75 countries across six continents.

Developments in the North Sea don’t have a significant impact on our revenues.

FdH: It means finding ways to stay Dutch elsewhere in the world. HMC, as we said, executes its projects around the globe, yet we have our headquarters in Leiden and carry out our major maintenance in the Netherlands. At the same time, we’ve developed new logistic lines away from the North Sea and are constantly expanding our operational and commercial networks. In each region there’s a learning curve to make, but it still pays off to invest in new areas. Of course new markets often mean new competition, and that’s where HMC shows its ‘Dutch’ heritage: convincing the local stakeholders of the advantages of using our assets.

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Hugo Heerema: There’s a shortsighted competition on price going on in our segment HH: Our business doesn’t depend on continuing E&P activity in the North Sea. The world is our workplace, and all the Dutch OFS companies are global players. Even if the story about dwindling North Sea development opportunities were true, Dutch companies would still enjoy plenty of business. A lot of the engineering, project management and procurement for far-away projects still goes on right here. In my view, there’s no such thing as a knowledge-based economy. Knowledge and innovation can only thrive in countries where the underlying industry is still present. And our industry is still and will continue to be very much a presence in the Netherlands.

Hugo Heerema, a graduate of Delft University, worked for several years as the Commercial Director and later Executive Vice President of Heerema Group. In 1993 he acquired Bluewater, a specialist provider of FPSOs and single-point mooring systems. The company currently owns and operates five floating production systems and has branch offices in key markets around the world.

Hugo Heerema is CEO and President.

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What trends do you see for the next decade?

HH: I’m confident in predicting another decade of high activity levels. Deep water and arctic oil and gas are growth markets. With nuclear energy out of favour, good old oil & gas will be more in demand than ever.

Renewables are interesting - we’re involved ourselves in developing a floating Tidal Energy Converter - but they will remain complementary. What could pose a threat to the offshore industry is the shale gas boom. The colossal onshore gas reserves discovered in recent years are just the beginning of more discoveries. Oil companies are now investing billions in floating LNG, particularly for the Japanese market, but as more onshore shale gas comes in production, I wonder whether floating LNG is going to be the worldwide hit they said it would become.

FdH: We’re focusing on the deepwater segment. Our latest investment, Aegir, with a total value of around 800 million dollars, is the most clear statement we can make in relation to future trends. Deepwater developments, in the next decade, will account for a large share in new oil & gas production. This will demand closer collaboration among larger industry players. Further investments will be needed, both in vessels and in new installation technologies. Arctic is also seen as new frontier, but it is still early days to try to express an opinion on how it will develop.

FV: I see the role of contractors changing. Dredgers used to be subcontractors on the projects they engaged in, but these days for medium-sized projects we’re often the main contractor. This has significant consequences for our people. The education level of our staff is steadily rising. We have less high-school level staff and more MScs and PhDs on our payroll. Fewer superintendents and more project managers. Besides dredgers, we employ quantity surveyors, marine biologists, procurement staff and general managers. We have enormous in-house engineering departments working on design. We are evolving into a very different kind of industry than we used to be.

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‘Small OFS companies are

hotbeds of innovation’ As finding and producing oil and gas becomes increasingly complex, innovation is the make or break of success, for operators and OFS companies alike. With Professor Pacelli Zitha of Delft University we look at how innovative our industry is.

What is the likeliest place for technological innovation to evolve? The universities?

University and corporate research each play their own role in generating innovation. I recently became a fulltime professor, before that I spent part of my working week at Shell’s laboratory in Rijswijk. What university labs do is study a very narrow subject in great depth. In a company lab, attention is spread across a wider range of subjects that are relevant to the business. Some teams will be working on applications with a time to market of five years or more, others on things that will be applied within a year or two. Cooperation of public institutions and companies could in many cases streamline research and development effort and lead to faster results.

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do this at far lower cost, and at less reputational risk.

They’re hotbeds of innovation. I’ve often heard it said that if a technological breakthrough for E&P is going to surface anywhere, it will be with a smaller company.

And following its success, that company will become the target of takeover bids from IOCs and the bigger service companies.

Meanwhile OFS companies, eager to move up the value chain, are developing innovations of their own. A good idea?

It’s hard to say who should or shouldn’t be doing research. Operators can leave it to service companies, but then they will have to accept that these parties, if they succeed in developing innovations, will become a formidable power factor. This is leading to uneasiness with IOCs in particular, who are not used to sharing power.

New production technology was at the root of the shale gas boom. What’s the outlook now?

In the past five years we’ve seen huge advances in horizontal drilling and fracking, which will be opening up not just shale gas, but also increasingly shale oil fields. In the Netherlands, given the perception of the public and politicians that fracturing is risky for the environment, shale reserves won’t be developed for some time. But once the technology has been sufficiently proven in neighbouring countries, we will follow suit.

In the meantime, I think we should continue to invest in building shale expertise. There isn’t much of it around in our country. Shell has some expertise gained in North America, but Shell is not the party who’s going to be developing the relatively modest Dutch shale accumulations. They’ve got their sights on China, where the reserves are expected to be huge.

What about smaller OFS players like our country’s own Van Oord, Boskalis, Bluewater and HTC? For them, I think the situation is very favourable. To big operators, developing new technology is a headache.

They have internal systems in place for testing innovations and bringing them to market, but smaller companies can

What other trending topics do you see?

Enhanced Oil Recovery is hot again. Much of the EOR technology currently used was developed in the eighties, after the first oil crisis. When the oil price tumbled, interest in EOR faded, but with prices rising and reserves dwindling, EOR is being revisited. Smaller

Professor Pacelli Zitha, born in Mozambique, earned a PhD in Physics at the Université Pierre et Marie Curie in Paris in 1994. He accepted a postdoc position with the Department of Geosciences and Engineering Geotechnology of Delft University, where he climbed the ranks to become Professor of Oil and Gas Production in 2007. In 2006 and 2007 he was seconded on a part-time basis to Shell’s Rijswijk laboratory as Senior Research Advisor, working in the lab’s Exploratory Research and Improved Oil Recovery divisions.

We should continue to invest in building shale expertise. There isn’t much of it around in our country outfits are buying up abandoned fields and using classic EOR to develop them at a tidy profit. The larger players, however, are making new advances in EOR. In East Asia, for example, the majors are investing $40 billion in EOR to keep production of their existing wells from falling.

In the North Sea, the Norwegians are investing heavily in EOR, and rightly so. If we can increase recovery from these fields by 5%, we can continue producing there for another 20 years! The latest in EOR is the intelligent well.

With intelligent wells we’re getting better and better at tracking what’s going on in the reservoir and injecting well fluids to enhance the production process. That way we get more out of wells using less energy and less water. More IT not only increases the recovery rate per well, but also means you need fewer people to get the job done.

That’s interesting, too, as human resources are becoming perhaps the industry’s biggest bottleneck. What should be done to address this problem?

Students who choose to specialise in Petroleum Engineering and Geosciences do continue with a career in those fields, but they have not been enrolling in overwhelming numbers. What’s being done about this?

Individual companies offer prizes of a few thousand euros for outstanding theses, or grants to particularly gifted students. In our department, only four of the 25 MSc students have grants from IOC companies. The university would benefit if companies would contribute to a more substantial joint fund instead, that would be a more structured, less fragmented approach. We have a university fund which could be an excellent vehicle for this. More important is the question why we’re failing to attract the kind of creative minds that are essential to long-term success of the oil industry. This has partly to do with the public perception of our industry as old-fashioned, involving hardship and non-sustainable.

This perception is of course not completely right, because the industry has made enormous progress in modernising its processes. The industry should however communicate better about its high-tech characteristics and modernise areas that have stayed behind if it wants to appeal to today’s youth.

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‘The emphasis is on quality’

In an ever more complex global E&P arena, oil & gas companies face dilemmas in their dealings with contractors. We asked Ruud Zoon, Managing Director of GDF SUEZ E&P Netherlands and Chairman of industry association NOGEPA, to comment on a few.

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Your company’s relationship with contractors: hands-on or hands-off?

It depends whether you’re talking about our Dutch E&P affiliate or GDF SUEZ E&P International. The Dutch company became a part of our organisation in 2000, but it has been operating in the Dutch sector of the North Sea for almost 50 years now. We are the largest Dutch offshore gas producer and the largest offshore infrastructure owner. We have a very solid knowledge base on subsurface geology, on facilities construction and operation, and we have strong relations with the Dutch government and regulators. We have our own purchasing department. We do basic engineering ourselves, hiring relatively small engineering firms for more detailed engineering. This way we’ve already constructed some 40 offshore production platforms for the Dutch offshore sector. When we contract to a construction yard, generally in the Netherlands, we provide most of the specifications and drawings and free-issue the equipment. In essence we take the lead, and directly manage the contractor company. I would therefore say hands-on.

And internationally?

GDF SUEZ E&P is relatively young within the GDF SUEZ group. At corporate level we are not an E&P based organisation like Shell, BP or Total. For our parent company, the French-based multinational utility group GDF SUEZ, developing upstream activities is part of its strategy for international growth and contributes to building a diversified, balanced and profitable portfolio of reserves. It’s a vertical integration step. We started building a position through acquisitions, but our international E&P activities are now also expanding organically, as we embark on major projects.

Right now GDF SUEZ is operator of the Cygnus gas field development in the UK and though “Groupement TouatGaz”, a joint venture with Sonatrach, the Touat Project in South West Algeria. These are large-scale projects for which we have to build teams on a project basis, recruit experienced and competent project staff, and work with the most experienced and competent contractors and service companies. Generally these projects are contracted on an EPIC basis, with large contractor companies becoming responsible for basic and detailed engineering, purchasing, construction, installation and commissioning. It is likely that also operations will be (partly) outsourced to companies with local operational and logistical experience.

From my own contractor days I had a preference for dealing with experienced and more hands-on clients In the early planning stages and FEED phase, we concentrate on scope, budget and schedule definition and on selecting those contractors that have the skills, competencies and reputation that are needed to make each project a success. We need to ensure these companies can execute on an EPIC basis before we put them on our bidders lists. Our relationship with the large contractors is more hands-off compared to our smaller projects in the Netherlands.

To let a commercial dispute turn into a legal case is a lose-lose situation and should be avoided, in my experience, almost at any cost A hands-off client: the contractor’s dream or the contractor’s nightmare?

It should not make much difference to the contractor, although from my own contractor days I had a preference for dealing with experienced and more hands-on clients.

In such cases you share more effectively the responsibility for achieving project success. However, in the end the EPIC contractor will be judged and rewarded based on his ability to complete the project scope within a reasonable schedule and at a competitive price. Dealing with an experienced and competent client obviously allows the contractor to have more meaningful discussions on what is a realistic schedule and price for the work that needs to be executed. In GDF SUEZ E&P, if the specific project 35

Because developments in the Netherlands are becoming smaller in size, we have to be very costconscious experience is not readily available in our organisation, we will ensure that competent consultants or new staff are brought within the project organisation.

Choosing a contractor: price or quality?

In the Netherlands, with our hands-on approach to projects, the construction services we procure are well-defined. Because developments in the Netherlands are becoming smaller in size, we have to be very cost-conscious to keep positive margins on our projects.

Capital is scarce, and the GDF SUEZ group has many opportunities elsewhere in the world to invest. To end up on our bidder lists, companies obviously need to meet certain minimum standards when it comes to proven experience, reputation, HSE skills and human competencies. Once companies qualify and the bids are in we generally award with a strong focus on price.

For large international projects it is often a different story.

We depend more heavily on the contractor’s skills and

Ruud Zoon has a MSc degree in Petroleum Engineering from Delft University and has over 30 years’ experience in E&P. After an international career with Mobil Oil Corporation, he became Vice President of Bluewater Energy Services in 1999, where he led the company’s Floating Production activities in various countries around the world.

In 2004 he joined Husky Energy in Canada as Vice President and Lead Officer, responsible for Husky’s offshore activities on the East Coast of Canada. He was appointed Managing Director of GDF SUEZ E&P Nederland B.V. in 2010. In 2011 he became Chairman of the Netherlands Oil and Gas Exploration and Production Association (NOGEPA).

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reputation, so quality becomes paramount and the ability to execute projects effectively is the decisive factor.

Bidder lists are generally smaller and limited to a few large and competent contractors, able to manage and deliver large-scale and complex EPIC projects. They also need to be able to meet the specific demands of GDF SUEZ. Only then do we focus on the commercial aspects of the project. Quality definitely comes first.

Payment terms: lump sum or reimbursable?

There is a time and place for both. For complex projects where the scope is not well defined, reimbursable contracting is obviously the only option. Attention then needs to be paid to how to provide performance incentives for the contractor. Otherwise you write a blank cheque. However, lump sum contracts are only effective when the scope of the project is well defined, when FEED has been completed and schedule and costs are well understood, and when dealing with competent contractors. If this is not the case, lump sum agreements quickly turn into reimbursable agreements via the change order mechanism, which then results in overruns on budgets and schedules and frustrations on both sides.

There are many examples of this within the industry.

Contractors who have taken on projects on an EPIC and lump-sum basis in a very competitive tender process may discover in the course of the project that their price was too low, that they underestimated complexity, and that more resources are required to meet client demands.

Their only recourse is the change order process and the willingness and flexibility of the client to address the situation. If the client does not respect the rules, a legal dispute will be the consequence with often a very detrimental impact on the project.

Renegotiating: ‘a deal’s a deal’ or flexibility?

Quite often as a complex and demanding project progresses, parties need to address contractual and commercial issues. It is then up to the wisdom and experience of both sides (client and contractor) to look for ways forward that are mutually acceptable. Only then can the project proceed and have a chance of succeeding. To let a commercial dispute turn into a legal case is a lose-lose situation and should be avoided, in my experience, almost at any cost. Unless it is very clear that one party is evidently at fault. However, my experience is that when dealing with competent and reputable clients and contractors, this is hardly ever the case and reason almost always prevails.

Capital Projects in execution: Topside of a platform lifted onto jacket

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Panel discussion highlights

Human resources constraints were identified as one of the most serious threats to our industry: Samir Awad: It’s hard to segregate the influence of the lack of labour in the delays that have led us to tone down our five-year plan but a lack of qualified labour in shipyards is playing a significant role. In Brazil, we’ve had waves of shipyard activity: in the seventies with the Japanese, in the late eighties, and now a very big jump in activity from basically dormant. It’s natural that workers have to be requalified, prepared for delivery again in competitive pace. But shipyards are not the only villains.

Ruud Zoon: Our company does not have the necessary skills in its workforce and relies in this respect on the contracting community. Finding drillers is our biggest headache. Because of the large amount of drilling involved in developing shale gas assets, experienced drillers are very expensive and difficult to contract. The biggest bottleneck we see for the future, given that we will continue to depend heavily on oil & gas, is the talent pool.

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Maarten Wetselaar: Across the industry, the average experience level of crews on the rigs is lower than it was ten years ago. At the same time the standards we set ourselves, that regulators set, that society’s expectations imply, are quickly moving higher and higher. Nothing less than a zero-mistake global operation will do. All this is stretching the envelope further. In the nineties, Shell essentially embraced full outsourcing of its projects. We learned our lesson and paid dearly for it. Since then, and as we take on bigger projects, we’ve been moving to get more critical competency back into the company, and the ability to distinguish what is critical and what isn’t. We’ve been learning as we go, without any grand philosophy, and doing more in-house than we used to.

Pieter van Oord: Everybody here agrees that not enough people study engineering in the Netherlands. To meet demand, 40% of our school-leavers would need to go into engineering, whereas in fact 25% do. The shortage of skills is one of the big challenges, but also presents a big opportunity to the Netherlands in the

next decade. Getting more students into engineering would benefit the industry and our country. One idea is to waive tuition fee for tech students. But political support alone will not get 18-year-olds to suddenly make a different career choice. We have to do much more to make technical studies and careers more attractive. But we’ve just started. TV programmes like Megastructures, showcasing projects like Maasvlakte II, can increase our appeal. But we need to target earlier age groups with promotion like this.

About developing shale gas in the Netherlands and public acceptance MW: The key learning point from the Brent Spar is the need for very early engagement across a much broader range than just the people you need the permit from. And still, with all these lessons, we’ve seen the carbon capture and storage project in Barendrecht fail due to public resistance. However many lessons you learn, there’s always a new one around the corner.

Given the population density and the low tolerance for industrial activity outside designated zones – which is not where the gas is – shale gas won’t be developed in the Netherlands on any significant scale until enough other similar countries have derisked the concept and proved that it’s doable. So we’re very involved in shale gas discussions, but not here, beyond providing generic information on how we make it work elsewhere.

RZ: NOGEPA feels that shale gas potential needs to be tested. All our activities, including shale, are governed by very strict rules that we need to abide by. We have a licence to operate in the Netherlands, and have been active here for many decades. Building and testing a shale gas well is not so very different technologically speaking from developing a tight gas well or any other oil

or gas well. We need to be more transparent and explain better what we do. The Netherlands is after all a gas country. We make a lot of money from gas: between 10 and 12 billion euros flow into the state coffers every year.

We have an extensive gas infrastructure. But our reserves are declining! So we firmly believe we should test that shale potential, but under very strict guidance.

Money, money, money... our E&P panel’s views on the impact of oil prices, currency trends, and credit availability.

MW: Our long-term strategy is set based on beliefs about long-term supply and demand trends. The oil or gas price of today doesn’t determine whether we invest through what we see as a cycle rather than a long-term downward trend. We have a very strong balance sheet: especially given the current problems with banks, we’re more worried about where to park our cash than about where to get it from. The point about low oil prices and in a broader perspective, the economic situation in Europe and the whole liquidity situation is that for many businesses in this room the question they face is not whether there is demand for your service or product but can you finance your company? Is the liquidity in your balance sheet or the provider of your finance actually going to be there to facilitate your growth? That may well be a more critical issue than the availability of market.

IOCs and NOCs can invest through the cycle, but will you be able keep up? If the disintermediation of the banking system continues, you need to tap new sources of funding in order to be part of that growth.

RZ: In the end, the problem of funding is not just the contractor’s problem, it’s a joint problem. We need a well-established, experienced, competent contractor community to be able to do business. If competency 39

is not there, if financing is not there, if contractors disappear from the market, we suffer as well. My company is in a different situation from Maarten’s, because we’re a utility. GDF Suez has 45 billion euros of debt on its balance sheet, more than any other listed company worldwide. We really need to watch our liquidity to maintain our rating, else financing becomes more expensive. We have to be extremely careful where we spend our money and how we control our budgets.

That’s why we really focus on quality, experience and expertise in the tendering phase. If we budget for a specific amount, we need to stick to it.

SA: Most of our revenues are earned in Brazil. We don’t enjoy import parity. Sometimes we’re making much more money than we should, sometimes we’re losing money, depending on whether we’re importing the product or not. At 90 dollars a barrel, our E&P business units can still enjoy very sweet revenues, while downstream business units are struggling to make ends meet because of the situation with the exchange rate and price controls in Brazil. Regarding E&P expenditure, we have long-term contracts for rigs, equipment etc. which are very expensive to cancel, so that’s the last thing we’d do.

Investments in refineries, however, we have some leeway to postpone, as building has not started yet.

MW: Oil price dynamics are driven more by the break-even prices of a number of the sovereigns that are big oil producers – like Saudi Arabia, Russia, Venezuela who need a certain oil price level to make their national budgets balance. That comes into view a bit earlier than the break-even price of the industry players. If you add that to what is becoming quite a high marginal cost of production of the high-cost fields, you can’t really imagine the oil price going down for a prolonged length 40

of time. To 70 dollars perhaps for a while, but not back to levels below that.

Contractors on the delicacies of dealmaking:

Hugo Heerema: Oil companies are locked into certain conventions on how to tender and negotiate. It’s all prescribed. But there are situations where you can make your point more clearly to an oil company. For example, if you renew your contract under new terms you have a contractual position to reopen negotiations. Then you can bring your point across. But you need quite a strong contractual position to get the right attention. I know the rule is not the same for everybody. Some companies are more inclined to listen to what the contractor’s wishes and constraints are. But very often you’re just pushed into that awkward tendering framework where you cannot make your point or you can try to but they won’t listen.

Frank Verhoeven: Our experience is not so bad with the global companies, but there are now quite a number of local oil & gas companies and the attitudes are very different. It takes time before you learn what customers want locally. What doesn’t make it easy nowadays is that the lead is often with local companies.

Frans den Houter: It’s getting more and more difficult for us, as we work in new regions, to get reliable weather forecast data. Moreover, weather is indeed changing.

Both these factors increase the weather risk. Who pays for weather risk depends on the contract and the area.

The better the data, the better we can assess what risk we’re taking.

PvO: For a two-week contract it’s very difficult to make statistical predictions about the weather, but if you work somewhere for a year, it’s much easier for a contractor

to take on weather risks. We always do for contracts of a year or more.

FdH: You have to take into consideration the amount of risk a project brings to your balance sheet, and how that interacts with other projects you have. This adds a new factor in planning what you’re doing, and deciding whether or not to take on a project.

How important is scale for contractors?

HH: Of course scale matters. You see the giants developing like Technip and Haliburton, who can spread out and pick up a huge part of the market, but if you look around, the biggest innovations have come from smaller, privately owned companies. It’s something that’s not always acknowledged and respected enough, but smaller companies can have that drive and decide to go for something that every board would shoot down. Larger, consolidated groups are probably less entrepreneurial.

Van Oord and Boskalis, besides being OFS players, are also part of the highly successful Dutch dredging business. Why isn’t the Dutch OFS sector more like the dredging sector?

PvO: Dredging is a very successful cluster. There are two key players besides Boskalis and Van Oord. One is IHC, which probably builds 50% of the world’s dredging vessels - just compare that to oil & gas vessels, most of which are built in Far East! The other is a very important customer, Rijkswaterstaat, the Dutch Ministry of Waterways and Public Works, which has provided a great deal of support to the industry with bold projects like the Delta Works. This project was a major engine of innovation in the dredging industry. The Oil & Gas contractor cluster lacks a big client like Rijkswaterstaat.

Shell is not playing the same role as Rijkswaterstaat does in the dredging sector. Shell as an international company tenders worldwide, and for them it makes no difference if a contractor is Dutch or another nationality.

FV: If we go back in history, twenty, thirty years ago, for FV: In our acquisition strategy, we look for companies that offer synergy with our existing activities. We’ve experienced that you are limited in the way that you can grow as well. In terms of capabilities, by which I mean both people and assets, there’s a maximum that you can absorb.

the larger projects the dredging companies were mostly subcontractors to the large civil building companies in the Netherlands or Sweden. We had no choice, we had to go abroad, we had to deal with risks, and so we took over more and more that role as well, for projects like Maasvlakte, complete port infrastructure works. The driver is the enormous increase of transport all over the world. But also of oil & gas exploration and production.

That gave us the opportunity with all our engineering know-how to make the step, I think.

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In Conclusion engineers. Often, this was because other industries were competing just as hard for the available talent.

This time round, with other industries slowed down by the economic crisis, the O&G industry should be more successful at attracting brilliant minds. But it will require joint action, and this looks difficult given the fragmentary nature of the Oil Field Services sector.

Against a background of macroeconomic concerns about issues such as the slowdown of the Chinese economy, the European debt crisis and the US economy’s slow recovery, the outlook for the O&G industry is encouraging. With global energy demand steadily growing, the market holds great promise for both oil & gas companies and their contractors. Hand in hand with these opportunities, however, the future holds uncertainties and challenges.

As recovery of oil and gas becomes more technologically complex and labour-intensive, the risks involved are increasing and require closer collaboration between O&G companies and Oil Field Service providers. The risks involved are becoming too high for contractors to shoulder alone. The sharing of risks needs to be laid down in new kinds of contracts. A further shift in contracts from lump-sum to cost plus/reimbursable could help to better align the interests of the partners.

It will also allow service providers to pass through cost increases in consumables, wages etc.

Closer cooperation is also required to master non-technical risks. Issues that are fast becoming the make-or-break of oil & gas projects include competition for resources, such as water, the question of local content and building local capacity, community development and community engagement.

A third major challenge, our speakers say, is the growing shortage of properly trained technical staff. Earlier O&G industry cycles teach us that this shortage does lead to higher salaries, but has little effect on the inflow of 42

Various speakers mentioned the difficulties they have obtaining financing for their new investments in equipment. This is more a problem for small and midsized niche companies than for larger ones, many of which have already found their way to alternative sources of finance.

Many Dutch Oil Field Services providers are successful global players with good prospects. This is a blessing in a national economy that has otherwise practically ground to a halt. Businesses and the government would therefore do well to join forces in addressing the challenges outlined above.

We thank our speakers and interviewees for the insight they have given us into the developments in the oil and gas industry and in the collaboration between O&G companies and Oil Field Service companies in particular.

A further improvement of cooperation between the two is our best hope if the oil & gas industry is to meet the challenge of delivering enough energy for tomorrow’s world.

Marcus van den Hoek

As always, Deloitte’s experts will be around to help the industry make the most of the opportunities and to master the challenges that lie ahead. Our annual Oil & Gas conference is one of the many ways we do that...

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...we hope to see you there next year.