April 2007
Interview: U.S. Coast Guard Commandant ADM Thad Allen
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Louis E. Schaefer, Jr. Chairman of the Board
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CONTENTS
April 2007
EDITORIAL: Energy by Joseph Keefe
2
EXECUTIVE ACHIEVEMENT: John Janik, President, Electronic Power Design, Inc.
3
Managing Editor jkeefe@maritime-executive.com
WASHINGTON INSIDER: INTERVIEW WITH U.S. COAST GUARD COMMANDANT ADM THAD ALLEN
8
Evan Naylor
by Joseph Keefe
Art Director evan@maritime-executive.com
CASE STUDY: SUPERIOR OFFSHORE INTERNATIONAL, INC.
Tony Munoz Editor-in-Chief tonymunoz@maritime-executive.com
Joseph A. Keefe
Brett Keil Senior Vice President Sales & Marketing bkeil@maritime-executive.com
Elizabeth Cash Sales Administrator Elizabeth@maritime-executive.com
Daniel Bastien Graphic Designer dbastien@maritime-executive.com
Valerie K. Leichtman Copy Editor, MarEx Newsletter valerie@tmmarket.com
by MarEx Staff
18
by Joseph Keefe
EXECUTIVE INTERVIEW: JIM MERMIS 34 Chief Executive Officer, Superior Offshore International, Inc. by Joseph Keefe
TEEKAY SHIPPING ENTERS THE FPSO MARKET
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EXECUTIVE INTERVIEW CHRISTIAN LEFEVRE Deputy CEO, Bourbon Offshore
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W&O SUPPLY: VALVE WIDE OPEN–FOCUS ON QUALITY
54
by Joseph Keefe
by MarEx Staff by MarEx Staff
Rich Grable Graphic Designer MarEx Internet Services rich@tmmarket.com
Published by TM Marketing Group, LLC The Maritime Executive, LLC (ISSN 1096-2751) 3200 S. Andrews Avenue, Ste. 101 Fort Lauderdale, FL 33316 Telephone: (866) 884-9034
Superior Achiever
TheMaritime MaritimeExecutive Executive 1 The 1
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
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EDITORIAL It’s the energy, stupid.
E Joseph Keefe Managing Editor
Distribution of The Maritime Executive: Markets Served: Shipbuilders and repairers
15% Naval architects, lawyers, consultants, and insurers
58%
Ship owners, operators, managers, charterers, and brokers
13% 7%
Marine equipment manufacturers
5% 2%
Government
Other
International Circulation: Canada
19% 36%
Western Europe
16%
Asia
14% Scandinavia
7% South & Central America
5% 3% Eastern Europe Other (Africa, Australia, Misc. Island Nations)
Domestic Circulation: Other East Coast
2% 26%
28%
West Coast
29%
Managing Editor Joseph Keefe can be contacted at jkeefe@maritime-executive.com with
15%
Gulf Coast
2
lections have a way of coining catchy phrases to meet the needs of one camp or another as they try to sell their message. Not surprisingly, and in an age where packaging can mean far more than substance in any venue, the slogans work, and they work well. Not too long ago, the unforgettable “It’s the economy, stupid” became the catch phrase which came to embody everything that anyone needed to know about that particular election cycle. As the 2008 elections loom large in the windshield, I just happen to have the perfect slogan for any candidate who wants to use it: “It’s the energy, stupid.” Next year’s elections are especially important because of the presidential sweepstakes already underway, but there will be numerous seats in Congress up for grabs, as well. The election(s) will hinge on any number of important issues, but I’m going to predict (in no particular order) that foremost among these issues will be the Iraq war, the high cost of energy and the crushing trade deficit that could eventually make all other matters seem unimportant. Not coincidentally, all of these issues are related to one another. The reasons for fighting the war in Iraq can be packaged in a variety of different ways, but at the end of the day—and I take no particular pleasure in telling you this—it comes down to preserving regional stability so that the oil can continue to flow unabated. It’s why we have two carrier task forces deployed in and around the Persian Gulf and it is why we cannot easily extricate ourselves from this mess. Frankly, I don’t know why this concept is so difficult for so many to grasp. Unless we can secure and guarantee at least a portion of our considerable energy requirements from other sources, we are going to be there for a long, long time. It doesn’t have to be this way. Whatever you think you know about global warming or the astronomical cost of heating John Edward’s 25,000 square-foot house, you also know that considerable stockpiles of fossil fuel energy are available right here—right now—at home. And I’m not talking about the Strategic Petroleum Reserve. Some day, we’ll move to a greener way of life here in America, but until that time comes, we’re going to need energy to get Ken and Barbie to work and back in their luxury SUV’s. This energy lays untapped under the frozen ANWR tundra, deep off the Continental shelf of our Gulf, West and East Coasts, and also sits on Alaska’s North Slope in the form of millions of cubic feet of “stranded gas.” All of it is currently off limits to the American consumer. It doesn’t have to be this way. Americans can only hope that, at some point, lawmakers will wake up to the reality that any energy extracted from U.S. sources in the future will (a.) involve the most environmentally sound construction and production techniques ever attempted anywhere and at any time in history, (b.) create sustainable employment for tens of thousands of Americans—including mariners, (c.) return hundreds of millions of dollars to the U.S. economy and tax coffers and (d.) help to significantly reduce the trade deficit—a large portion of which hinges directly on energy imports. But, I’m preaching to the choir here, right? All of the foregoing is arguably unimportant in the face of the best reason to develop our own energy: I’m talking about removing the geopolitical grenade (oil) from the hands of people like Hugo Chavez, or worse, the rapidly escalating chaos which will permeate every sector of the Middle East after we “depart with honor.” I want us to get out of there as much as the next guy. It sure would be nice if we had some sort of viable energy plan to back up that kind of action when it’s time to do it. Right before I sat down to pull the trigger on the last e-file for this issue of MarEx; I filled up the tank on the minivan at $2.87 per gallon of self-serve Regular Unleaded Gasoline. And, I can’t help thinking that without a rapid change of direction in America’s energy policy, five years from now, that same gasoline will cost $4.87 per gallon and we’ll all still be reading the body counts in the Sunday New York Times. It doesn’t have to be this way.
The Maritime Executive
Midwest
comments, input and questions on this editorial or any other piece in this magazine. The Maritime Executive welcomes your participation in our editorial content. MarEx
EXECUTIVEACHIEVEMENT
By MarEx Staff
ALL PHOTOS COURTESY EPD, INC.
Designing a World of Power
john janik, President Electronic Power Design, Inc. & EPD Asia Group, LLC.
nowing what you want to do for the rest of you life at 14 is a truly marvelous revelation. Personally, I wanted to be a champion surfer, rock star, astronaut, tennis pro, brain surgeon, and, yes, I must admit it, President of the United States. These eclectic career paths swirled in my youthful imagination, but they were nothing more than the fleeting dreams of a young boy. At 14, John Janik was consumed by electronics and spent his teenage years learning and working on his passion at an electrical company in Houston. He derived great joy from tearing apart and putting back together electrical motors and transformers, and being around the splendidly intricate minds of electrical engineers and mechanics. After breaking his leg skiing, the teenage protégé pleaded with the company owners to allow him to work in the stockroom while convalescing, so he could learn more about the parts and components that made the electrical stuff run. Janik was simply enriched by electronics and his desire to learn more drove him to Texas A&M University. After graduating with a Bachelor of Science degree in Electrical Engineering, he was hired by General Dynamics (GD) to work on the military’s F-16 Fighter Jet Program. At the time, GD had different engineering groups working
The F-16 opportunity exposed Janik to a large budget and program to fix harmonics in planes, which put him in the center of the next generation of applied sciences for generator-power systems and controls. on the various power systems of the plane. For instance, there were groups working on RADAR, flight control computer systems, avionics, and other computerized systems that made these sophisticated warplanes scorch the stratosphere. However, each of these various flight components of the F-16s required power supplies. The F-16’s main-power source was a 60-KVA generator that functioned with a constant-speed drive, which worked much like a transmission. Because the F-16 was a high-performance warplane that made a lot of high-gravity maneuvers, its main generator’s constant speed drive transmission had a high probability of failing. When the main generator did fail, its backup unit was a small 10-KVA generator. This smaller generator ran with a high frequency directly coupled to the turbine and had inverters that produced Pulse Width Modulated (PWM) waveforms that synthesized regulated AC sinusoidal wave forms that were new to the industry. In 1983, when Janik joined General Dynamics, the company had discovered that when the F-16’s inverter came online, it produced a lot of harmonics, which created AC power system disturbances. It was a “phantom” problem and a mysterious issue that could bring these technologically-
advanced warplanes down. When teams of electrical engineers began working on this critical flight problem, the young Janik had the good fortune to work alongside some of the greatest avionic minds in the world to solve the disruptive-power-harmonic problems. While generator-power systems were not in the same league as the glamour fields of computerized flight systems, RADAR, or avionics, it was a known fact that without power, the F-16 wasn’t leaving the ground and, more importantly, staying in the air. So the company formed a new engineering group called Power Systems and Controls, which became responsible for all of the plane’s power supplies and the complete generator-power system. Consequently, the young electrical engineer from Texas A&M was put in charge of completely understanding every nuance and function of the 10-KVA generator and its constant frequency output PWM inverter box, which is much like today’s basic AC variable speed drive units. At this time, the science of harmonics in power-drive systems was a completely neophyte discipline, and there was simply no scientific experience in the switching algorithms that were burning up power supplies. The F-16 opportunity exposed Janik to The Maritime Executive 3
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Designing a World of Power
a large budget and program to fix harmonics in planes, which put him in the center of the next generation of applied sciences for generator-power systems and controls. The MarEx recently caught up with Mr. Janik in the Houston offices of Electronic Power Design, Inc., and had an opportunity to speak to the man responsible for designing the state-of-the-art, electrical-integrated, generator-power systems and controls currently being used in the diesel-electric, offshore-support vessels for Rigdon Marine and the French giant, Bourbon Offshore. In conjunction with Larry Rigdon, Chairman of Rigdon Marine, Jacques de Châteauvieux, Chairman of BOURBON, and Guido Perla, Chairman of Guido Perla and Associates, John Janik’s Electronic Power Design, Inc. has designed the generator-power systems that have increased cargo payloads for these companies by more than a third. As Rigdon Marine and Bourbon Offshore build vessels that are filling the shipyards around the world, the accomplished electrical engineer from Houston, Texas has become an integral part of these forward-thinking executives that are forever changing and revolutionizing the offshore energy support industry. 4
The Maritime Executive
John Janik’s Electronic Power Design, Inc. has designed the generator-power systems that have increased cargo payloads for these companies by more than a third. MarEx: Why is there such a buzz over the new integrated-power systems being used in the Rigdon and Bourbon vessels? Aren’t generated-power systems and controls a universal science for both land and sea? Janik: Generated-power systems for an F-16, offshore-drilling rig, or marine vessel are very different than land-based power systems. Land-based power systems can be visualized as a huge nuclear plant that generates an infinite amount of power that then must transmit this power from a long distance away with very long transmission lines. By contrast, in a generated-power system on a ship, there is only a very small power plant with very short transmission lines, and that little subtlety makes all the difference in the world. Most of the specifications ever written for generated power were done for land-based systems. Consequently, self-generated systems received little attention. Items like harmonic promulgation and power-system designs that were written for land-based systems
just wouldn’t work on ships or airplanes. MarEx: How did you move from aviation systems to marine systems, aren’t they vertical markets? Janik: In 1985, as the defense budgets were being severely cut, the defense contractor I worked for began laying off workers and I could see the handwriting on the wall. The electrical company I previously worked with as a teenager needed an electrical engineer, so I returned. While my education was based on AC drives, I was designing drive controls, and printed circuit boards with resistors, transistors, and Op Amps for circuit boards for DC drives. The company was busy and I was happy to be back and employed. Also, during this time the oil industry was booming and the company was building lots of motors and control systems for the energy companies. Suddenly, the company began working on larger and more complex jobs. Instead of being in a high-volume business, where you simply
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DesigningOurabusiness World of Power is about power systems integration. In order to make one functioning system work with another power system, it takes a complete understanding of the entire system and how everything works together.
up coming to my company. Along with a lot of hard work and a bit of good fortune, we’re still in business 20 years later. MarEx: Today, EPD is a well-known designer, builder, and commissioning company of integratedpower systems. What growing pains did you have to overcome to become a global organization? Janik: Vendor supply issues were our replaced a motor if it failed, we were now biggest hurdles. Many of our competitors working on much larger jobs; and if a had stronger relationships with the vendors generated-power system failed, it usually and could buy parts with much lower meant high financial costs. While not bank- multipliers on the prices for parts. We had rupt, the company owner decided to close less overhead and less employees, but it the business and reorganize the firm. was tough for us to compete on a level I was only 25-years old at the time, and, playing field. We went back to servicing as members of the old company began systems, but as we grew, our prices for parts forming a new company, I believe they got better and over time we became more thought I was too young to be a partner, competitive on a global basis. and I wasn’t asked to join the new venture. MarEx: While the company has a stellar While I didn’t have a lot of money, I still reputation for power systems and EPD is evaluated my options. I was an excellent competing in the global marketplace, why engineer and knew my trade well, so I are companies beating a path to your decided to open my own company. I found- door? ed Electronic Power Design (EPD), which Janik: I believe it goes back to our roots basically was a one-man company that of knowing the big picture about how serviced generated-power systems. However, generated-power systems work. Ships with soon the company’s reputation began to variable speed drives and more complispread and I found myself busy designing cated systems like dynamic positioning or power systems for lots of companies. In diesel electric systems are much like the fact, the reorganized company that did not problems and same kind of issues the allow me to become a partner became F-16 had. one of my best accounts. But they began A lot of our competitors may know how having partner problems and over time they to build a piece of an integrated system went out of business. Since they were one very well, but not many understand how the of my biggest accounts, I started to worry whole system works in harmony. Our busiabout my future. But, as fate would have it, ness is about power systems integration. many of their projects and contracts ended In order to make one functioning system
work with another power system, it takes a complete understanding of the entire system and how everything works together. In the past, I have witnessed systems fail, and it simply becomes a finger-pointing contest between manufacturers. Suddenly, a power-system problem arises and different manufacturers of different components start pointing fingers at one another—and the vessel owner or cement plant manager or mine operator gets caught in the middle. It is tough to design systems that won’t affect other systems, and if you start designing power systems that become too expensive, your company will simply become less competitive. It took years for people who own and buy systems to understand that if piece “A” isn’t designed right, then it will affect piece “B,” and vice versa. Suddenly, if the vessel or drilling rig is down, and the owner begins losing money, they’re not happy with the supplier and nobody wants that. But that’s what EPD does right. We design, program, commission, and service integrated systems that operate flawlessly—and that is the secret to our success. MarEx: How did EPD end up in the marine industry? Janik: We started by working on a hopper dredge for American Dredging, which is now Weeks Marine. In fact, we did a lot of dredges for different companies and the Army Corps of Engineers, including contract dredges in South Korea. When EPD was a small company, we simply serviced industries with the best opportunities. Whether it’s mining operations, sand and gravel, dredging, plastics plants, windmills, or vessel operations, without power, companies are not working. It is our business to keep companies productive with integrated power. MarEx: EPD is now the integrated-power systems company for Rigdon Marine and Bourbon Offshore, two of the largest builders of offshore support vessels. Tell us more The Maritime Executive 5
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Designing a World of Power
We have completely containerized our fully-integrated systems with steel housings. By keeping workers from affecting the units, we’ve protected ourselves and the shipyards from potential claims. Additionally, we have designed all of the shipyard’s required connections on the outside of the housing, which will also minimize damage problems. Now, commissioning a vessel simply becomes a pleasant experience for all involved. about designing the systems for these nextgeneration vessels that now transport more payload cargoes than vessels much larger. Janik: This goes back to the “finger pointing.” Shipyards want to build vessels fast and as economical as possible. Unfortunately, many of their workers don’t understand the ramifications of, say, what sandblasting can do to a computer part. Generators and power systems are usually large and are put into the hull and the ship is built around them. With the power systems sitting unprotected in the hull, they are absolutely going to get sandblasted, painted, and, most likely, have workers standing on them. Now, when the vessel is ready to be commissioned, the electrical workers arrive on the scene to power up the systems. Remember, the engines, fuel systems, and cooling systems have already been installed, and the final event is powering up the power systems. Let’s say the power 6
The Maritime Executive
systems don’t function properly. What generally happens in a power-failure situation is that vendors start finger pointing and claiming it couldn’t possibly be their units. Suddenly, the shipyard may want to claim warranty and the electrical contractor shows them a big footprint on the power system. All of a sudden it becomes a “cover your liability” situation. These types of scenarios aren’t good for anyone involved. At EPD, we’ve designed integratedpower systems to avoid these “messy” situations. Furthermore, understanding it takes lots of money to commission a vessel, our company has designed power systems that take very little commissioning. Our mission was to design and construct systems that are structurally sound and protected from the chaos that will eventually happen around them. We have completely containerized our fully-integrated systems with steel housings. By keeping workers from affecting the
units, we’ve protected ourselves and the shipyards from potential claims. If workers don’t have internal access to the power units, then they can’t be responsible for damages. Additionally, we have designed all of the shipyard’s required connections on the outside of the housing, which will also minimize damage problems. We have added harmonic filters and harmonic mitigation systems. These are interference problems that EPD has worked on for years. Now, commissioning a vessel simply becomes a pleasant experience for all involved. MarEx: Please, there must be more than just building a steel encasement around the power systems that has made EPD one of the top integrated-power systems providers in the world? Janik: Absolutely. Let me finish by saying that in addition to enclosing the power systems in steel housings, we have also designed light-weight transformers that won’t produce harmonics. EPD has written specifications concerning the potential for a high level of harmonics, and put all of the sub-vendors on alert. So, now the refrigerator, air conditioning, and air compressor manufacturers can build their motors based on a high potential for harmonics. By building a system that produces a low level of harmonics and advising sub-vendors about the potential for a high-harmonics level, the vessel or plant can still operate in a high-harmonic environment and function. We containerize our systems; we have reduced harmful harmonics that burn motors up; and designed innovative cooling systems, which are space savers. These three issues have strategically positioned EPD, Inc. as a world leader in integrated power. MarEx: We understand that EPD is building a new manufacturing plant in Asia? Janik: Yes, and it is quite exciting. EPD Asia Group, LLC will be located in Yangzhou, China, where we are building a 125,000 square-foot plant with offices. The facility should be open mid-2007. With the shipyards in Asia filled with new construction for the next 5 to 6 years, we think it is a wise investment to increase production and to meet our client’s needs. MarEx
$1.8 billion in investments between 2007 and 2010
Photo rights : Bourbon
for next generation vessels positioning us as a market leader in global maritime services.
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Truth to Power: Redefining the Coast Guard’s Missions U.S. Coast Guard Commandant ADM Thad Allen Addresses Failures, Fiduciary Responsibilities and the Legacy Missions of Safety, Security and Stewardship
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ack in March, MarEx went to Washington to do what we do best: ask the tough questions about the most pressing issues of the day. In line with that, it is somewhat of a well-known tradition that we regularly make the effort to visit Coast Guard headquarters to meet the commandant, especially in the wake of a change of command there. Less than one year into his tenure at the helm of the country’s fifth uniformed service, Allen has had to confront more than one internal failure both head on and in the glaring media spotlight usually reserved for other, more high-profile commanders. So far, the marks he has received are high, but the term is far from over. Probably the most enduring impression of Allen gleaned from our short, one-hour portion of his valuable time is his utter lack of false pretense. Having been to Coast Guard headquarters any number of times in the past and meeting the previous occupants of that office under similar circumstances, we expected this meeting to be like all of the others—quite formal. However, on this occasion, we were greeted by a commandant who wore his blue 8
The Maritime Executive
“work” fatigues, complete with matching work boots; moreover, his attire matched the down-to-earth atmosphere in his suite of offices. It was clear from the start that Allen is not necessarily enamored by the trappings of his office, but rather seems to understand what his position can do for the Coast Guard. It’s a start. Allen assumed the top job at the Coast Guard in May of 2006, fresh off of pulling together what was a foundering response effort to Hurricane Katrina, a feat which was widely viewed as a remarkable performance. Waiting for him in Washington was the fallout from the poor contract administration of the Coast Guard’s $24 billion Deepwater capital acquisition plan. Allen’s ability to sort out complicated and poorly organized messes, which was proven with his actions on the Gulf Coast, no doubt played heavily in the decision to nominate him as commandant. The jury is still out on whether he can work the same magic with the Deepwater plan. Allen will tell you that his success in Washington hinges directly on his ability to facilitate change and create vision. He started off the interview by telling us, “As I told a lot of people at our ‘all hands’ meet-
By joseph keefe ing, when I was a junior officer, we used to talk about ‘they and them’—but I’m essentially ‘they and them’ now. There’s a certain duty to the service to recognize how things were as a junior officer, and take on some things that need to be fixed, and take on some problems, and navigate a course for the future. That’s important now, not only because of the issues we’re encountering internally, organizationally and with the acquisitions and the changing ‘threat’ environment that we’re dealing with.”
Truth to Power
There are a lot of things that the Coast Guard does well, but anyone who reads the news on a daily basis knows that there is more than one aspect of its job performance that has been decidedly unsatisfactory over the last few years. For his part, Allen recognizes that changes are necessary and his intention is to position the organization so that it is able to change. Consistent with that, he insists that there are two principals that he has always operated on: “truth to power” and transparency. The first he describes as, “If you are going to work for me, you are going to have to speak ‘truth to power.’ This means that you
ALL PHOTOS COURTESY U.S. COAST GUARD
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are able to walk into my office and say things to me that you wouldn’t necessarily say to others, but they are things that I need to hear. In fact, it’s gotten to the point where I get e-mails where the subject line is ‘truth to power,’ so I know I’ve got ‘incoming.’ I’m not displeased by that, frankly.” As for transparency, Allen’s second principal of management, he states, “I’m quoted a lot as saying that transparency of information breeds self-correcting behavior. It’s easy to self-synchronize an organization in the right direction if everybody holds all the same information—if everybody has the same goals and are trying to drive the organization. There is a lot of significant organizational change going on in the Coast Guard right now. There’s going to be more in the next two to three years.” Since becoming commandant, Allen has communicated that tenet directly to the men and women of the Coast Guard through his “all-hands” message format that allows him to notify every member of the Coast Guard when anything happens. In essence, he sends an e-mail to every person on his global address list. Over the past eleven months, he has used this procedure at least eight times.
Deepwater: 20/20 Vision
The skills that served Allen well during the Katrina response were the culmination of thirty-five years of operational experience that included time spent as a deck-watch officer and as a search-and-rescue controller before moving up to command a shore force that actually responded to search-and-rescue operations. This was not the first time that Allen had responded to a catastrophic event. Allen adds, “It all kind of layers on and builds up over a lifetime to create a portfolio of skills. This helped me a lot when I was down there in Katrina.” The internal crisis best known as “Deepwater,” though, will be every bit as challenging, but in a different kind of way. Directly on the heels of his thirteen straight years spent in operational assignments in the Coast Guard, Allen decided to go to graduate school. While there, he was selected to be commander, at an age which was actually very late for the Coast Guard. But, that said, Allen insists, “I’m a pretty experienced practitioner of public administration. Over the years, I’ve really tried hard to be a student of government, specifically of how our federal government is intended to operate.” Allen is also exten-
sively involved outside the Coast Guard doing just that, as a Fellow in the National Academy of Public Administration and as a member of the Council of Foreign Relations. “So,” he continues, “I try to engage in lifelong learning. That transfers into how you deal with organizational structure and acquisitions, and so forth.” Allen will need every bit of those public administration skills as he tries to address the fatal design flaws and massive cost increases in the Coast Guard’s newest cutter acquisition that were uncovered by federal audits. The cutter is part of Deepwater, the Coast Guard’s ongoing $24 billion rebuilding effort. Regarding Deepwater, Allen is first and foremost pragmatic: “We also need to understand that we need to be competent, from a business standpoint, to execute contracts and to execute them correctly.” Allen freely admits that the contract was not perfect, but says, “What we did was set up a separate structure to deal with the acquisition, and in the process, disenfranchised the technical community. And, we’re paying the price for that now because we’re able to reconcile differences between our naval engineers. We’re looking The Maritime Executive 9
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WASHINGTON INSIDER “If you are going to work for me, you are going to have to speak ‘truth to power.’ This means that you are able to walk into my office and say things to me that you wouldn’t necessarily say to others, but they are things that I need to hear…”
at ship designs that were offered by our contractors that were adjudicated internally, that essentially drove a cultural wedge or cleaver through our organization that hurt us. We are fixing it.” One concrete manifestation of that effort is Allen’s recent granting of carte blanche to the Coast Guard’s chief engineer in vetoing designs. In March, Allen told MarEx, “Deepwater isn’t so much a flawed contract or a flawed acquisition strategy or a flawed procurement approach, if you will. I think more of the blame rests with the organizational structure and culture and how we executed the contract. Even a poorly written contract, if it’s executed competently, can minimize risk to the government. We disenfranchised several parts of our organization during the process and we didn’t create an integrated Coast Guard to deal with integrated systems.” Nevertheless, Allen then went ahead and put the brakes on the Deepwater Fast Response Cutter-B acquisition with Integrated Coast Guard Systems and reassigned the project to the Coast Guard’s Acquisition Directorate. The project involved twelve patrol boats scheduled for delivery 10
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in 2010. ICGS, a joint venture between Lockheed Martin and Northrop Grumman, was notified of the decision in mid-March. There are other problems, though. Referring to the boats taken out of service from the Florida Keys because of design flaws, Allen says, “The National Security Cutter fatigue life is not unusual by first-of-class ships construction. The extension of 123 is not working and potentially, from my point of view, a much more serious problem. We’ve extended $100 million of government money and the question is, ‘How much value have we accrued from that?’ At some point, we’re going to have to move to protect the government’s interests.” Allen is on record as saying to Congress that the concept of a systems or performance-based contract for a systems integrator should not be impeached by anything that is going on around government. But, if the Coast Guard is going to do better in the future, it is going to have to create a competent organization that can manage complex systems integration contracts—there is no other way around it. However, Allen is also quick to remind
people, “We don’t have a naval sea systems command within the Department of Homeland Security. I consider this not a Coast Guard issue; rather I consider it a department issue.”
Katrina: Lessons Learned/ Solutions Offered
Allen got the request from the secretary to go to New Orleans on the 5th of September, which was one week after Hurricane Katrina came ashore. The now infamous debacles in the Superdome and Convention Center had already occurred. Recognizing that that there was no cohesive effort within the federal government dealing with the state and local responders, Secretary Chertoff dispatched Allen, who was positioned in Baton Rouge by ten o’clock that evening. Allen’s first order of business, establishing effective communications, involved getting everyone on the same page. Allen recalls, “I spent a lot of time in the first seven to ten days merely stating to people, ‘I’m a senior federal official. I’m in charge. I have these responsibilities; this is what I intend to do.” After showing others
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WASHINGTON INSIDER “…we had a hurricane…but, in reality, the effect was…of a weapon of mass destruction.”
Fuelling the innovation behind LNG June 19 & 20, 2007 • J.W. Marriott • Houston, Texas
Key topics & expert industry speakers include: TIMELINE OF A NEW IMPORT TERMINAL
Darron Granger, Senior Vice President of Engineering & Construction, Cheniere LNG Inc, USA
EXPANDING LNG INVESTMENTS
Kurt Georgsen, President, Statoil Natural Gas, USA
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that there was a hand on the tiller, he moved headlong into his next goal: decreasing response time and cutting through all the red tape. Allen’s ability to analyze a situation from an operational standpoint served him well on the Gulf Coast. According to his analysis, had the federal response matched the actual crisis at hand, the results would have been far more successful. He elaborates, “The way I explain it to people is that we didn’t have a hurricane. We had a hybrid event. We had maybe the most devastating hurricane in the history of the country, but if the levees don’t breech in New Orleans, then what you have is a very devastating hurricane, but ground zero is in Bay St. Louis in Mississippi because the eye went right over the Pearl River. When the levees breeched and the city flooded, 80 percent of the city went under water. I’d characterize that as the use of a weapon of mass effect on the city of New Orleans without criminality. So, we had a hurricane and we responded initially like it’s a hurricane under the national response plan, but, in reality, the effect was the effect of a weapon of mass destruction. You need to organize and respond as if that had happened.” That is exactly what Allen did from the first day of his arrival in Louisiana. Allen’s ideal response model to this hybrid event would have included a senior law-enforcement official in charge, which would have left no doubt about accountability, who was in charge and what rules everyone was operating under. Everything else would have been subordinate to that, including the response to the communities and everything else. After Katrina, however, there was no
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“We have got to come to a commonly-held understanding or agreement about what constitutes a maritime security regime for a coastal nation state in a post-9/11 environment.”
effective command and control structure. Response teams kept pushing resources through the existing disaster relief process, assuming that a competent authority existed on scene to take the resources and properly apply them to mission effort, but those resources, at least in the early stages of the relief effort, did not get to where they were needed most. So, Allen’s immediate challenge when he got to New Orleans was to figure out how to get the available resources where they were needed without undercutting the constitutional relationships of the federal government, the state government and the local mayor. Allen recalls this trying task: “In some cases, I had to be more aggressive than I officially or normally would be. And there was criticism of that. Some people thought I exceeded my authority in actually directing operations down there, which, I have to say, on a couple of occasions, I did. The bottom line was that due to the exigency of the situation, I don’t think there was any choice and I don’t think that Katrina ought to be a standard for how you want to run this in the future.” 12
The Maritime Executive
He adds, “A clear lack of situational awareness on the part of others made this necessary.” Like the United States Maritime Administration’s (MARAD’s) chief, Sean Connaughton, Thad Allen knows that along with the accolades for a job well done, there is always room for improvement. Connaughton wants to catalogue all of MARAD’s assets in order to formally position this equipment as a standard part of any future emergency responses. Allen’s plans include improving the Coast Guard’s response capability by developing an internal “force-packaging program,” which he eventually hopes to expand outside of the Coast Guard, to the entire interagency mix. This program would entail requiring that certain incidents have certain capabilities, packaged for the desired mission effect for the particular event. In the case of the Coast Guard, Allen has laid plans to take all specialized, deployable forces, such as maritime security units, and organize them under a single command, dubbed the “deployable operations group.” Allen calls this the
“organic lift from within the organization” and envisions this type of plan extending to FEMA and other similar groups so that help is readily obtainable, if ever he need go outside of the Coast Guard’s resources in order to accomplish a certain task. The Coast Guard will, Allen says, “create and adapt the force package to meet the situation—train, equip and provide.”
Some Good News—for a Change
Allen insists that there is far too much ink given to the bad news and too little attention to what the Coast Guard is doing right. For instance, he states, “There are a lot of parts of Deepwater that are working. The aviation side, for example, we are very happy with. That doesn’t get a lot of airplay.” He also points to the fact that the Deepwater solicitations, which went out before September 11th, were meant to link deepwater cutters to aircraft operating in a deepwater environment through a sensor network. “We are doing that,” he says. “Even the legacy cutters are now using very effective and sophisticated communications to reduce the time neces-
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Allen lists safety, security and stewardship as the legacy issues which cannot be left by the roadside just because the higher-profile emergencies have been laid on his plate.
sary to get approval to use warning fire when, say, interdicting out a drug runner out of Columbia. Within the USCG it works very well.” The issue now, according to Allen, is integrating that process across the full spectrum of federal and state assets in both a homeland security role and in time of national or local crisis. This project, called “Rescue 21,” is, from Allen’s perspective, “the gold standard—a common operating picture [that] must be created.” Allen is also adamant that the Coast Guard’s performance in the Deepwater situation and with contracts is not reflective of what is happening elsewhere in the agency, especially as it concerns stewardship of funds and assets. Other acquisitions, such as icebreakers, buoy tenders and coastal patrol boats, which he characterizes as spectacular successes, are all “on schedule and on budget.” Furthermore, he maintains, “For a mid-sized federal government agency who acquires assets, we’ve done a good job. Moving to a task such as Deepwater, which involves much greater complexity, was much more than we had done before.” 14
The Maritime Executive
Job One for the Coast Guard: According to the Commandant
When asked to define his biggest concern for his command, aside from the Deepwater issues, Allen does not hesitate: “We have got to come to a commonly-held understanding or agreement about what constitutes a maritime security regime for a coastal nation state in a post-9/11 environment. We know what our mission is. A better question to ask is how we get there.” He uses the example of the air-trafficcontrol system, which he calls “an artifact of the last one hundred years of aviation travel.” Allen explains, “The aviation industry made that a requirement for safety. Transponders were introduced, and a host of other safeguards. In the maritime world, however, you have a very independent communications systems—anonymity was, and often still is, a competitive weapon.” Allen sees the issue as deciding how much of the aircraft paradigm can be made “wet”—or perhaps none of it. Expanding on this, he says, “We did some very good things in the first three or four years following 9/11. We went to advanced notice of
arrival for foreign shipping. We succeeded in getting requirements for automatic identification systems. We recently concluded at IMO [International Maritime Organization] agreements for long-range tracking. All very good. But we’re building towards something and I don’t think we yet know what that something is. What is the end-stage for maritime security for a coastal-nation state? Do we want a complete ring of radars around the country? That’s probably unreasonable. If so, what is reasonable? Legislation should buy out risk and move towards a common standard for security and I don’t think we’re there yet.”
The Other 101 Jobs—Managing the Multi-Missioned Portfolio
Under the broad category of “everything else,” Allen lists safety, security and stewardship as the legacy issues which cannot be left by the roadside just because the higher-profile emergencies have been laid on his plate. “Because we are multi-missioned,” he expounds, “we’re always managing a portfolio of supply and demand. So, there’s a problem set and we have to
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his credentials are rock solid, his perseverance unwavering and his past accomplishments impressive. So, the only question is: Are the other 32,999 Coast Guard members up to the task of following his lead?
constantly determine what we have to throw at the problem set. One of the enduring things about the Coast Guard is that you don’t need five agencies to have five ships out there; you have one ship or asset that can do five things. There’s an inherent economy in all of that, but it’s based on the fact that our commanders are going to have to do operational risk management on every single event—deciding what constitutes the highest threat and then applying resources to affect that mission. We don’t need fundamental change in this way—that’s the fundamental genius of the Coast Guard, putting these resources out there and letting our commanders deal with the threat. But, supply and demand quantities have changed.” Because of this multi-missioned characteristic, Allen constantly finds himself reminding people, “Our port security mission has been around since 1917, so this is nothing new for us. Stewardship of the oceans is a different animal, though. Before you can do any of that, you have to understand regimes in place—by international law, by treaty, by flag state, by coastal state and so forth.” The final component of the Coast Guard’s legacy missions is safety. Included in this category is the traditional 16
The Maritime Executive
search-and-rescue function, which Allen describes as being the heart of what the Coast Guard will always be about.
Looking Back While Moving Forward
Deeper than the Deepwater mess is the issue of unifying the Coast Guard’s financial system in order to come to a standard logistics procedure. Allen sees the improvement of internal controls and the standardization of logistics controls as one of the key facets of fixing much of what went wrong with Deepwater. Doing that will not be easy, especially since he freely admits that the Coast Guard has long operated as a group of small businesses in an environment which demands strong central management. It is a task which will not likely be completed until long after he has been replaced as commandant. The loss of the eight 123-foot patrol boats in the Florida Keys came at an especially bad time, as well. And while he claims to have shored up Coast Guard capabilities in the Keys in the event of a mass migration from Cuba, all of the branches of armed services are already stretched to the breaking point. Nevertheless, working with the U.S. Navy, Allen has
retained five 179-foot patrol craft that were supposed to go back to the Navy at the end of 2008. Three of these will be stationed in Pascagoula, impacting the Keys operating area. He adds, “There may also be an opportunity at Bollinger shipyard to acquire more 87-foot patrol boats. It’s important to do that while the production line is open and the unit costs are low.” The Coast Guard’s severest critics, however, say that he will need to exploit a lot more of these kinds of opportunities in order to achieve the economy of scale that will eventually counterbalance the failures of Deepwater. When he is not tackling Deepwater issues or trying to maintain the legacy missions that make the Coast Guard the operational bargain it has always been known for, Allen is also facing challenging day-to-day events which include such occurrences as the tragic drowning of two Coast Guard divers on the West Coast and an embarrassing episode involving discipline at the U.S. Coast Guard Academy in New London, Connecticut. In both cases, he moved decisively, instituting policies and corrective measures without delay. Those responsible were dealt with harshly. Elsewhere and operating largely under
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Looming on the horizon…is what Allen calls the “small boat threat,” …vessels of less than 300 GT…
the radar, are 300 to 400 guardsmen in the Persian Gulf, providing everything from security for oil platforms (that account for as much as 90 percent of the Iraqi gross domestic product), training the locals to eventually take on these tasks and operating the six patrol boats which rotate in and out of maintenance status. In that theatre, the Coast Guard has experienced one fatality, the result of a suicide-attack boat which detonated as it was turned away. Looming on the horizon to be examined and managed is what Allen calls the “small boat threat,” which refers to the security issues presented by vessels of less than 300 GT that are still largely undefined and, more importantly, unaddressed. The changes in this protocol will eventually rival STCW, ISPS, SOLAS and OPA-90 when they come to pass. The maritime industry can perhaps take some measure of comfort in the fact that it will be Allen who will, at least at the beginning, be at the helm as these policies are shaped and moved towards implementation. Like all of the other protocols, though—especially those occurring in a post-September-11th world—implementation will likely be painful and the cost, prohibitive. There has never been a more exciting time to be in the Coast Guard, yet wearing the dark-blue uniform has arguably never been more difficult either. Having a man like Thad Allen in charge at a time like this is comforting, but he is only one of 33,000 individuals tasked with managing an ever-changing portfolio of difficult missions. Nevertheless, his credentials are rock solid, his perseverance unwavering and his past accomplishments impressive. So, the only question left to be answered is: Are the other 32,999 Coast Guard members up to the task of following his lead? At press time, the jury was still out on that one. MarEx
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
Superior Offshore International, Inc.
A Case Study in Perseverance Louis E. Schaefer, Jr. is the chairman of the board for Superior Offshore International, but for readers who are not familiar with his dynamic maritime services company, a simple title like that does not give full justice to his role within the firm. In reality, Louis Schaefer IS Superior Offshore—starting it many years ago, taking it to where it is today—fresh off its initial public offering (IPO) and just around the corner from launching Superior’s own cutting-edge, partly self-designed, 432-foot offshore diving and services vessel. Wherever it goes from here, Schaefer’s indelible stamp will always be affixed to whatever Superior Offshore accomplishes. In a business where experience and competence means everything and diving and subsea operations will continue to be at the heart of earning revenues, knowing that Schaefer’s guiding hand is still at the helm is a very good thing. By Joseph Keefe
Superior 18
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
Offshore DPIII multi-service vessel Superior Achiever
Commercial Diving Subsea Construction
Construction Fabrication
ROV
Deepwater The Maritime Executive 19
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
L
ouis E. Schaefer, Jr. founded Superior Offshore and has been chairman of the board since August 2006. Schaefer was chief executive officer from 1994 until August 2006. Before that, Schaefer boasts deep roots in the business of diving. From 1986 to 1992, he was an account manager at Cal Dive International, Inc., an offshore energy services company, and from 1984 to 1986 he worked for American Oilfield Divers, Inc., an offshore energy services company. Earlier, Schaefer served as Chief Executive Officer of Schaefer Diving, his own offshore energy services company. But the foregoing CV merely scratches the surface. Schaefer’s influence upon this previously unknown, largely undefined sector of the maritime business is unmistakable and undeniably profound. Foundations Born in Victoria, Texas in 1943, Schaefer lived there until 1955, during which time he often went down to Port Lavaca and Port O’Connor on the weekends; fishing and crabbing and doing all manner of activities on the bay. His fascination with the ocean and all the creatures that live in the bay came from those experiences. Later, at just 18 years old, he started scuba diving. While working on the railroad in Austin, Texas, a friend invited him to go diving in Lake Travis. His first diving experience was an adventure and from then on, that is all he really wanted to do. Within a year, he got his employers to transfer him to Corpus Christi, Texas and it was there in the Gulf of Mexico that he began diving in earnest. By 1962, he had started his first business, Trident Diving, and for the next four years he lived his dream in the Gulf of Mexico: diving, bringing others out to do the same thing and, more importantly, developing the skills that would eventually lead him to bigger things. Then, in 1966, he enlisted in the United States Navy with the goal of becoming a Navy deep sea diver. Leaving his partner in charge, Louis set out to hone his diving skills even further. The Navy had other ideas, however, and it told the 23-yearold Schaefer that he had to go into the fleet to get a rating before he could go to diving school. “So, I figured the next best thing was submarine service,” says Schaefer. Off he went to submarine school in New London, Connecticut and was eventually stationed on the SS Picuda (SS-382), an old diesel boat stationed out of Key West, Florida. In the Navy for almost four years, Schaefer continued to apply to diving school, without success—the Navy needed submariners. Nevertheless, and although it was a very small consolation prize, he got to supervise some diving on board the sub as a function of his previous experience. He never did get the recognition of being a Navy diver and in 1969, 20
The Maritime Executive
he left the Navy and went back to diving. By this time, he had sold Schaefer Diving to his previous partner and had started his second business, Schaefer Diving company. Soon thereafter, Schaefer moved to Houston, Texas, where he had been told of some coral reefs located off the coast of Galveston, the Flower Garden Banks. These coral reefs consist of two coral reefs, East Flower Garden and West Flower Garden, that are about twelve miles apart . The reefs, which come to within 70 feet of the water’s surface, are surrounded by 400-foot-deep waters. Schaefer explored the reefs and fell in love with the beauty of the location. Eventually, he went back, found a partner, built a boat and started running divers out to the Flower Gardens. The first to operate a dive boat that went out to the Flower Gardens, Schaefer did this from 1970 until 1975, during which time he also began doing oil-field and salvage work in the off seasons. But diving was still his passion. Says Schaefer, “I continued to do the charters—and they were really more like expeditions than charters. We would go to different spots and everywhere we went, we made underwater films.”
The School of Hard Knocks Schaefer might have been content to let things ride forever, just as they were. However, in 1972, the seminal event which probably defined the next thirty-five years of his life occurred: a 110-foot utility boat, the Middle Ground, sank off of Port O’Connor, Texas, about 66 miles south of Freeport. Schaefer dove on the boat and found it to be in remarkably good condition. Almost new when it had gone down, the boat seemed to be to Schaefer the vehicle that could possibly take him to the next level in the business. He went to see the owners, who, interested in getting rid of their liability, sold the boat to him on the bottom, “where is, as is.” What was to follow would probably give most of us gray hair. After an initial failed attempt to raise the boat from the bottom using a railroad tank car welded to the deck of the boat, which included a scary episode where Schaefer himself involuntarily shot out of 160 feet of water to the surface in a matter of seconds— and survived to tell about it—winter set in and he abandoned the effort until the follow-
case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
the Flower Garden Banks…Consist of two coral reefs, East Flower Garden and West Flower Garden, that are about twelve miles apart. The reefs, which come to within 70 feet of the water’s surface, are surrounded by 400-foot-deep waters. Schaefer explored the reefs and fell in love with the beauty of the location. Eventually, he went back, found a partner, built a boat and started running divers out to the Flower Gardens.
The Maritime Executive 21
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC. With the money gained from that venture, Schaefer then bought a 110foot boat up in Boston, Massachusetts, the Rocket III, that he brought down and immediately put to work in the oil-field business. Eventually, he started converting it to a dive vessel—adding four-point moorings, diving compressors, and a thirty-ton A-frame. In reality, it became one of the first purpose-built dive boats in the U.S. Gulf. ing summer. When he finally did go back out and inflate some tanks again, he discovered that the slings with which he had affixed his air tanks to the boat had rusted through and broken—the tanks shot out of the water like submarines. The third time was the charm and he finally got the boat to the surface and towed it into Freeport, Texas. At the time, 1975, it was the deepest salvage that had ever been attempted or accomplished in the U.S. Gulf of Mexico and as it turned out, a harbinger of things to come. Schaefer’s intentions to refit the boat in order to make it into a commercial diving platform ultimately had to be set aside because the deterioration of the engines and other key parts was far too great to permit salvage, but he was able to sell the bare hull, which was still a good piece of equipment, to someone else. With the money gained from that venture, Schaefer then bought a 110-foot boat up in Boston, Massachusetts, the Rocket III, that he brought down and immediately put to work in the oil-field business. Eventually, he started converting it to a dive vessel—adding four-point moorings, diving compressors, and a thirty-ton A-frame. In reality, it became one of the first purpose-built dive boats in the U.S. Gulf. Looking back on it, Scahefer says, “It worked out very well, but was a little bit small for the things we wanted to do. It was our main dive boat from 1977 to 1983. But in 1983, we chartered the M/V Seaway Eagle and started doing a lot of the saturation-diving work in the Gulf of Mexico.” Saturation diving, simply described, is a technique developed by the U.S. Navy in the 1950s that allowed divers to remain at high pressures for weeks or months at a time without having to undergo frequent decompression. The practice eliminated a large portion of wasted time for divers. It was discovered that when a diver is underwater for long periods, the time needed to decompress reaches a maximum and stable point—decompression time for a 22
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
diver who has been underwater for one day could be the same as that for a diver who has been down for a week. Divers operating in the saturation mode live underwater and work out of a pressurized facility, such as a diving bell or underwater habitat, typically for a week or more. Today, an increasingly large percentage of commercial underwater construction work is performed using remote-operated vehicles (ROVs) that are controlled from the surface. Louis Schaefer will tell you, however, that there are still many underwater jobs that only a human diver can accomplish. The work came hard and fast. But almost a year later, Schaefer’s contract was due to be renewed and the client wanted him to guarantee them almost 100 percent utilization on the boat. “I told them I couldn’t do that; even though at the time we were running about 90 percent utilization. Anyway, they turned around and chartered the boat to Oceaneering who took the boat and used it somewhere else in the world. So, that was a big setback for me,” Schaefer laments. Continuing, he says, “And at that time, we were on our way to becoming one of the premier companies in the Gulf at that time. We had one division and Schaefer Diving consisted of our 110-foot vessel and the Seaway Eagle, until we lost it. But, we chartered other third-party boats also.” The bad news did not stop there. In 1984, Schaefer Diving did a big job for Gulf Oil, which was in the process of being bought out by Chevron. During the transition from Gulf Oil to Chevron, the oil major lost all of Schaefer’s invoices and documentation. The end result of the snafu was a painful setback for Schaefer. He looks back at the episode with a remarkable lack of bitterness: “They held our money for almost a year and I had to shut down the company. We didn’t go bankrupt or anything, but I just couldn’t keep going. The money amounted to $455,000 and it was devastating after 14 years of working 24/7 to lose it all at that time.” Eventually Chevron paid off the banks, but there was not much left after that. Everybody got paid, but Schaefer lost the business. After that, he worked for American Oilfield Divers (AOD) from 1984 to 1986, mainly in sales and marketing. “I tried to help them with their safety program, but they didn’t support it as strongly as I would have liked them to.” AOD eventually got bought out by Stolt and Schaefer left to start yet another diving business: Superior Offshore Services. Superior’s work consisted at first of mostly providing subsea drilling templates for offshore drilling outfits. They built and installed valve caps and other accessories for the offshore markets, as well as providing commercial diving support for offshore drilling. “We provided divers, we provided the drilling templates and whatever else they needed,” says Schaefer. But anyone who remembers Houston in 1986, also remembers the downturn in the oil industry. It was a time when entire housing subdivisions in Houston saw the 24
The Maritime Executive
Saturation diving, simply described, is a technique developed by the U.S. Navy in the 1950s that allowed divers to remain at high pressures for weeks or months at a time without having to undergo frequent decompression. The practice eliminated a large portion of wasted time for divers. It was discovered that when a diver is underwater for long periods, the time needed to decompress reaches a maximum and stable point—decompression time for a diver who has been underwater for one day could be the same as that for a diver who has been down for a week. vast majority of homeowners walk away from their mortgages. In the latter part of that year, Jerry Rule of Caldive approached Schaefer and asked to work for Caldive, promoting the company and providing sales support. In a downturn year, Caldive could not pay Schaefer a salary or expenses, but agreed to pay him a commission. Schaefer reluctantly agreed to Rule’s terms. Within four years, he was the highest-paid employee at Caldive.
A Superior Model Takes Shape Louis Schaefer hired another person to run Superior while he worked for Caldive and during that time, Schaefer third-partied all the diving work to Caldive and Superior got all the fabrication work. This, in effect, according to Schaefer, was where the idea of having two different divisions within Superior began. It also was the time when the working relationship between the two specialties was defined and refined. Customers could now get a “turnkey” job with fabrication, template design and diving—all rolled into one contract. Or, in other words: better service for the customer and more work for Superior Offshore. But in 1992, Schaefer was having difficulties with his manager at Superior and asked his supervisor at Caldive for some time off so that he could go back and “fix” his company. They asked him to take a leave of absence and he did. In 1994, Schaefer got back into diving and started Superior Diving Company. For more than ten years, Superior Offshore Services and Superior Diving Company, Inc. existed as two different companies. In December of 2005, the two merged into one company, Superior Offshore International. The Superior Offshore “turnkey” system was now a reality, but the inception of that model had occurred long before. Although throughout the late 1990s and well into the next decade, Superior’s two companies were doing just fine, it was Hurricane Ivan which really put them on the map. Directly after the killer storm hit, Schaefer chartered a dynamic-positioning/dual-redundancy (DP2) ship called
the Mansal 18 and installed an onboard saturation-diving system, rated for 600-foot depths. Superior was then performing a steady volume of hurricane repair work in the Gulf of Mexico. And, in March of 2005, they went ahead and bought the Mansal 18 and renamed it the Superior Endeavor. “That vessel,” says Schaefer, “has turned out to be a fantastic ship.” Buying the Mansal 18, in retrospect, was not a difficult decision for Schaefer. “From that moment on, we have been one of the top contenders in the Gulf. We had a proven track record; knew the revenue streams. We had the quality crews; we had everything we needed.” At 265-feet long, it was originally built as a diving ship and had a complete, though not operational, saturation-diving system hooked in below decks. To solve this problem, Schaefer just slid his own system on the main deck, inside of a hanger, right on top of the original system. Today, the vessel is in the shipyard and Schaefer says that they are reactivating the original system on board, which will free up Superior’s portable system for another ship.
a seven-man crew of tenders. The units are deployed for a wide variety of tasks which could include disconnection from a subsea tree or blowout prevention in support of drilling operations. Camera monitoring, turning of remote valves and disconnecting guide wires also make up a large percentage of this type of work. This is state-of-the-art, very sophisticated equipment, costing as much as $4 million each. Very soon, Superior will have three units working. Currently, ROV’s only account for 5 percent of their business revenues, but eventually this is expected to grow to 15 percent.
Maturity: Legacy Work, Modern Management Now in the spring of 2007, Superior Offshore has almost 600 employees on the payroll, but with plans to put more ships to work, Schaefer says that they could have as many as 1,000 employees by the end of this year. Commercial diving is still the anchor of Superior Offshore and is certainly the embodiment of Louis Schaefer’s life experience. Today, commercial diving encompasses 80 percent of Superior’s total business revenues, with the marine, diving, ROV (offshore) and fabrication sectors making up the other divisions in the firm. In general terms, the work—all of it supported by Superior’s legacy diving work—can be described as follows:
Remote-Operated Vehicles (ROV) ROV’s perform the full gamut of work, from underwater surveillance right down to actually hooking up shackles, construction, repairs and installation. Rated to depths of 2,000 feet, these 150-HP ROV’s are usually dispatched with
Fabrication Superior’s fabrication division allows it to perform “turnkey” repair jobs. A customer may have a broken pipeline and Superior will provide the pipeline welders, divers and fabricators. Everything needed for the job is placed on board, and the Superior vessel and team then go out and cut out the damaged section, put end connectors on each end of the pipe, build a spool piece right on board, lower it down and complete the repair. Fabrication assignments now account for perhaps 15 percent of Superior’s revenues.
Deepwater In reality, according to Schaefer, ROV’s constitute a part of this division. The Superior Achiever, the 435-foot, DPIII subsea-construction vessel, now being built in the The Maritime Executive 25
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
There is at least one place where the walk follows the talk, to the letter: Louis Schaefer is passionate about safety. He says emphatically, “I’ve always been the leader in safety in every endeavor that I’ve done in the offshore diving business.” Today, his enviable total recordable incident record, documented by OSHA, speaks volumes. Although his employee totals have grown exponentially in the last two years, Superior still achieved a reduction in recordable accidents. That record, in itself, is no accident.
Netherlands at a cost of $120 million, is billed on the Superior Offshore Web site as “the future of Superior Offshore International.” Scheduled for delivery in June 2008, the Superior Achiever will serve as the future icon and key component of Superior Offshore International’s developing deepwater division. Beyond the initial, basic cost of the vessel, Schaefer says, “We’re also installing the cranes, saturation systems and other custom equipment, designed to our specifications.” This will bring the ultimate cost of the vessel to around $135 million. Although described as fairly small by Schaefer, the 432-foot Superior Achiever will be the largest ship in the Superior fleet when launched. Soon, any firm competing in the deepwater markets will need ships like this—while it costs a lot more to build and operate such a vessel, the revenues are far more rewarding in the deepwater game. “It’s the same kind of game as the shallow draft work— but just a lot bigger game,” adds Schaefer.
The Market Looks at the Competition: Debunking the Myths… Often, when people think of Superior Offshore, the comparisons to Caldive naturally follow. After all, Louis Schaefer spent a fair bit of time there himself, helping 26
The Maritime Executive
to develop its business mix, before moving on to ramp up Superior into what it is today. However, as the IPO loomed closer to becoming a reality earlier this month, selling the Superior concept to Wall Street necessarily involved differentiating Superior from other, seemingly similar companies. But, the truth of the matter is that while Caldive might just be the most similar entity to Superior in today’s markets, the analogy is anything but an apples-to-apples comparison. Having recently gone public, and changing their name, Caldive is now basically (majority) owned by Helix, a deepwater contractor. Hence, Caldive can not move into deepwater because it would be in direct conflict with their owners. “Whereas,” says Schaefer, “the deepwater market is totally open for us; we don’t have any restrictions. It provides a new dimension for our company—with unlimited expansion opportunities.” Louis Schaefer is candid about his prior relationship with Caldive. It was there that he gained a lot of business sense and operational knowledge and, perhaps most important to the future of Superior Offshore today, his introduction into the bigger and deeper water jobs. Nevertheless, Schaefer remains friendly with his former colleagues there to this day.
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
The Three Keys to Offshore Success: Safety, Safety and Safety Safety is all the rage now in the maritime world. Everyone talks about it and everyone claims to be actively pursuing this holy grail, but in many places, the gap between what is promised and what is delivered is wide and—to use a diving metaphor—deep. There is at least one place where the walk follows the talk, to the letter: Louis Schaefer is passionate about safety. He says emphatically, “I’ve always been the leader in safety in every endeavor that I’ve done in the offshore diving business.” Today, his enviable total recordable incident record, documented by OSHA, speaks volumes. Although his employee totals have grown exponentially in the last two years, Superior still achieved a reduction in recordable accidents. That record, in itself, is no accident. Back in the days of his charter-diving business, Schaefer would routinely take novice divers as much as 110 miles offshore. As many as 24 divers would take three dives a day and sometimes another at night. Taking care of that many novice divers took a lot of effort to make sure that everyone stayed safe. “But during that whole period we never lost a diver,” states Schaefer. He adds, “Our philosophy was, and still is, that we all go out and
we do the job and we all come back safe. I have never compromised my safety standards.” Safety lapses on Schaefer-led operations have been extremely rare over the years. Without a doubt, however, the defining moment that forever set his safety policies into stone occurred in the early 1970s when Schaefer agreed to take an underwater-welding school’s graduates out into the Gulf for “checkout dives.” During the first year, he took them out and could readily see that they did not really have the right equipment, including emergency air and safety equipment. Schaefer talked them into letting him set up and run a proper dive station on the boat. That year, all of the divers successfully performed their 150-foot dives, qualified and everybody went home safely. The next year, however, the school called to charter the boat again but told Schaefer that because it had new gear, it would provide the diving supervision and asked Schaefer to just “run the boat.” He reluctantly agreed. Very soon after arriving at the dive site offshore, however, an accident ensued where one diver died and another one, thankfully, was revived. In the wake of this incident, Schaefer took a look at the divers’ “new” equipment and realized that they were no better set up this time than they were the first year. Schaefer declares adamantly, “I The Maritime Executive 27
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC. “We had to take it to the limit, but we didn’t cross that line. In any situation where we couldn’t safely predict what the outcome would be, or more importantly, a safe outcome, well, then we’d back off and find a better way of doing it. We all enjoyed working and doing what we did, but at the same time, we never lost sight of the fact that we all wanted to come home. And, we always did.”
of attention formerly reserved for the deep-draft players. Nevertheless, Schaefer readily admits that the offshore diving and subsea work of the 1970s and early 1980s embodied somewhat of a “cowboy mentality.” But Louis also says, “We had a select group of guys and knew what we could get away with and what we couldn’t. In the old days, perhaps, we were as bad as any of them. And we did things that were just way off the charts, and accomplished some awesome things. But, in those days, it helped to have a little ‘cowboy’ in you.” Schaefer then tempers these remarks with, “We had to take it to the limit, but we didn’t cross that line. In any situation where we couldn’t safely predict what the outcome would be, or more importantly, a safe outcome, well, then we’d back off and find a better way of doing it. We all enjoyed working and doing what we did, but at the same time, we never lost sight of the fact that we all wanted to come home. And, we always did.”
Innovation Through Safety
made up my mind at that time that I would never again be associated with any diving operation that I couldn’t have a point of control in the operations and safety of that operation. I never wanted to see anything happen like that again.” Schaefer continues, “I didn’t care if the diver was Jacques Cousteau—if there was anything wrong, I was going to stop it.” Today, virtually every sector of the marine business comes under close regulatory scrutiny. Very soon, according to the top decision makers in the U.S. Coast Guard, even the sub-300 ton-market will receive the same kind 28
The Maritime Executive
Performing new tasks that have never before been tried is nothing new to Louis Schaefer. Perhaps the most visible manifestation of that reality was raising the Middle Ground from the ocean floor in the 1970s; a feat which was the deepest such salvage effort ever attempted and completed at that time. That accomplishment gave Schaefer his first inkling that he was capable of doing big things. Achieved with makeshift equipment and a whole lot of imagination, that salvage operation actually developed techniques that Superior Offshore—and others—still use today. That early success also brought about the realization that there were no purpose-built boats in the early 1970s for this type of work. Schaefer laments, “Every job involved rigging up and rigging down. I thought: ‘This is insane— there has to be a better way.’” After buying the Rocket III, he immediately started converting it to a dive boat—a specialty boat designed the way Louis Schaefer wanted it—not how a shipyard said it should be done. Many years later, Schaefer has been actively involved with the layout of the Superior Achiever in a similar way. This input includes spotting the locations of the cranes, saturation-diving system and moon pool, an opening ideally placed in the middle and on the centerline of the ship that provides a calm and stable area to deploy divers. “A lot of other people launch over the side but we think that this method is more dangerous,” insists Schaefer. Louis Schaefer could not have imagined all of this when he was raising that sunken boat off the bottom in the 1970s. In so many ways, the Superior Achiever represents a quantum leap forward for Superior. But Louis says, “Look. We’re already in the big game with our current vessels.” Indeed, Superior has already been operating a similar ship to the Achiever (a sister, actually) for over a year. “We’ve seen the shortcomings of that vessel, where it could be
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC. Superior’s definition of “the next generation in subsea services” means that the firm is growing because of its safety record and because of its outstanding performance. Says Schaefer, “We have the desire to do it right. If we can’t do it right, then we won’t do it. It’s simple, really: use professional people, with the right, well-maintained equipment, for the right job. I named the company ‘Superior’ because we strive every day to live up to the name. We can only be Superior if we are superior. We won’t settle for less.” Louis E. Schaefer, Jr., Chairman, Superior Offshore International, Inc. improved, and we’re doing that as we build. When our boat is finished, we’ll step off that boat onto ours and will be operating in the environment we want, that we created and that we know is the most efficient in the world.” The spring of 2007 finds Louis Schaefer sitting as chairman of the board, but his move upstairs has not changed the way he thinks or diminished the influence that his input can have on the future of the company. The events which preceded Hurricane Katrina, prompted by his foresight, are ample testimony to that. While Hurricane Ivan got Superior into the big game with the bigger oil and gas transmission companies, it was Katrina which made these companies thankful that they had previously made the leap of faith. Schaefer remembers Katrina well. “When I saw Katrina coming and then make the turn towards New Orleans, I was in Houston making some sales calls. I called my operations manager and I told him to load every bit of our diving equipment at our Belle Chase facility and move it to Lafayette to our facility there. Then, I told all my people in New Orleans to pack their stuff—kids, dogs, everything—and head for Houston. I was staying at the Marriott Hotel in Houston and I went downstairs and I said, ‘I want twenty rooms.’ And they looked at me kind of funny, and I continued, ‘For two weeks.’” This was before the storm came ashore. Finally, Schaefer told his operations manager to put the ten best dive boats that Superior would normally use on standby and then on Superior’s payroll. Because Superior got virtually every employee out of New Orleans, it was one of the first companies to respond. In the end, says Schaefer, “We had these ten boats rigged out with gear and divers—it was a tremendous surge in business for us.” That surge in business continues today. If Ivan brought Superior Offshore into the big leagues, then it was Katrina that proved that the company belonged. For Schaefer, however, it was not all about the money or the revenue streams. By taking care of his people first, everything else eventually fell into place, but he was not done. After the two weeks, he started moving everyone to Lafayette, putting them in rental houses and apartments, and began running all of his operations out of Lafayette. 30
The Maritime Executive
Next, he bought houses and let the managers take over the payments. Naturally, all of his employees were more than happy with this arrangement, especially in the face of the alternative. Superior’s definition of “the next generation in subsea services” means that the firm is growing because of its safety record and because of its outstanding performance. Says Schaefer, “We have the desire to do it right. If we can’t do it right, then we won’t do it. It’s simple, really: use professional people, with the right, well-maintained equipment, for the right job. I named the company ‘Superior’ because we strive every day to live up to the name. We can only be Superior if we are superior. We won’t settle for less.”
Keeping Their Eye on the Ball It all sounds good, but even Superior’s executives know that all the good planning and safety in the world will go for naught unless they can make money, and a lot of it. Superior’s revenue stream of $242 million in 2006 is projected to grow to as much as $340 million in 2007. These expectations have made the initial public offering (IPO) much easier to sell to potential investors, but the change from a privately-held firm into a publicly-traded—and heavily scrutinized—company brings baggage. The excitement of a listing on the NASDAQ and the prospect of raising as much as $150 million is tempered by the fact that Schaefer and his CEO, Jim Mermis, know that they are going to have to focus on explaining how they are doing what they do, the profit margins, thought processes and a myriad of other things to their new investors. Schaefer shrugs off such worries, though, “The major decision process might have to move at a little bit slower pace, and it goes without saying that plans for expansion and growth will have to be laid out better for others. On the other hand, almost all the money we’ll garner from the IPO will go right back into the company. So the company will be debt free at the end, with $35 million in cash on hand and revenues of $1 million per day, average. All the pieces will be in place for expansion once the IPO is complete—we just need to do it in the most profitable and efficient way.”
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case study: SUPERIOR OFFSHORE INTERNATIONAL, INC.
Schaefer will remain the majority stockholder in the company, so he will continue to have a strong say in what direction Superior Offshore will ultimately go. “I certainly will take into full consideration the needs and input of the stockholders and investors.” Schaefer, at the end of the day, will still have skin in the game. “A lot of skin in the game,” he adds emphatically. “It’s my life. I put all this money back into the company because I believe in the company.” But, Schaefer continues, “I can’t imagine any other company in as a good of a financial condition than we are; now, and even more so, a few weeks down the road.” It is expected that a three-to-five year contract for the Superior Achiever will be signed in the next six months. What happens next is still a matter for internal discussion. Schaefer is candid about his desire to begin building another ship, but whatever they do, build or charter in one of the many new purpose-built vessels expected to hit the markets in 2009 and 2010, one thing is for sure: they’ll be expanding into the game, once again.
Schaefer will remain the majority stockholder in the company, so he will continue to have a strong say in what direction Superior Offshore will ultimately go. “I certainly will take into full consideration the needs and input of the stockholders and investors.” Schaefer, at the end of the day, will still have skin in the game. “A lot of skin in the game,” he adds emphatically. “It’s my life. I put all this money back into the company because I believe in the company.” But, Schaefer continues, “I can’t imagine any other company in as a good of a financial condition than we are; now, and even more so, a few weeks down the road.”
Diving In: the Heart and Soul of Superior Offshore International It is easy to sit on the sidelines and have a clinical view of Superior Offshore’s growth and successes. Today, the firm’s future appears to have unlimited potential and, although this highly technical business may outwardly only bear a slight resemblance to that which Louis Schaefer started over thirty years ago, Superior’s future is still firmly rooted in the world of diving. Along the way, the setbacks have been many. Arguably, there are very few businesses and entrepreneurs that could have come back from the disappointment of not being able use the salvaged Middle Ground (1975), the loss of the company’s biggest workhorse charter, the Seaway Eagle (1983), and, most significantly, the shutdown precipitated by the documentation foul-up in the wake of the Chevron-Gulf merger (1986). Without a doubt, one of the main reasons that Schaefer has always had the wherewithal and drive to continue on, even in the face of some major bumps in the business road, was the untimely loss of his left leg on the evening of August 16, 1977. Schaefer nearly died from the loss of blood that night, but can still look back on the event with a touch of irony, and humor, as the event coincided exactly with the passing of Elvis Presley: “He and I had a bad day—him worse than me.” Six weeks later, though, he was back in the water. “As owner of the company, they couldn’t tell me not to dive. In the water, I’m only perhaps 10 percent handicapped, but on land, I’m 80 percent handicapped. That’s why I still love diving.” Predictably, the comparisons of Schaefer to another particularly famous diver, Carl Brashear, the first black U.S. Navy diver, arise. Brashear was the first Navy diver to be restored to full active duty as an amputee after he lost his leg during a salvage operation in 1966. Brashear, who 32
The Maritime Executive
recently passed away at the age of 75, was portrayed by Cuba Gooding, Jr. in the 2000 film Men of Honor. Schaefer has heard the comparisons before, of course. He is clearly not bothered to have the parallels between himself and Brashear discussed, but says with a twinkle in his eye, “I’ve made a whole lot more dives than that guy.” At 64 years of age, Louis Schaefer is still diving. The company that has emerged into an industry powerhouse from the shadows of his many ventures is still diving, too. The dives are becoming deeper, longer, more complicated and increasingly farther away. Don’t look for any of this to change, any time soon. MarEx
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Executive interview: Jim Mermis
Jim Mermis
By Joseph Keefe
CEO of Superior Offshore International, Inc. The past two years at Superior Offshore have brought enor-
mous changes, exponential growth and the formulation of a grand master plan, which promises to launch this firm into the forefront of the international, deepwater-construction business. Superior is not yet the biggest of the offshore service providers, but it has long been recognized for qualities that are arguably far more important: an uncompromising commitment to corporate safety and core competencies honed though years of practice. The best may be yet to come. The second quarter of 2007 will bring the long-awaited IPO which will soon provide the launching pad from which Superior Offshore International will dive into the next big thing: the international, offshore subsea markets. A debt-free, asset-rich and supremely competent Superior Offshore will make its new debut this year. And the market is sitting up and taking notice. In our Q&A with Jim Mermis, President and CEO of Superior Offshore, he talks about where Superior has been and more importantly, where it is going. Join us as we explore the company’s exciting story. 34
The Maritime Executive
I enrolled in Tulane University in their executive MBA program. So, I spent 18 months of my working life working steers the company and decides 14 hours a day and going to school the direction we’re going, what projects we’re going after and at the same time to get an executive how we’re going to move ahead all of that. MBA. So, I guess, realistically, I’m one with MarEx: So, it’s now a five–man, of the guys who started out at the top, executive committee, once the COO is on board? jumped in the water, went to the bot- JM: Yes, and after we go public, have a five-man, indepentom and finally came back to the top we’ll dent board of directors, all of whom have various backgrounds again. and expertise. James Persky will
MarEx: Superior’s roots are firmly planted in the business of diving. The company is more than that now—much more than that. I think it would be useful for our readers to see where the firm has been, before we talk about where it is going. Can you give us a brief history of your diverse firm? JM: Louis Schaefer, our founder, has been in the diving business since the early 1970s. It’s been a small diving company and in fact, he didn’t have vessels for most of that time. I started with the company since 2005 and I’ve been here almost two years. Louis had one four-point boat when I started and he’d taken a dynamically–positioned, saturation-support dive vessel named the Mansel 18 on a spot-charter basis. That was right after Hurricane Ivan. I came in somewhere in the middle, in between Ivan and Katrina. So, when I came on board, I had a little more international and deepwater background than Louis. I brought some people with me and obviously after Katrina, that’s when our real growth started. MarEx: Let me follow up with that. You are a privatelyheld firm and the internal workings of your firm are largely proprietary in nature. At least they are, right now. But MarEx readers are going to want to get a sense of how your organizational chart looks and the executive makeup of the firm in particular. Louis Schaefer is the founder of the company and chairman of the board. You’re the CEO. Can you give us a feel for how you run the company on an executive basis? JM: Sure. While Louis hasn’t exactly taken a step back, he has let me take the reigns and run the company on a day-today basis. He’s also let me take the company and steer it in the direction that we’re headed. And, we’re headed into the international, and more importantly, the deepwater markets. I talk to Louis at least once a day—maybe twice—but the day-to-day business myself and the management committee pretty much run the show. Any major decision that might affect the company economically or operationally, then we’ll bring Louis in and make a group decision and move ahead. MarEx: When you say “the management committee,” what are we talking about? JM: Essentially, the management committee is made up of myself, Roger Burks, our CFO, Joshua Koch, and of course, Louis. We just recently hired a COO, Petrice Chemin—I’ve known him for years and he’s got thirty years in the business, primarily with Stolt Comex Seaway. Beyond that, we’ve got our individual department managers: operations manager, diving manager, our ROV manager. But it is the executive management committee who
head the financial audit committee. Eric Smith came from Saipan and McDermott and is currently teaching at Tulane University. We’ve got Leon Cordon who’s already on the board of the Singapore Oil Company. Tommy Coleman will also join our board—he’s the head of a large tanker terminal company. MarEx: Let’s focus on you for a minute. Nobody likes to blow their own horn but the readers and, I am sure, your future investors are going to know what skill package is going to be running Superior Offshore. What makes you well suited to run the firm and take it to the next level? JM: I actually started out as a diver in 1975 with Subsea International. And I worked my way up through the ranks and eventually transitioned offshore and became offshore operations manager. When Global Industries purchased Subsea, I wanted to learn about the deepwater business so I went to work for Stolt Comex Seaway as operations manager. And then during my tenure with them I was a senior project manager and actually ran deepwater and international projects for them as well as operations. Shortly thereafter, I went to Torch Offshore. Torch wanted to get into the deepwater markets and they essentially hired me to run their new-build vessels. At that point, the market went south and Torch chose not to go public. So I did deepwater business development for Torch for three years. Eventually, Torch did go public and I think everyone knows the story. They didn’t make it and went bankrupt. Somewhere along in the middle of all that, in 2000, I enrolled in Tulane University in their executive MBA program. So, I spent 18 months of my working life working 14 hours a day and going to school at the same time to get an executive MBA. So, I guess, realistically, I’m one of the guys who started out at the top, jumped in the water, went to the bottom and finally came back to the top again. MarEx: You’ve managed at a publicly-traded firm before. So, tell us how you think things are going to change once you’ve gotten past the IPO, not only in terms of your management style, but also in the actual decision-making process. A privately-held firm can sometimes be nimble and quick, while a publicly-traded company has to answer to many masters. What will change and what will The Maritime Executive 35
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Executive interview: Jim Mermis
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Executive interview: Jim Mermis …everyone wants to compare us to Caldive; whereas Caldive really isn’t through an ROV company, comparable to us. We supply diving vices through the ROV’s we own and Helix owns. Caldive doesn’t. services; so do they. We supply diving that We also supply deepwater assets services internationally; so do they. in a deepwater capacity. Helix owns assets; Caldive doesn’t. But, we supply deepwater-construc- What really works for us, though, our entry into deepwater, is tion services through an ROV compa- in that deepwater-construction and even the E&V ny, through the ROV’s we own and that contractors companies do not look at us as competition. In some manHelix owns. Caldive doesn’t.
stay the same? JM: Well, we are going to be responsible to our shareholders up to a point. Major decisions, of course, will have to be run past our board of directors. I think that the day-to-day business and the growth opportunities that we have, we’ll be able to do that just as we do now. What is important to us is that we have made the big capital commitment of the Superior Achiever, our deepwater-construction vessel. So, through our capital expenditure plan—our strategic plan—we don’t have to come up with any other major capital expenditures in way of vessels or acquisitions. We’ve aligned ourselves with different contractors within the industry. We’ve put together cooperative agreements, we continually take on third-party vessels, and essentially what that amounts to is that it gives us equipment to operate within the industry that we don’t necessarily own and that we don’t necessarily have a long-term commitment in. We’ll do this through short-term vessel charters, cooperation agreements and I’m trying to put into place basically in a low-risk basis. You can think of it as a joint venture. We each enter the business together. If the barge is not working, I don’t have to pay for it. If my equipment isn’t working, the other contractor is not being paid, so we both have a vested interest to make sure the asset goes to work. If we don’t go to work, neither one of us gets paid. MarEx: You’ve got to sell yourself. Everyone of us has to sell ourselves every day. What’s the number one thing you are going to have to sell to the investors on the day that you go public? JM: It’s probably not what you want to put in the magazine. But, we have to differentiate ourselves from the competition. MarEx: Well, that was another question on my list, but let’s combine the two into one answer then. JM: Well, you have to look at us and the services we offer. We’ve expanded our core services in the Gulf of Mexico and we’ve gone from 60 divers to 665 people offshore. We’ve identified the fact that in the Gulf of Mexico, while there’s still plenty of work for everyone for the next five years, we’re not going to put all our eggs in one basket. We’ve identified that in order for us to grow, we’re going to have to enter the international markets, but more importantly, the deepwater markets. So, the real driving picture for us and where we get our multiples from is that everyone wants to compare us to Caldive; whereas Caldive really isn’t comparable to us. We supply diving services; so do they. We supply diving services internationally; so do they. But, we supply deepwater-construction ser36
The Maritime Executive
ner, the deepwater-construction guys look at Caldive as competition because they’re 70% owned by Helix—the guy that’s bidding on the same contracts that they’re bidding on. I think Helix’s entry into the production business is starting to be looked upon by the majors—and maybe even some independents—as a competitor or competitive business. The key for us and our entry into the deepwater-construction business is that fact that we can work for the deepwater-construction contractors. Helix is getting in their bids. We don’t want to be competition to the deepwater-construction contractors. We want to supplement what they do. Consequently, I’m going to get five or six bids from those contractors to provide ROV’s, divers or even the Superior Achiever in support of the deepwater projects that they are pursuing. MarEx: When I talked to Louis Schaefer, he alluded to all of this, especially in terms of Caldive and their parent company. But, you mentioned another part of the equation. JM: One of the other things that separates us from the competition is that we’ve experienced this tremendous growth within the last couple of years. If you look at our key people—project managers, executive team, offshore superintendents and supervisors, and even the divers— very few of those people have worked here for more than two years. But, you take a look at the rest of the people that we have, and they have fifteen, twenty years experience—not at Superior, but instead, at Caldive, Global, Stolt, everywhere throughout the industry. So, what that’s allowed us to do is to bring on those individuals on board with all these years of experience. We’ve taken all these combined “best practices” from wherever they’ve worked previously, put them on the table, and essentially we’ve cut and snipped at these practices and made them our own. At the end of the day, we’ve got a combination of the best practices of all the different companies that we compete against. Because of this, and with the deep experience of our people, I think that we can give a better product to our clients. MarEx: Okay. Well, that wasn’t really where I was headed with that question, but let’s shift gears and ask a similar question. I had a terrific talk with Louis Schaefer a couple of weeks ago and really enjoyed it. But, Louis calls Superior
And what’s really significant for us is the fact that we’ve gone from 60 personnel to over 660 working offshore in Then, you take a look at Subtech, just a couple of years. Our total record- and what they bring to the mix is South-African and European able incident rate in 2005, spanning 260 divers that work to a different 546,000 man-hours offshore, was standard, an international standard. Realistically, they work to a 1.46. In 2006 we had 1,118,000 the standard that we are going to have to attain, in order to do man-hours working offshore and our international work—to do deepwork. So, total recordable incident rate actually water-construction Subtech is kind of a shift in our mentality. They’ve brought a lot dropped to a 1.07.
Offshore the industry’s “leader in safety.” He talked about his early passion with safety and how one of the things he realized early on was that he would not do a job if he couldn’t do it safely. And if he had to cut back on production, then he would favor safety over operational efficiencies. Can you expand a little bit on that? JM: Sure. Safety goes hand in hand with success in this business. You’re not going to be an unsafe company and continue to have the kind of opportunities that Superior has. If you start to take a look at some of our clients—the Shells, the Chevrons, and the BPs, the big players in this world—those majors have higher safety standards than anyone else in the industry. Consequently, we not only meet those standards but we far surpass the standards that they require. And what’s really significant for us is the fact that we’ve gone from 60 personnel to over 660 working offshore in just a couple of years. Our total recordable incident rate in 2005, spanning 546,000 man-hours offshore, was a 1.46. In 2006 we had 1,118,000 man-hours working offshore and our total recordable incident rate actually dropped to a 1.07. (Editor’s note: OSHA defines the Total Incident Rate as a mathematical calculation that describes the number of recordable incidents that a company experiences per 100 full-time employees in any given time frame.) MarEx: Just so I get it right and our readers understand, what exactly does a 1.07 mean? JM: It’s an OSHA formula and here’s how it works. First of all, the OSHA standard says that you have to have a total recordable incident rate of less than 2.0. Look, we’re committed to safety, our numbers prove that and because we’re a safe company, this allows us to go to work for the BPs and the Chevrons of the world. MarEx: You’ve recently announced that you’ve acquired another diving company, Subtech Diving and Marine, based in Durban, South Africa. Obviously, you’re going to bring some things to their portfolio and they’re hopefully going to bring some things to yours. You’ve said previously that it is your goal to move into the deepwater and the international markets, globalizing the Superior brand name. Talk about this move, the synergies you’ll create and how all of that fits into your long and short-term strategies. JM: You know, interestingly enough, if you look at the companies we work for—the majors, the independents, the subsea-construction companies in the Gulf of Mexico—we’ve taken our core business of diving and we’ve parlayed that into ROV’s, deepwater assets. This has given us the opportunity to work not only for these clients, but also to get into the international, deepwater markets.
of policies and procedures and key individuals that have allowed us to make the transition from where we are now at, to where we are now going. They’ve got a kind of European mentality—they’re more policy and procedure driven. They operate just a little bit differently than we did before we picked them up. Subtech also has offices in the Middle East and in Africa, so they bring a client base to the mix, as well. MarEx: You bought them. What do you bring to the table? Would it be fair to say that you brought the assets and financial wherewithal to help them expand on what they already do well? JM: You hit the nail right on the head. MarEx: Talk about the European standard of diving operations that you’ve alluded to. It sounds like Louis has been running a pretty tight ship here no matter what standard you’re adhering to now. But, the European standard seems to be a different one. Let’s talk about it. JM: Well, first of all, it’s a different mentality. The European standard pretty much sticks with deepwater projects. We’re already supplying divers to the world’s biggest, semi-submersible DP derrick barge and I think the day rate on that project is somewhere around $800,000 a day. When you are dealing with an asset that costs $800,000 per day, you definitely want all the “i’s” dotted and the “t’s” crossed. Everything is based in risk assessment—and every step in a project is planned. Historically, in the Gulf of Mexico, you had a plan, but you jumped in the water, did the work, and away you go. The European standard incorporates far more planning, far more engineering and this better fits the high-dollar projects that we’re striving to do. MarEx: You are already starting to integrate this into your standard operating procedures, yes? JM: That’s correct. Our in-house training facilities train all of our new people who come on board. Right now, if you come on board at Superior as an offshore superintendent or an offshore supervisor of any sort, the odds are pretty good that if we don’t know you, then you’ll be sent out onto one of our vessels to work alongside one of our Superior employees who knows how we operate. And, he’s going to watch you operate before you get the green light go ahead and run that boat or job on your own. We do The Maritime Executive 37
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Executive interview: Jim Mermis
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Executive interview: Jim Mermis A structure may be laying on its side and although the storm cap has been checked, it’s still a live well. So, for as the future of Superior Offshore five years, we’re going to clean up the International. Now, that’s big for a firm that has three other junk and after that, let’s say we only talk thriving divisions. Tell us why the take one-quarter of the wells and put deepwater division is so important to you and also let the readers them back into production, then the know how you intend to make the Superior Achiever the workhorse Achiever is the kind of boat that can for this goal. future of the industry do that. She’s designed for modular isJM:in The deepwater. If you remember before Hurricane Ivan and construction.
this at our own cost, but once again, you look at the number of people and jobs that we have going on, and the practice pays for itself over the long haul. Depending on the individual, this side-by-side redundant training can go on for as long as a month and no less than two weeks. MarEx: Let’s talk about your hurricane response work. Katrina was, and probably still is, a large portion of your work. Louis Schaefer has said that it was Ivan that put you on the map and that event was how and when you realized the full power and capabilities of the firm. He also outlined for me the operational readiness that allowed Superior to respond during Katrina, where perhaps, others couldn’t. So, you are very well known for this. But, what’s going to be the next big thing that Superior is going to be known for, beyond your obvious competence in your core businesses? JM: You know, I’ll tell you, we recently had a fatality—a devastating event for us and for our people. Superior had never had a fatality in its forty-year history. But we have done in response is pretty much unheard of in the United States and the industry. We studied that fatality, spent a lot of time and money to determine just what happened. The Coast Guard has investigated; Vanuatu, the flag state, has investigated. We’re still waiting for the Vanuatu and the Coast Guard report. But what we’ve done is to step up within the industry and have made what we know about that fatality public knowledge. We have gone to our clients, we’ve gone to our employees, and we’ve said: this is what’s happened, this is why it happened and this is going to be what we’re going to do to make sure that it never happens again. We would never try to turn a fatality into something that eventually will translate into an economic positive, but this fatality could have had a tremendous negative impact on the company and possibly prevented us from moving ahead with the IPO. So, what I think what Superior is going to be known for is that we’re a “blackand-white” company; we put things on the line, we tell you like it is, we don’t sugarcoat anything. We tell you the truth and if that’s boring, then that’s what it is. MarEx: Where would you say your best overseas opportunities exist in the near-term future? JM: As I’ve already said, the opportunity for us is to build on the relationships that we already have. Realistically, we’re looking at Mexico, South America, Africa and the Middle East are where we’re going to try to concentrate on. We already have relationships in those regions and we have people that work for us that have contacts in those areas. MarEx:The Superior Achiever is described on your Web site 38
The Maritime Executive
some in the industry call it “St. Ivan” because it revived and literally saved the industry. Before Ivan, everyone was headed for deepwater within the Gulf of Mexico and out of the Gulf into Deepwater, internationally. The work in the Gulf of Mexico—there’s still plenty of it, but the future of the industry is in deepwater. That’s because deepwater has barely been touched. We have two opportunities with the Achiever: we can go to work for the deepwater-construction contractors. What makes the Achiever an extremely desirable vessel is that within the niche that she’s designed for, she can do anything, anywhere in the world. We’re not going to go out there and reel off 10,000 feet of 10” diameter pipe in 10,000 feet of water but what we are going to do is go out there and support the deepwater contractor that’s reeling off that pipe. We’re going to be able to do the subsea tieins; we’re going to be able to do the infrastructure more quickly and a lot cheaper than they can. The other opportunity for the Achiever is that we’ll put it into deepwater, where there are 113 toppled platforms in the Gulf of Mexico, in anywhere from 700’ of water all the way to shallow water. If you look at the toppled structures, it translates into probably 2,000 wells that have been toppled, as well. A structure may be laying on its side and although the storm cap has been checked, it’s still a live well. So, for five years, we’re going to clean up the junk and after that, let’s say we only take one-quarter of the wells and put them back into production, then the Achiever is the kind of boat that can do that. She’s designed for modular construction. She can reel off four, six-inch diameter pipes in 1,800 feet per hour. That’s 500 tie-backs. You’ve got that work to look at, you’ve got the work in support of the deepwater contractors, but she’s also been designed with equipment that will allow her to construct her own SAV system on deck with four lifts of the crane. And that’s using her own crane. So, we can sail for Africa and have our SAV system on deck and we can do shallow-water support work. If the opportunity comes to support the deepwater contractors, then we take our crane and we lift the modular system off the deck in four lifts. So, while I say that the future is deepwater, we also have no intention of relinquishing any of our shallow-water work or anything else we’ve always
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…rather than wait for two years for our own new build, there’s going to be an opportunity to pick up on somebody else’s new build who doesn’t necessarily have the wherewithal to continue to operate. And here’s the other thing: you can build new vessels all day long but there’s a limited supply of qualified personnel to operate these boats.
done. But, at the end of the day, I think deepwater is going to hold a lot more opportunities for us. There is less competition and certainly, the margins are higher. MarEx: The Achiever is going to be ready when? JM: They started cutting steel for her in February of this 36 years of experience. year and everything is still on track for delivery in June $51 billion in backing. of 2008. True passion for the sea. MarEx: Okay, so here’s my next question for you. Right in line with your deepwater mission and international aspiraIs your marine pollution 212-292-8700 tions, it looks to me that there’s plenty of work for the Superior Achiever. Are you going to wait for her to come out and start www.wqis.com insurance with WQIS? working and get committed to some long-term work, or are you going to go ahead and start building that second vessel? JM: Well, this might be where you hear a little different Maritime Executive.indd 1 4/11/07 1:23:40 PM story between what Louis (Schaefer) tells you and what I tell you. The Superior Achiever, at $130 million, is a trein manufacturing removable/reusable insulation mendous capital investment for us. Look around at the industry and you’ll read about all of the vessels and capacTemp-Set® Covers for the offshore and marine industry. ity that are going to be delivered in 2009 and 2010. I think Removable / Reusable Insulation that the way I see the company growing, we’ve got to shore up and do better what we do now—we’ve got to step and Blanket Manufacturer take hold in the international and deepwater markets now. Insulation Specialists We can’t wait for the Achiever to come out. If we do that, we can still have that growth and the ramp up without the • Thermal capital commitment or another acquisition. We’ll do this • Acoustical through our alliances and cooperative agreements with the people that we currently work with by bringing assets on • Fireproofing line with long-term charters. I think the key is, at least how • Freeze Protection I see it, there’s going to be an overcapacity of construction equipment and new-build vessels come 2010 and I think Introducing Fire-Temp® that’s going to be an opportunity for us. And, this is where Cover for fuel valves and perhaps Louis and I don’t necessarily see eye-to-eye, rather than wait for two years for our own new build, there’s actuators. going to be an opportunity to pick up on somebody else’s new build who doesn’t necessarily have the wherewithal to For superior quality & service, continue to operate. And here’s the other thing: you can call Superior Energies, Inc. build new vessels all day long but there’s a limited supply of qualified personnel to operate these boats. MarEx: So, as I understand it, you’re going to continue to Superior Energies Inc. charter in equipment and eventually, you’ll have your own vessel, the Achiever, which because of modifications you’ve
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The diving group provides divers, obviously, but they also provide management for 80% of the projects that we work on. The ROV division will be a stand-alone division and we in fact have a deepwater ROV boat and we have a 150-HP, 3,000-meter ROV on the Yens Surveyor. made in its design, will be better than virtually everything else out there. Then, you’ll charter in at a cheap rate and keep those charters busy, based on your experience and contacts, and play off the confidence that the majors have in your core competencies and experience. JM: That’s absolutely right. MarEx: We’ve talked a lot about where you want to go and that appears to be deepwater and the international markets, in particular. I understand that this year you’ll do about $340 million in business. Tell us where you see those numbers, five or ten years down the road. JM: Well, we certainly hope that five to ten years down the road, we’re doing a billion dollars annually. MarEx: Let’s talk about your legacy work – the diving aspect of your business. What is the future of that aspect of your business? JM: The diving group provides divers, obviously, but they also provide management for 80% of the projects that we work on. The ROV division will be a stand-alone division and we in fact have a deepwater ROV boat and we have a 150-HP, 3,000-meter ROV on the Yens Surveyor. We also have a marine department that basically manages all of our ships, crewing, maintenance and repair, dry-docking and all of the upgrades. And then we have the fabrication division. This stand-alone fabrication division gives us a significant advantage with the competition. Basically, that division is able to build diving system, saturation equipment, perform fabrication for our clients and in this way, we provide a seamless, start-to-finish job. Doing the fabrication in house, we make sure it is delivered on time and then the client can go into production. MarEx: So the fabrication division provides for “turnkey” solutions, in conjunction with your other divisions? JM: That’s right. MarEx: What about the deepwater division? JM: Well, right now, the deepwater division falls into the ROV division. The deepwater division is something building now for the future, starting before the end of this year. We’ll be bringing in engineering and deepwater-project managers so that we can fully integrate the new build and make sure everything is structurally the way we want it to be. MarEx: We’ll look forward to seeing your visions go forward – Thank you for your time today. JM: My pleasure. MarEx
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Executive interview: Jim Mermis
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FPSO By Joseph Keefe
Teekay Shipping Enters the FPSO Highly Regarded Tanker Operator Shakes up Offshore PRODUCTION The news last September that a bidding war had erupted for the North Sea Floating Production Storage and Offloading (FPSO) specialist Petrojarl ASA made for interesting reading. The story dominated the marine financial market news sector for more than a few weeks and as the stakes rose, it was apparent early on that Petrojarl would soon have new owners. So when the dust finally settled, the news that Petrojarl had yet another principal was not necessarily eye-popping stuff. Instead, the big story was that the world’s dominant tanker operator, Teekay Marine Services, with its purchase of the majority of Petrojarl’s stock, had entered the FPSO game.
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The Maritime Executive
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FPSO
Game
Teekay Petrojarl ASA Instantly the largest operator of FPSO vessels in the North Sea, Teekay now has under its command four such vessels with a combined production throughput of almost 340,000 barrels per day and a crude oil storage capacity of more than one million barrels.
The Maritime Executive 43
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FPSO
In the Beginning The bidding war for Petrojarl ASA was lively, and eventually saw the price of the company’s stock climb by about 65 percent in less than a month’s time. The radical increase in valuation reflected the booming oil market and the premium that the industry had placed on the control and availability of FPSO vessels. During this period, Teekay increased its ownership stake from 22 percent to 37 percent and then again to about 40 percent. Rival suitor Prosafe held a 30 percent stake in Petrojarl, but ultimately could or would not increase its position to match the 50 percent ownership achieved by Teekay on October 18, 2006. Seeking to increase their fleets of rigs and oil-production vessels as high oil prices spurred producers to spend more on exploration and production, both Teekay and Prosafe were seen as anxious to get their hands on Petrojarl’s fleet. Eventually, Petrojarl’s board recommended that the shareholders accept Teekay’s offer. Once the Vancouver-based Teekay Shipping had achieved the 50 percent share mark, it was all but over and it effectively declared victory in its battle for control of the Norwegian oil production services firm. Nevertheless, Prosafe declined to sell its 30-percent stake in the company and confirmed that it would remain a significant shareholder—a situation that still exists today. With Teekay, the Canadian-based, U.S.-listed tanker group in charge, Prosafe’s continued investment should be a safe bet. At the time of the acquisition, Teekay Shipping had already established a solid reputation as a major player in the maritime industry. Its assets carry about 10 percent of the world’s maritime oil traffic and Teekay has also expanded into the liquefied natural gas (LNG) shipping sector through its subsidiary unit, Teekay LNG Partners. The New Normal Because over the past twenty years Teekay has made its reputation as an owner and operator of high-quality tank vessels that provides safe transport of petroleum on a worldwide basis, its decision to enter the FPSO market sector was clearly not a casual one. The company never does anything without considering the worst-case scenario and then planning for those consequences. According to Graham Westgarth, president of Teekay Marine Services and interim CEO of Teekay Petrojarl ASA, the plan to enter the FPSO market had been batted around internally for the last two or three years. “It is Teekay’s ambition to be a leading service provider to the oil and gas industries,” says Westgarth. The company’s real reasons go far beyond that slick mission statement. As the decision process went forward, Westgarth admits that Teekay knew that it lacked some competencies in key, core areas of the FPSO game, but says that it more than made up for those shortcomings in other areas. That is not to say that this is Westgarth’s first experience with 44
The Maritime Executive
…the plan to enter the FPSO market had been batted around internally for the last two or three years. “It is Teekay’s ambition to be a leading service provider to the oil and gas industries,” says Westgarth. The company’s real reasons go far beyond that slick mission statement.
Graham Westgarth, president of Teekay Marine Services and interim CEO of Teekay Petrojarl ASA
FPSOs—far from it. During his final five years at Maersk, Westgarth served as general manager of a fleet of forty vessels, during which time he also established and managed the A.P. Moller FPSO operation in the UK sector of the North Sea. And while Teekay’s prior experience as a whole was firmly rooted in marine matters, rather than the subsea/offshore fields, Graham adds, “Technically, we are ready.” Beyond this, Petrojarl ASA, one of the real pioneers in the FPSO markets dating back to the 1980s, was already known for superior operating competence; hence there was instant synergy between the two partners. Still a relatively small player in a growing field of vessels and players, the impact of Teekay’s arrival has yet to be felt across the broad expanse of this sophisticated and relatively new (in terms of the maritime world itself) business sector. If Teekay has its way though, that could change very soon. Graham Westgarth gave a hint of where Teekay eventually hopes to go with its newest venture when he told MarEx in March, “It’s about getting closer to our key customers. It’s about the potential for vertical and horizontal integration of our services to others.” His choice of words is telling and the previously one-dimensional world of
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FPSO Graham Westgarth gave a hint of where Teekay eventually hopes to go with its newest venture… “It’s about getting closer to our key customers. It’s about the potential for vertical and horizontal integration of our services to others.” …the previously one-dimensional world of FPSO management will probably soon learn exactly what they REALLY MEAN.
FPSO management will probably soon learn exactly what they really mean.
Teekay Petrojarl ASA Instantly the largest operator of FPSO vessels in the North Sea, Teekay now has under its command four such vessels with a combined production throughput of almost 340,000 barrels per day and a crude oil storage capacity of more than one million barrels. Westgarth calls Teekay’s initial foray into the world of FPSOs a “second-tier operation” in terms of numbers and capacity, but “first class” in terms of quality. The average age of its FPSO fleet is about fourteen years, a little older than what Teekay is usually comfortable with, especially when one takes into consideration the average age of the company’s combined fleet, with newbuildings factored in, is less than eight years old. Westgarth dismisses any concerns over this, however, when he says, “Age is not as much of a factor in the FPSO market. Upgrades happen here more frequently because, for example, after the expiration of a five-year charter, a particular vessel may have to be sent elsewhere to hook into a different inter46
The Maritime Executive
face.” All of the Teekay Petrojarl FPSOs are of double hull construction. For the time being, Westgarth says that the Patrojarl arm of Teekay will be run as a separate entity, but plans for rebranding are currently underway. Although Petrojarl has had more than one other owner and and many of those only got into the game for short-term profits, Teekay, according to Westgarth, is in it for the long play: “Unlike previous operators of this tonnage, we’ve taken a longterm view. As such, Petrojarl is amenable to the Teekay way for doing things.” And doing things over the long haul has always been a good thing for the tonnage and companies
that Teekay has acquired. Perhaps even more importantly in today’s marine markets, this long-term outlook is also good for the employees.
The FPSO Markets Worldwide offshore oil and gas production is growing rapidly and if the U.S. Congress can ever agree on the conditions under which the offshore U.S. markets can also be exploited, this sector of the market may be poised to explode. On April 10, Dahlman Rose & Company, a selfdescribed boutique investment bank specializing in the marine shipping and energy industries, announced that it was the first investment bank to initiate coverage of the floating production sector and eight Norwegian FPSO companies. Furthermore, the release stated, “Dahlman Rose believes that FPSO companies present strong opportunities for investors seeking long-term growth.” This statement was probably music to Graham Westgarth’s ears, as it sounds ominously like the Teekay way of doing things. Others, especially Teekay’s newest competitors may find it slightly less comforting.
February 2007
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FPSO
According to Dahlman Rose analyst Omar Nokta, “Deepwater oil and gas production is increasing as a percentage of total worldwide production and is expected to grow substantially during the next few years. Onshore oil and gas reserves have been largely depleted and increS h i p C onsultants I nc . mental reserve replacement and production Marine towage and consulting firm established in 1980 growth will increasingly n Merchant Mariner Owners with extensive background in oceanbe sought in deep waters towing world wide. off the continental shelf.” n Towing services all around the US Coast, South America, the Atlantic and Pacific Oceans, Europe, the Middle East, and Asia. Dahlman Rose goes on to n NSCI enjoys a long track-record of successful, reliable service. say that oil and gas pron We serve all destinations with a deep knowledge base and valuable duction in deep waters has time saving service infrastructure. been restricted by a lack of n Worldwide sale & purchase of commercial & offshore vessels of all types and configurations. infrastructure and occan Management services & operational staff with vast insight and sional harsh weather, but long, “hands on” field-experience. the advent of the FPSO has, to a certain extent, www.nordicship.com 954 524 0025 changed this variable. Dahlman Rose, and will likely remain strong. Graham WestTeekay as well, believe that a robust, longgarth points to this particular aspect of the lasting FPSO cycle has just begun—invesbusiness as a key reason for Teekay’s entry tors will see “outsized returns,” according into the market. “The quality of earnings is to Dahlman Rose. Furthermore, as MarEx very good and the day rates for FPSOs are went to press with this issue, Dalmon Rose too,” he said. Given the statistics, it is hard reiterated its buy rating and $62 target for Teekay Shipping (NYSE/TK). Teekay’s stock to argue with him. was trading in the $55 range on April 12. The bullish outlook for FPSOs is rooted Into the Future: The Teekay Bundled Suite of Services in the fact that brown water reserves are dwindling rapidly. As oil exploration firms As a player in the FPSO markets, Teekay venture into deeper waters, the area where is not yet one of the biggest, but it is many believe the lion’s share of undevelcertainly the most intriguing. Primarily oped reserves are located, they will increas- known for its crude oil tankships, Teekay ingly turn to FPSOs and shuttle tankers has steadily increased its penetration into as the logical solution for production and both the offshore and natural-gas sectors. transport of crude oil supplies. With crude Its control of more than half of the world’s oil prices showing no signs of abatement, shuttle tankers should give readers real the development of smaller offshore fields insight into where Teekay eventually wants remains attractive. Dahlman Rose analysts, to go. Beyond this, the company’s solid in fact, predict that as many as 90 new financial position gives it easy access to the development projects requiring floating capital required to make other moves. solutions will arise in the next five years. Graham Westgarth was frank in his As many as fifty of the new projects assessment of Teekay’s intentions in may require FPSOs. Thus, with only one March: “We are actively involved and hundred or so FPSOs in the worldwide always looking at further expansion.” He fleet and perhaps half that total under con- also made it clear that Teekay would evenstruction, demand for this type of tonnage tually be the offshore industry’s “turn-
Nordic
The Maritime Executive 49
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FPSO Teekay key” provider of production, storage and transportation of crude oils in the deepwater markets. With two-thirds of the puzzle already in place, an enviable quality record and existing petroleum transport relationships with the world’s oil majors on which to build, it would be a real gamble to bet against additional moves into the FPSO game by Teekay. Indeed, as long as crude oil prices continue to trade in today’s range, further consolidation in the industry is almost certain. Teekay’s worldwide reputation is unquestionably solid, but Graham Westgarth perhaps puts it best when he says, “It’s not one thing that we do—we’re professional and quality-driven on an international scale. Quality is bundled into everything that we do. And, we like to win.” Westgarth refused to be more specific about Teekay’s future plans, but he did say that real opportunities were presenting themselves in Brazil; he did not rule out an aggressive entry into U.S. or Australian waters, either. Whatever Teekay decides to do down the road, it is almost certain that the vertical integration of all of its assets and business units will come into play when the timing is right. It is a simple model and one that any number of companies might want to follow. Trying to do that without the financial might and existing assets of this industry giant would be a daunting challenge. But, as Graham Westgarth likes to say, “The higher the hurdle, the better for Teekay.” FPSO industry insiders will soon find out just how high Teekay sets the bar. MarEx
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executive INTERVIEW By MarEx Staff
interview: Bourbon Executive
Christian Lefevre Deputy CEO of Bourbon Offshore Shares HIS Views On Explosive Worldwide Growth
T
he financial results recently posted in March 2006 by French offshore giant BOURBON caught our interest. We reviewed the company’s financials and found it posted extraordinary growth over its 2005 results. However, while the company’s growth was impressive, the MarEx was really struck by the unbelievable growth demonstrated by Bourbon Offshore. The division had revenues of USD 503 million (EUR 376.6 million), an increase of 35.8 percent, gross operating income (EBITDA) of USD 247.2 million (EUR 185.1 million), an increase of 60.1 percent, and operating income of USD 149.6 million (EUR 112.8 million), which is an increase of 92.9 percent. The MarEx was fortunate to catch up with Christian Lefevre, Deputy CEO of Bourbon Offshore, the fast moving executive based in Marseille, France. We think that our readers will enjoy learning more about this globally expanding and profitable offshore giant. MarEx: Bourbon Offshore recently announced an additional order for 46 next-generation offshore vessels costing USD 730 million, and this on the heels of a 56-vessel announcement by the company in April 2006. As of February 2007, your company has 110 new supply vessels on order. Explain the strategy intended to globalize Bourbon Offshore as a major player by 2010? CL: In our original 5-year plan, we invested heavily in deepwater offshore vessels. Without a doubt, many already considered us a leader in the market. In the new strategic plan, Horizon 2010, BOURBON wanted to continue building vessels, but this time in a series of type vessels, like the GPA 670, GPA 640, and GPA 654, GPA 254 and four of the Ulstein designed X-Bow vessels, which were being built in China. We are also building an additional 5 anchor-handler vessels with 120 tons of
bollard pull that are being built in India. This comes on the heels of the 8 anchor handlers we built in Singapore. And, we are building continental shelf vessels to replace the aging fleets around the world, which will use the same technology used in our deepwater fleets. In all, we have 112 vessels PHOTO: BOURBON under construction, including crew boats, and will eventually have 357 next-generation vessels in service with an average age of 6.5 years. MarEx: Explain how the new cargo systems on the BOURBON series of vessels have increased the amounts of payloads over traditional offshore vessels? CL: Traditional vessels of 180 feet were carrying less than 1000 tons of cargoes and most cannot carry liquid mud. Our new series of vessels will carry 1.5 times that amount of cargo and will carry 4,000 barrels of liquid mud. Also the cargo systems, like the pumps, will have the ability to meet the requirements of the largest rigs in operation. MarEx: Once the BOURBON Horizon 2010 building plan is accomplished, how will this position your company in the global offshore marketplace? CL: If you look at the current vessel order book of our competitors and the average age of our company’s fleet at 6.5 years, we certainly have the ability to be one of the leaders in global services to the offshore energy industry. Furthermore, with the global shipyards at capacity, any competitor wanting to become aggressive in building nextgeneration vessels will have to wait many years to catch-up with our company. MarEx: Recently, BOURBON released its 2006 Annual Results. The offshore division
had an astounding 35.8 percent increase in revenues with EBITDA (gross operating income) soaring by 60 percent. What in your analysis is driving this remarkable growth of Bourbon Offshore? CL: There are two major factors in this growth. First, we took delivery of 31 vessels in 2006, including supply boats and crew boats. Also, the market is extremely strong, and we have an upside on the day rates for our vessels. Additionally, we have a number of vessels working in the North Sea spot markets, which has very high day rates. MarEx: We in America especially understand the necessity of discovering new resources for oil and gas. It is evident that energy companies are going even deeper in the oceans of the world to find these resources. Discuss some of the strategic markets that Bourbon Offshore is operating in. CL: BOURBON has a strong presence in West Africa, which is one of the most promising markets for deepwater. From Angola to Nigeria, we have a significant base of operations. We are also in Brazil, which is absolutely one of the top emerging offshore markets in the world. And, we recently brought the first anchor handler to Mexico and we are working this ship in 1000 meters of water. MarEx: Recently, your company introduced the X-Bow anchor handler designed The Maritime Executive 51
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executive INTERVIEW
by Ulstein, the Norwegian shipyard. Additionally, your company has also introduced 2 X-bow, platform-supply vessels with the “Clean Design” standard. Please explain
what the clean design standard means. CL: At Bourbon Offshore, we strongly believe in environmental compliance and protection. So, these clean design vessels are double-hull ships. The critical products we transport, like oil and liquid mud are not close to the side hull and water in case of an accident. It is very much like double-hull tankers. The clean design vessels are very popular in the North Sea. MarEx: Excuse me, but the X-bow vessels are a very odd design; while I am sure your naval architects reviewed and approved the design. Explain how this vessel’s unique bow is different than that of the tradition bows. And, additionally, what has been the experience with operating the X-Bows thus far? CL: The X-Bow is a very easy vessel to maintain in high seas; it really is marvelous how they handle. More importantly, the vessel’s odd bow actually reduces fuel consumption, which is extremely important to our customers. Also, the vessel can achieve 12 knots in high seas while other vessels of
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similar size had to greatly reduce speed. We currently have 3 X-Bows in operation. The Bourbon Orca is an anchor handler, and the Bourbon Mistral and Bourbon Monsoon, which are platform-supply vessels. We also have 4 more similar vessels designed by Ulstein that are being built in China. MarEx: What are your actual duties as Deputy CEO of BOURBON? And, explain a typical day of work for you managing the company’s global operations? CL: First, let me say that we put great faith in the abilities of our local managers around the world. I myself came from being a chief engineer, then offshore vessel captain, and worked in the fleet, so I understand the business from a unique perspective. I also worked with naval architects in designing vessels, so I know how important it is to have a safe and comfortable working environment for our mariners. I spend a lot of my time going on the vessels to ensure everyone is focused on our safety programs and to listen to what we can do to provide a better living environ-
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ment for our employees. I spend most of my time in motion, traveling and visiting our offices around the world and to the shipyards that are building our fleets. MarEx: BOURBON maintains that there are four key elements that will drive its success: Safety, Innovation, Human Resources, and Cost Control. What is your philosophy in developing a corporate culture based on these elements? And, how will you ensure that everyone within the company adheres to these goals? CL: Our highest priority is safety through our “Be Safe” campaign. Our TRIR (Total Recordable Incident Rate) was down to 2.5, which is the best in the offshore industry. We like to say through innovation, we differentiate ourselves from our competitors. This can be seen on the X-Bow vessels and in the series of diesel-electric, dynamicpositioning-2 vessels we are currently building around the world. In terms of human resources, we develop true partnerships with local partners throughout the world, which means that our
local personnel actually have key positions of responsibility within our company. We have a large amount of our personnel that are of different nationalities, and they are trained in the BOURBON culture while operating vessels under their own country flags. We think that is truly unique. Lastly, we have organized the company to a high level of cost controls. We understand it is extremely important to establish cost controls while the markets are good, so when the markets are weaker we can still compete effectively. Plus, as we are building vessels in series, we can move our personnel from region to region without a lot of additional training. Also, to maintain a strong culture, we have invested in training simulators in Marseille and in the Philippines. We feel that a critical factor in controlling costs will be to make sure that all of our deck personnel understand the safe operations of our vessels. MarEx: The Company’s Horizon 2010 structured a plan for success. What is your
analysis of its progress? And, how has your company’s aggressive building program changed the dynamics of the offshore industry? CL: The Horizon 2010 strategic plan has been developing well, and it can be seen in the 112 vessels currently under construction. Our customers are very pleased with these next-generation vessels, especially from the safety side of our operations. In terms of downtime at the offshore platforms because of vessel breakdowns, there is essentially none with our company due to our ships being new. MarEx: Finally, what is your vision of the offshore markets over the next few years? CL: We truly believe the offshore energy cycle will continue to be strong for the next five years and beyond. While there may be some weak down periods, at BOURBON we feel that we have strategically positioned the company through investment in nextgeneration vessels for modern offshore and by training our personnel at the highest standards in the industry. MarEx
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executive INTERVIEW
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FOCUS ON QUALITY
Valve Wide Open: W&O Supply Continues to Expand in More Ways Than One One of the marine industry’s leading industrial suppliers adds industry giants Transocean Offshore, Inc. and Teekay Shipping Corporation to their contracted client base. By MarEx Staff W&O Supply starts the year on solid ground
With or without Teekay Shipping or Transocean Offshore in their large and growing stable of clients, 2007 will probably be remembered as a banner year for the marine industry’s largest distributor of pipe, valves and fittings. Already servicing all segments of the marine industry, including commercial shipping, the U.S. Navy, Military Sealift Command, MARAD, USCG, cruise lines, barge owners, offshore oil and natural gas rigs and shipyards that build and repair vessels of all sizes, W&O ended the first quarter of 2007 by welcoming the news that Teekay and Transocean had entrusted them with service agreements. The news only served to underscore the complete depth of penetration that W&O enjoys in every sector of the marine industry. W&O Supply has been supplying piping products to ships and shipyards since the mid-1970s. Since that time, the company has grown to thirteen branch offices in the United States, as well as one location in Antwerp, Belgium. The firm is a wholly-owned subsidiary of PON Holdings B.V. of the Netherlands. As a part of PON Holdings’ group, PON Power, W&O Supply enjoys the advantages of a distribution network that stretches throughout Europe, Middle East and Asia. The company’s primary focus today is on servicing the global maritime industry and its needs for piping related products, Marine Engines and Power System solutions.
Valve Wide Open
The March 19th announcement that W&O had secured contractual agreements with Transocean Offshore, Inc. and Teekay Shipping went far beyond the obvious expansion of business volume. Both new clients are recognized for high quality standards within their own business lines and Teekay transports approximately 10% of the world’s petroleum cargoes on their considerable fleet. Teekay recently dipped its toes into the booming and lucrative Floating Production Storage and Offloading (FPSO) sectors of the marine industry. Industry observers are watching to see what they will do next, but it’s a good bet that they will continue to expand into this market, and when they do, their requirements for valves and piping products will grow with it. Transocean Offshore, of course, is best known as the world’s largest offshore drilling con54
The Maritime Executive
Jack Guidry, President and CEO, W&O Supply.
tractor, providing a versatile fleet of mobile offshore drilling units for the development of oil and natural gas reserves. Transocean employs more than 12,500 employees. Neither company will partner with anyone that they do not know in advance to be a quality player. The news deals, though, only amplify what others in the marine industry have known for a long time: W&O is for real. The general service agreements designate W&O Supply as a provider of marine valves and related products for Teekay Shipping’s fleet and Transocean’s offshore drilling rigs. W&O Supply’s reputation for distributing quality marine products quickly and efficiently was a major factor in the company being awarded both contracts. Valves, pipe and fittings are critical components of ships and offshore rigs and their failure can lead to costly interruptions in operations. “With investment in quality products and services, W&O Supply has equipped itself to win contracts against some of the toughest competition in the world. Today, that investment has
paid off with the award of these two important contracts,” said Jack Guidry, President & CEO, W&O Supply. “I am delighted that Teekay Shipping and Transocean Offshore have entrusted their needs to W&O Supply.” It goes without saying that the contracts could eventually increase W&O’s business mix and volume substantially. Currently, Transocean Offshore operates a wide range of equipment, including 28 John Kilbride - Vice President of Shared rigs that can drill in more Services, W&O Supply. than 4,500 feet of water. Teekay, on the other hand, boasts a worldwide fleet of 164 tankers spanning every sector of the market.
Services and is responsible for the seamless integration and management of these services which are shared by all W&O Supply branches. Kilbride’s experience in the marine, third-party logistics
Ramping Up to Meet the Flow
New and potentially significant business for any services company usually means that new employees will have to be added to the mix in order to satisfy the needs of the customers. And when your new customers are quality-driven operators like Teekay and Transocean, you can’t very well fill those openings with just anyone. In answer to new challenges, and to ensure continued exceptional management, W&O Supply has created a new department that they call ‘Shared Services.’ W&O Supply’s Shared Services department combines materials management, information technology, warehousing and logistics, enabling the company to improve communication and workflow between these services for its 13 locations across the U.S. John Kilbride has been promoted to Vice President of Shared
The Maritime Executive 55
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FOCUS ON QUALITY
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FOCUS ON QUALITY CONNECTING THE OFFSHORE OIL & GAS AND MARITIME INDUSTRIES WITH THE LATEST COMMUNICATIONS TECHNOLOGIES
Theme: Change is Constant
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Training VSAT Installation Certification
TECHNICAL SESSIONS A comprehensive 3-day Technical Program consisting of 2 panel Sessions, 5 paper sessions and demonstrations. Panels • Offshore Communications Roundtable • Executive Roundtable Paper Sessions • The Broadband Pipe • Telecoms on the Move • “Acts of God” and the Business Continuity • Addressing the Skilled Labor Crisis Demonstrations • Offshore Video Conferencing • Real-time Streaming Video from Rigs, Ocean-going Vessels, Divers and ROVs
2 Day Expo! Communications Companies and Service Providers
Five paper sessions covering the following technologies: • Satellite • Wireless • Acoustic Communications • Fiber Optic Systems & Networks • IT Solutions • Ocean Observing Systems • Real time Rig Monitoring • Emergency Response • Submarine Telecom • Ship and Cargo Tracking/Monitoring
W&O Supply and information technology industries will further improve the firm’s ability to remain efficient in a rapidly changing environment. Also promoted was Carl Herman to the position of Director of Materials Management and SPACE Valve Products. In his new position, Herman will manage multiple product lines, including SPACE valves. Herman’s extensive knowledge of W&O Supply’s product lines along with a sales and sourcing background, makes him the ideal person to lead this critical department. Finally, W&O Supply brought Kevin Smith on board to serve as a Sales Engineer for the Engineered Products and Automation division. Based in Houston, he will serve W&O Supply’s growing offshore energy client base. In this unique position, he will work closely with outside engineering firms to educate them on the leading-edge marine technologies available for new vessel and rig design. There’s little doubt that he and Teekay’s new FPSO group, as well as the good people at Transocean will get to know each other well in the coming years. That’s a good thing for everyone. Valve Wide Open: it’s not W&O’s motto, but it could be. Providing equipment for the world’s most respected tanker company and largest offshore drilling contractor is fast paced work. W&O won’t just be going with the flow, however. The customers expect far more, and knowing W&O Supply, they probably get it. MarEx
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