Eelco Hoekstra – Chairman and CEO, Vopak – Netherlands
The chairman and CEO of Vopak discusses the company’s role in providing infrastructure and service for almost 400 years. He details the strategic positioning the world’s largest independent storage company has taken, especially the company focus on hub, import and distribution, gas, and industrial and chemical terminals, as well as recent projects of note such as the Pengerang facility in Malaysia and the launching of break bulk at the Gate Terminal.
Can you please describe how your leadership directives have evolved since we last met you in Singapore 2010, and what strategic direction you’re now taking the company as chairman and CEO?
Fundamentally, my leadership directives have not changed much since I headed Vopak’s Asian operations in Singapore. I’m still very much focused on the three value drivers of the company. The first involves finding the right location to invest in—an important decision involving the long-term allocation of capital. The second element centers on operating the terminals with the utmost standards in safety and efficiency. The final component has to do with strengthening our strategy to our customers. Even when I started with the company, these three elements were deeply rooted within Vopak’s ambitions and have only been growing in importance since. Within the last three years, under my direction, we’ve made more disciplined, concrete, and clear decisions based upon these fundamentals. More specifically, my efforts have heavily focused on streamlining our portfolio for the long term, providing a clearer direction on our business development efforts, and driving operational efficiency through productivity at our terminals to support our customers.
With its 400th anniversary right around the corner, Royal Vopak has firmly established its leading presence in the industry, now the largest independent tank storage provider operating 72 terminals across 26 countries. In terms of resources, capabilities, and assets, how much of an impact will the Netherlands serve, as Europe’s energy hub, in furthering the company’s growth agenda?
If you look at it from a historic perspective, the country has been hugely important. First of all in size, our assets in ARA represent a substantial part of our business. In terms of resources, there are two main components—human resources and financial resources. Having the scale here has developed an opportunity for us to generate cash that can be allocated into our global growth strategies. Secondly, by growing and evolving managers from the large base of competent human capital in the Netherlands, we have been able to send leaders to different continents to instill Vopak’s values throughout our business all over the world. In this respect, the Netherlands has been very important. What you see now is that the company has evolved in such a manner that the scale we’ve established abroad, particularly in Asia, is very much in balance with what we have in Europe. North America is the only continent where we are less represented than we are in Europe, Middle East, and Asia. Generally speaking, however, we’ve been able to successfully multiply our model quite well.
Given Vopak’s stake in the global gas market, how can the country effectively leverage its intellectual and physical assets to maintain its relevance in the European energy market, considering the declining levels of indigenous gas production, and truly preserve “the Golden Age of Gas,” as Ben van Beurden of Shell puts it?
Liberal markets, the foremost characterization of the Dutch economy, were recently debated at the international energy charter discussion in The Hague. It was inspiring to be part of the discussions with the governments. This is a facet of the economy that I whole-heartedly believe in. In a free market environment, the amount of goods or services sought by buyers is typically balanced by the goods or services produced by suppliers. Through competition and a moderate amount of regulatory oversight, the market will continually strive towards equilibrium and produce the most optimal price levels. So if you look at availability and affordability of energy and create a free economy in which those components can freely reside, I believe economies will prosper. The Port of Rotterdam has been a prime example of this—clear regulation in customs, and a strong performance of service industries, with subsequently clear expectations of liberal markets. The Port’s growth is self-evident standing as the largest in Europe. As another example, we also have the Gas Roundabout, an expansive and reliable network of infrastructure that transports products from the supplier to the end consumer, including the industry, at price and quality levels that both parties can trust. This mindset of liberal economics is intrinsically ingrained within the Dutch DNA. We’ve seen several foreign markets, more notably Singapore, choose this direction, as it ultimately attracts business. If you ask me how can the Dutch support this trend it is through their understanding and knowledge on how liberal markets function and their relative importance to a country’s thriving success. Vopak has been utilizing the same mindset. Anytime we cross country borders we evaluate whether or not a country has good regulations on customs, prices, and quality. Governments can certainly force these three ideals, but at the very least, they must let the markets decide on where to allocate capital—that way, to the benefit of consumers, price settings become more efficient.
From a management perspective, how will you further ensure the quality of developing projects while simultaneously lowering overall costs, in the context of aging assets and the costs associated with the increased level of inspection and regulatory scrutiny, as well as the growing oversupply of storage capacity?
There are several trends in this field. I think society is becoming more critical about protecting people and the environment—a very logical way of depicting the world. I think the global landscape has become more transparent because there are more technologies that allow further transparency in a real-time environment. In my opinion, this is a natural progression, and, as a result, I’m not particularly concerned. Any industry, whether it’s gas or oil, needs to display a level of transparency and depict the quality of its daily operations. Players in this industry must radiate trust to consequently receive trust from the public. I think as long as the general direction is clear, then everyone is moving in the right direction. Customers will then have a similar view and will see the requirements that are set forth by governments. Ultimately, I’m sure there will be a mechanism, one way or another, to reward us for the efforts undertaken. We need to make sure the controls put in place by regulators are working well, maintaining a standardized level of risk mitigation in the industry. Speaking for the Netherlands, it’s strength has been that regulators here have a high level of competence and capabilities, so at least you have someone across the table that understands the technical side of the industry that you’re in.
The company’s stock price currently stands at EUR 45.26. How do you strategically balance long-term capabilities, while offsetting the shortsighted pressures from shareholders?
It’s my responsibility to explain to shareholders that this is a business that fundamentally operates on a long-term view. That’s something we try to depict in all of our communications and engagements with shareholders. As I said, one of the the most important decision that we can take is allocation of capital. Whether it’s concerning refining, tanking, regasification, liquefaction, or the broader oil and gas industry, these are long-term decisions that are made on the basis of long-term trends. Consolidating the time it takes to have assets in operations and the investment horizon for returns, there’s already at least a 20 year cycle. Effectively mitigating shortsighted pressures lies in the education of shareholders with regard to better expectations management. This is not a business that can be looked at through a quarter-to-quarter basis. The steady returns that shareholders are looking for are accumulated overtime through successful long-term positions and proven operational track records.
Given the current downturn in oil prices, many players have begun divesting non-core assets and implementing aggressive cost-reduction initiatives in hopes of unlocking value wherever possible. Similarly, Vopak has also recently restructured their terminal portfolio criteria to more effectively align the company’s strategy execution with changing market dynamics. How will Vopak stand to benefit from these changes?
The four terminal portfolio criteria that we’ve set forth are as follows: hub terminals where major shipping routes exist, prices are set, the crossroads of all arbitrage activity define the oil market; industrial and chemicals terminals; import distribution terminals with structural deficits whereby refining or manufacturing are not likely to substitute for imports in places such as Australia, East Canada; and terminals facilitating growth in global gas markets, which require larger feedstocks for chemical manufacturing or gas as a transfer fuel.
We started doing this way before it became known in the market that companies were having difficulty maintaining their occupancy levels. If you look at 2013 or even 2012, we started divesting terminals in such geographies as in Ecuador and Chile. So we already had a fluid or continuous view of where we wanted to be in our portfolio. Our productivity and efficiency levels have always been of primary concerns to our customers and investors. Managing these levels has been an on-going effort across multiple cycles. Considering the cyclical nature of this industry, short-term swings don’t typically startle us. The only thing that we’re looking at is the long-term view on where product flows are required. We have a large group of good employees sitting on this floor, analysts and product directors alike, looking at future flows, where we need to have our network and how we are able to run our terminals efficiently. That’s really the only thing we’re interested in on a day-to-day basis. That means obviously that there are quarters that you’re lucky because of the market structure, but that’s not what we’re effectively working towards.
In line with the criteria, the company has made a series of recent acquisitions and established partnership stakes in several ventures including the including the recently contracted world-scale industry terminal in Pengerang, Malaysia. How will this project strengthen the company’s overall portfolio?
If you look at the Pengerang Industrial Complex (PIC), we built together with our respected partners the SPV1 terminal, which was the first phase in the project and rented it out to third parties, allowing us to establish proof of concept in Pengerang. Before our efforts, the area was a barren land. We reclaimed land—believing strictly in the location, which boasts proximity to major shipping routes, deepwater access, and favorable physical characteristics. We were very interested in owning it to expand our base in Southeast Asia. We’ve proven that the location is indeed very suitable. We’re very pleased that Petronas has decided to build the Refining and Petrochemical Integrated Development (RAPID) complex. It will be one of the biggest refining complexes under development in Southeast Asia. It’s a sincere pleasure having the opportunity to work with such knowledgeable partners with long-term views on how the market runs—further adding to the liquidity of that particular sight. We see this as a major step in our development in Southeast Asia. We now have land available to further growth, and if we have our way in the next decade, it will serve as a tactical asset in our expansion efforts moving forward.
We’ve also seen the company capitalize on growing interests in shale gas developments in North America and diversification of energy and feedstock in the Middle East. Will these dynamics continue to project promising growth prospects moving forward?
Very simply put, there will be more production in North America, more production in the Middle East, and more consumption in Asia. That is the prevailing route we’ve seen, and from there, we’ve been analyzing which commodity will flow in which direction. That’s where I think the growth will come from predominantly in the next few years within our industry.
Despite global economic weakness, many players have seen promising growth in LNG demand, especially from Far East countries such as Japan and Korea. That being said however, adequate infrastructure for the containment, transportation, and storage of LNG is still in its early stages of economic appeal. In your opinion, to what extent will LNG penetrate the global value chain? And will it ever reach industry-wide scalability?
To my humble opinion, it will. The numbers speak for themselves. LNG was four percent of global GAS trade, and now it has reached ten percent. If it reached ten percent last year that means it is on the rise and has been continuously rising. Several factors contribute to the appeal of this fossil fuel, especially the sheer availability of gas worldwide and the price at which it can be produced in certain countries. Furthermore, the innate characteristics of gas serve as a major draw, especially considering the environmental advantage compared to dirtier fuels when it comes to NOx, SOx, and CO2 emissions. To this end, there are a multitude of large economies that would stand to benefit for having the addition of gas in their energy mixes. I agree with you that will take a while to build up the asset base, especially when considering the capital-intensive nature of LNG. But if the evolution of oil throughout history is any indication, the commoditization of gas will likely continue over the next twenty to thirty years at least.
The company currently owns with its partners two LNG terminals—the Gate terminal in Rotterdam and the Altamira terminal in Mexico, with a break-bulk facility currently under construction in the former. In your opinion, what implications, if any, will small-scale LNG have on the future energy supply security of emerging, and even developed countries?
Small-scale applications will be used as a substitute for existing forms of energy. Thinking less along the lines of supply security, the growing interest in small-scale LNG will be driven by either its price or sustainability qualities. Especially in archipelagos countries such as Indonesia or the Caribbean, small-scale LNG will have a material impact as a cleaner, and more efficient source of energy that is widely available internationally. So, it partially depends on how small-scale LNG is applied in that sense. The other thing is that, in OECD countries, say Europe and North America, both continents have very well-establish gas infrastructure that can be utilized and opportunities for small scale LNG for the transport sector. To distribute gas here in the Netherlands is a very simple thing. But if you take countries where the networks are not that sophisticated or expansive, then demand for alternatives will be even greater as building small-scale terminals along the coast might be cheaper than building the infrastructure required to meet future energy demands.
The company’s leading market position is not only attributed to its relentless drive for flexible and quality service, but also its conviction towards safety performances. What types of policies and procedures has the company implemented to ensure the utmost standards in health and safety?
I think our safety and sustainability performance ratings over the last ten years speak for themselves. We’re the only company that I know of in the independent tank storage business that publishes details on its sustainability data. The second thing is that it’s something we do whole-heartedly. It is deeply rooted in our culture. It has to do with all the other areas that I’ve mentioned. As a major player in oil and gas, we have to stay relevant to society, and society is very clear in what it wants. It wants incidents and accidents, particularly in our field, to be absolutely reduced to a minimum. So there’s a duty there that we need to adhere to. Since we’re handling a lot of products that require good care, we spend a great deal of time aligning safe operations with our primary responsibilities. My first and foremost responsibility lies with the people that work at the terminal—my own personnel and contractors. Our whole conviction towards safety starts there. We’ve always targeted the same three things: quality of infrastructure, process, and mindset of people. If you look at the amount of money that we’re spending on sustainable CAPEX, a large portion of our capital that we earn ever year gets reinvested to maintain and ensure that our terminals are intrinsically safe. Looking at our internal processes, we’ve developed company-wide functions to ensure the utmost standards in risk mitigation with departments such as internal audit and operational leadership, which has been running for 10 years to provide preventative insight and further our on-going health and safety initiatives. That being said, we still have incidents and accidents, so we’ve continued to improve along those lines and provide quality assurance wherever possible. I’m satisfied with the last 10 years, and I’m very enthusiastic to progress even further with our safety agenda. We would like to be better than all of our clients in safety. We’re a long way, but we still have a few to beat.
What are your personal leadership philosophies on chartering success for a company such as Royal Vopak?
399 years ago, when ships would enter to Amsterdam, storage companies like Vopak didn’t have their own warehouses. But people trusted us with their keys to take their goods, bring it to their warehouse, and store it—allowing us to develop a widespread reputation of trust, integrity, and safety. 399 years later, we’ve preserved that heritage while growing internationally and expanding our capabilities and product lines. It is my personal ambition to continue that legacy in the coming years, while also having the courage to pursue new ventures. More than anything else, the people that I work with will continue inspiring me every day on both a professional and personal level. Our people’s sense of camaraderie, willingness to adapt, and unparalleled drive for incremental improvement collectively embody Vopak’s core principals, and I can only hope to hand over the organization to the next generation with the same level of pristine ambition.