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Interview

Jim Delaney – President Director, Frank’s International Indonesia

Jim Delaney - Photo

The country director of a pioneering tubular and oilfield services firm divulges how his company has successfully conquered a large slice of the local deep water completions market. He also reflects on the implications of changes to the profile of his client base, and on ways to retain a competitive edge in the tendering process.

How would you describe Frank’s International’s relationship with the Indonesian Market?

Franks International started its operations in Indonesia in 1983 via an agent, providing our premium services through to all oil companies present. The major milestone in our common history with this market was in 1997, when we set up Franks International as a PT PMA (i.e. a fully-functional local legal entity) providing us with physical proximity to the market and our clients. We are currently equal in market share with our two main competitors, Weatherford and Tesco.

The year 2015 hasn’t been one of prosperity overall as we have witnessed a serious landslide in rig count and overall drilling activity due to the lack of upstream investment in Indonesia. Right now, we perceive domestic players trying to fill this investment gap and note multiple endeavors underway to enhance overall attractiveness to foreign direct investment, so we can be reasonably confident that 2016 will represent the recovery year for the local oil and gas industry.

We have been noticing a sharp increase in the activity of domestic oil and gas players. How does this development affect your business?

Currently my client base is split in half between domestic and foreign players, I expect that to change in the coming years as Indonesia is currently embarking on a political course of nationalizing many assets of the hydrocarbons sector under the umbrella of Pertamina. The latest tangible demonstration of the latter developments is Pertamnina’s announced takeover of Total’s Mahakam operations in 2017/18 when the original Production Sharing Contract agreement runs out. Pertamina is also taking over in West Java and West Madura, and sector insiders are already suggesting a possible takeover of Exxon Mobil’s Arun field. I believe that the future foreign activities in the Indonesian upstream market will be limited to offshore activities, where Pertamina and the other domestic players lack the requisite know-how and equipment.

How do you distinguish yourself from the competition in the domestic market?

We hold the level of our service quality higher than our competitors and are able to offer unique equipment and tools for deep-water projects. This, however, imposes its own challenges in the Indonesian market, which is unfortunately a market in which procurement contracts are won on the sole basis of a low price. SKK Migas organizes the tenders and tries to ensure a minimum of three bidders in each instance. To ensure the participation of three bidders, SKK Migas tends to keep technology specifics general, so as not to out-specify prospective companies. This leads to all bidders offering minimum technology requirements and competing on price. Once a contract is won, the value of this contract is fixed in a race to the bottom on the technological front.

You have mentioned that deep water projects are one area of specialty of Frank’s International. How do you assess future opportunities for this niche in Indonesia?

Deep-water drilling has certainly been a priority and core focus area for the local industry in recent years. However the fall in the oil price has unfortunately paralyzed many of those projects with high expense offshore drilling temporarily priced out of the market. For example two major offshore projects by Chevron and Inpex were recently deemed economically unviable. The Indonesian state apparatus realizes the untapped potential of these projects and is closely collaborating with both entities in order to change the market dynamics and re-establishing commercial viability. Some progress already seems to have been made with a new timetable being figured out that should see work restarted within three years.

How strategically significant is the Indonesia market for Frank’s International?

For Frank’s International, Indonesia has been the leading source of revenue in the region for the past 15 to 20 years, and thus naturally remains one of our mores strategically important markets. The Indonesian market has been afflicted by political unrest, corruption and thus turmoil within the regulatory apparatus which in combination with the oil price drop has hit the Indonesian market harder than its peers in the Asia Pacific Region. Nonetheless, we stay committed to this market, as we are confident of its rapid recovery. Our analysis is that the Indonesian oil and gas market will recover much more rapidly and resoundingly than its counterparts in Australia and Malaysia.

Frank’s International recently became a public entity, what changes did that bring?

Franks International has always been renowned for its technological prowess and the superiority of its technology, which is why, despite the higher costs, we continued to manufacture only in the US and the UK. The transition from a family run business to a public entity has not changed our commitment to quality. The morals and unique characteristics of Frank’s international have very much remained; solely our presentation and the operations of our business were affected.

As one of the success stories in Indonesia, what is your advice for other companies willing to enter the market?

Competitiveness in tenders is the key to being successful in Indonesia. New players will face vast difficulties entering the Indonesian market, as the large investment sums needed will be a significant disadvantage in competing with established players. Incumbent players possess advantageous market knowledge such as awareness of client needs and familiarization with the regulatory framework. They also have assembled local workforces that correspond to ever-stricter local content requirements. In short, it is a tall order for new entrants to bridge the gap.

How does Frank’s International go about ensuring alignment with those local content requirements?

The problem is that we, along with international brands such as Tesco and Weatherford, deal in high spec technology that more often than not entails 100 percent foreign direct investment. Despite being vastly more sophisticated than most of the local companies, indigenous entities will always enjoy preferential treatment in tendering when the government is pushing a nationalist agenda and fixated on raising local content. There are two options to overcome this obstacle: either to devote ourselves to those tenders in which local companies cannot participate due to the specific requirements of the tender, or to sell some of your assets to domestic players.

How do envision the company’s development in Indonesia?

In five years’ time, Frank’s International will still be a significant player in the Indonesian market. We are well positioned for grasping any emergent business opportunities just so long as the regulatory framework allows us to do so. Indonesia is notoriously unpredictable so making even short-term forecasts can be difficult. The political course of nationalization is an example of the sort of disruption that we periodically have to deal with. Nonetheless, I am confident that this specific change in dynamics will not challenge our foothold in the market, as we remain able to provide specialized technology, solutions and innovation unmatched by any domestic player.

Click here to read more articles and interviews from Indonesia, and to download the latest free oil and gas report on the country.

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