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Nathan Meehan – Senior Advisor to Global Management Board, Baker Hughes, Indonesia

The Senior Advisor to the Global Management Board of one of the world’s top 4 oil field service companies discusses the significance of the South East Asian marketplace for the application of cutting-edge drilling technologies and about how turbulent oil prices are throwing down the gauntlet for OFS firms to innovate more efficient drilling techniques.

This morning when you addressed the Asia Pacific Oil and Gas Conference in Nusa Dua you spoke about there not being enough margins in the existing way of business under the prevailing oil price and for the need to innovate new work styles in the oilfield services segment. Just how “fit for fifty” is Baker Hughes?

One of the real innate characteristics about Baker Hughes is the strong focus on technology and innovation. Technological advancement is in our DNA and always has been. We continue to come up with commercial nanotechnology, completely new types of artificial life and breakthroughs in directional drilling. The heart of our business is about coming up with a new ways of solving existing problems and that is what we are renowned for. We are used to collaborating with clients that bring us challenges. I truly believe that we are going to be able to weather this storm better than most because we are going to be competing on exactly the sort of tasks that we perform best at.

Of course the dramatic plunge in oil prices came as much as a shock for us as everybody else, but our capacities to rebound are strong. We’re talking about a technology driven company whose bread and butter is innovation and one that has historically displayed a high degree of resilience. To give you a specific example of collaborating with a client to pioneer new approaches, we recently found ourselves unable to drill a particular interval because of instability so developed a specific tool that leaves the liner in place as you do the drilling; surmounting the risk of ending up with an unstable type hole.

How significant is South East Asia relative to Baker Hughes’ global portfolio?

Our most important market is quite naturally the home market of North America, but South East Asia nevertheless represents a critical part of the energy jigsaw and thus remains significant region for Baker Hughes. Relatively rapid economic growth rates, expanding populations, evolving energy profiles and sheer market size all combine to render the region too big to ignore. In some countries such as Vietnam we have enjoyed many decades of presence and can today count on local market leadership. In others such as Malaysia and Indonesia, we maintain strong positions. The Asia Pacific space is also important in general for the plentiful opportunities to collaborate with local NOCs, IOCs and a whole host of smaller entities.

One of the issues we hear about a lot in Indonesia is that the tendering process tends to be conducted predominantly on cost and price competitiveness. How does a firm like Baker Hughes deal with such a scenario given that you are an elite technology provider positioned at the higher end of the spectrum?

We might well appear to be heavy on upfront costs, but when you calculate and factor in the efficiencies generated over the course of a project directly accrued from harnessing a specific Baker Hughes technology, then you will likely discover that our products are very cost-effective. It all comes down to being able to see the wider picture. For example, if we can drill much faster then the client can naturally afford a more expensive drill bit. Similarly if we can stay much more in zone than our competitors because of our advanced technology, then it follows that the client will be able to afford the better directional drilling and geo-steering services that enable that precision and generates those savings. This has to be demonstrated and communicated especially during the current period when many oil and gas companies are struggling with their cash flows and financial bases.

Ultimately you cannot buy oilfield services in the same way as you might purchase catering and at some point most customers figure that out and resist the temptation to go with a much cheaper option with inferior technology that will lead to spiraling costs and long project delays later on down the line. Our real compensation relates to how effectively we can ensure that operations stay up and running and are duly completed in half the time. Our clients are ultimately paying for our proven ability to minimize the downtime.

I goes without saying that all of the operators from Statoil to Saudi Aramco are going to be seeking value for money and to minimize their costs especially during these current belt-tightening times. Nevertheless their overriding aim is to identify a total solution that resolves the specific problem they are experiencing. If we can demonstrate that our artificial lift innovations can get the job done without failure and the need for additional work-over, then that is the option that they will select. Baker Hughes, wherever possible, seeks to work with tenders whose bidding specifications really reflect the desires and needs of the client. That is because we understand that customers don’t want drill bits, but rather holes. They don’t want pumps per se, but rather the end outcome of oil coming out of the ground.

As the requirement to cut costs trickles down to the oilfield service sector, what is Baker Hughes doing to manage its own balance sheet?

We’ve obviously had to work hard on reducing our costs and to be honest with you unfortunately that has translated into quite a few lay offs. We’ve also refocused and consolidated our R&D efforts on those tasks that we consider to be the most critical and valuable. Personally I love practically all of our R&D ideas and we have a rigorous internal development process to screen them before we start to invest in them. A reduced order book means that some of these excellent ideas are in hibernation for a while and we are focusing strictly on those areas that we consider can really produce the biggest bang for our buck.

The other main strategy is to focus on those areas that simply aren’t experiencing so much of a downturn. We have a lot of production chemicals in the artificial lift segment and technologies related to pipeline services that don’t tie directly to rig count. Doing what we can to increase market share in those areas obviously makes a great deal of sense and has the benefit of reducing our risk exposure.

Meanwhile we are very busy looking into ways of lowering he costs to drill a well. Average well costs for unconventionals have dropped considerably and nowadays it’s not unusual to reduce them by 30-40 percent. We have proven that, as long as we can enter the design process at an earlier stage via enhanced collaboration with the customer, we can actually generate much lower operational costs. This is something that we have proven time and time again.

Our eagerness to be involved much earlier in the sequencing is actually one of the reasons why we are ramping up our offering for reservoir development services (RDS). By gaining the requisite expertise to help with the design and evaluation process, we realize we can better anticipate problems and that through understanding the geo-mechanics of the reservoir we gain a better situational awareness of the sorts of oilfield solutions that are more likely to be effective.

Given the crowded nature of the market in countries like Indonesia, what are the hallmarks that differentiate Baker Hughes from the other big three oilfield service companies?

Technology leadership in drilling services and more specifically in the drill bits both represent key areas where I’m proud to say that we are best in class. The new generation of artificial lift systems immediately springs to mind. I’m concerned about the tens of thousands of horizontal wells that we drill that will all ultimately need artificial lifts but where sucker rod pumping might not be appropriate and yet we are marching ahead with new technologies that will circumvent that obstacle.

Then there is our remarkable Kymer hybrid drill bit that combines PDC and roller cone bit technology for smoother drilling, remarkable torque management, and precise steerability. Leveraging the cutting superiority of PDCs in soft formations and the rock-crushing strength and stability of roller cones in hard or interbedded formations, the hybrid bit has the potential to maintain a higher overall rate of penetration for more footage than a roller cone or PDC could individually. What’s perhaps eye-catching about Baker Hughes is that, even if everything else belongs to our competitors you’ll notice that the tool that runs the liner is ours because we are able to perform some tasks more consistently and always retain a lead ahead of the technological curve.

Then there is our demonstrable prowess in geo-steering which I am confident represents very much the future of drilling. Let’s not forget we’ve transitioned from doing 10 percent horizontal wells just a decade ago to 70 percent today. The days of drilling a simple vertical hole are long gone and nowadays we’re talking about drilling more complex wells requiring sophisticated liners, better drill bits, directional drilling and more advanced completions such as the frack-point type. 15 years ago the part of the total expense to drill a well that related to the rig contractor was far and away the largest, but in many of today’s wells today the service companies carry a significantly larger percentage. I don’t see that changing and, if anything, we are even more critical to the design of such wells under a low price environment where there is a compelling need to take costs out. I am confident we can position ourselves at the forefront of the new trend towards optimization. The rules may be changing, but the game continues.

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