Pedro Ascorbe – Chairman & CEO, Dragados Offshore, Spain
Pedro Ascorbe, chairman and CEO of leading Spanish EPC firm Dragados Offshore, provides a fascinating insight into the changes sweeping across the oil and gas industry in the wake of the dramatic decrease in the price of both commodities.
Last year ended with the announcement of a framework agreement for the fabrication of offshore and onshore modules between Dragados Offshore and Shell. How is the Shell agreement advancing and what are Dragados’ flagship projects right now?
“The majority of our business is offshore and the cost of getting oil or gas from offshore fields is generally higher, therefore you require higher prices. There are many companies that are not able to survive this part of the cycle, but being a Spanish firm we are accustomed to the competition of international companies because Spain, practically, does not have any offshore oil or gas.”
We are indeed very happy with it. The Shell framework actually only concerns our Mexican yards and therefore does not apply to our Spanish operations. We are also starting an exciting project in a couple of months which is a modular fabrication for petrochemical facilities in the United States. This is a major target in our planned expansion in Mexico, as ultimately, through our two yards in the country, one of our aims for Mexico is to reach the US market. It is important to note that this is not the first time we have developed something for the US from Mexico but this is certainly a big milestone for us. We are not only focused on growth in Mexico but also diversification and the development of products for different markets.
There are a lot of projects coming up that will focus on petrochemicals, LNG, and the fabrication of refineries among many others, which is a very interesting development for us. Alongside these ambitions, we want to continue to expand in our traditional oil and gas market, Mexico. Currently, we are participating in one huge and complicated tender which includes apart from the EPC project, operation and maintenance for several years after the installation of the platform.
We started operating in Mexico in 1999 and at that time we managed to execute a project with an experienced partner. To be able to tender is the difficult second step because you really have to understand the local market dynamics. Suddenly we were awarded three projects but we had not expanded our business sufficiently at this stage so we required another contractor. We learnt a great deal about the market from these experiences and after two years we were in a much stronger position than when we initiated the business. We proceeded to get more and more contracts through our tendering techniques including two major high and low pressure compression projects last year. Three years ago, we acquired a new yard in Altamira. This facility boasts a deeper water capacity which allows us to undertake increasingly challenging projects. The site itself is still under construction but we have are already successfully executing various projects there. Deep water facilities are essential for the future market in Mexico, given the growth in demand for that particular capacity. We also required more space for the additional modular projects we were taking on.
The reason our yard in Altamira is incomplete is because we have been investing in new facilities in line with the market. Executing new projects often leads to new requirements; in the offshore industry, no two projects are the same. The fabrication phase and the assembly phase are such that companies dedicated to the offshore industry require a large amount of space because in the vast majority of cases the components are not built in their final position.
You have identified the Americas and, to some extent, Western Africa as key growth areas for the company. How successful have you been in this regard? Can you give us an idea of the geographic split of revenues and your market predictions for the two target areas?
We are satisfied with our performance in the Americas. If we were not happy and were not delivering the performance our shareholders expect, as a private company, we would not stay in the region. We believe we now have a great understanding of both the tendering process and the market so we are looking to remain in the area for many years to come.
So far, we have the facilities for Northern European investment, the Mediterranean, the West Coast of Africa, Mexico, the United States and surrounding countries in the Gulf of Mexico. We have ambitions to move into the Brazilian market but it is not an easy area to break into and it will most probably require local support. Due to the local content requirements of the project to be developed in Brasil, we would need to establish a yard locally and create a fruitful partnership in Brazil in order to be competitive there. It is a scenario we are looking into but we are not ready to proceed. Obviously, the situation is very unstable with Brasil’s and Petrobras’ well documented problems. With most of the projects being performed in deep water, our reference opportunities are not, at present, so extensive.
Our starting point for penetrating the US market is, as I mentioned, Mexico where with a lower labor rate we can compete with other contractors. Obviously, we need to gain the confidence of US companies operating in Mexico in order to take on multiple projects. This has not been easy but we foresee strong references from our current projects which should allow us to push on in regard to both onshore and offshore activities. With Mexico increasingly opening up to foreign contractors, there is a lot of interest in this market. International clients are beginning to settle and become established names in Mexico, not in the least due to the different rounds of foreign investment to develop offshore fields, based on the recent change in laws in Mexico. This is an interesting development for us because with our expertise we can of course take on projects for Mexico on behalf of international corporations. The market is still in an exploration phase with plenty of new developments particularly in the offshore section of the industry to be realised. However, the establishment of both local and international companies suggests a positive future for contractors. Mexico as a country is also growing and the increase in Mexican oil and gas projects is closely related to the decrease in oil and gas prices.
What has been the impact of the oil price drop for Dragados Offshore and what strategy have you put in place to weather the storm?
We cannot deny that there has been a huge impact and many projects have been put on hold. The majority of our business is offshore and the cost of getting oil or gas from offshore fields is generally higher, therefore you require higher prices. There are many companies that are not able to survive this part of the cycle, but being a Spanish firm we are accustomed to the competition of international companies because Spain, practically, does not have any offshore oil or gas. We have always survived through diversification. During this particular crisis, we have entered the offshore renewable energy industry. Two weeks ago, we were awarded the construction of the HDVC platform in partnership with Siemens. Whilst experiencing another negative period fifteen years ago, we fabricated structural components and entered the hydro-mechanical machinery business to keep our facilities fully functioning until the oil and gas scene became more positive. One of our biggest projects at the time was actually the construction of the Oresund Bridge (the bridge that joins Denmark with Sweden). We made the structural components and built all the spans of this bridge. From this basis we have plenty of options should the oil and gas industry suffer from a lean period. That particular project required steelwork, welding and various capacities not necessarily associated with the oil and gas industry, but well known by our organization and fit for our facilities.
What can the market expect and what are your predictions in terms of revenues and growth for this year?
Our 2016 performance was good with all circumstances considered. Obviously, with the fall in oil prices the performance was not as impressive as previous years and our turnover has decreased but the company is very healthy with future projects in the pipeline. I predict we will return to previous levels in two to three years.
To what extent has being part of the ACS Group helped Dragados Offshore get through a tough period?
Of course, it is an advantage because the ACS Group is the market leader globally for construction services in terms of sales. It is always good to belong to a big group as they often have roots in a variety of useful places. Equally, the financial capacity is immensely helpful and often sister companies can assist our efforts. ACS Group has also recently established ‘area delegates’ so it is not only companies that they deal with. This provides the whole group with knowledge of the Far East, Middle East among many other markets. Essentially, we are responsible for our own ideas and expansion but the group is there to assist us where applicable. We have an annual conference to share information. This year, the conference will be held in Brazil. The delegation obviously has the obligation to pull in all the experts and companies from the various regions to participate which leads to a coordinated effort to expand the business and find opportunities somewhere suitable for everyone.
How different do you expect the company will be at the end of this cycle?
In the oil and gas industry, every year is an evolution. I am sure we will emerge from this difficult period with the capacity to undertake different projects aside from our oil and gas ventures. We now have strong references from our wind energy projects to use in the future.
As a long-time specialist in offshore fixed and floating platforms for the gas industry, the company has engaged in a careful diversification strategy that includes FEED or subsea pipelines. Can you give our readers an overview of the services you now offer and of the company’s capacity?
We are currently working on both offshore oil and gas and renewable energy platforms. We build all types of platforms, shallow water subsea pipelines and are able to conduct modular construction; our current project in Mexico is a clear example of this. We can develop almost any oil and gas project, and in addition execute structural and mechanical components. Even though these latter elements are not our core business, we are well prepared for a diverse range of projects.
The acquisition of the yard at Altamira is our most significant investment in recent years. A few years ago, we also modified quay to establish a deep water quay in Cadiz to allow big floating structures to be moored and to carry out integration projects. Every year, we are evolving with new jobs and automated processes. For instance, our cranes are rather old and could benefit from investment. Post-downturn, there is a good second-hand market for equipment like this so I am sure we will take advantage of that. We are a conservative company in the respect that we do not like to invest upon speculation. We justify our investments against projects we have already been awarded.
What share of Dragados Offshore’s revenue comes from its core business in comparison to its recent renewable energy activities, and how do you want the balance to shift in the coming years?
The future is very difficult to predict in this industry. The oil price affects projects, markets and various other vital factors. Currently, our revenue is shared equally between the oil and gas sector and renewable energies. In previous years, obviously this figure would have been heavily in favour of our oil and gas activities but considering our current and future projects we expect renewable energies to play a huge role.
Our evolution has to be in line with the market, and we have fierce competition despite our diversification. Currently, firms are beginning to look at renewable opportunities in the US including the key players such as Statoil, Dong Energy among other traditionally European clients. For us, it is vital to have expertise to facilitate these ambitions.
What is your message to potential partners?
We have successfully used our knowledge and experience in the oil and gas industry to diversify and create a variety of platforms outside our traditional sector. Our latest projects will provide us with references that will demonstrate our capacities even more. Many companies are not aware of the difficulties faced when conducting offshore business; the installation period, the design conditions and even traditional renewable energy operators have struggled in this respect. Usually, turbine generator or transformer companies were contracted to manage their projects. Now, we are returning to a more traditional method of companies experienced in the offshore industry partnering together to undertake projects rather than taking on projects by companies that are not sufficiently equipped to tackle these. The expertise of designing, building and installing a platform offshore is very significant. In addition, the cost competitiveness is improving and time is of the essence. At the end of the day, we build onshore but we need to transport products offshore. To install products offshore takes approximately one to two months, with a very limited window to execute this phase, which means you have to schedule all your activities very carefully. As a business, you do not want to lose time, which is why our guarantee is so valuable. These types of contracts are incredibly risky which is why a company in this business needs to be financially strong but also capable of applying expertise. Simply put, if you do not meet your time scales, you will fail.
What are your thoughts on the quality of Spanish engineers?
I agree with the very high reputation in which Spanish engineers are held because the talent available here is very impressive. The degree of success among Spanish engineering students 30 years ago was no more than 50 percent. I started my career with lots of friends but many did not succeed. We are also blessed with quite a lot of design engineers in Spain in addition to construction based work.
Going back to the company roots, you are a very important part of the Cadiz ecosystem and the highest provider of industrial jobs in the basin. What may surprise observers is that the company was built from the ground outside of an “offshore area of expertise”. What has been the most challenging aspect in this regard? How can Spain compete with other offshore hubs around the world?
It is true that it is a rather strange way to start a company when your main products are not located in that country. It is important to note that our labor rate is far more competitive than that of Northern Europe. Also, we are in a strategically important location. Cadiz provides access to both the Mediterranean and the Atlantic Ocean. Equally, the weather conditions are very favorable as we can conduct our activities throughout the whole year. This is a luxury that yards in Northern Europe cannot offer. Another advantage in being based in Cadiz is the fact that there are three major shipyards and petrochemical and refinery industries which provides us with a great labor source within a 150 kilometer radius. Our labor is generally all Spanish, and over 90 percent locally sourced. The Cádiz yard and the start of the company was actually formed from the idea of reclaiming the sea using the soil from the development of the dry dock of the nearby shipyard, as a resource to fabricate future products, a project executed by the civil construction division of the original Dragados Group. This idea was obviously boosted by the presence of the shipping industry and lots of coastal activity.
You have been working for the company for many years and indeed headed it for the past 15 years. Having supervised dozens of projects, which one is the dearest to your heart and why?
I would say the first one is always special. Equally the Snøhvit project was a major milestone for Dragados Offshore; as it was the world’s first LNG liquefaction facility to be built in a completely different location. I was also very happy with our first Mexican project because at the time we did not even have an office in the country. I am convinced our current projects will provide us with great references and that there will be more exciting projects to come in the future.
What do you believe the company stands for today?
We install a very hard working and competitive mentality here. If you work hard, you will surpass your competitors.
What words best summarise the future of Dragados Offshore?
Safety, Diversification, Excellence and Sustainable Growth.