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with Arie Vliegenthart, CEO, Swellfix

23.10.2008 / Energyboardroom

How did Swellfix come into existence, and what is the relationship with its former parent Shell?

Swellfix is 100% owned by Shell Technology Ventures Fund 1, which continuously looks at new investment opportunities for technologies coming both inside and outside Shell. Currently, the fund is managed by Kenda Capital consists of a pool of new technology companies in different stages of development. Looking at the average time it takes to survive as a new technology before achieving a profitable hold in the market, it tends to be 15 years at minimum, and 25 to 30 years to have decent penetration in the oil business; although different reports say different numbers, the common fact is many years.
In entering the market with a new technology to put in wells, there has to be a certain level of belief in the technology and the providing company’s structure and stability, because the company still has to be around when the well starts producing. Generally, the oil business is rather conservative in picking up new technologies for that reason. Also, engineers faced with high oil prices are typically busier drilling new wells and bringing up production, and not so keen to try something new, because they simply don’t have the time to validate if it’s going to work. Therefore, as a new technology inventor, it’s difficult to start a company because by projecting a time of acceptance 15 years down the road, most private capital is uninterested. Shell picked up on this circumstance and now supports companies like Swellfix, with a proven concept ready for commercialization, until ready to stand on their own. Then, they sell it to fund the next growth company.

Since becoming independent two years ago, Swellfix now counts over 5,000 failure-free installations. What have been the most significant milestones and achievements over this time?

The first milestone, quite bluntly, was to get sales outside Shell. Having already run over 2,500 packers inside Shell, with a product suited to a few operations inside the company, Swellfix had the reputation inside, but not outside, Shell. Nobody knew
Swellfix or the product, and it looks different than the competition. To take a product that was better than the rest, but not recognized as such, the question was how do we prove it?

Going from this stage to actually having a clients base of over 50 non-Shell companies in a very short time, was the biggest milestone in the first year of operation.
What was the process behind getting the name out beyond Shell?

As I said, it takes a while to convince people to change their ways, especially with a maturing industry that may have been doing things one way for 40 years. It was not always an easy sell, entering an office with a “funny-looking” packer and convincing potential clients that it will replace or change the way they work. Having a good track record of course helped, and Shell’s technological reputation was like an approval stamp. For example, many of Weatherford’s expendable technologies come from Shell patents. Still, at the beginning. Swellfix did not have global support, but the beauty of the product is that you don’t need a lot of local support. To deliver, Swellfix needs to know a lot about the given well, sufficient information to bespoke-engineer the product and know it will work, but not necessarily on-site. We send it, and they run it. These joints connect up like any other casing joints, and you don’t need to be an expert to do it. And if our clients get in trouble and needs to know how long they’ve got before the packers set, all they have to do is make a phone call, specifying what time they ran in, depth, and temperature, and Swellfix can assess the situation and solve the problem. In terms of convincing people to use it, the product’s simplicity helps.

In terms of market acceptance for new technologies, do you observe a sort of “sweet spot” between lower oil prices and the record highs of late?

That’s the million dollar question, but it’s a good one because Swellfix has to make fair judgments and work out a few scenarios, in projecting the company’s aggressive growth. It’s hard to say, but at the lower end at least there is certainly going to be trouble, because operations simply shut down. For example, Swellfix is just now launching a new product in the US, with manufacturing up and running in the first quarter of 2009. The whole tight gas market in the US seems to be structured so that if prices stay above $7 on the longer term, everybody’s happy and keeps on drilling tight gas wells. Under $7, they will start stacking rigs, and the market collapses. If they’re not drilling those wells, our product will have less of a market. Having said that, the cost pressure of drilling wells and getting more oil or gas in this case, that’s the time where Swellfix’s technology can really help, because it saves money constructing the well and gets more resources out effectively. With exceptionally high prices, there’s less push from management to do things cheaper, but instead the preference is to drill more and as quickly as possible.
Finding the time to validate new technology is another hurdle to overcome. Swellfix can tell its customers and convince them of benefits, but for them to take the step to put it in their well is another matter. Take a well engineer under pressure in Saudi Aramco or any of the other national oil companies, in a big push to complete a drilling plan. If that individual does something conventional, and uses mechanical packers or cement, and it doesn’t work out, everybody accepts it. But if swell packers are used, and they don’t work, the question arises as to why somebody decided to change the status quo after 50 years.
Customers must have confidence, and validation for the technology, in addition to testing, and Swellfix is very strong in having its own Aberdeen test facility, and still works very closely with Shell R&D and manufacturing partners for rubber components. If it’s necessary to convince potential clients, the company can very quickly set up a full-size test and a program to help them validate their requirements. In the end, this takes time, but if they take it and it works, it’s heroic. At a certain level, people are forced to do things differently or the operations won’t be economically viable. In some of the mature fields, it only makes sense to do it differently than 10 years ago because old methods are no longer cost effective. This includes not only swell packers, but new technologies in general.

Beyond getting some early successes and a track record outside Shell, now that there’s a lot of business planning occurring, what are your biggest issues as CEO in bringing Swellfix to that next level?

The biggest challenge will be to increase the company’s footprint, in a smart way. It’s fair to say that our product is best in class, and very well-perceived as the technology leader in swellable elastomers. The next step to take, without losing focus and making sure the products keep on working, is to go to the mass markets. Swellfix doesn’t want to make its products a commodity, but at some point you have to also penetrate the more common wells, to really accelerate growth. For example in the US tight gas market, Swellfix developed a specific product that is better than what’s out there and cost competitive, and has combined the high-end, bespoke service philosophy with a more commodity-stile product. This is the type of approach that will really increase and multiply Swellfix’s output. Otherwise, in doing design and testing work for every well, as we did in the first one or two years when the company was trying to convince the market of the quality of our work, the company faces the problem of a consulting company: if you have good consultants, and you want to double revenue, you need double people. Swellfix wants to avoid that, in looking at distribution channels and standardizing them with specific products for specific markets, rather than specific products for a specific well, and that’s the challenge for upcoming years. The first example will be the success of the US tight gas market, with more coming up in the future, such as sleeve-type products, or slip-on devices to aid in logistics for Saudi Aramco and alike.
At the same time, Swellfix has global agreements to supply through most of the large service companies, like Schlumberger, BJ, Smith, and Weatherford, and needs to be ready to support them, and growing design and internal processes accordingly. Perhaps surprisingly, the least challenging aspect is technology. Of course, Swellfix needs to stay ahead of the game to ensure technology is the absolute best and to research continuously, but that was done before the company’s birth. Now, the concern is to build the structure around the company that can actually deliver products effectively on a global basis, and to grow the company in a controlled way.

In increasing that footprint without a linear relationship between people and profits, how does Swellfix recruit?

That’s been another challenging area over the last year: getting first of all people we can afford. Big companies are tying in people pretty well, with options schemes and stock purchasing plans, which Swellfix, as a small company, has a difficult time matching. On the other hand, Swellfix has something to offer: here, employees can really make a difference. Therefore, Swellfix is about trying to attract people who can appreciate the fact they will be working in a small team and really make a difference. If someone comes up with an idea for a certain market in Russia or China, in three or four months’ time, the company will have a prototype ready to go visit the customer. Although it’s important to attract people excited by such prospects, it’s also important that they be capable, because unfortunately there are not many people in the world that you can send to a country like Angola tomorrow without any support. At Swellfix’s stage, true business development requires people who can fuse business development with sales and a broader understanding extending beyond just the sales, to recruitment, relationships with suppliers and transport companies, all the way through to customers. All that together you’re really building a business, and to find someone who can tick off all those boxes has proven difficult.
In some areas, training indigenously may work, and in others, it may involve expatriates who have been in-country for a long time. As a small company, Swellfix needs to dig where the gold is. The trick is to find the five or 10 opportunities per year that can really generate money at high probabilities. Overall, the strategy is to identify, map out, focus in, find the people who can follow-up, and then move on.

Looking towards the future of growing Swellfix’s global footprint, what is your vision for the next five years?

Looking five years into the future, there are two sides. Swellfix is owned by an investment company, and may therefore at some point be sold or become part of a larger organization, to recoup the investment for new company development. On the other side, Swellfix’s technology has not been developed to its full extent. In the future, it will be combined with cement or mud systems of lost-circulation material or other similar materials, and not necessarily rubber. We will also see it in many other phases of the whole oilfield lifecycle. Swellfix started by segmenting the reservoir, now we use it in combination with cement, and who says we won’t replace cement? The uses can even extend to repairs to service wellhead seals. There are many other areas where this technology can add value, so I expect to see a much broader product segmentation far beyond zonal isolation. In fact, early 2009 will see Swellfix rebranding, with new product names and also as a company, because we provide products like swelling o-rings for subsurface safety valves, which have nothing to do with zonal isolation. Therefore, the company will see segmentation not just geographically but across product lines.
Effectively, Swellfix’s bread and butter comes from two products: rubber wrapped on a mandrel or a piece of casing or tubing, or a slip-on type device. The branding effort will be around making the product line more clear, because at the end, Swellfix will always be selling a swelling packer or elastomer. Apart from o-rings and all the other special items, the other rebranding will come by doing a two-tier focus: one toward high-end, bespoke services where the company is already strong in the market. If it’s got to work, people generally know to call us, and Swellfix’s strength in that market is shown in sales. The other tier, where the company has not traditionally been strong, is at the lower end of the market where products aren’t such critical items, but just have to do their job. This represents a new market for Swellfix, having previously focused exclusively on the high end, that will see penetration in the low end, with a more commodity-stile product that is fit-for-purpose.
In the longer run, Swellfix will work more closely with other companies running the gamut of well completion services. Swellfix provides the rubber, but there’s much more that goes into a well: screens, valves, etc. These companies include the larger MNCs which represent current partners, in addition to independents, to come to a bigger picture of how to develop a cost-effective well completion, in a way I call “cost-effective smartness”. Seeing where the world is going in drilling, it’s all about enhanced oil recovery and in-fill drilling to get more out of the same fields. Obviously, new fields in deepwater are happening, but at the same time those also need to be maximized in subsequent phases. Whether water floods, steam floods, or CO2 injection, the better the control, the better the effect. Drilling more wells doesn’t necessarily mean you get more out of them. Technologies like swelling elastomers, especially when combined with complementary technologies can make up a smart completions package to make wells more economically viable. In the end, if Swellfix and its partners can come to cost-effective smartness, there’s a whole world to be conquered, and that’s where I see the future of Swellfix. As an enabler to allow other technologies to do even more for the oil business, the closer we work with those companies in developing solutions together, there’s still a lot to be done.

What is your final message to OGFJ readers?

The main message is that swellables are here to stay. It’s a new technology we haven’t seen the end of, just the tip of the iceberg of what can be done with this technology. I encourage them to think proactively and see how and where swelling elastomers can help them depending on whether it’s a service company, operator, to help produce more oil or gas, or complete wells more effectively. For service companies, they can combine swelling technologies to create a better service adding to cementation or other existing technologies, rather than see them as a threat. In this regard, Swellfix has recently started a global agreement with BJ services, who’s also doing a lot of stimulation and cementation. Swellable elastomers will one day replace cement in many occasions, and what I like about our cooperation with BJ is that they don’t regard it as a threat, but rather an opportunity to do things together. If one of the biggest cementation companies can see the value, that’s a very promising development. Swellfix is really just at the start, and here to stay.



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