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Interview

with Christian Lange, Chief Executive Officer and Managing Director, Neptune Marine Services

28.07.2010 / Energyboardroom

Neptune Marine Services recently completed a corporate rebranding of its global operations. What have been the steps in this process and how has it consolidated Neptune’s global image?

Neptune was incorporated in 2003 and listed in 2004 in order to develop our underwater welding technology, NEPSYS®. Since 2006 we have acquired a number of companies, all of which had their own strong brands. Initially we stylized these brands in the same form as the Neptune logo, however it wasn’t too long before we realized that, while all of the companies looked and felt like Neptune, there was a pressing need for a united corporate identity. In meeting this need, as of 1 July 2010, our global business has been rebranded under the single Neptune brand, both internally and externally, and each business forms part of the broader Neptune service offering.

And consistent with the Group’s organizational structure, are the businesses that make up Neptune’s offerings arranged between Neptune Offshore Services and Neptune Engineering Services?

Yes, those are our two major divisions. Within the Engineering Services division, we provide a host of subsea engineering and design services and have engineering design and engineering fabrication capabilities that focus on subsea technology. Typically we design and fabricate the equipment and then install it offshore.

That said however, we are not an EPIC company such as Allseas, Clough, Acergy, or Technip. We support those companies with services that comprise about 30-40% of our revenues. The bulk of our revenues come from the operator within the aforementioned offshore and engineering services. In this capacity we work directly for the operator to perform inspection, repair, and maintenance (IRM) services offshore. This provision of offshore IRM services is our major focus however, due to the fact that the assets and expertise are the same, we also get involved in supporting new construction activities. We typically support the construction companies through surveys, diving, ROVs, and pipeline stabilization services. We also do a host of upfront engineering to support them in detailed design.

Not being an EPIC, but rather, a company that supports EPICs is an important distinction for us. One thing that we that we need to address and contend with is a lot of EPIC companies looking at us as competitors. We have made the separation between “church and state” so we very clearly support them and do not compete with them on those specific scopes.

That is not to say, however that they do not compete with us. A lot of those companies are looking at various life of field services – from seismic drilling to decommissioning – which is our sweet spot. But overall, we make a clear distinction that we are there to support their services and activities.

Was it always the strategy to offer a wide suite of services or was that something that Neptune grew into and developed over time?

I can only speak of the strategy from February 2006 onwards as that is when I joined Neptune. I got involved as CEO and Managing Director after the company floated and during the commercialization process of our dry underwater welding technology. Back then we were housed on the same floor of this building but only occupied a quarter of our current space with six full-time employees. We had an annual turnover of about $1 million and probably lost three times that much in the process. However, the company was not designed to make money in those days. At that early stage it was all about proving the technology and commercializing it.

In February 2006 we effectively rebuilt the management team and the Board of Directors in the process. Part of the first six months of my mandate was looking at what the company wanted to do, where it fit, and what it would do with the technology. My goal, with the support of the Board, was to build a service organization with the NEPSYS® technology as the key differentiator. We put together a strategic plan to build a broad-based subsea engineering company that provided the industry with engineered solutions. We were not using a template like other companies and basing ourselves on specific services such as survey, ROVs or inspections. We wanted to be engineering led in order to focus on our core disciplines and utilize our key advantages.

Our aim was to provide engineered solutions rather than just services. There is a key difference between the two: the first is about value through bespoke solutions; the latter is about just doing the commodity based work. If a client has a problem that needs fixing or maintenance, for example, we will design a solution, build whatever mechanical devices or equipment is required, and deliver it to the marketplace. We do that under our own steam. We use very few subcontractors.

After spending the better part of six months reviewing the marketplace in Australia, I felt that there was a role for a domestic Australian company that offered our broad range of services; and that model could be expanded to key offshore areas. Our strategy over the last four years has been to build that model which we have done largely through acquisition. We have invested a fair amount in ROVs and a few vessels. We have also expanded our business globally. About 50% of our business is here in Australia, 20% in the UK and Europe, 20% in Asia and the Middle East, and the remainder in the US. Our goal is to expand in those regions so that they are all about equal size. We still have a lot of work to do but we have grown from six people in 2003 to the better part of 700 today. Revenues were effectively zero when we first started and now stand at a couple hundred million dollars. As we see it, we are just coming to the close of the second phase of our strategy which is to start expanding the business geographically.

Has most of the growth to date been organic or acquisitive?

Interestingly, I think it has been evenly split. We clearly built the business from nothing to where we stand today and roughly half has come from organic growth. Acquisitions were there to build a business. That should be understood because realistically there was no business in place – there was a technology. We wanted to build a business with certain attributes and capabilities, which we did through acquisition. If you look at a typical offshore project that we execute today, it involves almost all of our different business segments at some stage in the project life cycle. We sought to build synergies across business lines to essentially produce the equation that “1+1=3.”

We have managed to achieve that in a short span of time despite the global financial crisis. Our two years of operating in 2008-2009 were very good as we built the business and built it profitably. This year, in the aftermath of the global slowdown that has hit all subsea companies with global leverage, our business has managed to continue to build its pipeline of opportunities.

What are some specific examples of projects or clients that have benefitted from Neptune’s model and utilized its full suite of integrated services?

Apache Energy is a good example of a closely built up relationship in Australia. They were previously a customer for diving and engineering but today use our whole portfolio with the exception of underwater welding.

A second example is ConocoPhillips. Their Bayu-Undan facility was a diving and survey client and now we do their full inspection program, which we just finished this year. That involves all of our services, again with the exception of underwater welding.

We announced back in December that we won a three year contract with Qatargas for their annual inspection program. Once again we won because we were technically differentiated from the local companies and competitors in terms of service offering and because all of our businesses were able to integrate across a single platform.

Looking at it from a customer’s perspective, what helps them manage a project? Reducing the number of subcontractors on a project. Instead of managing six different subcontractors, they are managing one which has the same aspirations, goals, and standards that they can appreciate. On any subsea construction you have the vessel owner, the surveyors, diving companies, and ROV operators. Quite often they are all different companies. We have one project management team and everyone is part of the same company. There are no competing objectives. We think that is a tremendous capability that many, but not all, clients are looking for. There is always the case where a client will take what they perceive to be “best in class.” But companies such as Apache and ConocoPhillips want to partner with an organization that they can depend on for a suite of services. That is where we aim to fill that gap, particularly from an engineering perspective. In practice, our role is to understand what the client is trying to achieve and provide that solution instead of the service as a means to the solution.

One of the advantages of Neptune is that we can look at a project and if, for example, we do not have a vessel in our fleet we can source it from the market. We are not necessarily forced to use our fleet. Our focus is on applying new and insightful ways to deliver a program. Rather than telling a customer what they need to do, we can design a solution based on our internal expertise and reduce time frames and costs in the process.

How many more functional areas does this company need to grow into to round-out but still sustain a value amongst its portfolio of solutions?

I do not think that there is a lot of deviation or diversity to come. The growth from this point on will come from scale. We will offer the same suite of services, but “super-sized.” What we have now in Australia are all of the services that we generally require. There are probably one or two that we have in Aberdeen but do not currently offer here; so there is scope to grow organically here and still have a full suite. In Aberdeen, the US, or Asia, we offer less than half of our full capability because we have not expanded those service segments yet. Realistically we only started a year or so ago so much more is still to come.

For me it is not about what else we need to offer. By and large we are in the space where we want to be. It is now about scaling those opportunities in the key offshore regions. It is about how to look at the US and what we need to do there as well as Asia, West Africa, the Middle East, and Brazil. It is an amazing opportunity because the one technical fact that is not going to change is that more and more infrastructure is going into the water. Once it goes into the water, it rusts and deteriorates from Day One. That fact is coupled with a trend amongst oil companies today to reduce production costs which sometimes requires tying in marginal fields with existing assets. Therefore, because those assets are being asked to go beyond their originally designed life, we have looked at life-extension programs of existing assets for several projects. Also, oilfields generally tend to last a bit longer than thirty years ago because of changing reservoir technologies and enhanced completion technologies. Once again it gets down to a fixed asset in the water that is subject to deterioration from a range of environmental factors.

You had mentioned the Global Financial Crisis (GFC) earlier. Several subsea and marine services companies we have been meeting with have described themselves as insulated from the crisis because of the proliferation of Australian energy projects and the insurance of long-term contracts. Did Neptune’s European and North American acquisitions expose the Company to the crisis in a way that domestic Australian were immune to?

The GFC had the impact of reducing investment spending in oil and gas development. Worsening economies means that demand for oil and gas changes. Adding to that, the US market, which a lot of LNG projects were geared to support, found a new supply in shale gas. So you have production oversupply and a worsening economic climate. Nobody was insulated from the GFC.

The Australian oil and gas market, given its steady growth last year and this year, has certainly become more competitive. I do not think anyone was immune to the crisis. Different parts of a company’s business have reacted differently to the crisis. Companies with exposure to Asia, the US, and Europe will definitely feel an impact since those markets have slowed. Here in Australia our business has definitely strengthened during the GFC, but just strengthened in different parts. Whereas last year our Asian and US businesses were our superstars, this year it is Australia. But the Australian environment is becoming extremely more competitive. There were half as many competitors three years ago as there are today in this industry. A company such as Mermaid Marine is a classic example. Part of their Achilles Heal in the past was their Dampier supply base; now it is their cash cow. Strategies that were frowned upon in years past are now superstar growth drivers. We have seen the same thing in an emerging company.

In areas that are still robust – Brazil, West Africa, and Australia – activities have remained solid. Because Asia was slow we shifted focus to the Middle East, which is already paying dividends. For us, that region represents our largest opportunity.

Your largest opportunity even over Australia at its current pace of growth?

Yes, one of the things that I am intolerant of is people saying that Australia lacks the people, technology, know-how, or expertise as the Gulf of Mexico or other regions of the world. That is not true. Australia has a fantastic education system and most of the industry here – myself included – have either come from those regions or have worked there and repatriated. It is rubbish to suggest that we do not lead the world in technology or adoption of technology. In many cases we lead the charge. When a young company like Neptune goes to the Middle East, our focus is on technically differentiated solutions, not a commodities offering. We have a real opportunity to put first class assets in the Middle East and partner with the national oil companies the same way we do in Australia.

Where, then, does Australia sit on the value chain of the global oil industry and its service technology? With, as you say, many industry leaders moving here from the North Sea or the Americas does Australia play the role of importing know-how and technology, enhancing it, and re-exporting it to growing regions? Is that the process and cycle as you see it?

Australia as an oil and gas province was a speck on the global marketplace and in some instances still is. When you think of the infrastructure and investment here in Australia it sort of pales in comparison to already established regions such as the Gulf of Mexico, West Africa, Brazil, and Europe in terms of number of wells drilled every year, number of platforms, and fixed employment, etc.

But what has happened is that LNG, particularly the Gorgon project, has put Australia on the map. We are talking about possibly being one of the top two LNG producers in the world. That could happen. It could also very well not happen. We certainly do not have the second largest reserves of natural gas. From a reserves perspective Russia certainly has more than Australia as does Iran and maybe even Nigeria.

Yes, but Australia has the advantage of accessibility of reserves. Russia’s newest and largest gas fields are practically in the North Pole.

It is not only accessibility; it is the cost relative distance to your marketplace; and Australia’s historic identity as a good place to invest because of a profitable return and fairly low sovereign risk.

This is why I think the Resources Super Profits Tax was such a silly idea. It does not affect the petroleum industry because we already had the resource rent tax regime in place. But it does affect investment by giving the perception that Australia’s sovereign risk is increasing because the government can just change its mind and retrospectively tax projects. I was disappointed because Australia is one of a few stable economies with steady growth. There is an enormous amount of foreign investment coming in. Any government that seeks to add uncertainty to that business environment is crazy.

Furthermore, I am a big fan of Lord Brown of BP and an admirer of what he was able to do with BP in shifting their focus and growing their business. He once said that the government’s role is to build a box in which business has to grow. But the government cannot build that box without the input of businesses because businesses know how to generate efficiencies and profit far better than government. That is an absolute fact. For our government to not even consult the industries that they were going to target was an enormous mistake; and it cost the Prime Minister his job, in effect. Once again, it has put a question mark over Australia with respect to sovereign risk.

An already inherent risk that we have here in Australia is that it is not an easy place to operate. None of our infrastructure is close to a large city or port. Karratha is one example, but that is just one port. If you are going to do something, you will generally have to build the infrastructure as well. Second, we have the reputation of having a fairly “robust” industrial relations environment. These have always been the concerns with any investment in resources in Australia. When you start thinking about the tax and if it is a big deal there are a number of things that add to the equation and hence why I think the Resources Super Profits Tax was a very poorly thought out program. Certainly the communication and involvement of industry was sub-standard.

Regarding BP and Neptune Marine Services, as CEO of a subsea company, how do you look at the Deepwater Horizon incident and what lessons do you extract from it?

It was an unfortunate event that in all likeliness could have been prevented. What will happen is that the industry will take a good hard look at itself. These events tend to galvanize the industry. Twenty years ago Piper Alpha fundamentally changed the way we operate offshore. This will be another game changing event with regards to the checks and balances of the industry’s operating procedures and how much resides with certain individuals; because the risks are enormous.

Looking at the number of deepwater wells drilled over the last few years, the number of accidents that have occurred is next to nothing. However, it is a tragedy because it is something that could have been avoided. It will force the industry, particularly in the Gulf of Mexico, to examine its regulatory environment with respect to asset integrity and the risks of deepwater drilling. Yes, it was a catastrophic disaster and needs to be seriously looked at and avoided. I think it will certainly improve the regulatory environment not just for drilling but with respect to asset integrity which I believe needs to fundamentally change in some areas.

The incident proved that it could have happened to any operator and, additionally, exacerbated to the extent that it has been because of outdated safety procedures. What impact then will this have on the safety culture in Australia?

The oil and gas industry in Australia has one of the better safety records of all industries. To use a simple example, when we bought the fabrication company, Link Weld Engineering, it was operating with a Lost Time Injury Frequency Rate that was worse than the national average for fabrication services. Now we have brought their rate in line with the broader oil and gas LTIFR, which is no small feat. It goes to show that with time and attention you can change these cultures. That is very important and my concern is that if all of these LNG projects get off the ground we are going to find a number of people of different backgrounds that need to be trained under the same safety culture.

We operate on an island. We are not the US with access to a highly mobile workforce. We do not share a border with Mexico or Canada. We have a very small population (less than 10% of the US). Where will we find the workers? They will come from the US and Asia and government and industry will find a way to do that. But then, all of a sudden, we will have a large influx of people who may not speak the language and have different cultures, educational backgrounds, and expectations. I have worked for most of my career in international operating environments so I have a good idea of what I am talking about. When we try to blend them together it will present challenges. We try to operate under one culture that promotes our priorities and values when it comes to safety. When you put all the new backgrounds, culture, and expectations together, the management of the integration of all of these people into our businesses is my main concern.

Does Neptune aim to replicate and emulate its high Australian safety standards into its global group of companies?

What we seek to do is use the higher of our own standards or the standards in which we operate either through the regulatory environment or our clients. Generally, we try to have very high standards that exceed our clients. But since you are not always going to be that way, our aim is to operate at the higher level of ours standards: either the government’s standards or the standards of our clients.

With the growth of the Australian market and a host of emerging subsea markets that has taken Neptune all over the world, what are the global priorities for the future of this company?

Our second strategy session will take place later this year to form our 3-5 year strategy going forward. In a nutshell it is about how to maximize our profitable growth. From a tactical perspective it will require taking our Australian business model and making sure we successfully migrate it to Asia, the Middle East, and West Africa. We have very clear values in wanting to build this into a global, dynamic, offshore company. We are on the first steps of a journey that will take the best part of the next 5-10 years to achieve that scale, size, and reputation. We are making fantastic progress in Australia and now need to look for ways to evolve that business and brand it in other offshore jurisdictions.

It seems that you came on to pioneer acquisitions. Does that attest to a previous work experience in strategic acquisitions with Schlumberger?

Not at all. In fact, my time with Schlumberger was spent in field operations. Typically I spent time in locations whose performances were sub-standard and needed an infusion of energy to grow the business. Looking back at the various opportunities I had in Schlumberger, most of them were geared around some form of change management. We at Schlumberger did not handle acquisitions at that level so that was never part of my career there. But it had to be a natural way to grow our business here at Neptune. If we wanted to grow our business beyond where we were, we needed to have a strategy of either buying or building the parts. And we chose a combination of both of those parts.

Are there any final comments that you would like to convey to our readers about Neptune?

We started off with an idea and a vision to create a world-class service company. To date, it has been an energetic story and we are still in the early stages of our growth. When you say world class what do we mean? Ultimately, when this journey is over and when this journey is over for Christian Lange, I would like to say that we built Neptune into a premier brand in the oilfield service domain. That is my goal.

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