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Interview

with Fernando Martins, Vice President – Latin America, GE Oil & Gas Brazil

21.06.2010 / Energyboardroom

In Latin America you’re responsible for all GE’s Oil & Gas portfolio including VetcoGray that was incorporated three years ago. Can you highlight some of the actions over this consolidating period and what the challenges have been?

GE Oil & Gas is built on over 160 years of combined experience, initially in compressor manufacturing. To give you an overview: in 1842 a company named Nuovo Pignone was established in Florence, Italy as a cast iron factory that began the design and manufacture of compressors in 1901. In 1994, GE acquired a majority shareholding and began to expand the portfolio offering, initially with the formation of an aftermarket Global Services business in 1997. GE Oil & Gas became a stand-alone GE business in 2005 and widened its portfolio across the entire oil and gas value chain with the acquisitions of VetcoGray in 2007 and Hydril Pressure Control in 2008, and also the realignment of Oilfield Technologies (OFT) from GE Energy in December last year.

Today, our turbomachinery division supplies turbine and compressors worldwide, including for LNG applications and offshore production platforms. We also provide equipment and services for the downstream segment, including refineries and petrochemical plants.
Our Drilling & Production business – that combines VetcoGray, Hydril and OFT – supports the upstream segment, particularly in subsea.

VetcoGray is a leader in the supply of subsea trees, risers, wellhead systems and subsea controls. In addition, VetcoGray also provides Capital Drilling Equipment, floating production solutions and land flow control solutions.

Hydril is also a well-established brand with leading drilling technology, including blowout preventers (BOP).

Both companies have deep domain expertise and are now fully and successfully integrated into GE Oil & Gas. We are driving major synergies and benefits for customers through reliable innovations, the cross-fertilisation of engineering expertise and efficiency initiatives such as product structuring.

Before being incorporated into GE Oil & Gas, VetcoGray had been under the ownership of a private equity group who may have lost sight of the technology and as a result VetcoGray lost some of its position in the market. How are you turning this around?

Obviously we saw in VetcoGray a business that was really attractive but that needed urgent investment, especially in people and in R&D. The metrics of a private equity investor are of course very different from the metrics of an industrial business like GE, so we immediately saw huge potential to build on the business’ inherent strengths and to multiply them by implementing GE’s world-class standards in organisational management, supply chain excellence and pioneering technology incubation. VetcoGray has really risen to the challenge and is delivering consistent results for our customers and for GE’s shareholders.

Under its previous ownership VetcoGray was a conservative company with a hierarchical structure with many people reporting to one at the top. GE is much the opposite: it’s a functional organization requiring a lot of collaboration, networking and proactive teamwork at every level.

Each time you go to extremes you’re going to encounter some complications and we made the conscious decision to go from one point to another. When GE acquired VetcoGray, the entire Latin America region was run from the U.S, with all the Regional/Global leaders sitting either in Houston or in the U.K. Today VetcoGray is localised with business expertise in country and the region and has a much more customer-focused and customer responsive business. The culture is entirely consistent with that of GE – we have worked hard to change that and to become one company. Our global leaders are well connected into the region and see a strong local presence as vital to our future long-term success.

With such differences internally, how does the customer see you today? Are you two different pieces or are you GE Oil & Gas?

I think that customers and the market are starting to see us as one integrated company as these changes take effect. For example, our major customer Petrobras is a very specific customer, in that they have a number of people inside our operations, including resident inspectors under Mr. Camara’s management. These customers are in fact part of our team, delivering for Petrobras, and I believe they recognise a ‘one GE’ approach. They are aware of everything that is happening and we have a very transparent and valuable relationship. It is a great collaboration effort and I am sure this works well both ways.

Another shining star customer that we have today is OGX, from the EBX group. With the EBX group, under Mr. Batista’s leadership we are working not only on opportunities on the O&G side (OGX & OSX) but also in Energy (MPX), Mining (MMX) and Logistics (LLX). OGX is a great company to work with, and they have top-notch professionals as well. I think they already see the benefits that GE provides and the combined solutions that GE can provide.

That being said, we have been taking different approaches and addressing what we are calling PIP: People, Investment and Processes. We are already investing more than U$20MM in property and equipment, only for our Vetco Gray Sites (Mfg and Service facilities). We are revising and updating key processes and most importantly, upgrading or creating key positions, such as the newly created supply chain director position. Up until two months ago, we had sourcing, manufacturing and quality operations all reporting to a different manager so what we have done is combined the responsibility under one position. This is being implemented across GE Energy and in doing so we can attract a higher talented resource to the position. As a result we were able to attract Marcelo Soares of GE Aviation who headed the Celma facility that is the worldwide benchmark for our aviation services. We also agreed that this position would be 90% focused on the Oil & Gas business at the beginning to speed up our recovery mode, so he is playing a key role for us at the moment.

Currently, he is also helping us to expand our offerings as GE is looking to contract more land to expand our service facilities. This not only for our aviation business but to repair turbines for the oil and gas and energy segments as well. GE is the only company that have local facilities to entertain a broad array of turbines repair as our aviation business justifies the investment. No other business can justify that without having this synergy.

What is the extent of GE’s turbomachinery business in Brazil?

This division based on the foundations of Nuovo Pignone has a broad portfolio for the offshore & downstream market, as mentioned before, as well as the midstream for pipelines with valves, compressors and pumps. In Brazil, we have a field services unit in Macaé to provide technical support as well.

We started the year very well by securing some important orders and we have also gained a contract for Petrobras’ new Comperj petrochemical complex, so you can see we are serving the market both in the upstream and downstream in Brazil.

We already see a tremendous amount of growth in the market and the eight drillships being ordered by Petrobras to the local market, will require 32 turbines as well as 48 compressors. It’s just the beginning of the 28 unit plan (drillships and vessels) that has been detailed to the industry.

Just a few weeks ago we delivered two complete compression modules for the P-56 platform which are now in Brasfels’ yard but which were built at a yard we rented in Guanabara Bay. These modules are about 1,200 tons each and were a large undertaking for us. At a certain point, the building process required 600 employees. This was an initiative to increase our local content so we imported the skids but managed to make the modules with 65% local content which the Government and Petrobras were very pleased with.

We were able to bring in this many people due to GE’s ownership of another company, Granite Services that focuses on specialized workforce solutions. It’s a large advantage for us but also something the rest of the industry can take advantage of.

As you mentioned, Petrobras is a specific customer as they know their suppliers in and out. GE Oil & Gas has built a long-term relationship with the national champion over the years and while they know you’re going through a period of change you’ve also secured the largest contract for wellheads in the industry with 250 for $250 million. How have you managed to keep this relationship intact?

Petrobras has strict technical requirements and they usually asks for customized systems, which is why we don’t supply them our standard MS-700 & MS-800 systems. All of the other companies in Brazil use our standard offering but Petrobras wants everything specifically engineered and tailor made for their use. For instance, for the contract you mentioned, it takes an estimated 200,000 engineering hours for the four custom systems. As you mentioned, we have a very strong and long partnership with them and they understand that the above represents big challenges that temporarily can deteriorate our performance.

Due to this engineering demand we have to increase our own capacity both in terms of people and facilities that is why we are adding more than 80 engineers, both in Jandira and Macae, thru this year. We are also creating a group that GE currently has in the US called the Advanced Technology Organization (ATO) with the idea being that we will no longer need to do the majority of our qualifications abroad. In addition we are also creating an engineering group in Macaé where we are already renting an office while our expansion is not ready. This is all in order to prepare ourselves not only for this contract but also for the demand to come. We know it will be for even more and we want to do it as locally as possible.

Are you going to be able to keep up with the region’s demand, specifically Petrobras?

Yes. In fact, GE has all the elements to do it, considering its size, financial health and R&D leadership. When it comes to Subsea Wellhead Systems we are very well positioned and we want to keep that way. On subsea production systems, subsea trees and manifolds, for example, we have a lot of opportunities to improve. For turbomachinery equipment I think the customers already recognize the major technology advances since GE acquired Nuovo Pignone. In order to do so we need to continue to add people and increase our capacity and we are moving as fast as we can in this.

Another initiative that was communicated by GE’s CEO Jeff Immelt at the beginning of this year is the decision to build GE’s fifth Global Research Center (GRC) in Brazil. GE’s GRCs offer strong competitive advantage and contribute to continuous reliable innovation across the entire GE business. The biggest GRC is in Niskayuna, New York and employs 4000 engineers, approximately 75% of which have Ph. D’s. We’re very excited about such a center coming to Brazil and the only thing left to determine is if it will be here in Rio de Janeiro, São Paulo or Minas Gerais.

While I am personally in favour of GRC location in Rio de Janeiro we have to recognize that there are special needs to consider, other than proximity to the customers. Having qualified engineers available to join us is key as well as good available space and financial benefits, like tax cuts. We are considering the hiring of more than 200 engineers to work in the R&D facility. So at the end the decision will have to be weighted considering all the factors. We are not looking to make something the same size as what is in New York but it will be impressive and must be flexible to grow.

Several companies have mentioned that there is much more engineering talent available outside of Rio de Janeiro. As you already have a facility in Jandira in the state of São Paulo do you find this to be true?

Regarding Sao Paulo and Rio de Janeiro, I would not favour one compared to the other. We have very good universities at both states and we also have to consider that is easier to convince someone to relocate from Sao Paulo or Minas Gerais to Rio de Janeiro than the opposite.

Another thing that impacts our industry, despite of the state, is that there is a clear lack of engineers in the Oil & Gas market because there are two industries that hire the best talent: consulting companies and banks. I obtained my Bachelors at the Military Institute of Engineering here in Rio de Janeiro and one of my sons is there today. What he tells me is that things had not changed over the years. It can be hard for an engineering company to compete with these industries at the starting salary level they are offering, so most of these graduates are going after jobs outside our industry.

Today, we’re starting to go to the universities to promote GE and show how many businesses the company is involved in so that they know they have the opportunity for a diversified and more balanced professional life. They know that if they get sick of oil and gas they can move to healthcare, aviation, media or even finance; these moves are common within GE.

With so many people looking for talent, what’s to stop your competitors from coming in and buying these graduates off of you in two to three years once you’ve trained them?

I think the scope of opportunities within the company is one of the best points. Engineers look for opportunities to discover new breakthroughs – GE is a wonderful company to provide the scope and resources to be able to make breakthroughs in many areas of engineering. All of the people within the GRC have the freedom and financial support required to pursue their chosen field of domain expertise and engineering interest.

Most of this research is not for direct business short-term application but rather the foundations of what will be available five to ten years from now. For instance, when I recently visited the GRC I saw that they’ve recently been able to replicate the surface of a lotus flower – which liquid cannot stick to – in a metal form via nanotechnology. This is interesting when you consider the potential use on airplanes that would eliminate the need for de-icing. Today this is too expensive to be commercial but such a process is under development.

These kinds of projects are very attractive for new graduates, especially here in Brazil where we don’t have a lot of companies investing in this kind of research.

On the top of that GE has great retention programs and we strive to keep our workforce happy, motivated and intrigued throughout challenging and rewarding careers.

With the talent you’re building here, do you have the ambition to take your engineers and use them elsewhere for GE Oil & Gas?

We do have this ambition but it won’t happen in the short-term because we presently have to concentrate all our efforts and resources here in Brazil. This is a very specific market, one that is not that strong in the U.S. and is only starting in West Africa.

I would estimate that for the next decade we will remain focused on Brazil while doing some niche analysis on up-and-coming markets such as Colombia which currently presents a good business environment and has the ambition to push offshore. Oil companies are already beginning to invest heavily there so it makes sense for us to look into this possibility as well.

You’ve come on board to GE to not only handle the region but also to consolidate the company’s oil and gas offerings. It’s certainly a challenge and is pointed in the right direction. If we come back in five years what can we expect from GE Oil & Gas? Will you still be here?

As I mentioned before, there are a lot of opportunities in GE and in a market with so much going on it’s difficult to say exactly where I’ll be.

I’m sure GE will be a leader not just in wellheads but in production equipment as well. Every big company looks to grow, not only organically but also through acquisitions, and GE is no different. We’re always looking at opportunities and we will do what it takes to compete fairly and with energy and to be the technology leader. That’s GE’s culture.

Do you have a final message to your clients here in Brazil?

GE took some time to realize how to play in the subsea market here in Brazil as well as how to benefit from the acquisition of VetcoGray worldwide. We have a lot of talented people, and through our restructuring we will emerge as a more integrated group than can quickly respond not only internally but externally as well. Looking forward, our customers can expect a much better and more focused GE Oil & Gas with a lot of additions to engineering capabilities, as well as infrastructure investments which will translate into a more robust operation.

I would also like to emphasize that GE is the only company that can provide the entire solution, from the downstream, midstream and top down to the bottom of the sea. Understanding the entire process is a major advantage to all our customers.

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