with Gary Smart, CEO, Tendeka Norway
Three years ago, you were working as the group vice president of Weatherford, what attracted you to take on this opportunity with Tendeka?
Tendeka provided me with the opportunity to take a different approach to serving the completions sector, Tendeka saw a gap in the market where there were not many mid-sized companies focused on completion; you tend to see many low-cap companies with a strong technology and service orientation serving their local market and large players with a global footprint but less completion specific focussed due to their extensive portfolios across multiple sectors. There was virtually no completion-focused company in the middle, combining a global footprint with strong integrated technologies and services. This was the idea behind creating Tendeka.
Tendeka was therefore incorporated in 2009 though the merger of three companies. The integration of these companies allowed them to progress from being product sellers, which is a restrictive market for the larger international bids. With greater capabilities, more people and a wider geographic footprint, we were capable of being a systems and product provider. We then augmented the merger with two acquisitions giving us a software capability with the first and a sand screen and inflow control business with the second – the technology which recently won the business with Statoil via our Norway entity acquired via Well technology AS which was predominantly a wireless business
Especially after the last two acquisitions we were positioned in the market as a completion systems service company with a set of competencies across the reservoir. With our global footprint we could tap into a much larger international completions market, whose size is around USD 8.5 billion today. As a product seller, you are addressing around 10% of this market, if you have a systems and services capability then, this grows to around 50 percent. The merger and acquisitions therefore grew our addressable market five-fold and this was the main reason we did it.
In the first year, we did not really integrate the three founding companies and instead we tried to assess where our market capabilities lay. It was only in the latter part of 2010 that we fully integrated. An integration is not a checklist conducted over a specified time, you have to move together at the right time and as a smaller company we had more flexibility at the pace that we wanted.
Not all of the integrated companies were involved in services before the merger. How successful have you been in reorienting their business model?
We have a classic service company matrix with regional hubs, and business units which run the product lines, with the profit centres are the regional hubs and the cost centres as the business units. Prior to developing these business units we had distinct companies which we converted into product lines. For example, we had a zonal isolation company and we bought the sand screen and inflow control company. Zonal isolation is a straight product and when you add the sand screens it becomes a system. The sand screen company had people with reservoir engineering capabilities and the swells company had the global footprint of sales offices and business development. Together they formed a completion systems business simply by adding the two companies together.
Tendeka’s other business unit is focused on measurement, monitoring and control, with fibre optics, wireless monitoring, intelligent completions and software. This is very innovative business. In this case, software is more about the product sale, consulting and interpretation services, fibre optic monitoring is much more about the provision of services than solely about the hardware installation. Wireless involves services and equipment and software interpretation. Again it was a case of merging best practices between service oriented companies and product oriented companies.
Tendeka won a contract recently with Statoil for the Troll field, why do you think you were selected?
If you have good product coverage in one particular area then it is easier to introduce other services because the relationship is already established. So long as you have already demonstrated that you are a reliable provider to your client, not letting them down on quality, turnaround or providing extra support, it is a case of pulling other products and services through into your existing relationships. In the case of Statoil, one of the companies we acquired, Well Technology, which was incorporated in the Norwegian market back in 2003, giving it nearly a decade of operations in Norway, had been a provider to Statoil in development projects.
When you work on more innovative projects you have to work closely with the operators. Fortunately, many of our employees have extensive service company experience and know the Norwegian client base well including Statoil.
The Statoil deal was multiple years in the making, going through technical qualification, full audit of our processes etc. Statoil is encouraging some of the smaller players, but you also have to stand up well to the technical rigour that they demand. Tendeka is a smaller company, but we have the experience of a larger company through our staff. The equipment that we bought with Flotech is a very good industry design, originating from people with over 30 years of sand control experience. It is also helpful that Norway is a very supportive environment; it is easier to do business here and Statoil will listen to you and encourage you. There is also an increasing diversity of clients in Norway making this a good market for us.
There is often a greater readiness to try out innovative technologies in Norway. How do you see the acceptance of technology across both sides of the North Sea?
The Norwegian side does appear more ready to accept new technology. New technology is always touted as the lifeblood of the oil industry, but it takes a long time to become mainstream. I would guess a very small percentage of technologies actually becomes mainstream technology. I believe that across the North Sea, Norwegian companies are more encouraging of innovation and the State structures such as the Norwegian Research Council are ready to co-fund trials of new technologies, giving small companies better access to the market.
UK has some equivalent examples, but the market does not move as quickly. There are a lot of innovative small companies in UK as well, however in terms of uptake, Statoil will be more ready to take on board new technologies. They spend a long time de-risking these technologies with rigorous qualification protocols and we have spent several years until the prototyping stage with Statoil on our wireless intelligent completions technology.
The most significant difference between the two markets is that in UK you no longer have a strong presence of the IOCs, instead there are a lot of independents who do not push technology as actively but encourage and work with smaller companies on proven technologies. Therefore I think the take up of technology is stronger in Norway because the operator mix that you have here is different than in the UK.
How do you see the strength of the North Sea market within your global portfolio?
Within the North Sea as a whole, the UK market will lag behind Norway for some time even though the taxation system has changed. General E&P activity has been down in the UK for years and even with the tax changes, the market will need a long time before the investment is where it needs to be to reach the level it was before the recession – after all the UK is still in recession.
Norway is far less volatile, the rig count has not suffered any major dips over the last 3-5 years. This makes it strong for investment and sustained business. With the new finds, the activity level is only going to increase further. You therefore do not need to worry too much about business decline. This stable environment has allowed some of our businesses to grow their presence since 2003.
The only downside in this geography and any other when discussing new finds is that we are a completions company, so we are the last element in the well cycle. Our growth from new plays will not be immediate, but it will come; we must be long-term investors. Our focus so far has been on the mature assets and following delays on projects like Skarv we can bid on this. The large finds of 2010 and 2011 will not have a significant impact on Tendeka for several years. Their benefit is simply to prove that Norway is a strong site for investment and we will gradually ramp up our presence in Norway over the coming years, growing our competence and capacity.
Whilst waiting for the Norwegian completions market to grow in new plays, Tendeka is pushing out internationally into the Middle East, Gulf of Mexico and Southeast Asia. Why is this the right time?
Tendeka gained an international presence through our incumbent companies. The companies that do well in the UK market are exporters. There is not enough business in the domestic market to provide the growth curve that companies want. Tendeka therefore does a huge amount of business in US oil shales – we did not move into shale gas, which is actually quite fortunate given the plummeting price of shale gas in the US. Given its global growth, you have to be in the shale market and there is no fracturing in the UK apart from a couple of operations near Blackpool. Asia Pacific, Australia and China are growing their CBM resources and Russia is involved in shale oil. Our continued internationalization is therefore driven by the fact that shale is really taking off as a global industry and our technology is appropriate for shale. Fracking completion is the largest completions market in the world and we should be in there.
In conventional resources, Norway has the longest lateral wells in the world and given that we focus our attention across the reservoir, this makes it a good market for us. There is also a growth in interest for reservoir monitoring; people want to know what is going on in their wells and one of the largest markets for this is the Middle East.
How challenging is it to do a good job in rational and commercial markets like Gulf of Mexico and the North Sea as well as relationship-based, differently regulated markets in Southeast Asia and the Middle East?
Many of our staff having worked for major service companies before. Many of them have either lived in these geographies or have contacts who have. In China we have an agreement with a local company which incorporates Chinese capabilities and local knowledge. In Norway our operation is mostly Norwegian and the individual in overall charge of the technical side of operations in Norway has 30 years’ experience serving this industry.
We also move with our client base. Some NOCs like Statoil are more equivalent to IOCs and when dealing with an IOC contact in one market you can often find that they have been transferred to another market and this helps you set up there. The North Sea is a great environment for building up contacts with companies. Conversely, you find that in South America this market has a different set of clients and this makes it much more challenging from a market entry perspective.
How do you see the development in the years to come?
In the early years we were defining how we could best serve the market and manage the integration process. We were integrated by 2011 and it was then that we developed our growth strategy. Over this time, Tendeka has grown 200 percent.
Moving forward will require being in all the key completions markets and addressing the existing markets as best we can. Multi-zone reservoirs, sand prone, heavy oil, tight gas, shale oil will develop or grow further as important markets. We have a lot of scope to add to our products and systems, there is a drive for innovation sponsored by operators. We are innovating on clear client needs.
Tendeka today is composed of 5 companies, 4 of these companies, or their technologies, and systems are commercial, the last one is the wireless monitoring and intelligent completions business and the most innovative at the moment with a 5-year curve from market entry, gaining multiple clients, and going international whilst continuing to innovate. Inside 5 years we will be moving into innovations in wireless which have never been done and operators are sponsoring these developments. Inside 5 years this wireless business will be our 5th commercial success. There is also internal product development in fracturing, and although it is internal I consider it the 6th potential company. In 2014 these six companies will all contribute to the growth of Tendeka, from that point on we will look to be in all global markets. This is my prediction for 5 years but I would actually like to be there in 3.