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Interview

with John Paterson, President, Rolls-Royce Marine

24.08.2010 / Energyboardroom

Looking at the current performance of Rolls-Royce Marine, we see that the company as a whole showed better profits than last year because of good cost control and a good trading performance of the marine business. What is making the marine business perform so well?

If you compare the 2010 to the 2009 half year results, there have been some one-off costs in 2009. Therefore, the current comparison is somewhat flattering for the growth rates which amount to around 15% at a sector level. Overall, 2010 has been an extension of 2009, showing a significant order backlog and deliveries for orders predominantly taken in the course of 2008 and 2009. The market as a whole suffered particularly in the first half of 2009 in terms of overall shipping activity, trade and finance.

There is no doubt that the industry is approaching the end of the new build cycle and as we go forward and look into the future, clearly the demand for new vessels is coming down. This decrease will somewhat be offset by a demand increase in the aftermarket. Thus, Rolls-Royce will see less demand from new build activity but is gearing up to handle increased demand in the aftermarket.

For 2010 in particular, the first half has been very strong compared to an expected decrease in backlog and increase in demand from the aftermarket in the second half. Also, the marine sector is becoming a more significant portion within the entire power systems group. Compared to three to five years ago, the marine division is now an important element within the group and has become the second largest division within Rolls-Royce.

In the meantime a key milestone has been the relocation of the marine headquarters to Singapore. In earlier statements, you justified choosing Singapore for the location, the marine expertise and the access to Asian growth markets. What are the realized benefits we have seen so far?

To migrate a global headquarters takes a long time and it will take years to really see and identify the realized benefits. Singapore was chosen because of its proximity to the markets that were already significant for the company, in particular for China, Korea, Japan, India, Vietnam and Singapore in itself. The Singapore facilities today function as the global head office for the marine business, while the operating business for offshore is still run out of the Nordics.

The Global Services business was also placed in Singapore because of the talent present in the market here. Since it has only been a year to migrate some key executives from Europe and the UK, it will take more time to further develop this relocation. Singapore is also particularly important for Rolls-Royce’s aerospace business. Singapore is developing into a hub for Rolls-Royce where the company aims to place more of its assets and resources. At the end of the day, it is not about the activity that is maintained or carried out in Singapore, but rather about coordinating the global business from Singapore.

It is public knowledge that Singapore is a very convenient and well-run place to conduct business, with airport access, good logistics and so on. From a corporate point of view, this was why Singapore was selected. Traditionally, the business was run from the Uk and the Nordics where a large part of the offshore side is still clustered. Over time, Rolls-Royce hopes to see a similar cluster arising for offshore and marine in Singapore.

You mentioned the strong aerospace opportunities in Singapore. When we met with Brian Townsley of Swire Pacific Offshore, he commented that his division can draw on the expertise of Cathay Pacific Offshore, also belonging to the Swire Group. To what extent can Rolls-Royce Marine draw on the different technologies and expertise within the group and do you have any particular examples?

The offshore and marine sector is only one part of the group, since the more traditional Rolls-Royce technology in Marine is predominantly oriented towards the naval sector. Rolls-Royce’s technology for its naval and marine solutions has historically been gas turbine-orientated. From a technology point of view, most of what is being done in commercial marine was acquired with the acquisition of Vickers in 1999. Thus, a lot of the technology that is relevant to the offshore industry is not historically contained within the Rolls-Royce Group. In spite of this, as part of a larger group, the marine division can draw on the group’s skill sets in project management, systems integration, processes and so forth. In addition, Rolls-Royce has the ability to support and manage long-term contracts and customer relationships. These elements form the DNA of the company.

More recently and particularly related to the offshore segment, Rolls-Royce has recently acquired ODIM which added significant expertise for a number of functions covering a broad range of support such as IT systems, project management, access to geographic markets and the power of the brand as a whole. This illustrates the fact that a large majority of technology for the marine business came forth out of acquisitions. Another example is the diesel engine technology coming from Bergen. The marine division is a recent addition to Rolls Royce and while the naval gas turbines have been operating for 40 or 50 years, the newer technologies have been specifically brought in to address the offshore sector.

Today’s vessels carry equipment of various manufacturers. At the same time, owners and operators are increasingly asking for one-stop solutions of one reliable manufacturer. How can external growth through acquisitions such as ODIM contribute to providing these more complete solutions?

The ODIM acquisition is enabling Rolls-Royce Marine to address some newer offshore-specific markets in the same way the company has been addressing the traditional anchor handling market. The UT design together with the onboard technology combined with what has been acquired from ODIM, will enable Rolls-Royce to address new markets relating to activities such as seismic, subsea and E&P.

A typical Rolls-Royce designed offshore vessel has something between 50 and 60% of its value attributable to Rolls-Royce. This covers different aspects from the design authority through to the propulsion, deck machinery, DP and so on. That model enables the company to provide a level of support to the customers that is unique in terms of the scope of services provided. The ODIM acquisition gave the company additional capabilities to translate this model and enter new markets, particularly seismic and subsea. The overall long-term service agreement type of concept which is quite common within the aerospace environment is still relatively new in the marine sector, but nevertheless applicable in certain areas. Again, the parent group has the expertise and experience in managing these long-term service agreements, referred to as Total Care within Rolls-Royce.

To better support and service your customers, you also have numerous service centers of which five new ones were recently established. What is their role and what elements do you look for when choosing the locations?

Unlike in the aerospace industry where you can get the engines off-wing and send them anywhere, in the marine world we need to be close to where the customers and the vessels are, which could be any place in the world! Clearly, developing service centers in key locations is critical. Six centers have recently been established (last year, across North and South America, Europe and the Middle East)while more are planned for Poland, Hamburg, Namibia (this year) etc. in order to service some of the key offshore support markets.

At the moment, the emphasis for new centers has largely been around the offshore requirements where in terms of service intensity, it is the most important element of the marine portfolio. These vessels are used 24/7 and have a very high downtime cost. In order to be able to respond quickly, to repair and maintain vessels requires an elaborate network. Most of the locations such as Rio de Janeiro in Brazil and Galveston in the USA have been around key offshore markets. This has been one driver, but certainly not the only one. It is imperative for Rolls-Royce to provide a network for all its customers.

With the industry moving more towards deepwater environments and harsher climates, how will this affect assistance in remote locations?

The trend that E&P is being driven into more harsher environments is likely to continue. At the moment, those locations are still served by onshore facilities. Rio de Janeiro will be supporting a huge deepwater market while Rolls Royce has also opened facilities in Saint-John’s in Newfoundland for example. As the Arctic opens up more, it is not hard to imagine that places such as Saint-John’s will develop in a similar way as Aberdeen has done in the past. Rolls-Royce simply needs to ensure it can offer the support where the customers say they require support.

Robert Magnussen of Berg Propulsion mentioned the importance of offering fit for purpose solutions. To what extent do you include the customer in the design and production phases?

The customer is a very important part of the design phase and one of the strengths of the offshore division is that Rolls-Royce is located near significant customers who have traditionally been operating in more challenging environments such as the North Sea. These are the more demanding customers in terms of vessels types, sizes and so on. The whole process of design both in terms of vessel design as well as the supporting machinery etc. is very much done in conjunction with the customer. This is quite a unique relationship in an industry that is dominated by innovation and technology to enable operators to explore harsher and more complex environments while at the same time, the industry also requires a great deal of safety and regulation.

With safer deck operations for the offshore simulator, Rolls-Royce participates in a joint-venture with a customer base that tries to design out hazards on deck. This is quite a unique partnership compared to some other industries. If there is a tender of one of the big oil companies for a charter and there are a few of Rolls-Royce customers, the shipowners, competing for that tender, one can rest assured that the industry will come up with different solutions to solve the same problem. Rolls-Royce needs to be able to accommodate these differences and come up with positive, innovative, better and improved solutions.

One particular trend where Rolls-Royce can also be an innovator is in the field of greener and more cost-effective solutions. What is on your agenda to realize these ambitions?

Within the marine space, Rolls-Royce is a technology leader. Leadership and technology tends to drive to more efficient solutions, while efficiency and going green generally also work in the same direction.

Looking at the traditional diesel propulsion, Rolls-Royce has been active in developing solutions around hybrid and diesel electric propulsion as well as LNG-powered marine gas engines. Specifically for the gas engines, Rolls-Royce Marine is currently a market leader. The decreased environmental impact of these engines in NOX and SOX is significant and it is clear that the gas engines will enable the marine sector to significantly reduce emissions, particularly for operations in harbors and coastal areas where LNG fuel support systems can easily be put in place.

On the propulsion side, Rolls-Royce has been actively working on PROMAS which is an integrated rudder propeller where significant propulsion efficiency can be gained, directly benefitting the environment. Technology and the environment go hand in hand and Rolls-Royce is working hard to make major contributions in the areas it is active in.

Before being so involved in the marine sector, you were pursuing a career in the aerospace industry. What have been the main challenges to move from one sector to the other and to what extent have you been able to draw on your previous experience to apply it to the marine business?

There are some clear parallels on the part of aviation where I have been involved. I was responsible for the worldwide services business within the aerospace segment. Clearly in marine, as the industry goes through a large new building boom with approximately 650 UT vessels out there, this fleet needs support. Rolls-Royce therefore has been working hard on establishing a services footprint.

Personally, it has not so much been the aerospace background but rather the experience gained in running a global services business that added value. Other overlapping topics have been the long term service agreements and through-life support. Clearly, the naval business can also build on some of the technology from the aerospace division, predominantly because of the gas turbine orientation and a similar customer base. Apart from those elements, there are not that many synergies between these two divisions.

Both from a services and original equipment perspective, the marine world is more fragmented and constitutes a business that cannot be run from one point on the map but require a global presence. My experience therefore rather comes from running a number of geographically dispersed businesses.

Since your appointment, what have been your ambitions and what is left to achieve?

In this line of business, the goals always keep changing and usually become increasingly difficult each year. Looking at the overall results of the marine business in the last four years and putting this in perspective with the buoyant marine industry, the marine division can be very satisfied with what has been achieved in this short space of time.

The goal of Rolls-Royce today is to be the customer’s first choice in a wide spectrum in marine. Rolls-Royce is probably the number one in terms of portfolio breadth and now has to consolidate on this to develop a truly world-class services organization supporting the original equipment business. This will further enable the company to use the available technology around us to engage in various initiatives for more efficient and greener solutions.

Further to that, Rolls-Royce aims to continuously challenge itself from an R&D, innovation and technology perspective.

The offshore business in particular requires more complex solutions and is an area where Rolls-Royce will keep building on its position to grow the other divisions.

The merchant business will also grow its turnover from smaller cargo vessels, ferries, tugboats and so on and will see an increasing use of gas engines. For the more traditional naval business, the goal will also be to secure a significant gas turbine platform. Rolls-Royce will also keep looking at gas turbine propulsion in particular for large LNG vessels, which has been has been on the agenda for quite some years now.

Do you have a final message to send out to the readers of Oil and Gas Financial Journal?

Rolls-Royce Marine is an important part of the industry. Despite not being core oil and gas, the company can support the industry in many areas. Rolls-Royce aims to build on the technology it has developed and the reputation it has build to remain an important part of the industry in the years to come. As the company faces more and more technologically challenging environments, Rolls-Royce will keep working closely together with the oil majors and the different shipyards and shipowners to support the industry. Rolls-Royce is here to say and will keep building on its technology and expertise to grow its position worldwide.

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