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Interview

with Morten Tønnessen, Managing Director, Geocap AS

23.01.2013 / Energyboardroom

Prior to joining Geocap, you had a successful career as a geoscientist in Norsk Hydro E&P and later in business development for Roxar building up the business internationally, especially in the Middle East and Asia Pacific Southeast Asia. What was it that attracted you to come and join Geocap and what sort of opportunities did you see?

The main reason was that when I got back to Norway I was convinced through conversations with other Norwegian companies that Geocap had everything that the industry needed, but was something of an unpolished diamond. I was asked by the Geocap management to come in and give it a polish. Geocap already contained very strong innovators – something for which Norway is famous, in fact, Norway’s innovation and technologies also forms the backbone of huge international E&P service companies like Schlumberger and PGS Halliburton, indeed this is what these companies grew out of .

What excited me about Geocap was the prospect of coming in and bringing my expertise in commercialisation, networking and my understanding of the oil and gas business side to move this company forward. Norway has 800 service companies in oil and gas, but manyost innovative companies fall through the cracks by trying to enterjump into the market and bridge the gap between innovation and commercialization without required understanding of the market, the competetition and focus on sales. too quickly. What is really needed to get into the market against the dominating international and US based companies and get day-to-day high volume uptake of new work is technology, requires not only that is not purely research prototypes-, based, but easy to use , cost efficient and fully tested and supported solutions. unfortunately much of this sort of business has recently been taken by large American companies.

My personal challenge derived from a feeling that it was time to stop this innovative Norwegian business from simply being taken out of the country through acquisition and so I was interested in teaming up with some other Norwegian companies of similar size to show that we are not purely explorers here in Norway but that we can innovate and commercialize too and that Norwegian technology and companies is a solid foundation for sustainable and profitable business.

The IT and software industries in the oil and gas sector are characterised by an extreme lack of real competition; especially when compared to other markets like telecoms. It is notable that oil and gas only has two or three major players in software and yet billions are spent on geoscientific and seismic seismic software packages, tools and databases where companies such as and Schlumberger and Halliburton seem to be monopolising around 70%80% of this market at the moment. I believe that Norway should get back in on the action.

Why do you think that the standard model is for major international service companies to buy up Norwegian companies – is the gap between innovation and commercialization larger in Norway than in other places?

Actually Norway is possibly the best place for this gap to be bridged before moving into the international realm: if you cannot succeed in Norway then you will not be able to make it anywhere else. Thanks to the strong support of Norwegian oil companies the gap can be crossed here in a single jump and the cluster networks among these 800 companies which I mentioned are guided and tested in real life by theour customers. For example someone from TGS might sit in my office, tell me “I need this, such and such” and I can simply hop on my bicycle and go over to talk to the relevant people.

Here in Norway where the demand is so high we should certainly be able to create strong technology for seismic interpretation, databases, grading technology, well-planning, optimising production, geological modelling and mapping; this is what Geocap does. This was a big part of our success at Roxar in the Asia-Pacific region where we were able to sell niche software for $10 million annually . If this sort of technology works in Norway then it will certainly leave far behind anything that is available in Indonesia from Petronas or Pertamina.

Cost is the main concern in other markets like those of Southeast Asia, but smart Norwegian companies are learning how to set up small, lean and mean teams for the innovation side and partner and outsource to where labor is cheaper. In our case, we have a team of twelve talented staff in Norway and all the testing is done in China where weI have 30 people with cheap access to data and manpower which can be put into operation 24/7. Vietnam is the same, people there work seven days a week and so we are able to produce software which is competitive.

In this office we have eight developers which, if you believe the literature, is often the optimal size for a high performance software development team.company. Any software team company with much more than five developers is likely to be less productive.o go downhill fast. That is why we run a tight ship here and you can see this across Norwegian companies – a big part of our success is based on the ‘small is beautiful’ philosophy.

You say you bring business development experience to the company. and you mentioned the offices you have in China and Vietnam for testing. What was the situation like when you joined the company?

Geocap was one of those typically innovative companies which wanted to do everything itself – to come up with the idea, develop it, test it and then sell it, as though it did not trust anyone else. Companies like this often have an imbalance between what I call the farmers, fishermen and hunters, between nerds and non-nerds. Unfortunately Norwegians are not like the Swedes – whothey have a better standard of business education and culture – but Norwegians seem happy just to come up with these brilliant ideas but then to go home and straight out to their cabin in the mountains without caring whether anyone actually buys the product. Our thinking is often: “Why should I care? I’ve just made the best product in the world and there are other important things in your life – family, kids, sports – so I leave the office at 3pm and enjoy five weeks’ holiday a year” and leave it to someone else to sell what I’ve made. . This is why we need to be cooperating with people who can fill the commercialization gap; you can hardly not even run a support desk here in Norway without paying people triple salary because of the overtime laws. This is why we need to start doing things a bit differently if we want to be a part of the international game.

The Norwegian market is big, but not big enough if you really want to make your company something significant. This is another trap Norwegian companies fall into: they become complacent, pleased to have Statoil as a client and then they just sit there supported by the funds from software sales and recurring maintenance revenues. Such companies do not bother marketing or promoting themselves and they see no incentive to do this for as long as they can happily make their $200,000 or $300,000 salary. They simply resist moving on to the next step and grow the company.

Those who do break the mould, however, often go to the other extreme. Companies like Petrell list on the stock market and become successful there, but then the financial people take over completely, they often kill innovation and then they realise that all the strong talents have left the company and they have no choice but to sell to the international service companies. That is when innovation often dies as a result of big acquisitions; people leave and start up their own companies. Schlumberger and Halliburton have done it this way but Wwe Norwegians need the opportunity to innovate freely so if we are not given that chance -, then we start our own businesses. When a company undergoes a big acquisition you see ten new companies popping up the next morning.

So this market is more or less impossible to consolidate?

That is right, Norwegians cannot be held down, we take the money from the larger companies and then put it right back into starting to follow our dreams all over again – that is how it works.

If that is the case then how are you going to avoid making the same mistakes, what is the secret of maintaining this innovation?

Sooner or later a large amount of money is almost certain to come along and sometimes you are not going to be able to say no, you have to move on and start again with this money. Nonetheless, it is very important to consider who is behind Norwegian companies like Geocap – who are the shareholders? This is particularly important for me as in the case of Geocap the company is owned exclusively by its own employees. This means everyone is following the same dreams and together we are able to say to any potential acquirer that in fact the company would prefer to do things its own way. No one here is dreaming of being part of a big corporation and if that happens then everyone would simply cross the street to some other company. As a manager you want to hold on to people so you incentivise them by paying them well and allowing them to determine their own goals – you challenge them by putting demanding clients in front of them and they come up with the goods. In this kind of situation people will not leave for big money. If they are run properly, small Norwegian companies do not see many people jumping ship.

Growth is often its own incentive and access to easy capital from the equity markets is often the fastest way to grow. Geocap however takes a relatively conservative position by saying that it will only take money from investors you trust. How do you then generate fast growth?

As I said Geocap is seen as something of an unpolished diamond, but polish is all it needs since it has already been cut. This fact will become more and more visible now as Geocap enters the mid-leagues of companies and becomes more prominent. From that point on the difference is made by whether you are able to take things on yourself or whether any of the bad guys in the financial world are allowed to get too close. Many of those I have read about in previous editions of Oil & Gas Financial Journal are of the same way of thinking.

Within the industry there is a lot of communication regarding how to build strong alliances between Norwegian companies. Funding is not where the problem lies since that is readily available. It is more in the area of overlap where work is needed: smaller Norwegian companies do overlap too much on the administration, marketing, sales and distribution side of things so we can all benefit from coordination and partnership on this. Norwegian companies need to be left alone by the big finance sector, but they also require a new interface. Part of Roxar’s success came because it was a group of eight or ten companies acquired during the 80s and 90s which made up the company. A culture of corporate pride was then laid over this. I have brought this experience with me too, a kind of Norwegian idea that ‘pride’ is seen to stand for Professional, Reliable, Innovative, Decisive and Enabling. This kind of feeling drives a lot of Norwegian businesses.

How much does your experience at Roxar influence your thinking about Geocap?

Roxar’s story is interesting for the Norwegian industry; on a global scale Roxar is not especially large. On the software side the IT industry is 80% controlled by Schlumberger who have 110,000 people working on the market and are controlling it. They are a kind of Microsoft in this regard. Halliburton too get a large share, and Roxar therefore remains relatively niche in software with only a small5% global share. Yet they provide geological software for some of the most important oil and gas companies on the planet such as BP, Statoil and Saudi Aramco.

Basically Schlumberger’s product does not work at Ghawar, the largest oil field in the world. Operations on the Norwegian fields cannot be optimised with products like Roxar’s. BP chose Roxar for their worldwide operations because they wanted to do something different from Chevron and Shell who do not use Norwegian technology. The other big part of Roxar’s business is their multi-phase business where they claim to be a market leader. This has been the case in technology until recently, but competetition is tough in this market. although in this area the Chinese are moving in and putting together better devices than I have seen made in Norway. The domestic production side of things is getting harder for all Norwegian companies due to the strong Norwegian kroner and manufacturing and assembly has to be moved to low cost countries overseas. – more or less all assembly has moved to Romania, India and elsewhere. In these conditions Roxar has done well to hold onto a 30% market share in this area and it is a big business. The company was valued at around $500 or $600 million when Emerson bought them. Of course since then many talents left the building… I am determined to keep the innovative mode within Gecoap.

At the Operators’ Conference in Stavanger several speakers were mentioning the innovations in geological imaging as the principal game changer over the last five year. How do you see Geocap’s role in this context?

This is exactly the area where Geocap will be taking the lead. Before any E&P exploration and operations begin, the opening up of new acreage in the Arctic and other frontiers in Africa, Ocania, Asia and South Americasuch as the Horn of Africa, Brazil, Tanzania and the Antarctic, requires delineation and is a joint process between nations of the UN. There are really only three companies worldwide with UN approval for what is called shelf-delineation of which Geocap is one, one is a Canadian company, one a Danish company and the third is Geocap. This is why when the previous foreign minister Mr Støre signed the agreement between Norway and Russia with Vladimir Putin, the map behind him was a Geocap map. Geocap , in cooperation with Grid Arendal/UNEP calculates the limits of the borders between China and Vietnam, around Australia and Indonesia and between all African nations, in Oceancia and Americas. This is why two of Geocap’s employees have just returned from the Bahamas, two are currently in Sydney, and there have also been recent visits to Uruguay, Chile and Argentina. We also fly regularly to the UN in New York to speak to the commissioners involved in the UN Law of the Sea (UNCLOS) who draw the lines. They are using 27 Geocap licencees trained by us and all projects submitted to the UN have to use Geocap software, and this is all well before oil companies are even close to starting production. During that preliminary period we take seismic datameasurements, map out the seabed, look for offshore minerals and oil and gas possibilities. This is why also seismic companies such as TGS and PGS follow close behind us and use Geocap software. s because we have this advanced technology for scouting and exploring for example in the Antarctic where old-fashioned Schlumberger products no longer work. Scouting and initiating challenging seabed and subsurfacemapping like this requires automatic scanning through gigabytes of data which is why our technology is so important.

Production in areas like this will be very complex so for this kind of work one requires an understanding of the seabed, of infrastructure and pipelines and this is why we are one of the two leading companies in sonar and seabed multi-mapping worldwide. We can comfortably map out anything from rivers in Italy, or the seafloor in Korea, Taiwan, China for future development of pipelines or indeed for anything anyone wants to place on the seabed. For this you need a map and an understanding what is underneath the seabed so that your structure sits safely on good foundations. We also work with companies installing some of the largest offshore wind farms between France and the UK. They are using Geocap technology because when placing windmills out to sea you need to make sure they are safe and positioned in the most optimal locations. will not fall over. A lot of calculations are involved, and that is geoscience. Geocap’s vision is to bridge the gap between GIS and subsurface technology going forward. services.

Your business is split between oil and gas companies and government clients. What is the balance?

Our largest clients are governments, though we deal with many of them through the UN system – as we do not deal with Oceania nations like Tonga or Tuvalu directly. In South America and Europe we can deal with governments directly, but elsewhere in the world we go through larger organisations. In the UK for example, we go through the Commonwealth. We also work through DOALOSualus, Geosciences Australia and Australia Aid – these are the organisations which put this technology into force and train the staff as part of a submission to the UN. We basically help these organisations to create the best possible presentation to really blow the UN people away. We provide a full 3D presentation zooming in to the country in question and its sea territory and borders, detailing what neighbouring countries will want to claim and documenting everything in movie form and calculated down to the last centimetre. This is perfect for the busy staff at the UN who do not want to have to deal with lots of paperwork.

Such precision is a huge improvement on how things were done before and is becoming more important. Look at the recent news stories about the disputes between China and Japan .and Malaysia and Singapore. In the old days a line just used to be drawn 200 nautical miles from the shore. Norway did this and actually managed to get one step ahead of the Danes by taking Ekofisk. If the lines were redrawn today according to modern UN regulations, Norway would possibly lose a lot of resources to the British and the Danes.

The next big border dispute seems to be in the Arctic, something we have seen recent evidence of with Russia laying their flag on the sea floor. Do you see Geocap becoming involved in this charged situation?

Geocap is already getting a lot of calls from the Russians, the Japanese, the Canadians requesting software and support. One of Norway’s great advantages in this sort of situation is its neutrality since it means we are essentially seen as non-political in this process. This means that anyone making claims in the arctic turns to us. Geocap itself does not provide data favouring one side or another, it merely provides the technology to allow others to put together claims, for example in the Arctic. This has to be the first stage and no Norwegian company is going to be able to step in an drill the first well there before the borders have been set. This is the next big challenge and Geocap is involved in this right now. The next people to get involved are the seismic companies and we work with TGS and PGS who shoot the first seismic line and collect survey data and map it as quickly as possible. Then that information can be put in front of the decision-makers in 10,000 oil companies across the world to see if they are interested in investing in drilling under the ice. Geocap is keen to be a part of this and is focused on exploration – this is significantly different from Roxar who are more involved in optimisation.

Geocap’s exploration focus s take us it to places no one has imagined could have anything to do with oil and gas. The company currently has two employees in working in Sydney for the Deep Sea Minerals Conference because Geocap is also exploring for these, along with anything else of value such as gas, fish, minerals and even shipwrecks with gold on board. It is a broad market which is why Geocap is teaming up and working closely with the largest GIS companies like ESRI /ArcGISArcGIS and others.

Finally, to follow on with the analogy of the company as a diamond being polished, with the projects currently being undertaken by Geocap when are we likely to see it in a fully polished state?

As I mentioned I joined the company six months ago, although I of course have been in the industry for 25 years. This is a profession for me and I find myself still feeling energised by it. In just six months Geocap has seen a big transformation which is to be followed by a significant new release in the second quarter next year. This, if it goes well, will be a very important step for the company. Geocap still has a long way to go as a company. Roxar took five years to turn around in the Middle East, but I am confident Geocap can have the same success.

What would be your final message to our readers?

As the previous Prime Minister of Norway Mrs. Gro Harlem Brundtland once said;, “Llook to Norway” , because great things will come from here in the future

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