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Interview

with Nelson Ney, President – Latin America, Baker Hughes Brazil

27.04.2010 / Energyboardroom

Last year Baker Hughes reorganized into a geomarket structure. Coincidently you previously served as president of Centrilift, the artificial lift product line, which is a significant business in the Brazilian market. Today, what is the overall scope of operations?

We currently offer all of our services in the market from reservoir characterization to production. Our artificial lift product line, enjoys the highest market share in electrical submersible pumping (ESP) systems in Brazil, and will continue to grow as more subsea and deepwater projects develop. Of course, drilling is a big focus in the market now, given the exploration and development of the newest offshore fields. Today, we are the leading directional drilling company for Petrobras with 50% of the market share for the past three years. In order to maintain this position, we need to continue investing within the country, not only in infrastructure but also people.

Human resources is one of the biggest challenges that we as an industry will face here in Brazil. Local content is being promoted and development of a Brazilian workforce is an important part of that initiative. Therefore, we are engage in significant knowledge transfer to develop the local talent.

Baker Hughes’ Latin American operations have been outperforming the group at the global level. What is the driver behind this growth?

Baker Hughes has five geomarkets in Latin America and the growth has not come from every one of them. We have seen considerable growth in Mexico, Brazil and the Andean countries – including Colombia, Ecuador and Peru. Two geomarkets have been relatively flat in recent years, Venezuela and the South Cone, mainly driven by Argentina. In these geomarkets, the particular environments we face have meant that our organization has had to adapt to different risk profiles.

Mexico has had some challenges, which have impacted many of our competitors; however Baker Hughes has continued to grow because we are latecomers to the market. Pemex is re-evaluating its approach to the challenging Chicontepec reservoir and looking for new technologies to extract reserves. This will result in a short-term reduction in activity for some of our competitors. Baker Hughes has been shielded from this decision since the work we have had is with local integrated operations companies whose activity has not been held back. Of course, pricing pressures still exist because there is a lot of excess capacity in the country.

In the last several years thousands of wells have been drilled in the Chicontepec region, but productivity results have not met expectations. In response, Pemex has taken an interesting approach to develop the necessary technologies. The company has created a new business model with the major service companies called ATG Laboratories. They want service companies to test their technologies in designated field sectors, to either increase field production or lower production costs. During these short-term contracts Pemex evaluates the various technologies and decides which are best for a massive deployment in the field.

The agility has improved in the market as well. For instance, we signed our most recent deal with Pemex, our field laboratory contract, in record time. I can’t comment on Pemex’s internal processes, but I do know that the new president is demanding quick resolutions and actions from not only his people but from industry players as well.

Comparing Petrobras with Pemex, what would you say some of the similarities are between the two?

They are very different organizations, perhaps because of the nature and history of the companies themselves and also the laws they are governed by in each country. Pemex openly expresses the limitations they face in operations and contracting under the Mexico Public Works Law, which may not be built with the global oil and gas industry in mind. On the other hand, Petrobras is open to international investment and partnering and can source and develop leading edge technologies.

How would you factor in ECOPETROL out of Colombia and the Andes region?

Ecopetrol is, in our opinion, going in a positive business direction, following a similar model to Petrobras. They have privatized a portion of the company, which is a large differentiator in terms of how you can manage the company, meaning the ability to behave more like a private enterprise. Furthermore, they are looking outside Colombia, investing in Brazil, Peru, Ecuador and the Gulf of Mexico.

Today, I would say it’s a new Ecopetrol. They have brought on board people with IOC operations experience and are partnering with larger companies like Petrobras and Repsol to gain knowledge in new areas such as offshore operations. Eventually, they will do their own offshore development in Colombia. When you compare the relative sizes of Petrobras and Ecopetrol, they have equally aggressive investment programs over the next five years. As a result, there is a lot of activity in Colombia at the moment for the service industry.

Colombia is focused on remaining a net exporter of oil and will at least maintain if not improve upon its self sufficiency. In light of this they changed their production sharing agreements to be more attractive to IOCs.

Peru is following a similar route as Colombia and has also changed their contracting model. Today we see a number of IOCs there as well.

In the Brazilian market, Baker Hughes has what E&P Director of Petrobras, Guilherme Estrella, called a “long-standing partnership” between the two companies. What are some of the defining factors of this relationship and how has Baker Hughes been able to create this dynamic?

Baker Hughes has been here for more than 40 years and Petrobras knows they can count on us when new technologies are needed because we are a company focused on innovative offerings. In fact, it can sometimes be hard for us to compete on easier fields because our technology does come at a premium: reliability and proper execution are important to us, since most of the reserves and discoveries in Brazil are offshore in challenging environments. Field development is expensive and demands flawless execution, any failure is very costly.

In the last three years we have grown tremendously our directional drilling and formation evaluation product line and proudly claim the leadership position in this area. We have broken our own drilling records in the new discoveries and repeatedly proven to Petrobras that we can bring savings: The faster and more efficiently you drill the more money you can save.

We have also signed agreements with five different universities for technical cooperation, personnel development and sourcing. Recently, we signed a technology cooperation agreement with Petrobras which is something our competitors are also working on. This is a brilliant initiative by Petrobras as they seek to lower the cost of production in new fields in order to make it feasible at oil price levels of $45 per barrel. They feel the best way to do this is to develop the technology locally.

Through our cooperation agreements we have elected 11 specific projects, which address needs identified by experts from Petrobras and Baker Hughes. Both companies are investing funds to develop these technologies in a reasonable amount of time and to test them locally. We want to do as much as possible here in Brazil, which is why we are establishing our own regional technology center near the CENPES and RFRJ campus. This is where we intend to bring some of our own scientists and transfer technologies using both the university and Petrobras.

This investment is nearly $30 million over the next several years. What is it about Brazil that you think is worth putting this money in?

The development of the pre-salt fields is not something that is going to happen in five years; they have yet to finish evaluating the reserves and they are likely to be much more than what has been officially recognized. As a result, it’s fairly easy to assure management that you will have plenty of work in the market for at least the next 15 years.

Importantly, this is a country where we want to keep our leadership position and in order to do that you have to be a part of this technological development. Petrobras is focused on lowering costs and developing local knowledge, so not only is this a good way to maintain our partnership, it’s also the right thing to do. Baker Hughes is enjoying good business in Brazil and as such we should invest in local capabilities.

Looking forward where do you see this technology being used? Of course, you can use it in Brazil but how do you establish this as a hub for later?

The Gulf of Mexico, West Africa and Brazil form the ‘Golden Triangle’ for offshore, deepwater fields, many of which are being explored today. Brazil’s pre-salt play provides an extra challenge and is already ahead of the game, so it makes sense to do the development here, especially since Petrobras is also a leader in deepwater activities.

As a group, Baker Hughes establishes centers of excellence to cover specific technology needs and Brazil is a great answer for deepwater demands.

The pre-salt findings have been the reason for much of the industry’s focus on Brazil. At the same time, the government is looking to restructure its agreement to get more out of the production windfalls which has led to the discussion of creating a Petrosal agency to control the region as well as establishing Petrobras as the main operator. While this immediately affects IOCs, it inevitably reaches service providers; how will this impact your business in Brazil?

It’s a difficult situation, even for Petrobras if they become the only operator of new blocks. In such a case, they will likely have to rely more on service companies to handle some of the workload. I’ve started to see some interest in integrated operations here in Brazil and while Petrobras may want to concentrate in the new regions, they may also try new models in established fields.

Integrated models are a buzzword for many service providers. Recently, at the global level, Baker Hughes brought on BJ Services to add to its portfolio of services. What is it that you can provide that other service providers cannot?

I wouldn’t say we can provide something that others cannot but the integration of BJ Services into the company certainly strengthens Baker Hughes and establishes a comprehensive product portfolio, making us a good alternative for our customers. In Latin America and in Brazil specifically, BJ has a strong position, including three stimulation boats in operation. So, Petrobras has received the news of the merger as a very positive sign, along with high expectations for the integration of our operations.

We’re excited because BJ has very talented people and, as I mentioned before, human resources are a challenge in Brazil so we value the 800 employees they bring to our operations.

In the last four years we have done several acquisitions in reservoir technology, which has strengthened our capabilities in this aspect of our portfolio. So, when you add this to the capabilities BJ brings, we can provide a product and service portfolio as good as or better than our competitors.

In a competitive environment, how do you retain your talent from going to one of the other two big names or other service providers?

That’s our day-to-day challenge and as you move up in an organization you inevitably become an HR manager because it’s the most difficult aspect, and probably the most expensive one, in terms of both money and time. Lately, the best way to retain people is to offer career development because times have changed and when you look to hire staff out of university the first thing they want to know is how they can develop within the company, both in the near term and the future.

What we do, and what most of the big service providers and operators are focusing on, is identifying our key performers and making sure they’re happy. This means more than compensation as they have to be challenged and feel that you are continuing to invest in them while providing career opportunities. By bringing BJ Services on board we become a bigger company with the option to move people across different product lines in order to expand their knowledge.

Over the past 20 years you have had the opportunity to develop with the company as well. Now that you’re at the helm here in Latin America, what do you want to see happen with the company over the next 10 years?

I want Baker Hughes to become the leader in Latin America. I think this region is a great opportunity for the company. We are already strong in several product lines but we also have a lot of markets where we are underrepresented. This means we have a lot of opportunities to grow. For example, last year we opened operations in several countries where our drilling and evaluation product line was not present. In Colombia, we historically worked mainly for BP in high-end drilling and evaluation services and today we are working for Ecopetrol. In Ecuador we started working with Petroamazonas and in Mexico we are on the upswing in a market where we used to only be strong in the completion side of the business.

There is so much room for growth in Latin America that even if the activity in the markets themselves doesn’t grow we have opportunities to expand our market share. So in that sense, the operations are fairly low risk.

In the general economic and internal environment, some countries are experiencing some difficulties that we trust will eventually stabilize. Argentina has sizeable gas reserves yet they are still importing high-priced gas. Their model may need adjusting in order to incentivize operators to produce gas locally. At the moment our customers are not interested in investing there because it’s not economically feasible.

In tough situations like these, you have to right size to mitigate your costs but also stay functional in order to react quickly when activity ramps up again. Of course, you protect your top talent; for instance, when resizing we relocated our professionals to other regions because you want to retain them.

In the past year, what do you think you in particular brought into the operations here?

The most important initiative for Baker Hughes in the past year has been our restructuring into geomarkets, which brought a lot more of the decision making closer to the operation. I’m the president of Latin America for Baker Hughes so, while I obviously have responsibilities to headquarters, I also have the autonomy to move faster and stay closer to the customer.

Previously, if you wanted to build a new base in a new location you had to gain consensus from seven different managers and corporate executives. Additionally, there were a lot of overlapping costs concerned with multiple divisions operating autonomously. We have been able to drive down costs through this integration.

The biggest thing impacting our customer is having five regional markets within Latin America, all with their own vice presidents who are accessible and focused on their needs.

Baker Hughes is a company that believes in the developments here in Brazil and we can be a true partner to Petrobras. Looking forward, we will show an even greater commitment to the community.

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