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Interview

with Robert R (Bob) Harvey, President Director, Weatherford Indonesia

24.04.2012 / Energyboardroom

MIGAS is targeting $18billion investment in Indonesia’s oil and gas industry in 2012. On behalf of one of the key service providers to the industry, what is your level of optimism for this market?

There are no doubt good foundations for optimism when looking at the Indonesian market but they should be qualified with a few caveats. Personally speaking, I am very optimistic because Weatherford’s business is picking up well and the company is expanding into areas that were not previously part of our traditional business. This positive growth follows 3 relatively challenging years where the company was trying to consolidate its presence in the Indonesian market. It is extremely rewarding finally to see the benefits of operational efficiencies in our service quality and company performance.

Regarding Indonesia as a whole, some deepwater projects are coming to an end such as those of Hess / Murphy and the MSEC Deep Water Consortium . Big projects coming up include ExxonMobil’s Cepu block, Chevron’s West Seno and projects by Niko Resources. This cycle means that there will be a dip in the market at the end of Q2 going into Q3, which should pick up again in Q4. However, the chief concern is that 2012 could end up as a mediocre year having started as a strong growth year primarily because of slippage in project implementation. Projects due to start in Q4 could be postponed to 2013 for a number of reasons. The Cepu Block development has already been delayed this year, the West Seno project was also delayed because of the cabotage issue. As a consequence of such delays and the uncertainty surrounding Governmental regulations / PSC contract sanctity, Indonesia is a flat to declining market.

My chief concern is that as older, established PSCs are expiring, it is new companies which are coming in and bidding on the new blocks. These new companies are not names like Shell, Chevron, Total and ConocoPhillips but rather the smaller international companies and speculators. In the short-term I see 2012 and 2013 being good years, but further down the line PSC contracts transitioning and limited investment from major Oil and Gas Operators, will present issues for Indonesia’s production industry. In 2017 Total’s blocks could move to Pertamina operatorship, in 2018 Chevron’s blocks could be transferred whilst some ConocoPhillips blocks may transfer in 2020. Kodeco has already transferred operatorship in its blocks to Pertamina. Production is therefore being taken over by local producers with Pertamina chief among them.

Investment will be the key. By 2024, three times the current amount of investment will need to be introduced just to maintain production above the 900,000bbl/d level.

Indonesian politicians are driven to bring back ownership over their energy industry. My concern is that the approach is misaligned with the reality of the international market and the nature of the industry itself. Often rather than using incentives to promote cooperation, the government simply specifies targets such as a 35% local content clause without providing sufficient guidelines on what they are trying to achieve and how it is to be achieved. Companies often struggle to source 35% of their services and equipment from local industry. This creates a situation of back and forth as the government incrementally lowers the local content percentage and companies retender. The result is delayed production, as the process takes 3-5 months longer to complete. Weatherford participated in a tender for a casing patch which was released a total of 7 times, taking 6 months to complete. The fact is that Indonesia would easily be able to increase its production if the tendering process was improved.

How would you describe the tendering process in Indonesia?

Unfortunately, the Indonesian tendering process drives down the attractiveness of the market for international companies, at the same time as Indonesia is trying to increase FDI in the country. One issue that companies face is that during the tendering process, with very limited response time, if you do not address all of the issues in the initial clarification period, and there are still uncertainties, you cannot withdraw or decline a bid without receiving a sanction count against a red card. If you include exceptions in a tender then you will also receive a sanction count. If a company receives enough of these sanction counts, they are banned from participating in tenders from that customer for a year. Initially this mechanism was designed to streamline the process but it has achieved the exact opposite.

It is the government’s intention to expedite the tendering process but the measures introduced are counterproductive. There are too many punitive disincentives present in the Government regulated tendering process. The main problem is that the process enables Operator supply chains to manipulate the penalties of sanction points to their advantage. There also exists the operator’s ability to pass its risks onward. Indonesian companies are often more willing to accept the risk associated with unfavorable terms and conditions as their investment and exposure is significantly lower.

Indonesia is a low bid market which focuses on the unit cost whilst neglecting the Total Cost of Ownership. Taking rig suppliers as an example, local companies are unwilling to invest in state of the art rigs, or equipment upgrades, because the cost of recovering this investment this would price them out of the market. Buying new rigs entails mobilization costs and depreciation. BP MIGAS limits the price per horse power which discourages investment, and technology / efficiency upgrades. The result is that most land rig contractors are Indonesian companies using inefficient 25-30 year old rigs. International companies do not want to import rigs yet Indonesia could utilize another 40 rigs at present. The problem is that in the current system, it does not matter if a high-tech rig brought in by a company like Weatherford would ultimately save companies millions of dollars through greater drilling efficiency and speed. What matters is simply the unit price. Weatherford has the largest land rig fleet in the world and I have been pushing for the company to send its rigs to Indonesia but I fully understand my management’s concerns with their competitiveness in this market. Until the Indonesian government takes on a Total Cost of Ownership model the situation will remain unattractive.

What steps can companies take in communicating with government to improve the situation?

I am very grateful for personalities like the Minister of Energy and Mineral Resources, Bapak Jero Wacik, the Director General of Migas, Ibu Evita Legowo and the Chairman of BP MIGAS, Bapak R. Priyono because they understand the difficulty of the situation for companies here. They must support national interests whilst being receptive to the needs of industry. They face a difficult balancing act as different levels of developmental maturity exists between the two.

In 2010 when I first met with Director General Ibu Evita Legowo the first thing she said to me was “Thank you for your investment”. I walked out of the meeting room with my Regional Vice President, who told me that previously Weatherford had never before had access to this level of authority within the government. Last June Weatherford opened a 38,000m2 facility in Narogong which many consider the best of its kind in Asia Pacific. However, because of the government regulations on the cabotage issue, GR79, on cost recovery issues and PTK 007 on procurement and local content, Weatherford’s business was negatively impacted. With PTK 007rev2, we found that we could no longer compete in markets where we used to be competitive. As a result, we were suspended 13 business units and terminate contracts with 200 Indonesian employees. The government, the operators and the service providers all want the same objectives: growth, increased investment, better technology, more training for employees and increased production. Unfortunately government regulations have made it tougher and tougher for international companies to participate and has led to a flight of assets.

Fortunately, there are members of Commission 7 such as Bapak Satya Yudha who have experienced the operational environment for foreign oil and gas companies in Indonesia. Gradually, we are witnessing a culture change and they are bringing oil and gas governance round to considering the investment climate more and more. I feel that it is important to communicate the needs of industry in all avenues available and I am optimistic that with time the investment climate for companies will become more positive .

What are the challenges which most affect Weatherford in this market?

Weatherford, like all companies, faces several challenges such as shifting regulations relating to taxation and few companies in Indonesia are confident with legal arbitration. Indonesia is also not known for its stable legal foundations and companies here do not always feel that they can receive a fair hearing in court. Rather than resolving issues, the system is designed to be punitive. Since the Macondo incident in 2010 the Terms and Conditions of contracts have become much more unfavorable with the intent to push the risk onto the contractors. In Indonesia, many tenders state that you either accept these Terms and Conditions or, you risk disqualification (and sanction points). There is no room for negotiation. Guidelines such as PTK 007 create, and foster, high risk exposure for tender participants and makes Indonesia a less attractive destination for investment.

So why would you invest in Indonesia?

Not long ago, I had a conversation with Karl Ehlers, Sr. Director from the Executive Office of the United States President. His job is to promote growth between the two countries and he asked me why we would invest in Indonesia considering these challenges? Our COO Peter Fontana asked the same question recently. My answer to both is that the government is engaging us to address our concerns, to shed light on the problems and find solutions. Indeed, I tell the government that I am an Indonesian nationalist because I want the same objectives as they: Increased investment, production, growth, technology transfer, competency and job creation. When you consider the opportunity for change in Indonesia, you appreciate that the country offers vast potential for the growth of business. There is only one argument that needs to be made when talking to those who champion Indonesian nationalism and that is to ask what constitutes a nationalist? Isn’t a nationalist someone who is investing, building, growing, creating jobs, bringing in technologies, and partnering with, or subcontracting Indonesian companies? In my view, this is the essence of local content and once this is understood Indonesia will offer fantastic opportunities for international companies.

Looking at Weatherford within this picture, how has the company been able to turn around the challenging last 3 years to create strong growth?

Many of Weatherford’s challenges in Indonesia were in fact self-inflicted. The company is entrepreneurial by nature and expands by acquiring other companies. Therefore the challenge it faces is making these subsidiary companies function well as a single, One Weatherford, unit. The last 3 years have involved restructuring the company’s operations to bring better cohesion to our business in Indonesia. As a result we are now first in class in HSE and becoming the best in class in terms of service quality and performance. Weatherford has invested a lot in the equipment, training and structure of the organization over the last 3 years and one of Weatherford’s business units now functions at 99.85% operational efficiency. In fact, we are using this division as a model for the rest of the company. This increase in performance has driven up the morale and ambition in the company. Weatherford has been able to attract top quality Indonesian workers into the organization and our existing employees are being sent overseas for training, giving them greater vision for what they can achieve. The company is building a strong reputation in Indonesia partly because of our dialogue with the government. I was very pleased to learn that not long ago representatives from Chevron met our Global Account Manager in Houston and praised our operation in Indonesia, stating that BP Migas recognizes Weatherford is a company trying to work with Indonesia to achieve mutually shared goals.

Having improved its service provision what can Weatherford contribute to the efficiency of an Indonesian E&P project?

Weatherford is probably the world’s best company in artificial lift and production optimization. These are two aspects that have previously not been engaged fully in Indonesia and Weatherford is looking to develop these in 2012, increasing production through well monitoring systems, various pumps and down hole optimization technology. Our growth in Indonesia will also come from areas which we have not traditionally participated in. Through operational efficiency, high competency levels, investment in technology Weatherford is adding value.

Over my career I have been fortunate to be involved in technically challenging wells including world record extended reach, deep water, remote location, hostile environment and high temperature / high pressure. Indonesia is moving in this direction and Weatherford has had tremendous success with its managed pressure drilling group, indeed this is the group with the highest operational efficiency in the company. Weatherford also performs fishing, casing running, lining hangars etc but in deepwater horizons, Weatherford’s managed pressure drilling group brings the most value to a project. Essentially the technology allows us to regulate the hydraulic pressure in the drilling process through the equipment being used on the surface and downhole. Especially since the Macondo incident in 2010, managed pressure drilling is the main game changer for these more high-risk projects.

You have been expanding your workshops in Indonesia. What will this bring to your deepwater direction?

Weatherford is looking to build another facility in Balikpapan in East Kalimantan and is therefore following the West to East trend of the Indonesian oil and gas industry. Our expectations are that it will be finished by 2013 and the tender process has already begun. This facility will enable Weatherford to operate more efficiently in deepwater projects in the East of Indonesia. The other addition will be a pressure testing bay. Currently clients need to take their blowout preventers (BOPs) to Singapore for testing before bringing them back in to Indonesia. This facility will allow clients to test their BOPs here. These are non-traditional directions for Weatherford, but are areas where we see good potential for the company.

You mentioned earlier that Weatherford has become best in class in HSE and the company has received two Regional awards for its safety record. Considering that local employees comprise 94% of its workforce. How have you been able to instill a culture of safety in the organization?

The basic strategy is to lead by example to bring a cultural change within our organization. On the streets of Indonesia you can often see people riding mopeds carrying giant sheets of glass; this is the challenge that Weatherford struggles with. It is therefore necessary to place a special emphasis on safety in Indonesia and soon after I joined the company we created a Stop Work Authority card which has my name and number printed on it. It is mandatory for all our employees to carry this card and if any employee observes what they consider to be an unsafe act or is involved in any aspect of work where they feel under qualified or uncomfortable they are empowered to call me and stop the operation immediately. This initiative has now spread throughout Weatherford’s operations globally. One of our safety campaigns depicts a worker returning home to his two children because this is what we set out to achieve: to have all our employees always being able to return home to their children.

Looking at your operations here, how would you sum up Indonesia’s importance to Weatherford?

There is a large question mark hanging over Weatherford’s relationship with Indonesia. Weatherford has just had the best year in terms of its revenue in Indonesia and yet our Return on Investment underperforms compared to the rest of the region. Revisited tax years, unsubstantiated law suits, unfavorable regulations impacting our ability to bid on contracts and so on. Indonesia is not the backbone of our operations in Southeast Asia but it provides a great potential someday to be a substantial contributor to our operations in Southeast Asia.

Weatherford is broken up into 4 geo-markets and Indonesia is the smallest of these. My expectation for Weatherford this year, through our improved operational efficiencies and the contracts we have in the pipeline, is that Indonesia prove itself and we will be #1 in Asia Pacific in operational efficiency, service quality, safety and financial performance compared to investment. However, this can all change in a heartbeat if any slippage occurs in exploration, development and production projects, or, regulatory changes are implemented which impacts the industry. Indonesia is a constant roller coaster and the country can only become a stable backbone for operations if the government unites with the PSCs to protect the sanctity of the contracts and work out the terms and conditions for operating here.

What is your personal ambition for Weatherford over the next few years?

My intention is that between 2012 and 2014, Weatherford’s business in Indonesia will double in size. The only Weatherford obstacle to fulfilling this plan will be capex and the amount that we can obtain to invest in Indonesia if, the financial return in Indonesia underperforms to the region’s expectation. External factors would include more restrictive rules and regulations from the Indonesian government. Indeed, Weatherford won 28.8% of the completions contracts that it went after in 2010 whereas last year we won 4% due to Local Content changes. The reason is not pricing but Contract Terms and Conditions especially in terms of Local Content requirement. However, I am optimistic that our ambitions can be realized.

Given your experience around the world, what has been the main challenge for you in Indonesia and what experience were you able to draw upon?

The main challenge for me was to turn around the Weatherford operation. My main advantage in achieving this is a great wealth of experience in over 50 countries with the right mentors who taught me what to look for, how to provide leadership and guidance and how not to let one’s ego get in the way of successful operations. I am grateful for having a young but very strong team working with me in Indonesia.

What would be your final message on behalf of Weatherford Indonesia?

My advice would be to pay a lot of attention to what the Indonesian government is doing. If you have a fast moving company with the ability to adapt to the market, you will be successful here. Ultimately, there is no model from elsewhere which you can transplant to work in Indonesia. For me, Indonesia is like a Balinese painting where a thousand stories are being depicted in one canvas. If incentives are introduced and uncertainty significantly reduced, I would advise companies to enter the market and enjoy working with the Indonesian people.

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