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Interview

with Zvonimir Djerfi, Vice President, Baker Hughes Norway

14.07.2009 / Energyboardroom

Baker Hughes has recently reorganized from seven divisions down to one organization with seven product lines, nine regions and 23 geomarkets – one of which is Norway, the one you are heading up. What was the strategy behind the decision to reorganize and what does this change mean for Norway?

Baker Hughes’ reorganization was driven by the needs of our customers and our own interpretation of what best supports them. Based on various kinds of feedback, the company looked at its portfolio and current market needs, and made the decision to bring us closer to our customers, while still responding better to their needs in regards to integrated services provided through our products.

Looking at Baker Hughes prior to the change, the seven divisions you mention were functional, with every division headed by a president residing in Houston. After May 4, 2009, that is no longer the case, and now, Baker Hughes has nine regions around the world headed by nine presidents. Executives have moved from Houston to be closer to geomarkets in the areas where the customers are. For example, we now have a president in Kuala Lumpur taking care of Asia and the Far East, another in Dubai for the Middle East, and yet others in Russia, Europe, Africa, and Latin America. At the same time, the company is also remaining product line-focused, with technology development headed by product line presidents who shall remain in Houston.

Baker Hughes has taken our learnings from the past 100 years, and has decided to remain focused on technology through the product lines in order to not lose that excellence we have in technology development and deployment, while acknowledging that now, because of the company’s size, it’s ever important to be closer to our customers and provide a wide spectrum of solutions. This doesn’t preclude the company from providing either individual service product lines or products, but rather facilitates integrated products and services where they are required, either in a wide spectrum of all seven product lines we can cover, or as the customer would wish bundled together as desired.

Overall, the reorganization has two main drivers: 1. customer focus, and 2. geography.

Although you have been in your current position just a few months, you began your career in Norway and were previously here for quite some time before leaving a decade ago. Upon your return, what do you remark as the biggest changes in the market?

The biggest change is that there are many more operators in Norway now than when I left. Ten years ago, there was a handful of operators in the NCS, and now, there are many more of various sizes and needs in terms of support in technology, services, or management. In a sense, as the NCS has become more mature, it has also become very similar to the UK situation of five or 10 years ago.

This new state of affairs is quite exciting, because with more operators, there are more ideas coming in, many different views on resource development, and added flexibility and efficiency for operators in aspects like rig-sharing.

Despite this increase in operators, there is still one dominant player in StatoilHydro. How fundamental is Baker Hughes’ relationship with the primary producer on the NCS?

It is very important. Even going back in history, Baker Hughes has always had our biggest revenue share from Norsk Hydro and Statoil, and this continues after the merger. The combined entity is responsible for some 70% of development and production, and a nearly equal proportion in terms of significance to Baker Hughes’ revenue stream in Norway.

The price of a barrel of oil has had asymmetrical effects throughout the sector – what has volatility’s impact been on Baker Hughes here in Norway?

We are experiencing a similar situation to many of our peers in the rest of the industry. Norway hasn’t been as much affected with the economy’s downturn as in other parts of the world; however, we know that some new projects, particularly in northern areas of immature and virgin fields, will probably require higher dollar per barrel prices than current levels. Therefore, we expect a slowdown in some exploration activity in 2010, which could delay developments further down the road. However, in terms of development work, we believe it will stay approximately steady throughout 2009, although in 2010 we really don’t know. Broadly, our customers are sending messages that they don’t plan to cut any big projects which have already committed to come online from now until 2010; however, in parallel, obviously exploration will probably suffer.

You mention the concept of providing integrated solutions, a buzzword among your peers. What is the focus given the restructuring and your new appointment in Norway?

In Norway, Baker Hughes has been a very strong player, with some of our seven divisions, now product lines, much stronger than others, such as Baker Oil Tools and INTEQ, with the latter comprising almost half of our over 1,000 personnel in the country. Baker Hughes has held a leading position for a long time, but has made acquisitions over the last few years in recognition that not all of the seven divisions, now product lines, have had the same strong position as Baker Oil Tools or INTEQ. Obviously, our goals with Baker Hughes are to 1. grow the business with product lines that have not traditionally been strong, and 2. better protect our market position by leveraging from the stronger and more established into the up-and-coming divisions.

Baker Oil Tools, INTEQ, and Drilling Fluids comprise some 90% of personnel – what are the upcoming areas you want to emphasize, how much complementarity is there between them, and how will they integrate within the existing divisions?

It all depends on where the industry is going. Baker Hughes has a wide product portfolio, and what we are doing now is really looking at the market segmentation in terms of where we can leverage off available synergies; for example, we have merged Production Quest into the Baker Oil Tools product line. This will be the primary task over the next half year, to actually see where we can leverage from the synergies.

On the production side, we have an opportunity for growth, and on the drilling and evaluation side, we are already strong, with opportunities to strengthen our position in some of the smaller product lines. In terms of reservoirs, Baker Hughes has made acquisitions of Gaffney, Cline & Associates, the RDS business of Helix RDS, and GeoMechanics International (GMI), which still operate as independent and well-known entities, with the mission to enhance reservoir performance of our solutions.

In fact, anything we can do to enhance reservoir performance and prolong the life of the reservoir is our mission. With this knowledge base Baker Hughes has acquired to actually expand our knowledge about reservoirs, we feel that in mature markets like Norway there is definitely an opportunity to enhance and prolong reservoir life to increase oil and gas recovery. Through our past performances, for example, in Troll, Baker Hughes has already demonstrated by developing such technology together with Hydro, for which the company was awarded in 2006.

On the technology side, although specific knowledge about the reservoir came from an operator, Baker Hughes’ experience over a large number of reservoirs means that we have much to contribute with a similar type of knowledge, which although may not necessarily be as intimate as the operator, is instrumental in terms of developing new technologies at an earlier stage than would be otherwise.

It’s interesting you mention new technologies, because the NPD just released a statement saying they weren’t going to award the Increased Oil Recovery Prize for 2008, because no company had lived up to expectations. What are the most exciting new technological developments that Baker Hughes is working on that may perhaps win the prize for 2009?

I don’t know if they are going to come to the stage where we could win the prize, but there is no secret that in mature oil fields, you want to see further ahead of where you’re going, to determine the pockets of reservoir which are there and can’t really be seen through seismic interpretation. The end result is using various methods while drilling to foresee and investigate to better access those pockets of reservoir.

In the reservoir, there are many elements to look at in terms of enhancing recovery and limiting damage to formations, reducing influx of undesired fluids – either water or gas or both – and it is really about the reservoir and getting the recovery percentage up. In Norway, it is already high compared to the places I have worked previously, such as in Asia. When in Asia, my job was to talk about what we did in Norway, and I was so proud having been on the Troll rig drilling when we started with reservoir navigation equipment, and I was able to share this pride by being there, and how in Norway we reached levels of 40, 50 and sometimes 60% recovery while in some parts of Asia they talk of 20 to 30%. Nonetheless, every single percentage point in any environment equates to huge volumes of oil and a big prize at the end of the day.

To move towards the highest recovery rates possible, Baker Hughes is looking at traditional solutions in terms of reservoir placement, chemicals, chemical treatment, and artificial lift for nonconventional oil types, such as the challenges faced in the North of Norway with heavy oil. A further challenge in Norway is the strict requirements surrounding environmental friendliness, and Baker Hughes is researching how to proceed in all our products in the most efficient way possible, without any slippage or unnecessary increase in CO2 emissions, operating in the most ecological way possible.

Given that you’re fairly new and with a change in mission, what would you say is your dream project in the near term?

For me, it’s a project located further up north in Norway, which is a position likely shared by many oil companies and service providers as well. For this dream to become a reality, we obviously require political and regulatory acceptance, and the dream project would be a frontier one along the coast in the extreme north, because they have particular challenges in the environment. I’m not talking only about sensitivity to environment, but also logistics, weather conditions, and everything else that comes with the territory.

I’ve been in charge of a project in the area of Sakhalin Island, a Russian territory just north of Japan, which brings to mind many of the aspects I would envision in a future potential project. To think about how that project was supported, in having the drill rig on the beach, drilling outside and offshore 11km wells, although perhaps not to be executed in exactly the same way, if the fields were similar enough, Baker Hughes would welcome such a logistical challenge.

For example, some fields in the north of Norway are 2,500km from Stavanger – the same distance as from here to Rome! The important fact to note is that such developments are not only dream projects for companies like Baker Hughes, but also for Norway as a country, because if we can do them right as a showcase without damaging the environment, and taking care of the local society while developing an economical project, it will open up new opportunities. This has been done in other parts of the world, and Norway has the potential to pioneer in this way as it has in the past

You mention the political and regulatory difficulties – particularly in the north, and particularly in Norway. What can companies like Baker Hughes, or you as its head, do to move forward on such issues?

We can do a lot in terms of basically showing the proof of how we would handle various challenges, and when I say showing the proof, it’s not just by using such and such technology, but really addressing its application and showing what we have done in other parts of the world which are similar to a given challenge. This process actually opens up the mind of people who cannot comprehend how things would otherwise be done. Just as Baker Hughes has done by transferring experience from Norway to other parts of the world, we would probably need to do the reverse to allow people to look at the situation from a different perspective and understand that solutions are possible with the right application of the technology, measures, regulations, people, and everything around it. It works in a similar way in other countries: when, for example, Baker Hughes drilled the first trilateral well in Bohai Bay outside of Beijing in China, I was presenting what we did on Troll to a group of people from CNOOC supported by the local government in Beijing province. When they asked questions regarding our presentation, which was not too technical, while demonstrating what we had done and the techniques used, the most powerful thing was my ability to say “I’ve been there, I’ve done that!” This makes the difference in convincing people to give a green light and go-ahead to do the right thing. In an environment where access to experiences and technology, and transfer of them is easy because of globalization, I think this is what we need to do. We need to get closer to decision-makers, not only in oil companies, because they already understand, but also oil companies together with the service industry, presenting the case to people who are decision-makers on a political level, either locally or at higher levels within the government or wherever.

You’ve been all over the world with Baker Hughes over the past two decades. As someone with a lot of international experience and as former director of Global Sales for a multi-billion dollar company, what’s your best lesson for an up-and-coming international manager?

The best lesson is to regard the world and career as the learning ground which is changing all the time. I came to Norway with a very open mind from Serbia – which doesn’t have any oil and gas – and I learned a lot by applying what I knew into the field. Then when I moved to Asia, I didn’t know what was out there, but kept an open mind and talked openly about my experiences, trying to transfer those experiences, from which I gained a lot of access to and interaction with people. Being willing to understand cultures in different parts of the world gives a lot back in terms of knowledge, and I don’t think I would have come to this position, nor my positions in Houston or elsewhere, if I hadn’t gone with that kind of open-minded attitude – not to mention a supportive family willing to travel around the world! I understand that in Norway, living standards are high, and it’s not always easy to leave that behind and go to a different environment, but if my experience is any example, you can always come back – with a much broader perspective about the world, different cultures, and experiences.

As a final message to OGFJ readers, not only here in Norway about Baker Hughes in this most important geomarket but around the world, what would you like them to know about the company and your ambitions?

In regards to Baker Hughes in Norway, I would say that we’re very proud of what we have achieved. Baker Hughes is a well-respected service company in Norway, but not only that – it’s a well-respected local citizen. We have over 1,000 employees in Norway, which for a country of under 5 million is quite a big responsibility, and we are proud of that. More than 90% of our people are Norwegian, and we have responsibility for their development and the simultaneous development of Norway’s oil fields by getting our people through various ranks in the company who have either contributed by their knowledge or patents obtained through the years that Baker Hughes has given money to be implemented. The openness with which the company has treated our employees and customers has been reflected in the same type of openness about technology development, and has been a major contributor to our present leading market position. The message should be that we always have to look at the long-term, bigger picture, and that has paid off for us in this regard. Short term is important, and as a business manager I would be lying if I said otherwise – return on investment is definitely important – but we must not lose sight of the longer-term strategy, and in Norway Baker Hughes is in the very fortunate situation of having customers with a similar type of vision who are willing to support us to get to that point.

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