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with Brian Townsley, Managing Director, Swire Pacific Offshore Pte Ltd

15.07.2010 / Energyboardroom

Swire Pacific Offshore is part of a Hong Kong based conglomerate while most of your operations are based in Singapore. Can you explain to our readers why and when the choice was made to operate from Singapore?

Swire Pacific Offshore is a wholly-owned subsidiary of Swire Pacific Limited a Hong Kong registered company. The head office of Swire Pacific Offshore was based in Hong Kong from inception in early 1976. From the start until 1993, Hong Kong harbor had a limited amount of offshore activity, there was two or three fields offshore and only a few vessels. The head office was run as a single entity, while the company also had regional offices in Singapore, Dubai, Australia and various other places. A rather weak market in combined with the oil crash in 1985 – 1986 decimated most of the offshore support vessel business. As a result, everyone in the industry became more prudent with expenditure. Swire Pacific Offshore always made sure it achieved good value for money and therefore moved the head office from Hong Kong to Singapore and combined it with the regional office to achieve economies of scale. The company has had more vessels operating in and out of Singapore than it ever had in Hong Kong. The shift just made common sense.

You mentioned the group has already gone through rough waters with the 1985 – 1986 oil crash. In a broader sense, Swire Pacific is also an extremely old entity of over 200 years old. How has this helped you to have gone through the past crisis and, in particular, the decrease in activity in the exploration segment?

In 1985, the market substantially crashed as far as offshore support vessels are concerned. Swire Pacific Offshore ended up with 50 percent of its fleet laid up by 1986, while the remaining 50 percent of vessels only had an approximate 50 percent utilization. As a consequence, cash was going out faster than it was coming in. The benefit of having a stable and large parent company comes through in those sorts of times. The offshore support business is only a small part of Swire Pacific, which was aware of the fact that this segment would be cyclical and therefore looked at its subsidiary as a long term investment. If Swire Pacific Offshore would have been an independent company, I dare say it would have not been here today. At that time, a lot of consolidation was taking place in the industry and Swire Pacific Offshore was lucky in the sense that it did not need to do much to survive, other than reinitiating the vessels to get them back to work and slowly build up activity as the upturn came.

Can you compare the impact on the offshore sector of the global financial crisis of 2008 – 2009 with the crash in 1985 – 1986?

For Swire Pacific Offshore, the impact of the latest crisis was not as dramatic as in 1985 – 1986, but considering the fall in utilization and the drop in rates in combination with the inflation of costs over the past years, the recent impact was probably on par with what happened in 1986 for most vessel owners.

You also acquired a seismic survey company in 2007 and have now experienced a drop in utilization rates in 2009. What is happening in 2010 and what are your financial prospects for this year?

Swire Pacific Offshore’s best performance was probably around the back-end of 2007, when the company experienced the highest utilization and a reasonable day rate for the vessels. From then on, activity tailed off with 2009 and 2010 being tough years. In 2009, Swire Pacific Offshore still had more than 50 percent of its long term charters carrying the company through into 2010. A lot of these are up for renewal at the moment, but the rates are less than what they were when Swire Pacific Offshore entered into these contracts in 2007. The day rates have thus come down and, industry-wise, utilization has come down as a product of the reduction in the number of projects in conjunction with the oversupply of tonnage. Throughout 2009, there has been a continuous stream of new vessels coming into the market. This oversupply will continue throughout 2010 and it will take until the last quarter of this year before improvements will be seen again. By 2011, a substantial return to order is expected to take place as far as the offshore support vessel industry is concerned.

The fleet of Swire Pacific Offshore amounts to around 70 vessels while you also have 20 vessels under construction. Have you postponed any of your plans considering what is happening at the moment?

Swire Pacific Offshore owns 73 vessels today, almost all of which are now Singapore flag, and has 17 more under construction. Some of these vessels are delayed because of the shipyards, not because of a cancellation or request to postpone delivery from Swire Pacific Offshore.

Out of these 17 vessels, what is the proportion that will replace existing vessels and how many will be an addition to the fleet?

Four of the vessels are additional and will extend the fleet profile. Eight of the vessels being built are the lower horsepower vessels meant to replace the vessels that were built in the early 80s when the company had a newbuilding program in Japan. These vessels have now reached the end of their useful life, of which the first one will go the scrap yard at the end of this month. Of the vessels on order, there is also one that is a replacement vessel on the seismic survey side which is a small 3D shallow water seismic survey vessel. Swire Pacific Offshore provides the marine equipment, the marine complement and the marine platform. The charterer provides seismic data and the recovery of the information. Then there are also two accommodation barges with 200 ton cranes for hook-up, maintenance and offshore construction work.

Swire Pacific Offshore pulled out of the accommodation vessels segment while you now launched a program for two new luxurious barges, which are not covered by a contract. What pushed the company to take this risk and go back to a business in which it was involved and had pulled out?

When Swire Pacific Offshore went through the down cycle in the mid 80s and half of the fleet was laid up, these were mainly the anchor handling and platform supply vessels for exploration support. At the same time, the company also had capital ships, which were the DP2, DP3, dive support vessels and also some hook-up support equipment similar to these 200 ton accommodation barges. A lot of those units were on term charter and went straight through the down cycle. They actually contributed enough cash to keep the company in a good position. The lesson learned was that by having all the eggs in one basket which is attached to the exploration market, a vessel provider becomes very vulnerable. A little bit of diversification based on solid foundations works quite well. The reason Swire Pacific Offshore is going back into diversifying is purely because of the number of platforms that is already out there and will remain there for quite some time, of which several will need maintenance.

The exploration market worldwide is changing with a shift towards ultra-deep waters and a need for new technologies and new types of service. One of the strengths of the company is its global network and strong emphasis on marketing and feedback from the people that work at sea and operate the vessels. You are probably in one of the best positions in the market to comment on the current trend in terms of demand. How do you picture what will happen in the next five years?

Swire Pacific Offshore did not make any advanced breakthrough identifying the fact that many of the existing offshore platforms are old and will need maintenance. However, on the technology side, a modern designed medium to larger high horsepower supply vessel costs in the range from USD 30 to USD 70 million. At the same time, you could probably buy a 30 to 50,000 ton deadweight Handymax for a similar price. The reason modern supply vessels cost so much is due to the technology that needs to fit in a very small space, resulting in a mobile power station, with a balanced propulsion system that is interfaced to a sophisticated computer arrangement that can control the manoeuvring of the vessel. At the same time, the vessel has to be capable of towing large rigs, handling hazardous and noxious substances, carrying deck cargo and keep station in harsh sea conditions. To maintain a balanced understanding of what is required, many of our shore staff started their careers as sea staff. The company tends to encourage promotion from within and rewards loyalty accordingly. As a result, the people onboard feel free to speak out on what issues they encounter. The company then decides which feedback is constructive and can be used in an effective way. From the start of the company, the management has always encouraged an open dialogue. At the end of the day, anyone could buy technology or build a ship, but to operate it, you need the right people.

An often heard comment is that there is a sort of return from automation towards more quality and reliability in the industry, an aspect reinforced by the Deepwater Horizon catastrophe. Do you concur with this statement and how does this translate in the technology we find on your new vessels?

From a shipowner’s perspective, Swire Pacific Offshore has always built on the strength of being a quality operator such as Cathay Pacific Airways, in which the parent company Swire Pacific is a 42% shareholder. When the company built its own marine simulators, it looked at what Cathay Pacific did building their airlines simulators years ago. Technology is essential but at the end of the day the company needs to know what business it is in and what hazards are out there. It needs the quality of the people, the training and the safety commitment from the top down. That is something many offshore companies have always advocated.

The sector has hundreds of competitors and you are in the top 10. How have you seen the sector evolving over the past 30 years and how is it going to evolve following this crisis?

The business has gone up and down with players coming and going because of low entry barriers. For companies like Swire Pacific Offshore it is important to try to push the entry barriers higher which can be facilitated by more regulatory standards, more capitalization and increasing difficulty for new entrants to obtain the commercial security to get involved in the industry. Looking back at the recent cycle, a lot of orders were placed in 2007 and new entrants came into the market. Some of those companies had very little operating experience in the offshore industry. Consequently, the sheer volume of vessels that was ordered resulted in the current oversupply in the market. Even the best companies will not survive unless they receive a commercial return, so unless the industry becomes more regulated and focused on a steady return for operators, it will always remain a very difficult business. When the market does crash, there is no easy exit for companies owning a relatively new fleet of expensive vessels as no one will buy these vessels against the owner’s perceived value. So without some regulation, the industry will continue to experience cycles as it moves forward. The spirit is to remain positive and make sure that contracts are reasonable to make money during the upsides of the cycles to carry the company through the downsides.

As far as opportunities and external growth was concerned, you were waiting for the upturn in the second half of 2010. Nevertheless, the company acquired Blue Ocean earlier this year to address the offshore wind industry. Focusing on the offshore service industry, what are your plans now? Are you still waiting or are there opportunities at the moment?

Blue Ocean Shipping was acquired by Swire Pacific Offshore last quarter. The reason for this purchase was to look at diversifying into a non-oil related business Swire Pacific Offshore’s core competence is marine activities. Offshore wind farms and renewable energy has a lot of potential for the future, but what this segment seems to be missing is sufficient expertise on the marine side. The company has owned and jack-up rigs, DP vessels, crane ships, accommodation barges and so on. Swire Pacific Offshore probably has the world’s largest DP fleet in essence and secured its supply chain of personnel through building accredited training centers to be able to bring the officers through to a DP standard that is internationally accepted by the Nautical Institute, as such the company needs to package these ingredients together to look for the best opportunities to apply them. Renewables and wind farm installation lends itself to someone competent in operating jack-up vessels which involve a high level of sophistication. This segment needs confident and competent people with strong project management skills and the ability to identify the marine risks associated with the projects in order to put in place a safe operation. Swire Pacific Offshore believes it has got the ingredients to handle such projects. The acquisition of the well connected Blue Ocean Shipping fits within this strategy.

As far as further expansion is concerned, the company plans for the worst and hopes for the best, a typical seafaring attitude. The opportunities are not present today. There is still too much equipment out there and one could argue that some of it is available at possibly reasonable rates. But Swire Pacific Offshore has to make sure that it maintains a long term view, implying that if the company pays too much for an asset at the onset, it will suffer for the rest of that unit’s life.

Will there be an opportunity to further diversify the activities and balance with service units that are geared towards production units, rather than exploration units?

We believe the production segment is over heated at the moment, as such we are an observer not a player at the moment.

On the basis of oil-related and non-oil related segments, the company will not look for a balance, purely because it provides marine services to the offshore industry as its core business. The company will continue to work around the periphery and diversify where it can use its core competences without stretching or pressuring the core business, Swire Pacific Offshore will look for such opportunities. In addition, the company is also involved in salvage services, as well as oil spill response services. Nevertheless, this diversification effort will not produce the returns balance out the offshore support activities in the next five to ten years.

One of the characteristics of the company is that it is also involved in the vessel design process. How is this different from the competition, if different, and what advantage but also pressure does this put on the company?

Swire Pacific Offshore does not design vessels, but works very closely together with the designer. Fundamentally, the designer needs to have his line drawings correct, optimize the speed and efficiency etc. Swire Pacific Offshore simply wants to make sure that what it is buying into, is comparative on a fleet basis. The company generally purchases series of vessels rather than simply acquiring one unit. This allows Swire Pacific Offshore to have sufficient influence in the design to make sure that the equipment used is reliable. Within the fleet, the core hubs of operations are the Far East, the Middle East and West Africa. In each of those locations, the company warehouses contain critical spares in stock that have a long lead-time. Rather than, for example, having to order a spare part from the manufacturer with a lead-time of three months, the company simply sources it from one of its warehouses to have the vessel operating again in not more than two weeks. When Swire Pacific Offshore gets involved in the building process, it wants to know that there is redundancy in the design, that the vessel is build for safety and that there is continuity and supply for replacement parts in the future.

You mentioned increasing costs. These can come from the raw materials used, the costs of the yards as well as more expensive personnel. With the current scarcity of qualified human capital, how does the company manage to retain its staff, in particular its senior staff?

The company, and in particular the Swire Group, has always had a low turnover. Swire Pacific Offshore may not pay the top salary and it does not pay banker-type bonuses. It is a steady operator with a commitment to shipping that recognizes the true value of its staff. The personnel at sea work in a very hazardous environment and for all of us it is of the utmost importance to be able to go home without any injuries. The safe working environment Swire Pacific Offshore offers, gives everyone a great sense of comfort. The increase in our human resource costs is no different from that of any other ship owner. The company was in fact rather fortunate to hire some young officers that were laid off by the container shipping lines. At the moment, the company carries a surplus of people. One could argue that this is not efficient, but for a company having 17 vessels under construction, it is too risky not to be able to man one of those vessels once they are delivered. The company invests not just in training from the front end, it also pays study leave to make sure the officers have increased opportunities for career development. The company further takes the time to listen to its staff, and deal with any of their concerns.

There might also be a cultural gap between experienced people in the industry and younger generations that have become more demanding and versatile. Is this something you also experience, how do you deal with this and how does it change the way you conduct business?

This has been the case since the beginning of time. As time moves on, people’s aspirations and attitudes move with it. Today, many of the younger generation do not want to spend their time working on a vessel as they would prefer to start in a senior management position straight away. It does not matter what culture or nationality you are, there are good people everywhere. When a company hirers the right people, these new recruits will very quickly realize they have to have the experience and education to make it to the top. They will then become more patient in acquiring new knowledge and skills to reach their objectives. In Asia this is more apparent but that is simply because the region started from a lower base level compared to the Western offshore markets. The right people in this industry quickly realize they need experience and communication skills to relate to their peers and crew members.



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