Mastering the transition tightrope
Lorenzo Simonelli has reinvigorated Baker Hughes’ oilfield business lines while positioning it to be at the forefront of the energy transition
Petroleum Economist CEO of the year Lorenzo Simonelli has navigated Baker Hughes through one of the most transformational periods in its 112-year history. It recently emerged from a brief spell as a GE company as a thoroughly modern ‘energy technology company’, positioned for the energy transition and starting to post some impressive numbers.
GE announced in October 2016 it was to acquire Baker Hughes Inc. and integrate it with GE Oil & Gas to form a single player, Baker Hughes, a GE company. The transaction closed in July 2017, but the original arrangement was to be very short-lived; in November 2017 GE announced it would exit its financial position in the combined business in an orderly fashion. The combined business remains intact, but GE has since deconsolidated the business and retains only a 36.8pc share of its ownership, which it has committed to winding down to zero.
Simonelli has been president and CEO since the company’s creation in July 2017, from when he oversaw the merger before also being named chairman in October 2017. For GE, 2017 marked the beginning of a turbulent period. Its stock ended the year down 45pc, before halving again during 2018. GE no longer saw Baker Hughes as a strategic investment and decided to sell it to raise capital. Simonelli, a native of Tuscany that had been a ‘GE man’ since joining its financial management programme in 1994 and the president and CEO of GE Oil & Gas since 2013 adds that GE “decided that separation and an orderly exit was the right approach”.
It was not the construct of the deal that prompted GE’s exit, rather the need to monetise the investment to pay down debt and concentrate on other interests. Baker Hughes’ self-contained but diversified nature made it an obvious candidate.
“There is a narrative out there to which we have got to be sensitive—carbon footprint”
There were inevitably cultural differences to overcome between corporate-giant GE, with its strength in big data and software, and the more entrepreneurial Baker Hughes, with leading positions in in drilling, chemicals and tools. Market share had slipped in several key areas going in to 2017 and, post-merger, Simonelli began to implement the new company’s strategic plan, which is now bearing fruit.
The logic for integrating the businesses remains intact and, in many ways, mirrors the digitalisation trend permeating the industry. It had been run as an autonomous business unit within GE—publicly held with its own board—so “nothing really changed”, according to Simonelli. “The business portfolio retains diversity, a really differentiated portfolio, and the benefits of bringing the two together.”
Baker Hughes has four major business lines. Oilfield services is predominantly made up of the pre-GE Baker Hughes Inc. and includes a variety of services such as drilling services, wireline, artificial lift and chemicals that compete with Halliburton and Schlumberger. It makes up the bulk of the company’s business—as of the end of the third quarter, year-to-date revenue was $9.6bn, up 11.6pc year-on-year and accounting for 54.9pc of the total.
The oilfield equipment business—which includes subsea and deep-water production systems, flexibles and manifolds—came from GE Oil & Gas and competes against sub-sea players such as TechnipFMC, Aker and Schlumberger’s Cameron International. Year-to-date OE has revenue of $2.2bn, up 15.8pc year-on-year.
Turbomachinery and process solutions also came from the GE side and includes rotating equipment and LNG liquefaction train systems integration capability. Year-to-date the business generated revenue of $3.9bn, which while down by 7.1pc year-on-year, disguises the strength of the business; its $6bn of forward orders represents an increase of 33pc, its fastest growing business by this metric.
“There is a lot that we can do organically with our portfolio”
Lastly, the digital solutions business—which participates in oil and gas and other industries—includes sensors, measurement, inspection and data collection. Year-to-date, it had revenue of $1.8bn and orders of $2bn, compared to $1.9bn for both measures, year-on-year.
So is the new Baker Hughes, arrived at through a combination of design and providence, now of the correct size and contain the ideal blend of assets? “There is a lot that we can do organically with our portfolio,” says Simonelli. “The first focus for us is continuing the integration, continuing the operational execution and improvements, and organically growing some of our product capabilities.”
He says he will always stay open to acquisitions but, as the company is already of a capable size, the company is probably better off without adding further complication. Even outside GE it is already a big group, with a presence in 120 countries and more than 65,000 employees. “I do not have any M&A plans for the near future. But we will continue some pruning of the portfolio, as we have been doing over the last few years.”
Its portfolio of business lines means it can be somewhat agnostic about the direction of the energy transition while avoiding being swept along by the cyclicality of “swinging up and down with the price of oil,” he says. “We love to have diversity within the company.”
That said, Simonelli has a clear strategic direction regarding the transition. “Over the course of the next decade, gas will be a winner—if you look at energy consumption continuing to increase, the abundance of gas and [growth of demand for] LNG.”
Baker Hughes has been involved in gas projects that have received FID this year with capacity totalling 80mn t, which Simonelli says the firm largely “won from a liquefaction equipment perspective”. For oilfield services, he says there is “a slant towards gas” particularly in terms of innovation, for example to lift associated gas or utilise gas turbines to generate electricity for electrified submersible pumps (ESPs). Likewise, he says oilfield equipment business specialises in large-bore gas fields.
Baker Hughes has been steadily realigning its business for greater exposure to midstream, chemicals and industrial markets. Its 75pc focus on the upstream in 2014 has been reduced to 60pc today and it estimates that this will decline further.
The slant to gas fits with the company’s strategy for the energy transition. “There is a narrative out there to which we have got to be sensitive—carbon footprint,” he says. “We cannot be blind to the climate change and carbon footprint discussion.” He considers his firm to be an energy technology company and says he “wants to play across the value chain, helping our customers with whatever are their biggest challenges.”
“Over the course of the next decade, gas will be a winner”
To take a leading role in the transition, says Simonelli, companies need to demonstrate a technology is reliable and less expensive than existing arrangements. “If you take on the narrative of the carbon footprint and show you are conscious about the impact of climate change, you need to address it upfront and show how you are improving your carbon footprint.
“There is no hiding from investor sentiment. The industry has been in a tough place for the last couple of years so we must make sure people understand we are an important part of the world economy. Our role is to work with our customers to reliably provide clean, efficient, sustainable energy.”
Baker Hughes is focused on its own use and creation of CO2, so-called scope 1 emissions. It committed in 2012 to a 50pc reduction in emissions by 2030 and to be carbon net-zero by 2050—and is on track with a 34pc reduction so far. “We have had this going for some time now. We feel comfortable with the targets we set ourselves and employees are engaged.”
The separation from GE enabled not only a rebranding but an opportunity to engage with the employee base. It installed ‘ideas boxes’ and has received more than 500 waste reduction suggestions from employees, such as switching to LED lighting and electric vehicles as well as utilising solar panels for electricity where possible.
33pc Increase in orders for turbomachinery and process solutions
He is suspicious of apparently simple solutions that are hastily advocated by those not working in the energy sector. “It is important that we participate in the dialogue around the energy mix. Some individuals are trying to stop the use of gas—I think that is wrong. To give gas negative optics, to call it the same as oil or coal, is very non-factual. Gas is the cleanest available fuel and when you look at its abundance and the demands for electricity, it is natural that it should play a large role over the next decade. We see continued long-term growth for gas, in particular LNG at higher single-digit rates.”
While decarbonised gas may have a big role in the future, “it is a work in progress”, he says. “There has got to be a better understanding of what decarbonisation actually means.”
While carbon emissions released during operations are relatively straightforward to measure, it is much more complicated to fully understand the total level of carbon emissions from the lifecycle of a product. For example, most people view EVs as being carbon free but the manufacturing process may be carbon intensive and a lot of CO2 may be emitted when it is recycled.
The industry, generally, struggles to overcome the belief that it is defending its own interests. “It has got to be a consortium of the oil and gas industry, with policymakers and economists. There has to be a dialogue between environmentalists and the oil and gas industry, to better understand each other. We have to find solutions, as an industry, with all the different parties on getting gas is helpful in reducing CO2 emissions. And it has been one of the key success factors in bringing US emissions down. We have got to talk about it more and work, very much, with developing nations on this aspect.”
The International Energy Agency estimates that that global renewable energy capacity will increase from 2,497GW in 2018 to between 7,233GW, based on stated polices, and 10,626GW, based on its sustainable development scenario, by 2040. There are elements of renewables where Baker Hughes naturally plays a role, supplementing renewables and providing stability. But it will not be getting into the saturated market for manufacturing solar panels or wind turbines. “I see opportunities for us to partner and work with renewables companies. But we have our areas of expertise and will stick to that. Gas is going to be a good complement to renewables, and we have launched a hydrogen turbine and are in geothermal equipment.”
Its digital solutions business produces measurement and inspection tools and sensors that can be applied to monitor grids. “You can start to derive a better understanding of grid sustainability and the number of short circuits that there are, the outages that take place.”
While the hardware is important, and is already in place, the true value lies in how it is utilised. “It is the artificial intelligence (AI) and predictive analytics that take place afterwards that is going to be key.” It has a partnership with C3.ai for AI “which allows us to get to the algorithms that are truly predictive”.
Earlier this year, Baker Hughes formed an alliance with C3.ai—founded by Tom Siebel, the creator of Siebel Systems (now Oracle Siebel), a well-known customer relationship management (CRM) provider. C3 has worked on projects for Enel, Shell and the US Air Force. “C3.ai has shown some true applications of AI. With the partnership, we use AI internally to better drive productivity improvements as well as introduce it to oil and gas customers globally,” he says. “We are at the early stages of a transformation within the industry.”
“I see opportunities for us to partner and work with renewables companies”
The focus on AI is already impacting the industry’s culture—with data scientists recruited from Silicon Valley firms—although there will always be a need for the “capability to understand oilfield operation,” he says. “We see it happening today. For example, with Equinor, in offshore drilling we have shown the relationship between data-driven insights and remote operations, the ability to drill a perfect well with more remote engagement. We are going to have to reposition people into new skill sets—it is more a reskilling and re-concentration of individuals than a de-manning exercise. We have a duty to enable the workforce.”
Simonelli says Baker Hughes’ approach is based on the idea that “you need an ecosystem”. It offers a C3.ai platform of AI that can be hosted on an Amazon Web Services or Microsoft Azure cloud, or on the customer’s premises. “Customers create their own applications and other players come in and sit in the same ecosystem. We are moving towards a world that is more conducive to partnering and working together for an outcome. We will continue to play a key role where we have competence, domain experience and equipment.”
This increasing interconnectedness poses the question of where value is created and can be captured. “Being in the middle [is ideal]. Understanding the pain points of customers and providing at an open architecture to which people can add their own applications,” says Simonelli, describing something akin to Apple’s App Store for industrial AI. “That is more sustainable than trying to be everything to everybody. There is always going to be something new, and new things to think about. It is better to go in with an open mind than restrict people from playing on your platform.”
AI has become a central theme of the industry and this is set to long continue. “We are really at the early stages, if you look at the data captured and used,” he says. Data capture within the industry is of a scale that very few industries achieve but according to a recent study it only utilises 3pc of it to make informed decisions. “We need to move towards even more different types of AI and mass computers to drive increased productivity. The use of big data analytics will drive the next aspect of productivity.”