Related Articles
Forward article link
Share PDF with colleagues

Perfecting the portfolio

GE Oil & Gas is growing, riding on the back of the increasing industry trend for companies to outsource specialist functions. Nigel Ash talks to the chairman and chief executive officer, Claudi Santiago, at the company’s headquarters in Florence

ASK AN airport taxi driver to take you to the international headquarters of GE Oil&Gas in Florence, Italy, and he will ask you if you mean Nuovo Pignone. It seems odd that this $3bn a year division of the world's second-largest company, General Electric, should have maintained the branding of the Italian compressor firm, of which GE bought control from Eni in 1994.

Yet although the GE Oil&Gas portfolio now contains nine companies, including its most recent acquisition, UK pig specialist PII Pipeline Solutions, there has been no move from GE in the US to subsume the Nuovo Pignone name.

It has been suggested that in the sometimes-delicate political world of oil and gas, it suits GE's purposes to have a flagship name in its oil and gas division that is not obviously American. However when asked to explain this branding issue, Claudi Santiago, chairman and chief executive officer of GE Oil and Gas since 1997, who bases himself in Florence, produces a Giaconda-ish smile and politely moves the conversation on to his division's performance and the way in which it has increased its product portfolio, in part through acquisition.

The acquisition trail

In 1999, the division bought Texas-based Gemini, with its high-speed reciprocating compressor technology. A year later it purchased Rotoflow, in Los Angeles (hydrocarbon turboexpanders), and Thermodyn, in France (low- to medium-pressure centrifugal compressors and impulse steam turbines).

In 2001, it acquired A-C Compressors and Conmec, both of which specialise in repair, maintenance and upgrading of turbines and compressors. Last year, it acquired the pipeline-integrity specialist PII Pipeline Solutions. In August MJ Harden Associates of Kansas, specialist in geospatial data management, was added to PII, to boost their pigging technology.

GE Oil&Gas has increased its revenues from $1.3bn in 1995 to a forecast $3.4bn this year, partly through acquisition. The strategy has had two aims, says Santiago: to upgrade existing technology and to lock into clients through selling them outsourcing deals for the maintenance of the equipment they buy.

We have been developing upgrades to all our product lines, even if they are 10 or 20 years old, he says. The concept is that for any piece of our equipment running anywhere around the world, there is an opportunity to make it better. Such asset optimisation is the secret of a longer life. 

Besides selling such upgrades, Santiago explains that GE Oil&Gas has focused hard on what he calls insurance. In the past, the big oil companies and the original equipment manufacturers (OEMs) had a different relationship, where the name of the game was that we, the OEM, sell you a unit and if you have a problem, if we have the time, we will come and fix it, or we will sell you a spare part.

Because capital was abundant and there was not the emphasis that there is today on shareholder value, investments were scrutinised less and the industry was prepared to buy perhaps more units than it needed. When the climate changed and it turned to asset optimisation, we recognised that we had to protect our installed equipment base. 

The outsourcing trend

As a consequence, he explains: What we tell our customers is: if you give us a chance to be your partner on the maintenance of say, these gas turbines, we can give you a flat-rate price to look after them and, if they go wrong, the fix will be at our expense. Years ago this was unthinkable. Now the relationship is win/win, not win/lose.

There is a clear outsourcing trend in the oil and gas industry. We can do a better job maintaining our equipment because we did the designs, we built it, we know it and we have the diagnostics.

In 1995, only 5% of our $1.3bn revenues was from these high value-added resources. In 2002, the proportion had become 27% of $2.7bn of revenues. This year, we expect $3.4bn and the percentage of the high value-added [profitable outsourcing] will be between 33% and 35%. 

Santiago's division spent $42m on research and development (R&D) last year. A further $57m will be spent this year and he expects some $80m in 2004. Although some of it is greenfield research, such as work on offshore liquefied natural gas (LNG) trains, much of the R&D effort goes into existing equipment.

However, Santiago points out that on top of its own R&D spend, GE Oil&Gas benefits from the research investment throughout the entire GE group of companies. There is a GE technical council, which meets quarterly, which involves all the technicians in all businesses and they exchange ideas and problems. 

Meeting the challenge

Harking back to last year's acquisition of PII, Santiago recalls: When we were looking at that space, we saw that we could flow down some of GE's medical-systems technology into pigs. The challenge was to integrate a camera and a computer. It has since happened and we now have the latest generation of pigs. There are 60 PhDs working in GE's research centres whose whole life is about technological innovation. Sometimes they will spend a lot of time working on something that does not, in the end, produce a solution. That happens. But it does not matter.

The salesman in Santiago comes to the fore when he asserts: I believe strongly in the principle that it is very hard to have a bad day with a customer, even if they say no. At least you have the opportunity to find out why they want to take a different route. We have thrown our expertise into projects that we nevertheless went on to lose. A few years ago, we were looking at a pipeline-building scheme and we invested a lot of money in that project. But, in the end, the customer went with something else. We had thought we had enough products in our portfolio, but it was not the case. We learnt from that failure and spent $50m developing a product to fill that gap. 

Santiago is not easily drawn on the problems of low margins complained of by many industry suppliers, although he admits his division's margins are not the margins enjoyed almost anywhere else in GE. He feels that if the whole supply chain of the industry is indeed skewed, then the response to tight margins should not be complaint, but more consistent productivity.

Providing solutions

If we can provide a solution to customers' problems, they are very fair. We are working in an industry where fairness and performance are key attributes. If you perform, if you solve the problem and you execute the solution, it is very difficult for the customer to be unfair.

We must continue to do what we have been doing - developing technology in response to need, not solutions that are disconnected from the market.

This is an industry where technology and service have a premium.

All the operators in oil and gas are looking to maximise shareholder value. They have been doing a nice job of it in the last few years and there has been a tension between them and OEMs. Nevertheless, we are not at the point where the operators are endangering the technology goose that lays the golden egg.

There is much more tension in the supply chain, but it is not at the point where we are going to be fracturing it. We must continue to invest, we have to inject more technology into our products and we have to be more productive. By moving the division into the life-cycle of a customer's asset, GE is prepared to trade off an initial low margin on the original transaction.

LNG is now a core strategy for the division. It is supplying ExxonMobil's new 7m tonnes a year (t/y) Qatargas II LNG plant, with compressors powered by a Frame 9, 100 megawatt (MW) gas turbine, the largest used on an LNG train. It is also involved in the 5m t/y BP/Pertamina Tangguh LNG plant, in Indonesia.

GE Oil&Gas is also focusing on subsea compression technology.

It was involved with Norsk Hydro in a pilot project on the Troll gasfield and is now working on the Ormen Lange deep-water gas development, where there will be no topside installation (PE 10/03 p14). In July, GE Oil&Gas renewed a development and commercialisation agreement with Aker Kværner for subsea compressor technology. Last year, GE launched its 2.5 MW, Blue-C subsea centrifugal compressor. The division is working with Aker Kværner on a pilot for a 12.5 MW compression unit, expected to reach the market in 2008.

It seems possible that the need for further subsea compression technology will trigger one of GE Oil&Gas' next acquisitions. But Santiago is not to be drawn. Subsea is still a fragmented space, he says, with different people doing different things. There is no clear leader in the space. But GE can be a player. It is going to take a few years and one of the big challenges will be below 2,000 metres.

Also in this section
BP gets Magnus money back
6 September 2019
Enquest pays off first loan issued in innovative North Sea financing deal
The majors' messy divide
21 August 2019
Two gassy Europeans, two shale-obsessed Americans and one in between is too simplistic a division
Aramco sends off IPO signals
13 August 2019
The company boosts key investor metrics, suggesting it has renewed its appetite for an IPO