Depth, breadth and data
Fresh from the merger with Baker Hughes, GE Oil & Gas boss tells Petroleum Economist about his firm's plans for digital analysis, cost-cutting and recovery
Lorenzo Simonelli, head of GE Oil & Gas, can point to glimmers of hope, if not signs of a rampant recovery. The oil and gas division recorded organic growth in orders of 2% in the fourth quarter of 2016, stemming the declines of the previous two years.
"Having orders flat in the fourth quarter is a good sign," he told Petroleum Economist in an interview at the company's annual meeting in Florence. "We are starting to see projects starting to come back and we are focused on making sure we can capture that recovery."
There's still a long way to go. GE Oil & Gas's Q4 2016 revenues were $12.9bn, almost a quarter below year-earlier levels.
So the firm was no more immune to income losses during the recent slump than any other business in the sector. Still, as a division in one of the world's largest industrial companies, GE Oil & Gas can take a longer-term view than some of its competitors. "We are a longer-cycle business, so we look at our backlog and that has remained healthy," says Simonelli.
The financial clout of the GE parent also facilitated the recent Baker Hughes deal. At a time of high risk, uncertain product demand and limited financial resources, GE was still able to pounce. It announced the $32bn deal at the end of October 2016, taking advantage of the collapse of Halliburton's and Baker Hughes's proposed merger.
The new entity—to be known formally as "Baker Hughes, a GE Company"—has a complex structure. Simply put, it will house all of GE Oil & Gas's activities and all of Baker Hughes; GE owns 62.5% of it and Baker Hughes's shareholders own the other 37.5%, which will be publicly traded. This structure gives GE control of the new company without the extra cost of buying all of Baker Hughes.
"We could have bought outright," says Simonelli. "There was an aspect of whether you wanted to apply all of the disposable capital in one transaction—GE also has opportunities in health, aviation and other businesses. This was a transaction that allowed us, and both sides' shareholders, to benefit from the complementary nature of the two businesses."
Simonelli will head the merged company, while Baker Hughes chief executive Martin Craighead will become vice chairman. The deal brings together the world's largest manufacturer of oilfield equipment with a services provider that leads in horizontal fracturing, among other areas. It creates a new type of player, strong in both manufacturing and service provision, with an emphasis on pushing more use of digital processing and analytics in the industry.
Simonelli says the merger takes GE further upstream than it had been, in terms of the equipment it can offer. He also claimed the deal differentiated GE Oil & Gas from others in the oilfield-services sector through its involvement across upstream, midstream and into downstream.
"It allows us to go from the mud line all the way to the surface, and from the surface all the way to the refinery and petrochemicals," he says. "You go from the ability to understand extracting the resource, all the way to refining the product."
Scale is part of it. Beefing up GE's activities turns the company into the world's second-largest oilfield-services company, behind Schlumberger, with tentacles reaching into most parts of the industry. The combined GE Oil & Gas/Baker Hughes operation would have revenues of over $30bn a year.
Industry regulators may find issues with the merged organisation's dominance in some sectors, notably artificial lift and some other US activities. But Simonelli believes the limited overlap between the two companies' activities also minimises the potential for monopolies problems.
"We don't anticipate any," he says. "We are going through the process and we anticipate a close in mid-2017." He highlights the relatively limited lack of disruption to operations that will result from the merger. "We don't anticipate there being big areas of restructuring. It's going to be rooftops where we've got the activities in the same locations and so on", he said.
This suggests the deal has a better chance of coming through regulatory scrutiny unscathed than the failed Halliburton/Baker Hughes deal, which was called off in May 2016. Still, the limited overlap between GE Oil & Gas and Baker Hughes has raised some questions over the value of the merger to shareholders of the two companies—at least for those who put cost-cutting first and can't see where the big savings will be found.
GE executives say operational and organisational efficiencies, such as job cuts and reductions in overhead costs, will contribute to $1.2bn and that another $400m in increased revenues will be generated through growth opportunities by 2020.
Ultimately, though, they are betting on the tie-up producing longer-term financial benefits due to the merged entity's increased breadth of activities, backed by access to GE's company-wide digital technology. Company bosses will also be hoping that the recovery in oilfield activity that seems to be underway will bolster Baker Hughes's bottom line. Its revenues fell by 37% in 2016 to $9.84bn. A 2% rise in fourth-quarter revenue to $2.4bn, compared with Q3 2016, reflected a pick-up in North American activity—and offered some hope of better times to come too.
"2017-18 is going to be pivotal. If you go back to prior cycles, people would say the industry hasn't learned from its mistakes," Simonelli said "So this is an opportunity for the industry to sustain the improvement and make sure it is there for the future."
The GE Oil & Gas chief is especially evangelical about the potential of digital and analytical technologies to improve efficiencies across the supply chain, from reservoir to petrochemicals factory.
This starts with a change in the relationship between suppliers and operators—one where solutions to problems evolve through collaboration and data analytics rather than through a prescriptive approach. "It has to be a different ecosystem. It can't be a relationship where a specification says here's what you need to provide. It needs to be an iterative process, similar to the way you develop software, so it needs to be agile," he says.
For GE, the idea is to apply data gathering and processing techniques being developed across the parent group to the merged company, enabling better prediction of problems and their timing to save money for operators and better organise maintenance to reduce downtime.
"The combination of Baker Hughes and GE Oil & Gas provides us with an opportunity to take digital through the value chain. That's going to unlock value for our customers—the operators—that they haven't seen yet," Simonelli says.
This involves better use of existing data, as much as creating new ones. The average offshore rig already has 30,000 sensors that generate data, but less than 1% of them are used to make decisions, according to Simonelli. The task is to exhume information stuck in "data graveyards", where it lies unanalysed and fails to drive insight and better decision making and predictive analysis. In this vision of the future, data generated by offshore oil wells, rigs and pipelines, for example, will be collated and analysed to provide more successful drilling, more efficient use of subsea equipment and better use of pipeline capacity.
GE certainly doesn't have this data-analytics field to itself. Competition is hotting up. The new company's main rival Schlumberger, for one, is no slouch in developing big data-analysis applications. But GE hopes its clout will help draw oil and gas customers to its company-wide Predix cloud-based industrial-operating system, built on open architecture. Likewise, it can offer its Digital Twin, which models industrial processes using increasing amount of data.
But it has some less esoteric things to offer too. The company hopes its latest turbine will lead a further recovery in equipment orders. GE presented its LM9000—derived from the parent company's aerospace turbines and aimed at the liquefied natural gas, pipeline and offshore markets—at the annual meeting in Florence. It appeared in many forms, including as a 3-D printed model and as part of a virtual-reality training package. Simonelli refers to the turbine as "a shining example our innovative approach to engineering".
Tellurian Investments' Martin Houston told the meeting that he was suffering with "turbine envy", on seeing images of the LM9000. But he then went on to extol the virtues of the unit's predecessor, the LM6000, which Tellurian is using in its US Driftwood LNG project, emphasising his company's preference for using existing known technology and its desire to keep costs down.
That cautious approach reflects the view of many in the industry in today's more straitened times and suggests GE's salesforce will need to be at the top of its game, if the company wants to maximise sales of its top-of-the-range products.