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Operating in the BRICs--The Schlumberger Approach

Date: 5/11/2010

Ladies and gentlemen good afternoon, I would like to thank Goldman Sachs for their invitation to address this BRICS conference. Acronyms aside—the future of all our businesses—and perhaps nowhere is this more true than in energy—will  increasingly be a matter of adjusting to the fundamental shifts in population, economic growth and wealth between the OECD countries and the developing world.

Let me begin with some numbers. At the beginning of the of the First World War the proportion of the world’s population living in Europe and North America was over 33%. By 2003 the combined populations of that same geography had fallen to only 17% and if we believe UN forecasts it will decline to just 12% by 2050.

If we now look at the West’s relative share of GDP, the trends are even more dramatic—dropping from producing 68% of global GDP in 1950 to 47% in 2003. If the relative growth rates of the West and the rest of the world remain the same over the next 30 years as they were between 1973 and 2003, then the combined GDP of Europe, the United States and Canada will roughly double by 2050. This implies that almost 80% of the world’s GDP growth between 2003 and 2050 will occur in what is now considered the developing world—an overwhelming figure. Furthermore, the World Bank has estimated that by 2030 the number of middle-class people in the developing world will reach 1.2 billion.

Obviously, such a shift in economic power has huge implications for energy. First, all sources of energy will be necessary to meet future demand. Second, energy conservation in developed economies along with new technology to produce consistent reductions in the energy intensity of the developing world will become critical to ensuring adequate supply.

In the context of the BRICs, it is instructive to look at their energy reserves and consumption versus those of the GCC countries.  While it may not make a great deal of sense to look at this collectively, such a view reveals a situation that the West should recognize. Energy resources, particularly in oil and gas, are not always close to, or owned, by consumers.

The most striking fact is the size of coal reserves and their consumption in the BRIC countries.  This is a key element of the carbon dioxide emissions debate and shows how intractable the problem is in the short and even medium term. In terms of oil and natural gas, which most concern Schlumberger, the size of the reserves in the GCC countries as well as those in Iraq and Iran is a key element as it is the competition to access such reserves that will govern the supply of oil and gas to the BRIC economies. Obviously within the BRIC economies this is not uniform. Brazil and Russia are major holders of oil and gas and will both be major suppliers and probable exporters for a long time to come. India and China on the other hand will undoubtedly become the largest consumers as they are not so richly endowed with natural hydrocarbon resources.

The position of India and China greatly resembles periods of the West’s past with oil and gas reserves. Winston Churchill’s determination to diversify the UK’s supply of oil once the Royal Navy had switched from coal to oil led in part to the foundation of the Anglo-Persian oil company.  The continuing struggle between Europe and the USA to dominate access to emerging Middle East supplies after World War II saw the foundation of Aramco—the Arabian American Oil Company. This was followed by the search for new non-OPEC reserves of oil and gas after the first oil shock in 1973; the growth of OPEC; the subsequent nationalization of foreign ownership of reserves throughout the world; and the growth of the national oil companies. Resource nationalism has now placed all but a small percentage of conventional oil reserves off limits to private international capital.

Of course the way in which China and India will access future supplies is unlikely to resemble the colonial attitude taken by the West in the past. It is much more likely to continue to imply investment by those countries in oil and gas reserves throughout the world—perhaps on an unprecedented scale. We have already seen both countries make huge investments in oil and gas properties and sign immense financing deals with resource-rich countries against the security of future supplies.

Overall however the four BRIC countries are important to a company like Schlumberger as they all want, for different reasons, to access the technology necessary to find and produce oil and natural gas.

I would like now to discuss some general principles of how we engage with all countries before drawing some specific examples from both BRIC and GCC countries that are fundamental to our business. To do so, I am going to talk a little bit about the history of Schlumberger and the values that guide us.

Conrad and Marcel Schlumberger, the company’s founding brothers, instilled three core values that remain central to the company today.

• Our people thrive on the challenge to excel in any environment. Their dedication to safety and customer service worldwide is our greatest strength.
• Our commitment to technology and quality is the basis of our competitive advantage.
• Our determination to produce superior profits is the cornerstone of our future independence of action and growth.

The roots of these values can be traced back to the Schlumberger family who steadfastly insisted in the importance of learning and education that later took form in the belief that one must always keep a close eye on the customer’s needs. The brothers firmly believed in the idea of driving their company’s future success by re-investing in the business—particularly in research and development. They also introduced some simple global principles recognizing from the early days that the future success of their invention would depend on expanding outside their native France. For example, they made English the language of the company, and the dollar the money of account. They also immediately started on the idea of an international mobile population to perpetuate the company’s culture.

Two other events had a major influence on Schlumberger’s ability to develop as a completely independent multinational corporation. The first was the decision by the family—after the rift caused by the separation of the US part of Schlumberger from the French part following the occupation of France during World War II—to  seek a neutral jurisdiction in which to incorporate a holding company. Indeed, incorporation in the Netherlands Antilles in 1956—six years before the company went public—has served the company well by bestowing a certain neutrality.

The second event was the realization by the first non-family Chairman of the company that intellectual talent existed everywhere in the world and it was up to Schlumberger to harness it.

Jean Riboud had an Indian wife. He would spend holidays in India over many years where he would meet intellectuals and prominent figures. He came to the conclusion that Schlumberger should build its engineer workforce from all the countries in which it worked. Riboud said; “If I have one purpose, it is to expand the concept of merging together into one enterprise Europeans, Americans and citizens of the rest of the world; to bring Asians, Africans, and Latin Americans so they feel at home with their own culture, their own religion and yet feel that Schlumberger is their family”. I can say that his vision has been very largely achieved. He should have added that they should all feel that they had an equal opportunity to go as far within the company as their merit would take them. Forty years on, Riboud’s vision is core to how we approach countries throughout the world.

Let me now turn to how this policy has been applied in the BRICs—although I would emphasise that a similar pattern would exist in all the countries in which we work.

You will notice that we consistently maintain a large number of engineers of each nationality outside their home country. This is the guarantee that we maintain consistent standards of operation across the world, and it is also the way we prepare people for senior assignments in their home country. Mobility, early in the career, is a requirement. Our current manager in India is Indian but has worked in the North Sea, the USA, Kuwait and China. He has been trained in different environments and in working with different cultures. He knows his opportunities are equal to those of all other nationalities.

You will notice that we have a disproportionate number of Indians outside India. This is due to the influence India has had over the years on Schlumberger research, development and manufacturing that today have led to a number of collaborative efforts on the complex exploration and production questions seen in India today.  It is also due to the fact that Schlumberger was one of the first, if not the first foreign company to hire from the campuses of the Indian Institutes of Technology.
 
You will also notice the very large population of Russians. They make the single biggest group by nationality in Schlumberger today, due in part to the acquisitions we have made and to the fact that we have acquired manufacturing operations in addition to creating our own research and development laboratories.

In each of these four countries there is a common thread in the population of people we hire for each maintains a strong tradition and strong support for science and engineering. The quality of the graduates that we hire can match, if not surpass, anything the West can produce.

I would like now to extend the discussion beyond the people aspect and look at specific examples of how we have developed our operations in two of the BRIC countries. I will also deal briefly with a similar development in a GCC country.

 Schlumberger first went to the Former Soviet Union in the late 1920s when the company was only a few years old. Russian engineers were hired and trained. Operations were performed in various parts of the country until the Soviet regime made it impossible to continue. A long period of absence followed until we returned in 1990. It was touching then to find that even after a sixty-five year absence a portrait of Conrad Schlumberger was still hanging in the Gubkin Oil and Gas University in Moscow. On our return our initial beginnings were difficult. We could not get substantial business with the Russian oil companies, and the attempts of the international oil companies to penetrate the Russian market were small and slow. Logistics were complex and operating practices different.

Our big opportunity came after the rouble devaluation of 1998. We had a customer, Yukos, who wished to try a different methodology to exploit its Western Siberian fields. The results were extremely successful in terms of rehabilitating the older fields and spectacular production improvements followed. We started to perform similar operations for Sibneft with similar success.

We had no doubt of the future importance of Russia for Schlumberger, so despite the perceived risk of investing there we decided to make a series of commitments that would make it clear that we were in the country for the long term.

We had already begun to hire significant numbers of Russian engineers. We had also begun to seed research programs at many academic institutions across the country to select those that would be best suited to our technical needs. We opened a small research laboratory on the campus of Moscow State University, which provided us with excellent access to both students and faculty. This centre has now moved off campus, but is at the origin of our Moscow Research Centre which now employs 53 engineers and scientists. We subsequently opened a technology centre in the Siberian city of Novosibirsk, the home of Akademgorodok, a centre of Russian science where we now employ 93 people.

We have built two manufacturing plants in Tyumen, a Siberian city at the heart of the oil and gas industry.  But perhaps more importantly we have also built a very large training centre to serve the needs not only of Russia and the former Russian-speaking republics but also increasingly to meet many of the training requirements of the European countries. The centre caters to many different disciplines for our employees and for our Russian customers.

Before I move on to discuss the acquisitions aspect of our growth in Russia, I would like to point to some numbers that demonstrate that the efforts we have made in research, engineering and manufacturing in Russia have been of significant importance.

Over the last ten years we have filed a total of 234 patents around inventions that have emanated from our Russian research efforts. These have not only been for the Russian market, but also for worldwide application. A novel proppant used in hydraulic fracturing with considerable success in the USA for example came from our laboratory in Novosibirsk. And leading-edge processes for testing gas condensates have come from our Moscow research centre.

We have also acquired a series of service companies in Russia whose technology, practices and workforce have been particularly adapted to the Western Siberian market. Their technology is fit for purpose and their knowledge of the problems associated with production in Western Siberia is far superior to ours. When we combine their skills with the advanced technology we bring from other parts of the world, we have a winning combination.

Our position in Russia is now as a strong provider of services in the three principal markets. In Western Siberia our activity is supported by the knowledge acquired through our acquisitions. This has helped tailor our service delivery to the high-volume nature of Western Siberian operations. In Eastern Siberia, where frontier exploration and development requires the use of more advanced technology, the traditional Schlumberger product lines play a greater role while in Sakhalin, the offshore activity of both international and Russian customers requires use of advanced technology—particularly in extended-reach drilling and intelligent completions. But common to all areas has been the recognition from both customers and authorities of our commitment to invest.

I would like now to talk a little bit about our research laboratory in Saudi Arabia to show how common technical interests can lead to other opportunities.

More than 60% of the remaining known conventional oil reserves lie in carbonate formations and of these over 70% are in the Middle East. We therefore decided a number of years ago to build our carbonate research capability in that region. We first opened a technology centre in Abu Dhabi to provide the capability to apply new solutions to carbonate reservoir production and then decided to move the bulk of our carbonate research to the area.

The result was the Schlumberger Dhahran Carbonate Research Centre located in the Dhahran techno valley administered by the King Fahd University of Petroleum and Minerals. The centre has programs around aspects of carbonate exploration and production including surface seismic near-surface characterization, advanced logging measurements and hydraulic fracturing. It currently employs 26 engineers and scientists and works in close co-operation with Saudi Aramco as well as the faculty of King Fahd University. This laboratory, together with Abu Dhabi and a number of other countries in the region, has filed a total of 45 patents since 2006 and significant progress has been made in determining the production mechanisms associated with carbonate rocks including estimations of recovery factors.

Imagine our surprise when about two years ago a very large technical delegation from Petrobras asked to visit both our Abu Dhabi technology centre and our Dhahran research centre. As I am sure many of you know, the pre-salt discoveries in Brazil are in carbonates whereas the more traditional reservoirs in Brazil in the Campos and other basins are sandstone. Petrobras was effectively searching for sources of carbonate knowledge and where would this be more prevalent than in the Middle East? (While the Brazilian carbonates are very different from those of the Middle East they are nonetheless carbonates.)

Schlumberger has been in Brazil for 55 years providing a variety of services to Petrobras and other customers. The recent series of pre-salt discoveries is leading to a whole new era for the Brazilian oil industry with huge areas offshore and onshore that remain to be explored. To meet the need for our own services, we are currently finishing construction of one of our largest bases in the world to support deepwater operations and pre-salt development activities.

Following the visit of Petrobras to Dhahran and many subsequent conversations in 2009, Schlumberger signed a technology cooperation agreement with Petrobras initially covering joint work initiatives with Petrobras in four areas; electromagnetics, seismics, nuclear magnetic resonance and electrochemical sensors. The alliance has led us to the decision to build a new research and development centre on the campus of the Universidade Federal do Rio De Janeiro Technology Park. However, we were not comfortable that the projects with Petrobras would provide sufficient critical mass, or that the centre should be limited to only certain activities given the importance that Brazil is going to assume in the exploration and production world.

We therefore decided to expand the centre’s scope to cover other research and development activities relevant to Brazil but with importance to Schlumberger work worldwide. We will, for example, move certain software activities to Rio de Janeiro and we will create a centre of excellence for time-lapse seismic and electromagnetic processing. Eventually these activities will probably employ as many as 400 engineers and scientists. This is a major commitment that will take several years to achieve but like Saudi Arabia or Russia, it is critical to our long-term future.

Our experience in China is somewhat different. China has a large domestic service industry attached to its oilfields which we have not been allowed to penetrate at any scale. We are, and have been for the last 30 years, a window into high technology. While our activity has grown considerably in the last ten years due to the new urgency to increase domestic supplies of oil and gas, we still remain a relatively small player in domestic service activity. We do, however, have a very fast growing activity for the Chinese oil companies as they expand outside China.

Our big success in China has been in the area of manufacturing and software engineering about which I will say a few words. We decided a number of years ago that we had missed the initial wave of software investment in India. We use Indian software houses as outsources for development and software maintenance, but not for key developments. Instead, we put a software laboratory next to Tsinghua University in Beijing. This now has about 300 people with an average age of 32. As recruitment is almost exclusively from Tsinghua and Beijing Universities, the quality of people we hire is exceptional and the lab has developed domain knowledge skills at a remarkable pace. We have transferred certain of our most complex software developments to them and they have succeeded.

Our two manufacturing plants outside Shanghai were built from scratch. But true to the companies culture we hired a large number of engineers who spent 18 months to two years in our field operations before coming back to work in the plants. The result is extraordinary. The company culture has been grafted on top of the extraordinary ambition and productivity of the local workforce.  These are not operations that are only about cost, the quality of the work is equally impressive.
 
I have spent a lot of time describing how at Schlumberger we apply our core strengths to develop our activities in the BRICs as well as in other developing countries. I would like now to make some observations about what we see in these countries as key to success. I feel that there has been a fundamental change in the attitudes to international corporations and their activities and that it is increasingly important that companies learn how to adapt. Nowhere is this truer than in energy, where politics and economics have always tended to be mixed.

Firstly, I am struck by the ambition of the developing nations to learn. Resource nationalism in the past was not always accompanied by a willingness to assume the responsibility for learning to manage and exploit natural resources. It is a feature of the latest bout of resource nationalism that many governments and companies are showing a much greater determination to master the skills necessary for the management of their resources.

Obviously countries like Brazil, Russia and China have long traditions as managers of oil and gas and their capacity to access knowledge that does not exist domestically is helped by today’s communications. The days of research and development being remote from the application of technology are disappearing.  Increasingly this is being performed on site. The possibilities for experimentation are greatly enhanced by this. It is key that multinationals understand that their commitment must be genuine and long term if they are to succeed. Conscious encouragement of foreign investment in research, development and manufacturing reflects a desire to create more local content but also is becoming more and more focused on enhancing the body of local knowledge.

Secondly, the desire to create competent local research, development and engineering capability is extremely prevalent. Investment in science and engineering by these countries is impressive. To me this represents a fundamental difference in the use of the oil rent between now and the 1970s with so many Middle Eastern countries striving to build their universities into real forces for their countries’ futures.

This is equally true of national oil companies as they develop the competencies of their workforces. Schlumberger Business Consulting is constantly asked to perform benchmarking exercises as well as design competency development programs for national oil companies. The ambition to reach equal or greater competence than the traditional oil majors is a strong motivator.

It is fundamental to our future to continue to operate in the oil and gas industries of the BRIC and other developing economies. The belief of the Schlumberger brothers in the power of technology and in the education and learning of people makes our capacity to invest in this natural.

Ladies and gentlemen, I have not had time to discuss all our commitments in the BRIC countries but I hope I have given you some indications as to how we proceed. Thank you very much.

Andrew Gould

Schlumberger Chairman and CEO Andrew Gould addressed the Goldman Sachs BRICS Conference in London.

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