Schlumberger

Poupeau Speaks at UBS Houston Energy Symposium

Date: 9/16/2015

Good morning/afternoon ladies and gentlemen.  My name is JF Poupeau and I’m Executive Vice President of Schlumberger Limited.  I’d like to thank UBS and Angie Sedita in particular for the invitation to speak at this conference.

Today’s topic is the Schlumberger transformation. I will explain how and why we are accelerating its deployment, and the impact we seek to achieve through this ambitious multi-year program.

But before we start, let’s get the formalities out of the way.

Some of the statements I will be making today are forward-looking. Our results could differ materially from those projected in these statements.

I therefore refer you to our latest 10-K filing and our other SEC filings.

Transformation…

It’s a word everyone is familiar with in a general sense, meaning a change in form or nature.

However, if you attended our investor conference in June 2014 in New York, you would have been introduced to the word’s broader scope as used within Schlumberger.

During today’s presentation, I will define what the transformation means to Schlumberger. More specifically, this will include the transformation rationale and its goals; its implementation methodology; a few early results; and its critical success factors.

So, without further delay, let’s begin.

This organizational diagram illustrates Schlumberger’s top level management. On the left side you will notice the three product groups — Characterization; Drilling; and Production—followed by Operations. Moving up one level, and starting from the left, the company Executive Vice Presidents include the CFO Simon Ayat; the EVP of Technology Ashok Belani; and then me as EVP of Corporate Development and Communication.

Further down are the green rectangles whose locations denote where the ownership of the transformation resides within our organization. The four blue rectangles below EVP Corporate Development list the primary functions that I engage in on a daily basis, and yet the green transformation program rectangles account for approximately 50% of my time. I am leading the transformation program via oversight of the project management office, which develops and drives all the projects, the methodology, and the transformation goals. Essentially, I am the custodian of the transformation program.

All of the work being done in the transformation is enabled by Information Technology, which is owned by the EVP of Technology. Change Management is owned by the President of Operations, Patrick Schorn, and deployed by his team, which encompasses Schlumberger’s geographic footprint consisting of 37 GeoMarkets.

As you can see, Schlumberger Executive Management has clear ownership—or accountability—of the transformation program’s development, enablement, and deployment.

In addition, I think it’s important to note that our transformation board is composed of all the direct reports to Paal Kibsgaard, our Chairman and CEO, and the function heads that support human resources, finance, legal, logistics, etc.

With so many members of Schlumberger’s top level management team sitting on the “ownership stage,” if you will, such a complete level of accountability enables a transformation program that is truly integral to our business thinking and decision making.

Before we delve into where the transformation program is today, let’s first look at its origins and progress to date. The first phase of the transformation centered on the Research & Engineering (R&E) organization. Early on, we recognized the potential for performance improvements in three key areas, namely: Increasing the rate of technology innovation; shortening the time to market; and improving product reliability and performance.

It was important to begin the R&E transformation early because the payback from technological improvements can take several years to materialize due to both the multi-year product development cycle as well as the time associated with the gradual field replacement of older technologies by newer ones.

We began defining the transformation roadmap in late 2007. Now, eight years later, and after spending more than $350 million, we have completely transformed Schlumberger’s R&E processes.  More specifically: We reorganized the team; and designed and piloted new approaches and methodologies based on internal initiatives and best practices from other leading industries. Furthermore, we introduced more modern systems for engineering and manufacturing.

Collectively, this came to be called the Schlumberger Product Development Method. This proprietary R&E method is now the guidebook used by all Schlumberger engineers, project managers, and scientists throughout the more than 90 centers that make up our Research, Engineering, and Manufacturing (REM) organization.

The transformation as applied to engineering has yielded a 60% increase in our ability to introduce new and higher-impact technologies per R&E dollars spent. During the last few years, we’ve spent a little more than a billion dollars in R&E per year. As a result of the R&E transformation, we now have relatively more new technologies coming into the market—so we are getting more bang for our buck.

In addition, the new technologies that are coming into the market now are more reliable than previous technologies. This improvement in reliability translates to an 80% reduction in the nonproductive time (NPT) that is attributed to manufacturing failures. This percentage is based on actual field data related to the frequency and cause of equipment failures.

Today we are beginning to bear the fruit of this eight-year investment through the ability to commercialize new technologies, which are delivering increased reliability and higher levels of efficiency compared to previous generations.

Here we have three examples. At the left, the Quanta Geo photorealistic reservoir geology service from Wireline enables a significant improvement in oil-based mud formation evaluation measurement reliability. This technology is already being run in the Utica Shale.

The second is the Drilling & Measurements deployment of the TeleScope ICE ultra-high temperature measurements-while-drilling service, which is a key enabler to efficiency gains in fields such as in the Gulf of Thailand where a large number of high temperature wells are to be drilled.

And the third is from our Completions team, where instead of using plugs to isolate zones in the formation, the Infinity dissolvable plug-and-perf technology is using degradable fracturing balls. This eliminates the need for mechanical intervention, as nothing is left behind in the wellbore. This new technology is already in use in South Texas, where it is enabling efficient completions that do not require any type of mechanical intervention or the skipping of any stages.

The R&E transformation was the precursor to what is today an enterprise-wide undertaking. Although the transformation program established its roots during a period of healthy market growth, the fundamentals it is based upon have since become even more compelling given the current industry environment.

Today’s industry environment is also obliging operators, suppliers, and other service providers across the E&P industry to overcome technical and commercial challenges by transforming their performance. These industry challenges are, in fact, the very ones we introduced at our investor conference in June 2014. During the conference, we provided some early results from the transformation program, and we introduced the main themes of technology, reliability, efficiency and integration, and how we are leveraging these themes to outperform both technically and financially.

The first step toward establishing an enterprise-wide transformation is to leverage the company’s scale. Scale is something that can deliver tremendous value when the inherent business complexities are managed effectively.

For example, every month our combined product lines conduct more than one million operating hours, which represents a vast reach in terms of being able to understand and serve our customers, as well as provide a window for identifying market opportunities.

Schlumberger resources include 150,000 mobile assets and 2,350 facilities. In addition to the 58,000 suppliers we manage who generate more than 500,000 transactions a month, there is also an extensive transportation network and multiple back-office systems.

The seeds of transformation were planted eight years ago during a generally positive business climate when our results were already good. We knew that if we challenged ourselves by looking for new ways of working, the company could achieve even more. As you will recall from the R&E figures I shared previously, even a small increase in operational efficiency and reliability can be material when a company leverages its scale.

We have undergone an extensive period of analysis and investigation into every aspect of our operations, where we broke down some extremely complex processes into manageable pieces that allowed us to better understand WHAT we do in order to challenge HOW we do it. As a result, we identified key themes tied to our management system, organization, IT enablement, and company culture that pointed to new ways of working.

Once we agreed upon this new direction, we established five internal goals that became the core of our transformation, as shown on this slide. One goal is to achieve a tenfold improvement in Operational Reliability while another pertains to doubling our Asset Utilization. Another goal is to increase the productivity of our people, both in the field and in support roles, by 20%. These are complimented by a 25% reduction in inventory levels. However, we are not just stopping at reducing our days of inventory on hand. We are also focused on optimizing our processes around accounts receivable. The combination of these initiatives will serve to lower our investment in working capital.

Allow me to give you some examples of what these goals actually mean in terms of the business.

Since its inception, Schlumberger has focused on acquiring data and maximizing its use to improve our customer’s performance, reduce their risk, and help achieve their exploration and production targets. As one of the largest service providers in the industry, we are also a major channel through which our suppliers contribute to the value chain—a chain that we are all a part of.

A technical challenge of our business, that you are likely unaware of, is that our customers often engage us on their projects later than they should, and establish a very narrow scope for us to work within during the design phase. For example, we are frequently approached to provide products and services as defined in the well program, but are rarely consulted during early phase development of the well program itself.

Hence, one of our new ways of working is intended to break down the barriers within the value chain by leveraging our technology and operating models to provide customers with fully integrated workflows.

Though how does one translate this into reality when the entire industry is facing significant challenges, many of which have a commercial or contractual aspect?

For instance, service providers are assessed based on the quality of their services in terms of failure rates and NPT. These are often linked to a service provider’s performance evaluation and to the established commercial terms. Consequently, service providers maintain a resolute focus on minimizing these service quality indicators.

However, our NPT generally accounts for approximately 1% of total operational time. This low percentage still represents a little over 2,100 material events, hence our focus on the ten-fold reduction in NPT rate. However, while it is always important to minimize the risk of failure, significant gains can be realized by incentivizing service providers to focus on the remaining 99% of operations, when things are productive, so we can further optimize project execution.

An example of how we are implementing this approach is with Statoil’s Mariner project, which is a field under development 150 kilometers east of the Shetland Isles in the North Sea. Statoil awarded us this contract based on demanding technical and commercial terms that necessitate a new way of working, which was already well underway as a part of Schlumberger’s transformation.

The commercial model being used on the Mariner project goes far beyond the traditional delivery of services. It provides a total well delivery model—from drilling to production—that maximizes value via the integration of a “one team” approach with a shared understanding of the project’s objectives.

In essence, this new way of working allows Schlumberger to fully align ourselves with an operator’s objectives and lower total well delivery costs by working together to eliminate waste. As in any collaboration, we rise together by doing the right things at the right time, all of which helps to minimize costs. Initially, Statoil sought a level of transparency that didn’t exist in the industry at the time, but now it does under the aegis of Schlumberger’s transformation.

One might ask how this is different than the work that Schlumberger has done for Statoil up until now. The answer is that we have taken Statoil’s objectives and put Schlumberger’s profitability on the line in order to deliver the high level of performance required for the Mariner project to be successful.

Also, an important consideration is that the remaining large oil and gas reserves are not located in environments that are easy to access. By partnering with our customers, Schlumberger can develop the technology that is fit for purpose and deliver the lower cost per barrel that we all seek.

As we increase this type of engagement with customers and our company’s transformation continues at a steady pace, we have started to industrialize our approach, and named it the Schlumberger Transformation Method.

Based on our experience with the R&E transformation, the Method is composed of change management best practices as well as lessons learned, adapted from other companies in other industries, to align with our own methodology. In addition, the Method is geared to the implementation of change management and industrialization of our own projects. Taken as a whole, the goal is to accelerate our transformation.

This methodology is Schlumberger intellectual property built on our experience. The transformation team is composed of Schlumberger employees with early stage engagement from our former internal consulting group, SBC. This process is entirely owned by the Schlumberger line management team.

This slide is an example of that rigor as it was applied to the multiskilling process. Part of our transformation effort is to look for new ways of deploying our field people so that they are equipped to run multiple services across conventional product line boundaries.

The y-axis lists the skills required for each of the themes. The bars represent a snapshot of where we were at one moment in time in terms of our effort to equip each theme with every skill. Once achieved, every bar on the graph would be completely filled with blue, thus, no orange showing at all.

The premise behind multiskilling is to establish a more effective way to execute our services to the benefit of both Schlumberger and our customers. This reduces the number of people at the wellsite and increases workforce productivity, creating a win-win situation.

We spent years piloting multiskilling themes across the product lines and now, due to the Schlumberger Transformation Method, we have laid out stringent requirements for the development and deployment of new ways of working in the field.

Our intent is to guarantee that the changes we develop are not only implemented properly, but that the improved processes are sustainable long term. Such a rigorous approach will assist in accelerating the transformation’s impact on our technical and commercial performance.

Now let’s look more closely at the five transformation goals that we’re building upon to make Schlumberger one of the best-run companies in the world.

In terms of increasing Operational Reliability, we have introduced the standardization of general work tasks via documentation that allows our people to “Do It Right” and avoid NPT. This is also being pushed to other parts of the business and we have realigned the quality function to focus on this.

With regard to lowering Inventory Levels, we are centralizing the ordering and distribution of our inventory in order to improve the overall inventory management process.

In order to increase Asset Utilization, our goal is to decrease field Net Book Value and depreciation by reassigning the ownership and allocation of assets so they are Area-specific. This includes an investment in systems that tracks assets and monitors their use on a global basis.

We’ve already touched upon multiskilling, which is one theme enabling an increase in our people’s productivity. Another is optimizing support so people in the field can focus on core activities at the wellsite and reduce the amount of time they spend on tasks at the support facility that are not part of this core. Dedicated facility support teams will manage common tasks across product lines as well as those that require product line-specific skills. This new approach improves work-life balance in anticipation that our industry is expected to grow longer term, while the pool of available talent may not increase at the same rate.

Finally, we are working on the reduction of Unit Support Costs where we are implementing reductions in line with market activity and accelerating the streamlining of internal support processes.

Now I’d like to share some results from four of the five transformation goals that illustrate what we have achieved thus far. The reason it’s not all five is because each program is running at its own pace, so results are staggered accordingly.

Our commitment to improving reliability is a long-standing one that began with our engineering, manufacturing, and sustaining organization (EMS). Approximately 25% of our reliability issues stem from product reliability. We’ve made excellent progress in this area that is proven by an 80% reduction in manufacturing’s NPT rate (NPTr). However, the challenge now is to reduce process reliability, where approximately 75% of our issues are categorized.

Although we’ve always focused on service quality and we have seen a marked improvement, this area is still not where we’d like it to be. During the period from 2009 to 2014, we reduced our NPT by half at a time when operating hours were actually increasing. Thus, in order to reach our goals, we not only need new tools and a new approach, we require a new mindset.

As a result, last year we launched a “Do It Right” initiative that focuses on the importance of following procedures to improve the consistency of our performance. The initiative uses documentation we call Standard Work Instructions (SWI) and checklists to improve process reliability regardless of operating environment. For example, to date Wireline has 3,500 SWIs in place that cover 135 distinct services.

The slide illustrates a few examples of product-line improvements, which means that the efforts to improve process reliability are indeed paying off. In addition, to accelerate the deployment and use of SWIs, the quality organization has a new focus and title, Operations Integrity. Their focus will be on the industrialization of SWIs and checklists in conjunction with achieving field competency so that we will achieve the goal of a tenfold improvement in operational reliability.

Recently, at the end of Q2, we set a record low of NPT incurred for customers, while simultaneously surpassing the halfway mark of a multi-year goal to decrease NPT by a factor of ten.

In regard to asset utilization, the chart on the right quantifies our progress in reducing capex as a percentage of revenue in 2013/2014, in line with stated goal.

Before 2013, capex increased in line with revenue. However, when we concentrated on better use of our assets, we started seeing positive results. Two of the key drivers in this achievement included: Global Traceability, where the ability to track assets with technology such as RFID chips, GPS, and QR codes helps us understand where and how assets are being used.

The second driver is our investment in Centers for Reliability & Efficiency, or CRE, which is where assets are centralized and maintained. In May, we opened such a center for Asia in Port Klang, Malaysia that houses assets for Wireline, Drilling & Measurements, Testing, and Completions. Piloted in 2013 for Wireline and Drilling & Measurements, the CRE concept has since led to reductions in asset fleets, a decrease in maintenance-related service quality incidents, and a decrease in capex for both product lines.

People productivity is steadily improving due to multiskilling, remote operations, and better planning and sharing of our people.

In one example from Mexico, Schlumberger improved people productivity using remote operations complemented by multiskilling. Drilling & Measurements remote operations for directional drilling activities began in 2013 and are directed by a command center in town. The well site supervisors and their assistants trained to run the full suite of directional drilling tools, allowing the directional drillers to move from the rig site to the command center. Since the start of this initiative, more than 180 wells were drilled without a directional driller at the wellsite, but with supervision from technical resources working remotely in the command center on multiple operations. As a result, using remote operations decreased the rig crew by 35%, which is contributing to direct cost savings in personnel compensation and accommodations.

In terms of multiskilling, we have also seen some good results from our integrated projects in Ecuador where we have decreased the average drilling and workover services field crew size by about 26% and 40% respectively over the past two years.

Not surprisingly, International Oil Companies and National Oil Companies working remotely offshore have been early adopters of the multiskilling approach. As we gain a better understanding of the value that the multiskilling approach brings to field operations, we continue engaging with our customers to alter contractual terms to reflect value-based pricing.

In terms of support costs, this graph illustrates three items in particular which deserve mention.

First, when Schlumberger acquired Smith International in 2010, we established a shared service organization. This group initiated an extensive program to streamline our internal support process and more rigidly control the addition of support staff. As a result, our support organization actually decreased in size during the following years of growth.

Second, we can see the reductions in both direct and support headcount made in the last nine months as we reacted early to the drop in activity. These reductions were enabled by the agility of our exceptional field management team underpinned by our confidence in the progress of the transformation program.

Thirdly, you can see that up until this year we have grown our revenue nearly 4 times since 2004, while in the same period we continue to optimize our support head count growth to about two-fold only.

Finally, all of this energy and investment in transformation would be meaningless if it did not translate into significant value for Schlumberger and our customers.

Here is a recent example from Alaska where Drilling & Measurements achieved a benchmark in the Schlumberger transformation story by increasing people productivity via remote operations for a large operator on the North Slope. Using six tools connected in real time that drilled and took logging-while-drilling measurements, this deployment now stands as the most complex bottom-hole assembly completed via remote operations. The key enablers included cross training the logging-while-drilling engineers to directional drillers, and assigning key responsibilities for the various phases of the operations. To increase people productivity, the Drilling & Measurements rig crew was reduced from 5 to 3, a 40% reduction, and one remote operations expert working in a Drilling Technology Integration Center on multiple rigs was assigned. As a result, the rig crew reduction is expected to save the customer $180K annually in staff accommodations & travel

In another remote operations example, through close collaboration with an international operator in the Gulf of Mexico, the terms and conditions of the Drilling & Measurements contract were modified to allow more flexibility in personnel allocation. Rather than applying pricing discounts on products and services, the Drilling & Measurements rig-based personnel was optimized, and a remote operations expert supporting multiple rigs assigned. The result was lower rig-site cost and HSE exposure for the customer, as well as improved service delivery and cost management for Schlumberger.

As previously mentioned, our EMS transformation was started in 2007, yet the results of its full deployment were only felt starting in 2014. Armed with this knowledge and our successful deployment track record, we have accelerated the components of the Schlumberger transformation program I have discussed here today. As you can appreciate, the transformation program consists of numerous projects, all at different stages of development and deployment.

If we were, however, to describe our overall transformation progress with the same baseball analogy we used in June 2014, I would say that we are now entering the fourth inning.

Before I conclude, I’d like to highlight the critical factors for the success of Schlumberger's transformation.

A transformation of this size and breadth requires a mature and stable organization with an effective management structure. Effective means that management has its finger on the pulse of everything that is going on within the company and can lead a framework that has no gaps when it comes to implementation and prioritization of the course of action that is agreed upon. There can be no slack in this framework; it must also be quite stable.

In addition, one cannot underestimate the large amount of technology that this level of process integration requires. Integrating a new process not only means that old processes are discarded, but also requires the introduction of rigor to the newly adopted processes. A good example of this is the Standard Work Instructions that I mentioned earlier.

Please remember that this process started with our engineering transformation in 2007, which means the plan that we are following today is already well established—allowing us to effect transformation throughout the rest of the company. The byproduct of this transformation is the proprietary methodology we are creating.  This is in keeping with Schlumberger’s ever present goal anticipating not only what our customers need in the future, but also what the industry needs as a whole.

In the ocean of change, we not only want to position ourselves ahead of the wave, but rather to anticipate knowing when the wave is going to arrive.

This approach to the market compels us to review the company’s strategy every four or five years. It’s a strategy that factors in downturns, and this is why we anticipated there would be a downturn before the end of the decade. Indeed, we did not know exactly when that wave would hit, but it was within this context that we launched our transformation.

The current industry downturn simply provided a major impetus to accelerate our transformation process because every part of it is constructed to address our customers’ and the industry’s existing and future challenges.

Thank you.

Poupeau

Schlumberger Executive Vice President Corporate Development and Communication Jean-François Poupeau addressed the UBS Houston Energy Symposium.

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