How learning to say no turned PSN around
  from: Asian Oil & Gas
  by: Darius Snieckus
  Friday, October 27, 2006

Since finalising a $280 million management buy-out from Halliburton in March, Production Services Network - formerly KBR's asset management and optimisation unit - has been pushing ahead with a strategy aimed at 'transforming a successful business into a major international player'. Darius Snieckus checks progress with PSN chief Bob Keiller.

But then, as PSN chief executive Bob Keiller points out, the independence finalised in April through a $280 million management buy-out was something closer to a formalisation of many years of greater or lesser self-determination as part of Big Red.

'The production services business [that has become PSN] was part of many different divisions of the Halliburton group over the years. We were part of its energy services division, then we were part of the operations and maintenance division of KBR, and then we became part of the energy and chemicals division,' he explains. 'So we have had various links into the larger corporation and as a result of that we had developed a degree of independence long before the MBO.'

Independence can be double-edged, of course, and the success the company has forged for itself in recent years has been nothing if not hard-won. When Keiller took on the job of UK director for production services in 2002, he found a business performing at what he considered a 'rather mediocre' level: 'Our rate of winning new contracts wasn't particularly high and our ability to make money wasn't particularly strong, and we appeared to have a shrinking backlog of orders.'

And this despite 'many very good people, many well-meaning improvement efforts, and a strong safety performance ethos', he adds.

The turnaround that translated into pro forma revenue climbing by the end of 2005 to around $800 million, Keiller continues, resulted from a counterintuitive shift in approach to an evolving market that ranged over asset management and optimization; brownfield projects; engineering, hook-up, commissioning and start-up; maintenance management and execution; and longterm production operations. The change, he says, was learning to just say 'no'.

'We made it all right to turn down opportunities to bid work,' he says. 'Up to this point we had been bidding anything and everything and not winning very much of it. By allowing people to say "no" and concentrating on the jobs we think we can win and add real value to, slowly but surely we have been able to turn our profile from being a slow downward spiral into an upward arc.'

'Fundamentally, it was about giving our people the freedom to do the work they knew they could be doing but for the paralysis caused by certain corporate constraints,' states Keiller, who made it one of his first orders of business in his then-new post to scotch some 50 of the 70 'actions' on the 2002 business improvement plan. Focus - and competitiveness - restored, the company was soon back on the upswing. 'Order books have been growing ever since,' he underlines.

Nonetheless - as much due to being the sole low-margin, service-intense subsidiary within the capital project driven KBR division - parent Halliburton perceived sell-off of the production services unit as being in line with an ongoing corporation-wide plan to divest non-strategic assets.

This suited Keiller and Duncan Skinner, co-engineer of the MBO and now chief financial officer at PSN, just fine. The commerciality of the unit, reckons Keiller, was a question of perspective: 'Judge it purely on profit margin compared to other parts of KBR and you'd think production services was anaemic; judge it on duration of contract, length of tenure, and return on capital employed and you'd be more inclined to seeing it as a strong business to be in.'

By late-2004, the duo had the wheels turning on the buy-out.

The industrial logic of production services' potential was clear, 'modest gains for modest risks', offers Keiller. 'And because we had the security of long-term contracts, there was a good basis on which to grow and build a bigger and better business.' Fifteen months later, with backing in place from Bank of Scotland Integrated Finance - 'something like a ten-year mortgage to buy the business' - the seal was set on the deal to form one of Scotland's largest private companies.

By creating PSN predominantly via a trade and asset - rather than share - deal, Keiller and co were able to lift the various business units into a new corporate structure, maintaining the 'knowledge, people, processes and procedures, the tools developed over the years - all those things we hope will continue to make the company successful but none of the things we didn't need or want'.

Around the world
Votes of confidence in PSN's remodelled business strategy have come in from all quarters, with the contractor having maintained 'every one' of its clients through the MBO, from supermajors BP, Shell and ConocoPhillips through numerous national oil companies and NOC-IOC joint venture combines to a growing stable of the independent operators, including Nexen, CNR, Apache, Talisman, and Cairn.

The company's geographic spread is expanding too and now spans most every major offshore basin around the world. A sample of recent contracts shows PSN is already making good on its stated intent of ensconcing itself as a 'major international player'.

Off eastern Canada, the company has secured several long-term engineering, construction and procurement services with the likes of ExxonMobil for the Hibernia development and has extended an existing EPCM support deal on PetroCanada's Terra Nova field through to 2009. 'These sort of contracts provide a tremendous foundation for PSN in a basin that is growing and should create further opportunities for us,' enthuses Keiller.

A $30 million deal with ENPPI (Engineering for the Petroleum & Process Industries) on behalf of BP and Egyptian General Petroleum Company joint venture the Gulf of Suez Petroleum Company is the latest deal logged by PSN in Egypt. Covering project management and project control services on its Gulf of Suez assets, the four-year assignment represents the largest-ever offshore rehabilitation development in the area, and, says the PSN chief, is 'a demonstration of the confidence that ENPPI and GUPCO have in our ability to provide the best brownfield expertise for this type of project'.

Further afield, PSN is undertaking a three-year contract encompassing operations and maintenance services for the Rong Doi and Rong Doi Tay gas fields off Vietnam for the Korea National Oil Company. With options for extension for a further 20 years, the deal will kick off with PSN providing initial setup support through the pre-production phase, and move on into management and execution of all operations, maintenance and support activities on the FSO development, set to be commissioned in third quarter of this year.

In the Bass Strait off Australia, the company is keeping shoulder to wheel on a five-year assignment for ExxonMobil covering engineering, procurement and construction work on the operator's area offshore assets along with its onshore facilities in Victoria.

Greater internationalism is not being gained by PSN at the expense of its home patch however. Among recent contracts in the UK North Sea - which still represents almost half of all current company business - is a five-year deal awarded by CNR International last July for engineering and construction support on the independent's entire asset portfolio in the province.

Under a multi-million pound contract, the contractor is providing project management and construction services, in addition to engineering services, for projects and modifications on producing developments including Ninian, Murchison, Balmoral and Tiffany.

With a presence in 20-odd countries internationally, the US Gulf of Mexico stands out as being one market that PSN is keen to make a greater impression on.

'In the US we currently have only a small slice of the production services business, but given that much of it is a mature market like the North Sea we believe that our offering would be a competitive one with a view to growing our overall business,' he says. 'We'll start in the shallows and start paddling out toward the deeper water developments.'

In announcing the MBO earlier this year, Keiller suggested its new-look independence would ensure the company could be 'more responsive and flexible' in its relationships with operators. This is not a byword for being at clients' beck and call, however, as he underlines. Rather it is more about choice.

'The flexibility we now have is more aligned to the front end of our business development cycle - and being more selective in terms of those business opportunities we pursue,' he reasons.

'Within the framework of a large corporation, quite rightly, you have to abide by the corporate rule-sets, and criteria, and there were times that, working for KBR, we couldn't respond quickly enough or couldn't meet the demands of a given job while making sufficient returns to satisfy our parent company's commercial requirements.'

As PSN, he adds, contract pricing, risk, and response time issues can all be dealt with 'much more flexibly'. Revenues of $950 million are targeted for this financial year.

A recent Centre for Global Energy Studies report calculated that some 75% of increases in global oil and gas output over the past decade have come out of 'reassessments' of existing developments. As Keiller acknowledges: 'The great thing about being involved in brownfield business is that you've something like 70-100 years' worth of assets out there that need ongoing attention and support. And then you have all the greenfield developments that become brownfield opportunities as soon as they reach start-up.

'All the activity currently taking place in both Opec and non-Opec countries is going to translate into 5-10 major projects each year for the next 5-10 years and all of it will need some form of brownfield support,' he concludes. 'If anything, we see the market for brownfield services getting steadily bigger and bigger. This industry is changing quickly and we have proved - and continue to prove - that we "do" change.' AOG

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