Santiago: Navigating A Global Reset
To be sure, Santiago is keenly aware of the challenges that his company's customers are facing – particularly those in refining and petrochemicals. "Global economic conditions are continuing to impact our industry," he said. "We are going through a global reset where everyone must adjust to new oil and gas price levels and also re-evaluate project economics." However, Santiago contends that the industry's fundamentals remain strong despite the "turbulence" and that its long-term outlook continues to be positive.
"There are many bright spots in the downstream industry in terms of both specific geographic pockets of opportunity and, of course, for businesses such as GE that can drive genuinely safe, proven, and reliable product, equipment and services innovation," noted Santiago. A telecommunications engineer who has been at the helm of Florence, Italy-based GE Oil & Gas for 10 of his 29 years with GE, Santiago sees great potential in the natural gas sector. NG is projected to enjoy a 2.5% annual demand increase for the next 10 years as it becomes a more critical "bridge" fuelling power generation. "This means midstream LNG and pipeline transportation infrastructure will be needed to drive regional growth in developing markets," he said.
Santiago observes promising signs in gas storage as well. GE has signed a number of contracts, primarily in Europe, to supply its Integrated Compressor Line (ICL) technology. The centrifugal compressor, which runs on electricity rather than gas, is designed to help gas plant operators increase reliability while lowering noise levels and carbon dioxide emissions. "One such significant ICL contract is a $25 million agreement to supply three ICL units to OMV of Austria for the Neustift compression station," said Santiago. "With this construction, the capacity of the Penta West Gas Pipeline, which Neustift serves, will be doubled."
According to Santiago, there is even reason to anticipate an uptick in refining orders--particularly in the Persian Gulf region. "When we look back to 2004, large investments were announced by the main oil-producing countries in the Gulf region whose stated aim was to diversify their economies by moving downstream in the oil value chain," he recalled. "Today these investments, after some delays, are finally finding the right environment to move forward."
For facility owners, operating under a regulatory regime that is becoming more demanding compounds the challenges they already face from the economy. For instance, manufacturers, importers, and users of chemicals in the European Union must now comply with complex REACH chemical regulations that place a greater onus on them to verify these substances' safety. A carbon emissions trading system, which has been established in the EU and Australia and may soon be implemented in the U.S., dramatically impacts how refiners, petrochemical plants, pipelines, and others in the oil and gas supply chain operate. Given the additional cost of complying with stricter regulations, facility owners often find it more economical to upgrade existing equipment rather than purchase new units.
"One key trend is that we have seen a dramatic change in the market toward retrofits," Santiago said. "Customers want to inject the latest technology into their existing units to get the most out of the equipment in terms of availability, reliability and efficiency, while also addressing stringent environmental requirements."
For example, the Power Crystal technology retrofit kit that GE markets is designed to boost power and extend maintenance intervals in gas turbines that power pipelines and LNG plants. The retrofit kits offer "increased production at relatively lower CAPEX costs compared to the high cost of installing a brand-new high-performance gas turbine," Santiago explained. "The technology is based on single-crystal material technology that was originally developed for GE's aircraft engines and later adapted for use on its advanced, heavy-duty gas turbines and is suitable for all mechanical drive applications such as LNG, re-injection and pipelines, for both onshore and offshore."
Santiago said the downstream industry also is finding it cost-effective to deploy advanced remote monitoring and diagnostic (RM&D) system technologies. He explained that such systems drive faster responses in critical plant operations to prevent unplanned shutdowns, improve rotating equipment efficiency, and provide real-time remote unit control panel maintenance and dry low NOx system tuning. "GE Oil & Gas RM&D systems are proven to deliver a 1.4-point increase in availability, up to 10% efficiency recovery, and up to 80% time saving in remote tuning."
Changing Center of Gravity
The focus on preserving existing assets notwithstanding, perhaps a more lasting change for the downstream industry is its changing geographic focus. Long concentrated in North America and Europe, the sector has been aggressively expanding its reach eastward -- even before the economic crisis, which has exacerbated the surplus of capacity. "The Middle East, leveraging its low feedstock cost, has swiftly emerged as the dominant player," said Santiago. "Europe and even North America, historically the ethylene swing producers, are moving to net importer roles, while China is trying to curb its dependence on imports."
According to Santiago, market dynamics are changing as well. "In normal market conditions, we would have seen a prolonged period of sluggish prices and margins, while today the situation is forcing companies to take painful, but necessary actions," he said, referring to consolidation. "This is leading the market to move faster than normally expected."
Santiago predicts these changes will yield a downstream sector that looks different both geographically and structurally. "Looking forward, we expect the sector will change by 'traditional' Western players driving deeper integration between refineries and petrochemicals to economically exploit all streams, even assuming marginal 'foothold' roles in the market, and also by pushing for strong partnerships in low-cost feedstock countries."
Because the Middle East has developed its marketing expertise and commercial penetration both in OECD and Asian markets, Santiago expects it to become the largest downstream player. However, he pointed out that China and India will continue to invest in these countries to feed internal demand. "Asia is currently the fastest-growing region in the world with China and India being the two main engines of that growth," he said. "GE Oil & Gas has a long-standing presence in the Asia Pacific region and we have created local organizations for managing our business and ensuring that we have a strong frontline project execution capability."
In China, GE has secured a number of highly significant turbomachinery orders. The company is supplying compressor trains for two milestone projects that will feature the world's largest coal-based propylene plants. "Specifically, these two China projects -- the Shenhua Ningxia Coal Industry Group's plant in the Ningxia province of western China and Datang International Power Generation Co. Ltd's facility in Xilinguola, Inner Mongolia -- will help produce approximately 500,000 tons of polypropylene per year from coal," Santiago said.
Another promising market in the Asia Pacific region is Malaysia, which enjoys a centralized location in Southeast Asia's burgeoning oil and gas industry. "GE has a vibrant presence here and in June we announced a joint venture agreement with Malaysia's leading integrated oil and gas service provider, SapuraCrest Petroleum Berhad, through its subsidiary Sapura Power Services, to further expand and enhance its service center for the regional oil and gas industry," said Santiago. He explained the service center will use GE Oil & Gas' most advanced service and repair technologies to maintain, repair, and refurbish heavy industrial gas turbines and components, using OEM approved standards. "This enhanced facility is expected to be operational by the end of 2009 and one of the center's pioneer clients under this joint agreement will be Petronas, which has recently issued a letter of intent to use the facility," he added.
Elsewhere in the region, Indonesia is boosting exploration spending by 50% to $2.7 billion in 2009. In addition, Thailand has a $12-billion, five-year spending plan to boost oil and stranded gas production. Also, Vietnam's growth level is robust both offshore and in refining. "All these countries need to increase their hydrocarbon production to fulfil their growing internal demand," Santiago explained, adding that the region serves as a natural access point to the expanding Australian LNG market. "Our strong local presence and investment in the Asia Pacific region, in conjunction with our proven ability to fulfil customer needs across all segments of the oil and gas industry, will, I believe, help ensure that we continue to grow our business in this exciting market."
Ready for the Reset
On a global scale, Santiago believes that GE Oil & Gas is well-positioned to be an industry leader in a reset global economy because it demonstrates the ability to address three core challenges: continuous innovation, systems integration, and localization. "At GE Oil & Gas we are investing significantly in research and development to carefully evolve our extensive range of proven downstream portfolio refinery and petrochemicals industry standards -- turbines, compressors, expanders and pumps -- to reach even higher levels of reliability, availability, and performance. Of the $6 billion that GE spends annually on R&D, around $1 billion is focused on oil and gas. This investment is in addition to the $170 million that GE Oil & Gas specifically will spend this year to keep innovation flowing."
The company's technological prowess aside, Santiago credits his colleagues for turning GE Oil & Gas into a prominent equipment and services supplier. "I was appointed to my current position of President and CEO in 1999 and it's an understatement to say that I have enjoyed every minute," he concluded. "Every day presents fresh challenges, new ideas, and the opportunity to work alongside incredibly talented people. I'm truly proud of what GE Oil & Gas has achieved to date, growing revenues from $1.3 billion to, so far, $7.4 billion, and I know that we're well positioned to achieve even greater success."