Up Close: Global contract win win for OMV, M-I SWACO – Dr. Ringhofer
In each issue, Momentum sits down with the many experts within the M-I SWACO organization for a candid look at their area of expertise and how it impacts not only our company, but the industry as well.
Up Close recently changed direction and visited with Dr. Wolfgang Ringhofer, head of procurement & contracting for OMV Exploration & Production, the largest integrated oil and gas company in Central Europe. In a wide ranging interview from his Vienna, Austria, office, Dr. Ringhofer discussed, among other topics, the five year global contract between the operator and M-I SWACO that covers both mud services and solids control, the level of activity OMV anticipates in the future and the value of solid operator contractor alliances in today’s business climate.
Momentum:
First, tell us a bit about OMV and your range of activities.
Wolfgang Ringhofer:
OMV is a very fast growing company, which basically developed in Austria. Our E&P activities were concentrated solely in the Vienna Basin of Austria until 1985 when we first ventured internationally with a presence in Libya and later expanded into Pakistan in the early nineties. These were our first very successful international operations. Today, OMV holds a balanced international E&P portfolio in 21 countries structured around six core regions, namely CEE, North Africa, Northwestern Europe, the Middle East, Australia/New Zealand and Russia/Caspian region. With the acquisition of a majority stake in PetroM in December 2004, OMV became the largest oil and gas group in Central Europe. Technically, we have been quite successful. For example, looking back to 2006, of the 27 exploration and 18 appraisal wells we drilled that year, 22 were discoveries, which equates to a 49% success rate.
Based on the tremendous growth and success we’ve experienced, we saw the need to establish the right alliances with our contractors.
Momentum:
What were the primary drivers in the decision to establish contracts on a global basis?
W. R.:
With the growth and worldwide level of activity we now have and the challenging market situation we have to work with, cherry picking (products and services) could not be part of the game for a successful procurement strategy. First and foremost, we wanted to develop long term relationships with our suppliers, so our priority was to establish long term contracts for three to five years. What we envisioned was having a dependable sup ply of products and services not only for the global operations we have today, but for all the areas where we would be operating in the future. Minimizing the total cost of ownership with best performing contractors is one key for sustainable growth in our industry. We first conducted introduction meetings jointly with our senior management and all potential suppliers to explain what we were aiming for and the ingredients that would make the alliances successful. We then went to the market with global tenders that would include the joint volume of Petrom, which basically increased the overall volume by about 30 rigs. This is a huge number considering today’s market situation in Europe.
According to our contracting strategy, our first global tender was for seismic services, followed by wellhead, casing and tubulars, and continuing with all drilling related services, including mud services and solids control. Basically, at the end of the day we had comprehensive contracts covering all drilling related products and services. This is all in line with our strategy to develop long term strategic alliances with all of our valued suppliers, resulting in a win win.
Procurement was one of the strongest proponents for integrating our key suppliers into our operations and forecast planning. Our first step was to have supplier performance review meetings with service companies. We jointly developed KPIs to measure performance and once a year we review where we are with all the pertinent parties. This is designed to present a clear view of what we are planning in the upcoming year. One of the elementary questions to me still is how the contractor’s regional growth strategy fits with the operator’s strategy. When it doesn’t fit, it can be very difficult. I have experienced that procurement success depends heavily on standardization. When technical requirements are standardized, then establishing a consistent supply chain and consequently saving on overall project costs will be much easier to achieve.
Momentum:
What exactly were the deciding factors in selecting M-I SWACO for mud services and solids control, and how would you describe the relationship today?
W. R.:
M-I SWACO certainly is not a new company to us. We are very well established with M-I SWACO who understands our business due to long lasting experience. However, I would say that the driving factors in the selection of M-I SWACO were your technical capabilities, worldwide presence in our operating areas and predominate QHSE performance in combination with best economical project performance. QHSE was a very strong point for M-I SWACO and is important to us. In all of our operational areas, we see environmental regulations becoming more and more strict and that will continue in the future. For example, in the upcoming years, we will begin operations in Norway, which has some of the strictest environmental regulations in the world. We have a major development in New Zealand, a beautiful country, and our QHSE strategic goals are designed to keep it that way, to minimize the environmental footprint in our operating areas.
Also, of utmost importance in a successful alliance is having the right people in the right places. Since we signed the contract for mud services and solids control in late 2006, M-I SWACO has shown that you can establish a learning curve and transfer experiences from one part of our operations to another part. If, for example, we are facing a technical problem in one part of the world, we feel confident that M-I SWACO can provide appropriate resources and the necessary understanding to develop a solution based on your MI local and global expertise combined with OMV specific experience. So, the right people in the right places is the key. OMV embraces new technology, but without having the right people in place, new technology will not be successful. Essentially, we see each other as team members here. We recognize that without a long term agreement, the contractor cannot make sound investments in people and re sources. When entering into difficult exploration areas, it is reassuring to know we will have the products, services and qualified people we will require. Measuring procurement success, the first thing most people ask is, ‘How much did you save?’ While cost savings are important, basically, we see success as a merger of good people and fit for purpose technologies at a reasonable price to achieve best in class results.
Momentum:
With this long term alliance, do you see any opportunities for joint research projects or integrating any of the other M-I SWACO product lines?
W. R.:
Some of our ventures already have made contact with your Production Chemicals organization, so this partnership does not necessarily have to cover only mud products and services and solids control. The master services agreement gives us the possibility of adding additional materials and services, if necessary. In Romania, we see opportunities to partner with M-I SWACO for pit cleaning technology. We could be partners in that effort for the long term.
Insofar as research possibilities are concerned, we are looking at more research projects, particularly in low permeability fields and depleted reservoirs.
Momentum:
Considering the many countries in which you operate, having one master service agreement covering all of them must pose enormous challenges?
W. R.:
Yes and no. While there is only one tender, there are different specifications for each country, so all the special requirements had to be incorporated into the leading document. On the other hand, as the MSA, which was signed by the senior entities of OMV and M-I SWACO, covers all legal aspects and standard terms and conditions of a contract and is valid for all OMV ventures and affiliates, all contract negotiations will be speeded up. Below the MSA, we have 10 to 12 service contracts that cover the special conditions and requirements, like SOW, pricing, etc., for the various countries.
Another big challenge for us was dealing with the cultural and operational differences, which are enormous. In the beginning, many people thought that was driven entirely from the head office without any local content or input. Of course, this has been a challenge for both companies. But, once the people understood the benefits and saw the success, they became very much committed. The commitment starts with the senior management of our company and your company and filters down from there. The commitment, encouragement and support of (OMV Chairman) Mr. Helmut Langanger and (M-I SWACO President & CEO) Mr. Don McKenzie has strengthened this alliance.
Momentum:
How do you see your level of activity going forward?
W. R.:
We will be increasing activity in most of our regions where we operate. For instance, in Pakistan we will go from one to two rigs and in Yemen we’ll begin using a second rig in March. We also intend to move into Russia, Egypt and, as I said earlier, Norway, where we have the acreage and have started seismic acquisition. Once we get to the exploration drilling phases, we will add those countries to the list of MSA users.
We know the cyclical nature of our industry and we know prices and activity eventually will roll back. While the activity may change, the operator/ contractor relationship will continue. We have the right ingredients in place to sustain the alliance.
