08 Aug Gone fishing: Australia’s local businesses need to rethink their approach to #LNG
Howard Thomas and I have spent a few days in Darwin working with several local businesses on how they might get into serving the #LNG sector. The experience reminded me of fishing, and not solely because of the stunning colors of the ocean in Darwin. How should local business fish for business in the largest LNG ocean in the world (Australia’s vast new installed base of LNG plants)?
A friend of mine, who was also a client at the time, passed on a very useful fishing tip that has served me well in business.
If you want to catch a big fish, you need to use a long line. tweet
There’s so much meaning packed into this little phrase. It has influenced my thinking for such a long time that it bears revisiting for the emerging LNG services sector.
Distinguishing fish from whales
Pulling in one of the long 5 year, all encompassing services contracts to provide end to end ops and maintenance services to a new LNG or gas plant certainly qualifies as catching Big Fish. Let’s call these contracts Whales.
A lot of whales have been caught already, like this one.
There’s plenty of other Big Fish besides the Whales. A good one is the contract to replace burnt out lightbulbs at one of these LNG or gas plants. Imagine if you were the Australia based services company that landed that contract? Think you’d be in good nick? It’s a dead cert. There’s likely thousands of light bulbs on one of these facilities, many at height, of different styles and features, and must be on 24/7. How about the company that provides replacement air filters to all the scrubbers and intakes on the site? Another Big Fish. How about the company that provides all the rental cranes, tools and equipment? How about insulation installer on cryogenic pipe? Big Fish.
Early on, because of Whaling season, there won’t seem to be any other Big Fish around. But they’re there, if you know how to find them and how to fish for them.
Who are the Whalers?
No, dear reader, it’s not a Jamaican reggae band, known as the Wailers. It’s the global services companies, of course (the Usual Suspects). The Usual Suspects have been chasing the Whales for some time, trawling the world’s oceans, fishing with very long lines. And they’re pretty good at it – they’ve landed a lot of Whales so far.
Now that all the Whales have been caught, and the downturn in oil prices has cut off new capital spend, the Usual Suspects are hurting. Their financials are in very poor shape as almost $600b has been taken out of the sector in the past two years, and these low oil and gas prices have killed off a huge number of mega projects. The challenge is that the Usual Suspects really struggle to go after anything smaller than Whales. They’re just not geared for it, with their big boats (overheads), their harpoons (marketing teams), and their large crews (high salaries). They’re really only suited to go after the Whales.
It won’t get any easier for the Usual Suspects. If you think about it, LNG is priced as a global commodity, tied to two other commodities (oil and the US dollar), and neither is in Australia’s control.
One of the few things the projects can do once the capital is spent, and facing a revenue line that is capped by the volume capacity of the plant, the oil price and the currency conversion, is to work with their suppliers to constantly lower costs. This is really hard to do for the Usual Suspects. They’re Whalers.
That’s not to say local business is entitled to this market. They’re not. The projects will contract with who they see as the best. Draining the ocean to favour local business is not going to work.
How will fishing conditions change
As it turns out the Whales will be subject to a review in just a few years. If the Usual Suspects haven’t done a good delivery job, the LNG projects will be more likely to consider alternative suppliers. Indeed, in oil and gas basins the world over, many buyers of such services eventually shift over to local businesses as their contracts renew. As I see it, the conditions for shifting over (high project costs, low LNG prices) are very good at the moment.
The LNG projects are almost all over budget, or late or some combination of the two. But now that the capital is sunk, one of the few ways the projects can get close to their original financial targets is to squeeze hard on the operating and maintenance costs.
That means squeezing the Usual Suspects for price concessions or cost reductions. The Usual Suspects can only take so much squeezing as they have large fixed costs and capital market pressures. To cope, they will try to contract out where they can. The contracts they let out will be Minnows to them, and probably just Bait Fish to a local services company. That’s where new entrants have to start fishing.
How to fish for Big Fish
Here’s a few steps any good fisherman will recognise, applied to the challenge of fishing for services work.
Pick your stretch of water
Recognize that the LNG sector, in new basins, will always let out Whale contracts initially. There’s too much risk to turn over ops and maintenance to unknown local firms too quickly. Their going-in position, and it’s completely reasonable, is that no local service company truly has the gear. And no one ever got fired for hiring IBM. So crabbing about it won’t do any good. It’s done.
It also means that service companies need to start selling services to the Usual Suspects who will shortly be letting out Bait Fish contracts.
Forget the net
Being all things to an LNG project or a Usual Suspect (fishing with a net, trying to get any work at all) is not going to work. These are world scale operators, very demanding and with big performance targets. In my experience, they can afford to purchase the very best and they will. The best you’ll get, and be known for, is Minnow fishing.
This is line fishing at its finest. Be focused.
Pick your target
Fish differ. If you want to chase Marlin off St Lucia, you will need a fast ocean cruiser, with a deck mounted chair, a heavy duty rod, a reel with serious braking power, and 500m of 1000 lb test line. But if you want a champion salmon from the Mighty Bow in Calgary, you’ll want a supple 12′ rod, a 100m of 50lb line and hip waders.
Lightbulbs are not filtration. Pick one, and be very good at that area. Aim to be truly world class at it.
Get the right lure
Big Fish will respond to different lures or value propositions. The engineer responsible for site lighting will have a different view of risk compared to the engineer responsible for filtration. If a light is out for a period of time, the plant can still run. There will be safety worries, to be sure, but it’s not the end of the world. If a filter clogs up, and there’s no spare, untold damage could happen to the units in the plant dependent on highly purified processing. No filter, possibly no LNG or worse, damaged kit.
A services company specialising in lighting might offer 48 hour turn around, quality lower cost third party bulbs, trained teams able to operate at height, specialized shielded equipment for site operations, brass no-spark tools. A services company that specialises in filtration might offer hot shot turn around (2 hour response time), always in stock inventory, 24/7 stand by installers and pre-installation conditioning to remove any fines.
Spend time picking out the right lure, put some bait on it, and cast your line.
Get your technique right
The oil and gas industry operates at a level of safety that is above what Australia’s local firms are used to. Not meeting the safety standard is no excuse. Fishing at this level requires a level of safety performance that simply must be met.
Train your teams on how to fish properly.
Be sure to badge your team. Over time, as they spend on-tool hours at site, the LNG project will take note of how the Usual Suspects rely on a handful of quality local firms for specialised execution. They will get to know your brand. When the contracts come up for renewal, and they will, the customer will be strongly tempted to cut out the middle man and go direct to the experts. Strike!
Will the customer be tempted to contract with the quality local supplier even though the Whale is in place with the Usual Suspect? Of course they will, with the pressures they’re under. Will the Usual Suspects object? Yes, but not too strenuously for fear of losing the whole contract.
Pay out your line
Landing one of these Big Fish takes patience, but that’s okay. The LNG is a long game (20-30 years) too. There’s time to get staff hired and trained up, register with key supplier databases, meet the ultimate customer, win some small projects.
Let’s. Go. Fishing!