2.4Value Driver: Financial & Commercial

Customer Centricity – Bringing SBM Offshore Closer to its Clients

Driving SBM Offshore’s commercial strategy is the Company’s focus on global opportunities, its state of readiness to react to the market and the priority given to client needs supported by a solid understanding and management of commercial and financial risks and opportunities. This focus goes hand-in-hand with SBM Offshore’s belief that continuous and improved client interaction will contribute to a greater alignment of views on the appropriate risk/reward balance and cost management in a sustainable manner beneficial to SBM Offshore, its clients and its stakeholders.

Operational costs

The operations expenditure (OPEX) on the fleet consists of costs related to maintenance and daily running of the facility. Reducing OPEX cost is a Group objective whilst maintaining the safety operations combined with high uptime performance. The Company is actively pursuing methods to reduce OPEX through optimization of operations and maintenance schemes.

As an example, improved stock control and spare parts management resulting from a stream in the Company-wide transformation Odyssey 24 (OD 24) will decrease spare part stock costs. Another initiative is to reduce manning levels on board offshore with the introduction of a control room onshore by means of advanced telemetry technology.

Restructure Along Product Lines

To weather the industry challenges and use these to its advantage, the Company decided to streamline the organization from 2015 by focusing each of its five Regional Centres on specific products. SBM Offshore believes that this will bring the Company closer to its clients, will reinforce the Company’s business proposition and create value by leveraging its knowledge base. The Management Board believes that this step will ensure SBM Offshore’s future success in the evolving business environment. In addition, it will deepen the Company’s knowledge base and focus SBM Offshore’s talent on operational excellence for each product line.

In the new organization, business ownership will be brought to a product level with product lines enjoying the full strength and experience of a dedicated team in each Regional Centre. The synergies between the product lines are maximized by top management.

In place will be a more agile organization with a more diversified product offering focused on operational excellence and an improved management of the cost base. This will be combined with stronger means to develop tomorrow’s managers through an increased portfolio of leadership roles that empower them to grow the business.

The new organizational model along Product Lines involves implementation of the following improvements:

  • Revision of the business development and acquisition approach in closer coordination with project execution;
  • Specialization of each Regional Centre along a set of product lines with clear ownership and accountability;
  • Further development of integrated project teams.

A Product Line is defined as a distinct product sold or marketed to an external or an internal client. Product Lines as organizational units have responsibility over their own profit and loss. The centres will also be in charge of acquiring business through their own sales team with central support, with the objective to capture, further refine and maintain the product memory of the respective products. For example, one product line will be totally dedicated to FPSOs, the Company’s key offering. The product lines will be managed by the five Regional Centres in North America, Brazil, Europe and Asia.

Reposition Strategic Product Portfolio

Rejuvenating its strategic product portfolio – while keeping its focus firmly on the high-end, high-technology FPSO segment – ensures that SBM Offshore offers a complete spectrum of products to accommodate all floating production needs. Based on its know-how and historical track record in other segments, such as Semisubmersible and TLP production units, turret and mooring systems, terminals and buoys the Company will reposition its portfolio by enlarging the envelope and explicitly including these trusted solutions.

Risk Reward Balance

The Company on its own cannot counter the trend of a hesitant market in view of slow demand for oil and increasing production costs. Value will be created in the long run by focusing on the right balance of risk-reward. Given the inherent risks in project execution, financing and the average project duration, the risks of being saddled with loss making projects for years to come is clearly not in the interest of shareholders. The Company will maintain its pricing discipline when participating in the ongoing tenders.

The low order intake momentum affects SBM Offshore’s turnkey business and the Company has had to take tough measures to reduce its turnkey capacity. By retaining the core staff capable of handling the large complex projects, the Company has taken great care not to weaken its position in the medium term, when it expects the market to come back with a strong demand for FPSOs.

Focus on Cost Efficiency

The economics to develop an offshore oil field are under pressure due to the low oil price in combination with increased investment costs. SBM Offshore focuses on creating value by developing products and services at lower cost through a wide range of initiatives. The main focus is on reducing the full life-cycle cost of supply, installation and operation of the FPSO by combining and optimizing all solutions.

Standardization of products

Increased standardization of products and services throughout the product life cycles will reduce overall costs compared to tailor-made solutions. The challenge is to optimize the balance between maintaining quality products with high efficiency against lower cost standard solutions whilst maintaining the highest level of safety.

Focus areas for standardization are related to engineering of topsides, hull standardization, framework agreements over the full life cycle of equipment supply and spare parts management among others.

Experience and optimal management

Feedback from the turn-key projects and ongoing operations is an important source of information for continuous improvement of the standards of SBM Offshore’s product lines. This type of feedback tends to create product standards, which do not always seek the optimum balance between benefits and costs. To create value for its customer, SBM Offshore wants to improve the interaction between experience and knowledge-based management in the development of its product standards with the objective to maintain quality and reliability against lower costs.

As an example, we expect that a Process Safety Approach towards topsides design complemented with operational experience will result in a reliable and more cost-effective product.

Suppliers frame agreement

Long-term supply contracts will create incentives for the supplier to perform better in terms of quality, reliability, cost, delivery and maintenance in order to secure the long-term supply. Using the same equipment throughout the fleet reduces spare parts levels, ensures consistency of performance and timely delivery.

Value is created with cost reduction in the complete product lifecycle, both CAPEX and OPEX combined, while maintaining reliability of supply and performance.

Reducing the cost of non-quality

Costs associated with non-quality in engineering, equipment, supply and services affect both construction and offshore operations. During construction the main effect of low quality equipment causes rework, increasing costs and delay in schedule. Replacement and re-order of goods increases cost in the supply chain, transportation and stock management.

During operations, cost of maintenance, spares and consumables should improve with less failure and reduced spare part levels and vendor support. Redundancy of equipment can be optimized whilst maintaining uptime performance.

Full cycle cost of facilities

As the level and quality of the initial investment affects running costs later, SBM Offshore aims to optimize the overall full life cycle costs of its projects.

Risk Concentration

SBM Offshore operates predominantly in deepwater areas. The primary areas of development for oil in deepwater are concentrated in Brazil, the Gulf of Mexico, Africa, Asia and the North Sea. SBM Offshore aspires to a well-balanced regional portfolio and focuses on development of business in new provinces that are emerging in South America, Eastern Africa and the Mediterranean. See section 4.6 Risk Management for the full outline of SBM Offshore’s risk and opportunity management strategy.

Reliability

Reliability goes hand-in-hand with superior financial results by safe, high-level performance during offshore operations and timely delivery of FPSOs and other products. Operational excellence is determined by the Company’s high-quality products and talented, motivated personnel.

SBM Offshore focuses on quality, health, safety and environment as is evidenced by increased training, supervision, measurements of relevant indicators, as well as close collaboration with clients and contractors at the yards and offices where the execution of activities takes place.

Compliance

SBM Offshore gives special attention and focus on a strong compliance culture. The Company recently issued its core values with ‘Integrity’ prominently placed among them. Following the discovery of potentially improper sales practices some years ago, SBM Offshore has put in place a compliance program and there is no room for complacency in this respect. See section 4.5 Corporate Governance for a full outline of the Company’s Compliance strategy.

With the focus on reliability and compliance, the Company has laid a foundation to comply with requirements for the ESG (Environment, Social and Governance) criteria of lenders and investors. In 2015, this proved to be an important contributor in qualifying for funding by Export Credit Agencies from the Netherlands and Japan.

Funding

The lease and operate model, where SBM Offshore owns the FPSOs, leases them to clients, and operates them for the duration of the project requires substantial financing. Through diversification of project finance sources, the Company reduces its dependence on traditional project finance provided by international banks. The Company will continue to pursue this route, which creates value.

Joint Venture Structures

When SBM Offshore signs a new FPSO contract, it generally sets up a Joint Venture (JV) with one or several partners, while maintaining at least 50% ownership. The JV is the formal contracting party that contracts with the client and places the purchase order for the FPSO with SBM Offshore serving as project contractor. In this set-up, the project risk remains mostly with SBM Offshore, while the partners co-fund their share of the construction lump-sum cost.

The JV also arranges project finance, with a pre-completion guarantee from the parents and a non-recourse structure once the FPSO is on hire. JV partners include local national oil companies, industrial and financial partners such MISC Bhd and Nippon Yusen Kaisha (NYK) and financial partners such as Mitsubishi Corporation.

The JV structure allows SBM Offshore to balance the risk profile, CAPEX investment, funding and operational exposure per project with optimal return for its stakeholders.