March 2010 Vol. 237 No. 3

Features

Claudi Santiago GEs Envoy To the Worlds Oil & Gas Industry

To have been a fly on the wall when GE Chairman and CEO Jack Welch picked up the phone in 1997 and called one of his rising young stars, a fellow named Claudi Santiago, about heading a new business segment that would later be called GE Oil & Gas.

If the legendary now-retired executive is known for one over-riding quality, it was for picking the right person for the right job. In Santiago, he saw the makings of a world-class businessman blessed with the intelligence, personality, drive and the curiosity to lead a new business into unchartered and often treacherous directions.

In an interview with P&GJ during a turbomachinery conference in Houston, Santiago, 52, recalled the day he took Welch’s call. At the time, he was in Paris directing GE Information Systems in Europe. Having worked with GE Information Services since he was recruited from the Universidad Autonma of Barcelona in 1980, Santiago probably never envisioned that he would someday become an expert on gas turbines, compressors and the pipeline inspection process.

“He (Welch) asked me to go into the oil and gas industry because we wanted to expand our presence. I told him that I knew little about it but he said he wanted me to go there because this is an industry that needs people who can innovate and can look at things with a fresh pair of eyes.

“‘You’re coming from the software industry that is used to fast innovation and the telecommunications business that is used to applying significant amounts of time and resources into technology so I am convinced that you will make a difference over time,’” Welch told Santiago.

While he may have been satisfied spending the rest of his career with information services, Santiago had been around long enough to know that when you received a call from the chairman, something was in mind for you, leaving you with two options: “either you go, or…you go.”

GE had just made its first major step in owning an energy company with the purchase of Nuovo Pignone turbine company in Florence. Santiago, a native of Spain who is fluent in English, French, Spanish and Italian, joined Nuovo Pignone and established its Aftermarket Services unit, which today accounts for a significant portion of GE Oil & Gas’ revenues by providing services ranging from product upgrades, customized service agreements, remote monitoring & diagnostics, and field-based technical assistance.

In 1999, Santiago was named senior vice president of GE and President & CEO of GE Oil & Gas. Today, GE Oil & Gas is a world-class company with activities on every continent and a major component of GE Energy Infrastructure with 12,000 employees involved in providing equipment and services for transportation, LNG, production, storage, refineries and petrochemicals. It is also one of the struggling corporation’s few profit centers.

During the interview, the industry was still struggling from the effects of the global recession, financial meltdown and sluggish energy prices. All of these are affecting GE Oil & Gas, but its leader offers a global perspective that is confident the industry will recover from its latest cyclical downturn. Meeting long-term challenges of providing enough oil and gas to feed an energy-thirsty world will not be so easy, however.

“We are living in special moments of our lives with a massive economic recession around the world. There is no doubt that the economic crisis has impacted the oil and gas industry. We have seen demand for hydrocarbons softening, reserves increasing, and clearly some projects are being thought over two or three times before the customer makes a decision,” Santiago said.

“Still, there is a future for oil and for gas as the world will continue to require energy moving forward. If you consider that demand could increase by a little over 1% annually – with the existing 5-6% depletion rate of the reservoirs – in about 10 years the world will need to produce about another 54 million barrels of oil daily to satisfy this incremental demand and compensate for the depletion. To put that in perspective, that is about five times what Saudi Arabia produces today,” he continued.

Difficult Environments
The more energy that is produced around the world, the more difficult it becomes to find and exploit new oil and gas reserves. In recent years, liquefied natural gas (LNG) has played a larger role in transporting natural gas to the highest bidders. Chevron is planning the world’s largest LNG project, called Gorgon, in Australia. The $37 billion project is expected to come online in 2014 and produce about 8% of the world’s LNG. GE received a $400 million order to provide equipment to compress natural gas and sequester carbon dioxide release during production.

“When you think about where this oil is going to come from, it’ll be from challenging reservoirs and difficult environments,” Santiago said. “Ten years is not a long time when you realize how long it takes to put these kinds of projects online. So despite the economic crisis and the recession, the world is living today and this industry will need to produce hydrocarbons to sustain the prosperity of many countries for the future.”

And there is no question that a big source of this new energy will be derived from oil and gas. Gorgon is indicative of the types of projects that international companies, national companies, independents and their service providers will need to undertake, keeping in mind that it takes years to recoup their massive investments.

To succeed, Santiago identifies the two enablers that will be fundamental.

First is an appetite to continue to invest in technology; second is an ability to innovate. The two are inseparable, said Santiago, whose company has long been renowned for both.

“We will need to innovate to make sure we have access to these new reservoirs in a cost-effective way and become more sensitive in respecting the environment. The industry needs to respond to climate change and reduce emissions that some of this equipment produces around the world. We will also need to innovate to make sure that our rotating equipment as well as our subsea equipment becomes even more efficient than what they have been,” he said.

“The point is, we have an opportunity to really respond to these global needs, but we have challenging times in terms of the time we have left to bring these hydrocarbons online and the kind of new products that the industry will need.”

Don’t Fear Success
To respond to these challenges, Santiago cites three paramount goals. The first is overcoming the resistance to being first.

“When you innovate and bring a new product into the industry, you have to take a calculated risk and be prepared to be the first in the industry to embrace a new product. That takes some courage but the industry needs to learn how to do that,” he said.

Second is following a concept that GE has perfected: taking advantage of the advances made available in sister industries.

“In aviation, we develop new materials that are lighter and less corrosive. In health care, we have sensor technologies such as ultrasound that do stress testing. These will tremendously benefit the design and development of new products that will be fundamental for the oil and gas industry.”

Third requires a collaborative effort that Santiago sees growing across many different disciplines.

“There will be an appetite for operators, academia, and the technology suppliers like GE to work together and clearly define the key priorities that the industry needs to face and overcome.

“If we meet these three things, we will be able to respond to the challenges that we will face so that these hydrocarbons will be available when the world will need them. It is not if the world will need more hydrocarbons, it is when it will need them. We have the responsibility to make sure that they are there and available in a cost-effective and an environmentally friendly manner for the world to sustain its prosperity and develop its economies,” he said.

Investing In Technology
Santiago acknowledged that GE has not been immune to the global recession or its exposure to the financial services industry. But the one element of corporate strategy that will not be sacrificed is research and development.

“If there is one area that we will not sacrifice, it is our appetite for research and development. At the end of the day it is paramount for us as a company to preserve and protect these projects and continue to bring new products to the industries where we operate.

“GE spends about $6 billion every year in research and development. About $1 billion of this dedicated to supporting the oil and gas industry. This is probably the safest investment for our future, so we have been cutting many other areas including, unfortunately, downsizing the company in some portions of our financial services business especially. But the chairman (Jeffrey Immelt) has made clear that our budget for research and development is untouchable.

“We know that the oil and gas industry will be a cyclical industry, but if you think about oil and gas, particularly LNG, and look back 20 years, you will see that the major innovations have always happened when the industry was in a downturn and oil was at a record lows. It is a tribute that companies in the oil and gas industry are looking at this for the long haul. We can weather the storms together and protect these investments because we know that they are for the long cycle,” Santiago said.

GE Oil & Gas’s R&D is primarily in five areas.

1. Subsea compression technology.
2. New materials to increase efficiency of rotating compressor equipment.
3. Electrification – driving compressors with gas turbines as well as electric motors. One recently launched GE product is the ICL – Integrated Compressor Line – an electric-driven compressor that Santiago said is selling extremely well worldwide.
4. Product upgrades by injecting new technology into its installed base of gas turbines put into service 20 years ago and helping make a pipeline more efficient, environmentally friendly and ultimately substantially increasing its life cycle.
5. Pipeline inspections where we have businesses that check for corrosion and cracks. The ultrasound technology developed through GE’s health care program is especially useful in developing these inline tools.

Downstream Concerns
Santiago said the downstream segment (refineries, petrochemical plants) of the business has undergone the most challenging times of his company.

“We see relatively small activity worldwide and predict that the downstream will continue to be slow moving forward. There are some upgrades but not new greenfield projects because they have either been postponed or delayed. This is being compensated by pipelines and LNG plants moving forward and a robust subsea segment that continues to be there for now and in the future.

“We are seeing a huge amount of activity with large infrastructure pipelines that are being built, particularly in China and in emerging economies where natural gas will be needed to produce electricity. We have been working with PetroChina the last few years and continue working to build the two largest pipelines ever built.

“We’re beginning to see more coming down the pipe with new LNG projects, especially in Australia. We’re very excited about this new wave of LNG it’s one of our core competencies and we have invested in developing very competitive solutions that we feel are very compelling for our customers.”

Santiago has also found that operating companies have taken varied approaches in deciding whether to cut their capital expenditures, increase them or keep them where they are.

“Everyone is sensitive that the world has been, and will continue to be in an economic recession, but we have seen several international oil companies sustaining or increasing their level of investments because they feel there is no better time than now to put their money to work since they can benefit from the capacity that exists in the industry and enjoy very attractive and cost-competitive products.

“There are others, especially the independents, who were financially leveraged before the economic downturn and have significantly cut their capex. In general, the national oil companies continue to have a very healthy amount of activity. We have enjoyed a substantial number of projects awarded to us by national oil companies – PetroChina, Pertamina, Qatar Petroleum and Sonatrach for example. These are well-run national oil companies that continue to invest to make hydrocarbons available for the time that the economy recovers.

Many companies shy away from working overseas. GE has eagerly sought out those opportunities by deploying a successful strategy that seems to belie its enormous size.

“We have made a huge effort to develop customer intimacy by being close to them, understanding what they need and making sure they know we are there and available when they need us. Having people who speak the same language; shops that can provide after-market services; training their engineers and transferring some of our technology – domain knowledge – to them to ensure they became more self-sufficient about the latest, most sophisticated equipment.

“With the national oil companies in particular, this is the most important asset that we have been able to develop and it is paying dividends because now we have engineers worldwide willing to meet with the NOCs and be able to understand each other and together incubate the best solutions to meet their needs,” Santiago said.

Protecting Technology
One issue that many companies face is the theft of their hard-earned technologies. Santiago agreed this can be an issue, but takes an enlightened, pragmatic approach. In today’s business climate, it has grown increasingly difficult to delineate a clear division as to what is mine and what is yours.

“At the end of the day in this industry, everyone will need to protect their intellectual property and knowledge. But we will not be successful with the challenges that we face in this industry if we do not learn how to cooperate and share. We are okay as a company to transfer some of our expertise to our partners. If nothing else, this pushes us to continue raising the bar. We have shared what we knew last year, but at the same time, we are getting smart and creating new domain knowledge that we will probably be able to share three years down the road.

“You say that perhaps some of your technology might be replicated by somebody else. As long as it is yesterday’s and not tomorrow’s technology, we have to admit that could be the case. But that pushes us to really continue to invest in tomorrow’s technologies. Perhaps that’s what makes our company unique inside the industry because we know that we are here to play that kind of role and constantly push the boundaries to ensure that we get to new horizons that we have never touched before.”

“We must ultimately realize that to get these hydrocarbons out of the ground to sustain economic prosperity will require a collective effort including academia where research and development will be done; the major operators including national and international oil companies, and technology providers like GE, all collaborating to develop the best solutions for the industry,” he said.

Santiago said GE has not ignored the growing interest in alternative fuels.

“I am convinced that renewables as well as nuclear have to be part of the solution for the world’s future energy needs. The world has to diversify and renewables are part of the solution. But in the bigger scheme of things, renewables will continue to be just a marginal part of the total energy supply that the world will require for the next 50 years.

“The nuclear industry is a little harder to predict because the regulatory challenges are more complex. However, nuclear has to be a part of the solution. GE wants the world to develop alternative sources of energy because all will be needed. I am not sure that the oil and gas industry can respond fast enough to deal with the energy demand that the world will throw at us. We are investing as a company in renewables – wind and other sources – and I think it will continue to evolve and expand,” Santiago said.

Nor is the company unaware of the move toward climate control change. That is what GE’s Eco-imagination Initiative was designed for.

“We are committed through our company and across all segments of the industry where we plan to invest in eco-friendly products and eco-friendly effects. We are committed to respond to climate change and do our part. A significant portion of our investment goes into upgrading our installed base – turbines, compressors – to make them more environmentally friendly.

“There is a tremendous appetite – all the way down from the chairman – to really be a player in the world that will respond to the climate change challenge that we all need to face as human beings.”

Finally, there is the question of managing such a large and diverse company as GE Oil & Gas. Santiago defines the strategy in two words: innovation and speed.

“The biggest challenge for me is to convince other constituencies in the industry that innovation will be paramount for us in the years to come. For some of the projects that he need to execute on, if we don’t move fast, we’re going to be running out of time and that is never a good thing. We are trying our best to make sure that we are ready, but there is a sense of urgency that we would like to see across the industry that sometimes I don’t feel is there in the way that I would like to see it,” he concluded.

Which leaves one to wonder if GE has another challenge in mind for Claudi Santiago? His long tenure and record of growth at Oil & Gas speaks for itself…but who knows what else is on the horizon if and when the chairman calls…