Lamprell and National Oilwell Verco Companies Strategies

This paper aims to thoroughly discuss and analyze 2 of the Middle East’s biggest players in the oil and gas industry. Lamprell and National Oilwell Verco’s operations will be one of the main topics together with the challenges both companies face in the ever-changing marketplace. Another topic that will be tackled is how these two companies strategize to conquer the obstacles they are facing.

Lamprell has been present in the energy industry for more than 35 years. It has prominently played the lead role in the development of the said industry and rig construction business. Lamprell has long been a market leader in the provision of diversified engineering. The company is well known for the safety of their equipment and for the professionalism and efficiency of its staff.

“Lamprell has established a leading market position in the construction of shallow-water drilling jack-up rigs, lift boats, land rigs and rig refurbishment” (“Lamprell About US” par.1).

In summary, Lamprell’s operations focus on new build jack-up rigs, land rig services, renewable energy, offshore construction, and rig refurbishment. On the other hand, the National Oilwell Varco (NOV) has been around since 1841.

“NOV is a worldwide leader in providing major mechanical components for lands and offshore drilling rigs, complete land drilling, and well-servicing rigs, tubular inspection and internal tubular coatings, drill string equipment, extensive lifting, and handling equipment, and a broad offering of downhole drilling motors, bits, and tools. The company also provides supply chain services through its network of distribution service centers located near major drilling and production activity worldwide” (“About NOV” par 2).

Comparison and contrast of the operations of Lamprell and NOV

Both companies focus on the building and construction of rigs, offshore infrastructures that involve drilling and extraction of raw materials. Lamprell sources out materials and equipment for the construction of rigs and other infrastructure while, on the other hand, the National Oilwell Varco focuses more on equipment. NOV manufactures equipment for the rigs and sells the said equipment to clients. Their solution is based on the provision of quality materials that can help customers execute projects efficiently. NOV also provides management solutions to the client like Lamprell but unlike the latter NOV emphasizes more on selling out technology as their main business solution. NOV’s operations involve sourcing out labor and natural resources from 3^rd parties.

What are some of the challenges being faced in the current marketplace for Lamprell and NOV?

Both companies experienced the challenge of setbacks in the past years. Lamprell was at its low point in 2012 when the company lost about USD 111 million due to operational difficulties when it expanded into wind turbine vessels. The biggest obstacle for Lamprell was to turn the business around, but when they were doing so, they lost their ability to attract new businesses; thus they experienced weaker order backlog at the end of 2013 (“Lamprell shares fell after oil rig maker warns on revenue” par 5).

Lamprell experienced a change in management in March 2013. Before that, the company was facing management issues. It seems that since a new chief executive was appointed, the company has been doing well. It has been stabilizing its growth, and a turnaround for good has been evident (“Edmond Jackson’s Stockwatch: Is Lamprell a textbook turnaround?” par 16). Lamprell’s new Chief Executive Officer (CEO), Mr. Jim Moffat, informed the public that the company’s biggest challenge, in general, is the oil and gas industry’s cyclicality, which is common in most if not all industries. According to Moffat:

“There is going to be a downturn sometime in all major markets and product lines. They are cyclical in nature” (Shaw-Smith par 8).

According to Mr. Clay Williams, Chief Executive Officer (CEO) of NOV, the biggest challenge for them is to reach unexplored areas where oil can be extracted. The days when easy oil can be extracted easily have long been gone. Mr. Williams noted that oil production growth would be coming from deep water and from shale.

“Deepwater production has slowly grown from zero to 9% of the world’s production over the past 20 years, while shale production has gone from zero to 3% over the past six years” (“What everyone missed in National Oilwell Varco Inc.’s earnings” par 4).

According to the CEO, the competition today lies in the lowest cost-supply of oil to maximize a company’s margin, thus maximizing its profitability. In order to have the lowest costs, raw materials should be cheap. The challenge is deep water, and shale explorations are very expensive (“What everyone missed in National Oilwell Varco Inc.’s earnings” par 5). Mr. Williams is confident that NOV can provide their clients with the best quality equipment for the said project at the most cost-effective and competitive market prices (“What everyone missed in National Oilwell Varco Inc.’s earnings” par 5).

Would the challenges be different if these companies were based in North America?

If these two companies were based in North America, they would still face the same challenges. Problems with regards to the oil and gas industry’s cyclicality and client’s drive to minimize cost and maximize profits are evident in all industries around the world; thus, whether the companies are based in the Middle East or North America, the challenges will somewhat be the same.

What recent events affected sales at Lamprell?

Lamprell’s sales dropped when it focused on wind turbine vessels in 2012. The company experienced some operational difficulties, thus affecting sales. When the company decided to change management in March 2013, the company slowly recovered from its financial losses in 2012.

Why is the relationship between Lamprell and Saudi Aramco so strong?

Saudi Aramco has been a long time client of Lamprell. Lamprell is well aware of Saudi Aramco’s policies and what they want since they have been working together for a long time already. Many of Lamprell’s projects have been awarded by Saudi Aramco (Lamprell Media par 2).

What risks does Lamprell face due to the unique nature of their business?

Lamprell is exposed to the uncertainty of the oil and gas industry as their CEO, Moffat, calls the cyclical nature of the industry. Since the company primarily focuses on providing its services related to the construction of oil rigs, it may face the challenge in the future by other players who can provide the same service at a lower cost due to the lower cost of raw materials.

What are the core values and strategies of Lamprell, and how do they contribute to their success?

For 2014, Lamprell’s medium-term strategy involves “focusing on their existing businesses such as new build rigs, offshore construction, lift boats, rigs refurbishment, and land rig services” (Lamprell About Us par 1). In the long term, they will be expanding to other related businesses such as topsides, modular LNG, onshore plants, and FPSO markets. By diversifying their scope, Lamprell can further strengthen its profitability.

How is Lamprell geographically organized, and why?

Lamprell’s head office is in Dubai, but the company has seven other branch offices in different parts of the UAE, Kuwait, and Saudi Arabia to overlook the different operations (Lamprell About Us par 2). Lamprell has organized each sector of its business by geographically separating them geographically so that each team can focus on their specializations. For example, the facility in Jebel Ali specializes in the FPSO topside and module market while the Hamriyah facility is geared to cater to the new build jack-up market (Lamprell About Us par 5).

Why did Lamprell choose the Hamriyah location to set up operations?

The Hamriyah location was chosen by Lamprell to set up operations concerning newly built construction projects, especially the building of structures on oil and gas, reparation of rigs, and wind farm installation vessels. The location’s facility is suited for the construction of any structure required in the exploration and extraction of oil.

“The Hamriyah facility has about 335,000m² of construction space, an additional 30,000m² of devoted storage. The facility opened in 2010.” (Lamprell About Us par 1).

The Hamriyah facility was built for the main purpose of constructing and storing heavy equipment of Lamprell. The high-end facility of Hamriyah was purposely designed to suit the needs of Lamprell and its clients.

Comparison and contrast of the employment packages at Lamprell (and the Middle East) and in the West and Europe

Lamprell’s employment packages focus more on employee’s health. In May 2013, the company decided to hold a health screening camp where all employees in the UAE were invited to join the event. They have also sponsored a talk on breast cancer awareness where Lamprell’s female employees were taught on the basis of the said disease. They were also exposed to special doctors who entertained their concerns about the topic (Lamprell Careers par 1). Lamprell’s employment package includes benefits that focus on the employee’s health and safety while that of the west is just concerned with salaries since health packages are already offered by the government. Lamprell extends its concern to its employees’ health by conducting seminars and talks which educates its employee.

The importance of strategic partnerships at NOV

NOV has been around for the longest time, and partnerships are essential to the company. The importance lies in the connections and the endless benefits both NOV and its partners gain through working together. NOV has been producing exploration and extraction equipment for the oil and gas industry since 1841. As easy oil has long been gone and the current market ever-changing, strategic partnerships are important, for they bring about new ideas, technology, and endless connections that are needed in the highly competitive oil and gas industry.

The margins of NOV are relatively high. Are these margins fair?

The company has every right to maximize its profit margin as best as they can in order to keep the company afloat and maintain its standards. It is only fair that the NOV management does so, as the company has to fulfill the high expectations of its shareholders. The company is the one manufacturing its equipment; thus, it is the one sourcing out the raw materials needed for the production of equipment. Savings can be found in manufacturing as the company can manipulate many factors in the production of these devices (“National Oilwell’s Profit Beast Estimates Recover” par 6).

What types of rigs (land rigs vs. offshore rigs) have the highest margins, and why?

63% percent of NOV’s total revenue comes from its rig technology team. Finding and extracting oil has become so difficult to do that NOV’s offshore rigs have been taking advantage of this problem by putting higher margins. Destinations for oil extractions are currently in the farthest areas where it is difficult to access; thus, the need for NOV’s advance technology arises (“What everyone missed in National Oilwell Varco Inc.’s earnings” par 4).

What are the challenges and cost implications of extracting oil from the oil sands vs. from Saudi Arabia?

Crude oil prices have been spiking up since 2011 due to the growing demand of the world market while the sources of easy oil become scarce, leaving companies such as NOV to resort to explorations from extremely hard to reach areas. Given this situation, synthetic crude oils are produced to supplement the growing demand of the market. As crude becomes, expensive governments have been researching to meet the demands. Thus, the governments of Canada and Valenzuela have relied on their oil sands. The increase of crude oil price per barrel is enough to stimulate the dynamic growth of the oil sands production, especially since the cost of production has little difference.

The challenges and cost implications brought about by the extraction of oil from oil sands is that NOV should adjust their production system to extract a heavier grade of oil from oil sands. NOV would need new heavy-duty equipment will be used if the old ones for conventional extraction are not compatible. The geographical location must also be considered in this aspect as most oil sands are located in Canada and Valenzuela. Since NOV’s primary business is located in the UAE, the team would have to travel all the way to Canada or Valenzuela to extract such oils. This would mean traveling costs. Another challenge is the skill and training of employees in the field of oil sands. The process may be similar but not completely the same. The company needs to invest in equipment and education in order for it to gain success in the field of oil sand since oil sands are not common in the UAE.

How does NOV maintain their competitive advantage given that much of the fabrication is subcontracted to third parties?

NOV manufactures its own equipment; thus, they have the ability to manipulate production and customize equipment as well as their services to satisfy customer’s needs. NOV maintains its competitive advantage in the market by being innovative. NOV has been around in the business for the longest time. They are the first to see trends and can forecast what is about to happen in the oil and gas industry. They have forecasted that the next area where to find oil will be from deep water and shale.

Why does NOV choose the Jebel Ali Free zone to operate?

NOV chose the Jebel Ali Free zone because it is strategically located halfway between Dubai and Abu Dhabi, where major offices are held. NOV’s savings increases by choosing the said free zone as they can avail a renewable concession of 0% corporate tax for 50 years, no restriction on capital repatriation, 0% import or export duties, 0% personal income tax, no currency restrictions, no restriction on foreign talent, NOV can mortgage their premises to a financing company, and there are an onsite customs at the area (Jafza Explore par 2).

What are some of the rules and challenges of employing local Emiratis?

It is very hard to employ a local Emirati to work for private companies because the government has been subsidizing its citizen thus the drive to accumulate more is not encouraged because of this stipend provided by the government (“UAE’s Drive for Emirati-Run Economy is Thwarted by Handouts” par 2). It is necessary that both employer and employee must enter into an employment contract according to the UAE labor law though contracts may not necessarily be in writing. When disputes arise, the conditions of the said contract may be proven by any means of evidence acceptable to the law (UAE Labor Law par 15).