Saipem and Sustainability: scenarios, business environment and market conditions

The oil industry services sector faces critical challenges in a complex and constantly evolving environment. For a global company like Saipem, the primary task is to develop robust and sustainable business, where the term ‘sustainable’ should be taken in its broadest meaning as the ability to generate value while taking into account the needs and interests of all stakeholders involved, and a correct and safe use of natural resources.

In this respect, Saipem has built a sustainability paradigm whereby elements such as Local Content (understood as a factor contributing to the development of the communities where the Company operates), safety and the environment, technological development, Human Resource management, and enhanced relationships with all stakeholders (particularly clients), are integrated within the business model.

In this framework, the Company’s distinctive feature is its constant commitment to excellence in conducting business, which translates into a high level of reliability in terms of technology, engineering and safety of operations.

In the last few years, the characteristics of Saipem’s target market (e.g. client profiles) have changed significantly:

  • Contractors are more and more often required to interface directly with the National Oil Companies (NOC), who have acquired a considerable amount of know-how in terms of technical and managerial capabilities, and are therefore increasingly replacing the International Oil Companies (IOC) and independent companies in the Oil & Gas industry’s development. Their hydrocarbon reserves are growing very rapidly, which makes them very active investors and primary counterparties in the execution of large and complex onshore and offshore projects.
  • Some operators in the electricity sector are showing a tendency to move up along the supply chain, acquiring gas fields to self-supply their plants.
  • Complex project joint ventures are formed with increasing frequency between Oil Companies, NOCs and IOCs to benefit from the mutual exchange of knowledge and from new and more advanced technologies.
  • Clients, whether on their own initiative or prompted by national laws, increasingly require projects to have significant portions of Local Content (a major example of this is Brazil).

 

Against this background, Saipem has the technological and managerial wherewithal to be chosen by clients even in a highly competitive environment. It also has the ability to adapt to the changing market by applying a variety of customized approaches to varying client needs.

Saipem bases its business on an EPC and EPIC (Engineering, Procurement & Construction and Engineering, Procurement, Construction & Installation for offshore projects) type of business model that allows clients to be relieved from many responsibilities and risks.

The Company agrees to operate under any type of contractual arrangement, from the execution of individual services to the development of entire turn-key projects and reimbursable contracts.

Furthermore it provides a wide range of technical services, particularly Front End Engineering and Design (FEED), which help the NOCs to define more effectively the scopes of work of extremely large-scale projects (i.e. worth more than 1 billion dollars), but which can also help the IOCs to plan what is known as fast track execution, by involving the FEED designer in the executive phase of EPC projects (1).

In order to share experiences, execution strategies and business opportunities, Saipem establishes strategic relationships with certain clients and enters into long-term partnerships that extend beyond the execution of individual projects.

Moreover, Saipem cooperates with other Oil & Gas contractors to share know-how, assets and experiences. An example of this is the joint venture with Chiyoda (Japan) for the LNG business.

Finally, with an eye to the aspects of social responsibility inherent in the production of goods and services, Saipem establishes mutually beneficial relationships with suppliers and creates synergies in order to meet client needs.

Another distinctive feature of the Company is its strong commitment to protecting the environment and local resources, without which it would be impossible to seize the opportunities that arise from frontier areas such as the Arctic or deep and ultra-deep waters where safeguarding the environment is a vital requirement. In order to continue to operate at this capacity and to achieve high standards, Saipem must constantly invest in research and development: these activities, which support the Engineering & Construction and the Drilling Business Units, allow the Company to develop technologies targeted at improving the operating reliability and efficiency of its equipment and control systems, as well as to contain and mitigate the environmental impacts caused by operations.

(1) Fast completion of a project achieved by optimizing its different phases in order to reduce the overall time below that required for a project executed using standard planning methods.

As discussed in greater detail further in this document, Local Content is a central aspect of Saipem’s sustainable business strategy.

Saipem aims to build stable and long-lasting relationships with local communities, bringing benefits in terms of investments, use of the local workforce, development of human capital and of the capabilities of the local entrepreneurs. Over the years, local project execution centres have been set up to carry out all or most of the engineering, procurement, project management and construction activities. The same occurred with the increasing presence of fabrication yards in countries like Nigeria, Angola and Kazakhstan, the engineering centres created in Norway, Romania, Croatia and India, or the logistic facilities in Peru. The development of these assets, which are extremely well integrated into the local setting, has continued during these years with the Karimun Yard in Indonesia (opened in 2011), the bases in the Arab Emirates and in Canada, and the investment in the new fabrication yard in Guarujá, Brazil, which will provide commercial and competitive advantages for the Company and allow the development of high Local Content for the host country. Saipem also intends to use Local Content as a driver of business development in countries such as Iraq, which are reopening to investments.

Lastly, there is an element which for Saipem represents the essential foundation underpinning the entire system: people, for whom the Company has established increasingly high health and safety standards and implemented a People Management System in all regions where it operates, while at the same time respecting the diversity and cultural traditions of the local context. This system includes the processes that accompany individuals from their recruitment and insertion into the work environment to training and career development.

The characteristics of the business model described above will allow Saipem to address, with a winning approach, the challenges, including sustainability, posed to Oil & Gas contractors by the current political and economic conditions.

Confirming late 2011 and early 2012 macroeconomic forecasts, the global economy is expected to grow by a moderate 3.4% in 2012 (5.4% in the developing countries and 8.4% in China). On the political front, changes that occurred in several countries that own natural resources, and in particular large hydrocarbon reserves, as well as tensions in the geopolitical arena (e.g. Middle East and North Africa), are likely to maintain oil prices at very high levels throughout 2011 and well into 2012.

Despite the economic crisis, the dynamics of the energy market are, fortunately, mainly linked to development in the non-OECD area, with an 8-9% increase in the overall global energy requirement in the 2011-2015 period, with fossil fuels (oil, natural gas and coal) still the major energy sources.

Both the growth of global oil production (expected to rise from 89 million barrels per day in 2011 to 96 million barrels per day in 2015, most of which attributable to OPEC countries) and the use of natural gas (driven by energy source diversification policies due mainly to environmental considerations) will generate significant and at the same time challenging opportunities for a global, integrated and multi-business contractor like Saipem.

Indeed, in the worldwide Offshore construction sector high price levels are encouraging the development of fields in hostile environments, particularly in the Arctic (where, according to the United States Geological Survey, one fourth of undiscovered global resources is located) and in ultra-deep waters. Examples of this trend are the large sums invested in the development of the Pre-Salt basins off the shores of Brazil, mega-projects like Galsi and Southstream in the Mediterranean, Shtokman in the Russian Arctic, and the resumption of ‘pre-Macondo’ activity volumes in the Gulf of Mexico.

Saipem will therefore leverage its advanced vessels (the Field Development Ship - FDS 2 started operating during 2011, the Castorone pipe layer will be tested in 2012 and has already obtained contracts), as well as the completion of the Karimun site in Indonesia and the investment in the new Brazilian base, expected to be completed in 2014.

The Onshore construction sector is also going through a positive phase, with the upstream, natural gas liquefaction, and refining segments driving the awarding of contracts in 2011. In particular, in the upstream segment (Middle East, China and North America) the development potential remains extremely high due to the need to replace the production capacity of declining fields. Similarly, in addition to good activity volumes in the onshore pipeline segment, natural gas liquefaction and regasification is expected to be driven by growth in demand, which will have an increasing weight in the energy mix. Saipem intends to seize important opportunities in Iraq (a country with enormous production potential and a severe lack of infrastructures) and in Canada and Venezuela, where the Company plans to increase production from bituminous sands and extra heavy oil, respectively. Despite increasingly competitive conditions in the Onshore E&C industry due to the aggressiveness of Asian competition, Saipem intends to maintain its position in all these sectors and regions as a leader and preferred partner for sustainable development, including by strengthening its project execution centres in areas with more competitive costs and through the development of a stronger supplier network in emerging regions like India and China, thus contributing to their growth and social advancement.

In the Offshore Drilling sector, Saipem is a leader in extreme environment operations thanks to its vessels Saipem 12000 and the new Scarabeo 9 (in operation since 2011) and Scarabeo 8 (expected to be delivered in 2012). In Onshore Drilling, Saipem will continue to operate on behalf of major and NOC companies, with a focus on South America, Saudi Arabia, North Africa, the Caspian Sea, and, to a lesser extent, Europe. In these regions, the Company can leverage its knowledge of the market, its long-term relationship with clients, integration and synergies with other business areas, and, once again, and above all, Local Content (Saipem has used up to 85% of local resources on land drilling rigs).

Within this market outlook, commitment to sustainability will remain a priority in Saipem’s business strategy.

Saipem has three main sustainability pillars. The first is attention to human resources, in terms of both workplace health and safety and training and career development. The second is the Company’s contribution to local economies and social advancement through the employment, in some cases in significant percentages, of local resources, the encouragement of local entrepreneurship, the assessment of the impact of the Company’s activities on the local area and the measurement (including quantitative measurement) of the socio‑economic effects, which are discussed with stakeholders and host communities. The third and final pillar is environmental protection and the use of technologically cutting-edge equipment designed to prevent risks and optimize operating results, even in extreme and challenging environments.