Drive Argentina’s local industryFebruary 19, 2018
Leonardo Brkusic, executive director of the Argentine Group of Suppliers for the Oil and Gas Industry (GAPP), talks to TOGY about the issues that domestic oil and gas services providers have had to grapple with and how an emphasis on unconventionals will impact the sector.
Established in 2002, the Argentine Group of Oil Suppliers (GAPP) is an association of oil and gas services providers with a mission to help its member companies expand into international markets. The organisation’s members provide a wide range of goods and services for the upstream, midstream and downstream sectors.
The group promotes Argentine industry outside of the country and provides aid to companies going through the process of internationalisation. To this end, GAPP engages in commercial missions around the world, participating in oil-related exhibitions and organising technical and commercial training seminars. The organisation has worked across North and South America, the Middle East and Asia.
On steps forward: “Some decisions have been positive, for example, the subsidised price of gas and the labour addendum. We celebrate the intention of trying to increase the system’s flexibility so investments can finally be realised. We are looking forward to those investments going from being just announcements to becoming a reality.”
On local industry: “The development of the industrial sector will be compromised if the country’s industrial policy in terms of hydrocarbons – be it in production, input and equipment manufacturing, or the development of new technologies, which is a very important opportunity – is to reduce costs by any means possible.”
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How do small and medium-sized suppliers view the developments that have taken place in the oil and gas industry since 2016?
We understand that the driver of activity is still reducing costs in quite an aggressive way. We are doing everything we can in that respect to adjust to the industry.
Despite this, there have been some measures that created some conflict in the sector, for instance, the decree regarding the import of used equipment for the oil and gas industry without taking domestic supply into account, at least in regulation making.
On the other hand, some decisions have been positive, for example, the subsidised price of gas and the labour addendum. We celebrate the intention of trying to increase the system’s flexibility so investments can finally be realised. We are looking forward to those investments going from being just announcements to becoming a reality.
What happened with Techint in Fortín de Piedra was positive in the sense that it brought oxygen into the market a bit. We also think that YPF’s five-year investment plan is positive. This was something that we were all waiting for. We think that this work plan is a step in the right direction. We believe that YPF should have an even more preponderant role in the industry with more significant investment levels. Let’s hope that it can increase investment when its projects transition from pilot phases to commercial phases.
It is our understanding that the other oil companies should gradually join this investment trend. PAE [Pan American Energy] is making some adjustments in this sense. However, we believe that foreign investments are what will ultimately end up providing dynamism for the sector.
What does the shift in focus from conventionals to unconventionals imply for local industry?
Unconventional activity will mitigate the negative impact of the drop of hydrocarbons production, especially in the San Jorge Gulf Basin. There is a drop in oil production all throughout the country, but the situation is most difficult in the San Jorge Gulf Basin.
We think it is positive that there is also an incentive for unconventional production in that basin, but we understand that a promotion scheme is required to maintain conventional production levels, because today 92% of the country’s oil production is still conventional and all of the associated industry is geared towards the conventional sector.
Therefore, the process of adapting to unconventionals has two sides: The incremental growth of unconventional production, and allowing the companies that work mainly in the conventional sector to adapt to unconventionals. A marked drop of conventional production, such as what we had in 2016 and 2017, also means a reduction of the market for domestic industrial production.
How are GAPP members shifting their industrial and operational focus towards unconventionals?
This is a process that will require a great deal of work and effort on the part of SMEs. It also requires some sort of leverage with a structural scheme for the industry that does not apply only to the oil companies’ operational costs, but also takes into account how this aggressive search for cost reduction impacts the industrial framework and the value chain.
We all agree that the industry needs more efficient costs. SMEs have been working on this for a long time, but we have to bear in mind that the sector’s industrial supply grew 30% in the past five or six years. Together with a drop in production, this has led to a situation in which the industrial sector is required to have the best cost-effectiveness in its history, while at the same time facing a very marked fixed cost absorption, and in many cases, still repaying that investment.
What are the challenges to increasing competitiveness and cost reduction in the industrial sector?
The development of the industrial sector will be compromised if the country’s industrial policy in terms of hydrocarbons – be it in production, input and equipment manufacturing, or the development of new technologies, which is a very important opportunity – is to reduce costs by any means possible.
In 2017, we witnessed that approach a little bit. If the best cost is achieved by resorting to imports, then we would do so. Both the oil companies and the decree signed on August 10, 2017 for the importation of used drilling equipment had this aim. This puts industrial businesspeople in a difficult situation because some companies are already considering becoming importers so that they don’t lose all the work they have done in commercial development. These are jobs and technological areas that would be neglected.
I think that there is still a need for a more integral discussion. We continue to ask for a panel that would carry out an integral analysis of the industry and how this measure would impact it. The industrial sector is the most interested in becoming the most competitive at an international level. I don’t mean competing with China, because that would imply a number of other issues such as social dumping. Thus, China is not our parameter of comparison.
Argentinian products continue being competitive against American and European products, as long as those products do not involve a massive integration of components manufactured in Asia, both in terms of standards and prices. We continue working to maintain these levels of competitiveness. We are competitive in a global framework with regards to prices. You will always find someone who offers a very competitive price, especially in this context in which markets are relatively depressed.
How is growing unconventional activity in the USA impacting the development of the sector in Argentina?
Unconventional production in Argentina has to be linked with unconventional activity in the United States, which is now increasing. It had a stronger incremental increase in early 2017. There was a month in which it dropped a little, and now it is bouncing back.
Greater activity levels in the United States would perhaps imply less equipment that is available to bring to Argentina. This could also help to define technological development areas for which there is a historic window of opportunity to develop products for the unconventional segment. Argentina has the great opportunity to be at the cutting edge of technology for unconventionals. It is the second-largest commercial market after the United States and Canada together.
Argentina’s unconventional development is incipient compared to that of the United States, but we are 10 years ahead of other Latin American markets that are just beginning to devote resources to this segment. We have to take advantage of this. The United States doesn’t have a technological offering that could satisfy its own needs and simultaneously flood other markets.
I think that if Vaca Muerta’s development meets expectations, domestic capabilities will probably not be able to satisfy demand in the very short term, due to the size of the development. However, as time goes by and with adequate planning, Argentina’s industrial capabilities will be able to adjust to increasing demand with the same level of high-quality technology. Therefore, I think it is a very good opportunity for all the different actors of the sector to sit down and discuss this to see what sacrifices and benefits are involved.
How competitive is Argentinian industry at the regional level?
We are relatively competitive locally, especially due to post-sales service. Our proposal to our clients and friends in the different markets is a long-term proposal. GAPP members together offer almost 1,000 lines of goods and services for oil and gas. We might notice a decline in sales for the products or lines that today might not be at their most competitive stage at a time in which the market is focusing on price as single driver, but our goal is to continue having a presence.
Therefore, we did not change our work strategy for 2017 in terms of visiting clients and markets. We continued visiting Mexico, Colombia, Bolivia, Chile, Ecuador, Peru, Europe and the United States, as well as a small group of companies in the Middle East to keep developing our businesses in the region.
Competitiveness is not only a picture of the price here and today. It is dynamic in relation with the macroeconomics of the other countries and the conditions of other markets. Many factors are involved. It is something that can be worked on internally in companies and the domestic macroeconomy.
What main weaknesses in the domestic industrial sector can be strengthened in the short term to attain a higher level of competitiveness?
Looking inwards at our companies, the issue of productivity is always something that needs to be examined because technologies and methods change. There is always something to improve. We believe in continuous improvement, and therefore, we try to promote it all the time. This is only one part of the equation.
Another part of the equation has to do with fiscal pressure, the logistics issue, the cost of energy, training costs and times for developing collaborators in the high skill level required for this industry. This is also an investment the company has to make in the employees’ formative development. Perhaps this is also an issue that could be worked on jointly by all the stakeholders to reach improvements.
Other factors contribute to the sector’s strength or weakness, such as financing, which is not something minor.
How has the availability of financing impacted the development of local industry?
Argentina still has a very small credit capacity for industrial leveraging. We hope that this can be reverted in the short to medium term.
We have proposed some financing programmes for large projects in the oil and gas or industrial sectors, similar to the one the BNDES [National Bank for Economic and Social Development] implemented in Brazil. This is because in today’s industry, in many cases, the company with the best financing scheme wins, not the one with the best price. The role of financing in business has become crucial and we made this proposal as a way for engineering and construction companies to regain their presence at least in regional markets, as that is a driver for Argentine product exports.
Giving consideration to the use of Argentine materials could also work in oil and gas projects. Local content is present in every market – the Middle East, Latin America, North America. This is not currently being implemented and the oil sector is not going to be included in the Compre Argentino [Buy Argentine] programme. Thus, we need to articulate our work with the whole sector in this issue.
Have some provinces taken the lead in promoting local content?
Yes, internally you have schemes implemented by several provinces. In 2017, Neuquén reinforced the Compre Neuquino [Buy Neuquén] programme and carried out certifications of the companies. We believe that in the short term this will be linked more to labour than with materials, due to Neuquén’s structural productive capacity. It remains to be seen whether Neuquén is able to develop a productive pole beyond services, with time and with the Vaca Muerta projects.
Today, the SMEs that are related to the oil and gas sector are linked to services provision. Nevertheless, we are there to support some of our companies. For example, in the Neuquén region, in Cipolletti, Texproil is even exporting to the Middle East.
There are some local, high-tech developments which are very interesting. We have to protect and promote those ventures. We think that it is time to begin discussing some collateral issues and providing leverage for this until market demand and the amount of work are able to become the driving motor of the development of these industries.
The government needs to take a stronger role articulating interests, into the industry’s current challenges and enact temporary measures to minimise the impact in the sector during this slow activity period, as the oil and gas industry will need them strong and in shape when activity finally starts booming. We need a regime for the local oil and gas industry, considering local manufacturing not as an obligation to buy local, but having incentives in fiscal terms could be interesting to be analysed among all involved players: government, E&P companies, oilfield services companies and the local manufacturing and small services industry.
How has the oilfield services sector been impacted by the downturn in activity?
The current problem is that the activity level has dropped 40% since mid-2015, and companies have fired 10-15% of their personnel. Companies had increased their productive capacities by 30% in 2015, when they were operating at full capacity. There is a gap. Companies are trying to maintain their staff and installed capacity with the intention of becoming strategic partners in the local oil industry as soon as it bounces back.
The financial mismatch and the difficulties the SMEs have to face are very different compared to the situation of the big services companies. Therefore, they require special treatment and that needs to be discussed. We need to protect them until the market can bolster them again with higher activity levels and demand.
What objectives would you like GAPP to achieve in 2018 and 2019?
We maintain our goal of continuing to grow in services and companies joining our scheme of business networking. We have never ceased doing that in all these years, even in bad times. We have always grown from one year to the next and we plan to keep doing it.
In 2018, we will implement a managerial training programme for SMEs, added to the training programme we have had for some years now. We will continue to articulate financing lines for companies. We will have even more tools at our disposal on our strategic information centre for our companies, added to our industrial investment project database for oil and gas and other industries, and rig and service unit counts for upstream. This will be a very important tool for the SMEs and resource optimisation in their commercial strategies.
We will continue looking for ways to collaborate with operators, oil services companies and the federal government in promoting the domestic industry, which benefits everyone. We think that the oil industry offers a great opportunity in terms of technological development and we will support it and the oil industry in Argentina.
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