The Interview

Interview

Steve R. Gill is CEO of Production & Processing Solutions in the Oil & Gas Division of SNC-Lavalin.

AS SEEN INNOV/DEC 2016

By Paul Hart

hen does a midstream supplier come over and become a midstream operator? When it responds to capital-challenged customers who need new assets but, thanks

to the downturn, don’t have the cash. Valerus is a well-known source of engineering, procurement, fabrication and construction services in the sector that has been through significant changes in the past two years. A two-step merger has made it a unit of Montreal-based SNC-Lavalin Group Inc., a worldwide supplier of infrastructure, mining and metallurgy, oil and gas and power services. One positive of that change has been new, readymade overseas markets. Its CEO explains here how Valerus has reworked what it does to better serve customers facing changes of their own.

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Crossing The Line

The Interview

MIDSTREAM The gathering and processing business is very specialized; what attracted you to it?GILL I’ll credit my dad, he was in the business. He started with Ingersoll Rand in 1958. I thought my dad was cool, so when I was growing up I said I wanted to be just like him—he was a mechanical engineer from Texas A&M. He got in the compressor business, so I said, “He looks like he has a lot of fun and he puts put food on the table, so let’s try it!” I started right out of school, a mechanical engineer from A&M, and I started with Ingersoll Rand two days after I graduated. The whole family’s still in the business.

MIDSTREAM Valerus recently be-came a part of SNC-Lavalin. How has the merger gone, and what has your organization gained through it?GILL We were acquired twice in eight months in 2014. That January, we were acquired by Kentz [Corp. Ltd.], which was an Ireland-based company that was more than 100 years old. Kentz specialized in engineering, construction management, commissioning and asset management, with particular strength in electrical and instrumentation construc-tion across multiple sectors including oil and gas, mining and power. What made them really unique was not only how long they had been in the business, but their global footprint. They were all over areas where we had never gone, and it automatically gave us global reach. It would have taken us the next 10 years doing customer relations to break into

new countries. When you are out in the desolate areas and you already have an operating infrastructure—or entities in those countries—it makes it a whole lot easier to just immediately walk into them. Several of us in the organiza-tion had been doing it for a while, and opening new offices in the international arena is quite an ominous task.

You need entities—legal entities, tax entities, all of those things—and if you already have that done you can turn the light switch on the next day and say, “I can operate in this country!” Take Mo-zambique, for example. We probably would have never gone there, and South Africa. There were a few areas where both of us operated but for the most part the very difficult areas—Iraq, Saudi Ara-bia—we had not been there before.

Later that year, in August, SNC-La-valin acquired Kentz. I like to say they ac-quired us, but they acquired Kentz, and they got us too. That furthered our reach because now we operate in 50 different countries, areas that Kentz didn’t oper-ate in; SNC-Lavalin did. It just expanded our list of countries that we operated in, and that was very encouraging. Equally encouraging is the fact that we recently assisted the mothership in obtaining close to $800 million worth of projects directly related to our technical expertise and products, such as an unconventional shale play in Saudi Arabia.

We leveraged our experience that we had gained as Valerus, when the shale plays were so active during the period of 2008 through 2014, and with all that experience that we had gained we were

able to assist SNC-Lavalin and Kentz. For example, because Saudi Arabia is one of their largest countries of operation, we just stepped in and provided technical solutions that we understand are a differ-entiator. It made us quite proud. In the end, the technical teams melded together really well.

MIDSTREAM What is changing in the North American midstream market?GILL Commodity prices—the environment has obviously caused everybody a lot of stress and a lot of challenges. The biggest differentiator or opportunity for us is the balance sheet that SNC-Lavalin has—a very strong balance sheet—and that is why our Build-Own-Operate (B-O-O) model, we believe, will continue to provide a lot of new opportunities. What’s unique about it and why it fits in so well with Valerus is everybody likes to have a big credit card—but what do you do with a credit card?

Our business focus is providing com-plete solutions, not just widgets. We’re not going to build this business one compres-sor at a time, we’re going to build it by pro-viding complete gathering and processing facilities. If you take the midstreamers of the world, which we’re talking about here, it starts at the wellhead.

We can assist in the technical exper-tise of building a gathering system that collects the gas from the wells, and then we take it one step further, by offering to engineer, manufacture and install the gas treating or gas processing module. So when you look up, instead of providing a

SNC-Lavalin’s Production & Processing Solutions provided turnkey engineering, procurement, construction and commissioning for

this 18,000 horsepower compressor station serving a Utica Shale gathering system. Modular equipment and piping design reduced field work required and expedited construction at the remote site.

All photos courtesy SNC-Lavalin Production & Processing Solutions

$1 million compressor, you’re providing a $150 million complete facility, and I think that is just starting to gain momen-tum for us. You match that with a fledg-ling company that may be backed by an equity group that would rather preserve their balance sheet for the E&P side and use ours for the surface facilities, and it puts us in a very unique position. We’re very excited about that.

MIDSTREAM Have you had a suc-cessful B-O-O project this year?GILL We are working on a project with a domestic midstreamer to provide all of their gathering and processing facil-ities—and we will operate it too. We’ve been working on the development of it for a long time, and we think this is a first step for many like this. That’s part of the reason that SNC-Lavalin is very excited. They like a model where we can go in and provide a complete cradle-to-grave opportunity and operate it.

Following this same thought process, what if you take that model to the inter-national market where they haven’t seen this concept? One of our key clients is in a remote location where they do not have operating infrastructure, and we are will-ing to commit $200 million to go build a complete facility for them. We can do it.

In some cases, the owner prefers to operate itself, but some people don’t have the operating infrastructure, so they want us to do it. That’s a real differentia-tor for us. Kentz was well known, as they had people all over the world. For exam-ple, in Mozambique, we have employed more than 2,000 people there during recent projects. You don’t find our tech-nical expertise just anywhere. And so, if somebody has a project with a short fuse,

or it’s a very technically complex facility, or they prefer not to use their balance sheet, then we’re an attractive solution.

MIDSTREAM Can you adapt for local situations? For example, how will your modular designs work in colder regions?GILL The world is a big place, and a lot of it is cold. As Valerus, we topped out at about almost $700 million in revenue in 2014, but our quest now is to be a big-ger part of the $10 billion SNC-Lavalin machine, so we’re going into areas in-cluding the Bakken and areas of Canada, if it makes sense. Since SNC-Lavalin is a Canadian company, your reception is a lot better because most people like to buy from their local country mates. So we have aspirations for expanding our offer-ings into Canada.

MIDSTREAM There’s a lot of poten-tial in Canada’s Duvernay and Mont-ney unconventional plays. Will you get involved in the tar sands?GILL The Kentz and the SNC-Lavalin guys are already deeply entrenched in the area with several projects, and others in the region.

MIDSTREAM New U.S. cracking ca-pacity will be coming online in the next couple of years, and this is expected to cause ethane prices to finally turn up-ward. How will that trend impact the gas processing business?GILL Intuitively, you would say the market will need more ethane, so people are going to grab it. Ethane is a nasty word right now because it’s more of an expense than it is a revenue stream. We will be very excited when that happens. We think we have all the technical prod-

ucts in our portfolio and the execution model to offer in order to immediately be ready when this turns. We like where we sit in terms of strategy, we’re ready for the market if it turns tomorrow or if it takes another year or two years.

MIDSTREAM You have discussed your strong international presence. Will that continue to grow as a result of joining SNC-Lavalin?GILL For our Production and Pro-cessing Solutions unit to participate in $800 million worth of new business is big when you realize that our total revenue, before the acquisitions, was $700 million in our best year. So we’re very excited that our little pieces fit in the larger cor-porate model. The international market is about being present in a country, and if you already have infrastructure, rela-tionships and a brand, that breaks down most of the obstacles of success. If you have the products and expertise to go with it, then one would conclude success is just around the corner.

MIDSTREAM How do foreign mar-kets differ from the U.S. and Canada?GILL The difference is the U.S. likes the standardization model, whereas the international clients are not as comfortable with it. We use the term “bespoke” because that’s what many of those markets have traditionally done. However, we think that the timing is very opportune right now for foreign companies to find more economical solutions because of commodity pric-ing pressure. We’re flying all around the world and offering alternatives, and it’s just a matter of time before they start to catch traction. Once we do gain

Gathering systems don’t always need a big turboexpander to process gas. The SNC-Lavalin unit installed this Joule-Thomson

plant, with a capacity of 35 million cubic feet per day, to serve a Delaware Basin system.

Installation took 14 weeks.

The Interview

traction, I think then you will start to have a snowball effect because if Com-pany A sees that Company B is more competitive because they took a stan-dardized model that’s just as safe, that’s just as efficient, that operates just as well, then they have to ask themselves and their engineers, “Why are we still doing a bespoke model? Customization takes us twice as long and it costs 50% more. Our model is broken.”

The real challenge is how do you diplomatically say that to a guy who has been doing things the same way for a long time? That’s a bigger challenge than you think. In some companies, engineers run the company, and so if you can’t make them feel comfortable that your design—again—is safe, is efficient, and that they are not really giving anything up for trying this new standardization, then you have a real challenge.

MIDSTREAM Could you speak to modular plant design vs. stick-built projects? Do you see increasing inter-est in modular projects? GILL Let’s talk about the two projects that I mentioned earlier, the ones that we won in Saudi Arabia. We built a plant in West Virginia, in the Marcel-lus, and it was done in record time, on budget; we made a bonus for safety and early startup. We basically took that exact same model and asked the client in Saudi Arabia, “If this were in your

desert environment, and it would op-erate the same way and provide you the same service, would you consider it?” And that’s basically where that project started. They couldn’t find a reason why it wouldn’t work in their environment vs. anywhere else in the world.

That’s a roundabout way of saying we believe modular solutions will increase in popularity over time. Once you get somebody to try it, and it’s more cost-ef-fective and it doesn’t give up efficiency or safety, we believe that it will gain traction in the regional markets.

MIDSTREAM Production & Pro-cessing Solutions has a new fabrication facility in Sealy, Texas, west of Hous-ton. What is different about it?GILL We are really excited about it. When I came to Valerus in 2008, we had five different facilities and they were basically basin-oriented in terms of location. It was important to have your presence in a basin, and so we had Longview for the East Texas region, we had Victoria for South Texas and Eagle Ford, we had the Northeast shop in Pennsylvania for the Marcellus, and we had Bay City, Texas, which was basically where we built our compressor pack-ages. That was kind of the nucleus.

With times changing and the neces-sity to operate more efficiently, we de-termined that consolidation was a really important factor for our future. This is

a key point: it speaks highly of SNC-La-valin’s commitment to the Production & Processing Solutions business, given the current market conditions, because we signed a long-term lease and are spend-ing a lot of money to relocate the right people to run the Sealy facility.

What’s interesting is with almost 400,000 square feet and a 30-foot hook height, we can build any product that I know of that we make right now. Intu-itively, you should be more efficient if you build everything under one roof. We are up and running and now ready for the market to help us out a little bit. The last couple of months have shown very encouraging signs both internationally and domestically. I saw a picture of our first production equipment going to the Permian just the other day. It was the in-augural equipment from our new facility.

We see Houston as the epicenter of the Western Hemisphere in terms of the oil and gas market, and with that under-standing, there are a significant number of visitors coming to town for corporate meetings or conferences, i.e. the Offshore Technology Conference. We know it will be a big benefit when visitors want to see our manufacturing facility, we can take them to one shop where all products are manufactured, instead of four spread around three different states. Two large international clients have already visited and audited it and we received very high marks. We’re excited about that.

Stringent environmental regulations are a factor in designing more and more gas processing plants. This Barnett Shale operation lies within the Fort Worth, Texas, environmental impact area and was engineered to minimize air emissions.

MIDSTREAM What has surprised you about the business recently?GILL I think we have been a little bit surprised that our turnkey model—providing a lump-sum turnkey price to producers with a quick schedule—hasn’t gained more traction than it has, given the commodity price pressure. We have had a very, very active year in terms of proposals but not as many of them turn into orders as would have been expected. That may just be that a lot of people have been looking and not committing. Let’s say the ratio doesn’t match the times of old, which is not really surprising. We remain confident that there are more benefits to the turnkey model than people re-alize. And having a $10 billion balance sheet as support has to be meaningful to somebody vs. getting a second bid-der who doesn’t have a meaningful balance sheet.

If you are a producer and want to put in a $150 million facility, you would want somebody to have this seamless guarantee from the inlet flange to the outlet flange and to be able to provide a seamless process warranty for the CFO, the CEO and the engineering group. They do not want to have to worry. If something goes wrong, is this company going to be able to fix it? I’ve been a little bit surprised that we hav-en’t seen the benefits of that as much as we thought.

Engineers don’t like to lose control. They like to have their fingerprints on a project. But what we have tried to ex-plain is that they don’t really lose con-trol because we have these standard designs that from day one—before you even get started—you can come look at and anything you want to change: go at it. That’s fine, as long as we change it at the beginning. It’s like ordering at Burger King, you can have it your way. Just tell me up front, don’t tell me at the end of the job.

That’s really our goal, for the customer to have a great experience. We called this year a reputation-building year because we knew business was going to be tough. We wanted every customer to have a great experience, so when business came back, they knew exactly where to go.

MIDSTREAM How is the fourth quarter looking for Production & Processing Solutions?GILL The last 60 days of the third quarter were really promising. I have received both international and do-mestic orders, and it’s very timely that we opened Sealy. We believe that not only did we get that business but we are going to be able to get things rolling in Sealy and take advantage of optimization and efficiencies. We have a promising outlook.

A lot of that is because of the interna-tional business. I mean, we are a global company. So while other people may walk around with their chin down, we have a lot of things to be excited about because of that overseas activity.

MIDSTREAM With all of the legal changes that have happened there, have you seen any uptick in your line of work in Mexico?GILL Yes, both Mexico and Argentina are areas that we have a magnifying glass on. Most of the people on our team have been around for over 20 years, and Mexico has been a big area. We know how to maneuver through

the minefield, so we are cautiously optimistic for both of those countries.

MIDSTREAM How do you see the midstream changing in the next five years?GILL Well in the short term, we’re really excited. As I mentioned before, people are focused on balance sheet and cash flow and I think that presents a great opportunity for us in the B-O-O model. In a downturn, a lot of people have to scale back in terms of their support ser-vices, so if you are able to provide project execution, project engineering—basically a turnkey model—we think that it’s very appealing to people who are sensitive about their budgets and are sensitive about schedules. So in the short term, we think that there is a lot of opportunity.

The long term: it’s all up to the price of oil and gas. But if you’re the most ef-ficient operator and have a wide breadth of products and expertise, I’m not too sure that we could position ourselves any better than we are now. n

Paul Hart can be reached at pdhart@hartenergy.com or 713-260-6427.

Organized: 2004

Headquarters: Houston

Leadership:• Steve R. Gill, CEO• James Gill, chief operating officer• Mark Carlton, general counsel• Dave Gutierrez, director of finance USA• Tara Hannan, director of

human resources

Ticker Symbol, TSX: SNC

Share Price: (Nov. 29 close): CA$56.17

Shares Outstanding: 150.29 million

Key expertise: • Gathering systems• Pipelines and storage• Sour gas/liquids treating and

sulfur removal

• Sweet and sour gas field development• LPG/NGL recovery and fractionation• Cryogenics, deep-cut ethane recovery• Coalbed methane production

and processing• Compressor stations• Metering stations• Pump stations• Truck/barge/rail loading terminals• Storage facilities and tank farms

Locations:• Houston• Sealy, Texas• Denver• Pittsburgh• Tulsa, Okla.

Source: SNC-Lavalin Group Inc.

SNC-Lavalin Group Inc., Production & Processing Solutions

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