Lessons learned with Kristian Siem

OE Staff

April 1, 2015

Kristian Siem was early in his career when in 1978, with the market at rock bottom, he formed an investment group to take a punt on a rig. Now 65, the founder and chairman of Siem Industries, and chairman of Subsea 7 and Siem Capital, as well as director of a host of other companies, has not looked back… much. Before starting his own business career, Siem held several management positions with the Fred. Olsen Group in the US and Norway. He spoke to OE.

Siem.
 

When did you first see the potential in the subsea technology and services market and has it exceeded your expectations?

DSND, the forerunner of Subsea 7, was in the early 1990s a marine investment company with a diverse portfolio of vessels, including a few dynamically positioned offshore vessels. These were chartered on term contracts to contractors who did the work for the oil companies. We thought the risk would be reduced by working directly with the oil companies and decided to build up a knowhow of project execution. That proved to be even higher risk and we learned the hard way. We now know what we are doing.

There has been a lot of discussion about how standardization could help address current cost escalation. Is a change in mindset needed to meaningfully implement standardization programs that would help reduce cost?

Yes, I do think a change in mindset is required and that may be forced through in the present situation where margins are squeezed for all players and particularly the oil companies, which need to find ways to make field developments economical. Some operators have management already with the right mindset, but without sufficient focus on opportunities to reduce cost by standardization and better planning in cooperation with the contractors.

Are new business models needed to address the changing demands in the sector, as the seabed becomes the new factory floor?

The trend towards more activity on the seabed will continue and cost is a decisive factor. However, whatever technical solution is chosen, there are opportunities for reducing costs not only by standardization, but also by better coordinated planning between operator and contractor and by avoiding duplication of efforts.

What attracted you to the offshore sector when you invested in the first rig in 1978?

I had already been working in the offshore sector since 1972 when I started employment in Houston. In 1978 the market was at the bottom, with no employment to be had for drilling rigs. The bottom of the cycle is where the best opportunities are found. Rig values were at the bottom, the oil price was rising, and we believed in the future of the rig industry. 100% financing was obtained based on cash equity sufficient to pay lay up costs for an extended period of time.

If you could go back to 1978 and do anything differently, what would it be?

In 1978, when we bought the rig from Viking Offshore, who were virtually bankrupt, due to the non-existent opportunities for employment. The investment was highly speculative and very few were prepared to take the risk to invest. In order to obtain the necessary equity capital for the purchase, we had to accept shareholders who were a mix of unpaid vendors to Viking, whose objective was solely to recover their claims and previous owners who needed to cover their downside through the sale. There was, therefore, a conflict between the shareholders at the outset. Some of us wanted to build a new drilling contractor for the long term and the others wanted a quick profit. The lesson is to align partner interests as much as possible at the outset.

Also, I could have assured better protection for our interest in the agreement with the other shareholders who wanted out quickly. All shareholders made 300% in 8 months, so that was not bad for anyone, but the buyer of the rig still has it in operation and has probably made 10 times the full purchase price in realized profit.

What have been in the main changes in the industry, particularly in Norway, since the 1970s?

The activity level has, of course, increased since that time and Norwegians have learned all the required skills of the industry. The negative change in this period is that we have taken on unnecessary large costs, which are peculiar to Norway and not sustainable internationally.