Analysis of Keppel Fels SITUATION ANALYSIS OF KEPPEL FELS

1 WHAT IS SITUATION ANALYSIS

The great Chinese strategist Sun Tzu said Know your enemy, know yourself; your victory will never be endangered. Know the ground, know the weather; your victory will then be total.[1] According to Sun Tzu, situation analysis is to know about everything that can impact on the victory. And the purpose of conducting situation analysis is to formulate a winning strategy. In this coursework, we will do a situation analysis on Keppel Fels. The 6 parts analysis is: a. b. c. d. e. f. The history of Keppel Fels Environmental factors Companys capabilities Major stakeholders SWOT analysis Future potential

HISTORY OF KEPPEL KFELS

In 1967, present day Keppel Fels (which started out as Far East Shipbuilding Industries) was founded by Lee Kim Chee. [2] In 1969, Singapore became the first country in South-east Asia to land a contract to fully build an oil rig. It was built by Far East Levingston Shipbuilding (Fels), a joint venture of Far East Shipbuilding Industries) and US rig builder Levingston Shipbuilding Company.[3] Since then, Fels had specialised in the building of oil rigs. In 1980, Keppel Shipyard took over the management of Fels. In 1997, Fels was renamed as Keppel Fels.[4] From a humble beginning in 1969, Keppel Fels has become the world leader in the fabrication of offshore oil drilling platforms.[5]

ENVIRONMENTAL FACTORS

We will mainly use Porters Five Forces Model (Figure 1) for environmental analysis.[6] Figure 1 3.1 Threat of New Entrants

Oil rig construction is a highly specialized field. The technical expertise requirement and high capital requirement combine to set up a formidable entry barrier. However, this does not stop new entrants to the market. An example of how an India shipyard overcomes this barrier is reflected in the following quote: "We are in talks, with two US-based oil rig manufacturers for a technological tie-up for entering offshore rig construction, and are planning to invest Rs4.14bn ($90m) in the proposed facility, which will cover an area of 180,000 sq m," said ABG managing director Rishi Agarwal.[7] Beside India, shipyards in China and other countries have started oil rig construction. 3.2 Bargaining Power of Customers

International Herald Tribune carried an article entitled Singapore rig builders thrive as oil explorers re-equip; Want to make an order? You may have to wait until 2009[8] This title sums up nicely the current bargaining power of Keppel Fels customers.
Some reasons for diminishing bargaining power of customers are: 3.2.1 3.2.2 Soaring demand for oil from fast-developing countries like China and India. In addition, about 75 per cent of the rigs in operation worldwide were more than 25 years

old. Replacements needed to be built. Orders flooded in, mostly from long-time of the local industry who decided it was time to go on a spending spree. US oil and offshore conglomerate Global SantaFe, for instance, has built about a dozen jack-up and semi-submersible rigs in Singapore over the last 25 years. 3.2.3 Hurricane Katrina had caused damage to numerous rigs. Industry analysts estimate that

12 rigsare damaged, of which five are likely to be scrapped. As a result, the cost of oil rigs soar, jack-up rig (three-legged floatable structures designed to take root in shallow seabeds to drill for oil and gas) cost between US$160 million (S$253 million) and US$180 million apiece in 2006, up sharply from US$120 million to US$130 million which was the price in 2004. Semi-submersibles rig (They do not have legs. As their name suggests, they are halfsubmerged in the water.) cost twice as much and are for deeper waters.[9]

While the customers have less bargaining power in term of prices, that does not mean they have less bargaining power in other critical areas, such as product design. "We see a crossbreeding between traditional floating production installations resulting in entirely new designs," says Kenneth Richardson, ABS VP of Energy Development. "These hybrids are unlike anything we have ever seen.[10] 3.3 Bargaining power of Suppliers

The marine sector in Singapore comprises about 600 firms and employs nearly 49,000 workers. Most small marine sector firms serve big companies such as Keppel Shipyard and Jurong Shipyard.[11] Due to the large number of suppliers as compare to the shipyard, the bargaining power of the suppliers is limited. In Singapore, the bargaining power of suppliers is further restricted by the government. For example, when Keppel Felss resident contractors want to employ foreign workers, they have to get approval from Keppel Fels. Supposing the contractor requests to recruit 100 foreign workers, and Keppel Fels grants quota of 50, then the contractor can only hire 50 workers. Work permit application to recruit the foreign workers are required to submit through the shipyard.[12] 3.4 Threat of Substitute products

Till date, oil rig have not faced any danger of substitute product. There is simply no way to extract crude oil except through the use of oil rig. 3.5 Competitive Rivalry within the Industry

Jackup rigs recently delivered or currently on order[13] Delivery date 2000-2004 2005 2006 2007 2008 2009 Totals Keppel FELS Singapore 5 3 5 6 3 1 23 PPL Singapore 2 0 2 5 2 0 11 Remainder of world shipyards 8 1 3 0 2 0 14

As seen from the table above (data correct as of July 2005), Keppel Fels is the world leader in jackup rigs construction, PPL (a subsidiary of Sembcorp Marine, formerly known as Promet) is the runner up in oil rig construction. Both Keppel Fels and PPL possess state-of-the-art proprietary rig designs that were sought after by top drilling and oil companies. Both rig designs have become world leaders. In the current boom, when both companies are functioning at full capacity, rivalry between the 2 companies is clearly not as intense. However, the battle for skilled labour is getting more and more intense. Being the worlds best and second best means that both companies have to recruit and retain the best marine engineers. As both companies are situated in Singapore, where the local skilled marine labour pool is limited, both companies are getting innovative in recruitment. Keppel Offshore and Marine (parent company of Keppel Fels) has even resorted to sponsoring a 21-part, prime time Mandarin Chinese drama series, featuring tales of romance on a jack-up rig[14] The purpose is to give the marine industries a more sexy image and subtly encourage young people that it is an exciting career option.

3 3.1

COMPANYS CAPABILITIES Financial

Keppel Fels never experienced losses even during the worst times when many shipyards throughout the world closed down. During the industry bust time, Keppel Fels diversified into shipbuilding and repair activities. In the current boom, employees in Keppel Fels enjoy a record high of 7.2 months bonus.[15] It is fortunate that Keppel Fels is financially strong, as the financial institutions in Singapore are reluctant to finance and insure offshore projects. In fact, it's easier to get a housing loan at present than a loan for a rig which can cost between US$150 million and US$450 million. 3.2 Technological

Keppel Fels has the advantage of proprietary design. That engineering expertise is difficult to replicate or accumulate. Today, there are 117 deepwater jackups listed on the poster published by Offshore (a magazine covering the key issues and trends relative to offshore technology, oil and gas E&P operations), with 46 (39%) under construction or soon to be built. The Keppel FELS design is the second most popular design, cornering 25% of the market (29 rigs).[16] Research and development has always been a focus of Keppel Fels management. Even now, Keppel Fels is working hard into development of deepwater solutions. It is working with partners such as US energy services company J. Ray McDermott and TexBASS to develop next generation rigs.

3.3

Contract

Choo Chiau Beng, head of Keppel Offshore & Marine, says: 'In our business, the first hurdle is of course to get the contract with the right terms and conditions. However, winning a contract is only the beginning of long and arduous work to ensure that we make money.[17] Quoting a mishap that cost rival SembCorp Industries $685 million on a conversion job that went awry, Mr Choo warned that yards must pay special attention to the termination, liabilities, indemnities and dispute resolution clauses as well as the specifications of a contract. Shipyard should avoid signing for uncapped penalties and liabilities. 3.4 People

Keppel Fels workforce consists of 70% foreigners and 30% local. This is due to government regulation that states for every local headcount, a company in marine sector can hire 3 foreigners. In addition, foreigners who are work permit holders are allowed to work up to 15 years in Singapore. Keppel Fels has a large population of work permit holders working as welders, fitters, mechanics and other skilled labourers. These are recruited from China, India, Myanmar, Thailand, Bangladesh, Malaysia and Sri Lanka. Keppel Fels faces an ageing local workforce. Many of them have served 30, 35, even 40 years. While they are committed, dedicated and enjoy the work, they are however in their 50s and 60s.[18] While this group of employees had built Keppel Fels into a world leader, they will not be around 20 years later. The key human resources challenges are: 3.4.1 Recruitment

Recruitment is always difficult for the marine industry in Singapore. Even when unemployment was high in 2003, more than 4,000 jobs went abegging in the rigbuilding and shiprepair sector. The problem is more acute in current boom, so much so that Keppel forks out S$2m to woo talents. Recruitment modes include TV and print advertisements, career talks, roadshows, outreach programmes at universities.[19] 3.4.2 Retention

Staff retention is currently a big challenge for Keppel Fels. Engineers down to skilled welders are being poached by competitors. 3.4.3 Succession Planning

Sucession Planning is an urgent matter. Now is the best time to transfer the experience and skill to the next generation.

MAJOR STAKEHOLDERS

A stakeholder is defined as anyone with a vested interest in the success of an organization. In general, a stakeholder can be one of two types: internal (from within an organization) or external (outside of an organization).[20] According to this definition, stakeholders of Keppel Fels include the management, employees, investors, suppliers, customers, government etc. In this coursework, we will only consider the Singapore Government as it has the greatest interest in the success of Keppel Fels. 4.1 4.1.1 Singapore Government Largest Investor

The parent company of Keppel Fels is Keppel Offshore and Marine Ltd (KOM). KOM is a wholly subsidiary of Keppel Corporation. Keppel Corporation is a listed company, with Temasek Holdings (Pte) Ltd as the largest shareholder, holding a 21% stake in the company.[21] Temasek Holding in turn is an investment arm of Singapore government. In short, Singapore government is the greatest investor of the company. It has, therefore, a great interest in the financial performance of the company. 4.1.2 Employment

The job of a good government is to keep economy at full employment. To do so, government has to create jobs and match jobseeker to the job. In many instances, reskilling is necessary. Keppel Fels has a workforce of 6000.[22] It has a large base of resident contractors, employing as many or more workers. Singapore government obviously want the bulk of the jobs to go to unemployed Singaporeans. Through Place and Train programme launched by Singapore Workforce Development Agency (WDA), it is able to do so. WDA will provide funding support for course fees, absentee payroll, practical training and subsequent wage support.[23] 4.1.3 Safety

Through legislation, Singapore government has endeavored to provide a safe working environment for those working in the marine industry. For example, every new worker has to complete mandatory safety courses before they can engage in rig building, ship building or repair work. As a result, the number of accidents has decreased even while workload is increasing. The number of accidents per million man-hours worked has decreased from 9.6 in 1994 to 2.2 in 2006.[24]

5 5.1 5.1.1

SWOT ANALYSIS Strengths Reputation

Keppel Fels is the undisputed leader in rig making. Ability to deliver quality rigs on time instills confidence in the customers. Oil rig is not cheap; it is a multi-million dollars investment. Customers simply cant afford to accept sub-standard rigs from shipyards that have no experience in rig construction. Thats why many customers rather wait till 2009 or longer, in order to get a rig build by Keppel Fels. Competitors simply cannot overtake the reputation that Keppel Fels takes more than 30 years to build up. 5.1.2 Financial

While rig construction is a technical skill, a core competency of Keppel Fels, managing a shipyard requires financial knowledge. Theres no point in having a busy shipyard that suffers from cost overrun. Keppel Fels management has proved that it is competent in financial management. First, it knows to avoid contract that could potentially bankrupt the shipyard. Secondly, it contains cost well; cost overrun is a major problem in many shipyards, but not in Keppel Fels. During the industry worst time, it managed to be profitable. More importantly, it has consistently yielded attractive returns to its stakeholders, especially the shareholders (Temasek Holdings being the largest) and employees. 5.1.3 People

Keppel Fels has a core group of employees who are experienced, committed and dedicated. These are the ones that built the company into the world leader. By imparting the knowledge gained from experience to the next generation, they ensure that the success of Keppel Fels for many years to come. All the employees in the company take part in various training and skill development courses offered or sponsored by the company. This ensures that the skill of the workforce remains the best in the industry.

5.1.4

Technology

Proprietary design is a strength that is hard to replicate or buy. The ability to develop new rig design is even harder to duplicate. Far-sighted oil companies are eyeing oil fields located in the deeper water. The shipyard that is the first to develop deepwater solution will have first-to-market

advantage. Keppel Fels with its strong research and development team, together with experienced partners, may be able to come up with best deepwater solutions. 5.2 5.2.1 Weaknesses Financial

Financial institutions in Singapore are reluctant to finance and insure offshore projects. This causes a constraint in the financial management of Keppel Fels. Money that can better used for research and development or other investment activities is now tied up in rig construction. 5.2.2 People

With more and more shipyards in the world diversified into rig construction, poaching staff from Keppel Fels becomes more aggressive. Staff retention couple with difficulty in recruitment is a major human resources challenge at the moment. If a large number of experienced staff leave, and the core group of dedicated staff retires, and not enough new staff to take over, this could well be the end of Keppel Fels. 5.2.3 Work Overload

Keppel Fels is running at maximum capacity. However, is it really maximum capacity or over the maximum capacity? With 6,000 staff and another 6,000 workers of contractors working hand in hand in the yard, and many of the 12,000 workers are new and inexperienced, safety lapse is likely to occur. 5.3 5.3.1 Opportunities Horizontal Expansion

In the foreseeable future, the book order for oil rigs will remain strong. Customers are willing to wait longer and pay more for rigs build by Keppel Fels. Keppel Fels in Singapore faces a land constraint, since the land in Singapore is expensive and oil rig construction does take up space. Even the yards in Texas, USA and Brazil are operating at maximum capacity. Now is the time to expand horizontally, to places like China and India, where the land is cheap and skilled labour is readily available. After all, many skilled workers in Keppel Fels come form these countries.

5.3.2

Vertical Expansion

Virgin oil field in located in the deep blue sea. Deep-water oil and gas exploration could boost world reservesby 180bn barrels of oil equivalent (boe) over the next three decades, according to a new study by consultants Wood Mackenzie and Fugro Robertson.[25] As the world rig builder, Keppel Fels realize the significant of deep water exploration. While the current strategy is development of deepwater solution, Keppel Fels should consider expansion into deep water exploration. The capital cost for deep water exploration is extremely high, but the returns is equally attractive. Keppel Fels does have the technical expertise to understand the risk of deepwater exploration and the financial ability to do so, given that its largest shareholder is the Singapore government. 5.4 5.4.1 Threats New Entrants

Many new entrants do have strong financial or technical support. For example, the India shipyard that is considering entering into rig construction has strong financial support. It plans to overcome the technical barrier by technological tie-up with existing rig manufacturers. In time to come, some new entrants can become a formidable threat to Keppel Fels. 5.4.2 Alternate energy sources

While there is no threat of substitute for oil rig, there exists threat of alternate energy sources, which can be substitute for oil. Solar and wind energy are renewable, cheap alternate sources of energy. While there is currently no efficient and economical method to tap the energy, rapid technological advances might yield such methods in the near future. When that happens, demand for oil and oil rig will reduce. 6 FUTURE

In the near future, I strongly advise Keppel Fels to fortify its leading position in rig construction. In the long run, Keppel Fels should diversify into deepwater exploration and tapping alternate energy sources. Demand for crude oil might reduce once efficient method to tap solar or wind energy is available, but there is always a demand. Crude oil is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics. 7 CONCLUSION

The situation analysis reveals that Keppel Fels is in a strong position to defend its leadership position. It is also in the strong position to diverify, whether horizontally or vertically. However, Keppel Fels has to recognise that there are substitutes products for oil, even if theres no substitute for oil rig.