Facing the specter of the drawdown to the wars in Iraq and Afghanistan, combined with sequestration, many firms in the defense industry are facing a perilous period. Spending on systems is expected to decline into FY14, after which it should rebound slightly, assuming there are no further major defense cut. Non-logistics services will fare slightly worse: Spending is expected to bottom out in FY13 and stay essentially flat in the short term. Logistics will be the most adversely affected, having seen 16% annual declines since FY11 and facing estimated 6% annual declines for the coming years. Given these projections, it is no surprise that firms across the industry are looking to expand into adjacent markets with similar requirements that are notably not as dependent on government spending. For many of these firms, the resource extraction support market fits this bill perfectly.
Resource extraction is a broadly-defined market that includes oil and gas production and mining. Firms in the industry face similar challenges to defense companies in terms of providing technically complex systems and life support services for austere environments. More importantly, it is growing rapidly. The mining industry output grew by 3% annually between 2000 and 2010, despite the recovery from a significant market shock in 2009. Additionally, while the number of onshore rigs is expected to stay relatively stable, the number of offshore rigs, which require significantly more services, is expected to grow at about 5% annually, especially in Africa, Brazil, India, and Europe.
The similarities between supporting forward-deployed soldiers and supporting drillers and miners are striking: much like for military logistics, services must be provided at austere locations where transportation connections and security are uncertain. Personnel spend extended periods of time at an isolated site and require housing, food, utilities, security, supplies, communication, recreation, and transportation. Some companies have even placed a special emphasis on providing high-quality living conditions as a means to recruit and retain personnel and build morale. Facilities can vary from temporary camps to large permanent campuses to offshore platforms or barges. The similarities between a mining site and a forward operating base are not lost on contractors: two of the prime contractors on LOGCAP, KBR and Fluor, are major energy and mineral extraction project managers, as are other major defense services firms, like AECOM and URS.
Logistics services providers are not the only firms that can transition their offerings from the military to resource extraction. Offshore oil drilling sites often have complex communications requirements that are further complicated by their remote locations. Harris CapRock is one of the many firms that have leveraged this similarity, providing parallel VSAT network offerings to the energy industry, maritime customers, and governments and militaries. Similarly, security contractors like Triple Canopy have branched out into providing security services work in the oil and gas and mining sectors. They play a vital role in protecting sites in countries with precarious security situations, like Nigeria.
Systems and Engineering Services:
Although the transition of systems manufacturers into resource extraction is more complex, requiring significant R&D, some companies are electing to take this path to diversify their customer base. Lockheed Martin, for one, is making significant investments into maritime commercial technologies, including using unmanned undersea vehicles to mine polymetallic nodules deep on the ocean floor. Some component manufacturers, like Ducommun, are already working across both sectors, fulfilling a shared requirement for high-performance, reliable parts.
Despite its potential for growth, however, the resource extraction support market poses unique challenges that make it somewhat difficult to address. First, unlike working for a government, oil, gas, and mining operations are fragmented among multiple customers with different roles in the value chain. International energy and mineral companies (e.g. BP or Anglo American) are only one set of the players that might be present at a site. Field services companies (e.g. Sclumberger, Halliburton), drillers (e.g. Transocean, Ensco), and construction/project managers (e.g. Worley Parsons, KBR, URS, Fluor) often also play a major role. Depending on the nature of the venture, these firms may be more important targets than the energy and mineral firms themselves. Additionally, most firms have fragmented contracting, with each division managing its own subcontractors for a given region or sector.
The resource extraction support market is also more opaque and difficult to break into than are most government markets. Providers must often be both licensed by the local government and prequalified by the site owners and operators. Furthermore, local firms are usually selected for international work, given the preferences of local governments and their ability to work with local nationals. These factors make it difficult to execute a global strategy, even though most major firms have a worldwide presence. Firms entering the market must instead evaluate opportunities on a global level and then develop local strategies, by which they establish a presence on the ground and target key stakeholders.
Oil rig image credit to Divulgação Petrobras / ABr via Wikimedia Commons