Forecasting the Future

An Article on the Dulles Chamber of Commerce’s “What to Expect in 2012” Discussion Panel

Late in January, the Dulles Chamber of Commerce hosted a panel discussion on “What to Expect in 2012”.  Members of the panel included executives from Professional Services Council, Raytheon, Northrop Grumman and Lockheed Martin.

The panelists discussed the expectations that 2012 has compared to 2012.  The main themes covered were the defense budget cuts, continuing resolutions, the current budget cloud of uncertainty, as well as the external events that may play a role in shaping the defense contracting environment.

The Dilemma:

Mr. Chris Bowie, Corporate Director of the Northrop Grumman Analysis Center said that 2012 will exceed the lows of 2011.  He also mentioned that the defense budget for 2013 will be 3% lower than 2012.  A contraction in investment accounts should also be expected. 

Mr. Stan Soloway, the President of the Professional Services Council mentioned Secretary of Defense Leon Panetta’s resolution to reduce America’s defense budget by up to $490 billion over the coming decade.  He briefed the panel that last year was the first time in ten years where the industry did not match the federal budget. 

The points mentioned above also means that the federal “funding stream remains under a cloud of uncertainty”, said Mr. Larry Duncan, Vice President for Federal and State Government Relations and PAC Affairs.  Yet, in spite of this cloud of uncertain, there will not only be challenges, but opportunities that contractors could benefit from.  Panetta’s resolution emphasizes a shift into reconnaissance, cyberspace warfare, special operations, and missile defense systems. 

Mr. Mark Esper, the Vice President of Government Relations for Raytheon, brought up the fact that external events will also play a big part in into feeding into that cloud of uncertainty that hovers around the federal budget for 2012 and beyond.  2012 is an election  year, and the Obama administration had to make a move to show that they are coming up with solutions to address the country’s deficit problem.  Of course, the winner of the elections in November will also dictate how the budgeting will be addressed in the years to come.  Although he still sees a “strong middle ground” out there, Mr. Esper noted that the parties themselves are moving further apart from each other.  He referenced 2010 when the Democrats were decimated.  In Congress, the deficit hawks now outnumber the defense hawks.

How to Thrive During Challenging Times:

In short, defense spending in general will face a difficult time within the coming years.  To meet the coming challenges, Mr. Bowie said that Northrop Grumman is reorganizing its structure so that it can better meet the new needs of the government. 

Mr. Duncan added that the reduction of the pie means that the bar has also been set much higher.  There needs to be a “resetting of expectations in terms of margins”.  Mr. Duncan suggested to the members of the audience that much more effective teaming arrangements be taken into consideration when it comes to resetting these expectations, as “the tightening of the belt flows down to the subcontractors”.

The representatives of the large prime contractors on the panel spoke of expanding their company’s horizons to look more aggressively at international opportunities.  They brought up USA’s NATO allies as potential sources of opportunities, namely: Australia, Japan, and Israel.  Potential external threats like Iran and China should also be taken into consideration when reviewing the international climate.  Mr. Esper added that in these challenging times, it is wise to “follow security threats are” and identify “where our partners and allies are”. 

Conclusion:

The climate for government contractors may be cloudy, but that doesn’t mean that there isn’t any room for sunshine.  The days of outrageous government defense spending may be behind us, but if a company does its homework and is able to leverage itself to respond to the changing environment, and if it is able to increase its efficiency and reevaluate its expected margins, then it should be able to thrive. 

Current Events

(for the Week Ending January 20, 2012)

5.            Government and African Union forces began a heavy offensive early on Friday against insurgent strongholds on the outskirts of the capital, Mogadishu, trying to drive the Islamic militants they have long battled out of the city, officials and witnesses said.

Both U.S. and French special forces are believed to be helping with guidance and intelligence, while keeping low profiles.

4.            China’s top energy group and its partners Qatar Petroleum and Royal Dutch Shell agreed to push ahead with plans for a $12.6 billion refinery and petrochemical complex in east China which is likely to start before similar rival facilities.

The project, which includes a 400,000-barrel-per-day (bpd) refinery and a 1.2-million-tonne-per-year ethylene complex, is one of several joint-ventures that China, the world’s second biggest energy consumer, hopes will provide the fuel for its expanding economy.

3.            Israeli leaders held talks with the top U.S. military commander, General Martin Dempsey, following the postponement of a joint exercise that was to be the biggest ever for the two allies.

Dempsey, chairman of the Joint Chiefs of Staff, said he stressed common interests and the important partnership between the U.S. and Israel in his meetings with Israeli counterpart Lieutenant-General Benny Gantz, Defense Minister Ehud Barak and President Shimon Peres. He was also scheduled to hold talks with Prime Minister Benjamin Netanyahu.

2.            France suspended its training operations in Afghanistan and threatened to withdraw its entire force from the country early, after an Afghan wearing an army uniform shot and killed four French troops Friday and wounded others.

1.            Major powers seeking to negotiate an end to Iran's suspected pursuit of nuclear weapons on Friday signaled their openness to renewed talks with Tehran but diplomats said the powers remain divided on their approach.

EU foreign policy chief Catherine Ashton, who represents the group, issued a statement making clear that a diplomatic path remains open to Iran despite tougher sanctions and fresh speculation of a military strike on its nuclear facilities.

Current Events

For the Week Ending in 1/13/2012

1.    Western oil firms remain in Iraq even as the US exits.  Iraq has a goal of raising its oil production capacity to 12m barrels per day by 2017, which would place it in the top echelon of global producers.  Recently, BP and CNPC finalized the first new oil contract issued by Baghdad for the largest oil field in the country, the 17 billion barrel super giant Rumaila field.  ExxonMobil, with junior partner Royal Dutch Shell, won a bidding war against Russia's Lukoil (and junior partner ConocoPhillips) for the 8.7 billion barrel West Qurna Phase 1 project. Italy's Eni SpA, with California's Occidental Petroleum and the Korea Gas Corp, was awarded Iraq's Zubair oil field with estimated reserves of 4.4 billion barrels. Shell was the lead partner with Malaysia's Petroliam Nasional Bhd., or Petronas, winning a contract for the super-giant Majnoon field, one of the largest in the world, with estimated reserves of up to 25 billion.

2.    Iraq: Panetta and Army Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, told the panel that the U.S. military will continue limited counterterrorism training with Iraqi forces at up to 10 camps around the country beyond the end of the year.  Panetta left open the possibility for continued negotiations with Baghdad over a force presence there.  The Pentagon chief also pointed out that the United States has some 40,000 troops in the region, including in Kuwait, Bahrain, the United Arab Emirates and Qatar.

3.    Iran:  Iran has begun uranium enrichment at a new underground site built to withstand possible airstrikes.  One of the scientists working in the uranium enrichment project Mostafa Ahmadi Roshan Behdast, was also assassinated this week in a car blast.  These recent events, along with the positioning of a new aircraft carrier strike group in the Arabian Sea (and another on the way to the region) continues to increase the tension in the region.  

4.    A rotor-wing UAV makes its debut in Afghanistan.  The U.S. military is testing a revolutionary new drone for its arsenal, a pilotless helicopter intended to fly cargo missions to remote outposts where frequent roadside bombs threaten access by road convoys. The craft have flown 20 transport missions since the inaugural flight on Dec. 17.  They have delivered nearly 18 tons of cargo, mainly thousands of Meals Ready to Eat and spare parts needed at the forward operating bases.

5.    The popularity of the unmanned aircraft continues to soar, and its relevance is only predicted to continue to grow.  UAV missions in the military already include deploying missiles and bombs, performing intelligence, surveillance and reconnaissance tasks, making cargo drops and more.  Combat air patrols by UAVs grew 660 percent from 2004 to 2009, according to the Air Force.  When President Obama rolled out his new military strategy earlier this month, he proposed more emphasis and resources on UAVs.

6.    China’s Pipelines in Myanmar In order to meet energy demands in its resource-crunched eastern, southern and central parts, China is constructing oil and gas pipelines in Myanmar, almost reaching to the seashores of Bay of Bengal. Currently, the CNPC, in agreement with the Myanmar Oil and Gas Enterprise (MOGE) and the Myanmar state security forces, is engaged in laying a 982 km (620 miles) long crude oil pipeline from Kyaukpyu Port on the western coast of Arakan State linking Kunming after entering the border city of Ruili in Yunnan Province of China at a cost of US $2.5 billion. Concurrently, they are also constructing another gas pipeline, capable of delivering 12 bn cm of natural gas per year, from Shwe Gas off the Arakan coast up to Kunming. At the same time, a deep underwater crude oil unloading port and oil storage facility is being constructed at Maday Island (Arakan Coast) to serve as terminus for the tankers coming from West Asia and Africa.

7.    US Military to Help Build South Sudan.  The United States military is joining efforts to help build the newly independent nation of South Sudan.  U.S. Defense officials say they are dispatching five officers from the Army, Air Force, Navy, and the Marines starting January 13 on the orders of President Barack Obama.  The United States has been boosting its military assistance to Africa in recent months. In October, Obama announced the deployment of about 100 troops to Uganda and other parts of Central Africa to help armies in the region battle the Lord’s Resistance Army guerrilla group.

8.    The Marine Corps is slowly increasing its mission objectives in the African continent.  The 180 members of Special Purpose Marine Air-Ground Task Force 12 (SPMAGTF-12) are serving in the Trans-Sahel region of Africa, stretches across the center of the continent’s north along the Sahara Desert. The unit has also deployed farther east, in countries such as Djibouti.  SPMAGTF-12 will rotate out of Italy in the spring, and 3rd Force Recon will take over the command element. Rotations for fiscal 2013 “are being sourced,” Winnacker added.  While not expected grow to the level of a 2,300-member Marine expeditionary unit, the SPMAGTF could add Marines in order to be “as relevant as possible.”
 

Current Events

8.         The US military unveiled its latest Unmanned Aerial Vehicle (UAV), Boeing’s A160 Hummingbird, a helicopter drone which utilizes a 1.8 gigapixel color video camera.  These UAVs are scheduled to begin operations in Afghanistan as early as May of this year.

7.         A deal between the South Korean government and Northrop Grumman for RQ-4 Global Hawk UAVs has been placed on hold after disagreements over costs and delays in getting formal US government approval for the sale.

6.         During the same week, South Korea finalized a purchase with Dassault Aviation for two Falcon 2000 reconnaissance aircraft.  These aircraft will enter service around 2017 and will be the replacement for South Korea’s aging RC-800 (Hawker 800) aircraft.

5.         Russia handed a Nerpa class nuclear-powered attack submarine to India on a ten-year lease for $920 million.

4.         Beidou, China’s version of America’s Global Positioning System, becomes operational.  China becomes the third nation to develop its own satellite navigation system, after the United States and Russia.  Analysts worry that this satellite system will be used to strengthen China’s growing military capabilities. 

3.         U.S. Defense Secretary Leon Panetta presented on Jan. 5 the results of the Pentagon’s strategic review of U.S. roles and missions worldwide in an era of budget cuts.  The news conference outlined how the U.S. will posture its military to address current and future challenges: its reduction of military personnel, its plans for increased flexibility and deployability, and a refocus onto the Asia-Pacific region.

2.         The Iranian Defense Minister Ahmad Vahidi said on Wednesday, January 04, 2012 that Iran planned to hold more military exercises right after its 10-day drill in the Persian Gulf.  In another escalation in rhetoric, Iran also threatened to close the Strait of Hormuz should an American aircraft carrier return to the Persian Gulf.  The U.S., which keeps a carrier in or near the gulf at all times, shrugged off the threat.

1.         The European Union agrees to embargo Iranian oil, while China has decreased its orders from Iran by more than half this month.  China and the EU are Iran’s largest and second largest purchasers of its oil, respectively.  These recent turn of events have increased the price of oil to nearly $114 per barrel.

It has been an interesting month of December.  For 2012, GovPartners will be releasing bi-weekly news updates from around the world which may be of interest to current (and potential) government contractors.  Below is a top-ten list of the news-worthy material which have dominated the headlines for the month of December:

10.          NATO vows to continue to carry out nighttime raids that target suspected insurgents.  The partnership with Afghan forces will also continue to increase as well, with Afghan special forces now take part in nearly all night raids.

9.            U.S. increasingly reliant on the three transit routes which snake through Central Asia, Russia and the Caucasus to ship non-military supplies and fuel into Afghanistan as the relationship between Washington and Pakistan continues to deteriorate.

8.            General John Allen reiterated that “the continued work beyond ’14 in terms of development of economic capability and governance will continue.  We will also see, probably, a U.S. military capability beyond ’14.”

7.            The U.S. military may have withdrawn from Iraq, but international companies continue to pour into the oil-rich country.  Earlier this month, Royal Dutch Shell PLC and Mitsubishi Corp. signed a final $17.2 billion, 25-year contract with the country.  Some $12.8 billion would be spent on infrastructure and $4.4 billon on construction of a liquefied natural gas facility.

6.            Iraq cabinet okays 2012 budget at $100 billion.  The new budget forecasts total government expenditures at $68 billion, including $31.6 billion set for investment spending in 2012.

5.            U.S. Defense Secretary Leon Panetta and General Carter Ham, commander of the U.S. Africa Command, paid a visit to the country in mid-December and expressed their confidence and support in Libya’s transition to democracy.

4.            Afghanistan's government signed a deal with China's state-owned National Petroleum Corporation, allowing it to become the first foreign company to exploit the country's oil and natural gas reserves.  The deal, initially valued at $700 million, could end up being more than ten times this amount if more reserves are discovered and developed.

3.            The Department of Defense’s $662 billion budget for 2012 was approved by the U.S. Congress.  The lawmakers agreed on $518 billion for Pentagon operations and about $115 billion to cover the wars in Afghanistan and Iraq.

2.            Kim Jong-Il passes away, names his 27-28 (depending on source) year old son, Kim Jong-un as his successor.

1.            Iran threatens to close the Strait of Hormuz, a vital route in the Gulf where more than 1/3^rd of the world’s ship-borne oil passes.