The market cometh, eventually
The faster the cash-rich Russian oil companies push forward productivity
schemes and technical innovations, the more glaring becomes the absence of
a real market in oilfield services.
Companies such as Yukos, TNK and Sibneft have signed
multi-million-dollar contracts with the largest international service
providers, while Surgutneftegaz and others have succesfully retained most
services in-house. But there are precious few independent Russian service
companies to meet the rapidly rising demand.
The exception that proves the rule is Petroallians, the only Russian
service company capable of competing with Halliburton, Schlumberger or
Baker Hughes. Its turnover has trebled from about $40 million in 1998 to a
projected $120 million this year, and Aleksandr Sizov, vice president for
corporate development, says "it's a struggle to keep up".
Sizov points out that in the Russian sector of the Caspian, Petroallians
- which provides services from offshore drilling to drilling support
(cementing, testing, well workover etc) - is one of a handful of all-round
service providers. In the US sector of the Gulf of Mexico, which is of a
similar size, there are "hundreds".
"There is no real market in services yet," he says. "There are the major
western companies, and companies of a western type such as ours, which
offer the full range of services and operate across the former Soviet
Union.
"Then there are many small Russian companies that offer only one
service, for example well workover, and typically operate in one
geographical location."
Sizov adds: "The development of oilfield technology favours integrated
service companies. If we are contracted to do well workover, we can propose
a solution, and equipment to implement it, on the basis of modelling and
monitoring at the same field.
"If each function is being carried out by a separate small company,
no-one is responsible for the final result in terms of increased
productivity."
That is why, he argues, as the services companies are separated out from
the vertically-integrated oil producers, they will either develop into
integrated providers or be swallowed up.
When the Soviet oil ministry broke up a decade ago, almost all service
divisions remained within the vertically-integrated oil groups. The
exception was exploration companies, some of which -
Khantimansiiskgeofizika, Bashneftgeofizika, Tvergeofizika, etc - continue
to flourish.
Petroallians started out in 1989 as MD Seis, a "geofizika" with a
difference: it was a joint venture between the oil ministry and a company
headed by an American oilman, Tom Russell, who had worked in the USSR in
the 1970s selling US geophysical services. By the time MD Seis became
Petroallians in the mid-1990s, it was doing all seismic activity in the
Caspian's Russian sector and Russia's largest oil company, Lukoil, bought a
stake.
Lukoil is Petroallians's major client and, although the company has been
fully independent (owned by management) since 1998, more than 50% of its
work this year has been for Lukoil, Sizov says. It is diversifying, though,
and this year had significant contracts with TNK, Slavneft and Sibneft.
Petroallians has just opened an office in Baku and signed up to a ten-year
alliance with the Azeri national oil company, Socar, to offer services in
the Caspian.
Just as Petroallians' business has mushroomed in the last three years,
so too has that of the major western service suppliers working in Russia -
with whom alliances are being developed by oil producers with bulging
revenue flows and an increasingly acute consciousness of the need for
efficiency improvements.
An insider at one of the western service providers says: "Some of the
Russian oil producers are quite conscious that service provision is not
their core business, and so the use of independent providers will grow."
The biggest deal is between TNK, Russia's no.4 oil group, and
Halliburton. The Texan company has a team of more than 300 staff at
Nizhnevartovsk, TNK's west Siberian base, working to improve productivity
at the Samotlor field that accounts for nearly half of the Russian
company's crude. The work is financed by a $560 million credit from US
Export-Import bank.
Schlumberger's two principal clients are Yukos and Sibneft. The joint
venture being developed between Schlumberger and Yukos is integral to the
latter's widespread productivity and efficiency drive, which has resulted
in production rising nearly 17% on last year, and new wells commissioned
rising 4.5% up year-on-year, to 175 in 2001 first half.
In August the two companies signed a three-year contract to establish in
Moscow a field development planning centre, using representative reservoir
models, and in September Schlumberger announced the sale by its subsidiary
GeoQuest of geophysical, geological, mapping, modelling, petrophysical and
reservoir engineering software to Yukos.
Sibneft has cut operating expenses by a whopping 24% in the last year -
and Schlumberger, which has 40 managers based permanently at Noyabrsk, near
Sibneft's main west Siberian oil field, has "played an important role", a
Sibneft spokesman says.
Sibneft's horizontal drilling programme is being carried out by two
western service providers, Deusag and Pride International, and one Russian
one, Sibneft Drilling, which has recently been demerged from Sibneft
itself; BJ Services has a substantial contract with Sibneft for
hydrofracting remedial treatment work; and Sibneft is in the course of
negotiating a contract with Halliburton.
The demerging of Sibneft Drilling, and Sibneft UKS, another former
subsidiary that does well workovers, is likely to set a trend. TNK has also
announced a tender for sale of two services subsidiaries.
As the services market develops, establishing Russian subsidiaries will
be a key issue for western service providers. Take ABB, which works with
Russian companies through both US-based subsidiaries (e.g. ABB Lummus
Global) and its Russian subsidiaries. Mikhail Khozyainov, head of ABB
Automation in Moscow, says that prices on contracts with TNK, Sibneft,
Lukoil, Slavneft and Surgutneftegaz - for upgrading oilfield power supply
systems - have been slashed by providing them from Moscow. "We were able to
offer the same systems at half the price. Our colleagues abroad had much
higher labour costs."
But creating a real services market will take time. Some oil companies -
most notably Russia's no.3 producer, Surgutneftegaz, and the largest
state-owned company, Rosneft - still retain almost all services in-house.
One industry insider pointed out that as Surgutneftegaz expands from its
west Siberian heartland to Timan Pechora and other new fields, as it is now
doing, it will be compelled to buy in services "as establishing them from
scratch at a new location would be prohibitively expensive".
Analysis published recently by Neft i Kapital magazine suggested that
the independent providers now account for only 25% of the Russian services
market. The research suggested that their share will rise to 50% over the
next decade - although the absolute increase will be greater, since the
market itself will expand at Timan-Pechora, the Caspian and other new
fields.
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