The market cometh, eventually

By Simon Pirani

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.

 

A version of this article appeared in Energy Day, 15 November 2001
Posted 15.12.01; © 2001 Simon Pirani

 

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