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Integra brochure
(pdf - 1.6 mb)

November 25, 2005

Journey to the center of the Earth

Imagine that you are a top-manager of a major international company. The load of money you get from your employer can hardly be defined by the simple word “salary”. Besides, you take advantage of a nice social package and bonus system. What else is to be desired?
However, you can look at the situation at a different angle. Say, you are a former raider, a specialist in hostile mergers. You are accustomed to kaleidoscopic changes, you rely only on yourself and make a maximum profit in minimum time. One day you turn 30 and ask yourself if you have made your career. “I could have held my position of Executive Vice-President for another 10 years. I was unlikely to become President”, says Felix Lyubashevsky in an interview to Forbes. A year and a half ago he was still on the Board of TNK-BP. What would you do in this situation? Lyubashevsky quit to start his customary business, that is to take over and consolidate scattered assets. Now he is working for himself and on a large scale. According to Lyubashevsky, in a couple of years his company’s capitalization will reach 1 bln dollars.
“In fact, I did not plan to work in an oil company as I did not quite understand this business”, Lyubashevsky recalls joining TNK. In mid-nineties, a young graduate of the Plekhanov Academy became President and co-owner of the National Center of Financial Investments. Co-founders were quite worthy ones: Incombank and Association of Workers of Law Enforcement Agencies. Speculating in shares and promissory notes Lyubashevsky made 1-1.5 mln dollars per year. In 1997 came an order he could only dream of. Consortium of Investors headed by Mikhail Fridman and Viktor Vekselberg wan a tender for investments in Tyumen Oil Company. However, the management of Nizhnevartovskneftegas (NNG), the major oil producing affiliate of TNK, kept them out of the oil pipe. TNK controlled only 38% of NNG shares. So, Lyubashevsky, among others, was called to struggle with the separatists. “For a large amount of money I managed to buy 6% of shares from the workers”, the businessman recalls.
Apparently, control over NNG was established thanks in no small part to that block of shares. At least, the TNK management appreciated Lyubashevsky’s talents. At the age of 24 he became Vice-President of the company and Head of Corporate Governance Department. At the time TNK consisted of isolated pieces of property and the task was to make a consolidated company of these bits and pieces. “I set up control where it was needed. I led reorganization. I did property registration. I was involved in development of the corporate strategy, the new structure of TNK”, Lyubashevsky elaborates.
He went on business trips, handled subsidiary managers. Among employees he was known as a decisive and result-oriented person. For example, TNK was involved in privatization of ONAKO and Slavneft. However, it is not enough to buy a block of shares in a Moscow tender, you need to ensure that numerous subsidiaries, their property and money flows come under central control. It was Lyubashevsky who did the main part of this spadework.
Everything was perfect. But eventually consolidation of the company was completed. Specialists in hostile mergers were no more heroes. “So the new slogan was "Now We Manage What We Have Bought”, Lyubashevsky tells. It was time to turn to oil production proper, production specialists came to the fore. Lyubashevsky engaged in a new business.
Western oil producers, on which TNK began to model itself , consider production, refining and sales as core business. Only 20% of operations (in money terms) are conducted by employees of oil companies, and what they do is oil production. Outsourced contractors get the rest: exploration, construction of field facilities, well drilling and workover, transportation and catering. It is cheaper, and not only because contracts are granted to outsourced organizations on a tender basis. In 1990-ties, 90% of operations in Russian oil companies were done by their own employees.
Working in this mode is like buying a new motor car together with a car workshop. Oil servicing business within an oil company is an unstable thing. Today the company wants 60 workover crews and tomorrow it needs only 40, but still it has to pay salary to all 60 ones. Volumes of drilling are constantly changing, but the number of drilling rigs remains the same, which means idle time for part of the equipment. Finally, you need time to purchase and repair equipment, to cut short theft in service divisions, improve efficiency of labor – management of large oil companies often can’t get around to it. By contrast, independent service companies both use their facilities to full operating capacity through working for many customers and make substantial investments in development of new methods of drilling and well servicing. Compare: in those years in Lukoil-Drilling, which is Lukoil’s service division, 18500 employees did the same volume of work as 3600 workers of the independent drilling company Parker Drilling did.
TNK of the year 2000 was no exception in the general practice. Two thirds of its 70000 employees were working in service divisions. Back in 1999, TNK hired consultants from McKinsey & Company to work out a development strategy for the company. It was Lyubashevsky, who suggested in the course of negotiations with international shareholders creation of special purpose service companies within TNK and their further sale to outside investors. “I showed to the shareholders that there are some 50000 people in the company, whom they “never see”, the reformer says. Initiative is punishable: in one year’s time Lyubashevsky was asked to implement this plan. He did not say no, while many of his colleagues in TNK were not too enthusiastic about getting involved in this work. “When Felix invited me to come with him I refused – why do I need all this north? I said I would not go to Nizhnevartovsk”, says Dmitry Zimin, who was one of directors in Lyubashevsky’s Deprtment in 2000. Nevertheless, the plan was implemented. Headcount in service divisions of TNK subsidiaries of the year 2000 (the merger with BP added some new assets to the company) was reduced to 27000. The share of work done by internal service companies reduced from 90% to 50%. The net cost of extraction of one barrel of oil was cut by 50%. Another achievement was that Lyubashevsky became one of the few top-managers, who retained their positions after the merger with BP. More to that, he took over the control of supply chain in TNK-BP and the company’s energy program. But Lyubashevsky showed no appreciation of the trust. “There were no further tasks for me to fulfill [in TNK-BP]. I had reached the top”, he said in the interview to Forbes.
 What was next? “I think, I first met him in the lobby of the hotel where I stayed during one of my visits to Moscow”, recalls the new partner of Lyubashevsky, American businessman John Fitzgibbons. This meeting was not incidental. In the second half of 1990-ties, he and his Russian partner of that time Nikolay Bogachev bought off several oil fields in West Siberia and consolidated them into Khanty Mansiysk Oil Corporation (KMOS). In 2003, the partners sold KMOS to Marathon Oil, which brought them about $300mln. Fitzgibbons decided to spend part of the money to create an independent oil service company in Russia. What he needed was an experienced partner. Some investment bankers he knew recommended Lyubashevsky – he was one of those who had created this market in Russia.
Negotiations did not last long. In late summer 2004 the parties shared responsibilities in the project that was given the name of Integra. 50% of the company’s shares went to the international partners financing the project: to John Fitzgibbons and the founder of Brunswick company, Swedish millionaire Gerard De Geer; Lyubashevsky got 30% of Integra and personal responsibility for business development.
What does the market, in which Lyubashevsky hopes to succeed, look like? This is exploration, drilling, geophysical surveys, current and capital workover, production stimulation, special purpose transportation equipment, repair and maintenance of field facilities. Investment company CenterInvest estimates the volume of these services in Russia at 5-6 bln dollars per year. Oil companies still perform over 60% of service operations. The western service companies’ share is 15-20% (Schlumberger, Halliburton, etc.). International companies take up the most expensive and hi-tech services: seismic exploration and interpretation of results, drilling of wells with difficult geometrical factors, hydraulic fracture of oil-bearing formation, etc. The remainder is shared by more than 500 independent Russian companies.
Hundreds of small companies that use old equipment and technologies can be disregarded. There are larger competitors. For example, drilling company Eurasia with annual turnover of $140mln. It used to have the name of Lukoil-Drilling and was part of the same-name oil company till the end of 2004. Now Eurasia belongs to a group of private investors headed by the company’s President Alexander Dzhaparidze. Yukos’ former major provider of oil services, Siberian Service Company (turnover of $180mln) has also become independent. A couple of months ago it was acquired by ex-minister of fuel and energy Yury Shafranik.
Felix Lyubashevsky forecasts that in five years the share of outsourced services will increase from today’s 40% to 60%. It means that financial flows of $1-1.2bn will be redirected and split between large companies among which Lyubashevsky sees Integra. The former TNK Vice-President intends to implement the ambitious plans by well-known methods – first of all by buying assets. Four trophies have been added to Integra’s collection since December 2004. Two companies were bought: Alliance based in Komi Republic and Sever (former subsidiary of TNK sold in the course of restructuring) in West Siberia. Then Lyubahsevsky set up control over Russian Geophysical Company, one of the major providers that have subsidiaries in four regions of Russia. Finally, in August Integra acquired drilling rig and tools production from Offshore Oil and Gas Projects Group (former machine-building empire of Kahi Bendukidze). These include several workshops in Uralmash (Ekaterinburg), two plants in Perm region and R&D organization in Moscow. Lyubashevsky also created a company to provide capital workover, with state-of-the-art equipment and good specialists. All this cost about $100mln.
Now Integra is a strong market player. The company can conduct seismic exploration, drilling and workover in three key oil producing regions (Timano-Pechora, West Siberia and Ural-Povolzhie). Together with assets Integra acquired customers – TNK, Rosneft, Lukoil, Russneft. Integra’s revenue is expected to be $220mln. And this is only the beginning. According to Lyubashevsky, today he is actively involved in negotiations with 30 companies, “With 5-10 of them we have already reached agreement about purchase terms”. Lyubashevsky assures that his company is able to increase its turnover to $500-700mln by the end of 2006 and to $1bn by 2008.
And what about competitors? Alexander Dzhaparidze, the major of them, looks surprisingly peaceful. “Felix is a well known player in the oil service market. He has done a lot to develop this sector. I believe that as head of Integra Lyubashevsky will use the emerging opportunities to the best advantage”, he said. Eurasia is not yet worried about strengthening of the competitors’ positions - the company has an exclusive five-year contract with Lukoil.
Lyubahsevsky does not have a strategic customer but he has money. In September, through JP Morgan the company got a participation loan and privately placed about 20% of its shares. The transaction yielded $130mln. In spring 2006 Lyubashevsky plans to make the initial public offering and earn $200mln. Well, with oil price of $60 per barrel, any oil securities will sell well. However, potential investors tend to estimate the oil service industry as a whole. The main problem in it is corruption. Orders are often distributed through kickback schemes or just friendship. “Adequate tenders are unlikely to be expected in Russia”, says Valery Nesterov, a Troyka-Dialog analyst. Lyubashevsky is rather optimistic: “Generations change and so do the rules of the game. Compare the situation ten years ago and what we see today. Obviously progress has been made”. Well, he must know what he is talking about. However, when Felix Lyubashevsky began to thunder against kickbacks at the conference “How to Become Gasprom’s Supplier” a couple of months ago, breathless silence settled in. The subject is too thorny.