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Integra brochure
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June 16, 2006

To fill a niche of our own

Russian oil and gas equipment manufacturers seek to respond to producing companies’ growing and quality-driven demand. Last year, Integra acquired a number of oilfield equipment manufacturing companies to form the basis of a competitive integrated company. The company development strategy as well as challenges and prospects of the Russian oil and gas machinery industry became the subject of the interview with Uramlash-VNIIBT president Vitaly Tkachev.
DossierVitaly V. Tkachev V.Tkachev was born on November 6, 1958 in the city of Magadan. In 1981, he graduated from the Kiev State Institute of Civil Aviation, in 2002 — from the Gubkin University of Oil and Gas. During 1981-92 he worked as mechanic, foreman, and chief mechanic of the Civil Aviation Administration of Yakutia. In 1998-2000 he served as 1st Vice-President of Upstream in Tyumen Oil Company. In  2000-02 he was President of ONAKO oil company, General Director of JSC Orenburgneft. 2003-05 — Chairman of the Board in JSC Iletsk-Sol. 2005 — Vice-President Engineering of  Integra Management. From October,  2005 — President of Uralmash-VNIIBT. Member of the Russian-Arab Business Council  and  the Council of Oil and Gas Equipment Manufacturers Association.
“NiK”: Vitaly, which companies comprise Uralmash-VNIIBT group now? — Last September, Integra acquired Uralmash-Drilling Equipment, which is the leading domestic drilling rig manufacturer.  Later on, the company was joined by the All-Russian Institute of Drilling Tools (VNIIBT) with pilot factories, the Pavlovo machine-building plant in Perm region and a pilot plant based in Kotovo near Volgograd. These companies formed Uralmash-VNIIBT group. Now we eye acquiring other, both engineering and production assets.
“NiK”: What is Integra’s objective when it expands the machine building division?— We seek to create a domestic machine building complex that would meet increasing needs of oil and gas producers. Globalization of oil and gas field machinery industry is a tendency that needs to be regarded.  We see active processes of mergers and integration of machine building companies around the globe. Events proved that competitive environment is not favorable for small companies, which are unlikely to survive individually. Quite the other way round, a company with sizable assets, active turnover and modern team of managers can be a strong and competitive market player.
As I see it, compliance with these requirements is an indispensable condition of competitiveness of the Russian oil field machinery industry,  that is why creation of Uralmash-VNIIBT group was a well-timed event. This consolidated structure with an integrated management – engineering – manufacturing – supplies – maintenance network can offer turn key projects from design to maintenance of equipment and spare parts supply.
So, our main strategic goal is to increase efficiency of all Uralmash-VNIIBT companies’ joint efforts, to make the group an industry leader. We not only want to survive, but fill a niche of our own in oil and gas field machinery market and compete on an equal footing with major international companies.
“NiK”: Which major challenges did you face when establishing Uralmash-VNIIBT?
- I would mention personnel shortage as problem number one. Most machine building companies,  including Uralmash-VNIIBT group, face this problem. Modernization of production facilities is also an important issue. Equipment wear in the group’s plants reached 70%. To handle this problem, we invest a lot into company development and state-of-the-art equipment. Another urgent problem is subcontractors: we need to reduce them.
“NiK”: Why is the subcontractor issue so pressing?
- A drilling rig is a complex product comprising a lot of different equipment. During the Soviet time, Uralmash used to fabricate complete drilling rigs from a small screw to the derrick. In the 90-ties, the machine building giant was divided, the number of contractors increased and now totals 420. These are various companies, not all of which comply with our requirements. Their deficiencies and errors affect the quality of our products. That is why we want to switch to independent production of drilling rigs to be able to manufacture most components within Uralmash-VNIIBT group by 2007.  Specifically, we make efforts to engage the Tyumen ship building plant in drilling equipment manufacturing, and we will continue to involve other companies that we plan to acquire.
“NiK”: What about foreign-made components?
- There are a number of issues that were not handled in the Soviet time. For example, our customers often want to install imported electrical equipment on drilling rigs.  Unfortunately, this was the case with high pressure pumps and top drives that account for the major part of drilling rig cost. Our companies gradually create equipment to replace foreign-made components. Uralmash has almost completed a top drive, which is to be tested and put into production. We have developed and tested high pressure pump UNBT-1600. Of course, we are not planning to manufacture all components by ourselves, we will equip our rigs with western pieces of equipment, the quality of which still exceeds that of domestic counterparts. This is mainly the case with mud cleaning equipment.
“NiK”: What made the former oilmen buy machine building assets that are in a poor condition, to say the least of it?
- It is true that core managers and specialists of Uralmash-VNIIBT used to work in oil and gas companies. In particular, I was head of Orenburgneft, 1st vice-president of TNK, currently I am working with former employees of Gazprom, Yukos and other companies. We all have been customers of machine building plants for many years and we know better that anyone the strengths and weaknesses of Russian-made products. Today, we have switched the job, we work in the machine building industry, and we know which trend to follow to meet the market demand. We quite consciously came to the industry that is in a sorry state, as you see.
Capitalization of oil and gas companies depends on reserves growth, that is why they are pushing to expand exploratory drilling. Besides, reserves for quick growth in old well stock are exhausted, so production drilling is expanding and drilling equipment purchases increase.
However, wear of Russian rigs amounts to 70%, and many oil companies will have to replace their equipment within the next few years. Today, demand for drilling rigs exceeds supply by approximately 40%. All the time we receive orders and invitations to tenders. Demand for drilling equipment in Russia will be inevitably growing in the coming years (and so will the prices), therefore, our companies have a substantial potential for growth. We must take advantage of this favorable market conditions to fill a niche that Uralmash deserves, after all this famous plant used to manufacture more than 200 drilling rigs annually.
To meet market demand, we need to develop our own product line solutions, improve rig design and increase rig manufacturing capacity. The process is already under way. Less than a year has passed since our team bought Uralmash-Drilling Equipment but we have already invested $20 million into modernization and acquisition of new cutting-edge machinery. This year the company is going to manufacture nine drilling rigs, while it  manufactured only four in the previous year, and production volume is expected to reach 40-60 rigs within the next three years.
Just recently, we won the Rosneft tender for five heavy-duty drilling rigs with load capacity of 270 tons for operation in Vankor block of fields. By the year’s end, we will produce an entirely new drilling rig that will be unique in Russia. This will be a heavy-duty rig of new design tailored to new requirements.
“NiK”: What is the Uralmash-VNIIBT share of the Russian drilling equipment market? Who are your competitors?
As far as heavy-duty rigs market is concerned, our share in Russia is 95%. We are still second to none among domestic manufacturers of 400-500 ton rigs, and Uralmash remains the source of design and engineering. However, Uralmash is not a monopolist. As a matter of fact, there are nearly a dozen manufacturers from around the world that regularly participate in tenders for rig supply held by Russian oil companies.
As for the drilling rig market as a whole, we face a tough competition, which only encourages us to develop further. Our competitors from among Russian companies are Kungur Machine Building Plant, Volgograd Drilling Equipment Plant and some others. Major foreign competitor in the Russian market is China.
However, it should be noted that China can’t compete with us in terms of design, assembly and overall quality because our equipment is better,  but the price… A Chinese worker’s hourly wage is 57 cents, Chinese machine building companies are 40% state-financed, whereas Uralmash-VNIIBT group is self-financed, it doesn’t take public loans and can’t afford being in the red.
Still, in some tenders the Chinese did not drop their prices lower than ours. The price is based on machinery design, and if the rig is stuffed with certain equipment, its cost cannot be lower. In fact, China has an advantage of manufacturing standard rigs of four modifications, but they will lose it as son as we build our product line.
“NiK”: What is the Uralmash-VNIIBT product line like?
- This year we will produce the first item of our new product line that we are developing for Vankor. Modifications will include specialty Arctic rigs that are not manufactured in the West. For example, in Yamal where shorter depth of drilling is required, rigs should have improved protection both for equipment and for people.
The range of drilling tools that we manufacture is too wide and we will have to cut production of some of them to focus on improvement of screw downhole motors and turbo drills, which are highly demanded.
Product line development is a very painstaking work. You have to discuss with the customer what type of drilling rig he wants to have on a certain oil field. However, we have an advantage over other manufacturers in dealing with oil producers as we used to be a customer and we perfectly understand what customers need.
“NiK”: What are the prospects of Russian drilling equipment supplies to international markets?
- In Soviet time, Uralmash-branded drilling rigs were successfully supplied to the Middle East and North Africa, many former USSR drilling companies used this equipment in Arab countries. Withdrawal of our oilfield service companies from these countries caused sharp decrease of drilling equipment export.
Nevertheless, last year we supplied four heavy-duty drilling rigs to the Syrian Oil Company, and this year Uralmash-VNIIBT group is going to participate in a tender to supply seven such rigs to Syria.
“NiK”: How do you assess the prospects of the domestic oil and gas machine building after Russia’s joining WTO?
- To compete on equal footage with major international companies, you need to have substantial financial, scientific, production and personnel potential as well as practical experience in the global market. This is where big and strong companies can demonstrate their strengths.
Unlike some experts, I believe that joining WTO will not worsen the situation in the Russian oilfield machine industry. Import duties for oil and gas equipment are so low that nothing will change after they are abolished. As for the  possible cancellation of the obligatory Russia’s 70% share of participation in contracts, this requirement is never fulfilled and there are many ways to evade its fulfillment.
I believe, solution to the problem should not be based on bans and protective measures, which are not too helpful. What needs to be done is to stimulate oil and gas producers to replace machinery assets and invest into new oilfield equipment.
“NiK”: Finally, I would like to ask a question that can’t be avoided when speaking about problems of machine building industry. Does Uralmash-VNIIBT need to be state-supported?
- We operate in the most high-profit sector of the Russian economy – oil and gas industry.  It would be wrong for the state to finance oil and gas equipment production from the state budget. The state must create preconditions to increase demand for Russian equipment.
We should more actively use the Tyumen region experience. As a governor, Sergey Sobyanin introduced a system of preferences that were provided to oil producers who placed orders with local plants. It is not for nothing that 2005 oilfield equipment production growth in Tyumen region exceeded 30%.
We know the experience of Norway where state support and orders from oil companies helped to establish a strong machine building industry able to produce state-of-the-art equipment. CIS countries also have successful experience. As Uralmash in cooperation with the Petropablovsk heavy-duty machine building plant is developing a mobile drilling rig, I would like to say about the Kazakh government’s position towards oilfield equipment industry development. Annual oilfield equipment production growth in the country exceeds 50%, which is 3,5 times more than GDP growth in Kazakhstan. The country adopted “Program of launching new types of oil and gas equipment in the plants of the Republic of Kazakhstan and development of the country’s machine building potential”,  KazMunaiGaz company increased oilfield equipment purchases from Kazakh plants.
New economic conditions in Russia will inevitably contribute to enhancing the role of industry associations. Our company works in cooperation with the Association of Oil and Gas Equipment Manufacturers and the Association of Drilling Contractors, which assist in establishing civilized rules in the Russian market and communicate the consolidated stance of the industry to the state authorities.