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Integra brochure
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February 17, 2006

The local oilfield service industry is fighting with foreign “reinforcements”

Disservice The local oilfield service industry is fighting with foreign “reinforcements”
Perhaps, the most unmistakable way to switch from raw-material intensive economy to high technology economy in a country with a budget that to a large extent depends on hydrocarbons is to develop oilfield machinery and services industries. Though slowly, by fits and starts, things are moving. Of course, it has nothing to do with presidential persuasion: market is not receptive to persuasive power. Things simply are favorable. Oilfield services and equipment market today is worth $20 mln, with annual growth of 25%. Equipment and services shares are half and half.  More than a thousand companies are operating in the two segments, but few are able to provide quality services and products. Consolidation that has been recently much spoken about is just natural under the circumstances. Estimates are that a dozen big holding companies will appear in the oilfield industry within the next 3-5 years. Similar forecasts are offered for the oilfield machinery industry. According to president of the Association of Oil and Gas Equipment Manufacturers Alexander Romanikhin, the market needs consolidation but it should be carried out in a civilized way, “when small companies realize that they simply will not survive on their own and the way out is merger with a bigger company”. For example, the major players in the oilfield machinery market are Uralmash-VNIIBT and Volgaburmash. Russian oilfield services market is associated largely with give giants: Schlumberger, Halliburton, Drilling Company Eurasia, Siberian Service Company, Integra Group. They are able to get millions worth of contracts, invest in technology development, equipment modernization, etc. According to Integra president Felix Lyubashevsky, these five share 20% of the oilfield services market. Another 50% is in hands of subsidiaries of vertically integrated oil companies. The rest is held by small and medium size independent companies. However, judging from how Schlumberger, Integra and Siberian Service Company overtake assets, the number of small ones will substantially reduce. It is also believed that the market share of vertically integrated oil companies will shrink as they are more and more actively selling their oilfield services subsidiaries and will soon switch to outsourced contractors. We reckon that the trend is not so explicit. It is reasonable to get rid only of non-core business lines. But how is it possible to trust an outsourcer with servicing a beam unit? It is notable that Soyuzneftegaz (headed by former minister of fuel and energy Yury Shafranik) bought a service company last fall: it is hard to rely on someone today.  A loosing battle? Quality and cost of services and equipment are closely connected: economizing on rigs results in extra maintenance expenditures, and vice versa. Oil and gas producers have already realized that given today’s oil prices and forecasted oil production drop they should be more careful about equipment and oilfield services efficiency. Thus, TNK-BP’s new strategy means “the company will discard the minimum price approach and switch to best quality”, said vice president for supply chain management William D. Sams. This strategy will tax local manufacturers’ powers to the utmost. “Our rigs are technologically as good as western equipment, but not as good in terms of design. We are working on that”, said Vitaly Tkachev, president of Uralmash-VNIIBT that is one of the country’s leading rig manufacturer. And this is typical of all segments of the engineering industry. Norwegian experts tried to assess 600 companies operating in this sector using their own quality criteria. Only 11 were recognized as compliant with the standards. This situation left the market players indignant. “We are so noncompetitive because we are poor, because foreign companies snatch contracts from under our nose, and they do so because… we are noncompetitive”.  To cut the long story short, they grip us by the throat with their capitals, and the emerging Russian markets needs state’s protection. For example, local manufacturers would like to see foreign companies barred from serving fields as general contractors. It is clear how the measures to restrict competition will tell upon equipment quality and, hence, upon oil production.
Meanwhile, the notorious Schlumberger and Halliburton also suffer troubles in the Russian market: their Russian branches are not sufficiently developed. With all technological advantages of a foreign company, the work is done by the local personnel. Oil companies often can’t hire international companies only because their local subsidiaries lack specialists. However, the need to expand and pay for training of local staff as well as just brand name determine high prices for “world class services”. Local companies have an advantage in this regard: they do not have to create infrastructure in the region, employ personnel, and the price goes with quality of work. Public organizations’ latest initiative (driven by Yury Shafranik) is aimed at building up Russian presence in the oilfield service industry.  What is meant here is establishing the Russian national oilfield service company that will be based, to all appearances, on Siberian Service Company. It is planned that the monopoly will comprise companies engaged in exploration, geophysical surveys, R&D, workover, well stimulation, drilling, designing and manufacturing of equipment, creation of G&G database. Naturally, this conglomerate will be controlled by the government.
This business was not chosen at random. Until recently, most of the oilfield services were provided in-house, and now 85% of the hydrofrac services market  (which is one of the most widely used methods of enhancing oil recovery) is held by independent companies. Workover and drilling services also became independent. Therefore, we are talking about self-sustaining and profitable sectors. They can finance R&D and exploration that are less successful. As for G&G database, a properly organized one currently does not exist.  However, if there is no national oilfield service company, then foreign service companies in the open market will get hold of  substantial amount of what is in point of fact confidential data on the Russian reserves. Today, only one of the five mentioned leaders is a 100% Russian company – the Siberian Service Company. Eurasia and Integra associated with the names of Alexander Dzhaparidze and Felix Lyubashevsky are in fact more than 50% western-owned.
The only thing that seems unpractical in the plan proposed by Yury Shafranik, who is an advocate of a strong state, is the transfer of equipment designing and manufacturing functions to the national oilfield service company. According to the Association of Oil and Gas Equipment Manufacturers, creation of a unified manufacturing company delivering the whole range of oil and gas equipment that would be also competitive is utopia. Even the major oilfield service independents do not mix services and manufacturing because it is often cheaper to outsource equipment manufacturing than manufacture in-house. “The government’s top priority now is to establish conditions for industrial development and raising national capital and not squeeze into companies by methods of force or pursue nationalization policy”, said president of the Association of Oil and Gas Equipment Manufacturers Alexander Romaniknin.
By Natalya Timakova