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Integra brochure
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July 04, 2006

Western companies will never dominate Russia

It was by chance that Felix Lyubashevsky found his way into the oil industry. He was head of an investment company, when in 1997 he was assigned the  difficult task of buying up shares of Nizhnevartovskneftegaz. This major oil producer was then only formally considered a subsidiary of the Tyumen Oil Company (TNK), as TNK held only a 38% stake in the company. The remainder were scattered  among employees, who literally worshiped the then company head Viktor Paliy.
The 23-year-old Lyubashevsky headed for the West Siberian city of Nizhnevartovsk that was the feoff of the famous oil baron and managed to buy approximately 6% shares for the TNK owners Alfa Group and Renova. His dash appealed to one of Alfa’s owners Herman Khan, who invited Lyubashevsky to join TNK. Having taken vice-presidency at 24, Lyubashevsky decided by 30 that he had hit the ceiling in TNK. He left the company to start a business of his own and took up oilfield services.  It was the oilfield services function that he was in charge of in TNK and then in TNK-BP. Lyubashevsky expects Integra, which he created  from scratch, to become a major player in the market that is worth $10 bn. How to Make It Happen became the subject for the Integra president’s interview to Vedomosti.
“My annual earnings slightly exceeded $1 mln”
- What made you leave TNK-BP?
- I was 30 when I quit TNK-BP. I was executive vice-president for oil services and supply chain. I was unlikely to become president. And I never was a TNK shareholder. My annual earnings slightly exceeded $1 mln – shareholders paid as much they wanted to pay. However, I sought opportunities to start a private business, as I believed it would allow me to better fulfill my potential. I understood that the oilfield service market matured for consolidation and there was a basis for creating a big company. And that is exactly what I am doing now.
- Why oilfield services?
Over the past five years in TNK and then TNK-BP, I was in charge of Russia’s major oilfield service operations with annual turnover exceeding $1 bn, and I know the market very well. I don’t think in Russia there are many of those who understand major trends of this rather untransparent market and see where Russia and the world go. Besides, I was aware that assets of this industry are underrated and Russian technologies are unique. This combination will make it possible to revive the oilfield services industry and create a company able to compete both in Russian and global market.
- You mentioned lack of transparency and scarcity of experts in the oilfield service market. Why is this so?
 - In the Soviet time, there was no such notion as oilfield service business.  Initially, this business was part of Soviet oil and gas industry enterprises. Following the privatization, it was contained within oil companies. Oilfield service operations were never considered a separate branch of industry, whereas everywhere in the world there are independent oilfield service companies that provide their services to oil and gas producers on a tender basis.  Diversity of the oilfield service business allows referring it to different industry sectors and requires different job-specific skills. Say, drilling and geophysical surveys have nothing in common. Equipment repair is managed by machine building plants. It is a separate industry.
- What is Russian oilfield service industry like now? Is it still unconsolidated and untransparent?
- There is a number of trends. The first is the separation of the oilfield service business from oil and gas majors. The independent company Eurasia emerged after Lukoil-Bureniye was sold. According to the mass media, Yukos’ oilfield service companies SSK and SGK also were sold. TNK-BP is now actively selling its service companies. The second trend is equipment modernization and improvement of services quality. Oilfield servicing and oil producing companies invest into cutting-edge equipment primarily of Russian manufacture.  Trend three is increased transparency of services orders. The fourth trend is the process of consolidation.  In 2005 and early this year, Integra invested over $120 mln into companies it had acquired.  We bought new equipment, we placed orders with a dozen and a half Russian manufacturing plants. Only a company with a turnover of several hundred million dollars per year can afford to do this. There are still few such companies, but new ones are emerging. These major trends will help the industry emerge from crisis and will make it able to compete in the global oilfield services market.
- What is the current structure of the oilfield service market?
- About 50% of oilfield services to oil and gas producers are provided by their own subsidiaries. Independent providers account for the other 50%, of which 10-15% fall to major Western companies who have taken root here: Halliburton, Schlumberger, Baker Hughes. They are successful enough in a specific market segment that requires unique Western technologies unavailable in Russia. Another 20% of the market are represented by big and well-established Russian holding companies, such as Integra or Eurasia. The remaining 15-20% come from small or medium size providers with modest turnovers and few orders coming in. Such companies either merge with each other or are taken over.
- How do they survive?
- They operate the stuff they managed to get somehow. The average age of the Russian rig fleet is 16 years. Small companies operate 20 year old equipment. Hence, you get incidents, poor quality services, dumping prices.  Many of these companies still have wage and tax arrears, which seemed to be a thing of the past.  This is cheap and cheerful. However, they lose tenders, as they are screened out after quality analysis.  In 2005 and 2006, we never lost a tender to a small but cheap provider.
“We didn’t steal a thing when leaving TNK”
- Who is the owner of Integra?
 - I have a 30% stake in the company. I control the company with my 1,69 vote.Other managers hold approximately 20%. The other 50% is owned by Russian and international investment funds. Unfortunately, investors are reluctant to invest into Russia when all you have is ideas. We did not steel a thing when leaving TNK. All we had was market expertise, managerial abilities and desire to create a strong Russian oilfield service company. We needed a source of capital. In Russia they do not invest in you if you have nothing but an idea. In the West they do. That is why we attracted some major financial institutions, such as J. P. Morgan. We held a private placement, raised funds, established the company, invested $120 mln into it.
- What funds are among your shareholders?
- There are twenty of them, each holding 2-3%.
- What is Integra’s share of the Russian market?
 - Russian oil and gas market is one of the largest in the world. However, Russian oilfield services are not presented in the global market, and the domestic oilfield services market is not developed. We face a unique challenge of reviving Russia’s oilfield service industry and creating a world-class market player.  Investing sizable funds into novel Russian technologies and equipment, a company like ours is able to make the domestic service industry independent of western giants, thus increasing the country’s competitive strength.  Comprised of small weak assets early in 2005, Integra has almost doubled in size only through new contracts, newly formed crews. We already sell our services and equipment overseas. In 2007, one-time contracts in the CIS and other foreign markets will become a significant part of our company business.  Russian metal makers and oil producers are rather aggressive in the foreign markets, whereas Russian oilfield services and oilfield equipment manufacturing industries do not have an internationally competitive holding company to represent Russia and buy assets in the West. Why not be the leaders? There is a reasonable likelihood of success.
 - What should you do to succeed?
- What international markets are there?  The US market that is actively developing within the new policy to mitigate volatility.  Then markets of Asian countries such as India, Iran, Iraq, Syria. And South American and African markets. These are geographic areas we can cover. The USSR in the period of iron curtain not only performed human space flight, but also created a super competitive defense industry. Russian machine industry is also unique and competitive in terms of price-quality ratio. A complete package of domestically manufactured well logging tools and equipment costs $500.000, while an imported one’s cost is $4 mln, with comparable quality of logging. All international companies operating in Russia gladly use local services.  There is many-fold difference in cost in other segments as well.
-When do you expect to fulfill the plan?
- This is a plan for a 3-5 year period.  I think, late in 2007 we will start considering expansion options.
- And what is Integra’s current structure?
- We have two major divisions:  machine building, with a turnover of $170-200 mln, and oilfield services, with a turnover of $350-400 mln. The oilfield services division comprises drilling, workover, geophysics & seismology, each accounting for one third of it.  We achieved a twofold increase in turnover.  The company’s EBITDA will be about $90 mln this year, while in 2005 it slightly exceeded $42 mln. This is an organic growth achieved through investments into existing assets, without new acquisitions. We operate in all main oil producing regions: Timano-Pechora, West Siberia, Volga-Urals. None of our customers, including Lukoil, Rosneft and TNK-BP, has a share of more than 25% in our orders portfolio. This is our strategy of remaining maximally independent and equally distant from our clients and, on the other hand, of building relationships on the basis of mutual benefit and respect.
- Does that mean that your business is not tightly linked to TNK-BP?
- I have the most complicated relationship with TNK-BP, as they are always trying to find a clash of interests. In many cases they prefer to deal with other companies rather than with me just because “Lyubashevsky worked here [in TNK-BP] and got on the inside”.  For me it is easier to build customer-contractor relations with Lukoil.
- TNK-BP is going to sell their oilfield service subsidiaries. Do you have any plans for them?
- For some yes, for some no. Last year, acquisition of new assets was for us a means of building a company. Today, we are able to invest into the company. For example, we did not buy any workover company as a basic asset, we created this company in September 2005, starting at zero, and now it has 50 crews.  For Russia, it is a rather big workover business.  Now we can afford to grow organically without buying any more assts.
- You are developing into a vertically integrated company, which operates equipment it manufactures. Is it a global trend?
- Many drilling companies in the world are also manufacturers of drilling equipment. Machine building for us is a separate business, there is a gulf between machine building and oilfield services. Our drilling companies are not obliged to buy drilling equipment from our plant “Uralmash – Drilling Equipment”. More to that, inter-group turnover does not play any role from the view point of overall performance. That is why Uralmash may be more willing to supply equipment to our competitors rather than to us. The only advantage that we gain from having both manufacturing and service assets is the opportunity to test new technologies by agreement with the customer. To have such a proving ground is a serious advantage.
- Are there machine building assets you would like to buy?
 - There is approximately the same lack of consolidation in the machine building market as there is in the oilfield services. There are about 100 major and minor players in this market, and it offers serious opportunities for development. First of all, we are interested in equipment for oilfield services. And there are such assets [in the market].
“It makes no sense to sell the company”
- What are you going to do after you get a big company with a turnover of $1 bn? Would you sell it?
- It makes no sense to sell the company. We believe that the major story lies ahead. We can make Integra a huge and competitive corporation able to honorably represent Russia’s interests in many markets. The company management is young, active and aggressive. We not only buy assets in Russia. We invest both in assets and in people. We have a team of strong professionals who joined us not for a short-term gain, but to develop this company. Why sell the company for $500 mln today if its capitalization can amount to $5-10 bn? We are too young to withdraw from business and just enjoy life.
- Do you have any IPO plans?
- IPO is an opportunity to enter capital markets, to raise funds for further active development. Today we have no definite plans for IPO. The debenture market is very good, we float Russian bonds. We will start selling shares only if we decide that we need funds to balance the debt load on the company and joint stock.  We are technically prepared to go public, as we have Western auditor PricewaterhouseCoopers, independent directors.
You said that Western companies such as Schlumberger and Halliburton have small market shares. But there is an opinion that they are rapidly building up their presence and may force Russian players out of the market.
- Globalization is a kind of scarecrow. Business is getting internationalized and globalized. This is a trend connected with the free movement of capital in the world. Companies are actively involved in the merger and acquisition process.  The Chinese and Japanese have bought half of America, and the Americans do not push the panic button. But the oilfield service industry is something special. Last year, the Russian oilfield services market was worth $10 bn. Big western companies accounted for about $1,5 bn. Halliburton’s turnover in Russia is about $200-250 mln, and it has not increased over the past five years. The turnover of BJ Services  is $100-150 mln. Schlumberger has a turnover of  $700-750 mln, which is bigger, but this is not the Western service as we understand it. Russia is the only country in the world where Schlumberger has drilling rigs of its own. It is only in Russia that they decided to take up drilling  -  to get bigger orders. And Uralmash-manufactured rigs account for 80% of their rig fleet.
I think, Western companies will never dominate Russia. We have unique technologies, which are simple technical solutions, adequate in terms of price and quality. The market has been open over the past 7-8 years, you can buy what you want, but imported equipment has not found demand, except some models. Moreover, Western companies have started local production of some materials and equipment. For this purpose they use Russian companies, pay local taxes and create additional employment: 95% of people working for Schlumberger are Russian nationals. Therefore, I would not exaggerate the threat.
Quite the other way round, there should appear Russian players able to develop their international presence. I believe that we will get access to the American market within a year. Why should the Chinese be ahead of us?
“More Oil for the Country”
- There has been talk recently that oil companies are robbing oil fields. Do oilfield service companies help them to rob?
- In the USSR they robbed Samotlor field, following instructions of the party and government, and took the plum. I think, this is robbing – “More Oil for the Country”. And what oil company owners are doing today is just small stuff. There is nothing dangerous. Recovery efficiency is increasing. Oil companies are interested in the maximum recovery of reserves, as it directly affects their capitalization and profit. All oil and gas companies, both state-run and private, demonstrate a mature approach by financing research and development.
- Oil production rate in Russia has been decreasing for some time. What is the cause of it?
- It is not decreasing. Old fields go into decline, and development of new ones goes very slowly. What is the problem? About five years were lost. Late in 90-ties, when oil prices went up, resources were pooled to revive old oilfields. Companies are now building up their resource base, many offshore projects have been launched that used to seem fantastic  - Rosneft in Sakhalin, Gazprom in the Arctic shelf. This calls for huge investments and increases demand for oilfield services, for both exploratory and production drilling. The industry is in an excellent condition. I believe that funds outflow from the oil industry to the Russian machine building and oilfield service industries will help us destroy the image of a raw material producer and create a high-tech country.
About the Company
Established in 2004, Integra Group is a provider of oilfield services, such as drilling, well workover, geophysical surveys to oil producing companies.  The company comprises: Uralmash, BK Alliance, BK Sever, First National Drilling Company, Russian Geophysical Company, Tyumenneftegeophysica,  Stavropolneftegeophysica, Geophyzservice,  Purgeophysica,  Nizhnevartovskneftegeophysica.  50% of the company shares is owned by the company management, of which 30% belongs to Integra president Felix Lyubashevky and the remainder are distributed among 20 Russian and foreign investors.
2005 consolidated revenue was approximately 6,5 bn rubles, the plan for 2006 is to exceed 15 bn rubles.
Felix Lyubashevsky was born in 1974 in Moscow. In 1995, he graduated from the Russian Academy of Economics named after G.V.Plekhanov with a degree in Economic Cybernetics. In 1995-1998 he was head of investment company National Center for Financial Investments.  In 1998 he joined the Tyumen Oil company as vice-president for corporate governance. In 2001 he took charge of oilfield services function of TNK, and in 2003 in TNK-BP. In April 2005 he became president, management board chairman and member of the board of directors of CJSC Integra Management.
Tatyana Yegorova