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Integra brochure
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June 04, 2007

Minor Companies with their low prices for services may not solve current problems that the drillers meet

Q: Lev Rafaelovitch, I would ask you to discuss the situation which takes place on the drilling market. How would you characterize the share of drilling and surrounding services and their place in the general oil service market in Russia? How and due to which factors the proportions may change? — According to the data provided by various analytical and marketing companies, today the volume of the oil service market in Russia is about $11-12 billion. The share of drilling, including kickoff offshoot and capital well repair, makes at least 75% of the market (over $8 billion). To my mind, today’s high prices for oil make may of the mine working and rehabilitation projects not profitable, that’s why this proportion will hold true for the nearest future. Still, at the same time, the amount of ‘simpler’ project will grow smaller. This means, that it will be necessary to imply new and often very expensive methods of oil production, which might change the existing proportion. In our opinion, the long term prospect is the following: ‘big drilling’ will insignificantly decrease, while the volume of offshoots and capital well repair and drilling will keep growing. Q: What are your forecasts concerning the growth of the inner drilling market for this year? — There are different assessments of the growth dynamics. Still, according to Douglas-Westwood, overall drilling, oil production and concomitant services market, together with the concomitant drilling equipment production in Russia, which today is being assessed in about $11.8 billion, will grow and reach $24.8 billion by 2011. This means, that percentage wise growth for 5 years will be about 110%. Q: What is your viewpoint onto the process of withdrawal of the non specialized drilling divisions from VINK? Is it true that this process has come to a standstill because of the lack of qualified drilling contractor? If not, what are the factors that influence this process? — The process of withdrawal of non specialized drilling divisions from VINK is at its full speed. I may not say that it has come to a standstill. The speed of this process is not related to the lack of qualified contractors. It depends on many other factors. For example, VINK in Russia is reluctant to work with independent contractor and prefer to work with their internal contractor. This may sometimes badly affect the industrial process. Q: Could you give an approximate estimation to the share of the Russian biggest players of the drilling market: VINK branch establishments and independent enterprises? —About 50% of the drilling market is occupied by the ‘internal’ companies, who are drilling companies that depend on VINK, such as DOOO ‘Burgaz’ (Gazprom), ÎÎÎ ‘Rosneftburenye’ (Rosneft), ÎÎÎ ‘Severnaya Burovaya Kompanya’ (Gazpromneft). The share of the BC ‘Eurasia’ which moved away from ‘Lukoil’ but still remains its biggest contractor is 8-10% of the entire Russian drilling market. For reference, Integra’s share is 3-5% and rising. Q: What is the rank of the foreign service companies in the Russian market? Are these only the companies that render high-tech services or both those who work in the mass sector of the market: drilling and capital well repair? — According to different estimates, the share of the foreign service companies in Russian market is 12-14%. Yes, there are really some high-tech foreign companies, such as Baker Hughes, Halliburton and Schlumberger, who possess the patented technologies which Russian companies do not have. However, as to drilling and capital well repair, the biggest share of this market belongs to Russian contractors. Still, the following companies are also actors of the drilling market: KCA Deutag, ‘Siberian Geophysical Company’ (Schumberger) and Parker Drilling.Q: Shall Integra compete with the western companies in the high-tech sectors of the service market after having bought ‘Smith Eurasia’? — Presently Integra is positioned in the middle technological service center. ‘Smith Eurasia’ is used as an engine which makes Integra competitive with such western service companies as Baker Hughes, Halliburton and Schumberger in some fields of the high tech services even today. We are sure that soon Integra becomes a very serious player in the high-tech services market. Q: In order to increase the quality of services, Russian drilling contractors should modernize and replace their equipment. In your opinion, how quick is this process? — The process of modernization and re-equipment never stops, but is rather slow. This is because minor drilling companies suffer extreme lack of money necessary for investments, and they meet with difficulties when attracting credits. This is to say that these are mostly ‘big market players’ who are involved into this process, mostly by attracting credits and leasing the equipment bought by the owner. Q: How does Integra solve the problem of the equipment modernization? What part does ‘Uralmash-VNIIBT’ play in this process after this engineering plants has become a part of the Integra Group? — Today ‘Integra-Burenye’ is busy with modernizing its machinery and equipment. Alongside with this we are elaborating a strategic program of modernization and technical re-equipment of the fleet. Of course having ‘Uralmash-VNIIBT’ engineering plant within the Group helps a lot in fulfilling the re-equipment task. Besides, it is also very important to know that each Integra block cooperates with other blocks on commercial basis. When choosing this or that project the priority projects become those most profitable from the point of view of the shareholders and according to certain market requirements. That is why not all the equipment we buy has been build by the Integra members engineering plants. Q: Nowadays an often topic is the necessity of signing long-term (up to 3 years) contracts with drilling contractors, which might ensure the financing of modernization of the equipment. What do you think about this process of prolongation of the contracts? — Unfortunately, the process of signing contracts for longer term in Russia is very slow. The owners seldom want to sign a contract for longer than one year, especially if the contractor is independent. However, of course, some of such contracts with independent contractors have already been signed. For example, Integra has signed several long-term contracts, which enable the company to modernize the drilling process and to increase its efficiency. If Russian owners are more active in signing long-term contracts, the contractors will become stronger economically and technically, they will be able to modernize and re-equip their machinery, and, which is important, they will be able to meet the world standards. However, the long-term contracts also have their ‘dark side’, particularly for contractors. Guarantying the volume of work, the owner requires establishing fixed prices and only agrees to change prices within the range of inflation, which does not always correspond to the market change of prices for equipment and materials. Q: In the end of 2005, in his interview to our magazine, the president of Integra, Mr. Felix Lubashevsky, spoke about the forecasted reduction and decrease of the minor service companies (low-tech). What is your vision of this process? — Mr. Felix Lubashevsky was absolutely right. The process of reduction and decrease of the minor service companies is really rather quick. Minor services assets are bought by bigger companies; sooner or later the owner will become aware of the fact that smaller players of the market with their lower prices may not meet contemporary requirements and solve the problems that the drillers face today. As a rule, small companies are not liable, as they do not have the necessary knowledge, technology and, which is of major importance; they lack financial resources for regular works. Q: Is Integra interested in working with small or middle oil companies or does it prefer working with big customers? — We are interested to work with any customer, if this customer is solvent! Still, there exists a division onto ‘strategic customers and simple ‘customers’. The first are all big Russian companies that are vertically integrated, and the latter are middle or relatively small Russian or CIS oil companies. In addition, of course, the effectiveness or our work, as contractors, does not depend on the position of the customer in one of the above lists. This is the principle of our work. Q: During its development, Integra became stronger by absorbing smaller service enterprises. How are drilling subsidiaries being integrated into the new business structure called ‘Integra-Burenye’? — Any service company develops by means of building or buying the fleet of machinery and technologies, or by means of absorbing its competitors. It is not necessary to absorb minor service companies. As an example, I would like to quote Halliburton’s story, the company that several years ago bought Dresser, which was twice bigger than the buyer was. The drilling assets of the companies that Integra has bought will further integrate into ‘Integra-Burenye’. We restructure all our drilling assets in order to create one drilling company having the equipment and the teams who are able to solve any tasks that might appear on Russian or foreign market.Q: How important and expedient it is for a big service company to be presented in all major oil producing regions? — We consider such presence of utmost importance. It enables us to diversify the customers and to enhance the stability of the company. Integra enlarges its geography on the basis of the plan and in accordance with the strategy of the company’s development. Today Integra is doing business and is presented in all the major oil producing regions of the CIS and abroad. Q: The necessity of participation in the Eastern Siberia – Pacific Ocean [VSTO] Oil Pipe made the exploration and development of the Eastern Siberia fields, where there is a lack of drilling contractors. Is Integra interested in developing this region? — Integra is interested in both Eastern Siberia and Yakutia and all the regions to their East. Today Integra is one of the major players in this territory and we intend to continue our work there. This region is difficult to develop because of lack of infrastructure, roads and communications, but we hope that within the decisions that the government has made concerning VSTO the situation will change for both our customers and us, the contractors. Q: In spring, the companies traditionally sum up the results of the previous year. Which financing and operational indexes characterized Integra’s oil servicing block in 2006? Do you have plans for the current year? — I may say that according for the data on April 10, 2007, the overall volume of orders that the Integra Group Service Block has is $750 millions, including $620 millions in signed contracts and the rest of the money corresponds to the tenders that we have won; the contracts by them will be signed in the nearest future. As to the last year, Integra considerably increased the volume of oil services. In 2006, Integra Group Oil Servicing subsidiaries jointly drilled 473.8 thousand m. (to be compared with 312.4 thousand m. in 2005), built 175 wells (to be compared with 134) and performed 1057 capital repair operations (to be compared with 367 in 2005).