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1
The Challenges Ahead:
Evolution of the Market
For Oilfield Services and
Equipment in Russia
Thane Gustafson
Cambridge Energy
Research Associates
Moscow,
December 2003
2
Russian Oil Production Trends
(million barrels per day)
12
Russian Crude Oil Production
West Siberian Production
10
8
6
4
2
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
0
3
Projected Production by 2010: The West
Siberian “Brownfield” Will Still Dominate
(million barrels per day/million metric tons per year)
Timan-Pechora
.5/25
Condensate
.3/15
Undiscovered
.2/11
Sakhalin
.5/24
Russian
Sector
of the
Caspian
.2/8
Source: Cambridge Energy Research Associates.
30704-2
Russian
Core
8.3/
413
East
Siberia
.2/8
TOTAL RUSSIA
10.1/503
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From Brownfield to Greenfield:
How Tight the Bottleneck?
How Long the Delay?
Diminishing
Returns from
Brownfields
World oil prices
Export capacity
Political risk
Tax regime
ROC ambitions
Gas options
2008
2012
Source: Cambridge Energy Research Associates.
30709-8
Growing
Greenfield
Opportunities
The Leading Russian Companies Have
Kept their Lifting Costs Low (2002): But
How Long Can They Continue Doing So?
4.50
4.00
US$ per bbl
3.50
3.00
2.50
2.00
1.50
1.00
0.50
-
Source: UFG Research estimates, TNK-BP
Average
5
6
What will Drive Cost Trends in the Brown
Fields of West Siberia?
• The dollar prices of key ruble-denominated inputs will
continue to increase:
— Steel: Prices of casing, pipelines, processing equipment will triple
by 2010
— Wages: Will also triple
— Electricity: Many pumps are electrically-driven; prices are being
deregulated
— Oil tools and rigs: Most of these are produced in Russia; prices will
rise with expanding demand and real appreciation of ruble
• Opportunities for increased productivity?
— Western and offshore competition: Favored by currency
movements, but difficult to overcome habit of choosing lowest-cost
contractor
— Potential from Spin-Offs and Competition: May prove to be illusory
as monopolist faces monopsonist at local level
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Growth of the Work-over and Service
Market
1600
1427
Western Siberia
1400
Central Russia
1200
$ mln.
1000
Other regions
806
859
808
800
600
400
200
284
267
226
14
14
234
15
34
0
1998
Source:
OMZ
Source: TNK.
1999
2000
2001
Outlook for Categories I and II: Well
Maintenance, Workovers, and Field
Redevelopment
3
$Billions
2.5
2
Workovers and
Redevelopment
1.5
Well
Maintenance
1
0.5
9
2
0
0
7
2
0
0
5
0
0
2
0
0
3
0
2
/year
Year
8
9
Outlook for Category III: New Wells in
Old Fields
7
6
5
Development
Drilling and Well
Completions
4
3
2
1
0
2
0
1
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
0
0
2
2
0
0
3
0
10
Exploration and Development
Drilling in Russia
35000
18.0%
16.0%
30000
14.0%
metres drilled
25000
12.0%
20000
10.0%
15000
8.0%
6.0%
10000
4.0%
5000
2.0%
0
0.0%
Expn Drilling
Devt Drilling
Sources: InfoTEK, RPI FSU O&G Statistics Yearbook, Oil & Capital
% exploration
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Evolution of Demand for Oilfield
Equipment and Services to 2010
12
10
8
Category V
6
Category IV
Category III
4
2
Categories I and II
Year
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
0
20
C ap ex in $Bil li on s
Category IV is New Wells in New Fields (incl. transportation, etc.)
Category V is New Fields in New Areas (incl. new infrastructure, etc.)
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Russian versus Western?
Who Has the Market Share?
The picture in the early 1990s
Western dominance
Edge
(In theory)
Percent
Russian
Market
Share
Russian dominance
Low
High
tech
tech
Source: Cambridge Energy Research Associates.
30709-5
13
The Market Shifts in the Later 1990s:
The Western Opportunity Fades
5
1
Western dominance
Opportunity
2
3
4
Percent
Russian
Market
Share
Russian dominance
Low
tech
1 Ruble devaluation in 1998
2 Rise of Russian service companies
3 Hybridization (e.g., hydrofracturing)
4 Some civilian conversion
5 New generation of Russian specialists
Source: Cambridge Energy Research Associates.
30709-6
High
tech
Will the Market Shift Again in the Mid2000s? Hybrids May Dominate, but Who
Will Own Them?
6
4
Western dominance
Percent
Russian
Market
Share
Western-owned
Russian?
tech
Or Russian-owned
Western?
1
2
Low
5
Russian dominance
1 Rubleappreciation
devaluation in 2003
2 Russian inputs more costly
3
High
tech
3 Growing need for “advanced” development and services (DOFF?)
4 Russian local content requirements
5 Growing Russian skills
6 Russian investment in West
Source: Cambridge Energy Research Associates.
30709-7
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15
Possible Consequences of the Recent
Troubles for the Oil Services Market
•
State Campaign against “Rape and Pillage”?
— Pressure to return to “traditional” emphasis on infill drilling as opposed to
“harmful” techniques to maximize per-well flow rates
— Ban on “cherry-picking” by shutting unprofitable wells
— Stricter enforcement of FDPs mandated by institutes
•
Pressure to explore more than is economically justifiable?
— Rejection of 10-year R/P ration in favor of traditional 40-year
— Implicit or explicit threats of license removal for non-compliance
— Pressure to begin premature development of “rim” opportunities?
•
Some companies favored over others?
— Rosneft, LUKoil, Surgut move ahead
— YukosSibneft slows down?
— TNK-BP becomes leader?
•
These possibilities will impact the size and shape of the oil
services market
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THE BIGGEST CONSTRAINT AHEAD:
The Race Between Crude Oil Available
for Export and Export Transportation
Capacity
9
8
7
Non-FSU Exports
East Asia
6
Million
5
Barrels
per
4
Day
Barents Sea
Southern Druzhba
Other
3
Butinge
2
Primorsk
Ventspils
Odessa
1
0
1990
Northern Druzhba
Tuapse
1995
Source: Cambridge Energy Research Associates.
90304-7
2000
2005
2020
Novorossiysk
2015
2020
Possible Implications of Recent Troubles
for Oil Transportation—and Thus for the
Oil Services Sector
• Tensions between the private sector and the state could
produce slow-down or paralysis in decision-making
— Yukos’s Daqing project may lose speed; yet Nakhodka pipeline is
too uneconomic to go forward
— Murmansk pipeline and terminal could get tied up in battles over
state-monopoly principle and right of private stakeholders
• The state may move to contain or shut existing loopholes
for exports
— By ending the “90% rule” on oil products export tax—and then
raising export taxes
— By raising railroad tariffs to snuff out non-Transneft crude exports
• These could result in constrained exports, shut-ins, lower
production—in a word, lower activity—and thus less
spending on services
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