Transcript Contents

Yevgeny Bulgakov
Development of the Oilfield
Services Market in Russia
Moscow
2-3 December 2003
Agenda
1. The Development of the Oil Field Services Market
2. Competitiveness of integrated and independent Service Companies
3. The Development of a «Russia-wide» oilfield service market in the context of the
consolidation taking place in the Russian E&P industry
4. The Place of International Service Companies in the Russian Market
5. Conclusions
2
Structure of the Upstream Oilfield Services Market
Upstream Service
Activity
Exploration Related Services
Seismic Acquisition
Data Processing
Exploration Drilling
Field Development
Field Planning and Modelling
Engineering
Construction
Contract Drilling
Drilling Services
Transportion
Production Operations
Well Repair Services
Facilities Maintenance
Equipment R&M
Field Transportation
Oil and Gas Transportation
Pipeline Maintenance and Repair
Service Source:
(Internal/External)
Market Participants
External
Internal and External
Internal and External
Russian
Russian and Western
Russian
Internal and
Internal and
External
Internal and
Internal and
Internal
Primarily
Primarily
Primarily
Primarily
Primarily
Russian
External
External
External
External
Russian
Russian
Russian
Russian
Western
Internal and External
Internal and External
Internal
Primarily Internal
Russian and Western
Russian
Russian
Russian
Internal
Russian
Primarily Internal
Internal and External
Primarily External
3
The Evolution of the Oilfield Services Market: TNK-BP
Phase 1
Services Internally Owned,
Integrated into Upstream
Operations
Costs established
arbitrarily
All Service Supplied
Internally
1995-2000
Phase II
Services Segragated
into cost
centers
within Production
Operations
Costs set
by cost centers
Most Services
Supplied
Internally
2000-2002
Phase III
Services segreated
into separate
business units
operated
at arm's length
from Production Operations
Phase IV
Service Businesses
and Assets
Being Divested
to Specialized
Service Companies
Transfer Pricing
Cost plus profit
(Benchmarked to
external market where possible)
Market Pricing
Some competition
between internal and
external service
companies
Most services
sourced Externally
2002-2003
2004 onward
4
Service Quality and
Technology
Price vs. Quality
When are Services Competitive?
Multinational Service
Companies
Internal
Services
External Russian
Suppliers
Service Unit Price
5
«Added Value» - A Method of Determing Competitiveness
Potential Value Added to TNK-BP from
utilization of oilfield services
Service Market
• Service Quality
• Time required to perform
service
• Cost of Service
• Service Quality
• Time required to perform
service
• Cost of Service
6
General Model of Value Creation for Upstream Operations
n
V
i
Si  Ci 
1  rWACC i
n 
Value Created for ТNК-ВР
TNK-BP revenues from
oil sales
V

S  C

Upstream Productionrelated expenditures per
year by TNK-BP
rWACC
Average weighted cost of
capital for TNK-BP
Service Companies create additional value for the Oil Producing companies
through:
1. increase/acceleration of ТNК-ВР Revenues (Production) - «S»;
2. overall reduction in ТNК-ВР Expenses (Capex and Opex)– «С»;
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Russia’s oilfield services market: As is.
 Markets for oilfield services are not transparent.
 Oil companies’ selection processes are biased in favor of in-house service units.
 Work volumes for competitive tendering are limited.
 Because external companies have to compete against oil-companies’ units operating as
cost-centers, margins are too low to attract new players.
 Infrastructure and access to auxiliary services are in the hands of incumbents.
 Bidding and contracting horizon is explicitly short-term, disallowing any sensible equipment
upgrades and limiting investment only to quick pay-back projects.
 Safety factor is undervalued in comparing competing contractors, thus impeding the entry
into the market for operationally advanced contractors.
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Russia’s oilfield services market: As it should be.
 Oil companies expected demand and expenditure information is shared with suppliers to
enhance their investment and planning decisions.
 Adequate work volumes are available to sustain business for external contractors.
 Tendering procedures are transparent and consistent with the market policy.
 Capital-intensive and infrastructure-dependent service markets enjoy long-term contracts.
 Non-monetary criteria such as safety and environmental awareness become high-priority
assessment factors.
 Truly nation-wide service suppliers exist and operate across the country and across
corporate boundaries.
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«Udmurtneft-bureniye»
Established in 1969, incorporated as an independent
business unit in 1998.
Revenue – over $ 50 million per year
Geographical Spread of Operations – Since 1997 they
have operated outside Udmurtia, providing services around Russian
and the FSU. They have been offered contracts in countries outside the
FSU.
Contract Porfolio includes a large number of
customers including: Sibneftegas, Pertex, Tatneft, Ritek,
Uralsk-neft, Belkamneft, Stimul, Alrosa (diamond mining), etc.
Management – operate independently to develop and
manage the business.
Workforce: over 2000
Capacity and Capabilities: 30
drilling crews, 23 workover crews,
engineering support center,
horizontal drilling, cementing,
transportation and rig moving,
equipment repair, mining related
services.
Udmurtneft-bureniye: an example of a Russian
Service company operating nation-wide.
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Opening Internal Markets by VICs
 The Key to the Development of a Market for Oilfield Services in Russia is the willingness of
most E&P operators to contract third party services
 A market with multiple buyers and multiple suppliers reduces risks and costs for all parties
– Service Companies can invest in establishment of servcie bases, service capacity and
introduction of new technologies to serve multiple clients - reducing costs for all
– Mobilization costs are born by multiple clients
– Utilization levels for service assets are increased, reducing unit cost of services
– Internal Service companies do not need to invest to meet «peak loads»
 E&P companies can offer some fraction of their service requirements to third party while
retaining some internal capability
– As third party service companies are able to supply services at a cost and level of
quality that meets pre-defined objectives, greater service volumes can be contracted
with third parties
– Internal Service companies of one E&P operator can provide services to other E&P
companies
• Allows benchmarking
• Allows evolution of market relationships and skills which can lead to the spin off or
sale of the internal service companies at a later date.
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Federal Oil Field Services Data Base
 Development of an Objective, Neutral and Reliable source of information regarding Service
Suppliers:
– Domestic Service Companies
– Multinational Service companies operating in Russia
 Information could include:
– Actual Capabilities on the ground for each Service Company in various Regions of
Russia
– Information on Service volumes performed in each region updated periodically
– Some information on performance and service quality
 Potential Value of the Data Base:
– Benchmarking of service performance
– Pre-qualification of contractors for participation in tenders
– Input to contractor performance management systems
– Expedite searches for specific technologies or know-how
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Multinational vs National Service Companies
 Generally, internal service companies are benchmarked against and compete
with other Russian companies.
 Some clients even divide the tendered scopes into lots designed for national
suppliers and those where global players are expected to win.
 Even in markets where both Russian and Western contractors are active (e.g.
fracturing services) there is a fair degree of job specialisation usually based on
the size and complexity of the operation.
 Therefore, there are clearly two distinct oilfield service market segments with a
negligible overlap.
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Value Generation - Current Situation
Service Quality and
Technology
Multinational Service
Companies
Higher Quality does not necessarily
generate more Value
Internal
Services
External Russian
Suppliers
Value Generation
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Why Higher Quality Does Not Necessarily Create Greater
Value
 Usually Imported Services provide the best technical solution and best quality but:
– costs of such services are high
– mobilisation is costly and difficult
– learning curve is costly to all parties
– cost to the client of developing (or switching to) a different contractor
performance management system is high.
A “pure” imported solution may destroy Value rather than add Value!
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Value Generation - A Possible Outcome
Service Quality and
Technology
Multinational Service
Companies
Market solution
with Hybrid participants
Internal
Services
External Russian
Suppliers
Value Generation
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Conclusions
 Divestiture of internal service companies ensures continued market development
 The development of the services market will enhance competition and enable the
creation of more value for the oil and gas producers
 The consolidation now taking place among Russian oil companies should be
followed by the birth and development of nation-wide oilfield service players
 The oil producers will be looking for hybrid Western/Russian solutions in pursuit of
the right balance of price and quality to maximise added value
 TNK-BP Approach:
– Encourage the evolution of the upstream oilfield services market
– Encourage other Vertically Integrated Oil Companies to open up their markets
to third party service companies
– Encourage regional service companies to expand their operational geography
– Encourage western service providers to acquire local assets and know-how
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