Oil Service Business Booming in Russia
Russian Oil Service Firms -- No Longer Startups -- Eye Future
biz.yahoo.com
HOUSTON (AP) -- In the booming Russian oilfield services market, the line between east and west is blurring.
High oil prices and European demand for natural gas have transformed Russia's once-sleepy oilfield services sector into a $13 billion business that could become the world's second-largest market by 2011. Two spheres compete for that business, which includes finding and producing both oil and gas: small Russian companies that perform routine drilling and well servicing, and international giants that take the lead on more complex jobs.
Recently, those two worlds have started to collide. A pair of three-year-old Russian companies, Integra Group and Eurasia Drilling Co., have grown into heavyweights in the sector, with combined revenue of at least $2 billion, or roughly equal to the combined Russian business of international giants such as Schlumberger Ltd. and Halliburton Co. Now, the Russian firms are looking at the next step -- one that is likely to put them into more direct competition with the Western companies. They have a long way to go to match the technical mastery of the international service firms, but both claim their lower costs and ties to Russian producers will allow them to keep their leading positions.
The stakes are growing every year -- just for Russia to keep production steady at 9.8 million barrels of oil a day, the country's largest producers are expected to increase spending on services by 15 percent annually, according to consultants Douglas-Westwood. With about 70 percent of the market still controlled by subsidiaries of the producers or tiny regional firms, analysts see strong growth potential for both international giants and companies like Integra.
"What you see in Russia is an oilfield service market that is still very fragmented, a lot of inefficient small companies with inefficient management," said Igor Kurinnyy, an analyst with ING in London. "The idea of a company with Western style management trying to achieve best practices should work."
The independent Russian oilfield services sector got its start earlier in the decade, as the Russian oil majors began getting out of the oilfield services business. TNK-BP, for example, slimmed down from 82 service companies employing 43,000 in 2003 to six companies and 7,000 employees this year.
Similar divestitures across the sector allowed Integra to start snapping up the best of the castoffs by the dozen. Integra is run by TNK-BP's former services chief, but a New York-based investor, John Fitzgibbons, helped found the company in 2004 and serves as chairman. With over 20 acquisitions in a variety of services, Integra zoomed to an estimated $1.1 billion in revenue this year, according to Deutsche Bank.
The company is trying to establish itself as a Russian version of an integrated service company like Halliburton, offering everything from routine drilling to high-tech seismic exploration, Fitzgibbons said. That will increasingly mean taking on more complex work, such as exploration in Eastern Siberia and managing entire projects, he said.
Eurasia Drilling got its start the same year as Integra, when a group of investors bought oil producer Lukoil Holdings' drilling assets. Like U.S.-based Nabors Industries Ltd., Eurasia mainly drills oil and gas wells, under the operating name BKE. The company relied on massive pre-existing contracts with its former parent to secure 20 percent of the market, and still earns 75 percent of its revenue from Lukoil, Russia's second-largest oil producer. CEO Alexander Djaparidze said he hopes to lower that revenue figure to 60 percent within three years.
Integra went public in February and Eurasia in November, with both listing on the London Stock Exchange.
Although they mostly perform different work, both companies found a niche in satisfying booming demand for basic services, while also touting experienced, high-profile management teams. The latter is still unusual in a sector dominated by small, often corrupt firms or subsidiaries of the producers.
"Western services can be of higher quality ... but that doesn't mean people need to use them," said Rod Westwood, an analyst with Douglas-Westwood consultants in Aberdeen, Scotland. "Most wells are not that complex to drill."
It's been slower going for most Western companies, which except for Schlumberger are just starting to see sales take off. The U.S. firms only found an entry point when Russian oil majors began to run out of low-tech ways to slow production declines. Halliburton has seen 25 percent compound annual growth in Russia since 2004, though 2007 revenue of about $350 million barely registers on the company's balance sheets. Baker Hughes Inc., which made its first effective push into Russia last year, reported a 58 percent year-on-year jump in business in its third quarter.
"I don't see anything stopping Russia," CEO Chad Deaton said when Baker Hughes announced earnings in October.
Fitzgibbons, Integra's chairman, doesn't dispute that Western companies have an edge in Russia when it comes to technology. But he sees Integra and other Russian firms quickly closing the gap.
"Wherever we can, we're upgrading," he said. "Our logistic costs are lower, our personnel costs are lower ... to the extent that our equipment allows us to compete technologically, we're going to be tough to beat."
TNK-BP sees things differently. The country's third-largest oil producer, which is half-owned by BP PLC, awarded $3 billion in long-term drilling contracts last week, with most work going to Russian companies. But with the announcement came a caveat: To "increase competition and introduce international technology and standards," two U.S. firms, Weatherford International Ltd. and Nabors were being brought in.
"I really don't understand what they're missing in the existing services (market)," said Djaparidze. |
