The Russian oil services industry: the vector of changes
Issue:
May 2012, Vol.7, No.5
Tags:
TNG Group
Russia’s oil services market is on the eve of a great change. In fact, this change is already under way. A new state corporation, Russian Geology, was created last summer to consolidate dozens of government companies. The authorship of this idea belonged to Khanty-Mansiysk Gov. Natalia Komarova, who had proposed it to Vladimir Putin, then-prime minister. This trend was picked up by three major industry players, Integra, Geotek and Schlumberger, which at the end of 2011 also announced their intentions to similarly consolidate their Russian assets in this industry. Rinat Kharisov, the CEO of the TNG Group, a major oil service company, talked about the attitudes of the independent market players to these integration trends in the industry.
Russia is currently experiencing the beginning of a major redistribution of the oil service market, which would result in the lion share ending up in the hands of the state and local subsidiaries of transnational giants. In this scenario, do you see any space left for independent players?
Whatever the circumstances, panicking is alien to us. Next year, the TNG Group will celebrate its 60th anniversary. Few companies can boast of such impressive history. We experienced a significant bump after Perestroika, we took serious hit in the era of chronic defaults, whilst this recent global crisis has equally taken its toll, but TNG Group has not only survived, but has even emerged much stronger. But our goal is not just to survive, but to develop further. Operating under a significant debt load can affect the cost-effectiveness and economic sustainability of any company, whether large or small, independent of or affiliated with vertically integrated companies. According to official data, the level of geological exploration works is returning to the pre-crisis level, though only in terms of physical volume. Therefore, even such a large contractor as TNG Group is compelled to stretch its capacities to the limit, exerting colossal effort in order to bridge the widening gaps in operating capital, review its plans and change tactics in line with the reduction of investment volumes.
Do you link all these problems with the negative consequences of the global crisis?
Not only. I am more inclined to believe that these are natural results of a systematic crisis in our geological exploration. One of its manifestations is the destructive way of selecting projects’ contractors today, where a customer is placed in a position that forces him during tenders to place the biggest emphasis on the price factor. Therefore, in order to win such tenders, contractors are forced to offer very low prices, almost at the projects’ nominal costs. Large foreign companies also use price dumping practices as strategies for entering the Russian market, while smaller local companies usually do not invest in technical upgrade and labor safety measures. All these factors negatively affect companies that want to develop, while the artificially set low project prices and high lending rates hamper modernization of production facilities and procurement of new technologies that are crucial in the industry.
If everyone is aware of these acute problems, what is preventing them from being solved?
At the very least, this stems from the fact that all stakeholders have different, at times even diametrically opposite ways, of how to deal with these issues. For instance, some advocate cooperation with large overseas transnational companies, which domestic contractors cannot compete with, while others believe that the state, personified in a specifically created service company, will be the required ‘savior’ for the local industry. Thus, in one of his recent interviews on this issue, Valery Garipov, the chairman of the subcommittee for the development of the Russian oil industrial complex and former deputy energy industry minister, said there was no point in setting up a new corporation on the basis of geophysical companies, about a 38% stake in which is held by Rosimuschestvo that does not participate in their management. “For the sake of efficiency, it would be more expedient to sell such assets to stronger and fast-developing Russian enterprises, such as the TNG-Group.”
“Next year, our company, the TNG Group, will celebrate its 60th foundation anniversary. Only a few companies in Russia can boast of such an impressive history in our industry.“
Do you agree with this point of view?
Certainly, yes, because, I also personally do not see any point in creating a state services company in this industry today. This will not help streamline the market or get rid of the above-listed problems. Quite the contrary, it will generate new problems for the existing players. Besides, consolidation of assets in our industry with foreign companies is a sure route to a dead end.
It is being argued that the threat of foreign expansion into Russia will force the domestic oil services companies to develop high technologies. Do you share this view?
The fear of becoming technologically dependent on Western countries is a very important, but not the only reason for us to develop high technologies. Domestic companies need them as a means of promoting their services on foreign markets, and even more importantly, as tools to significantly boost productivity, especially in conditions of increasing depletion of oil fields, deteriorating structure of reserves, diminishing number of oil sites available for drilling. At the same time, they will also help deepen the depth and comprehensiveness of our researches. The scales of funding R&Ds in Russia and abroad are incomparable, but there are still viable possibilities for the development of domestic geophysical technologies and facilities in Russia. For instance, TNG Group is currently carrying out scientific researches, both independently and in conjunction with universities, research institutions, as well as undertaking design and construction works, and expanding our instrumentation facilities created almost 60 years ago. Indeed, our company was the first in Russia to carry out industrial testing and commissioning of an impulse neutron generator, and today still remains the leader in this field.
Today, jointly with Kazan Federal University, we are concurrently implementing several innovative projects that are being funded from a federal grant. Though the projects we put up for the grant tender application were one of the most scientific knowledge driven and expensive, but they were, nevertheless, still approved. Their implementation is expected to take three years and cost RUR270mln. According to the grant terms, TNG Group is required to put up the same cash, thus bringing the total investment to RUR540mln. To us, such methods of funding R&Ds are most promising.
It is a fact that companies always need investments for innovations, purchases of new technologies, etc. However, the state t alone cannot cover all these grants. In this regard, Wwho will undertake the funding for geophysics in our country?
The answers to this question are limited to either public or private investments. Being highly technology-driven, geophysics is unthinkable without investments. The world experience has shown that hydrocarbons exploration and production require significant investments, whereas most mineral resources companies are only investing the minimum capital into geological exploration required to maintain the current level of production or retain their licenses on particular sites. By the way, according to the calculations done by Ernst&Young, the international audit giant, Russian companies need to double their investments into geological exploration in order to avoid facing the problems of depleting reserves as early as in 15 years’ time. The main question is, can the government act as a strategic investor? In theory, yes, as there are several examples. One of these is Norway, which has created conditions ensuring that 70% of all oil service operations on its shelves are carried out by local companies. In the United States, the government’s support for companies is provided via both taxation system and direct state investments. However, the most striking example is China. Not only has Chinese government’s policy enabled the country to raise its companies to a global level and protect its market, but has also helped them to globalize their services.
In Russia, the situation is starkly different. On one hand, the state recognizes the extraordinary importance of geological exploration, but on the other, the government’s budget for geological exploration works has been continuously reduced. The state should enhance the support of domestic geophysics in the form of soft lending, equipment leasing, granting of favorable treatment for importation of state-of-the-art equipment. Furthermore, the state could provide efficient assistance by helping promote domestic geophysics companies on the international markets. In such a situation, a major industry player, such as TNG Group, would consider attracting funds from the international securities market via IPO.
However, it is a known fact that undertaking an IPO is not an easy or a cheap procedure. In your opinion, is this game worth the risk for TNG Group?
Holding an IPO on the international stock market would ensure solid competitive advantages: raise the company’s prestige, give it a reliable status, as companies undergoing IPO processes must be absolutely transparent. Even the fact of preparing for an IPO provides opportunities to change the business management process in a fundamental manner, raise its quality and effectiveness. Secondly, IPO opens up a direct access to cheaper loans. Raising the company’s credit rating, and hence a marked reduction in its cost of borrowings, means new opportunities to fund investment projects and develop the company further. Full-scale technical re-equipment, development of cutting edge technologies, implementation of higher standards are only some of the positive synergetic effects from an IPO process that will give our company a powerful impulse for further growth on the world markets. Our positive experience on the global scale, evident in TNG Group’s overseas business portfolios record that includes successfully implemented projects in India, Turkey, Tunisia, Gabon, Morocco, Libya, Syria, Iraq, Angola and several other countries, testifies to the fact that Russian geophysicists are capable of competing with foreign companies in the Middle East and Africa.
One of the conditions of a successful IPO is the level of development and growth of the industry, in which such company operates. How sure are you of this component in Russia?
The Russian oil services market in general and geophysical services segment in particular are among the most promising industries. There are many objective reasons for this, which amongst others include the growing volume of the licensed primary oil-well sites market. Any contractual obligation to carry out exploration on these sites will automatically entail an increase in the orders for geophysical services. A company today that places more focus on technological breakthroughs is laying a solid foundation for competitiveness, dynamism and high profits tomorrow. Besides, it will also be acting for the benefit of our country, which is also interested in a successful rehabilitation of our mineral resources-based industries and the long-term commitment to and development of our oil and gas industry.
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