August 22, 2012
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№ 10 (October 2009)

Equipment Rental Reveals Its Anti-Recession Potential

In the current, not very favorable, economic environment Russian oil producers have an obvious but still unclaimed reserve to improve their operation efficiency. This latent reserve is rental of oil production equipment – a pattern widely used throughout the world but for some reason not applied in Russia.

By Farkhat Khafizov, Sergei Slepchenko

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   The key advantage of this pattern for oil companies is that they do not need to pay the total cost of oil production equipment at once, as a lump sum.  Given that in case of rental the equipment is operated under lease, the payment is calculated based on a stream day of equipment operated in the well.  The payment is made in stages, by installments, and depends on the time of downhole equipment operation.  One-time acquisition of equipment is quite an expensive affair even for a major oil company.  Whereas the rental pattern enables continuous introduction of oil production equipment for small oil companies in spite of all problems of the last months.

   Another advantage of rental for oil production companies is that the contractor provides a complete set of services from selection of units for wells and manufacturing of equipment based on the selection results to the repair of failed equipment and analysis of failure causes and recommendations on increasing non-failure operation time.  In other words, rental is not just lease of equipment with performing some one-time service operations – it is the contractor’s comprehensive liability for operation of downhole equipment in the well and an integrated solution of the customer’s specific tasks during operation of the oilfield equipment.  This is the best approach to be used for production in complicated conditions that are encountered more often recently.  

   Under existing production conditions, it is required to introduce highly reliable, high-technology downhole equipment to ensure an acceptable level of non-failure operation time.  Service maintenance of such equipment must be carried out by a service company of the equipment manufacturer and designer.  There’s hardly anybody else who could open up a potential provided during the equipment design.

   One-time acquisition of equipment always implies a risk that the equipment will not pay for itself or will work less than required.  In case of using the rental pattern, the customer pays only for actual time worked by the units and does not carry this risk.  In this case, the risk is borne by the manufacturing and service company – the contractor (manufacturer’s service company).  But on the other hand, this risk means that the contractor is also financially motivated to increase the downhole equipment operation time.  Benefits obtained by the customer therefrom are quite obvious.  Increasing non-failure operation time of the downhole equipment results in reduction of oil company’s costs, which is also quite useful during the current recession.

   Alongside with that, in case of using the rental pattern, the increasing non-failure operation time is beneficial for the contractor as well.  A poorly performing contractor will, in the first turn, make a rod for itself.  In this respect the rental pattern forms a fairer competitive environment than the traditional purchasing system (perhaps, this is a reason why this pattern is not applied).  The long-term rental won’t suit a poorly performing contractor because it makes the contractor to offer reliable equipment suitable for operation under very complicated conditions.  Considering continuously changing operation conditions, the contractor has to develop new improved equipment. That is, the rental in its essence is a natural source for innovation development of machine-building industry manufacturing oil production equipment.

   At the same time, the rental pattern is optimum for introduction of advanced developments.  In this case, risks are fairly shared between the customer and the downhole equipment manufacturer after required results are achieved – and payment will be made for actual time worked.

   The more reliable and high-technology the equipment is, the more beneficial, irrespective of its cost, is its use for the customer under rental conditions.  This statement is confirmed by calculations made by oil companies themselves.  See Figure 1 below for an example of such calculation made for an oil production company in West Siberia.

   It is seen that using more reliable equipment and service is more advantageous in spite of its higher cost, because, in the long run, it resulted in 1.5 times reduction of costs per ton of produced oil as compared to another contractor’s figures. Significant reduction of oil production costs was achieved due to enhancement of operational efficiency, reduction of failures, reduction of well servicing costs, and downhole equipment repair costs.

   Thus, the rental, on the one hand, enables oil companies to enhance their efficiency and, at the same time, is a source for innovation development of oil production and machine-building industries in the CIS countries.

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