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Home / Issue Archive / 2010 / February #2 / Weathering the Storm. Oil and gas market players hope for a rebound in 2010

№ 2 (February 2010)

Weathering the Storm. Oil and gas market players hope for a rebound in 2010

The global financial crisis did ripple through Russia’s oil and gas industry, but after passing the peak of the downturn the petroleum sector is going to bounce back in 2010, says the majority of respondents in a recent survey conducted by OGE.

By Bojan Šoć

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   “We have gone past the peak of the crisis. It’s difficult to draw definite conclusions yet, but a slow revival in demand for our products is providing grounds for confidence,” Severstal Metiz product promotion manager Irina Peremetko said.
“In my opinion, the peak of the crisis is behind us – and that belief us supported by our sales numbers, which have been demonstrating steady growth since September 2009,” adds Andrei Kireyev, director of the Moscow office of Germany’s KROHNE, one of the world’s leading manufacturers of process measurement instruments.

   This view is also shared by Gennady Bannikov, the deputy general director of the Russian branch of Norway’s TGS geophysical company. According to Bannikov, the major indicator of the industry’s revival is the “attitude of TGS’ potential clients and Russian authorities, on whom our business depends.”

   In the Moscow office of another Norwegian firm, Roxar (which provides reservoir modeling services in Russia), the assessment of the current situation is similar. “We are observing stabilizing tendencies, companies are regaining profits, and there are more vacancies in the market,” says Roxar.

Taking Off the Rosy Glasses

   Still, not all of our respondents shared this optimism on the industry pulling out of the crisis.

   “The forecast of Russia’s macroeconomic indicators for 2010 (the budget had a deficit of almost 3 trillion rubles, with social spending, defense and applied research accounting for the bulk of expenditure) and the steady low level of demand in pipe products in industrial and construction sectors (lower tax receipts in regional budgets and the growing spending load on those budgets in 2010 provide the basis for a ‘negative’ assessment of further development) don’t let us think that the crisis has abated,” says Sergei Aleschenko, strategic marketing director for the Chelyabinsk Tube Rolling Plant (ChTPZ).

   “Despite creating favorable conditions, such as the zero duty on exports of oil produced in Eastern Siberia, demand for pipes is growing insignificantly even in the oil and gas segment of the pipe market. The only segment in the market, which is demonstrating growth is the large diameter pipes segment, and this is due to the expansion of Russia’s trunkline network and the government’s active participation in implementing export-related oil and gas projects,” adds Aleschenko.

   Ametek LLC general director Yuliy Lieb suggests no comparison should be made between the financial crisis in the United States and the “completely systemic crisis in Russia where the economy is in a pre-collapse state.”
According to Lieb, the major strain on the U.S. financial system is possibly in the past thanks to “an incredibly massive injection of funds into the banking system and the deprivatization of such companies as GM.”

   “The equivalent measures that have been introduced in Russia on a significantly smaller scale did not and will not produce a proportionately comparable result – the billions of rubles injected immediately fled the system, never reaching the working economy, while deprivatized companies, now run by officials, quickly saw their modest efficiency levels drop further,” says Lieb.
“The crisis in Russia is not over, it continues and while the rest of the world is slowly coming out of it renewed, Russia with its declarations about the necessity of ‘modernization’ stays in the state of crisis, which seems to be dragging endlessly.”

   Where is the exit in such case? Artyom Khoroshansky, PromTekhInvest deputy general director for marketing and sales, says the lessons from 2009 should not be ignored. Otherwise, he adds, the industry will hardly be able to avoid another bad experience. “If we don’t make the right conclusions and if we fail to take concrete steps to stabilize and balance the economy based on manufacturing, and continue to live off the sale of hydrocarbons, we are sure to have many crises of different scale ahead of us,” warns Khoroshansky.  

To Keep or To Cut?

   It may sound paradoxical, but there are also some who see certain positives in the downturn. “We have to thank the crisis! Our branch supplies products to companies operating in the oil and gas industry and back at the end of 2008 we asked some of our staff who weren’t working efficiently to leave the company. These were employees who failed to meet the sales targets. Within a year some of them decided to quit as they couldn’t cope with the growing requirements,” comments the departure Vladimir Mitin, director of the Urals branch of YE  International.

   As a result of structural changes within the company, management efficiency was improved and since October 2009 the sales departments in all of the company’s Russian branches (the parent firm is the Finnish concern YE International – OGE) started increasing staff, adds the executive.

   Moscow-based Promtekhnokom also saw staff reductions last year, but the reason behind the firings had nothing to do – at least directly – with the consequences of the crisis. “Some of our employees had to leave us, though we had no problem paying their salaries,” says Promtekhnokom’s head of the Industrial Innovations Dept. Ilya Katorgin. “We’d rather say it was something we had to do in order to renew the staff and raise the level of its professionalism as part of a corporate effort to achieve long-term goals set by the company. Moreover, having changed the organization structurally, we are currently active in the job market, looking to hire people who could fit into our existing team.”
URALSIB Capital’s senior oil and gas analyst Viktor Mishnyakov notes that oil companies hardly made any cutbacks, but did stop hiring new employees. “They cut those who had part-time jobs and also those who were close to retirement age,” he explains.

   Sulzer Chemtech’s general director Lorenzo Ghelfi told OGE of a similar trend in his company. “We kept our original staff, and stopped hiring new personnel. As soon as sales and gross profits resume, we will increase staff and capacity accordingly. Keeping staff without layoffs costs us some money. However, we believe in committed people, they are our asset for future growth,” says Ghelfi.
Roxar also managed to avoid layoffs, but some employees were offered to take unpaid leaves. The U.S.-based Loadcraft Industries rig maker also fought the crisis by readjusting its HR policy. “We had layoffs, salary cuts and in our U.S. office some of the employees were temporarily released for several months,” says Tatiana Rudenko, CIS sales manager at the Loadcraft Industries office in Kiev.

   Belgium’s Magnetrol – the supplier of flow instrumentation to Russia’s oil and gas industry – said that it had “to cut jobs at our factory due to the loss of work.” A pleasant surprise was PromTekhInvest – not only did the St. Petersburg-based firm retain its entire staff in 2009, but it also managed to expand it in spite of the crisis.

   Moscow’s Omnicomm accomplished a similar feat. “Our company wasn’t strongly affected by the crisis since our products – fuel consumption control systems and equipment monitoring systems – have been in high demand during this very period,”  Omnicomm’s deputy general director Stanislav Yemelyanov tells OGE. “The market displayed an active interest in technologies that help cut costs. That is why our sales remained practically at the same level, and we didn’t have to fire anyone. On the contrary, we continued to strengthen our team, striving to improve the quality of products and services. We hired several talented designers and also introduced the post of implementation engineer.”

Investment Reductions

   Trimming HR expenses wasn’t the only cost-cutting measure in 2009. One of the most frequently used strategies in optimizing performance and minimizing financial losses was to reduce investment programs.

   “We reviewed our investment program, rated the projects according to their importance, giving the preference to those, which aimed to reduce expenses and produce an evident effect quickly,” says Peremetko of Severstal Metiz.

   According to Magnetrol’s Michael Brekelmans, the Belgian firm also had to reduce investments last year. “We cut mainly the investments in our expansion plans, but also slashed our marketing plans,” he says.

   KROHNE trimmed investments, too, but despite the reductions managed to open two new offices in St. Petersburg and Krasnoyarsk.

   “We optimized our marketing expenses first. The development of our product line was slower than planned initially, before the crisis,” says Janne Oksanen, president of Lainapeite, the local supplier of weather protection services and solutions (it is part of the Nordic Shelters Solutions – NSS Group).

   Amid this group of respondents the story of Latvia’s Dinaz holding company stands out conspicuously. The company's plans to build an oil refinery in the Daugava district (refining capacity – 7.8 million tons of oil per year, scope of investments – 2.5 billion euros) and an oil terminal in the port of Riga (reloading capacity – 10 million tons per year, scope of investments – 189 million euros) haven’t been reviewed and the project is in full swing. “The global economic crisis only accelerated the implementation of these projects, which have the government’s backing,” Dinaz President Nikolai Yermolayev tells OGE. “The crisis creates problems, but it also creates new opportunities. The availability of cheap raw materials and workforce creates perfect conditions for implementing the projects.”

Corporate Parties Are Off!

   Alongside reduced investment programs the 2009 corporate budgets were thinner on a number of other items. “Our company saved money on those expenses that do not affect directly the quality of performance. Such opportunities always exist and should be used. For example, if you’re on a business trip and a subway or a train will carry you from the airport to your hotel as quickly as a cab (or, perhaps, even quicker), why order a cab?” asks Vladimir Raschupkin, general director of Rolls Royce Russia.

   Energy consultants KBC saved “on everything, including bonuses and business trips” while Loadcraft Industries slashed advertising and exhibitions costs. Lainapeite spent less on office supplies and corporate parties, while Roxar decided it would not buy new equipment and furniture and would also trim spending on office supplies. Severstal Metiz was more frugal in allocating funds for business trips, office equipment and supplies, KROHNE spent less on office rentals, communications, transport and expendables, while Ametek broke the tradition of car fleet renewal and kept the automobiles bought three years ago.
The Perm-based FLEK company (provides chemicals processing services used in oil production and refining) carried out a comprehensive cost-cutting program. “Under that program we changed the motivation system, introduced rewards for economical spending of raw materials and feedstock,” explains FLEK’s deputy director for economics and finances Yelena Fedorchenko. “Besides that, we adopted tougher norms and limits for production-related costs (fuel write-off quotas, technical losses, etc), lowered the threshold of managerial expenses.”

Back to the Future

   Forecasting is a thankless job. The OGE-polled industry professionals assessed prospects for recovery of the hard-hit market with cautious optimism, expecting to see the first tangible signs of its economic rebound no sooner than the end of 2010.

   “I cannot predict how long that recovery will take. There are too many variables,” says Oksanen. His colleagues are more specific. “We see signs of stabilization, mainly in relations with our key customers. Certain stabilization trends can be seen mainly in the oil refinery market. This year, the market will come back to the levels of 2005 or 2006,” thinks Ghelfi. “We expect the revival of the market to begin at the end of 2010, or maybe later,” hopes Brekelmans.
For Ametek, 2009 was apparently not a year that should be forgotten.

   “Financially, we lost just a slight fraction of our business and in 2010 we cautiously plan to surpass the figures posted in the record-breaking 2008,” says Lieb.   

   Rolls Royce’s Raschupkin expects that it will take two to three years before the market returns to pre-crisis levels, while Loadcraft Industries’ Rudenko hopes the bulk of orders will be restored now that the company has set up new offices in several foreign countries.

   “According to our analysts, the market will fully recover in 2012. Separate segments, including those of prior, political significance, could recover even quicker, in 2011,” expects Promtekhnokom’s Katorgin. “The market’s growth will be provided by the implementation of a number of projects that are significant for the entire country (VSTO-2, BTS-2, Purpe–Samotlor pipeline, the Vankor field, gas supply to Russian regions),  as well as other private projects such as the construction of the Ust-Luga terminal, TNK-BP projects – Russkoye, Suzunskoye, Uvat – and others.”

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