April 18, 2010
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Home / Issue Archive / 2010 / February #2 / Drilling Market Looks Forward After Exploration Slump

№ 2 (February 2010)

Drilling Market Looks Forward After Exploration Slump

Companies hope 2010 recalls the better days of 2008 as they move past the slide of last year. Russian oil companies are upbeat at the beginning of 2010 despite last year’s slump – preliminary drilling results from 2009 are not showing the reduction most analysts expected.

Data collected from the Energy Ministry’s Central Dispatch Directorate (CDD) show that while exploratory drilling in the first half of 2009 was down 41.2 percent, production drilling only slowed a mere 2.2 percent. 

By Elena Zhuk

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TNK-BP, which showed the biggest drop in exploratory drilling in the first half of 2009, completed a successful $1 billion, two-part eurobond issue in early February. The company reported in its prospectus that the proceeds will be used to raise oil and gas production and reserves as well as to refinance short-term debt and cover other company needs. OGE learnt from TNK-BP press secretary Nikolai Gorelov that the company plans to double its investments in exploration in 2010. “Drilling volumes will increase proportionally. The Yamal Nenets autonomous district and the northern part of the Krasnoyarsk Territory will be the main regions where we plan to unfold extensive work,” he said.

   Another company which managed to brave the 2009 crisis was Rosneft. According to CDD statistics, despite cutting its drilling volumes 17.5 percent year-on-year in the first half of 2009, Rosneft managed to catch up to schedule by the end of December. In fact, the company's exploration drilling in 2009 was 61,200 meters, just a touch off the 63,500 meters it showed in 2008. According to Rosneft press service chief Nikolai Manvelov, this slight drop was mostly due to the company being “more thorough” in evaluating geophysical data during the crisis.

   Manvelov added that company intends to pay strict attention to geological data analysis in the future as well and this, augmented by a 150-percent boost in the volume of its geo- and 3D-seismic prospecting should allow Rosneft to continue enjoying its rebound in 2010.

   These programs are expected to lead to 60-percent growth in meters drilled. Rosneft will place priority on sites in West Siberia and on the Black Sea shelf. There appears to be little need for concern over Rosneft’s production drilling; the company increased its drilling from 2,158,000 meters in 2008 to 2,300,000 meters in 2009.

   “Limited financing and an uncertain future prompt companies to spend on current operations such as workovers of operating wells, restoration of idle wells and production drilling, rather than develop new projects involving exploration drilling,” a source at Integra Group said, revealing details of crisis management, “Moreover, exploration wells are usually more expensive than production wells. Even with high quality seismic prospecting and an established geological model, drilling a wild cat always entails a certain amount of risk. On the other hand, with production drilling, when the company knows the structure of the formation, a dry well is unlikely to be drilled.”

Licensing Activity Plunges

   One of the main reasons for declining drilling figures in 2009 was the lack of interest companies had in taking on new projects during the crisis. While “there were no serious acquisitions” in 2009 according to FINAM analyst Alexander Yeryomin, he said Russian companies are certain to increase their drilling volumes as growth in investments is in the cards for the oil industry in 2010. “According to the plans already voiced by some companies, in 2010 the volume of capital investments will grow 5-10 percent, which will result in respective growth for production drilling,” Yeryomin said.

   Alexander Pavlov, the deputy director of the Government Policy and Regulation Dept. for Geology and Subsoil Use at Russia’s Natural Resources Ministry, said companies have become “more critical” in selecting sites. Commenting on the “small number of victories” in the licensing matters in 2009, Pavlov cited the following data: there were only 28 auctions and tenders on Rosnedra-bound sites last year, while 152 auctions and tenders failed to take place. Altogether there were some 250 auctions and tenders on hydrocarbon-bearing sites.

   Of course, the upside to this is that these sites remain to be auctioned and as the crisis ebbs, companies’ appetites are likely to grow. Pavlov said the state will re-initiate the auctions in 2010 and Rosnedra has already drafted a 2010 forecast privatization list for subsoil blocks.

   Still, the licensees' low interest in auctioned blocks seems to have been caused by other factors as well. “The auctions fell through because the auctioned blocks had obscure data on reserves; no serious investor would go through with this,” a spokesman for Lukoil told OGE.

   Pavlov admitted delays in working out the accounting procedures for one-time payments on tender-free fields created additional difficulties in allocating licenses.

The Surgut Record

   It seems that poor market conditions had no influence on the forward behavior of Surgutneftegaz figures. The crisis only cemented the company’s reputation as a unique company living by its own rules.

   Unlike other large companies, in first half-year 2009 Surgutneftegaz did not slow its drilling volume, but even increased it, working through 20.8 percent more exploration drilling than the year before. Surgutneftegaz has also had good luck in license acquisition: in May the company acquired a development license for the East Talakan field (on a non-competitive basis – the tender was deemed invalid as Rosnedra received only one bidding application).

   Surgutneftegaz’ 2009 preliminary data indicate that the company has drilled a total 3,915,000 meters, compared to 3,296,200 meters drilled in 2008 (data from the company’s 2008 annual report). The information was published by the Neft Priobya corporate newspaper, citing Felix Yakhshibekov, the deputy head of the Drilling Dept. According to Yakhshibekov, in 2009 some 46 drill crews worked in West Siberia while 10 worked in the Sakha Republic (Yakutia).

   Naturally, the Surgutneftegaz press office declined to share its secret to achieving such goods results, merely commenting “there is no crisis in the company.” In 2010, Surgutneftegaz plans to boost production drilling to 3,946,000 meters. “Every drilling department in the new year will have well testing teams. We must staff such teams as soon as possible, so that beginning in January and February, they can contribute to completing the 2010 program,” Yakhshibekov said.

Contractors: A Cautious Comeback

   While different contractors faced different challenges during the 2009 crisis, most are cautiously optimistic about an upswing in work in Russia in 2010. Alexander Matusevich, the head of KCA Deutag projects in Novy Urengoi, said the crisis gave many of the company’s staff jitters and created some small financial problems. Yet, to KCA Deutag’s credit, “the company did not fire a single employee in Russia.” He said there is still enough work for drilling professionals and noted work in the Novy Urengoi region is running on schedule. A new project has been added to a KCA Deutag-supervised drilling site for the Achimgaz project (a JV between the BASF subsidiary Wintershall and Gazprom subsidiary Gazprom Dobycha Urengoi) to develop the Achimovsky formation in Urengoi field.

   “In 2009 we did see a certain decrease in drilling volumes,” a source in Integra Group said. Company reps  explained that Integra Group’s business portfolio is diversified and includes projects for large enterprises as well as for medium and small companies. Small and medium companies lowered their drilling volumes in 2009 resulting in lower numbers of drilling projects for Integra while many of the large firms that did retain their drilling volumes did their best to place orders with their own service departments.

   Dmitry Gorbenko, deputy commercial director at Integra’s Drilling, Workovers and Integrated Project Management Division, told OGE that the company is seeing new clients in 2010. “Despite the reduced scope of drilling orders, we see some new names in our client base alongside our traditional customers such as TNK-BP, Rosneft and NOVATEK. Currently, we are in talks with the operator of the development of one of the largest oil and gas fields in western Turkmenistan to sign a long-term (five to eight years), three-rig drilling contract,” said Gorbenko. 

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