April 24, 2011
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Home / Issue Archive / 2011 / March #3 / Surgutneftegaz Opts for VZBT Rigs Tender-led price pressure and hiking metal prices raised the cost of victory

№ 3 (March 2011)

Surgutneftegaz Opts for VZBT Rigs Tender-led price pressure and hiking metal prices raised the cost of victory

Interview with Dmitry Sinyukov, the head of the VZBT Moscow office, member of the board


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Oil&Gas Eurasia: Dmitry Viktorovich, would like to highlight any last year’s success stories?
Dmitry Sinyukov: Last year we completed on-schedule shipment of six rigs commissioned by Rosneft. The contract was executed in a short time – within a year. Even considering the short timeframe, the company coped with this difficult task well, though we had to take on some unusual responsibilities such as importing a number of components. In general I would say that 2010 had been a stable and successful year for the company and that we completed the year with financial figures “in the black”.

OGE: You mentioned the imported components. Why buying foreign components was needed?
Sinyukov: Equipment configuration is usually dictated by the customer, not by us. Most often it comes top drives, winches, bail links. For example, we were forced to acquire bail links directly from a U.S. company, being unable to find a common language, price-wise, with the representative in Russia.

OGE: Sure, the market has high quality Russian-made components...
Sinyukov: Yes, but not many people know about it. Most likely, this situation is a relic of the past, when Russia, for example, had no domestic production of top drives. Today, our designers have created much of what previously had to be imported. Incidentally, in February VZBT team received the State Prize of the Russian Government for the creation and implementation of import-substituting equipment for environmentally safe drilling for oil and gas wells (BOPs). This is a great achievement and the object of our pride.

OGE: What other significant recent events recently can you highlight?
Sinyukov: Of course, I will mention the most important event of the last fall, the sensational Surgutneftegaz tender. On 15 December 2010, VZBT won its largest, and perhaps one of the biggest in recent history, tender for the supply of 24 oil rigs with 4000 meters drilling depth and 250 tons load capacity.

OGE: What is the scheduled delivery time?
Sinyukov: The delivery date has been set within a year. Still, we’ve began to notice that a number of international suppliers of equipment parts are unprepared for such timeframes, so we informed Surgutneftegaz accordingly. Either the requirements have to change or delivery date must be shifted, or assembling will have to be done on-site, because one of the Surgutneftegaz requirements is to run a check assembly on the VZBT test site. Foreign manufacturers were unprepared for tight deadlines. The company’s management is now trying to speed them up and in any case, will do everything to fulfill this difficult but highly important order, not only for us or Surgutneftegaz, but in general for the industry. Order of this magnitude gives a strong impetus, momentum, rippling through the industry, through all domestic mechanical engineering, because in fulfilling the order VZBT will cooperate with a huge number of companies all over Russia. The order will load neighboring companies, which means job places, taxes, and most importantly, technology. Russian oil industry is re-equiping – thankfully, on the basis of our Russian technology. It’s nice that Surgutneftegaz shows a serious, strategic-grade patriotism in this matter. By signing this contract, the head of Surgutneftegaz Vladimir Bogdanov has done for the industry and for Russia more than many pen-pushers whose job is to worry about precisely these matters.

OGE: Could you be more specific about the tender? What companies did you compete with?
Sinyukov: Sure, the tender was joined by Uralmash building corporation, our main domestic competitor. The price was significantly pressured down by Chinese companies that joined the tender on position of fierce low-balling. In order to win we had to whittle down cost, and today we are trying to appeal to suppliers of parts and metal to understand our situation. Price is dictated by the customer and to retain the included rate of return, the company is forced to negotiate with the steelmakers, including on pricing matters. So far unsuccessfully. Our tenders show that the market mood is bad for us. We won the tender in late 2010 – the price of the metal rose twice this year already. We will find it very difficult to stay in profit but even so, we are looking for ways to cope with the challenge.

OGE: Have you considered the option of acquiring the metal abroad?
Sinyukov: Recently we held the first tenders, invited Ukrainian companies for participation. For acquisition, VZBT actively uses Russia’s Sberbank e-trade platform. This is the fief of Hermann Gref, who holds that to combat corruption, any governmental order must be carried out through an open e-trade platform. We fully support this point of view and, not being a state company, are an accredited member of the Sberbank’s e-trade system; we also promote e-trade bids among all other manufacturers. The situation is ridiculously absurd. The largest steel-makers sometimes refuse to participate in e-trade bids, putting it down to such strange reasons as shortage of people. How would you like to hear something like this from a massive Novolipetsk metallurgical complex?

OGE: And what is going on in today’s drilling services market?
Sinyukov: We are quite cautious about the trends in the Russia’s oil servicing market. Almost all producing companies suddenly announced their drilling units as non-core assets and started dumping them. This process began a while back pioneered by LUKOIL and has recently been joined by Gazprom, our biggest customer. When a company becomes formally independent, its business becomes less clear. In the sense that it is unclear what equipment the company is after. And while the producing companies understand the level of social responsibility, the service companies likely to pay no attention to the economic processes in the country, or to such strategic issues as national security, the development of new technologies, the condition of domestic engineering industry.
For example, to the point we have no permanent contracts with Lukoil’s offshoot, BK Eurasia – at the same time, with Lukoil itself we had stable business relations.

OGE: Why Chinese companies are so engaged in the market?
Sinyukov: Because of industrial strategy of the Chinese, where the state pays due attention to developing this industrial segment. New plants are being built, engineering companies get huge preferences from the state. They’re given interest-free subsidies and so are prepared to dot the world with their equipment, at most advantageous terms: leasing, manufacturing with no advance payment. I continue to express serious concerns about the prospects of the industry as a whole. We do not see any serious steps of our government for supporting the industry.

OGE: So, what is the solution?
Sinyukov: The toolkit is standard. First of all, installing import duty for drilling equipment. By now, this measure would have put a barrier for cheap low-quality Chinese machinery. We also need a strong state leasing company with a huge lobbying potential. That is, the oil servicing companies do not have such leeway of free resources as oil producers. They do not sell oil but rather get paid for meterage. Accordingly, they cannot afford to order 24 units like Surgutneftegaz just has done. They need strong leasing program, while we need prepayment to start manufacturing the equipment. There must be a mediator, the state-owned leasing company that will buy our manufacture, stimulating development and the industry, creating new jobs, and leasing this manufactured equipment to oil servicing companies. In fact, this company can make good money.
In this situation, it is possible to “kill several birds with one stone”: to improve the competitive edge of Russian goods, to improve social and economic situation in the country and to earn some money for the state.

OGE: How far is this idea from implementation?
Sinyukov: I have not heard about any such plans of our government.

OGE: It is strange that such a tempting offer draws no interest. After all, being a country-exporter of hydrocarbons, perhaps, developing the related industries is the idea made in heaven?
Sinyukov: Undoubtedly, industry modernization, which is so much a buzzword, must start somewhere where the fastest possible return can be achieved. Here, there is no need, as in nanotechnology, to start from scratch. There is a machine-building industry and it needs supportive actions. But, unfortunately, the government does not listen to us. So I am trying to use your magazine to get through to them with this idea. This all is just a few measures within the industrial policy of the state, which we are aching for; we have plenty of ideas.

OGE: Let’s get back to the company operation. Last year you unveiled STALINGRAD, a new generation of drilling rig. What the designers plan for 2011 year?
Sinyukov: Certainly, we will work on boosting the load strength. For us, 250 tons is far from being the limit. We plan to manufacture equipment with 320 tons load capacity, next milestone – 400 tons. We do not stand idling, we move forward. VZBT strives to become a universal manufacturer.

OGE: After Integra’s sale of its assets for the production of drilling equipment, you’ve got a new strong competitor. Do you have more problems because of this?
Sinyukov: We reacted positively to the deal. Much administrative effort is being put into restoration of Uralmash, so a player with such strong lobbying potential, no doubt, will prove useful for the entire industry. Perhaps Uralmash will facilitate protection measures for the Russian machine-building industry. In any case, the company will fight for its survival, and hence for the industry, and this will benefit us, too.

OGE: In your opinion, how many new units per year should appear on the market for sustainable renewal of the equipment park?
Sinyukov: I think, at least 100 units. This is not even for renewal, simply to counter the ongoing deterioration.

OGE: Maybe you could expand to foreign markets? Would you face serious competition there from local producers?
Sinyukov: We’re seriously limited, not only local competitors, but by local law, too. For example, the U.S. still has its Cold War dated Jackson-Vanik amendment, which limits imports from Eastern Europe. Of course, there are markets other than Russian which are of interest to us, but without government support we’re unable to enter them. We have Soviet experience of supplying production to 53 countries around the world, but at the time everything was done at the level of state contracts. We’ll be delighted to travel the mouth of the Orinoco River, if we are invited there.

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