February 4, 2012
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Home / Issue Archive / 2011 / July - August #7 / Flexible Strategy. VZBT Offers Equipment Leasing to the Customers

№ 7 (July - August 2011)

Flexible Strategy. VZBT Offers Equipment Leasing to the Customers

   Interview with Dmitry Sinukov, member of VZBT Board of Directors, the Head of Moscow Office

By Elena Zhuk

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   Oil and Gas Eurasia: Recently we informed the readers of our journal that VZBT won the tender for supply of drilling equipment for Surgutneftegaz. What is the current status of this order? How is it going?
   Dmitry Sinukov: The order is big and complicated. Surgutneftegaz as a client has always put forward advanced and innovative requirements that demand a lot of technical coordination. In compliance with the contract we would need to produce 24 oil rigs. The first sets are to be supplied in September, thereafter we are to deliver two sets of oil rigs monthly through the year.  

   OGE: Are any technical specifications reconsidered while processing the order?
   Sinukov: Yes, there are some changes in specifications. Surgutneftegaz specialists sometimes make some additions to specification list because they strive to get the equipment of the highest quality possible. We are also on our client’s side but we are restricted by a timeframe, by the prices defined by tender. We have to act accordingly and are forced to search for compromises like we normally do with other clients. Another problem we face is receiving imported components on time. We order General Electric engines directly from the US and have to speed up the delivery. Some components specified by Surgutneftegaz are manufactured by Chinese producers and it often raises both technical and logistical issues. In general, our drilling rig of the sixth generation is so unique that we are able to integrate any imported components with it. Also a lot of check assembly work is to be done in the future. Our customer doesn’t want to loose time in the field and asks us to assemble everything in factory testing area and launch several rigs. Then we are going to provide services for assembling kits in Surgut, providing commissioning and start-up while drilling the first well. By the way, our customer inspects technological process during the full period of product manufacturing. The customer also inspects technological process of spare parts and components we order from other companies.

   OGE: It wasn’t an easy order for you financially, was it?
   Sinukov: It wasn’t and it’s still is not easy. Even now it’s hard to say, what the final result will be. From the moment we signed the contract in December 2010 the price of the metal rose twice this year already. There is still a rising tendency, no one eliminated inflation. The fact that we had to involve significant credit resources testifies that it’s a tuff contract. We had to buy metal and components, though we had a poor prepayment. So we had to take a reasonably heavy principal in order to launch tenders and credit interest is lowering already a low-level viability. Nevertheless, we are doing our best to get good results.

   OGE:  Most of the plant’s facilities must be working for this order. What is the situation with other contracts?
   Sinukov: The plant’s capacity allows us to increase the production volume significantly. We fulfil other orders on time. Recently we supplied two drilling kits for the Perm branch of the Eurasia drilling company under the modernization program for that company. We supply preventer equipment, spare parts and knots, and take part in other tenders for drilling kits supply.
Apart from that I would like to mention that today VZBT offers its potential buyers to lease equipment.  It’s especially vital for companies that do not have enough resources to pay us when signing the contract. We have an opportunity to help them by pulling in a financial partner that is Sberbank leasing company. By the way, in the long run it is much more profitable for a buyer because there is no property tax and payments upon lease can be attributed directly to prime costs. This is an important issue when we talk about big orders.

   OGE: How successful is VZBT in preventer equipment production?
   Sinukov: For decades VZBT has been the biggest supplier of preventer equipment in the country. Nowadays a number of companies compete with us at this market segment. On the other hand, the group of technical experts of VZBT won the government prize for the development of this kind of equipment, although there were many companies participating including some of Gazprom structures among them. The orders are usually off-standard and we produce kits and special packages of the preventer equipment. Thus we developed the line-up of the bore caliber from 180 mm to 1350 mm, and we are not going to stop. We work hard, particularly on improvement of corrosive resistance. Another problem that often comes up is counterfeit goods. Price is crucial when purchasing such equipment but we run reliable testing system that can not be cheap. We even show faulted bodies of preventers to clients when they visit our factory. When the body bursts it is obvious that the existing technological system prevents us from manufacturing low-quality products. Most producers can’t show anything like this.

   OGE: Maybe it was worth setting up an Association of Drilling Equipment Manufacturers?
   Sinukov: Any association is established with an ultimate goal to protect interests of an industry sector. In this respect you need to have civil instruments for lobbying, which in our country are replaced with the phenomenon known as “corruption”. We would be willing to lobby deputies and even political parties had they been capable to influence the situation. But today deputies do not take decisions, so international instruments for lobbying do not work for us.

   OGE: There is a general opinion that production in Russia is less profitable than in China primarily because of energy costs. In Russia we have to heat premises during cold seasons. Besides, energy costs and other head costs including labor costs increase the final price of any production.
   Sinukov: They tend to have earthquakes instead. In addition to this factor of risk I would argue with the fact that their workforce is so cheap. Urbanization process is going fast and migration from rural areas to big cities results in raising life costs and increase in prices of natural resources. China mainly exports resources so relatively low labor costs are to be balanced by electricity and gas prices and so on. We are successfully winning tenders against the Chinese and our last contract with Surgutneftegaz just proves that. We have won the tender not because some sort of administrative instruction to work with the Russian companies came from authorities (may be we would not mind, but that was not the case) but because we were able to come up with a better price.
I may repeat it, but unlike the Chinese, we create jobs inside Russia, pay taxes here and deserve to have some preferences at domestic market. The state must realize that it is necessary to protect the domestic market. This will secure the technological stability of the state alongside with social stability. Take, for example, President Sarkozi who was battling to get the contract for production of Mistral helicopter carriers. He says that the contract will provide jobs for more than a thousand workers at French shipyards. We do not even dream about such support from the state, although we have much more employees working for us. As for Chinese manufacturers, they get lots of different “gifts” from the state, such as non-interest preferences, etc., especially when they produce goods for export.
As for your question regarding heating problem, I can tell that there are several ways to resolve the issue. It’s possible to go for modern energy saving technologies, to go for audit of the enterprise and get some guidelines and recommendations, to introduce economizing programme and reach energy efficiency, but all of that demands additional resources. For us it’s hardly the case because we had to get a loan in order to fulfil our contract. Unfortunately, the initiative to raise export duties on foreign drilling equipment export suggested by Vladimir Putin at the last Economic Forum has not been implemented yet. Though Russian producers of oil and gas equipment would benefit significantly if Chinese exporters had to pay 30-40 percent duty for their imported products when entering our market. Those who prefer using imported equipment should pay more and add up money to the state budget. To take cars, for example. There is an import duty, and owners of foreign-made cars have to pay it.
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