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Home / Issue Archive / 2007 / July #7 / The Rise of the Service Industry: Capitalizing on Russia’s Potential

№ 7 (July 2007)

The Rise of the Service Industry: Capitalizing on Russia’s Potential

By Sergei Balashov

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OGE correspondent has met with Igor Melnikov, president of the Association of Russian Oil and Gas Field Services Providers, to talk about the challenges the Russian service companies are facing and the importance of supporting the service industry in Russia and the role his organization is playing in fulfilling this duty.

Oil&Gas Eurasia: What are the main objectives and accomplishments of your organization?

Melnikov: The Association of Russian Oil and Gas Field Services Providers (Soyuzneftegazservice) was set up for the purpose of integrating separate domestic oilfield service companies with various areas of expertise. The first step towards consolidation of the Russian services market was the foundation of the public organization Souyuzneftegazservice, which researched the demands of the Russian oil and gas services market.

As a result, the decision was made on the setup of the Scientific-Production Association Soyuzneftegazservice at the end of 2006, which originally incorporated the largest players in the Russian market of geological, technological and geophysical research of oil and gas wells. Our goal is to offer a full spectrum of oil and gas services, namely competitive local oil and gas services. Soyuzneftegazservice is one of the very few, not to say the first, organization with a successful record of developing the national standards. In December 2006, the Technical Committee 431 of the Federal Technical Regulation Agency “Geological Exploration, Exploitation and Conservation of Mineral Resources” adopted the draft national standard titled “Oil and Gas Wells. Geological and Technology Research Regulations” developed by the experts of Soyuzneftegazservice. TK431 regulation was devised with direct participation of Soyuzneftegazservice. Announcement has already been made about the launch of the project to adopt the important for us international ISO standards: ISO 10414-1:2001 Petroleum and natural gas industries. Field testing of drilling fluids. Part 1. Water-based fluids и ISO 10414-2:2002 Petroleum and natural gas industries. Field testing of drilling fluids. Part 2. Oil-based fluids.  

Throughout its existence, Soyuzneftegazservice has become the influential and respected public organization, whose opinion has been listened to and taken into account.

OGE: How important today are the oil and gas services for the Russian economy? 

Melnikov: I’d like to stress that the notion of the oil and gas services should not be taken literally since those are not the services of catering to artificial dependence of Russia on raw materials and technologies, but a method of obtaining information about the status and future prospects of the mineral resources country-wide based on results of geological surveillance works, seismic research, drilling, geophysical wells research both off- and onshore.  Moreover, the oil and gas services provide the required level of production and transport. This includes design of production and field development and wells workover as well as automation of fields, oil recovery enhancement, offshore platforms construction, etc.

OGE: How do you explain the strategic importance of developing the service industry?

Melnikov: This high level of hydrocarbon production does not protect from, but on the opposite, leads to dependence of the economy on raw materials, which increases manifold if the country’s mineral resources are mined without application of existing home technologies of field services and machine/instrument building.

It turned out that our own natural resources were extracted using unjustifiably intensive and marauding methods posing a host of problems to the next generations, including the environmental ones; in parallel we financed our own technological dependence on the foreign services companies by not developing our own existing school of thought and numerous scientific centers.  Worldwide, only Russia, China and the USA have sufficient intellectual and industrial potential to put in place their own independent high-tech services for the national production sector.

OGE: Are there any specific measures of government support which could help the Russian service sector?

Melnikov: I believe the very fact of recognition by the state of how important the home market of oil and gas services and home equipment manufacture is for establishing the country’s technological independence is a great support to us. If we talk about measures of government support for the service companies, then in the first row it’s taxation policy. If the state makes the tax burden more stringent, then the enterprises are to lose money needed for their development, R&D, etc. Therefore, it’s obvious that the tax burden reduction is vital for the stable development of companies. Talking of the financial policy, evidently, expensive credits in comparison with the credits given by the Western banks cannot create competitive advantage of our enterprises.

And what about the role of the federal antimonopoly service? To my big regret, not everyone understands that monopolism of one sector is crippling the activity of another. One example is the recent situation with cement production. Today, the situation with petroleum chemistry products is getting worse.  All this dramatically aggravates the performance of the services companies as main consumers of these products whereas the regulating mechanisms are not there or they are simply not tuned up.  I’d like to make a separate note of the role of industrial and environmental safety watchdogs: if they are neglected, it can lead to multiple accidents with grave consequences including human casualties. It’s only now that the legal and regulatory base system is being developed and it tries to incorporate international standards without which no single enterprise can operate normally in any country of the world.

With all this in mind, it can be stated that the government bodies’ support must be permanent and systematic and involve the respective authorities.

OGE: What economic model of the services market looks the most efficient to you?

Melnikov: The most efficient economic model of the services market is the one, which demonstrates maximum consideration for the interests of the state in whose territory the service works are conducted. It is obvious that this model has room for both large and small companies with any form of ownership. There is also a need of shaping the structure, which would deal with the protection of Russia’s geopolitical interests in the fuel and energy complex both in Russia and abroad. Possibly, a national service company could fulfill this role.

OGE: Do the oil and service companies from abroad have any advantages in marketing? If yes, is there a way of finding solutions to the problem?

Melnikov: Surely, the world-brand foreign companies have advantage in comparison with the Russian ones due to their extensive track record in the market conditions on the global markets. The Russian companies have neither experience like this nor the required specialists. For this reason, expat managers are recruited to fill in the key posts for strategic control of companies. Without due account of Russia’s peculiarities and Russian mentality no efficient corporate administration or marketing policy can be developed. You can solve the problem only by raising a team of your own professionals with successful job experience in foreign companies, who know perfectly well not only the marketing, but benchmarking too.

OGE: How would you evaluate the general potential of the Russian services enterprises?

Melnikov: There’s huge potential. Our companies can really cope with implementing all existing and potential projects on the Russian shelf on their own. Foreign companies seldom share with us their know-how that we don’t have, while we have grown accustomed to developing the new ones within the shortest timeframe.

I’d say, we would be happy to cooperate with Schlumberger, if this interaction were accomplished at the level of technological exchange, which, unfortunately, does not occur. I can even say that, in spite of prevailing opinion, overseas companies neither import nor use their advanced technologies in Russia.

OGE: What must be done to use the potential?

Melnikov: What we need is the matching capabilities. As experience shows, western oil and gas services giants were created through mergers and takeovers. This made it possible to generate opportunities for provision of a full spectrum of required services ranging from prospecting to servicing the fields. This has resulted in not only competitive ability of the service companies but also in improved cost efficiency of oilfield services. I think, we can move forward this way very efficiently and within the shortest time.

OGE: In this case, can the domestic industry meet the needs of the service companies in machinery?

Melnikov: This question is very tough. On the one hand, Russia’s defense complex has the required manufacturing level, but to my great regret no one can say what to produce, at what price and in what quantities. In this case, no release of single copies of high-tech products can be profitable, there must be at least some guaranteed batch.

No one gives any guarantees, of course. In connection with this, I believe that we need a long-term program similar to the energy strategy of Russia until 2020, whereby the government would set the scope of geological survey works in relation to seismic surveying, drilling, etc.; whereby the subsoil asset users would define the real volume of the work based on obtained license agreements, and contractors – the available possibilities for high-quality operations and adequate supply of appropriate technology for at least a five-year period. Here, we can look at the drilling service example.

If the approved program stipulates that the scope of drilling will require operation of 500-600 drilling rigs of different power by 2010 with the currently available pool of 250-300, it is obvious even now that it is necessary to organize their production, and in two to three years the demand can be met by Russian manufacturers. If we fail to do this now, then we will have to buy them in China or to source the contract out to a drilling contractor from the overseas.

OGE: What has to be done to ensure successful promotion of the Russian field services?

Melnikov: Recently, the state has increasingly gravitated towards the consolidation of the state-owned and private assets of domestic enterprises. Reasonable concentration of available equipment, financial and staff resources, scientific research will make it possible to offer the integrated service, starting from planning and performance of seismic survey to control over field development over the entire period of the field operation, which will undoubtedly ensure the competitive edge of the Russian service.

This direct involvement of the state will ensure control and regulation of subsoil assets usage conditions, formation and management of strategic oil stockpile, while cutting expenses and ensuring the fulfillment of the government state order on geological survey operations, development of new oil and gas-bearing regions; compilation and storage of databases that contain the crucial geological and geophysical information for the fields will be achieved under the government control.

In connection with this, Soyuzneftegazservice and a number of other NGOs have appealed to the government agencies urging them to immediately review the situation in the country’s oil and gas sector in the context of national security. Russian technologies deserve promotion in the domestic and international markets through Russian companies.

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