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Kopeysk, Southern Urals

And as the market grows, so too does the market for ceramic proppants – small, spherical, high strength man-made material about the size of sand grains that is pumped into a reservoir to keep fractures open and to keep oil and gas flowing.

Carbo Ceramics – the Irving, Texas inventor, and the world’s largest manufacturer, of ceramic proppants – recognized this potential in 1991 when, during the last days of the Soviet Union, it shipped its first proppant to West Siberia. In the decade and a half that has passed, Carbo grew with the market, exporting proppant to Russia and selling Russian producers on the efficiencies of fracing and ceramic materials to enhance oil and gas recovery.

Carbo over the years, investigated joint venture and other growth opportunities, but in the end decided to just “become Russian.” This autumn Carbo took the final step, opening its own plant in the suburban Cheliyabnsk town of Kopeysk, a two hour flight from Moscow to the Southern Urals. Oil&Gas Eurasia visited Kopeysk to attend the plant opening which brought senior Carbo executives from the United States, region and city officials from Chelyabinsk and Kopeysk, and more than 100 Russian employees of Carbo, together for a party as big as Russia and Texas combined.

“It was an incredible achievement to go from ground breaking to commissioning in roughly 18 months,” Carbo CEO Gary Kolstad told guests. Yuri Klepov, Minister of Economic Development for the Chelyabinsk regional government, stressed that Carbo’s $45 million investment helped push overall foreign investment in the Chelyabinsk region to $1.5 billion. It also created 130 new jobs and is generating tax revenue. Kopeysk Mayor Mikhail Konarev, said he was “grateful” for the project because it’s about business, but business that improves the life of people living in Kopeysk.

Unique Among US Investments in Russia

John Stepanchuk, the U.S. Consul General in nearby Ekaterinburg, called Carbo’s accomplishment “unique” among U.S. investments in Russia. “It’s the first investment that I’m aware of that is a fully-owned American company but with 100 percent Russian staff,” Stepanchuk told OGE while touring the facility after having helped cut the ribbon officially opening the plant.  “In most cases, U.S. investments revolve around a JV or licensing agreements.”

Carbo though wants a solid Russian base. The number of frac jobs in Russia has been growing by an estimated 25 percent annually. PetroAlliance, Schlumberger, Halliburton, BJ Services, Newco and Calfrac already service Russian majors which, among the biggest fracers include Rosneft, TNK-BP, LUKOIL and Gazprom Neft. Next year, Weatherford joins the fray after having chosen Russia as its point of entry into the global fracing business. Weatherford’s first fracing fleet arrives in West Siberia in early 2008 (see OGE, October 2007 or search “Weatherford” on www.oilandgaseurasia.com).

“Our business in Russia is very important to us globally,” said Kolstad. “We, like all others, expect Russia to continue to grow and to supply the world’s energy needs. We have plants in the United States, China and Russia but there’s not one any finer than the one right here in Russia.”

And the way the investment came about could be a textbook case taken from anywhere in the world. Carbo’s head of product sales and marketing for Europe, the Middle East and Africa, Kenn Johnson,  worked in Aberdeen when he sold the first ceramic proppants to Russia in 1991 through a German company in Hanover. “We realized that the Russian market was going to be an interesting one and so in 1992 we exhibited in the first MIOGE (Moscow International Oil&Gas Show) as a part of the Scottish Trade Group.”

“We built up the business and sold all the ceramic proppant used in Russia for maybe three or four years; and then one of our competitors entered the market and we lost some market share,” he said. Carbo sold proppant primarily to YUKOS and to Sibneft which in the 1990s employed the fracing services of mostly Schlumberger and Halliburton to boost production. By the time YUKOS was dismantled and its major assets sold to Rosneft, it had become Russia’s biggest oil producer. 

“The only ceramic proppants in the world were actually produced in the United States (during the 1990s) and we were the major manufacturer in those days,” Johnson said. “Now we an have an increasing number of competitors in Russia and around the world. Obviously they’ve taken quite a bit of the market but we’re hopeful we can earn that back, now that we have a plant in Russia.”

Politics Yes but Price is More Important

When Rosneft took over YUKOS, it stopped buying imported proppants. It was not just politically correct to “buy Russian”, it was cheaper. Two Russian proppant manufacturers had launched competing ceramic proppant lines and with their proximity to the market, coupled with new tariffs on imports, they had knocked Carbo, along with other less influential foreign competitors, pretty much out of the game.

Carbo though fought back. After opening its first manufacturing plant outside of the United States in Louyang , China in 2000, which improved the logistics of delivering proppant to Siberia, Carbo began its quest for a plant site in Russia itself.

“I came to Chelyabinsk for the first time in 1997 and met with some local industrialists who were keen to get into the market with us,” Johnson said. “Eventually though, we decided to do it ourselves.” While touring sites throughout the regions over a period of years, Johnson was invited to visit, among other places, a city in the Chelyiabnsk region that had in Soviet times been a center of nuclear research. As such, it had a factory that made ceramic materials. “The mayor there was interested in attracting peaceful industries but it took three months to get the special visa you needed to go there,” Johnson said.

“In October 2003, we attended an investment seminar in Chelyabinsk and over the two days, mine was the only presentation in English. We got a big response from the local government people. And as a result we looked at sites and eventually decided to build the plant here,” Johnson said.

“Chelyabinsk is a big industrial city so you can get all the services you want in terms of steel work,” Johnson said. “The raw material (bauxite and kaolin clay) are nearby and the city is on a rail route that goes to Western Siberia.” In China also, Carbo chose a site for its proximity to the Citic steelworks. As Mark Edmunds, vice president for Operations who traveled from Irving to Kopeysk for the opening put it: “A manufacturing plant is a machine and to run that machine you need utilities like natural gas and electricity, you need raw materials and you need people with the right skills to run the machine.” Chelyabinsk, a trade crossroads and gateway to Siberia and Central Asia since its founding in the 18th Century, was perfect.

Planning Growth in Tandem with the Market

Under its agreement with the local authorities, Carbo got enough land to as much as triple the size of its factory over time, as demand grows. The plant opened its first month at 50 percent of its 50,000 ton (110 million pound) capacity and was soon operating at higher percentages of capacity, according to plant manager Chad Cannan, one of only two expats who rotate shifts at the plant. Other than that one expat, the Chelyabinsk plant is run 100 percent by local Russian hires.

Concluding contracts to buy Carbo products falls to Brian Davidson, Commercial Director for Russia based in Moscow. Davidson is confident not only of growing the high strength proppant sales side of  Carbo’s business but also in developing Pinnacle Technologies, a Carbo subsidiary that is the industry leader in high tech fracture mapping using tilt meters and microseismic. Pinnacle also assists clients in optimizing fracture design using its FracproPT™ software and offers engineering and design consulting on stimulation projects.

In this respect, Carbo sees its future in being able to train service companies and oil producers in selling engineered solutions. “We want to go into the market and teach frac design,” Davidson said. “We acquired Pinnacle technologies five years ago because we wanted a complementary business within Carbo that has the technical services, the modeling programs and the analysis tools to be able to measure the actual development of fractures. We use seismic devices and tilt meters enabling us to monitor a frac as it is occurs and literally see the orientation and angle of the fracture.”

Carbo maintains a warehouse in Surgut and ships proppant from Kopeysk by open rail car and bagged in box cars. “If you’re going to grow globally, you need to be able to build in your supply where the demand is going to take place,” Edmunds said. “This product is very heavy. It’s a lot like shipping dirt. It is costly to ship heavy dense proppants anywhere. If you decide that you’re going to import proppants into Russia from overseas the very first penalty you pay is the tremendous amount of cost that is associated with ocean transport.”
With a plant now in the Russian heartland, Carbo has indeed gained a competitive edge. In the words of U.S. Consul John Stepanchuk, Carbo’s venture into Russian manufacturing is indeed, “a real success story.”
 

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