The services industry knows that if you're in oil and gas, you'll be in Russia sooner or later. Russia ranks No. 1 in gas reserves and is first in oil after OPEC. Russia's policy of limiting foreign ownership of upstream assets may have taken the shine off the market for foreign producers, but on the service and supply side, the potential remains high. Somebody has to produce all that oil and natural gas and whether that somebody is a Russian producer or a foreign producer, they will need to contract with a service company.
Sir Ian Wood, the founder and Chairman of Wood Group visited Russia recently, his first trip since 1986, to assess his company's development here. Wood Group has been selling its Electric Submersible Pump (ESP) in the Russian market for more than a decade and it is now positioning itself to become a domestic ESP manufacturer while also sizing up new business opportunities in engineering services and project management both onshore and offshore. In describing how he sees Wood Group's development in Russia, Sir Ian underlined the need to first understand the country and its culture so as to do business in a Russian way; as he put it, "to become Russian." Here is what else Sir Ian had to say:
Oil&Gas Eurasia: How would you describe Wood Group's Russia strategy?
Sir Ian Wood: From the service company point of view, as Wood Group moves around the world - and we're now in 44 countries - we recognize that every country we go to is different and we also recognize that the way to succeed is to become an indigenous company of that country.
Our concept is that there is an international umbrella out there that is Wood Group, but with a matrix of companies. Wood Group is a very decentralized company with a small number of corporate staff, therefore our Russian company needs to be very much in line with the culture and recognize the great skills and technology base that Russia has. Our role is to see where we fit; define our differentiation and to recognize what we have that can add value to this extraordinary and fast growing Russian oil and gas business.
OGE: Will you joint venture with Russian companies?
Sir Ian Wood: We may or may not joint venture. We have to feel our way and bring with us our significant international knowledge in technology and applications. Where we can add value now is with electric submersible pumps (ESPs). We're No. 3 in the Western market behind Schlumberger and Centrilift. We have been selling pumps into the Russian market for over 10 years. We currently have an operation located in Nizhnevartovsk, with over 120 employees, primarily working for TNK-BP. We see significant opportunities to not only sell new equipment but also bring Western repair and service technologies to the Russian market, which is the largest single ESP market in the world.
We want to support existing Russian technology with our western know-how. In Russia there's a large indigenous ESP manufacturing business and a huge amount of installed Russian equipment. But, the run life of the Russian pumps is significantly less than the Western pumps. In order to maximize our clients' significant investment in installed Russian equipment, we believe we can extend the run life of Russian manufactured equipment through a combination of our component design and application engineering for optimum results. We will use Russian manufactured components, as well as Western, to repair and manufacture ESP equipment in Russia.
OGE: You have the beginnings of this already in Nizhnevartovsk, correct?
Sir Ian Wood: Actually, we are well beyond the beginning, we have a significant manufacturing and repair capability already in place. With over 120 employees, we are involved in adding more and more local value to our products and services. We are also beginning to provide application engineering that will ensure the proper equipment selection based on the individual well characteristics.
OGE: In what areas besides ESPs can Wood Group add value in Russia?
Sir Ian Wood: The other area is engineering, project planning and management. To support this effort, we have opened a new office in Moscow utilizing a large number of Russian engineers. Wood Group is very strong in offshore engineering and engineering for large offshore platforms. I would guess that we've engineered about a quarter to a third of the large offshore structures in recent years. We have a very strong position in that market through our companies Mustang Engineering and Alliance Engineering in Houston and J P Kenny, which is a world leader in subsea engineering and pipelines. So we've got some real expertise here.
Rosneft is just beginning to go offshore. So we think we have the potential to take some of our offshore expertise on the engineering side and do some of the conceptual work on the front end. We have a great deal of experience on the conceptual and FEED side.
We're also very strong in project management - the management of construction, logistics and planning both greenfield and brownfield. That's an area where there's potential for significant improvement in Russia, and it's an area where we will utilize our Brownfield experience to provide production enhancement, even in relatively small projects.
OGE: Back to ESPs, can you expand on your manufacturing plans? What about acquisitions?
Sir Ian Wood: It's not a secret that one of the domestic manufacturers is seeking a buyer. But it's a very strong time in the market and frankly not a good time to be making acquisitions. We will develop a supply chain where we'll end up manufacturing parts in Russia and we will continue to provide parts from the United States. I think we'll produce a better combined motor that way than we would if we looked to buy one of the domestic players. We'd create better value and we've got what it takes to develop an operation here with real differentiation that will benefit our customers.
Throughout the world, we're very good in performance contracting. We have a number of contracts around the world where our compensation is based on the run time of the motor. So we put a lot of development money into enhancing the reliability of the total ESP system, which is aimed at increasing the run life. We don't have such a wide geographic footprint as Centrilift or Schlumberger who both produce good equipment and have been in business for a long time. As a result, we tend to pick our markets quite carefully and clearly Russia is a target market.
OGE: From the point of view of Wood Group's global business, where does China fit and where does Russia fit in terms of percent of your total activity?
Sir Ian Wood: We're all looking at how we can take advantage of the Chinese opportunity and I do see it more as an opportunity than a threat. Already, for our wellheads and valves business, we have a very large manufacturing business in China that is producing a large amount of our products and supplements our main wellhead and valve manufacturing business in Shawnee, Oklahoma. In the wellheads and valves business we've just won a very large contract with Aramco in Saudi Arabia and part of that contract is to establish a manufacturing plant in Saudi.
As for Russia, right now, as a share of our global business, it's tiny. But we're still breaking into Russia. We're learning. We try to avoid making big decisions. We try to avoid picking a major partner up front. We'd rather get in and learn a bit about the market and who's who and what is our differentiation and where we fit in. We're still at that stage in Russia.
OGE: So where will Wood Group be in three to five years time in Russia?
Sir Ian Wood: I think we will successfully grow the ESP business. This is such a large market; something like 30 to 40 percent of the world's ESPs are in Russia. That in itself will lead to the fulfillment of our goal of becoming one of the more significant players in ESPs in Russia. I frankly don't know about our other businesses, it depends on where we fit and where we don't. And it's a challenging market where you have to be very cognizant of the sensitivities of the Russian operators. They are quite rightly attached to Russian content and doing things the Russian way.
OGE: What about Russia's future offshore and do you have any thoughts specifically on Shtokman and Gazprom's newest stated intention to work directly with foreign contractors?
Sir Ian Wood: Offshore looks to be one of the most exciting potential areas. Also there are very large areas not yet explored. It will undoubtedly challenge new thinking in Arctic engineering. We at Wood Group have significant experience in deepwater engineering. Mustang and J P Kenny are world leaders in topsides and subsea process.
So I guess Russia is similar to the North Sea in that the North Sea was a new technology frontier for offshore installations which at the time were in 300 to 400 feet of water. The North Sea was also developed alongside several cities that were in a position to service that new frontier. So this suggests that there will be some very exciting things happening here, though I suspect it will be over quite a long period of time.
OGE: What are some of the technologies to consider in developing offshore today?
Sir Ian Wood: I guess one of the frontiers of technology we've been working on is deepwater. We did the deepwater for BP in a Gulf of Mexico project which has had about $350 million of engineering in it and that was going down 7,000 or 8,000 feet. So now we're developing engineering in ultra-deep water. That's very important. There's a lot of oil and gas to be found on shelves down to 10,000 feet.
With ESPs, heavy oil is quite demanding and we're producing an ESP that will effectively work in heavy oil. That's an area where we're quite active. Our current focus is primarily on Canada On the pipeline side, the most challenging project we're involved in is the Gorgon development in Australia with Chevron and ExxonMobil. It's a very challenging seabed and we're doing the pipeline engineering and flow assurance.
OGE: What are some of your international projects that might have application in Russia?
Sir Ian Wood: We're applying cost effective Gulf of Mexico technology in the North Sea. An example is the Clair gas field and, in the Norwegian sector, the Valhall platform. Instead of the usual North Sea gold plated technology we're applying know-how that is fit for purposes. A breakthrough contract for us in the US was the Diana field for ExxonMobil. We have very significant knowledge and experience now in offshore engineering, which we can apply in the Russian market.
OGE: Any parting thoughts about Russia?
Sir Ian Wood: I don't think there's another area in the world where there is such a potential to increase the efficiency of production recovery. And that's a very key business for us as well. Wood Group does its best with customers around the world who are willing to outsource some of their operations. For example, we run part of BP's oilfields in Colombia. We've just won a large offshore maintenance management contract in Trinidad, again for BP, and we have a number of significant managed brownfield modifications and maintenance contracts for offshore structures in the North Sea. This is an area where we can add a lot of value.
But Russia is not at this stage an outsourced market. This is more a market where you get a specification, get the cheapest price and get the job done. We won't compete on costs, we will compete on added value. That's what foreign contractors need to do to be successful and that's what we're going to try to do.