Russian ‘outsourced’ service market continues to evolve
Weatherford recently announced the purchase of TNK-BP’s oilfield service arm – a $650 million business with approximately 4% of the Russian drilling market by expenditure. The deal will attract 75 drilling rigs from TNK-BP, around 8.5% of the total rigs in the region in addition to 180 workover units. This positions the company as a major drilling and workover contractor, ranking them second in terms of drilling rig numbers to market leader Eurasia Drilling Company.
"This acquisition marks a pivotal moment in the Russian drilling sector," noted Andrew Reid of Douglas-Westwood. “Let us remember that the majority of wells drilling in Russia are on a turnkey basis – i.e. the drilling contractor provides not only the rig and crew but all associated equipment, services and consumables. The opportunity for Weatherford to push their own products will be material.” Reid continued, “Whilst this looks great on paper, the reality is that a new competitor has emerged that will alter the balance of Western and indigenous service providers and we would expect to see some changes to commercial practices and relationships in the region – opening up a number of opportunities for stakeholders.”
Expectations have always been that the proportion of the market controlled by in-house service arms of the major E&P companies would eventually be sold off and this has been occurring for over ten years. Prior to the Weatherford acquisition, 42% of the drilling and workover market has been held in house (2009). Most operators have tended to focus on the core exploration and production competencies, while investing little in their legacy service divisions. Many of the new investments in rigs and use of enhancing technologies have been outsourced in the recent past and this trend is expected to continue as we witness other E&P companies divesting their service businesses.
Market activity in the region has been subdued in the recent past, however, although it remains a significant multi-billion dollar market. “Exploration led work has declined, although development led activity is holding up, on a par with 2008,” noted Reid. ”Our expectations are that activity will be lower throughout 2009 than in the previous year and pricing will cool, although it is unlikely to be as drastic as thought as the Rouble’s devaluation strengthens field economics.
”The real opportunities in Russia are likely to emerge from 2010 onwards,” comments Reid. “Hydraulic fracturing of development wells in order to enhance production gives diminishing returns each time the process is conducted and in the more mature regions of Western Siberia the process is becoming ineffective as a means of stemming production decline. Services to enhance production growth from existing reservoirs will come from the drilling of new wells and increased focus on directional and sidetrack drilling.The last boom in activity and credit markets helped finance a number of badly-needed new rigs and associated equipment in Russia, in addition to initiatives to increase performance and thus capacity in the drilling market. As debt and
equity markets remain closed, the pent up demand and lack of capacity additions. This will put huge pressure on this market in the future. Opportunities will not only emerge in the drilling sector however, logistical infrastructure and the whole suite of support services and equipment will prosper.
