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2015 Russian oilfield service market: current state and trends October 2015
The O&G and oilfield service markets are facing uncertainty
Oil pricing forecast
High volatility and volatile trends •
A sharp decrease in oil prices late in 2014 has led to analysts downgrading their forecasts;
•
Dropping oil prices and negative expectations may significantly affect investments in production, which may result in a decreased mid-term supply;
•
The market remains volatile and unpredictable, which is partly due to political and economic volatility in oil producing regions.
120 USD/barrel 100 80 Adjusted for a potential sharp drop in the current prices
60 40 20 0 2007
2009
2011
2013
2015
2017
2019
Actual price WorldBank (October 2014) WorldBank (January 2015)
Future uncertainties
Russian oil service market, RUR billion
• 850 750
Future uncertainties to investment plans are expected to primarily affect drilling. However, the market players have not announced any plans to reduce production in the short- and mid-term.
• Oil companies are becoming increasingly focused on efficient technologies, which may result in a more active use of horizontal drilling, hydrofracturing, and well service/workover activities at the cost of traditional drilling;
650 550
• The uncertainty is further exacerbated by the fact that the market is dependent on the response from oil companies as well as on oil prices.
450
350 250 2007
2009
2011
2013
2015
2017
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
2019 2
For Russian producers, a drop in oil prices is offset by the depreciating Russian rouble and lower export duties.
Oil price, net of export duties
Oil price trends 4.5 4
-11%
120
3.5
100
3
70
3
80
-46%
2.5
60
-32%
3.5 2.5
50
+13%
2
40
1.5
30
1
20
0.5
10
60 2 1.5
40
1 20 0.5 0
0 Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
0
0 Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Global price, RUB '000/barrel (left-hand scale)
Price, net of duties, RUB'000/barrel (left-hand scale)
Global price, USD/barrel (right-hand scale)
Price, net of duties, USD/barrel (right-hand scale)
Jul-15
• A drop in USD oil prices has been offset by the depreciating Russian rouble, resulting in an insignificant decrease in rouble prices; • Lower export duties have left Russian producers with the rouble revenue exceeding the "pre-crisis" level while there has been no significant decrease in the USD revenue, if compared to global oil prices; • In terms of revenue, dropping oil prices have been offset by the depreciating rouble and lower export duties. • However, in the near future Russian oilers may see their depreciation-driven revenue eaten by an increase in tax burden.
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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Major players in the Russian oilfield service market in 2014
Market shares of the key players
• SurgutNefteGaz and Rosneft service companies hold a share of 23 percent in the market. This figure is likely to rise as a result of the plans by Rosneft to expand its service capacities in 2015. Another 7 percent is held by Tagras and Targin, which are focused on a single customer; • With the four major players enjoying 44 percent of the market, another 37 percent are held by mid-size companies, each having a market share of up to 2 percent. These companies are generally specialized in services that support well construction, well service/workover, and exploration.
13% SurgutNefteGaz
35%
EDC
11%
Schlumberger Rosneft Tagras
10%
Halliburton ARGOS Eriell
3%
SSK
10%
3% 3% 3%
4%
6%
InvestGeoServis Others
Source: SPARK, company data and Deloitte analysis
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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Production and exploration drilling
Exploration drilling, million m
Production drilling, million m -7%
mln m
+4%
19.4 1.6
20.2
2.7 3.6 3.8 4.9 4.1
5.0
1.6
1.8
2.9
5.8
Source: CDU TEK, * Deloitte estimates • •
*
-1%
+8%
Others 0.08
Bashneft 2.7
Russneft
3.5
Tatneft
0.11
2.6 3.1 4.2
Slavneft 4.9
Lukoil 5.9
6.4
2014
2015* Conservative
0.20
0.23
0.22
0.20
0.15
0.17
2013
2014
0.85
0.93
Gazprom neft
SurgutNefteGaz Rosneft
2013
+5%
mln m 21.9
20.8 1.7
+13%
2015* Optimistic
A potential year-end growth may be 4 to 13 percent. For example, the H1 2015 saw a growth of 8 percent from the same period in 2014; In 2015, Lukoil became the only key player to announce a drop in drilling. The other players are planning to either expand or maintain drilling volumes.
•
2015* Conservative
2015* Optimistic
Source: CDU TEK, *Deloitte estimates
Exploration drilling forecasts range from -1 to +8 percent, depending on the approach to be adopted by the companies during the H2 2015. The H1 2015 is up by 6 percent from the same period in 2014.
A conservative scenario is defined as maintaining the same drilling pace as in the H1 2015. An optimistic scenario is defined as keeping with plans for production drilling and maintaining the same growth rates for exploration drilling © 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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Directional and horizontal exploratory drilling
Horizontal drilling
Directional drilling -16%
mln m
+33%
mln m
16.6 1.5 2.4
14.0 1.6
Others Bashneft Russneft
2.7
1.5 2.8
Slavneft Gazprom neft
3.8
2013
Tatneft
4.3 0.3
0.9
0.8
1.3
0.5
4.6
4.4
5.8 0.4
Lukoil
0.9 0.4
SurgutNefteGaz 3.4
Rosneft
2014
Source: CDU TEK
1.0 0.3
1.4
1.6
2013
2014
Source: CDU TEK
• The figure for wells drilled directionally in 2014 is down by 16 percent from 2013. Among the leaders, Rosneft and SurgutNefteGaz have seen the most significant decline in drilling; • The figure for horizontally drilled wells is up by 33 percent from 2013, reaching 5.8 million kilometers. With an almost tripled increase in drilling, Gazprom Neft is the greatest contributor to the growth in drilling; • The production drilling market seems to be heading toward more sophisticated wells at the cost of reducing a total amount of drilling.
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Production wells drilled by region
Production drilling in 2014
Production drilling in 2013
Western Siberia 4% 3%
5%
4%
Volga Region
11%
12%
Eastern Siberia
Timano-Pechora
82%
Caucasus and Southern Federal District
79%
Far East
Source: CDU TEK, * Deloitte analysis
Source: CDU TEK, * Deloitte analysis
• The regional drilling 'map' generally remains the same. Western Siberia is the sole leader, accounting for 80 percent of the total volume of drilling in Russia. This region saw only an insignificant decrease in drilling in 2014, down by 3 percent from 2013; • The end of 2014 saw the prospective oil and gas regions (Eastern Siberia and the Far East) increase their market share by 1 percent each due to Western Siberia.
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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Exploration wells drilled by region
Exploration drilling in 2014
Exploration drilling in 2013
Western Siberia
6% 4%
7%
Volga Region 5% Eastern Siberia
30% 59%
Timan-Pechora Basin
25%
58%
Caucasus and Southern Federal District Far East
Source: CDU TEK, * Deloitte analysis
Source: CDU TEK, * Deloitte analysis
• The regional drilling 'map' for exploration is significantly different from the production drilling 'map‘; • The regions have continued to maintain generally the same positions on exploratory drilling while the Volga region has seen the most significant decrease, down by 5 percent; • The share lost by the Volga region has been taken up by prospective oil and gas regions that have increased their share: Eastern Siberia, the Timan-Pechora Basin, the Caucasus, the Southern Federal District, and the Far East.
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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The drilling market
Drilling demand in 2014
Drilling supply in 2014
2% EDC
2%
Rosneft
2%
8%
SurgutNefteGaz
25%
28%
29%
RN-Burenie
20.2 mln m
SurgutNefteGaz
Gazprom Neft
20.2 mln m
Eriell 14%
Slavneft RussNeft
Tatburneft
2% 3% 3%
21% 21%
Lukoil
6%
Tatneft
Targin 20%
14% Others
Source: company data
Bashneft Others
Source: CDU TEK
• The four companies that have the highest amount of drilling account for 80 percent of the drilling demand; • The market of drilling providers is far less concentrated: EDC is the only independent provider with 28 percent of the market; • Independent drillers may see their market share shrink if Rosneft continues to expand internal drilling services.
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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The well service/workover market
Service/workover demand in 2014
Service/workover supply in 2014
SurgutNefteGaz
Rosneft EDC Tagras
30%
9%
Rosneft
16%
1%
20%
27%
3%
Lukoil
EOR and Well WO Co.
4%
Tatneft
ARGOS
4%
Gazprom Neft
Targin
Bashneft
5%
6% 6%
20%
4%
Integra Other service companies
Slavneft 15%
Internal services 2%
25%
RussNeft Others
3%
Source: company data, Deloitte analysis, CDU TEK data
Source: CDU TEK, * Deloitte analysis
• The four companies leading in terms of the volume of well service/workover activities account for over 73 percent of the market, with smaller companies holding a share that is twice as low as their share in the drilling activities. This means that smaller companies are focused on maintaining their existing capacities rather than on growing production; • The market features many smaller service providers with a total share of 20 percent. A share of 9 percent makes EDC the largest independent provider in the market.
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10
The merger and acquisition market Unprecedented level of activity
Mergers and acquisitions
•
In November 2014, Halliburton and Baker Hughes, second and third largest oilfield service providers in the world, agreed to exchange their assets. The deal is expected to be closed in the H2 2015;
•
In July 2014, Rosneft paid the Weatherford Group USD 398 million, acquiring eight companies that provide drilling and workover services in Russia and Venezuela; As a result, Weatherford's share in the Russian oilfield service market has reduced while Rosneft has obtained assets to build internal oil services to cover, to a significant extent, the needs of the head company;
•
• •
Presidential Order of 19 February 2015 has made 25 geological enterprises part of OAO Rosgeo; This merger will help Rosgeo pass a threshold of USD 20 billion as early as 2015 to join the leaders in the geophysical exploration market;
•
In August 2015, Rosneft paid USD 140 million, acquiring full ownership of OOO Trican Well Services, a Trican subsidiary in Russia; As part of the deal, Rosneft has obtained assets to boost efficiency of hydraulic fracturing services and well construction processes;
•
•
In late January 2015, Schlumberger announced an arrangement to buy a stake of 45.65 percent in EDC at a price of USD 1.7 billion; With Schlumberger's plans to acquire full ownership of EDC within three years, the Russian Federal Antimonopoly Service has decided to take a closer look at the deal. As a result, the deal has been postponed; In September 2015, Schlumberger scrapped the deal;
• •
Insolvency cases •
In 2014, RU-Energy Group, a holding company providing oilfield services, was declared bankrupt due to cash flow imbalances.
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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Challenges and trends in the Russian oilfield service market
Controversial impact from sanctions: •
Difficult access to capital
•
Difficult access to advanced technologies and equipment
•
Increased demand for services from Russian companies
Oilfield service market:
Pressure from oil companies:
• Key players maintaining their market positions
•
• Oil companies developing internal and affiliated services • More focus on market diversification and exports, which is partly due to the competitive rouble
•
• •
Rouble-denominated contracts for oilfield services Pressure for price reductions and better quality Adoption of the comprehensive approach to bid evaluations Increased focus on auxiliary well construction services
• Consolidating the market • Declining profitability
Insufficient resources: •
Lack of qualified labour
•
Lack of competencies and knowledge at local companies
•
• More focus on efficient operating and investing activities • Staff cuts • Shorter planning cycles
Need for investments in fixed assets
Cost pressures: •
Costs and investment value dependent on exchange rates
•
Decreasing opportunities for accessing investments; growing reliance on internal resources
Source: 2015 Oil and Gas Outlook Survey, Deloitte analysis © 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
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Contacts Authors Elena Lazko CIS Oil & Gas Leader +7 (495) 787 06 00
[email protected]
Alexey Nesterenko Senior Manager, Consulting, Strategy & Operations in Energy & Resources Group +7 (495) 787 06 00
[email protected]
Gennady Kamyshnikov CIS Energy & Resources Leader +7 (495) 787 06 00
[email protected] Audit Steve Openshaw +7 (495) 580 96 80
[email protected] Kelly Allin +7 (495) 580 96 80
[email protected]
© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited
Tax and legal
Energy & Resources regional leaders
Andrey Panin +7 (495) 787 06 00
[email protected]
Almaty Anthony Nicolas Mahon +7 (701) 7400 199
[email protected]
Corporate finance and valuation Yegor Popov +7 (495) 787 06 32
[email protected]
Kiev Artur Ohadzhanyan +38 (044) 490 90 00
[email protected]
Konstantin Kondakov +7 (495) 787 06 32
[email protected]
Baku Nuran Kerimov +994 (12) 598 29 70
[email protected]
Upstream Oil&Gas Advisers Lubov Gavrilova +7 (495) 787 06 00
[email protected]
Global Energy & Resources Leader Rajeev Chopra +44 7775 785350
[email protected]
Robin Matthews +7 (495) 787 06 00
[email protected]
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