The state loses market, 27 May 2013

Vladimir Borisov on how to preserve the national oilfield services

Interview, «RusEnergy» Information agency, «Exploration and Production in CIS» magazine, May 27, 2013.

Russian oil and gas companies make their choice towards foreign oilfield service contractors. Consequently, the latter own approximately 70% of oil and gas services market in the country, says president of Tyumen Association of oil and gas service companies Vladimir Borisov. He shared with RusEnergy his ideas on how to balance positions in the industry.


WTO without adverse effects

RusEnergy: In the year of 2012 Russia joined WTO. You can tally up primary totals: has Russian oil and gas service sector felt the changes?

Vladimir Borisov: In my opinion, the big changes have not happened yet. Russian oil and gas service sector works, rolling up its sleeves. So far we have managed to keep the financial and operational performance at the same level, and even to seek growth.


It is necessary to understand peculiarities of the Russian national character, adventurous and receptive to changes in extreme situations. WTO accession can be a strong indicator of problems within enterprises, that clearly indicates the current difficulties in relations between the state, the large vertically integrated oil companies and service companies, and that powerfully stimulates the market and government leaders to catch up to the level of countries – world leaders.


All the changes will be taking place gradually, during the next 15-20 years. But if the government will not take the necessary measures to support domestic companies, within the WTO membership conditions there will be no hopes remaining for the survival of the national oil and gas services and industrial production.


RE: What is the Reason? Is it low competitive strengths?

V.B.: First, there are things that are not related to the WTO: imperfection of laws, arbitrary fiscal and regulatory authorities, intervention of security forces in the operations of enterprises, bias and inefficiency of the courts, where business can be taken away for any reason. These problems appear to be more vital than the consequences of joining the WTO.


In addition, there is something else: we are currently facing a balance that suits oil and gas majors and foreign oilfield service companies. Certain loyalty is reached between them, lobbying forces` interests considered in the government and Duma, at the same time, the task of creating large Russian oil and gas service corporation was announced and defined. In this plan, there is no place for small and medium-sized domestic companies.


RE: What part of the domestic oil and gas services market today belongs to Russian contractors?

V.B.: Russian contractors have only 30% of the «pie». And predictions are difficult to make on how to change this balance. Probably, in the near future the Russian companies will remain within 30 percent of the market share, or it will drop to 20% by increasing the proportion of foreigners. Then, many companies will be disappearing or taken over.


Foreign oilfield contractors holding approximately 70% of the market, often "skim the cream" by obtaining the most profitable orders and easy projects. Young and promising personnel tend to walk away to them too, as well as equipment and technologies they use are primarily of their own origin – from abroad. Especially because of the WTO accession that made these imports much easier.


Ambiguous foreigners

RE: Do you think that international service contractors operating in Russia – is a negative thing? What about the latest technologies that they are willing to offer? The structure of reserves, as known, is worsening. It is technology that allows maintaining the production level.

V.B.: It is a moot point. I have come across the cases of re-export of Soviet technologies, and this will confirm many of my colleagues. Some, mastered and applied in the times of Soviet Union, now are returning from abroad under another sauce and international patents.


But there are, of course, positive aspects associated with operations of foreign contractors in Russia. Here is a simple example: about 10-15 years ago morals in the camps and in the oil fields were quite free, and drinking was common. Today it is completely out of a rule, drunken shift workers not even allowed on the plane and immediately fired.


In oil and gas services the discipline and safety requirements has grown considerably and the quality of work has increased. There are changes in the social aspects: people become more responsible, raises prestige of education and science, craftsmanship and engineering professions, self-esteem is growing, as well as lean approach to work, care for the environment and ecology. No matter how hard to accept, it happened due to foreign companies by their high standards, requirements, intense competition for customers and staff.


But, despite this, we cannot just go and leave almost the entire industry to foreigners.


RE: There are cases where international companies acquire Russian enterprises that live out their last days without orders, etc. As a result, companies revived, retaining personnel and business. How do you feel about these facts?

V.B.: There are precedents when Russian oilfield contractors changed their owners and received a foreign «residence permit».However, it is one of the most desirable and bloodless ways for foreign companies to emerge in Russia. In oil and gas service business there are no great opportunities for portfolio investment and stock speculations, so the companies are bought at the root, to perform serious work.


For us it is a better option than creating a competitor in the form of a new company, branch or representative office. Despite the change of owner, personnel is retained, as well as achievements and relationships in the industry, financial resources come into service, together with new technologies and equipment; is improving quality of management, living standards in the companies and the general approach to work. Russian companies follow these tendencies, sometimes due to employee turnover.


And sometimes the opposite happens: staff is starting to run away, to complain about the exploitative approach of expat managers, the active involvement of immigrants and barbaric methods when dealing with natural resources. It is more the case for some Asian companies, and to less extent – for Western.


But such a scenario still does not stimulate the development of our industry and technology. The state loses market.


RE: There are objective reasons for this: for example, high-tech services are almost 90%-owned by international companies, because they have a serious advantage – experience of developing offshore fields, or shale deposits.

V.B.: According to my estimates, the market should belong to the Russian companies by 50%. I am not sure about the better results. One has to accept the fact that the WTO requires equal conditions for all the participants, and we lack technologies that allow working on complex projects or offshore fields, lack high quality, efficient and modern equipment. Finally, the youth at the first opportunity aspires to leave for a foreign company.


We realize that we cannot participate in challenging projects, like development of the Bazhenov formation, offshore or shale projects. Welcome, international experts and global industry leaders, to participate in them.


But above all, we would want that the oil companies used the services of foreign companies in the absence of technological and production capabilities of domestic companies, in the absence of offers in the domestic market. It is often happens just the opposite now. «Cream skimming» - the development of simple and affordable, in terms of existing infrastructure, projects – is given away to foreigners, and complex and costly projects given on a residual principle to our companies.


Like Norway and China

RE: What form of support may be provided to the Russian oilfield services, taking into account WTO rules?

V.B.: Development of oil and gas services industry requires the support of scientific and technological development, development of industrial parks. It is also a package of measures that could change the current contractual practices and methodology of tax calculation, the work of fiscal authorities and banks. By the way, this concerns not only oil and gas services – businesses of all sectors dream about it.


Dumping issues need resolutions. We are constrained in financial capacities as we do not have parent companies abroad with a huge investment fund to operate below cost. Therefore, industry equipment and services price guide is overdue, that individual players were not allowed to significantly understate calculations and win tenders in that way. Selection should be based on the analysis of the contractors` ability to provide a quality service or product at the price that was recommended, for example, by a special agency of the Ministry of natural resources.


It was said a lot about non-recovery of pre-crisis level of prices (meaning Crisis of 2008), as well as about the practice of contracting for a short-term period not exceeding one year, with the terms of conducting the work at contractors` own expense, when the bills are paid 60 or more days after the job was done.


While, in this case, the contractor is obliged by law to pay VAT much earlier after completion of work. The company may not have the current funds to pay taxes, and fiscal authority has the right to block the account in the bank, paralyzing the work of the entire company and halting works in progress. I think there is a need to resolve this aspect of the relationships with customers.


As a result of supporting measures oil and gas service will rise, just as it does in the South-East Asian electronics industries, where they have adopted relevant programs of strategic national importance. In the long term, I think, common sense should win, and forecasted market value of $ 25 billion will belong by 50% to Russian companies.


RE: Are there any instances in the world, when the state – a member of WTO supported local service companies?

V.B.: There are instances, like Norway and China - countries that joined the WTO earlier than Russia and successfully protected enterprises in the oil and gas industry at the legislative level. In Norway, 70% of services operated by local companies. Those foreigners who want to work outside of the allotted part of the market can become subcontractors to the Norwegians. In China oilfield services are engaged only by national companies. The state also successfully subsidizes the export, selling drilling rigs on related credit.


There is another very lively example, however, relating to the state support at the international market. Tyumen in April hosted a forum of Finnish companies, organized at the high level – participants were welcomed by the Plenipotentiary Ambassador of Finland in Russia. 10 Finnish companies were presented, but a high-level national official was present too – value the quality of event! Of course, the receiving party should respond adequately – it did: local officials were there, they gathered Tyumen businesses and mass media.


Compare this with how Russian companies on their own and alone often make their way to foreign markets, acting at their own risk, not getting any support from our embassies and consular offices. Our officials do not have any thoughts about how to come down to a simple support and promotion of Russian businesses.


Returning to the Finnish forum, I would want to pique the flagships of the Russian business. Key support for the event provided «Fortum» - the largest heat-and-power company in Finland, and Tyumen region, as well. The Finnish have built the most modern and efficient central heating plant in Nyagan, rebuilt and operate CHP in Tyumen.


Having well strengthened their position in Russia, they start to promote other Finnish companies, of a smaller scale. This anchor principle of coordinated promotion of a national leader in the industry and the state in the development of small and medium-sized businesses in other countries must be taken into service.


RE: Tyumen region, stimulating oil and gas companies to cooperate with local contractors, has established 8% compensation to the cost of equipment and materials ordered at the Tyumen enterprises. According to the regional government, it also subsidizes service companies the interest rates on loans, compensates part of the costs of research, development and engineering works. Does this support make any significant effect?

V.B.: In general, all activities and arrangements, which we achieve in the negotiations with the regional government, have a positive meaning, and we appreciate the attention that the governor and his team draw on the development of business climate. However, judging by the state of oil and gas services industry, desires and efforts of regional authorities to support us are not enough. We need solutions at the federal level.


In the meantime, there is a tendency of bureaucratic reverence towards foreigners of all stripes. I would like to wish the people in power who are so eager to engage in the development of international relations, to use their knowledge of foreign languages and the experience gained in the course of overseas travels, turn the vector of their attention from the internal to the external direction. It is necessary to deal with the promotion of Russia and our oil and gas service companies in foreign markets, starting with neighboring Kazakhstan, the Caspian states.