Print

N.V.Komarova, Chairperson of State Duma Committee for Natural Resources and Environmental Management

“The need for development of the national oilfield services market in the fuel and energy sector is dictated by time”

The future of the Russian oil and gas industry, its competitive strength in the international market is getting increasingly dependent on efficient technologies, exploration and production methods.
Today, against the background of the growing domestic and world consumption, substantial depletion of traditional fields and reduced hydrocarbon production, Russia faces a strategic need to develop new prospective territories of East Siberia, Yamal Peninsula, the shelf of the Russian Federation and deep horizons of the West Siberian petroleum province.
In decades to come, Russia plans to implement a number of oil and gas projects that are unique in terms of both scale and cost. The projects include development of the discovered fields of East Siberia and continental shelf of the Russian Federation. Russia’s future oil and gas production centers are unique.
Offshore exploration and drilling carried out generally by USSR Ministry of Geology in 70-80ties of the past century that were smaller in scale than onshore research, allowed to discover 10 fields including 4 major ones with hydrocarbon reserves estimated at 100-130 billion tons of oil equivalent.
No doubt, resuming geological surveys and starting offshore production, as well as harnessing the resources of Yamal Peninsula, East Siberia and deep horizons of the West Siberian petroleum province will lead to a series of large discoveries.
Success of the ambitious plans depends on the ability of Russian oilfield services, geophysical and drilling companies to start large scale exploration of new territories, and on the ability of scientists, machinery and vessel manufacturers to provide service and production companies with equipment, navigation systems, telecommunication devices, materials and technologies.
Unfortunately, the current abilities of public manufacturing enterprises and private exploration and drilling organizations and companies are not up to the mark to perform the tasks. And there are many factors behind it.
The existing federal law “On placement of orders for goods, works and services for government and municipal needs” with regard to government contracts for geophysical surveys and drilling operations does not take into account the probabilistic nature of expected results, specifics of planning and performance period, the need for regular adjustment of type and scope of activities depending on the results.
The result is that the state orders not new discoveries, not reserves increment but types and scope of works, which are the means but not the goal. Paradox is evident.
The fewer results are obtained (the fewer discoveries are made) the more funds will be allocated from the federal budget to finance geological exploration and maintain production rates. The trend is gathering pace. Therefore, we stimulate budget spending regardless of the results. This problem was well-known and plagued the geology even in the 80-90ties of the past century when the state geological service worked most efficiently. This largely determined the appearance of unproved reserves and their further write-off. The scale of this disaster is immense. Unfortunately, in recent years governmental agencies have been reporting on “achievements” such as unreliable estimation of potential reserves with probability not exceeding 10%, or with increment based on oil recovery factors of long-operated oilfields.
It should also be noted that technology gap in geological engineering is getting larger. All this takes place despite the fact that Russia has unique human and scientific potential, which is unfortunately not endless.
It is a crime to be unaware that smart services that cost higher allow to achieve reserves growth and reduce oil and gas production cost.
For example, advanced technological solutions based on reliable reservoir data allow to drill one well instead of three wells, but this well has high flow rate and efficiency. The cost of these solutions is rather high, because, say, cost of drilling may reach 40% of all capital investments in oil production. How can we overcome the destructive trends? How should we take advantage of the chance?
The answer lies on the surface. Major projects in the Russian oil and gas sector should be supported by uniform laws, dynamic development of oilfield services market and independent oilfield services companies. RF Government should formulate decisions to develop R&D, manufacturing and technological resources of the geological engineering segment of the oilfield services market able to attract expertise and investment.
Today, approximately 300 oilfield services companies operate in the Russian market that is estimated at $10-15 billion annually. Oilfield service divisions of oil companies account for nearly 60% of the market, independent Russian companies have 15 %, and international companies’ share reaches 25 % and grows every year. International experience shows that transnational oilfield service corporations were formed through mergers and consolidation of smaller service providers. Asset consolidation processes are now underway in the Russian oilfield services market.
However, consolidation of the oilfield service assets is performed by large western market players who seek high added value that does not require substantial investment in the absence of clear regulations and laws. In fact, we give all our expertise and human resources without getting anything in return.
Here I would like to mention that Association of Russian Oilfield Service Companies have been established in recent months in Ural Federal District at the initiative of existing oilfield services companies and under the auspices of Federal District government to oppose hostile merger practices. The goal of the Association is to retain legal independence and national identity of its members, maintain and expand their scope of operation, use the synergy effect of the consolidation to enhance their competitive strength.
It is important but the most important thing is to switch to innovation-based approaches in geological engineering and drilling, to long-term alliances with manufacturing companies and research organizations. This will allow each member and the Association as a whole to undertake large long-term contracts including turn-key projects such as discovering of new fields without production sharing. Royalty but not right, project but not order, result but not scope of drilling, whole but not part – these simple principles constitute the ideology of strategic development of the Association members.
As chairperson of the Supervisory Board of the Association, I am aware of the importance of this initiative and the financial risks associated with geological uncertainty of expected results.
Given the high degree of capital intensity of offshore projects, development of East Siberian fields and West Siberian deep horizons, lack of efficient mechanisms of legislative, administrative and tax stimulation of field exploration in new territories, the development of measures to mitigate the said risks can and should become the basis for the RF government decision on forms and mechanisms of both local and international companies’ participation in development of new RF oil and gas provinces. So, what is the role of smart geological engineering services in this process?
Today, investment resources of oil and gas companies are restricted by internal regulations and interests of the owner (shareholder). In fact, large companies should invest only in projects with predictable production and economic results. Therefore, given the probabilistic nature of geology it cannot become an attractive investee for oil companies. Results of these activities are critical for them, as reserves increment increases companies’ market capitalization. And again, there is a paradox! Geological exploration results are important for an oil and gas company from the viewpoint of capitalization, but investing in exploration is not profitable. That is why the companies’ geological exploration budget is rather limited. Results of geological exploration are important for the state from the point of view of increase in value of natural resources, but the state does not know how to make the exploration efficient. Thus, it is clear that the oilfield services market can and must become the source of objective geological results (reserves increment) and technologies for hydrocarbon extraction (pilot commercial production). There is a reasonable question, “Where today’s Russian oilfield services market would get the funds?” The answer is simple, “In the accumulated capital market”.
However, to use the funds for geological exploration purposes, we need to adopt the practice of concluding civil license agreements that would provide, for example, for “geological” risks sharing.
I am referring to stimulation of oilfield services providers to discover fields through sharing discovery bonuses, with fifty-fifty operating costs sharing. Thus, the state as the single customer interested in the results announces the need for geological exploration, say, in offshore fields. Terms for your company’s inclusion in the offshore development pool can be defined in a contract (availability of skilled personnel, sufficient authorized capital, technologies, experience, etc.), and the selection criterion may be the application principle, that is your company’s readiness to perform a full range of geological engineering surveys in the announced territories, based on co-financing principles.
Operating costs may be feasibly shared in different proportions by the state and oilfield services companies depending on the degree of exploration maturity of territories. For example, if you apply for additional exploration and development of Yamal fields where maturity degree is rather high, operating costs may be shared 70%-company, 30%-state, regardless of the exploration results. In case of discovery and reserves growth, the service company would get a bonus that may be stipulated in the contract.
This is the essence of geological risks sharing. Being certain of its efficiency, the oilfield services company is prepared to raise funds and invest in geological engineering surveys, while the state retaining the right to use mineral resources or a field operator possessing this right are prepared to share the bonus from further development of the resources.
Thus, the state’s or field operator’s guarantee to consume the geological engineering services would create the stimulus for establishing a new accumulated capital market attractive for investors - oilfield services market that would allow to get added value before production; increase the value and investment appeal of fields prior to their transfer to the field operator; reduce unit cost of resources production and growth thus increasing long-term competitiveness of Russian hydrocarbon resources in the world market.
And I am sure that innovation potential of Russian companies in the sphere of geological engineering services, the still existing opportunity to keep human resources within local exploration companies against the background of the structural reforms of the state regulation system that have taken place in recent years, will provide us with a unique opportunity to create new instruments for implementation of projects such as offshore development, development of fields of Yamal Peninsula and deep horizons of the West Siberian oil and gas province.

  Previous  |  Next  

Up