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2015 Russian oilfield service market: current state and trends

October 2015

2© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited

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2007 2009 2011 2013 2015 2017 2019

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.

Future uncertainties

• 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;

• 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.

0

20

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60

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120

2007 2009 2011 2013 2015 2017 2019

Actual priceWorldBank (October 2014)WorldBank (January 2015)

USD/barrel

The O&G and oilfield service markets are facing uncertainty

Adjusted for a

potential sharp drop

in the current prices

Russian oil service market, RUR billion


For Russian producers, a drop in oil prices is offset by the

depreciating Russian rouble and lower export duties.

• 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.

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1.5

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2.5

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3.5

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4.5

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

Global price, RUB '000/barrel (left-hand scale)

Global price, USD/barrel (right-hand scale)

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10

20

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Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

Price, net of duties, RUB'000/barrel (left-hand scale)

Price, net of duties, USD/barrel (right-hand scale)

-46%

-11%-32%

+13%

Oil price trends Oil price, net of export duties


13%

11%

10%

10%

6%4%3%3%

3%

3%

35%SurgutNefteGaz

EDC

Schlumberger

Rosneft

Tagras

Halliburton

ARGOS

Eriell

SSK

InvestGeoServis

Others

Major players in the Russian oilfield service market in 2014

Source: SPARK, company data and Deloitte analysis

• 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.

Market shares of the key players


5.8 5.0 5.9 6.4

4.94.1

4.24.9

3.6

3.83.1

3.5

2.9

2.7 2.6

2.7

1.71.6

1.8

1.6

2013 2014 2015*Conservative

2015*Optimistic

Others

Bashneft

Russneft

Tatneft

Slavneft

Gazprom neft

Lukoil

SurgutNefteGaz

Rosneft

• 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.

0.15 0.17

0.22 0.20

0.20 0.23

0.110.08

0.850.93

2013 2014 2015*Conser-vative

2015*Optimis-

tic

21.9

+13%

Production and exploration drilling

Source: CDU TEK,

* Deloitte estimates

Source: CDU TEK,

*Deloitte estimates

19.4

20.8

-7%

20.2

+5% -1% +8%

* 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

Production drilling, million m Exploration drilling, million m

• 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.

mln m mln m+4%


1.4 1.6

0.40.3

0.91.0

0.5

1.30.8

0.9

0.3

0.4

2013 2014

Directional and horizontal exploratory drilling

4.43.4

4.6

3.8

2.7

2.8

2.4

1.5

1.5

1.6

2013 2014

Others

Bashneft

Russneft

Tatneft

Slavneft

Gazprom neft

Lukoil

SurgutNefteGaz

Rosneft

14.0

16.6

-16%

4.3

5.8

+33%

Directional drilling Horizontal drilling

• 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.

Source: CDU TEKSource: CDU TEK

mln m mln m


Production wells drilled by region

• 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.

Source: CDU TEK, * Deloitte analysisSource: CDU TEK, * Deloitte analysis

Production drilling in 2013 Production drilling in 2014

82%

11%

4% 3%

Western Siberia

Volga Region

Eastern Siberia

Timano-Pechora

Caucasus andSouthern FederalDistrict

Far East

79%

12%

5%4%


58%25%

5%

7%

Exploration wells drilled by region

• 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.

Exploration drilling in 2013 Exploration drilling in 2014

59%

30%

4%6%

Western Siberia

Volga Region

Eastern Siberia

Timan-PechoraBasin

Caucasus andSouthern FederalDistrict

Far East

Source: CDU TEK, * Deloitte analysisSource: CDU TEK, * Deloitte analysis


25%

21%

20%

14%

6%

2%

2%2%

8%

Rosneft

SurgutNefteGaz

Lukoil

Gazprom Neft

Slavneft

RussNeft

Tatneft

Bashneft

Others

28%

21%

14%

3%

3%2%

29%

EDC

SurgutNefteGaz

RN-Burenie

Eriell

Tatburneft

Targin

Others

The drilling market

• 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.

Source: CDU TEKSource: company data

20.2 mln m

Drilling supply in 2014 Drilling demand in 2014

20.2 mln m


27%

25%15%

5%

4%

4%

3%

1% 16%

SurgutNefteGaz

Rosneft

Lukoil

Tatneft

Gazprom Neft

Bashneft

Slavneft

RussNeft

Others

The well service/workover market

• 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.

Source: CDU TEK, * Deloitte analysisSource: company data, Deloitte analysis, CDU TEK data

20%

9%

6%

6%

4%

3%2%

20%

30%

Rosneft

EDC

Tagras

EOR and Well WO Co.

ARGOS

Targin

Integra

Other service companies

Internal services

Service/workover supply in 2014 Service/workover demand in 2014


• 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;

The merger and acquisition marketUnprecedented level of activity

• 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;

Mergers and acquisitions

• 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 inRussia;

• As part of the deal, Rosneft has obtained assets to boost efficiency of hydraulic fracturing services and well constructionprocesses;

• 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.


Challenges and trends in the Russian oilfield service market

Source: 2015 Oil and Gas Outlook Survey, Deloitte analysis

Controversial impact from

sanctions:

• Difficult access to capital

• Difficult access to advanced

technologies and equipment

• Increased demand for services

from Russian companies

Insufficient resources:

• Lack of qualified labour

• Lack of competencies and

knowledge at local companies

• Need for investments in fixed

assets

Oilfield service market:

• 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

• Consolidating the market

• Declining profitability

• More focus on efficient operating

and investing activities

• Staff cuts

• Shorter planning cycles

Pressure from oil

companies:• 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

Cost pressures:

• Costs and investment value

dependent on exchange rates

• Decreasing opportunities for

accessing investments; growing

reliance on internal resources

13© 2015 Representative office of Deloitte & Touche Regional Consulting Services Limited 13

Contacts

Gennady Kamyshnikov

CIS Energy & Resources Leader

+7 (495) 787 06 00

[email protected]

Audit

Steve Openshaw

+7 (495) 580 96 80

[email protected]

Tax and legal

Andrey Panin

+7 (495) 787 06 00

[email protected]

Corporate finance and valuation

Yegor Popov

+7 (495) 787 06 32

[email protected]

Konstantin Kondakov

+7 (495) 787 06 32

[email protected]

Upstream Oil&Gas Advisers

Lubov Gavrilova

+7 (495) 787 06 00

[email protected]

Robin Matthews

+7 (495) 787 06 00

[email protected]

Energy & Resources regional leaders

Almaty

Anthony Nicolas Mahon

+7 (701) 7400 199

[email protected]

Kiev

Artur Ohadzhanyan

+38 (044) 490 90 00

[email protected]

Baku

Nuran Kerimov

+994 (12) 598 29 70

[email protected]

Global Energy & Resources Leader

Rajeev Chopra

+44 7775 785350

[email protected]

Kelly Allin

+7 (495) 580 96 80

[email protected]

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]

mailto:[email protected]









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