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The Challenges Ahead: Evolution of the Market For Oilfield Services and Equipment in Russia

The Challenges Ahead: Evolution of the Market For Oilfield Services and Equipment in Russia. Thane Gustafson Cambridge Energy Research Associates. Moscow, December 2003. Russian Oil Production Trends (million barrels per day).

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The Challenges Ahead: Evolution of the Market For Oilfield Services and Equipment in Russia

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  1. The Challenges Ahead: Evolution of the Market For Oilfield Services and Equipment in Russia Thane Gustafson Cambridge Energy Research Associates Moscow, December 2003

  2. Russian Oil Production Trends(million barrels per day)

  3. Projected Production by 2010: The West Siberian “Brownfield” Will Still Dominate (million barrels per day/million metric tons per year) Timan-Pechora .5/25 Condensate .3/15 Undiscovered .2/11 Sakhalin .5/24 Russian Core 8.3/ 413 Russian Sector of the Caspian .2/8 East Siberia .2/8 TOTAL RUSSIA 10.1/503 Source: Cambridge Energy Research Associates. 30704-2

  4. From Brownfield to Greenfield:How Tight the Bottleneck?How Long the Delay? 2012 2008 Source: Cambridge Energy Research Associates. 30709-8

  5. 4.50 4.00 3.50 Average 3.00 2.50 US$ per bbl 2.00 1.50 1.00 0.50 - Surgut Lukoil Yukos Sibneft Tatneft TNK Int. Rosneft TNK-BP (check) YukosSibneft (e) Source: UFG Research estimates, TNK-BP The Leading Russian Companies Have Kept their Lifting Costs Low (2002): But How Long Can They Continue Doing So?

  6. What will Drive Cost Trends in the Brown Fields of West Siberia? • The dollar prices of key ruble-denominated inputs will continue to increase: • Steel: Prices of casing, pipelines, processing equipment will triple by 2010 • Wages: Will also triple • Electricity: Many pumps are electrically-driven; prices are being deregulated • Oil toolsand rigs: Most of these are produced in Russia; prices will rise with expanding demand and real appreciation of ruble • Opportunities for increased productivity? • Western and offshore competition: Favored by currency movements, but difficult to overcome habit of choosing lowest-cost contractor • Potential from Spin-Offs and Competition: May prove to be illusory as monopolist faces monopsonist at local level

  7. Growth of the Work-over and Service Market Source: OMZ Source: TNK.

  8. Outlook for Categories I and II: Well Maintenance, Workovers, and Field Redevelopment

  9. Outlook for Category III: New Wells in Old Fields

  10. 35000 18.0% 16.0% 30000 14.0% 25000 12.0% 20000 10.0% metres drilled 8.0% 15000 6.0% 10000 4.0% 5000 2.0% 0 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 % exploration Expn Drilling Devt Drilling Sources: InfoTEK, RPI FSU O&G Statistics Yearbook, Oil & Capital Exploration and Development Drilling in Russia

  11. Evolution of Demand for Oilfield Equipment and Services to 2010 Category IV is New Wells in New Fields (incl. transportation, etc.) Category V is New Fields in New Areas (incl. new infrastructure, etc.)

  12. Russian versus Western?Who Has the Market Share?The picture in the early 1990s Edge (In theory) Source: Cambridge Energy Research Associates. 30709-5

  13. The Market Shifts in the Later 1990s:The Western Opportunity Fades Opportunity Source: Cambridge Energy Research Associates. 30709-6

  14. Will the Market Shift Again in the Mid-2000s? Hybrids May Dominate, but Who Will Own Them? appreciation Source: Cambridge Energy Research Associates. 30709-7

  15. Possible Consequences of the Recent Troubles for the Oil Services Market • State Campaign against “Rape and Pillage”? • Pressure to return to “traditional” emphasis on infill drilling as opposed to “harmful” techniques to maximize per-well flow rates • Ban on “cherry-picking” by shutting unprofitable wells • Stricter enforcement of FDPs mandated by institutes • Pressure to explore more than is economically justifiable? • Rejection of 10-year R/P ration in favor of traditional 40-year • Implicit or explicit threats of license removal for non-compliance • Pressure to begin premature development of “rim” opportunities? • Some companies favored over others? • Rosneft, LUKoil, Surgut move ahead • YukosSibneft slows down? • TNK-BP becomes leader? • These possibilities will impact the size and shape of the oil services market

  16. THE BIGGEST CONSTRAINT AHEAD:The Race Between Crude Oil Available for Export and Export Transportation Capacity Source: Cambridge Energy Research Associates. 90304-7

  17. Possible Implications of Recent Troubles for Oil Transportation—and Thus for the Oil Services Sector • Tensions between the private sector and the state could produce slow-down or paralysis in decision-making • Yukos’s Daqing project may lose speed; yet Nakhodka pipeline is too uneconomic to go forward • Murmansk pipeline and terminal could get tied up in battles over state-monopoly principle and right of private stakeholders • The state may move to contain or shut existing loopholes for exports • By ending the “90% rule” on oil products export tax—and then raising export taxes • By raising railroad tariffs to snuff out non-Transneft crude exports • These could result in constrained exports, shut-ins, lower production—in a word, lower activity—and thus less spending on services

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