The Russian oil and gas industry, which was booming until recently, is now starting to suffer from the impact of the deepening economic crisis. This is primarily due to the steep decline in global oil prices and the decrease in purchasing capacity of the companies that traditionally have been the main consumers of oil and gas products. Nevertheless, the oil and gas industry still retains its status as a leading sector of the Russian economy. Moreover, as the Russian oil and gas market has matured, as illustrated by the giant companies Gazprom, Rosneft, Lukoil, TNK-BP and Surgutneftegaz acquiring smaller competitors, a market for independent companies offering field services and equipment has emerged. While the oil majors must now concentrate on core competencies – exploring, refining, and transporting their subsoil resources - and have therefore spun off their in-house field service operations, they still remain a leading driver of growth within the energy sector in terms of operation, service, equipment and technological development.
Over the past few years, the largest Russian oil companies have continuously increased their expenditure on infrastructure development, equipment purchase/repair and services. Last year’s market for services and equipment for the oil and gas sector is estimated at about $18 billion, with approximately equal market shares for services and equipment. However, due to the economic crisis, experts predict a 20% to 25% decline in this sector of the Russian market; thus the volume of services and equipment for the oil and gas industry in 2009 could return to the 2006/2007 level.
Even during the economic crisis, major oil and gas development projects already underway in the Yamal Peninsula, Sakhalin, the Timan-Pechora areas in Western Siberia and the Arctic shelf should result in technological upgrades as well as construction, infrastructure and other services for oil and gas field development. In the LNG segment, Gazprom chose France’s Total and Norway’s StatoilHydro as its partners to develop the $20 billion Shtokman gas field, and TNK-BP to develop the Kovykta gas field.
A distinguishing feature of the Russian market for services and equipment for the oil and gas sector at its current stage of development is the increased competition from both domestic and foreign companies. The number of Russian oil and gas equipment manufacturers has grown significantly and currently exceeds 15,000 companies. Though Russia’s technology is often old and its manufacturing facilities outdated, Russian products enjoy a price advantage, particularly in the transportation and pipeline segments.
Competition among importers has intensified as well, as evidenced by an increase in the number of tenders. Chinese companies, traditionally perceived as low-quality, low-cost suppliers, are working to improve their reputation as reliable suppliers of satisfactory quality products at competitive prices. Chinese government subsidies support equipment exports to Russia and help strengthen the position of China’s manufacturers in the market. There are concerns that the current economic crisis may provide an opportunity for Chinese companies to dominate the Russian market for oil and gas equipment.
Many Western manufacturers that ventured into Russia years or decades ago, successfully managed the market’s uncertainty and instability, and saw their products accepted by the local industry, are now reaping the benefits of a strong reputation and a well-established market position. They offer quality, modern equipment and are intense competitors.
The largest servicing and manufacturing companies currently operating in the Russian market include: Integra, BK Eurasia, Siberian Servicing Company, Cameroon, Baker Hughes, Bentec GmbH Drilling and Oilfield Systems, Parker Drilling, Schlumberger Oilfield Services, Halliburton, Weatherford and Bechtel.
Best Prospects and Services
Oil and gas field machinery as well as oil recovery, exploration and field management services are expected to retain their positions as the primary U.S. exports to Russia. Over the past two years, there has been a growing demand for well optimization, horizontal drilling, hydro-fracturing equipment and services, offshore development technologies and equipment, work-over, drilling and well tools and products, and idle well re-commissioning services. Some experts, however, predict that, due to the economic crisis, the Russian market for equipment and services for the oil and gas industry may contract significantly to accommodate a smaller number of companies that provide effective low-cost solutions for the rehabilitation/reconditioning of existing equipment and infrastructure.
U.S. products and technologies are recognized for their excellent quality as is U.S. after-sales service. U.S. manufacturers can further improve their market share by offering state-of-the-art technology and products and by employing reputable agents and/or distributors. Price continues to be the main competitive factor limiting equipment exports to Russia. To reduce manufacturing, transportation and other costs, and to comply with the Russian government’s policies on protecting local manufacturers’ rights, U.S. producers may wish to consider bringing their technologies to Russia and partnering with local manufacturers to make their products and equipment more competitive.