Russia has more proven natural gas reserves than any other country, is among the top ten in proven oil reserves, and is the largest exporter of natural gas and oil. The inflow from the oil and gas industry accounts for over a third of Russian federal budget revenues, and oil and gas production remains one of the leading sectors of the Russian economy.
Lately, a strong emphasis has been made on the necessity to develop the Russian oil and gas refining and petrochemical industry, which is expected to reduce the dependency of Russian economy on world prices on raw oil and gas. The plan is to not only fully employ existent domestic refining capacities, but to gradually build up and upgrade existing refineries and build new ones.
The report below describes the Russian market of equipment for the oil and gas industry, its current trends, and the opportunities it presents for U.S. equipment manufacturers.
The steep decline in global oil prices and the decrease in purchasing capacity of consumers of oil and gas products that took place in late 2008-2009 could not but affect the status of the Russian oil and gas industry. However, with oil prices going up again and Russian tax policy changing in favor of oil producers, it did not take the Russian oil and gas sector long to recover. In 2010, Russia was producing more oil than traditional world leader Saudi Arabia, which had reined in output to comply with OPEC cuts.
The Russian oil and gas market reached its maturity several years ago, when the giant companies Gazprom, Rosneft, Lukoil, TNK-BP and Surgutneftegaz acquired most of their smaller competitors. This was also the point when a market for independent companies offering field services and equipment started to emerge. Initially, most of key players in the Russian market of services for the oil and gas industry were represented either by branches of big international companies or by local companies established on the basis of servicing departments of oil/gas companies. As this segment of the Russian market continues to develop and consolidate, most of the international servicing companies that were initially present in Russia are retaining their position, but are experiencing increasing competition from their local counterparts.
In the years preceding the world economic crisis, the largest Russian oil companies had been increasing their expenditure on infrastructure development, equipment purchase/repair and services. In 2008, the market for services and equipment for the oil and gas sector was estimated at about $18 billion, with approximately equal market shares for services and equipment. However, due to the economic crisis, 2009 showed a 30 to 40 percent decline. By now, the volume of services and equipment for the oil and gas industry returned to its pre-crisis level.
As the country’s economy has recovered after the world economic crisis, major oil and gas development projects long underway in the Yamal Peninsula, Sakhalin, the Timan-Pechora areas in Western Siberia and the Arctic shelf, as well as new projects in Eastern Siberia, which are already yielding generous outcomes, generate need in technological upgrades as well as construction, infrastructure and other services for oil and gasfield development. In the LNG segment, Gazprom has chosen France’s Total and Norway’s StatoilHydro as its partners to develop the $20 billion Shtokman gasfield, and works with TNK-BP to develop the Kovykta gasfield. In August 2011, the Russian Government signed an agreement with Exxon Mobil to explore for oil in the Russian Arctic region. Specifically, the Kara Sea, the body of water between the northern coast of European Russia and the Novaya Zemlya island chain.
In addition, Russia remains one of the few regions that continues to look at major investment programs in the downstream sector. A reason for this trend is the relatively small investments made in the sector over the past decades.
As of today, Russia counts 30 major oil refineries with a total capacity of 261.6 million tons, and about 80 mini-refineries with a total processing capacity of 11.3 million tons. In 2010, Russian refining industry produced 36 million tons of gasoline, 70 million tons of diesel fuel, and 82 million tons of fuel oil. Most of Russian oil refineries were built in the two postwar decades: 16 plants, which is more than a half of the active to date in Russia, were commissioned in 1945-1965. Only two refineries with the total capacity of about 3.5 million tons were launched in Russia after the collapse of the Soviet Union. Thus, overall, plants built during the Soviet time are currently processing (?)about 98% of the oil, and until recently, only few of them had gone through significant technological upgrade. It is not surprising therefore, that experts unanimously admit a high wear-out coefficient (60-75%) and technological backwardness of Russian refining industry. Despite certain positive changes that have taken place recently, the quality of the product leaves much to be desired and the average depth of oil refining is still extremely low, under 70%. In addition, the hydroskimming capacity of Russian refining industry exceeds its capacity to produce refined petroleum products, which is explained by the fact that the Soviet oil refining industry was focused on the production of diesel fuel and fuel oil, while demand for gasoline was relatively low. Today, this leads to the situation when companies produce more low quality petroleum half-stuff than they can process to the finished product level, and therefore, often have to export semi-finished product at discounted price.
According to the Russian Ministry of Energy, $19 Billion will be invested in the modernization of Russian oil refining Industry within the period of 2011-2015.
Oil and gasfield machinery as well as exploration and field management services are expected to retain their positions as the primary U.S. exports to Russia. Over the past several 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. Effective low-cost solutions for the rehabilitation/reconditioning of existing equipment and infrastructure are expected to be in higher demand than ever before due to the decline of numerous oilfields in the Eastern Siberia.
Technological solutions for the petrochemical and refining industry are another, emerging best prospect area for U.S. companies. The ban on production of Euro-2 fuel, originally scheduled for December 31, 2010, has been postponed twice by now, because most Russian refineries failed to upgrade their facilities to the level necessary for the production of Euro-3 fuel. At the request of Russian refining companies, the government is likely to postpone the introduction of Euro-3 fuel emission standards until 2013, to be followed by the introduction of Euro-4 in 2014 and Euro-5 in 2015. This decision will be tied to the obligation imposed on all major refining companies to upgrade their facilities in order to comply with new requirements. This, as well as the ambition of certain Russian petroleum producers to export more refined products to the international marketplace will inevitably require intensive modernization and capacity increase of existing refining facilities.
Purchasing policies of major oil companies are very much politically determined. According to existing regulations, companies are obliged to give preference to locally manufactured products. Only the technology and equipment of the kind that is not produced in Russia can be purchased from foreign suppliers. The situation is somewhat more favorable in the area of off-shore production: Up to 40% of equipment used off-shore can be manufactured outside Russia.
There is also an economic reason for companies to choose Russian products: While the quality and performance of locally produced equipment is frequently below that of cutting-edge Western equipment, Russian equipment generally enjoys a substantial price advantage over Western and Asian competition. The incentive to buy Russian equipment based solely on price at first glance can appear strong, especially when local products are compared to Western analogs on case-to-case basis. Price advantage of Russian products is particularly evident in the transportation and pipeline segments.
Therefore, even though Russian customers often indicate displeasure with factors beyond sale price, such as poor quality control, technological backwardness and lack of reliability of locally manufactured equipment, as well as refusal of suppliers to offer adequate servicing provisions, locally manufactured equipment is given preference whenever it is possible.
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 and be seen as reliable suppliers of satisfactory quality products at competitive prices. Chinese government subsidies support Chinese equipment exports to Russia and help strengthen the position of China’s manufacturers in the market. Many Western manufacturers that ventured into Russia at earlier stages, successfully managed the market’s uncertainty and instability, and have seen their products accepted by the local industry, are now reaping the benefits in the form of a good reputation and a well-established market position. They offer quality, modern equipment and are intense competitors.
In the area of project management, Western engineering firms are generally well-regarded in Russia for their greater flexibility than that of their Russian counterparts. According to Russian sources, Western firms normally do not require blueprints from their customers, and often can offer equipment which is more readily available.