Drilling group ERIELL expects late 2022 recovery in Russian oilfield services market
The Russian oilfield services market should start to see a recovery by the end of next year, as the country’s oil and gas producers ramp up output after reining in supply in the wake of the coronavirus pandemic, the CEO of oilfield services provider ERIELL Russia Vitaly Dokunikhin tells NGW.
Oil prices tanked in March last year after the pandemic's onset, and Russia and other OPEC+ members responded by taking an unprecedented 9.7mn barrels/day of oil supply off the market to support prices. The cuts to upstream investment as a result of low prices and OPEC+ restraints have taken their toll on the Russian oilfield services sector.
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The services market contracted in size by 11.3% to 1.3 trillion rubles ($18bn) last year, Russia-based consultancy RPI estimates. This was led by a 12.5% contraction in the size of the drilling segment to 350bn rubles.
Drilling footage dropped by 1.5% last year, and there is expected to be a further, albeit slight decline this year as well.
“But I think the demand for services will pick up again by the end of 2022,” Dokunikhin says.
This is because the exploration segment was hardest hit by the crisis and will take longer to recover, the CEO explains. Exploration drilling footage slumped 7.8% in 2020 and fell by a further 21% in January through July this year. Production drilling, in comparison, decreased by only 1% last year and 4.9% in the first seven months of 2021.
ERIELL’s key clients include Gazprom Neft, a subsidiary of state gas supplier Gazprom, and the country’s biggest LNG producer, Novatek. The company fared better than its rivals, not least as it does more production rather than exploration drilling.
“We worked very little before COVID-19 on exploration and early prospect drilling, which were hardest hit,” Dokunikhin says.
Instead, most of ERIELL’s drilling is at gas fields in the remote Russian Arctic, where Novatek is looking to rapidly expand its resource base to support increased LNG exports. Novatek launched its first Arctic LNG terminal, the 17mn metric ton/year Yamal LNG, in December 2017 and aims to bring online its second, larger 19.8mn mt/yr Arctic LNG-2 in 2023. ERIELL has been working at Utrenneye and South Tambeyskoye gas fields that underpin these projects.
ERIELL competes in the so-called open market, Dokunikhin says, which accounts for only a third of overall drilling volumes. This is because the overall market is dominated by the inhouse drilling units of vertically integrated oil companies. ERIELL has a 10.5% share in the open market.
Looking forward, the CEO expects to see greater market consolidation as the integrated producers bring more services inhouse to keep control of costs. Some smaller players will also leave the market altogether, and competition will become stiffer, according to Dokunikhin.
“During the crisis, many companies in the industry found themselves at the brink of bankruptcy, and their exit from the market is only a matter of time,” the CEO says. “Meanwhile large companies have a greater margin of safety.”
ERIELL has faith in its technical ability, the CEO says. While in Russia as a whole, less than half of the drilling rigs are under 10 years old, this is the case for two thirds of ERIELL’s 33-strong fleet in Russia. Most of its rigs are also designed for drilling deep, complex wells in the remote Arctic, with lifting capacities of more than 300 mt.
Dokunikhin also points to the company’s technical feats. Since starting work with Novatek more than a decade ago, ERIELL has more than halved the time it takes to drill a well into the deep Achimov layer in Western Siberia to 35-40 days.
“The demand recovery will be accompanied by more need for high-tech work," Dokunikhin says.
Russia launched a localisation drive in 2014, after international sanctions were imposed on its oil sector. The government has introduced an Industry Support Fund to help support domestic manufacturing and technological development. ERIELL used this fund to secure preferential loans to buy domestically-produced drilling rigs.
The ministry of trade and industry is also setting up a programme to subsidise the cost of buying local drilling rigs directly, which will motivate companies to renew their fleets instead of ordering foreign supplements to modernise the old ones.
“The subsidy will allow drilling companies to prioritise Russian rigs over foreign ones,” ERIELL’s financial director, Artem Chernikov, says. “This will also promote environmental responsibility, as the subsidy will only be provided on condition that old rigs are handed over for recycling.”
(1 RUB = 0.14 USD)