Dttl Refinery Service Market En

8/4/2019 Dttl Refinery Service Market En

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Refnery Service Market in Russia

Oil and Gas

2011


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Contents

Introduction 3

Refnery market development 3

Personnel o refnery services 4

Financial standing o refnery services 4

The choice o contractor and conditions o servicing 5

Key threats and prospects o refnery service market development 6


3/8Refnery Service Market 3

Introduction

Development o rening industry during 2004-2009

was accompanied by increased demand in supporting

industries. In order to unction properly, reneries oten

require access to the ollowing:

Mature inrastructure

Non-stop unctioning o supporting industries (access

to distribution systems, uninterrupted supplies o raw

materials, etc.)

High quality o services (provision o modern

equipment and technologies, maintenance and repairs

o machinery, transport, etc.)

At present, the industry is engaged in a process

o technological development brought about

by a gradual shit to higher environmental standards

and an increase in oil processing depth. For example,

in 2012, Russia is planning to adopt Euro-4 emission

standards. Meanwhile, the implementation o

investment programs will increase companies average

Nelson index rom 4.5 to 6.5 by 2017.In turn, this will

lead to signicant capital investments in modernization.

This modernization process will aect the supporting

industries as well. In particular the renery service

market will experience boost o the demand

or machinery installation services and increase

in requirements or service quality and personnel.

Refnery market development

Renery service market has only just begun to emerge,

and so is too early to dene at this point. Unlike oileld

services, which have increasingly been outsourced overthe last 10 years, the outsourcing o renery services

is a relatively new phenomenon. However, as reneries

spend 11% o their total production costs on services,

it is probably air to say that the rening services market

may currently be valued at USD 3bn.

Breaking down the renery services market, is evident

that the main suppliers o services are generally aliated

entities o oil companies, which account or nearly 70%

o the market. Some oil companies, such as TNK-BP,

Surgutnetegaz, and LUKOIL, outsource their services

within the ramework o cost optimization programs.

This trend has led to the creation o an independent

market. Nevertheless, reneries have a number

o reasons or retaining certain in-house services,primary among these being saety requirements,

as industrial and environmental saety remains

the direct responsibility o reneries, even when services

are outsourced. For instance, industrial transport services

remain in-house, as reneries are concerned about

48%

41%

6%

5%

Mechanical service

Transport service

Energy service

Instrumentation &

Automation

Picture 1: Structure o the refnery

service market, 2009

Source: SPARK, Deloitte analysis


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Independent services

Aliated services

19%

20%

Instrumentation & Automation

Energy

Mechanical

Transport

81%

80%

46% 54%

100%


Picture 2: Services distribution between

dierent types o companies

losing control over this area, which is vital i repairs

or other work needs to be carried out at a plant.

At the same time, companies retain control over

passenger transportation primarily or historical, rather

than economic reasons.

Among integrated mechanical services, only machinery

maintenance is generally kept in house, with other such

services (mechanical engineering, major overhauls) being

outsourced. Maintenance and technical modernization

services are generally provided by independent entities

because o large fuctuations in demand or these services.

at Bashnet acilities. The markets or these services

remain relatively open and the majority o them have

already been outsourced. However, the companies

providing these services are mainly regional players

that have a history o serving reneries in this area.

Personnel o refnery services

Nearly 72% o people employed in the renery services

industry work or service centers that are integrated into

reneries, which corresponds to the 70% market share

o these types o businesses. The majority o personnel

provide mechanical services (approximately 57%).

The high employment costs associated with sta

involved in mechanical maintenance attests to the high

potential o the equipment maintenance and repairs

market, and the advantages o applying the outsourcing

model to these services. Nevertheless, at present,

the number o people working or integrated entities

providing these services is almost 1.5 that employed

by independent service companies.

The second largest share o the market in terms

o employment structure is represented by transport

services (nearly 35%) that are completely integrated

into the structures o reneries or aliated companies.

Meanwhile, the share o energy and instrumentation

& automation system services in overall personnel

structure is insignicant, as the maintenance o control

systems and energy equipment does not require a large

human resource base.

Financial standing o refnery servicesTo a great extent, the aliation actor determines

the nancial standing o service companies. One third

o aliated services incur losses due to the pricing

models set or the purpose o prot reallocation

or the benet o oil and gas companies. Transer pricing

prevents integrated services rom carrying out investment

Energy and control system services require

the involvement o a small number o specialists

and, thereore, are a popular target or outsourcing,

due to the greater eciency oered by the independent

business model. Energy services are rarely included

in the structure o reneries, and are mostly seen



56%

35%

5%

4%

Mechanical service

Transport service

Energy service

Instrumentation & Automation

Picture 3: Breakdown according to the number

o employees in dierent service companies, 2009.


programs and establishing benet unds or personnel.

These issues are usually addressed by parent companies.

Restrictions in the independent investment activity

o integrated service companies weaken their competitive

positions in comparison with oreign companies.On the other hand, aliated service companies do not

have to search or orders as this is done by the aliated

renery or other companies in the group.

On average the receivable turnover o independent

service companies is 30% lower than that o aliated

companies. The nancial standing o aliated

service companies can be adjusted by the parent/

head companies. According to statistics rom 2009,

the protability o independent service companies

on average was 10% whereas the protability

o aliated companies was 1.6%.

The choice o contractor and conditions

o servicing

Going to tender is a key tool or a contractor.

Approximately 80% o Instrumentation and Automation,

energy services and 45% o mechanical services

are bought on the basis o a tender. Industry

representatives have noted that better services

are provided by independent companies in comparison

to aliated ones.

The exchange o inormation about the quality

o services provided is signicantly hindered

due to the closed market. For example, the creation

o an O&G service provider database (which would

rate companies according to price and the quality

o services provided) would reduce the risks or oil

reneries associated with unreliable work and would

better control the cost o services provided

by independent companies.

Payment periods are also overly long (30120 days).

Small service companies can have substantial

problems meeting salary and tax payments within

these timescales. These terms are especially toughor independent service companies who do not have

access to cheap capital. Foreign contractors are more

likely to conrm long payment periods.


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Transer

to Euro-4

2012 2013 2014 2015 2016 2017

Transer to

Euro-5

Large-scale upgrade

o the equipment

on the oil reneries

Rise o the Nelson

index to 6.5

Picture 4: Future major events in the oil refnery

sector o the Russian Federation

Key threats and prospects o refnery service

market development

The threat o oreign competition is highly relevant

to the Russian market as the prices o many oreign

service companies (particularly those rom China)

are lower on average than those o Russian companies.

In addition equipment produced abroad is oten

o a higher quality which enables machinery producers

to win both machinery supply and maintenance tenders.

Russian aliated services also do not have the nancial

resources to renew machinery.

The dependence o organizations on oil companies

is a key problem with regards to expanding

the market. As previously noted, transer

pricing may lead to the unstable nancial health

o a company. Independent companies are unable

to decrease the cost o their services so theirkey advantage is the quality that they provide.

In the uture it is expected that companies will

move towards outsourcing renery services.

For example, Kirishineteorgsyntez, the largest

Russian renery, is serviced exclusively by independent

mechanical energy services and instrumentation

& automation companies.

Aliated service companies are not motivated

to improve the quality o the service which they

provide. Geography also plays an important role

in this process as the remote location o repair acilities

rom the reneries can substantially increase the price

o services due to increased transportation costs.

However, the independent service market is not

completely ree rom problems. Most independent

service companies are small-scale which oten leads

to weak corporate management. Providing a renery

service requires highly-qualied personnel and on site

involvement. The lack o qualied personnel is worsened

by the low mobility o employees.

The renery service market is expected to experience

some changes in the near uture. First o all, there

is signicant deterioration o equipment in Russian

reneries. It is estimated that 7085% o equipment

need to be replaced over the next 2 to 5 years. The need

to modernize production in relation to implementing

the Euro-4 ecological standard in 2012 are powerul

levers or increasing renery investment and

technological change. In turn the renewal o machinery

will rstly lead to an increase in the demand

or mechanical and instrumentation and automation

services and then to the demand or energy services.

Modernizing reneries can also lead to a decrease

in equipment maintenance and to toughening

o the personell qualication requirements.

The market entry by new oreign players will enhance

competition, improve service quality and decreaseservice prices.

The similarity o oileld and renery services could lead

to a merger o separate eld-specic types o services,

or example, transport services. The optimization

o maintenance costs by reneries and the desire

to obtain a better quality o service are vital to urther

shaping o independent renery service market.



Contacts

Moscow

Russell Banham

CIS Energy and Resources Leader

+7 (495) 787 06 00, ext. 2107

[email protected]

Elena Lazko

CIS Oil & Gas Practice Leader

+7 (495) 787 06 00, ext. 1335

[email protected]

Kelly Allin

Audit

+7 (495) 580 96 80

[email protected]

Andrey Panin

Tax and Legal

+7 (495) 787 06 00, ext.2121

[email protected]

Yegor Popov

Financial Advisory Services

+7 (495) 787 06 32

[email protected]

Yaroslav Gorodiskiy

Corporate Finance

Advisory and M&A

+7 495 787 06 00, ext. 1646

[email protected]

Wayne ThomasTransaction Services

+7 (495) 787 06 00, ext. 2325

[email protected]

Tatiana Kalashnikova

Petroleum Services Group

+7 (495) 787 06 00, ext.1300

[email protected]

Almaty

Daulet Kuatbekov

Audit

+7 (727) 258 13 40, ext. 2777

[email protected]

Michael Sturdivant

Tax and Legal

+7 (727) 258 13 40, ext. 2717

[email protected]

Kyiv

Justin Bancrot

Audit

+38 (044) 490 90 00, ext. 8660

[email protected]

Vladimir Yumashev

Tax and Legal

+38 (044) 490 90 00, ext. 2648

[email protected]

Artur Ohadzhanyan

Financial Advisory Services

+38 (044) 490 90 00, ext. 3618

[email protected]

Yuzhno-Sakhalinsk

Andrey Goncharov

Director o Yuzhno-Sakhalinsk ofce

+7 (4242) 46 30 55, ext. 3802

[email protected]

Baku

Elnur Gurbanov

Audit

+994 (12) 598 29 70, ext. 4318

[email protected]

Nuran Kerimov

Tax and Legal

+994 (12) 598 29 70, ext. 4339

[email protected]

International leaders

Adi Karev

Global Oil & Gas Leader

+ 852 2852 7509

[email protected]

Carl Hughes

Energy and Resources Leader

Deloitte UK

+44 20 7007 0858

[email protected]


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Dttl Refinery Service Market En