Overview of the Russian oilfield services market — 2019 · 2020-03-18 · of the oilfield services market Financial performance Cost structure of oilfield services, RUB trln •

Overview of the Russian oilfield services market — 2019


03

Opening remarks

Gennady KamyshnikovCIS Energy & Resources Leader, Deloitte CIS

We are pleased to present you with the full version of our annual analytical report. This year, we have updated the format and included deeper insights. The report offers an updated overview of 2018, expert opinions and the latest trends in technology, as well as recent market developments and key takeaways about the current state of the industry.

We have released a comprehensive analysis of the oilfield services market every year since 2014.

Dmitriy KasatkinDeputy Head of the Center for Socio‑Economic Studies at the Center for Strategic Research

A favorable price environment and fiscal policy helped Russian resource companies post impressive financial results for 2018 and resulted in increased profit margins for the oilfield services market, which is set to keep growing even as the peak of Russian oil production passes. However, structural changes will follow due to the need to adopt intensive development methods. The oilfield equipment manufacturing and production stimulation segments will grow significantly and the quality of services will become ever more important.

The persistence of low and inefficient investment in technical development and equipment from all market stakeholders could impede growth.

Opening remarks 03

Key findings 04

Oil prices 05

Performance of the oil production sector 06

Performance of the oilfield services market 09

R&D 15

Key events affecting the oilfield services market 16

Contacts 18


05


04

Key findings Oil prices

+31 %

556 mln tonnes

62–65 USD/barrel

60–63 USD/barrel

+39 % +3 % +8 %

29 % 10 % -10 %

+25 %

58 %

21 % 31 USD/barrel

6 USD/barrel

Operational performance of oil production companies

Operational performance of oilfield service companies

Performance of key oilfield service segments

revenue increase in 2018 (compared to 2017)

revenue increase in 2018 (compared to 2017)

CAGR of the oilfield services market(2014–2018)

rise in oil prices in 2018 (average 2018 price vs 2017, USD).

total Russian oil and gas production in 2018

forecast range of average annual oil prices in 2019

forecast range of average annual oil prices in 2020

profitability of oil production companies in 2018

profitability of oilfield services companies in 2018

decrease in the market size for geophysical services in 2018 (compared to 2017)

increase in the cost of oil production in 2018 (compared to 2017)

share of taxes in the cost structure of oil production in 2018

share of leasing expenses in the cost structure of oilfield services companies in 2018

cost of production per barrel of oil in 2018

cost of oilfield services per barrel of oil in 2018

We saw the emergence of a unique situation in 2018: the ruble did not strengthen as oil prices rose, but instead weakened considerably. This was largely due to the effect of the budget rule, which “sterilizes” budgetary income from oil

at above USD 40 per barrel (2017 level, the cut off price is indexed by 2 percent annually). All «super profits” from oil sales are used to buy forex, in turn weakening the ruble. This price and currency dynamic had an extremely positive impact on the financial results of the oil production sector as the “ruble price” of each barrel soared from RUB 3,100 to 4,300 per barrel.The price environment has remained favorable over the first three quarters of 2019 (the price of a barrel of oil has fallen only slightly to RUB 4,200); however, a considerable surplus of supply has accumulated on the oil market, which is currently being contained by geopolitical factors and the OPEC+ deal. Most forecasts agree that there is a significant risk of global oil prices falling in the near future.

Andrey KolpakovSenior Research Officer IEF RAS

• Oil prices rose from January to October 2018. The average oil price in 2018 was 31 percent higher than in 2017.

• Prices were driven up by the OPEC+ deal to reduce oil production and rising oil demand. However, Russia and Saudi Arabia boosted output following the relaxation of the deal, resulting in oversupply of oil on the market and causing oil prices to drop to USD 53.8 per barrel in October–December.

• Events in Saudi Arabia in September 2019 confirmed the dollar’s dependence on oil prices.

• Experts are forecasting an average oil price in the range of USD 62–65 per barrel in 2019.

• The main factor currently driving excess supply, and the following price drop, is the trade war between the US and China. The resulting slowdown in GDP growth suffered by both countries has stifled global oil demand.

Average annual oil prices (Urals)

Oil price scenarios, USD per barrel

2019 2020 2021 2022

Russian Ministry of Economic Development

63 60 58 —

Russian Central Bank 65 60 55 —

EIU 65 63 67 76

International Monetary Fund (IMF)

62 62 61 60

IEF RAS 63 59 64 68

2014

2018

2015

2016

2017

1.061.41

0.971.451.22

61.0 58.5

38.6

62.7

66.9

51.2 53.0

97.6

69.7

41.7

Oilfield services market size, RUB trln

Oil price (Ural), USD/barrel

USD/RUB exhcnage rate

The report used information provided by the Rosstat, the Institute for Economic Forecasting of the Russian Academy of Sciences (IEF RAS), as well as the results of the analysis conducted by the Center for Strategic Research.


07


06

Performance of the oil production sector

Source: company data

* Energy Ministry forecast

Financial performance Taxes

Cost structure of production, USD per barrel

The rise in MET payments from the oil sector in 2018 was driven by an increase in the price coefficient (Pc) multiplier in the following tax calculation formula:

Pc = (Urals - 15)*USD/261, where Urals is the price of Urals crude and USD is the USD/RUB exchange rate. Average Pc shot up to 13.1 in 2018 from 8.5 in 2017. As you can see from the formula, the driving factors are still the same here: the rise in oil prices and the devaluation of the ruble. However, the increase in MET did not have an negative impact on the sector’s financial results as the rise in sales prices was even higher. The implementation of the big tax maneuver, which will raise MET while gradually reducing export duties, started in 2019. Reduced export duties will raise the sales price (using netback) for oil producers, but this will be offset by increased production costs (as this includes MET). However, the Russian government will permit oil refiners to use reverse excise tax deductions to partially compensate for the increase in MET, which will slightly reduce the profitability of the oil production sector without dealing a critical blow.The proportion of oil eligible for tax concessions crossed the 50 percent threshold for the first time in 2018. The list of categories that qualify for relief has been gradually expanded. At the same time, there is no denying that the deductions are working: the industry is performing well, and moreover the budget isn’t currently experiencing any kind of shortfall.


• At the end of 2018, 51 percent of projects in the Russian oil production industry were using MET concessions. The proportion of oil output that qualifies for tax relief has increased from 28 percent in 2014 to 51 percent in 2018. Mature and small fields account for over half of the oil production eligible for concessions (53 percent).

• The Energy Ministry forecasts that deductions will rise to cover 68 percent of oil production by 2025.

Oil production

MET rates paid in 2018, RUB ‘000/tonnes

Profits, RUB trln

Cost of sales, trln RUB

Profit margin

T Revenue

Oil production not qualifying for MET relief, million tonnes

Oil production qualifying for MET relief, million tonnes

Percentage of oil production qualifying for MET relief

T Total, million tonnes

Amortization expenses

Taxes

Wages and insurance contributions

Maintenance

Transportation

Fuel and energy

Feedstock and materials

Other costs

Cost of sales

Urals crude price

2014

2018

2015

2016

2017

22 2730 3119

51 53

98

70

42

3

45 4

3

4

54

4

3

1013

1418

8

1 1211

1 12 11

2 2211

1 1111

1 11 11

Oil (on average)

New offshore fields

Hard-to-recover reserves

Mautre and smalll fields

Regional Concessions

Production with no concessions

10.28

4.80

8.78

8.65

4.60

12.94

2014

2018

2015

2016

2017

24%21%

24%

29%

21%

1.521.54

1.35

2.93

1.21

4.785.78

4.17

7.23

4.65

6.30 7.325.52 10.155.86

2014

2018

2015

2016

2017

31% 43%28%51%39%

2025

*

68%

154 215135 254198

337288

355

249304

492 504490 504501

One of the interesting peculiarities of Russian oil production is that its costs “adjust” to changes in global prices. You can see

this clearly if you look at both figures in dollars. The reason for this phenomenon is the exchange rate, which helps the industry adapt to the price environment on commodities markets.


• The total revenue of oil production companies rose 39 percent to over RUB 10 trillion in 2018.

• It is important to note that oil output (excluding gas condensate) remained unchanged in 2018 compared to 2017 at 504 million tonnes. Revenue growth was driven by the 31 percent year‑on‑year increase in average oil prices.

• The profit margin of production companies rose to 29 percent in 2018.

• The cost of oil production rose 25 percent compared to 2017, reaching RUB 7.2 trillion.

• The main factor behind this increase was a 48 percent jump in the tax burden from RUB 2.8 trillion to RUB 4.1 trillion.

• The production of one barrel of oil cost USD 31 on average in 2018 (15 percent higher than in 2017)

• Taxes account for 58 percent of oil production companies’ costs.


09


08

• One of the most widely‑anticipated effects of the increase in oil projects eligible for concessions and the rise in oil prices was an upsurge in investment in oil production. However, fixed capital investments actually fell slightly (by 3 percent) over the past year.

Equity and investment, RUB bln

Equity

Fixed capital investment

2014

2018

2015

2016

2017

1,68

2

3,37

5

2,01

1

1,76

1

2,20

0

1,35

2 1,48

4

1,46

2

1,45

1

1,53

7

Performance of the oilfield services marketFinancial performance

Cost structure of oilfield services, RUB trln

• Russian oilfield service companies posted revenues of RUB 1.45 trillion in 2018, a 3 percent increase on 2017,

• The sector’s profit margin was 10 percent.

• The cost of oilfield services remained unchanged from the 2017 level (RUB 1.31 trillion).

• Lease payments account for just over a fifth (21 percent) of oilfield service companies’ costs. Around 40 percent of drilling capacity belonging to oilfield service companies are leased out to the drilling divisions of vertically‑integrated oil companies.

• The costs of oilfield service companies account for an average of USD 6 per barrel of oil.


Amortization expenses

Lease payments

Wages and insurance contributions

Maintenance

Transportation

Fuel and energy

Feedstock and materials

Other costs

Cost of sales

2014

2018

2015

2016

2017

0.99 1.300.89 1.311.15

61

94

70

95

82

263

307

298

286

276

160

242

120

273

185

193

259

152

265231

161 179116

175190

5577

45

8365

2233

22

2430

77106

6811488

Profits, RUB trln

Cost of sales, trln RUB

Profit margin

T Revenue

2014

2018

2015

2016

2017

6% 8%8% 10%6%

0.07

0.11

0.08

0.14

0.07

0.99

1.30

0.89

1.311.15

1.06 1.410.97 1.451.22

Investment in the upstream sector declined three percent in 2018, although output of oil and gas condensate increased by 10 million tonnes. This would appear

to be largely the result of Russia’s participation in the OPEC+ deal: facing curbs on oil production and already having invested unused capacity, companies are holding back capital expenditure on future projects. This is in no way a question of capital: equity (net profit and amortization expenses) has been consistently in the black, posting a large surplus in 2018. Despite the current dip in investment, an overall upward trend will likely continue. All this means that there is potential for the oilfield services market to expand. On the whole, it is possible to say that the oil production sector remains a reliable and financially stable customer for oilfield services.


• The vast majority of investment (77 percent) went to the construction of new wells (43 percent) and production drilling (34 percent).

• The total amount of investment in production drilling rose significantly in 2018 (by 17 percent) while the construction of new wells received 14 percent less investment.

Fixed capital investment, RUB bln

Vehicles and equipment

Buildings and facilities

Exploration drilling

Production drilling

Other

T Total

2014

2018

2015

2016

2017

8040

856645

216274

199222208

687 739532

639648

55 5560 5759

423 429475 501492

1,462 1,5371,352 1,484 1,451


11


10

The oilfield services sector improved its equity balance in 2018, posting its best result in five years. Investment in equipment rose markedly,

although a statistically significant portion of them could be attributed to the upstream sector. If the oilfield service import substitution program is successful, an even greater share of these funds will be spent on purchases in Russia, giving the country a socio-economic boost.


• Oilfield service companies boosted equity to RUB 206 billion in 2018 (up 14 percent compared to 2017).

Equity and investment, RUB bln

Equity

Fixed captial investment

2014

2018

2015

2016

2017

137

206

115

137

181

105

160

156

141

161

• The CAGR of the oilfield services market was 8.4 percent over the past five years.

Drilling

• The drilling segment makes up 34 percent of the market. Although drilling’s share was unchanged in 2018, the segment increased its market share (by 2 percent) in monetary terms.

• The fact that production and drilling meterage remained unchanged while the size of the drilling market increased supports the thesis that production conditions are deteriorating, necessitating horizontal drilling, which is more expensive.

• The CAGR of the drilling segment was 4.2 percent over the past five years.

Well repairs

• Well repairs were the main driver of growth on the oilfield services market (rising 49 percent). However, if we exclude Novatek’s Yamal project, market growth would be 3 percent lower.

• The CAGR of the well repairs segment was 12.3 percent over the past five years.

Hydraulic fracturing

• Fracking rose due to the increased number of facilities adopting fracking techniques, including multi‑stage fracturing.

• The fracking sector has remained stable over the past five years (CAGR = 0).

Seismic surveying and GIS

• The volume of seismic surveying services declined 10 percent in 2018: 2D seismic profiling was down 25 percent and 3D surveys fell 6 percent.

• However, the amount and value of 2D surveys conducted at the expense of funds from the federal budget rose significantly (by 84 percent and 44 percent respectively). The amount and value of similar operations conducted at the expense of subsoil users declined 63 percent and 39 percent respectively.

• The volume of 3D surveying fell sharply (by 26 percent), while the value of these services dropped by a less drastic 6 percent.

• The CAGR of seismic surveying and GIS was 4.2 percent over the past five years.

Market structure, RUB trln

Seismic surveying and GIS

Hydraulic fracturing

Major well repairs

Drilling and related works

Other segments

T Oilfield services market size

2014

2018

2015

2016

2017

1.06 1.410.97 1.451.22

0.08

0.08

0.10

0.080.09

0.39

0.65

0.30

0.62

0.46

0.050.05

0.04

0.040.05

0.11

0.14

0.12

0.210.20

0.430.49

0.41

0.500.42

• Oilfield service companies invested a total of RUB 160 billion in 2018, the same as in 2017.

• Oilfield service companies spent the majority of their investments (70 percent) on equipment, driven by the need to upgrade their technical capabilities by modernizing the equipment base (including drilling technologies) and purchasing new equipment to meet the growing complexity of the services required.

Fixed capital investment, RUB bln

Vehicles and equipment

Buildings and facilities

Other

T Investment

Source: The Federal Agency on Subsoil Usage

2014

2018

2015

2016

2017

30 16

4

1315

83

107

64

112

77

43 3937 3549

156 161105 160141


13


12

Geophysical services

Source: The Federal Agency on Subsoil Usage, company data

Virtually all vertically-integrated oil companies reported more than 100 percent completion of production based on geological exploration.

Therefore, we can broadly estimate that geophysical services cost USD 0.3 per barrel of oil.


• The Russian market for geophysical services shrank considerably in 2014–2018 (by 19 percent).

• The market size of geophysical services was RUB 76.7 billion in 2018, a 10 percent decline on 2017. This was mainly due to a drop in the value of seismic surveying and geographic information systems (GIS) works (down 10 percent and 11 percent respectively).

• Independent Russian oilfield service companies provide half of the geophysical services on the Russian oilfield services market.

Top three geophysical service companies:

• TNG‑Group (independent company);

• Geotech Seismic Services (independent company);

• Bashneftegeofizika (international company).

Market size for geophysical services in Russia,RUB bln

Structure of the Russian geophysical services market in 2018

Seismic surveying

GIS

Other

State-owned

International

Russian independent

Division of a vertically- integrated oil company

19%13%

19%

50%

Drilling


Supply on the drilling market(Revenues of key players), RUB bln

• Vertically‑integrated oil companies account for more than half of the overall drilling market (52 percent). RN‑Bureniye provided 18 percent of supply, a significant (12 percent point) increase on 2015. Gazprom Bureniye, another vertically integrated oil company increased its share in total supply by 2 percentage points.

• Burovaya Kompaniya Eurasia (BKE) is the largest independent drilling company, although its share of total supply fell by 3 percentage points in 2018.

• RN‑Bureniye has the largest CAGR (20.3 percent) and TAGRAS Holding the lowest (‑9.6 percent).

Surguftneftegas

RN-Bureniye

TAGRAS-Holding

ERIELL Group

Gazprom Bureniye

Sibirskaya Servisnaya Kompaniya

Burovaya Kompaniya Evrazia

Others

2014

2018

2015

2016

2017

10 9

14

98

677076

63

745 655

5

2014

2018

2015

2016

2017

78.7

99.4

87.8

92.8

68.7

121.9

122.8

87.8

125.5

99.2

29.5

81.0

34.4

86.6

66.3

21.9 10.117.3 10.511.3

60.4 66.467.457.5 63.6

64.167.1

56.678.7

64.4

22.0 19.528.7 20.822.1

28.5 27.727.528.229.0


15


14

• Oil production companies reduced their spending on intellectual property to RUB 34 billion (down 29 percent) over the past year.

• Reserve estimates and the analysis of prospecting surveys accounted for almost all spending on intellectual property (93 percent).

• Priority areas for intellectual property include the development of drilling technology for low permeability reserves, multi‑stage fracturing technologies and the development of geological modeling methods.

• Oilfield service companies also reduced their spending on intellectual property in 2018, down 9 percent to RUB 4 billion.

• The vast majority of spending on intellectual property went towards exploration surveys and reserve estimates (94 percent), and predominantly on interpretation of prospecting surveys.

Spending by oil production companies on intellectual property, RUB mln

Spending by oilfield service companies on intellectual property, RUB mln

R&D

R&D accounts for 2-2.5 percent of total investment in the oil production and oilfield services sectors, which is

around USD 0.15 per barrel of oil. R&D trends this year generally echo investment in the industry.


R&D

Software

Exploration surveys and reserve estimates

169

96

2017

2018

94 139

4,46

8

4,09

0

4,731 4,324

R&D

Software

Reserve estimates and analysis of prospecting surveys

780

814

2017

2018

1,17

2

1,72

8

46,4

13

31,9

26

48,365 34,468


17


16

Key events affecting the oilfield services market

2019

Performance of production companies

Supply, demand and oil prices

Government regulation of the fuel and energy market

Geopolitics

Technological advances

Q1 2019

The share of oil production eligible for concessions reached 51 percent at the end of 2018.

January 2019Launch of the pilot project for the excess‑profits tax. The excess‑profits tax will not be applied to extracted resources, but instead to income from the sales of resources, net of export duties, reduced MET and production and transportation costs.

January 2019 US imposes sanctions on Venezuela that prohibit the export and reexport of diluents to the country. As a result, Russia became the main exporter of sour crude.

February 2019US Congress publishes a new Russian sanctions bill.

Q2 2019

April 2019Oil spill from the Druzhba pipeline.

June 2019Extension of the OPEC+ deal to reduce oil production.

April 2019Antipinsky Refinery files for bankruptcy

April 2019 US bans all countries from buying Iranian oil.

June 2019Additional US sanctions against Iran freeze Iranian assets abroad.

Q3 2019

September 2019Surgutneftegas commissions the Leninsky gas condensate field in Yakutia with oil reserves of 40 million tonnes.

September 2019RN‑Uvatneftegaz opens a new field with recoverable reserves of 5.5 million tonnes.

September 2019OPEC+ deal curbs oil production at 228,000 bpd (resulting in a reduction of 150,000 bpd by mid‑September).

July 2019 Rosgeo offers to develop and draft a state program for the geological exploration of the Arctic to regenerate the mineral resource base and “revive” the Northern Sea Route in 2020–2045.

September 2019Bill on excess‑profit tax deductions for Rosneft and Gazprom Neft to remove export duties on oil from eight fields.

September 2019US imposes sanctions against China for transporting Iranian oil.

September 2019Drone attack on Saudi Aramco oil facilities in Saudi Arabia result in a 5.7 percent reduction in global oil output and a 15 percent rise in oil prices.

September 2019Gazpromneft‑Noyabrskneftegaz develops and successfully employs MAGIC, a new oil deposit search method.

Q1 Q2 Q3

98.8 99

.1

100.

6

99.1

98.6

Demand, mln bpd

Supple, mln bpd

Supply and demand on the oil market


18

Lora NakoryakovaHead of the Center for Socio‑Economic Studies at the Center for Strategic Research [email protected]

Gennady KamyshnikovCIS Energy & Resources Leader, Deloitte [email protected]

Ian ColebourneChief Executive Officer, Deloitte, [email protected]

Kamila ZhalilovaCIS Energy & Resources Leader, Deloitte [email protected]

Alexander SinitsynPresident at the Center for Strategic Research [email protected]

Dmitriy KasatkinDeputy Head of the Center for Socio‑Economic Studies at the Center for Strategic Research [email protected]

Contacts

Victoria PigalkinaAnalyst, Center for Strategic [email protected]

Ekaterina TrofimovaCIS Financial Services Industry Leader, Head of the credit risk, rating advisory and corporate governance practice, Deloitte CIS [email protected]

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Documents

Overview of the Russian oilfield services market — 2019 · 2020-03-18 · of the oilfield services market Financial performance Cost structure of oilfield services, RUB trln •