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Oilfield services market

conditions and trends 2016Segments: drilling, well maintenance and

workover

June 2016

2© 2016 RO of the company “Deloitte & Touche RCS Ltd”.

0

20

40

60

80

100

120

140

Deloitte Worldbank

2020F01-2011 01-2012 01-2013 01-2014 01-2015 01-2016 2017F 2018F 2019F

Forecasted weighted average* oil price

Oil price volatility has grown considerably over recent years.

The uncertainty makes it complicated for companies to

establish long-term plans

USD/barrel

Source: Deloitte and Worldbank forecasts

*The weighted average price is a combination of prices for Brent and WTI crude oil taken with equal weights

High volatility and controversial trends

• The considerable reduction in oil prices and volatility in the oil market in 2014-2015 force analysts to review short-term oil price forecasts regularly.

• As of the beginning of Q2 2016, most experts agree that oil price recovery is going to be slow.


9985

330

607

780

61.792.9

396

607600

2016

2015

• According to the 2016 Russian Oil and Gas Outlook Survey, 55 percent of

experts believe that capital flow into the Russian oil and gas sector will not

decline for, at least, the next five years.

• The growth of uncertainty in the market has become one of the reasons why

there is no trend towards changing the amount of capital investments in 2016

among the largest vertically integrated oil companies (VIOC). At the same

time, the majority of market leaders are not planning to cut capital

investments abruptly, which confirms the absence of extremely negative

expectations.

• According to VIOC representatives, upstream will be the main focus for

capital investments. Funds will be allocated towards maintaining and

expanding exploration and production.

Despite the downward trend in the commodity markets,

Russian companies have set a drilling record

9

11

13

15

17

19

21

23

25

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

500

1000

1500

2000

2500

3000

3500

Oil price (weighted average) Meterage

Rubles/barrel

Capital investment plans for 2016, billion rubles

+30%

Source: Company data; the amount of investment includes foreign assets.

Neutral to positive expectations of market participants

• 2015 saw a continued disruption in the correlation between oil prices and

drilling meterage: despite the sharp decrease in oil prices, the meterage

increased by over 10 percent.

• The increase in meterage may have been caused by market expectations.

According to Deloitte’s 2016 Russian Oil and Gas Outlook Survey based on

interviews with executives from Russian enterprises, 61 percent of experts

expect a rise in oil prices in 2016.

• Despite the neutral to positive expectations, to relieve the impact of the current

decline in oil prices, key market players aim to reduce operating costs and

improve operating efficiency.

0%

-17%

-9%+60%

Average annual oil price and drilling meterage

Million m


5.8 5.06.7

4.94.1

4.3

3.63.8

2.8

2.92.7

2.9

1.71.6

2.3

2013 2014 2015 2016*

Other

Bashneft

Russneft

Tatneft

Slavneft

Gazprom Neft

Lukoil

Surgutneftegaz

Rosneft

+13%

19.4

21.9

24.5

+12%

20.8

-7%

• In 2015, the total production drilling market grew by 12 percent.

• Most key players expanded drilling volumes having implemented their annual

plans for production drilling.

• According to the representatives of most companies and actual Q1 data,

companies are not planning to reduce the volumes of production drilling in 2016.

• Rosneft stands out among the key players as planning to boost the volumes of

production drilling by no less than 30 percent.

0.15 0.170.11

0.22 0.20

0.21

0.20 0.23

0.17

0.110.08

0.11

2013 2014 2015 2016*

Uncertainty in the market puts pressure on exploratory drilling.

At the same time, companies are increasing meterage in

production drilling

Source: “Oil and Gas Vertical” magazine (CDU TEK), company data,

*Deloitte forecasts

• In 2015, the exploratory drilling market volumes decreased by 10 percent, which

was due to the uncertainty in the market and the suspension of participation in

expensive exploration projects.

• At the same time, according to the results of Q1 2016, exploratory drilling grew

by 1.8 percent as compared to the same period last year.

• Hence, in 2016 the reduction. in exploratory drilling meterage may slow down,

and, by the end of the year, meterage is predicted to be at the level of 2015.

Source: “Oil and Gas Vertical” magazine (CDU TEK), company data,

*Deloitte forecasts

+1%

0.82

0.74

0.82

-10% +1%

0.75

Production drilling, million m Exploration drilling, million m


4.43.4

4.5

4.6

3.8

3.9

2.7

2.81.9

2.4

1.5 1.2

1.5

1.31.7

2013 2014 2015

Other

Bashneft

Russneft

Tatneft

Slavneft

Gazprom Neft

Lukoil

Surgutneftegaz

Rosneft1.4 1.6

2.20.4

0.3

0.40.9

1.0

0.90.5

1.3

1.6

0.8

0.9

1.0

0.3

0.4

0.6

2013 2014 2015

Horizontal drilling remains a key driver for meterage growth in

2015, directional drilling is growing more slowly

16.6

+4%

5.8

7.4

+27%

• The 2015 market continued the trend observed in 2014: horizontal drilling meterage increased considerably as compared to the previous year - by 27 percent. It is

horizontal drilling that currently drives the meterage growth in the Russian Federation. Most key players continued to increase meterage in horizontal drilling. According to

the year’s results, meterage in horizontal drilling exceeded meterage in directional drilling at Gazprom Neft and Slavneft.

• Meterage in directional drilling grew by 4 percent in 2015, which was not as considerable as the growth in horizontal drilling meterage. The major boost in horizontal

drilling volumes was due to increased drilling by Rosneft (by 32 percent) as well as by small and medium-sized oil companies. At the same time, Lukoil and Gazprom Neft

have reduced directional drilling meterage considerably.

Source: “Oil and Gas Vertical” magazine (CDU TEK)Source: “Oil and Gas Vertical” magazine (CDU TEK)

14.6

Directional drilling, million m

+32%

+3%

-34%

-17%

+40%

+38%

-7%

+31%

+5%

-23%

-17%

+4%

-39%

14.0

-16%

+16%

-16%

+11%

+176%

+23%4.3

+33%

Horizontal drilling, million m


Western Siberia remains a leader in drilling volumes; however,

the share of other regions has grown considerably over 2014-

2015Meterage distribution in production drilling

84.2% 79.1% 77.9%

10.0%12.2% 14.2%

5.8% 8.7% 7.9%

2013 2014 2015

Other regions

Volga District

Western Siberia65.5%

56.3% 52.2%

24.5%27.8% 30.4%

10.0% 15.9% 17.4%

2013 2014 2015

3.4% 5.8%

13.5%5.3%6.3%

2.7%

2013 2014 2015

Source: “Oil and Gas Vertical” magazine (CDU TEK), Deloitte analysisSource: “Oil and Gas Vertical” magazine (CDU TEK), Deloitte analysis

1.7%

4.5% 5.0%3.4%

3.8%1.9%

2013 2014 2015

Far East

Caucasus and SouthernFederal Disctrict

Timan-Pechora

Eastern Siberia

20.8 million m 19.4 million m 21.9 million m 0.82 million m 0.82 million m 0.74 million m

Meterage distribution in exploratory drilling

• Western Siberia is still Russia’s main oil region, accounting for 78 percent of meterage in production drilling and 52 percent in exploratory drilling in Russia. However,

since 2013, the share of Western Siberia in the total meterage across the abovementioned regions has decreased by 6 and 13 percentage points, respectively.

• Stable and fast growth in drilling volumes has been continuously observed in Eastern Siberia: meterage for 2013-2015 is three times higher, and comprised 5 percent of

production drilling and 13.5 percent of exploratory drilling in Russia in 2015.

• Drilling volumes in the Far East continue to change considerably year-on-year: while in 2015, the share of production drilling increased by 0.7 percentage points, a fall by

1.4 percentage points was observed in exploratory drilling.


28%21%

21%

20%

14%

15%

28%33%

2014 2015

Other

KAToil-Drilling

Targin

Tagras

Eriell

RN-Drilling

Surgutneftegaz

EDC 25%30%

21%20%

20% 13%

14%13%

6%6%

8% 11%

2014 2015

Other

Russneft

Bashneft

Tatneft

Slavneft

Lukoil

Gazprom Neft

Surgutneftegaz

Rosneft

Source: Company data Source: “Oil and Gas Vertical” magazine (CDU TEK)

Supply and demand in the drilling market have not seen

significant changes; however, EDC’s share has been decreasing,

and the number of medium and small suppliers is growingSupply in the drilling market (based on meterage) Demand in the drilling market (based on meterage)

High demand concentration and considerable segmentation of suppliers

• The four largest Russian oil companies continue to account for most of the drilling demand in the market – more than 75%.

• EDC remains the only large independent supplier in the drilling market; however, its market share shrank considerably over 2015 - from 28 to 21 percent.

• Despite the market expectations, Rosneft has not demonstrated significant growth in the use of its own drilling capabilities.


164.2 178.5227.5

79.0 84.6

103.8104.5136.1

109.862.8

66.6

77.5

28.3

33.0

31.661.7

47.5

74.8

2013 2014 2015

Other

Bashneft

Russneft

Tatneft

Slavneft

Gazprom Neft

Lukoil

Surgutneftegaz

Rosneft

The increase in the volumes of capital investment in the

construction of production wells is due to the desire

to sustain production levels at mature oil deposits

Source: “Oil and Gas Vertical” magazine (CDU TEK)

344.3 370.4435.3

91.7119.9

124.141.5

51.0

70.636.3

2013 2014 2015

Far East

Caucasus and SouthernFederal District

Timan-Pechora

Eastern Siberia

Volga District

Western Siberia

523.4

+15%

Source: “Oil and Gas Vertical” magazine (CDU TEK)

669.8

581.9

+11%

• Western Siberia accounted for the majority of capital investment in 2015. Capital investment in Russia’s main oil region increased by 17 percent as compared to 2014.

• Capital investment in Eastern Siberia has increased by 70 percent since 2013, which is due to increased production in the region.

• Most key players in the market have increased their capital investments as compared to 2014, which is due to the depletion of major highly productive “old” fields, the

necessity of increasing their oil recovery and the equipment being worn out.

• Most companies claim that they are not planning to reduce capital investment in the construction of production wells in 2016.

523.4

+15%

669.8

581.9

+11%

Capital investment in the construction of production wells, billion rubles


29.4 32.3 33.3

13.9

18.6 19.9

11.917.1

3.9

8.13.3

2013 2014 2015

Far East


Timan-Pechora

Eastern Siberia

Volga District

Western Siberia

11.520.6

14.1

9.8

12.420.3

16.4

22.3 17.0

3.56.0

6.8

4.110.9

2013 2014 2015

Other

Bashneft

Russneft

Tatneft

Slavneft

Gazprom Neft

Lukoil

Surgutneftegaz

Rosneft

Due to uncertainty in the market, companies are reducing capital

investment in the construction of exploration wells

53.2

-1%

75.776.3

+43%

53.2

75.776.3

-1%+43%

Source: “Oil and Gas Vertical” magazine (CDU TEK)Source: “Oil and Gas Vertical” magazine (CDU TEK)

• As compared to the considerable increase in capital investment in the construction of exploration wells in 2014, 2015 saw a small fall.

• Capital investment increased by 16 percent in Eastern and Western Siberia but fell considerably in the Timan-Pechora region.

• Pressured by uncertainty in the market, key players have reduced their capital investment in the construction of exploration wells.

• Surgutneftegaz is one of the few companies in the market that has expanded capital investment, having increased it more than 1.5 times.

• Most companies claim not to be planning further reductions in capital investment in the construction of exploration wells in 2016.

Capital investment in the construction of exploration wells, billion rubles


12.2 10.6

9.18.5

7.78.4

3.23.8

8.2

2.1

2014 2015 2016*

Other

Russneft

Slavneft

Gazprom Neft

Bashneft

Tatneft

Surgutneftegaz

Lukoil

Rosneft37.0 40.4

28.830.8

16.116.3

17.56.6

2014 2015 2016*

45.7

+11%

109.1

130.9

+20%

43.9

39.4

-14%

115.9

-6%

The rise in expenses on well maintenance and workover is

due to the desire to increase oil recovery at existing oil

deposits

Source: CDU TEK, * Deloitte predictionsSource: CDU TEK, * Deloitte predictions

• In 2015, the total well maintenance costs were reduced by 14 percent.

• Most key players except Surgutneftegaz reduced their investment in

maintenance.

• Q1 2016 witnessed a 10 percent rise in well maintenance costs as compared to

Q1 2015.

• Therefore, in 2016 the decrease in well maintenance costs will probably slow

down and, by the end of the year, the total well maintenance costs may go back

to the level of 2014.

• In 2015, the total amount of companies’ investment in workover decreased by

over 6 percent.

• Small companies reduced their costs on workover by over 60 percent.

• Despite the decrease in total costs, almost all key players increased their

investment in workover.

• Q1 2016 saw a significant growth in investment in workover both by large and

small companies.

• Workover costs may rise by 20 percent in 2016 as compared to the previous

year.

Well maintenance costs, billion rubles Workover costs, billion rubles


Western Siberia is losing its share in well maintenance and

workover costs. In 2015, investment in maintenance in Volga

District and Eastern Siberia grew considerably

58.1%48.8%

34.7%44.0%

7.3% 7.2%

2014 2015

Other regions

Volga District

Western Siberia

43.4% 37.7%

51.7%54.4%

4.9% 8.0%

2014 2015

2.8%3.2%

0.5%2.6%

2014 2015Source: CDU TEK, * Deloitte analysisSource: CDU TEK, * Deloitte analysis

1.1%1.8%

3.7%3.2%

1.1% 0.9%

1.4% 1.3%

2014 2015

Far East


Timan-Pechora

Eastern Siberia

45.7 billion Rubles 39.4 billion Rubles 115.9 billion Rubles 109.1 billion Rubles

• In 2015, the distribution by region in the maintenance market changed considerably.

• Western Siberia, which was the leader in well maintenance costs (58 percent of the market in 2014), gave its place to Volga District and Eastern Siberia. Its share fell by 9

percentage points. The distribution of other regions by aggregate well maintenance costs changed insignificantly.

• The distribution of regions by costs on workover also underwent changes over the past year. Volga District’s share grew by 3 percentage points, the Far East - by more

than five times, whereas Western Siberia’s share fell by over 6 percentage points.

• The shares of the Caucasus, Timan-Pechora and Eastern Siberia in the investment in workover increased insignificantly.

Well maintenance distribution by region Workover distribution by region


There was no significant M&A news in 2015;however, at the

beginning of 2016, several transactions under preparation

came to light

• At the end of 2014, Halliburton agreed to acquire Baker Hughes for USD 34.6 billion (the price was eventually lowered to 28

billion due to the fall in oil prices).

• On 6 April 2016, the US Department of Justice filed a lawsuit to freeze this transaction.

• Problems in obtaining permission from the regulators and tension in the industry led to the cancellation of the deal, which was

announced in May 2016.

• Due to the termination of the merger agreement, Halliburton had to pay a termination fee to Baker Hughes of USD 3.5 billion.

?

• In February 2016, Sinopec, a Chinese petrochemical concern, announced its intentions to invest in the Russian oilfield

services market.

• Targin and Rosneft took part in negotiations on the possible creation of a joint oilfield service company on the Russian market.

• In April 2016, Schlumberger finalised a deal to acquire Cameron International Corporation.

• The deal amounted to USD 14.8 billion.

?

• In May 2016, Technip, a French oilfield service company, and FMC Technologies, an American company producing

equipment for underwater oil and gas development, announced a merger.

• The joint company will be named TechnipFMC, its capitalisation will amount to USD 13 billion.

• The deal is due to be finalised at the beginning of 2017.

• Technip and FMC have a total staff of 49 thousand people working in 45 countries worldwide. The total income of the

companies in 2015 was USD 20 billion.

Market consolidation: failed expectations

• One of the main expectations for 2015 was market consolidation through the withdrawal of small and medium players unable to withstand competition in the deteriorating

market conditions or the anticipated reduction in market volumes, and through the acquisition of these companies by larger players in the Russian oilfield services market.

However, this expectation has not been vindicated: small and medium-sized companies hold a significant share of the market.

• In spite of news emerging on the market, there were no significant M&A deals in 2015 on the Russian or global oilfield services markets.

• The beginning of 2016 was marked by a number of announcements of transactions under preparation: however, as at the beginning of Q2, they are far from completion.

Transactions in Russia and globally


The largest global oilfield service companies are planning to

reduce their headcounts in 2016 due to a noticeable fall in

revenues in 2015

45 49

35

123 120

95

0

10

20

30

40

50

60

70

2013 2014 2015

0

20

40

60

80

100

120

140

140 142

102

365 360

308

0

20

40

60

80

100

120

140

160

180

200

2013 2014 2015

0

50

100

150

200

250

300

350

400

Headcount,thousand people

Revenues, billiondollars

• The decrease in the volumes of work in the oilfield services market resulted in a decrease in revenues for

service companies in 2015.

• The response was to reduce headcount: the top-5 oilfield service companies reduced their headcounts by

an average of 15 percent year-on-year.

• However, the measures did not help to keep productivity at the previous level: in 2015, it was USD 333

thousand on average per person in the five largest companies, which is 16 percent lower than in 2014.

• The world’s largest oilfield service companies, Schlumberger and Halliburton, are planning to continue

cutting costs in 2016, which may be evidence of the anticipated further decrease in volumes of work on the

market and a fall in revenues of service companies.

Reducing headcount in Schlumberger and Halliburton

• In 2016 Schlumberger announced its

intention to lay off 10 thousand employees,

which constitutes 11 percent of the current

workforce.

• The company’s plans include adjusting the

resource base and rationalising the asset

base as activity levels in the oil and gas

market are expected to fall.

• In February 2016, it became known that

Halliburton would lay off 5 thousand

workers, which is 8 percent of the current

headcount.

• These redundancies are due to a fall in

drilling operations and cost cutting.

29 3324

7780

75

0

10

20

30

40

50

60

70

2013 2014 2015

40

45

50

55

60

65

70

75

80

85

90

Revenues and headcount of five largest oilfield service companies, 2013-2015


Internal obstacles

• Lack of skilled labour

• Depreciation of

production assets and

fixed assets

Customer pressure

• Requirements for

continuous quality

enhancement and cost

optimization

Oilfield services market

• Key players continue to keep

their market positions

• Changes in the distribution of

regional demand

• Constant work to improve

efficiency

• Increasing use of internal

sources of funding

Positive trends

• Market stabilisation, “new reality” in the economy

• Growth in demand for local services

• Strong interest from Asian investors

Macroeconomic factors

• Unstable oil prices

• Retention of the sanctions regime

• Rise in (foreign) equipment cost

• Complexities in using and acquiring new technologies and knowledge

• Difficulties in raising external capital

Trends in the Russian oilfield services market

Source: 2016 Oil and Gas

Outlook Survey, company data,

Deloitte analysis


Contact information

Gennady Kamyshnikov

CIS Energy and Resources Leader

+7 (495) 787 06 [email protected]

Elena Lazko

CIS Oil and Gas Leader


Alexey Nesterenko

Senior ManagerCIS Oil and Gas


Steve Openshaw

Audit


Kelly Allin

Audit


Andrey Panin

Tax and Legal


Robin Matthews

Upstream Oil & Gas Advisers


AlmatyAnthony Mahon

Energy and Resources Leader, Caspian region


KievArtur Ohadzhanyan

Energy and Resources Leader, West region


BakuNuran Kerimov

Energy and Resources Leader, Azerbaijan


GlobalRajeev Chopra

Energy and Resources Leader

+44 775 [email protected]

Authors:

mailto:[email protected]











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