1

The Challenges Ahead:Evolution of the MarketFor Oilfield Services andEquipment in Russia

Thane GustafsonCambridge EnergyResearch Associates

Moscow,December 2003

2

Russian Oil Production Trends(million barrels per day)

0

2

4

6

8

10

12

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Russian Crude Oil ProductionWest Siberian Production

3

Source: Cambridge Energy Research Associates.30704-2

Projected Production by 2010: The West Siberian “Brownfield” Will Still Dominate (million barrels per day/million metric tons per year)

Timan-Pechora

.5/25 Condensate

.3/15Undiscovered

.2/11

Sakhalin

.5/24

East

Siberia

.2/8

RussianCore8.3/413

Russian

Sector

of the

Caspian

.2/8 TOTAL RUSSIA

10.1/503

4

20122008

Source: Cambridge Energy Research Associates.30709-8

From Brownfield to Greenfield:How Tight the Bottleneck?How Long the Delay?

World oil pricesExport capacity

Political riskTax regime

ROC ambitionsGas options

DiminishingReturns fromBrownfields

GrowingGreenfield

Opportunities

5

The Leading Russian Companies Have Kept their Lifting Costs Low (2002): But How Long Can They Continue Doing So?

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Tatne

ft

Rosne

ft

Surgu

t

TNK-BP (c

heck

)Lu

koil

TNK Int.

Sibnef

t

Yukos

Sibnef

t (e)

Yukos

US

$ p

er

bb

l

Average

Source: UFG Research estimates, TNK-BP

6

What will Drive Cost Trends in the Brown Fields of West Siberia?

• The dollar prices of key ruble-denominated inputs will continue to increase:— Steel: Prices of casing, pipelines, processing equipment will triple

by 2010— Wages: Will also triple— Electricity: Many pumps are electrically-driven; prices are being

deregulated— Oil tools and rigs: Most of these are produced in Russia; prices will

rise with expanding demand and real appreciation of ruble • Opportunities for increased productivity?

— Western and offshore competition: Favored by currency movements, but difficult to overcome habit of choosing lowest-cost contractor

— Potential from Spin-Offs and Competition: May prove to be illusory as monopolist faces monopsonist at local level

7

Growth of the Work-over and Service Market

Source: TNK.Source: OMZ

8

Outlook for Categories I and II: Well Maintenance, Workovers, and Field Redevelopment

0

0.5

1

1.5

2

2.5

3

2003

2005

2007

2009

Year

$Billions

/year

Workovers andRedevelopment

WellMaintenance

9

Outlook for Category III: New Wells in Old Fields

0

1

2

3

4

5

6

7

2003

2004

2005

2006

2007

2008

2009

2010

DevelopmentDrilling and WellCompletions

10

0

5000

10000

15000

20000

25000

30000

35000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

me

tre

s d

rill

ed

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Expn Drilling Devt Drilling % exploration

Sources: InfoTEK, RPI FSU O&G Statistics Yearbook, Oil & Capital

Exploration and Development Drilling in Russia

11

Evolution of Demand for Oilfield Equipment and Services to 2010

0

2

4

6

8

10

12

Year

Ca

pe

x i

n $

Bil

lio

ns

Category V

Category IV

Category III

Categories I and II

Category IV is New Wells in New Fields (incl. transportation, etc.) Category V is New Fields in New Areas (incl. new infrastructure, etc.)

12

Source: Cambridge Energy Research Associates.30709-5

Russian versus Western?Who Has the Market Share?The picture in the early 1990s

PercentRussian

MarketShare

Lowtech

Western dominance

Russian dominance

Hightech

Edge

(In theory)

13

Source: Cambridge Energy Research Associates.30709-6

The Market Shifts in the Later 1990s:The Western Opportunity Fades

PercentRussian

MarketShare

Lowtech

Western dominance

Russian dominance

Hightech

1

23

4

5

1 Ruble devaluation in 1998

2 Rise of Russian service companies

4 Some civilian conversion

5 New generation of Russian specialists

3 Hybridization (e.g., hydrofracturing)

Opportunity

14

Source: Cambridge Energy Research Associates.30709-7

Will the Market Shift Again in the Mid-2000s? Hybrids May Dominate, but Who Will Own Them?

PercentRussian

MarketShare

Lowtech

Western dominance

Russian dominance

Hightech

Western-ownedRussian?

Or Russian-ownedWestern?

1

2 3

4

5

6

2 Russian inputs more costly3 Growing need for “advanced” development and services (DOFF?)4 Russian local content requirements5 Growing Russian skills6 Russian investment in West

1 Ruble devaluation in 2003appreciation

15

Possible Consequences of the Recent Troubles for the Oil Services Market• State Campaign against “Rape and Pillage”?

— Pressure to return to “traditional” emphasis on infill drilling as opposed to “harmful” techniques to maximize per-well flow rates

— Ban on “cherry-picking” by shutting unprofitable wells— Stricter enforcement of FDPs mandated by institutes

• Pressure to explore more than is economically justifiable?— Rejection of 10-year R/P ration in favor of traditional 40-year— Implicit or explicit threats of license removal for non-compliance— Pressure to begin premature development of “rim” opportunities?

• Some companies favored over others?— Rosneft, LUKoil, Surgut move ahead— YukosSibneft slows down?— TNK-BP becomes leader?

• These possibilities will impact the size and shape of the oil services market

16

Source: Cambridge Energy Research Associates.90304-7

THE BIGGEST CONSTRAINT AHEAD:The Race Between Crude Oil Available for Export and Export Transportation Capacity

9

1995

MillionBarrels

perDay

1990

8

0

6

5

4

7

3

2

1

2000 2005 2020 2015 2020

East Asia

Barents Sea

Southern Druzhba

Northern DruzhbaOther

PrimorskButinge

VentspilsOdessa

Tuapse Novorossiysk

Non-FSU Exports

17

Possible Implications of Recent Troubles for Oil Transportation—and Thus for the Oil Services Sector

• Tensions between the private sector and the state could produce slow-down or paralysis in decision-making— Yukos’s Daqing project may lose speed; yet Nakhodka pipeline is

too uneconomic to go forward— Murmansk pipeline and terminal could get tied up in battles over

state-monopoly principle and right of private stakeholders

• The state may move to contain or shut existing loopholes for exports— By ending the “90% rule” on oil products export tax—and then

raising export taxes— By raising railroad tariffs to snuff out non-Transneft crude exports

• These could result in constrained exports, shut-ins, lower production—in a word, lower activity—and thus less spending on services