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. Last Updated: 07/27/2016

Local Oil Firms Want Western Winning Ways

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Western oil field service companies providers are reporting a dramatic increase in business as domestic oil companies invest their windfall profits from high world oil prices and domestic costs that have been lowered by the 1998 ruble devaluation.

However, it is not only technology that the oil majors want, but also the corporate culture of their foreign partners.

"We have managed to triple our 1999 business plan in 2000 and next year we plan to double that again. The business has gone exponential for us," said Mike Watts, local director of Halliburton International.

Halliburton and other Western oil field service firms and the oil production firms refused give to any specific figures on their earnings, but Steve Allen, oil and gas analyst at Renaissance Capital brokerage, estimated the market for foreign companies here to be worth around $150 million a year.

Despite the rapid growth, the Western firms’ operations in Russia remain tiny and amount to only about 1 percent of their global turnover, said Watts.

Local service companies and in-house service divisions still retain the lion’s share of business as most oil companies keep costs low and ruble-denominated. Western providers’ charges are mainly in dollars.

Prime-Tass quoted Yukos-Moscow president Vasily Shakhnovsky as saying this month that Yukos will have spent $1 billion on company development this year, mostly on new deposits and upgraded equipment. The nation’s oil industry as a whole will have invested $4 billion to $5 billion, he said.

Shakhnovsky said investments in the oil sector take seven years to recoup.

Another leading Western service company, Schlumberger, said it has also doubled its local business in 2000. The company agreed to a five-year strategic alliance with No. 6 oil major Sibneft in October worth an estimated $20 million this year and more than $30 million next year.

Schlumberger is also to prospect and develop new fields for No. 2 oil major Yukos as part of plans to increase production there from 45 million tons of crude per year to 75 million tons to 80 million tons per year by 2005.

"These are more than just standard contractor-oil company relationships," said Mark Elliot, marketing manager at Schlumberger. "We are bringing cooperative planning, and the best practices to the other parties.

"I think the rationale is that you can be rich on just cash flow, but stinking rich if you put real value on the company. This is what they are after."

Halliburton’s Watts agrees that the transfer of international corporate culture is a major benefit of these relationships.

"You get that theme coming up over and over again," he said. "Russian oil companies we deal with want to know more of the Western philosophies of how to do business. They are trying to bring the best parts of that into their organizations."

High world oil prices will not last forever and companies are trying hard to prepare for consolidation in the sector, which is expected over the next few years.

"Getting results and learning to work with an outside contractor is the key," said a Sibneft spokesman, who declined to be named. "Investors will respond positively to that."

Simon Kukes, president of No. 4 oil major Tyumen Oil Co. and a former executive at U.S. oil firm Amoco before it merged with British Petroleum, thinks that if the nation’s oil majors are to convince investors that they can make the leap from domestic giants to true international players, the use of foreign management skills will be vital.

"I don’t believe that a Russian company of our size can operate without serious foreign partners," Kukes said. "To groom and grow the company from here we need a more sophisticated management."

Many domestic oil companies have boosted production during the past 12 months, in some cases by as much as 10 percent to 12 percent, after eight years of rapid decline.

Schlumberger’s Elliot states that resource management at Sibneft and Yukos now "stands up against the performance of any Western oil company — you simply could not improve the productivity of Yukos."

In 2001, Sibneft will invest $595 million in upstream development, three times more than this year.

A spokesman for Sibneft said that after several months of collaboration with Schlumberger, trust has grown and the partners are in discussions about moving "to the next stage of the alliance, working on a risk-reward basis."

Although less than full equity participation, Elliot agreed that such schemes indicate that Schlumberger is confident enough in the management of its Russian clients to take a stake in both the companies and the wider economy.

Yelena Krasnitskaya, an analyst at Troika Dialog, who follows corporate governance actions, believes that after years of appalling shareholder abuse in the oil sector the impact of service companies on credibility and share value remains secondary.

Things have gotten better this year, "particularly at Yukos, and integration with global companies should in theory lead to better corporate governance," she said.

"But with local companies there are other incentives and forces at work that explain the improvements," she added, listing pending American Depositary Receipt programs, the quality of financial and managerial advice brought in and activists among the existing shareholders.

Not all companies are managing to keep the momentum to improve corporate culture either. As they rush to maximize production, people and resources are being stretched to the limit. The huge increase in cash flow also takes the pressure off.

"I think that the [high] oil prices have been a blessing but also a curse," Watts said. "It’s actually slowed the process down. It becomes a case of near-sightedness. It’s like, ‘Well I don’t need that today in order to survive.’"

While analysts remain skeptical, some oil companies do seem to be making an effort.

Sibneft recently announced planned changes to its charter to bring the company closer to Western corporate governance standards.

James Henderson, oil analyst with Renaissance Capital, agrees that "these issues have improved significantly during the past 18 months. They are more open and clear."

Sibneft has appointed non-executive directors to the board and published far more transparent financial information.

However, the true shareholder structure remains obscure and Henderson still advises "caution" toward the company.

There is still a long way to go for many of the nation’s oil companies. As production rises, business prospects remain strong for the service providers.

The corporate culture may be more difficult Watts jokes, "One guy said to me, it is like trying to turn an aircraft with a paddle."