On Import Substitution, We Chose Evolution Over Revolution

Interview with Abdulla Karaev, Head of Procurement and Capital Construction, Gazprom Neft

Sibirskaya Neft magazine Abdulla Karaev

Recent political developments, directly impacting the economy, have brought the question of procurement security in Russia to the fore. The oil industry is no exception. According to Abdulla Karaev, Head of Procurement and Capital Construction, Gazprom Neft, the domestic oil industry has long passed the point of critical dependence on imported goods and services. Those companies that have systematically implemented import-substitution programmes can feel completely secure, selectively resolving issues regarding supplies for “complex” inventories.

— How far are domestic industry and Russian oilfield service companies meeting the oil industry’s needs for goods and services currently?

— Talking about the industry as a whole isn’t quite right, since the situation differs widely across different sectors, and the extent to which the domestic market can deliver varies not just across market segments, but also within them. As regards Gazprom Neft, usage of goods and services on the domestic market averages close to 95 percent. Obviously, consumption patterns within different companies will vary. But I would say that, in production, for example, the industry average is not less than 70–85 percent.

—And is that enough, for you to be able to talk about procurement security for existing projects?

— I think that figure is absolutely fine, allowing domestic demand from upstream enterprises to be met, and stability ensured, even in the event of some players leaving the market. Of course, the burden on the remaining companies will be greater, project lead-times might slip a bit, and a diversified approach to the problem will be essential, but demand will be met.

— Which means that Russian enterprises are producing everything you need?

— If we’re talking about our current assets and our most significant onshore projects, then in terms of those products that Gazprom Neft uses, Russian industry has got practically the entire range under control. Yes, from a technological point of view certain imported products and goods do, perhaps, exhibit better quality and characteristics. But even in replacing these, we aren’t halting production, but, instead, concurrently developing essential skills and competencies.

Added to which, we’ve already come a long way here. At one time, we had specific problems with submersible and wellhead equipment — we don’t have those problems anymore. The situations is changing, both as a result of domestic producers moving to a new level of quality, and as a result of international companies bringing production to Russia. For example, Schneider Electric, having bought a plant in Russia, is producing energy equipment to meet the needs of the mining industry. Schlumberger, which supplies us with, among other things, submersible pumps, has built a factory in Tyumen.

— What’s the situation with regard to oilfield services?

— In principle, domestic oilfield service companies have more than proved themselves on the internal market, and are meeting our needs. Again though, there are certain specific services for which western offerings are more attractive than Russian alternatives — in terms of efficiency, quality, and final ownership costs. In terms of securing production, all of this can be managed. And as regards all key services — drilling, well repairs and fracking — the situation is stable enough. But that’s not to say that our suppliers shouldn’t improve technology and improve the corresponding infrastructure.

— This is the case with onshore projects; is it a different situation offshore?

— We’re actively developing two offshore assets currently: the Prirazlomnoye and Dolginskoye fields. These projects are at different stages of development: the first is producing, with geological prospecting ongoing at the second. It’s clear that, in terms of the level of demand for goods, works and services, the consumption patterns on these two projects will be different. Once we start producing, we don’t purchase new equipment — all of our costs are related to the procurement of services, components and spare parts — predominantly imported products. However, our research shows that there is an alternative — including, among others, Asian markets. As regards the early stages of project development, in that situation we don’t, as yet, have our own quality infrastructure, able to meet demand for these services — simply because, in our country, nobody, hitherto, has had experience of implementing offshore projects in the Russian Far North. Although, as you can see, work is ongoing at the Dolginskoye field, and we’re not being turned down with services. Completing offshore projects in the future means we will need to establish quality in-country alternatives in the next three to five years — and we do have the prerequisites for this.

— And as regards tight reserves?

—The majority of projects involving the development of tight reserves are currently at the experimental stage, and it’s hard to say what procurement activities will come to light under actual production. There’s no detailed information on potential risks, due to the absence of any detailed concepts as to their realisation.

— Domestic goods and services in refining are not so prevalent as they are in production?

— In refining you have to differentiate between ongoing works and future projects. As regards new construction, the first question, of course, concerns the technology we are going to buy. It’s all, predominantly, western. Added to which, while the owner of such technology might not insist on your ordering equipment from a specific manufacturer, they do determine which international standards it must meet. Some domestic equipment meets specified standards — but some does not. Take, for example, the obvious difficulties associated with high-pressure compressors (HPCs). Apart from which, licence holders, as a rule, stipulate the use of specific catalysers not produced in Russia. Our Omsk refinery produces only a local range, intended for a relatively limited group of processes. Although, so far as I know, development of new products is ongoing.

As regards reactor, storage and column equipment, domestic producers are capable of producing products that meet oil companies’ requirements, and major steps have been made here in recent years, bringing Russian machinery producers closer to international standards. But there’s no question this is something we need to work at.

Overall, I think we have to concentrate not just on equipment production, but also on developing our own technologies. We’ve got to improve the basic research, science and technology base.

— A level of 95 percent in domestic usage of goods and services suggests that Gazprom Neft has been looking at this issue regardless of today’s “external stimuli”. Was “buying Russian” a top-down instruction, or was it a deliberate policy?

— We’re governed by the laws of the market, and there have been no special instructions from above. We just preferred evolution to revolution. We’ve always been active in developing our substitute base, our managers constantly monitor the emergence of new goods and services, and we work closely with domestic companies — together developing new products that meet our needs as closely as possible, and undertaking pilot testing at our various enterprises. And the transition to domestic production is underpinned by the overriding issue of efficiency.

If we previously assumed that the cost of owning expensive imports would, over the course of their lifecycle, be lower than slightly inferior domestic equivalents, then that situation has now changed. Nonetheless, we know where all of our bottlenecks and crunch points are, and understand the necessity of putting in extra work; and I have no doubt that we will be able to find the most effective resolution for each product or service.