Our job in localising oil and gas technologies is to improve products in Russia, while outstripping global competitors in technology

Bulletin of the Union of Oil and Gas Producers of Russia

Bulletin of the Union of Oil and Gas Producers of Russia

This special supplement to the Bulletin of the Union of Oil and Gas Producers of Russia think tank, “Current issues in import substitution”, comprises an interview with an expert on the current situation and status regarding import substitution in the industry, the problems faced, and strategies for development.

Experts’ views may not coincide with other points of view or the position of our editorial team. For that reason, the objective of this special supplement is to turn over its pages to act as a forum for differing points of view on the various problems in developing import substitution.

Readers are offered the opportunity of hearing the most diverse specialists, first hand, representing the various participants in this most complex – and most important – process of developing and strengthening the Russian economy.

Featured in this issue – Sergei O. Arkhipov

Head of Technological Partnerships and Import Substitution, Gazprom Neft PJSC.
Previously: Member of the Management Board and Deputy CEO at United Heavy Machinery (Uralmash-Izhora Group).
Founder of the CleanTech Russia non-profit organisation, an “accelerator” for resource management and energy efficiency start-ups.
President, Harvard Alumni Association, Russia.
Official representative of the Russian Massachusetts Institute of Technology (MIT) Alumni Association.
Graduate of the Legal Institute of the Ministry of Internal Affairs, Russia; Harvard University; and MIT.
Sergei Arkhipov teaches technological entrepreneurship, organisational design and strategy at the Moscow Institute of Physics and Technology, in the Russian Venture Company faculty.

— Sergei Olegovich, how do you view import substitution in the fuel and energy industry?

— Let’s clear up some terminology. Import substitution means the same thing as developing Russian products and technologies, and localising foreign companies’ products and developments in Russia. The most important thing is to develop Russia’s industrial base, together with engineering and production, to allow the development and production of cutting-edge products meeting the industry’s needs, in Russia.

You can find all sorts of statistics and data, from multiple sources, since each of these will have their own view of the situation regarding import substitution, and their own basis for reaching these conclusions. Practically all oil and gas companies are talking about 90- to 95-percent Russian content in their procurement requirements. And this is reasonably reliable information, particularly if you bear in mind, for example, that approximately 80 percent of expenditure in production goes on tubing and piping — and that the tubing and piping we have is Russian, and very competitive.

It’s not always right to talk in percentages. “Small, but perfectly formed” — that saying best sums up the problem of import substitution in the oil industry, which is quite small in relative terms, but which has a significant impact in that a new generation of high-technology solutions are so heavily dependent on it. So the import-substitution agenda has come to the fore — indeed, throughout the world today, and not just in oil, a small proportion of high-technology products are having an incomparably greater impact on the outlook for the industry’s development. The most challenging areas, like offshore and shale oil deposits, can only be properly developed by using the latest technologies — which is why they’re vulnerable to sanctions, because it’s in precisely these areas that the industry’s dependence imports is greatest.

This isn’t an exclusively Russian situation. The objectives of import substitution — and, in particular, of increasing the proportion of national content — have been, and continue to be, faced by all oil-producing countries, from Norway to Saudi Arabia. Some of them are like Norway, for example, which has been able to transform itself from a small fishing village to a recognised global leader in offshore production technologies, while others are just starting out. This challenge isn’t so much political, as economic and pragmatic. It’s also a question of developing a high-tech economy, and ensuring security of supplies, with the technologies essential for normal uninterrupted operations readily available, regardless of circumstances. As well as the question of taking pride, as a country, in the ultra-challenging technological solutions the nation is able to produce. In our case, sanctions have nudged national producers and suppliers into more proactive development of high-technology products.

According to data from the Ministry for Industry and Trade, between 2014 and 2016 dependence on imports in machine engineering for the fuel and energy industry dropped from 56 percent to 52. The oil industry is expected to be completely independent of imports by 2020. We can say that import substitution in the oil industry is going reasonably well. In any case, regardless of what the target percentage is, there are critical areas in which you have to be No. 1 worldwide in terms of technology. We have seen progress in moving towards technological independence (import substitution) — and, beyond that, in optimising export potential for Russian technologies in other oil-producing countries: which means confirming our market leadership in terms of technology.

— And what is it about Western partners, in your view, that’s so useful to the Russian market? And how do these, essentially, differ from Russians?

— In terms of “hardware” and software product quality, there’s practically no difference. Russian industry is capable of producing quality products, fit for purpose. But if we’re talking about fundamental differences in today’s technological world, then it’s a question of something we understand to be marketing — and which, ultimately, isn’t there. It’s about the approach to service that international partners are prepared to offer, and which, in fact, is a way of controlling a retail or sales channel — or, more precisely, the market. At the end of the day, you’re not buying a product from them, but a solution to your problem, through their service function. This might be the replacement of spare parts — which are sold not as replacements for parts, but as an activity that forms part of their service offering (they only change what’s worn out, and not what’s due for replacement under the plan); or, at the level of the oil companies — buying after-sales services in seismic surveying, or fracking. In other words, this is a departure from the classical scenario of the client or customer breaking a task down into its subcomponents (works, equipment, consumable materials, and so on) and, instead bringing these various components together at the task level, and completely delegating some of their traditional functions to the service company, which brings all of these components together in a single service activity, and sells them to the consumer as a maintenance or service package. To some extent, this is similar to what happened structurally in the transition from subsistence to specialised farming.

Two key consequences of the transition to the service model are interesting in understanding this. The first is the voluntary abandonment (the gradual loss) of part of its previously key competencies, on the part of the client or user. The outsourcing of some functions is the pivotal element in the transition to a service model — but, at the same time, in handing over, you forget. The second is the concentration of what were previously your own competencies in new centres within and among the service providers. If you are not a service provider, then the latest technological solutions, created by the service company in solving your problems, don’t belong to you, either; in giving more away, you stop learning. The problem of transferring competences and skills from the user to the service company — this, probably, is a problem at the governmental level. When a user abdicates some functions or another, outsourcing these to a service provider, the job of holding onto these within the national economy falls within the government’s remit. Otherwise, you become dependent on external agents for these services. You can see this in the everyday example of the new generation of taxi companies including Uber or Yandex.Taxi — the driver owning the car carries the main costs and risk, although the main profit margin doesn’t go to him, but on the service element, which provides the driver with passengers. At the same time, we all understand that progress cannot be stopped; and living in a primitive or subsistence economy is, of course, possible, as in the Soviet Union, but it’s very expensive, since only niche specialisms allow you to achieve minimum costs. And if we are going to continue competing in the global market, not only the best technologies, but also international best practice, particularly in providing services, need to work in our favour.

It’s now very fashionable to talk about “Industry 4.0” (the fourth industrial revolution), but in the context of our discussion, this is yet another element of dependence — now both on IT, and, in fact, on IT providers. Of course it’s good when, for example, installed sensors mean you can save on scheduled maintenance and repairs, and replace only those parts you really need to. On the other hand, you are completely dependent on the vendor who has sold you such IT-solution-packed equipment, with such an efficient service function.

The task of developing new Industry 4.0 generation fully-fledged national service-providers within the industry is a key area of focus in import substitution and in technological independence, at the end of the day. Systemic support for Russian high-technology service companies in today’s changing global economic structure is, perhaps, government’s most important task, in the near future.

— It would seem Western equipment suppliers and technology owners are better placed in service provision than Russian ones. Is this a question of experience, in your view?

— It’s a matter of thinking, first and foremost. Indeed, when you see that the world is changing the question becomes — how do you try and fit these changes in with your own existing base? We all know perfectly well that “in the beginning was the Word” — that is, ideas come first, and material things — second. It’s no wonder one of the world’s leading technological institutions, MIT, chose as its slogan “Mens et Manus” (“Mind and Hand”) — in other words, first you have to think and invent: and only then can you “do”. Calm reflection leads to the realisation that the service model is winning , and that, through specialisation and the integration of the latest developments, Industry 4.0 is allowing companies to make the important and qualitative transition from hardware suppliers to client-focussed solution providers. We, unfortunately, from several points of view, still have a strong Marxist belief in the primacy of material things — a belief in the importance of owning physical assets. But the world has changed a lot since Marx’s times, and has become more complicated, and there are many examples where owning “a bit of iron” or a vacant 3,000-square metre production floor doesn’t make sense without also owning a service solution for client needs.

We’ve now stepped up methods in solving the problem of ensuring independence from imports, at the technological level. It’s understood that the next stage will be to ensure technological independence at the service level, on the principles of Industry 4.0. If we don’t do this now we’ll definitely fall some distance behind in technological terms. What inspires a healthy optimism is that the market is in a new paradigm, which still hasn’t become completely clear, for either Russia or the West — and companies are trying to get a feel for the shape of the new service economy. We, as an oil company, see this, and actively support the idea of the digital transformation of Russian companies.

— This question of developments — this is one of the key questions in developing import substitution. Is there enough investment in R&D, in your view?

— In terms of absolute figures, there’s been some growth in the volume of financing in R&D in Russia, over the last few years. The government’s allocating a reasonably large amount of money to this, and there are statistics from the Ministry of Industry and Trade that show significant growth in percentage terms. Looking at relative figures, in terms of R&D globally we’ve lost about one percent. Spending on R&D in our country has fallen from three to two percent.

Numbers are numbers but, as Alexander Suvorov said, “You win not by numbers, but by ability.” What’s important is not how much you spend, but the outcome you get: don’t count your chickens before they’re hatched. According to statistics, most R&D in recent years has been going on in the military—industrial complex, with a further substantial amount being undertaken by state corporations. If we compare this with the global picture, then R&D in advanced economies is mainly being financed by small and medium-sized enterprises (SMEs). They are providing the main technological resources, which are then acquired by large companies through mergers, acquisitions, and buying patents. For example, in the pharmaceutical industry, the giants have not been developing for some time — it’s too expensive, and too risky.

Why small companies, specifically? Small companies are born in their dozens, hundreds: and dozens and hundreds of them also die. Accordingly, the “surviving” companies come up with the solution, which is then scaled up to cover the whole market. So working effectively with SMEs in technology will allow us to create an additional efficiency multiplier for R&D projects in Russia, including for oil and gas. For us, by the way, the success of small Russian technological companies in import substitution delivers a financial gain — they solve engineering challenges faster and cheaper, and are more aggressive in terms of lead times

— In that case, what areas of R&D need to be developed as a priority? Where are we falling behind the most?

— In principle, money will always find a good project, particularly since the Ministry of Industry and Trade has recently created a large number of effective financing instruments, through loans and grant funding. However, the problem often lies with Russian companies’ mentality, in that they always try to secure exclusively non-repayable (grant-aided) government funding. They say, like, we don’t want loan funding from the Production Development Fund at five percent p.a., we want a non-repayable facility. Given that attitude, everything is immediately obvious — you can’t make an omelette without breaking a few eggs: if a project isn’t expected to generate the income to pay off a loan from the sales of the product being developed, then this is an alarming signal about the viability of the “grant-aided” project being presented.

And major, tightly focussed RD on hyper-critical projects, obviously, won’t do us any harm. Take, for example, the Bazhenov Formation. This officially falls under sanctions but, objectively, the world doesn’t have the sort of technologies that would ensure effective production here. Which is why Gazprom, together with a range of other players, has established a testing ground for investigating the problems of — and finding effective approaches to — production at that deposit. And what we need here, in fact, is the creation of new, 100-percent Russian-origin breakthrough products. Of course, they’ll be based on some existing solutions or other. But we appreciate that such solutions — without adaptations, modifications, improvements, and without offering new attributes or features — won’t be able to solve this problem. So the Bazhenov Formation is our overriding priority, and the first area of focus.

The next requirement concerns multi-stage fracking. The modelling of the fracking process, per se, plays a critical role here. With the support of the Ministry for Industry and Trade, the Ministry of Energy and the Ministry of Communications and Mass Media, and in conjunction with other industry players, we have run a unique competition to put together consortia, have put four such consortia together and, as a result of these competing with each other, have named the MIPT-Skoltech-St Petersburg State University consortium as the winner of a competition to develop a Russian product for fracking modelling. Worldwide, the number of similar software products can be counted on the fingers of one hand — and all of them are American-made. The product being developed by the consortium will be head and shoulders above international competitors. The process, which began as an import-substitution programme for existing competitive American products, is, in fact, now turning into a process of outstripping imports, with colossal export potential. And it’s certainly the case that Russia, a future leading country in oil production, has all the prerequisites necessary to also become a leader in exporting oil-production technologies.

At the systemic level, demand for genuinely called-for projects and R&D is being curated by an inter-agency group comprising the Ministry for Industry and Trade, and the Ministry of Energy. The group includes all of our vertically-integrated oil companies (VIOCs) and a range of major industrial companies. This group has identified about 60 areas of focus, in which technological development of the most cutting-edge Russian solutions is ongoing. All of these areas involve high technologies, and each of them has enormous export potential. This was confirmed for us during joint discussions with oil companies from the Persian Gulf, whose dependence on Western solutions is close to 100 percent. For them, transitioning to Russian solutions is one element in diversifying their supplier pool. There’s no politics here, it’s purely economic. When you have a single monopoly supplier, and it’s demanding incredible prices, diversifying your suppliers is the only way to go.

I repeat — in addressing the task of developing the national supplier base, there are two equal solutions: developing Russian solutions from scratch, and completely localising the solutions of international players, in partnership with Russian companies. The Chinese have an appropriate saying for this — it doesn’t matter what colour a cat is, so long as it catches mice.

— The question of localisation is quite interesting. Isn’t this just some kind of double standard? Basically, just keeping the same foreign suppliers, and the same dependency, but in Russian packaging?

— It all depends here on the goals set for the project. For example, our company has an internal list of criteria, on the basis of which we determine whether a product is Russian or not — that is, whether it solves the problem of ensuring security of supply for us. For ourselves, specifically, we decided that by 2020 a Russian product should be deemed one in which the proportion of Russian content is over 90 percent. In terms of service providers this will mean more than 50 percent of key technicians holding Russian passports, with up to 90 percent of labour costs going on Russian personnel.

Such criteria, as you will appreciate, don’t, in principle, allow manipulation or the offering of “screwdriver assembly” operations [in which components from multiple suppliers are simple assembled on-site — i.e., foreign products are effectively imported, albeit in disassembled form]. We understand that “screwdriver assembly” is only likely to work for us for two or three years, and that even then we’ll still need to develop it, launch the next-generation product, and work on modernising it, at the highest level, against the competition, as part of our job here in Russia. And if Russia hasn’t developed the science and technology (R&D) base and the engineers able to do this, then we’re going to have to deal with the usual obsolescent production — examples of which we’ve had enough of, throughout history.

The notorious Zhiguli AvtoVAZ plant in the Soviet Union is, in my opinion, an example of poor technological transition (localisation), insofar as it failed to ensure the product’s competitive technological development against global market competitors.

Our task in localising oil and gas technologies is not to get hit in the face, and to do what we have to in order to ensure that a product’s Russian origin means it can be improved in Russia, and can be technologically developed concurrently with — and faster than —internationally competitive products. And an essential prerequisite for this is localising R&D. If you’re not localising development and testing or R&D then the project’s condemned to technological inferiority from the word go.

— Where’s the advantage in localisation, and what’s the point of it for Russian companies? For western companies it’s obvious — they hold onto their business: but for our clients?

— Speed, and the opportunity to further develop skills and other approaches to managing business, in Russia; increasing competition in the Russian market; knowledge sharing; and a multitude of other useful outcomes. Western companies are established technological leaders with smooth-running quality systems, production systems and component-supply systems — and, objectively, aren’t just component suppliers, but also suppliers of system solutions. Any localisation for them, means, above all, reorganising existing smooth-running operating systems and working practices — which means it costs money and time. For them, their whole system is, already, up and running, and they, objectively, don’t want standard localisation. In the absence of any distinct or forceful business pressure, any company will simply build you an assembly floor — a hangar, and offer you screwdriver assembly; and you’ll get your pumps, on which only the logo will be Russian. Which, obviously, doesn’t suit us, because with the next round of any kind or political hysteria, we could simply lose the supplier. So a full-fledged “propiska” (residency permit) for a foreign company — that is to say, not just assembly, but also component production and running R&D activities in Russia — that’s what we call localisation.

— So, in your view, the way to localise production is to promote our own products?

— Definitely. And it’s worth paying attention to Norwegian experience in localisation — which could be described as the most successful in the world — here. Where and how it differed from Brazilian experience, say. Which would be in Brazilian experience requiring capital investment, and measuring project effectiveness in terms of the volume of investment in them — the materialistic approach. And if a supplier didn’t fit in with the established framework, it was simply fined. Coercion in building up Brazilian “hardware” has resulted in an increase in national content, but not in advanced industries, so that now the Brazilian continental shelf — which was the whole point of the process, really — is being worked by the Norwegians.

In developing the Norwegian oil industry, the Norwegians went straight to the heart of the problem. To start with, in setting out the key conditions for localisation by those foreign companies owning the technology, they put forward only the requirement of localising R&D, without any reference to localising production. Localising R&D made it necessary to test what the designers worked out, and the engineers drafted. And this led seamlessly to the development of small innovative companies, which began developing products matching the ideas engendered by R&D. Gradually, these engineering companies began to build up their own products by developing a system of sub-contractors and sub-vendors from the main European countries. And now we see that Norway, without a doubt, is a leader in offshore technologies. Their bread and butter is offshore projects, in which they have achieved incredible success. So the question of localising R&D is crucial in localisation. As successful practice demonstrates, competent localisation of R&D can engender a vibrantly growing industry in its wake.

— And what if the process of localisation creates hothouse conditions for leaking our technologies and brainpower abroad?

— In today’s competitive world, maybe it’s more important what flows in — and water, as you know, always finds its own level. Let me give you the example of the Russian disruptor, RRT Global. The company ultimately went on to develop isomerisation technologies which differed exponentially from pre-existing solutions in terms of their effectiveness. For several years they tried to sell their technological solutions in Russia, but without success. Ultimately, they opened an office in the USA and sold their technologies to a leading global company. And there are many other examples in which companies were forced to go to the American market, because what they were offering were specific, point solutions. And this, as it happens, was the problem with RRT. They weren’t offering refineries a full and complete process, but only a partial one — isomerisation. They didn’t have a service-economy model, which would have offered clients a full turnkey solution. So the only way for their interesting technology to have any further life was to sell it to a market player offering holistic solutions — but we’ve already discussed that.

Suppose you offer a super-effective well-finishing system, and the market is structured in such a way that this operation is bought by a client from a service company as just one component of a service — well, you’ll have your hands tied, because you won’t be able to sell your improvements or developments to anybody except that service company. But that’s not important: what’s important is that if you look at foreign service companies’ appetite for buying small technological companies, and the appetite of Russian service companies — it doesn’t work in our favour, unfortunately. Foreign companies are exponentially more willing to buy technological solutions. Even here, it’s not a question of possibilities, but of strategic focus — your world view. If you are focussed on ongoing, consistent growth and technological leadership — that’s one thing, and you need new technologies, on any terms, so you buy technology companies. If you are only focussed on making money fast — well that’s a completely different story — you just find a technological leader and ask them to sell their “old shovel”.

It’s that focus on making money right now that’s got Russian industry into its current state — that of playing catch-up.

“We’ll make as much money as possible and buy the best technologies available from abroad” —this was precisely that mindset, the “Arab approach”, if you like, that became entrenched the 1990s and 2000s. So we can’t say we have something that has irrevocably flowed to the West. It could be said, on the contrary, that it’s returned in the guise of some solutions or other that we are still using, for more money. It’s a fundamental question here. We need — at the state and industry level — to create an environment that stimulates local service companies to actively develop their own technological solutions, and acquire small technological start-ups through M&A. It’s precisely the level of M&A activity in Russian technology service companies and start-ups that needs to be increased 10-fold if we want to see the Russian service sector competing with recognised global technology leaders on an equal footing. This is another area of import substitution now seen as a priority. For example, we’re currently managing the development of rotary controlled systems. And, moreover, we’re not buying these systems directly — we’re buying a service of which they are only a part — albeit an important one. So, we oversee all stages of pilot testing, show what needs to be changed, and how to improve the product. And then the next stage is that Russian rotary systems get introduced into service companies’ procurement, from our suppliers. Giving Russian products competitive access to the Russian market, actually, is the best guarantee against brain drain.

— How can we be confident that all those technologies developed in localisation partnerships will be used in Russia?

— There’s a good saying — “There’s no winning love by force.” The one thing we can, ourselves, do to ensure guaranteed access to technological solutions is to have engineering centres like this next to each other, in one country, on the one hand — and to have Russian passport holders working within them, on the other. If you’ve got non-Russian passport holders working in engineering centres like this then the likelihood that tomorrow they’ll pack their bags and go is much greater than if you’ve got 100 people working in a centre, 90 of whom have Russian passports. That is, you’ve got to ensure the greatest likelihood that, in any situation, our access to technology is maintained — either by physically locating it within the Russian Federation, or by having Russian developers, qualified workers, and engineers.

Once work is completely embedded all the way down the line — so that “what the head dreams up, the hands do”, then we’ll be able to say import substitution has been achieved.

Import substitution is, fundamentally, all about competitive products. So the “import substitute” has to be considered in terms of export potential. The products we develop must, a priori, be worthy of global interest and be competitive on international markets.

For example — if you look at the history of the last 10 years, Russia didn’t have its own proppants. It was precisely the encouragement of Russian proppant producers (not least Gazprom Neft) that led to the industry to now using exclusively Russian products. Foreign service companies in Russia are using Russian proppants. And, moreover — Russian proppants are now being exported. Proving that we, as an industry, can ensure the development of our local suppliers to a level at which they begin not to just to supply the local market, but at which they boldly go on to export. The situation with proppants is a classic example of how import substitution in Russia has every chance of success, and every chance of going beyond mere import substitution.

— An interesting example. And, say, if we’re talking about processing: are there any priorities here vis-à-vis import substitution?

— Yes, catalysts and additives. Catalysts are a priority area of focus for the inter-agency task force. The leading roles in respect of various kinds of catalysts have been assumed by Rosneft on one side, and Gazprom Neft, on the other. Rosneft is already producing its own catalysts in Angarsk. Gazprom Neft is running a project to produce its own catalysts at its Omsk Refinery. There are plans to commission sufficient capacity to supply domestic catalysts to the entire industry in Russia.

Catalyst production is one of those industries in which economies of scale have a significant impact. That is, the more you produce, the lower your production cost. So, obviously, the important thing here is to consolidate demand across the entire industry, while ensuring access to exports.

It’s the same story with additives. The reality with additives is that Russian companies — in a range of areas — have been engaged in blending, taking imported components and blending them. Now the emphasis is on creating exclusively Russian components, and first out of the tracks is a project being implemented by Transneft, together with partnering companies, on additive production in Elaburga.

— If it makes sense to replace basic refining technologies — can some western technologies be left in place?

— In major investment projects for the construction and modernisation of refineries or petrochemical enterprises, the licensors tend to be foreign players, as a rule. What’s important to the clients and customers is that the licensor guarantees them the opportunity of acquiring a turn-key project of guaranteed quality. Licence costs run to several million dollars but, in terms of the billion-dollar cost of the project itself, that’s barely noticeable. However, if you look at this more deeply, choosing a foreign licensor immediately limits the client’s freedom in their contracting strategy — leading to the involvement of a foreign EPC contractor, who then brings in his own accredited, and usually foreign, suppliers. And that — according to Ministry of Energy statistics — is what’s happening, with more than 70 percent of equipment and other costs in major projects going on goods of foreign origin, despite the availability of competitive Russian products. In this situation we again come to the conclusion that in today’s world it’s no longer enough to just produce a quality product — you have to understand the structure of the market, and how to get a product into the right sales channels. There’s no conspiracy theory here — it’s just the way the whole world works — and Chinese companies, for example, have understood this, and have long been selling their products successfully by being part of American, European, Korean and other EPC-contractors’ sales channels. In the same way that even great racing car drivers still need to know the rules of the road when driving in town.

Taking up the challenge of increasing the proportion of Russian products in major projects, an instant-access programme has been developed within Gazprom Neft, which is likely to be implemented with the support of the Ministry of Industry and Trade and the Ministry of Energy. Under this programme, it’s been found that the most critically important point is the “propiska” (registration) of Russian suppliers in vendor-lists (the approved directories of trusted suppliers) maintained by major EPC companies and licensors. According to our estimates, Russian companies being registered in such vendor-lists would increase Russian content in such projects by up to 80 percent.

Also, in the course of our analysis it became clear that, of the 10 key licenses into which large projects are typically broken down, about eight could, to a greater or lesser degree, be fulfilled in Russia. There are Russian developments that have not reached the level of a full-fledged license. And this is, already, the second wave of attention to be paid to helping Russian technological solutions acquire the status of fully fledged licenses, determining the configuration of major projects. In the meantime, we have, in theory, Russian developments, but many of them have not yet been tested, in practice — except in laboratories. It’s important to test everything out first, to show it all works, and then to think over the question of integration. We do have Russian re-workings, and works in process, as you can see.

— So it turns out, the principal objective isn’t to replace everything 100 percent?

— There’s no goal of 100-percent substitution because, whatever the situation, we are creating competitive Russian suppliers and understand that, in order to avoid a monopolistic view of the market and exorbitant prices, you have to have healthy competition. In particular, you have to have a healthy opportunity not only for a competitive market between national and foreign suppliers, but also for them to cooperate in creating new joint solutions. At the same time, you do need to create full-fledged alternative Russian products, fully competitive 100 percent of the time.

— Your opinion on the situation in automation management systems is interesting. Many experts see the greatest lag here.

— The issue of automated process control systems, actually, is very interesting. In fact, there aren’t any strict standards, globally — which is why so many companies produce systems like this. Under sanctions, some sources might refuse to supply, but there are always others. Then there’s also the theoretical idea of standardisation — if only at the single-country level. And here we see that concerns are arising among numerous Russian suppliers who are genuinely starting to offer Russian solutions. And there are examples of successful deep localisation — including Schneider Electric, for example.

There are problems in software, particularly at the level of operating systems. Here, the oil and gas industry can’t give any lectures, globally, because all economic sectors use operating systems. But as regards professional software, here we are seeing that the efforts of Russian mathematicians and developers are creating excellent competitive products (an example being 3D-modelling in hydraulic fracturing), and then some. So in terms of highly specialist oil software, specifically — the problem isn’t worth talking about.

— Obviously, the tasks and areas involved in import substitution are clear, and explicit. What might help in getting them implemented effectively?

— Firstly — the necessity of actively involving the customer or client in a project they believe to be important, for them. That is to say, if a producer says that rotary controlled systems are an important project, but the customer or client doesn’t think so, then, consequently, that client won’t be involved, and won’t help the developer to bring the project to market, or to commercial production. Sooner or later, this will lead to another unnecessary R&D paper, and a prototype gathering dust somewhere on a shelf.

The second critical point is — engaging and stimulating the customer or client, and not the producer. Which is what we’re arguing about with the Ministry of Industry and Trade. This works everywhere else worldwide — the state encourages customers to buy domestic products or content, rather than encouraging producers to launch new kinds of products. In this approach to stimulation, the basic principle of demand giving rise to supply should also work.

Some also cite the availability of state financing as a critical condition. But, in my view, that’s a bit trumped up. Several projects we’ve been working with, recently, funnily enough, have declined government support. They’re able to find money independently, on one condition — the recipient has to demonstrate the size of the market. In starting to develop a new product, a healthy business has to understand how many units it will be able to sell. Corporate consumers need to show not just their internal needs, but also the long-term needs (in their view) of the whole industry.

It is also assumed that the existence of long-term binding purchase contracts is a super-important condition for the development of new kinds of products. We see that, in practice, this is not the case, most of the time. You need a long-term contract, in fact, to allow a producer to attract financing, under guaranteed demand. If the producer can to attract financing, a long-term contract acts as a kind of a sinecure.

— As regards testing samples. A project for creating independent test facilities is being actively discussed by our Expert Committee. How do major companies see this? How important or necessary do you think independent test facilities are?

— The most important thing is that a test facility be established not for the sake of a beautiful building, but as a tool for solving a technological challenge. Consider Gazprom Neft’s Bazhenov technical test site (its Centre for Engineering and Technology for Hard-to-Recover Reserves), in Khanty-Mansiysk. The need for that test site was driven by the objective necessity of acting in concert with multiple players — to agree on a single and inclusive approach, and on universal standards in addressing the technological problems of this particular technical challenge.

Gazprom Neft actively supports the joint testing of new products by VIOCs. Why? Because in Russia there are no reference points — no benchmarking — for new products. That is — new products can’t be bought, because nobody’s bought them yet — it’s a cyclical argument, with no solution.

No test site’s going to solve that problem, unless or until you get rid of that technological snobbery. You’ll have your test sites, but they’ll just be idle.

Through the Ministry of Energy, we’re now trying to convince colleagues to run joint tests, in which everyone can do their bit. Joint tests like this, satisfying everyone, are likely to prove an engrossing project in terms of benchmarking. This is going to take some work. And whether this takes place at an independent test site or at a VIOC-controlled facility — I don’t know. I think that, in many cases, it’ll probably be more effective to do this at an asset or facility belonging to a specific VIOC, by virtue of the fact that they’ll at least have infrastructure in place. In any case, we first need to agree on the principles of such joint testing, on coordinating preparations for the technical tasks involved in testing, and on the joint use of test sites — and not adopt a position of technological separatism.

The fact that you’ve tested some compressor, on your own, doesn’t mean you’ve gained any extra know-how. It’s a common commodity, traded on the open market. And what’s the point of hiding behind a fence, of testing something “in the dark”, and not telling anyone about it. Every company has, definitely, some kind of know-how developments that, maybe, don’t need to be made public. But it is absolutely wrong to treat know-how in the same way as working with conventional suppliers of classic equipment and technologies. It’s not rational — and it’s just expensive.

For example, the major international oil companies are moving towards unifying onshore and offshore standards. They’re reaching a level of cooperation deeper than anything we could even dream of. The economy, in an era of cheap oil, dictates the need for coming together, to reduce costs. So a programme for joint testing, a programme for collective standardisation, is worth considering as a successful tool in achieving those goals.

— There’s no doubt the contact factor is very important. In your opinion, do large companies need to meet with representatives of domestic manufacturers and suppliers more, in order to understand each other better? Sometimes, Russian producers, particularly SMEs, can’t fight their way through to even a basic interview in a large company.

— The problem isn’t how accessible the customer or client is, but how far it has, internally, worked out a system for engaging with the external environment. If the client is operating on the principle of improving operational efficiency on a specific project with pre-existing equipment, their sole interest is going to be buying a specific pipe or compressor 10 percent cheaper. Other alternatives — for example, compression, or using a different pipe, can’t, objectively, be of any interest, due to the limitations of the technical environment and the standards on that existing project.

The system is designed in such a way that the procurement or import-substitution department works towards replacing specific similar imported products, or maybe developing something for future projects — but again, something very specific. If the company has a system for technology scouting in place, that means that they might also involve innovative technological solutions, that don’t fit well with existing projects.

You can’t say that you can’t get through. All available customers are accessible — as are those involved in import substitution: the question is whether you’re bringing them the solutions they genuinely looking for. And can you talk about closedness when you’re bringing them a solution, albeit incredibly innovative, but which the customer, objectively, doesn’t need? I think not.

— On the one hand, meeting with everyone, obviously, is impossible. But, on the other hand — a basic interview could speed up a lot of processes, and make things clearer — actually, for both sides.

— The golden rule is that you have to know your clients needs, and offer solutions. In our company, various subsidiaries have readily available information on our needs, whether this is in R&D, procurement, or import substitution. Gaining an understanding of such specific, formal needs, and offering solutions to them — that’s the correct — and a very straightforward — approach.

On the issue of import substitution, for example — on our website, in the “Procurement” section, under “Technological partnerships” — you’ll find a list of products of interest to us. There you’ll also find our very simple procedure for communicating proposals. All submissions are looked at, and there’s a large number of new suppliers’ accreditations achieved under our procurement system, specifically through that list.

Gazprom Neft is also actively involved in technology scouting. We appreciate that this isn’t import substitution per se but fully fledged import replacement, under our paradigm, insofar as technology scouting — that means real breakthrough developments, that could change the structure of the industry, as a whole.

If a company’s internal systems are designed on the principle of achieving optimum outcomes in operational activities in the here and now, then it’s going to be difficult keeping an eye on technological challenges and solutions in five to 10 years’ time. People are focussed on what’s happening today, and what’s going to happen in five or 10 years’ time isn’t interesting to them. Because of their operational engagement with the here and now, not all companies — not just Russian, but western too — have basic skills in technology scouting. So they’ve got used to just buying the best available solutions.

In my view, technology scouting is an essential activity in ensuring a company’s technological leadership in the short term. To that end, there has to be a structural function within the company investing time in scouting, as well as a team of professionals acting as technological brokers, able to implement unique cutting-edge solutions in the company’s current and future projects.

— Sergei Olegovich, turning to our final question. Name some top-rated projects in the industry directed at solving the challenge of import substitution?

— One excellent import-substitution project our company can be proud of is the production of base oils for drilling fluids — something that hasn’t existed in Russia, hitherto. The first consignment was produced in 2017, and testing successfully completed. A western service company is now about to purchase the entire lot. That’s what we’re so proud of — a product that has come into being thanks to our import-substitution strategy, and a very competitive one, at that.

We’ve also got a very interesting project going on in the agricultural sector currently. It turns out, where you have agricultural industry, you have the oil industry. But there is an interconnection. This project concerns production of Russian guar gum. Guar is a pulse crop, grown mainly in India and Pakistan, and is the most important component in hydraulic fracturing. A huge amount of the world’s guar is consumed by the oil industry. Before fracking was invented, guar production was small, mainly meeting the needs of the food industry. Now, Russian companies, with our support, are managing guar plant-breeding operations in the Crimea and the Krasnodarsky Krai.

Also — there’s the Cyber Fracking project (a breakthrough technological solution with huge export potential — a software product, for fracking modelling), and compressor production at Kazancompressormash — who are now in a position to produce a standard-compressor product line for Russia’s entire oil industry. We spent a year working with engineers in order to achieve that 100-percent outcome. In terms of offshore, we could cite success in developing the Russian seismic sector, and much more. At the same time, I do see that there isn’t a single area in which you couldn’t change something. There are varying levels of success, and projects at various stages, but by 2020 we plan to have in place competitive Russian solutions for all areas critical to the oil industry.

Interviewer: Anatoly Zamrin and Natalya Silkina
Executive editor: Sergei Chernykh
Photo: Maxim Tolstoy