Interview of Valery Kolotilin, Director General of Gazpromneft-Nefteservis

March 17, 2010. RBC Daily

Valery KolotilinLast year’s oil price downturn forced the oil producing companies to cut their budgets in terms of service activities. This was a serious trial for the Russian oil service market. The beginning of year 2010 so far does not promise any considerable growth; restoration of volumes to the pre-crisis level will take years. VALERY KOLOTILIN, Director General of Gazpromneft-Nefteservis, tells RBC Daily correspondent EVGENIA KORYTINA about the outcome of the crisis year and the company’s plans for the future.

WE EVEN SET RECORDS

- You have been Director General of Gazpromneft-Nefteservis for about a year (acting Director General from February 2009; the formal appointment took place in July - RBC Daily). How does it feel to head a company in the midst of a crisis?

- Of course, it is not as pleasant as working at the peak of demand, when service is essential, when the contractor (not the customer) dictates the terms in the market and when there is no need to carry out large-scale optimization programs in the company. This was a challenge for me and for the company as a whole, but I believe that we met it with dignity.

- You worked at TNK-BP before and left the company during a period of conflict among the shareholders. Was that why you left?

- No, it had nothing to do with it. I was concerned about my professional development and career growth. After I graduated from the institute I worked in the North for a long time. Immediately before leaving the North I held the post of chief engineer. Then I headed the supervisory service at TNK-BP in the town of Buzuluk, and then I worked in the Oil Services Division of TNK-BP in Moscow. In 2008, I came to Gazpromneft-Nefteservis and took up the post of Deputy Director General for Production and a year later I became the company's director general.

- How do you rate the activities of Gazprom-Nefteservis in 2009?

- The year was undoubtedly profitable, although maybe a little less profitable than the previous one. Naturally, we had to optimize expenses. But on the whole, we managed to overcome the crisis and not only fulfill the planned scope of work and retain our teams. In 2009, to a large extent owing to the parent company, we developed significantly. We even set records: for the first time in the history of the company we drilled 1.1 million meters and in principle moved to fourth place in Russia in this figure, beating SSC (Siberian Service Company - RBCDaily). In geophysics, we developed a new kind of business – supervising drilling; we have opened a new pipe repair shop. We managed to enter the external market with well work-over operations.

HEADING FOR THE MIDDLE EAST

- By “external market”, do you mean third-party organizations?

- Yes, that’s right. Last year we rendered on average about 6% of services to third-party organizations. About 8 % was taken up by the well work-over segment, and over 15%by the geophysics segment. Entering an external market in crisis conditions is a major achievement for the company. As for 2010, we have planned 13% for the external market in general for the division and 16-20% in the drilling, geophysics, well remedial and work-over segments. This year we have started to render drilling services for TNK-BP.

- Speaking of foreign projects: your predecessor declared in 2008 that the company intended to enter the markets of Cuba and Venezuela. Have you succeeded in this?

- The crisis had its impact. As you know, the Cuban and Venezuelan projects of Gazprom Neft are being developed; our time has not come to enter this market. But we are trying to expand abroad. We tried our hand in Syria in geophysics: We bid for a tender but this time we were unsuccessful. However, we have acquired positive experience.

- What foreign markets are of greatest interest for you?

- First of all, we are trying to follow our parent company in the regions of its activities. At the moment we are considering the Middle East.

- Among domestic companies in the Russian market, Gazpromneft-Nefteservis is one of the most structured companies rendering almost the full range of services. Still, what are the priority areas?

- We have defined three basic areas: drilling, geophysics and well work-over operations. It is in these segments that we will invest money first of all.

THE CRISIS IS NOT OVER YET

- Oil prices have now stabilized and holding at quite a high level. Can we speak of the end of the crisis coming soon and of a growing demand for oilfield services?

- It’s too early to speak of the end of the crisis yet. I would call it stabilization and a slight upward trend. So far, no growth in demand for oil related services can be observed. My forecast is that there will be no significant breakthrough in our market for one more year. Great interest and customers’ need for oil-related services will at best show itself by the end of this year or maybe even in 2011. The fact that the downward trend is over is positive.

- To what extent do you think the volume of oil related services will change in a year’s time?

- I believe that 2010 will be about the same as the previous year. The maximum that can be expected is growth of 5-10%.

- The main order placement season for 2010 is over. What does the portfolio of orders of Gazpromneft-Nefteservis look like at the moment?

- The portfolio of orders will be slightly larger than last year, mostly in the segments that I have already mentioned. As regards drilling, the same number of teams will be engaged; we hope that 20% of operations will be ordered by outside customers. We are planning major investments in geophysics, but the effect on the number of orders will be felt only in 2011.

- What does the investment program of Gazpromneft-Nefteservis for the current year look like?

- The only thing I can say is that investments in 2010 are three times as larger than they were in 2009. First of all we are developing the drilling and geophysics segments. According to our strategy, by 2011, the company will carry out at least one-third of its orders for external customers.

- What Russian regions are planned to be explored in year 2010? Is Eastern Siberia already included in the investment program?

- We already began to explore new regions last year. Samara Region and Nizhnevartovsk appeared on our map. In Eastern Siberia we are only represented there in the geophysics segment, but this is an old achievement. There is an investment program according to which a decision has already been taken about purchasing eight drilling rigs. We will receive three of them this year, and the remaining five units will be delivered to us next year. They can be used in both Eastern and Western Siberia.

 - Are these rigs made in Russia?

 - Three mobile drilling rigs were purchased in China. The bidding was open but, unfortunately, not a single one of our domestic manufacturers confirmed compliance with our statement of requirements. So far, no such mobile drilling rigs are manufactured in Russia. As for the remaining five drilling rigs, they are from a domestic manufacturer – Uralmash.

COMPETITION CONTRIBUTES TO DEVELOPMENT

- You have certainly heard that the state is planning to create a major geophysical player in the market under the “wing” of Rosneftegaz. What do you think of this initiative?

- I approve of this idea. They will be our rivals but we are only glad that they are coming: This contributes to our development too.

- Does Gazprom-Nefteservis render oil-related services to Gazprom?

- We do some work for Gazprom. Natural gas fields are specific for technologies which are different from the oil industry. So we only cooperate in the geophysics area.

- There is an opinion that the only way to create a major player in the market of oil-related services who is capable of competing with Schlumberger is to unite your company with the service division of Gazprom.

- Oil and the gas services are very different. If all the teams are raised to a work level meeting gas industry requirements, they will become noncompetitive in the oil market. I see no point in uniting for the sake of uniting. As for Schlumberger, at the moment a bigger player has arisen in the Russia drilling market, i.e., Weatherford, so rivalry exists.

- Is the company planning an IPO?

- For the time being we have no such plans.

- You graduated from Gubkin RSU and now Gazpromneft-Nefteservis is actively cooperating with the university. A non-commercial company has been set up.

- It was set up to use the university’s production facilities to attract students to practical training in our company. I think it is a good idea. We have already received another proposal for setting up a similar non-commercial partnership with another university. We are considering it at this time. It is clear enough that we are not altruists. Thus we get an opportunity to select the best students to work for our company in the future. And in general, the students will at least see that it is not only in Schlumberger that money can be earned.