Underground alert – Newspaper Kommersant No. 37 (7482) dated 03/03/2023

Sanction restrictions could lead to a 20% reduction in Russian oil production by 2030 if Russian companies fail to replace critical technologies in the oilfield services market, experts from Yakov & Partners believe. Now foreign companies operate in the most difficult market segments, where they also have the highest dependence on technology and equipment imports. Strengthening restrictions may further complicate access to them, and the possibility of replacing them with supplies from “friendly” countries is limited: Chinese counterparts are inferior in terms of technical characteristics and difficult to adapt, the company warns.

Russian oil production may be reduced by 20% if companies do not find a way to compensate for the lack of Western equipment and technology, follows from the review “Prospects for the Development of the Oilfield Services Industry in Russia until 2030” by the consulting company Yakov and Partners. The limitation of supplies to the Russian Federation of equipment for increasing production, we recall, is provided for by the sanctions packages of the G7 countries.

In 2022, almost all companies from “unfriendly” countries, including the “big four oilfield services” (Halliburton, Schlumberger, Baker Hughes and Weatherford), announced the suspension of their activities in the Russian Federation (in 2021, foreign companies accounted for 20% of the market). Under the conditions of strengthening sanctions, the remaining Western companies may also cease their activities, which creates risks of a reduction in well operations, while the investment opportunities of independent oilfield services (small and medium-sized companies) are very limited: they cannot compete on equal terms with market leaders in terms of technology.

Now, companies from “unfriendly” Western countries account for only 15% of the drilling market in the Russian Federation, but these are the most complex types of services, including in development and production on the shelf, as well as in the production of hard-to-recover reserves. In particular, 52% of the hydraulic fracturing (HF) technology market is occupied by companies from “unfriendly” countries, and the share of domestic equipment here is less than 1%. In offshore equipment, dependence on imported technologies reaches 80%.

So far, high-tech equipment is still purchased from Western companies or “friendly” countries, and part of the items in demand – like rotary steerable systems (RSS, allow you to control the well trajectory), is practically not supplied. According to Yakov & Partners, current balances may last for two to three years, and a gradual reduction in the availability of such equipment may lead to a decrease in drilling volumes. In total, 15% of the oilfield services market falls under the risks of the lack of alternatives to replace Western equipment. In the short term, a crisis is not expected in this market, but in the medium term, it is necessary to maximize competencies in the field of high-tech oilfield services, otherwise the risks of forced production cuts due to lack of technology grow, analysts warn. The creation of a mechanism for guaranteed ordering of oilfield services by producing companies, additional tax preferences and expansion of the production of the component base are capable of changing the situation on the market, the authors of the report believe.

As for the replacement of supplies from Western countries with alternative import channels, the main limitation here may not be the risks of secondary sanctions, but the technological backwardness of manufacturers. “Only certain types of high-tech equipment can be compensated by deliveries from “friendly” countries. However, for example, Chinese-made RSSs do not allow achieving the required accuracy and efficiency, and the Chinese counterparts of the same hydraulic fracturing fleets fail to achieve the efficiency of the latest generation of Western models,” says Andrey Streltsov, partner at Yakov & Partners. According to him, it may take years to adapt Chinese equipment and technologies to Russian realities.

Tatyana Edovina