Gwendolyn FrickerSenior ManagerRPI Service ConferenceDecember 2003

Strategy & Information Support

Business Opportunity Support

Internal Controls and Operations Management

Target IdentificationBusiness AssessmentsNegotiation Support

Market Research, Corporate Intelligence, and Special Reports

Corporate CommunicationsStrategy Review/Development

Business Process OptimizationInternal Operational Controls

INTERNATIONAL CONFERENCE

Services and Equipment for the Russian Oil & Gas Industry

Special Focus

Creating an Independent Service Market

December 2-3, 2003

Renaissance Hotel Moscow

Principal sponsor

Sponsors

Information Partners

Session 2 Session 2

The Russian Majors: Strategy The Russian Majors: Strategy in Relation to Oilfield in Relation to Oilfield

ServicesServices

The Russian Majors and The Russian Majors and Oilfield ServicesOilfield Services

International ‘best-practice’International ‘best-practice’ Oil company management time Oil company management time

is diverted from core activities is diverted from core activities E&P company management does E&P company management does

not have expertise in servicesnot have expertise in services Opportunity cost of capital (leads Opportunity cost of capital (leads

to reduced E&P CAPEX)to reduced E&P CAPEX) Access to latest technologies - Access to latest technologies -

spread the burden of R&D spread the burden of R&D spending spending

Specialized service companies Specialized service companies are better able to manage assets are better able to manage assets

Improve Key Variable Improve Key Variable Performance of Oil companies Performance of Oil companies – also helps banks/funds do – also helps banks/funds do comparisonscomparisons

Improve utilization of Improve utilization of equipment and employeesequipment and employees

Reduce costs Reduce costs Improve quality and service Improve quality and service

timetime Use of third parties adds Use of third parties adds

transparency to transactions transparency to transactions Cost of downsizing in event of Cost of downsizing in event of

downturn.downturn.

Reasoning for Divesting Service CompaniesReasoning for Divesting Service Companies

Do these reasons

Do these reasons

make sense for

make sense for

the Russian Majors

the Russian Majors?

The Russian Majors The Russian Majors and Oilfield Servicesand Oilfield Services

Reasoning for Divesting Reasoning for Divesting Service CompaniesService Companies

International ‘best-practice’ Oil company management time

is diverted from core activities E&P company management

does not have expertise in services

Opportunity cost of capital (leads to reduced E&P CAPEX)

Access to latest technologies Specialized service companies are better able to manage assets

Improve Key Variable Performance of Oil companies – helps banks/funds do comparisons

Improve utilization of equipment and employees

Reduce costs Improve quality / service time Use of third parties adds

transparency to transactions Cost of downsizing in event of

downturn.

‘‘Issues’ for Oil Issues’ for Oil CompaniesCompanies

Maintain or reduce lifting costs– especially for high-maintenance fields

Increase expertise in ‘core competencies’- exploration & reservoir planning/mgmt. (?)

Lack of internal information to take effective decisions

Avoid being monopolized by 1-2 external companies

Ensure access to equipment when needed

Decrease downtimes Improve quality and service

level

Does this same logic work for Russia? Does this same logic work for Russia?

Key Factors: Regionally-based monopolies, infrastructure and climate considerations, cost pressures, business conduct/skills Key Factors: Regionally-based monopolies, infrastructure and climate considerations, cost pressures, business conduct/skills Shock therapy for oil companies or transition period? Shock therapy for oil companies or transition period?

from a ‘regionally-based oil production / service industry from a ‘regionally-based oil production / service industry

What What Should Should

their their Strategies Strategies

be for be for Oilfield Oilfield

Services?Services?Should they sell? To whom? When?

How?

Session 3Session 3

Independent E&P Operators: Options Independent E&P Operators: Options and Challenges of Contracting and Challenges of Contracting Service Providers / VendorsService Providers / Vendors

Oilfield Service Offerings and Oilfield Service Offerings and ‘Independent’ Operators‘Independent’ Operators

Workovers / well Workovers / well servicingservicing

DrillingDrilling General Infrastructure General Infrastructure

(electric lines, private roads, (electric lines, private roads, social assets)social assets)

Pumping and Pumping and TreatmentTreatment

Pipelines (connection Pipelines (connection to trunk pipelines)to trunk pipelines)

Purchased drilling rigs and created internal dept..Diesel generators, plan primary work in winter

Double pay.

Eventually, build own pipeline.

Sample Solutions

Located small, independent company

The IssuesThe Issues

E&P CompaniesE&P Companies Entry Barrier to E&P Entry Barrier to E&P

sectorsector Increased costs compared Increased costs compared

to majors – source of to majors – source of delaysdelays

Additional CAPEX to Additional CAPEX to develop internal services develop internal services and/or build infrastructureand/or build infrastructure

Limits effectiveness of Limits effectiveness of operationsoperations

Service companiesService companies Life line for poorly Life line for poorly

financed closely-held financed closely-held companies.companies.

Market niche for Russian Market niche for Russian independents and Foreign independents and Foreign oilfield service companies.oilfield service companies.

Session 4Session 4

Growth Strategies for Growth Strategies for Service CompaniesService Companies

Growth OpportunitiesGrowth Opportunities

•Spin-offs into separate legal entities significant•Divestitures limited - ‘the jury is still out’•JV successful for introducing technology

* In terms of revenue.

Distribution of Service Expenses - Major Russian oil company

- 85%* closely-held service companies- 15%* other

Russian Oil and Gas Companies

Sell Service

Companies?

Divest

Hold

Opportunities?!

Opportunities?!

Acquisition for ‘Assets’ or Acquisition for ‘Assets’ or ‘Market Share’ ‘Market Share’

Year produced

QtyBook Value on 31 Dec 2002 (USD)

% of Total book value of Fixed Assets

0 2 $8 993 0,76%1987 3 $0 0,00%1988 3 $0 0,00%1996 655 $483 400 41,09%1997 9 $100 0,01%1999 4 $429 0,04%2000 37 $42 944 3,65%2001 121 $634 956 53,97%2002 22 $5 687 0,48%

Total 856 $1 176 509 100,00%

77% of Company owned-tools have been in service since 1996 and have exceeded their ‘service life’.

Similar tools in west = 3-year service life.

$1.8 million balance sheet liability for 1996 equipment plus inventory.

Acquired equipment was past service life at time of

sale/transfer to Company sold at restated book values +

28.9% markup.

•Asset base aging

•Funds for reinvestment

minimal

•Price increases

unavoidable

OPPORTUNITIES

FOR WHOM ?

Session 5Session 5

Competition and Russian Oilfield Competition and Russian Oilfield Services: The Role of Foreign Services: The Role of Foreign

Service Providers and High Service Providers and High TechnologyTechnology

Pricing and Cost StructurePricing and Cost StructureRussian Service Russian Service

CompaniesCompanies

LOWER PRICES are a LOWER PRICES are a function of function of

Lifting cost Lifting cost controlcontrol Related party transactionsRelated party transactions Lack of trustLack of trust Low rate of reinvestmentLow rate of reinvestment

International Service International Service CompaniesCompanies

HIGHER PRICES are a function HIGHER PRICES are a function of of

High personnel costsHigh personnel costs Operating cost structureOperating cost structure R&D costsR&D costs Efficiency of operations in RussiaEfficiency of operations in Russia Corporate OverheadsCorporate Overheads

(closely-held)

Cost StructureCost Structure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Foreign Service Co Russian Service Co

Profit Corporate Overheads and local G&A Direct materials Field Cost incl. Personnel

46%26%

47%32%

14%3%

25%8%

• Comparison of Cost structure. • Foreign Company charged 1.8 more for ‘comparable’* service.

Distribution of Revenue from Specific Service(Costs as a % of revenue)

Corporate Overheads and local G&A 10,14Direct materials 1,25Field Cost incl. Personnel 3,16

Internal cost multiple between Foreign and Russian

Company

The Technology Premium DilemmaThe Technology Premium Dilemma

Increase value of company- market

capitalization and/or Capital Accumulation

Short-term1994-2004

Corporate Priorities• Improve

transparency• Image• Reduce production

costs with focus on ‘short-term’

• Visible production increases

• Improve margins

IPOsSelloffM&ARe-

focus

Operational Process

Restructuring and

Personnel

Mid-Term2004-2008

Develop Core Competencies

• Field and asset management

• Information systems to support operations and management

• Quality and quantity of well, reservoir and production data

• Reservoir and Production engineers

??

Long-Term2008 - future

Effective Decision Making

Across the Company

Ability to evaluate the

return on Technology and Quality.

Session 6Session 6

Uniting Western and Russian Uniting Western and Russian Technology, Equipment and Technology, Equipment and

Expertise for Cost Effective SolutionsExpertise for Cost Effective Solutions

Uniting Russian and Western Uniting Russian and Western TechnologyTechnology

Imported Equipment

Russian Equipment

Where is the Balance?

• Import duties• Spare parts• Repair and

Maintenance• Workforce

Qualification• Client requirements• Certification issues

Uniting Western and Russian Uniting Western and Russian TechnologyTechnology

Workover RigsWorkover Rigs New rig in US – New rig in US –

$750 thsd to $1 $750 thsd to $1 millionmillion

Refurbishment in US* - Refurbishment in US* - $250 thsd$250 thsd..

Cost of R

ussian

hybrid?

$80-125 000?

Is there a Chinese

‘threat’?

* re-certifying the frame and derrick, replacing the engine with a new highly fuel-efficient engine, replacement of drums, brakes, lines, and installation of advanced lighter-weight materials for flooring.

RoundtableRoundtable

Practical Application of Technology in the Practical Application of Technology in the Russian Oil and Gas Industry: Russian Oil and Gas Industry:

Opportunities, Challenges, Economic Opportunities, Challenges, Economic EffectivenessEffectiveness