Drilling, Well Maintenance and Workover

If you have a client logo or other co-branding to include, this should go here. It should never be larger than the Deloitte logo. Oilfield services market conditions and trends 2016 Segments: drilling, well maintenance and workover

June 2016 Oil price volatility has grown considerably over recent years. The uncertainty makes it complicated for companies to establish long-term plans

Forecasted weighted average* oil price

USD/barrel 140

120

100

0 01-2011 01-2012 01-2013 01-2014 01-2015 01-2016 2017F 2018F 2019F 2020F Deloitte Worldbank Source: Deloitte and Worldbank forecasts *The weighted average price is a combination of prices for Brent and WTI crude oil taken with equal weights

High volatility and controversial trends • The considerable reduction in oil prices and volatility in the oil market in 2014-2015 force analysts to review short-term oil price forecasts regularly. • As of the beginning of Q2 2016, most experts agree that oil price recovery is going to be slow.

Average annual oil price and drilling meterage

Million m Rubles/barrel Neutral to positive expectations of market participants 25 3500 • 2015 saw a continued disruption in the correlation between oil prices and 23 drilling meterage: despite the sharp decrease in oil prices, the meterage 21 3000 increased by over 10 percent. 19 2500 17 • The increase in meterage may have been caused by market expectations. 2000 According to Deloitte’s 2016 Russian Oil and Gas Outlook Survey based on 15 1500 interviews with executives from Russian enterprises, 61 percent of experts 13 expect a rise in oil prices in 2016. 11 1000 9 500 • Despite the neutral to positive expectations, to relieve the impact of the current 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 decline in oil prices, key market players aim to reduce operating costs and improve operating efficiency. Oil price (weighted average) Meterage Capital investment plans for 2016, billion rubles

• According to the 2016 Russian Oil and Gas Outlook Survey, 55 percent of +30% experts believe that capital flow into the Russian oil and gas sector will not 2016 decline for, at least, the next five years. 0% 2015 • The growth of uncertainty in the market has become one of the reasons why there is no trend towards changing the amount of capital investments in 2016 -17% among the largest vertically integrated oil companies (VIOC). At the same 780 time, the majority of market leaders are not planning to cut capital investments abruptly, which confirms the absence of extremely negative 600 607 607 +60% expectations. 396 -9% 330 61.7 • According to VIOC representatives, upstream will be the main focus for 92.9 85 99 capital investments. Funds will be allocated towards maintaining and expanding exploration and production.

Source: Company data; the amount of investment includes foreign assets.

Production drilling, million m Exploration drilling, million m

-7% +13% +12% +1% -10% +1%

24.5 Other 0.82 0.82 21.9 Bashneft 20.8 0.08 0.74 0.75 2.3 0.11 1.7 19.4 Russneft 1.6 0.11 Tatneft 2.9 2.9 2.7 Slavneft 0.20 0.23 3.6 2.8 3.8 Gazprom Neft 0.17 4.3 Lukoil 4.9 0.20 4.1 0.22 0.21 Surgutneftegaz 6.7 5.8 0.17 5.0 Rosneft 0.15 0.11

2013 2014 2015 2016* 2013 2014 2015 2016*

Source: “Oil and Gas Vertical” magazine (CDU TEK), company data, Source: “Oil and Gas Vertical” magazine (CDU TEK), company data, *Deloitte forecasts *Deloitte forecasts

• In 2015, the total production drilling market grew by 12 percent. • In 2015, the exploratory drilling market volumes decreased by 10 percent, which • Most key players expanded drilling volumes having implemented their annual was due to the uncertainty in the market and the suspension of participation in plans for production drilling. expensive exploration projects. • According to the representatives of most companies and actual Q1 data, • At the same time, according to the results of Q1 2016, exploratory drilling grew companies are not planning to reduce the volumes of production drilling in 2016. by 1.8 percent as compared to the same period last year. • Rosneft stands out among the key players as planning to boost the volumes of • Hence, in 2016 the reduction. in exploratory drilling meterage may slow down, production drilling by no less than 30 percent. and, by the end of the year, meterage is predicted to be at the level of 2015.

Directional drilling, million m Horizontal drilling, million m

-16% +4% +33% +27%

16.6 7.4 Other 1.5 0.6 14.6 Bashneft 14.0 1.7 5.8 Russneft 2.4 -39% 1.3 1.0 0.4 +5% -17% Tatneft +4% 1.2 1.5 4.3 0.9 2.7 -34% +23% +31% 1.6 1.9 Slavneft 0.3 2.8 +176% -17% +3% Gazprom Neft 0.8 1.3 -7% 0.9 4.6 3.9 0.5 +11% Lukoil 1.0 +38% 0.4 3.8 0.9 -16% -23% +32% Surgutneftegaz 0.4 0.3 +40% +16% 4.4 4.5 Rosneft 2.2 3.4 1.4 1.6

2013 2014 2015 2013 2014 2015

Source: “Oil and Gas Vertical” magazine (CDU TEK) Source: “Oil and Gas Vertical” magazine (CDU TEK)

• The 2015 market continued the trend observed in 2014: horizontal drilling meterage increased considerably as compared to the previous year - by 27 percent. It is horizontal drilling that currently drives the meterage growth in the Russian Federation. Most key players continued to increase meterage in horizontal drilling. According to the year’s results, meterage in horizontal drilling exceeded meterage in directional drilling at Gazprom Neft and Slavneft. • Meterage in directional drilling grew by 4 percent in 2015, which was not as considerable as the growth in horizontal drilling meterage. The major boost in horizontal drilling volumes was due to increased drilling by Rosneft (by 32 percent) as well as by small and medium-sized oil companies. At the same time, Lukoil and Gazprom Neft have reduced directional drilling meterage considerably.

Meterage distribution in production drilling Meterage distribution in exploratory drilling

20.8 million m 19.4 million m 21.9 million m 0.82 million m 0.82 million m 0.74 million m 5.8% 8.7% 7.9% 10.0% 10.0% 15.9% 17.4% 12.2% 14.2% Other regions 24.5% 27.8% 30.4% Volga District

84.2% 79.1% 77.9% Western Siberia 65.5% 56.3% 52.2%

2013 2014 2015 2013 2014 2015 Far East

3.8% Caucasus and Southern 1.9% 2.7% Federal Disctrict 3.4% Timan-Pechora 6.3% 4.5% 5.0% 5.3% 13.5% 1.7% Eastern Siberia 3.4% 5.8% 2013 2014 2015 2013 2014 2015 Source: “Oil and Gas Vertical” magazine (CDU TEK), Deloitte analysis Source: “Oil and Gas Vertical” magazine (CDU TEK), Deloitte analysis

• Western Siberia is still Russia’s main oil region, accounting for 78 percent of meterage in production drilling and 52 percent in exploratory drilling in Russia. However, since 2013, the share of Western Siberia in the total meterage across the abovementioned regions has decreased by 6 and 13 percentage points, respectively. • Stable and fast growth in drilling volumes has been continuously observed in Eastern Siberia: meterage for 2013-2015 is three times higher, and comprised 5 percent of production drilling and 13.5 percent of exploratory drilling in Russia in 2015. • Drilling volumes in the Far East continue to change considerably year-on-year: while in 2015, the share of production drilling increased by 0.7 percentage points, a fall by 1.4 percentage points was observed in exploratory drilling.

© 2016 RO of the company “Deloitte & Touche RCS Ltd”. 6 Supply and demand in the drilling market have not seen significant changes; however, EDC’s share has been decreasing, and the number of medium and small suppliers is growing

Supply in the drilling market (based on meterage) Demand in the drilling market (based on meterage)

8% 11% Other Other 28% 33% 6% Russneft KAToil-Drilling 6% 14% Bashneft Targin 13% Tatneft 14% Tagras 20% 13% 15% Slavneft Eriell 21% 20% Lukoil RN-Drilling 21% 20% Gazprom Neft Surgutneftegaz Surgutneftegaz 28% EDC 30% 21% 25% Rosneft

2014 2015 2014 2015 Source: Company data Source: “Oil and Gas Vertical” magazine (CDU TEK)

High demand concentration and considerable segmentation of suppliers • The four largest Russian oil companies continue to account for most of the drilling demand in the market – more than 75%. • EDC remains the only large independent supplier in the drilling market; however, its market share shrank considerably over 2015 - from 28 to 21 percent. • Despite the market expectations, Rosneft has not demonstrated significant growth in the use of its own drilling capabilities.

© 2016 RO of the company “Deloitte & Touche RCS Ltd”. 7 The increase in the volumes of capital investment in the construction of production wells is due to the desire to sustain production levels at mature oil deposits

Capital investment in the construction of production wells, billion rubles

+11% +15% +11% +15%

Far East Other

669.8 669.8 Bashneft Caucasus and Southern 581.9 Federal District 581.9 74.8 Russneft 70.6 523.4 36.3 523.4 47.5 Tatneft 51.0 Timan-Pechora 31.6 124.1 61.7 33.0 77.5 Slavneft 41.5 119.9 28.3 66.6 Eastern Siberia Gazprom Neft 91.7 62.8 109.8 136.1 Lukoil Volga District 104.5 103.8 Surgutneftegaz 435.3 79.0 84.6 370.4 Rosneft 344.3 Western Siberia 227.5 164.2 178.5

2013 2014 2015 2013 2014 2015

Source: “Oil and Gas Vertical” magazine (CDU TEK) Source: “Oil and Gas Vertical” magazine (CDU TEK)

• Western Siberia accounted for the majority of capital investment in 2015. Capital investment in Russia’s main oil region increased by 17 percent as compared to 2014. • Capital investment in Eastern Siberia has increased by 70 percent since 2013, which is due to increased production in the region. • Most key players in the market have increased their capital investments as compared to 2014, which is due to the depletion of major highly productive “old” fields, the necessity of increasing their oil recovery and the equipment being worn out. • Most companies claim that they are not planning to reduce capital investment in the construction of production wells in 2016.

Capital investment in the construction of exploration wells, billion rubles

+43% -1% +43% -1%

Far East 76.3 75.7 76.3 75.7 Other 3.3 4.1 Caucasus and Southern 10.9 Bashneft 8.1 Federal District 17.1 Russneft 53.2 11.9 Timan-Pechora 53.2 3.5 6.0 Tatneft 3.9 6.8 Slavneft 18.6 19.9 Eastern Siberia 22.3 17.0 13.9 Gazprom Neft Volga District 16.4 12.4 Lukoil 20.3 Surgutneftegaz Western Siberia 29.4 32.3 33.3 9.8 20.6 Rosneft 11.5 14.1

2013 2014 2015 2013 2014 2015

Source: “Oil and Gas Vertical” magazine (CDU TEK) Source: “Oil and Gas Vertical” magazine (CDU TEK)

• As compared to the considerable increase in capital investment in the construction of exploration wells in 2014, 2015 saw a small fall. • Capital investment increased by 16 percent in Eastern and Western Siberia but fell considerably in the Timan-Pechora region. • Pressured by uncertainty in the market, key players have reduced their capital investment in the construction of exploration wells. • Surgutneftegaz is one of the few companies in the market that has expanded capital investment, having increased it more than 1.5 times. • Most companies claim not to be planning further reductions in capital investment in the construction of exploration wells in 2016.

Well maintenance costs, billion rubles Workover costs, billion rubles

-14% +11% -6% +20%

130.9 45.7 43.9 Other 115.9 8.2 39.4 109.1 Russneft 17.5 2.1 6.6 Slavneft 3.2 Gazprom Neft 3.8 16.3 Bashneft 16.1 7.7 8.4 Tatneft 30.8 28.8 9.1 Surgutneftegaz 8.5 Lukoil Rosneft 37.0 40.4 12.2 10.6

2014 2015 2016* 2014 2015 2016*

Source: CDU TEK, * Deloitte predictions Source: CDU TEK, * Deloitte predictions

• In 2015, the total amount of companies’ investment in workover decreased by • In 2015, the total well maintenance costs were reduced by 14 percent. over 6 percent. • Most key players except Surgutneftegaz reduced their investment in • Small companies reduced their costs on workover by over 60 percent. maintenance. • Despite the decrease in total costs, almost all key players increased their • Q1 2016 witnessed a 10 percent rise in well maintenance costs as compared to investment in workover. Q1 2015. • Q1 2016 saw a significant growth in investment in workover both by large and • Therefore, in 2016 the decrease in well maintenance costs will probably slow small companies. down and, by the end of the year, the total well maintenance costs may go back • Workover costs may rise by 20 percent in 2016 as compared to the previous to the level of 2014. year. © 2016 RO of the company “Deloitte & Touche RCS Ltd”. 10 Western Siberia is losing its share in well maintenance and workover costs. In 2015, investment in maintenance in Volga District and Eastern Siberia grew considerably

Well maintenance distribution by region Workover distribution by region

45.7 billion Rubles 39.4 billion Rubles 115.9 billion Rubles 109.1 billion Rubles 7.3% 7.2% 4.9% 8.0%

34.7% Other regions 44.0% 51.7% 54.4% Volga District

Western Siberia 58.1% 48.8% 43.4% 37.7%

2014 2015 2014 2015 Far East 1.4% 1.3% 1.1% 0.9% Caucasus and Southern Federal District 2.6% 3.2% Timan-Pechora 3.7% 0.5% Eastern Siberia 2.8% 3.2% 1.1% 1.8% 2014 2015 2014 2015 Source: CDU TEK, * Deloitte analysis Source: CDU TEK, * Deloitte analysis

• In 2015, the distribution by region in the maintenance market changed considerably. • Western Siberia, which was the leader in well maintenance costs (58 percent of the market in 2014), gave its place to Volga District and Eastern Siberia. Its share fell by 9 percentage points. The distribution of other regions by aggregate well maintenance costs changed insignificantly. • The distribution of regions by costs on workover also underwent changes over the past year. Volga District’s share grew by 3 percentage points, the Far East - by more than five times, whereas Western Siberia’s share fell by over 6 percentage points. • The shares of the Caucasus, Timan-Pechora and Eastern Siberia in the investment in workover increased insignificantly.

Transactions in Russia and globally

• In April 2016, Schlumberger finalised a deal to acquire Cameron International Corporation.  • The deal amounted to USD 14.8 billion.

• In February 2016, Sinopec, a Chinese petrochemical concern, announced its intentions to invest in the Russian oilfield services market. ? • Targin and Rosneft took part in negotiations on the possible creation of a joint oilfield service company on the Russian market.

• In May 2016, Technip, a French oilfield service company, and FMC Technologies, an American company producing equipment for underwater oil and gas development, announced a merger. • The joint company will be named TechnipFMC, its capitalisation will amount to USD 13 billion. ? • The deal is due to be finalised at the beginning of 2017. • Technip and FMC have a total staff of 49 thousand people working in 45 countries worldwide. The total income of the companies in 2015 was USD 20 billion.

• At the end of 2014, Halliburton agreed to acquire Baker Hughes for USD 34.6 billion (the price was eventually lowered to 28 billion due to the fall in oil prices). • On 6 April 2016, the US Department of Justice filed a lawsuit to freeze this transaction. • Problems in obtaining permission from the regulators and tension in the industry led to the cancellation of the deal, which was announced in May 2016. • Due to the termination of the merger agreement, Halliburton had to pay a termination fee to Baker Hughes of USD 3.5 billion.

Market consolidation: failed expectations • One of the main expectations for 2015 was market consolidation through the withdrawal of small and medium players unable to withstand competition in the deteriorating market conditions or the anticipated reduction in market volumes, and through the acquisition of these companies by larger players in the Russian oilfield services market. However, this expectation has not been vindicated: small and medium-sized companies hold a significant share of the market. • In spite of news emerging on the market, there were no significant M&A deals in 2015 on the Russian or global oilfield services markets. • The beginning of 2016 was marked by a number of announcements of transactions under preparation: however, as at the beginning of Q2, they are far from completion.

Revenues and headcount of five largest oilfield service companies, 2013-2015

200 365 360 400 180 308 350 • The decrease in the volumes of work in the oilfield services market resulted in a decrease in revenues for 160 300 service companies in 2015. 140 • The response was to reduce headcount: the top-5 oilfield service companies reduced their headcounts by 120 250 Headcount, an average of 15 percent year-on-year. thousand people 100 200 • However, the measures did not help to keep productivity at the previous level: in 2015, it was USD 333 80 140 142 150 thousand on average per person in the five largest companies, which is 16 percent lower than in 2014. 60 Revenues, billion 102 100 • The world’s largest oilfield service companies, Schlumberger and Halliburton, are planning to continue dollars 40 cutting costs in 2016, which may be evidence of the anticipated further decrease in volumes of work on the 50 20 market and a fall in revenues of service companies. 0 0 2013 2014 2015

Reducing headcount in Schlumberger and Halliburton

70 140 70 90 123 120 80 85 60 120 60 77 80 95 75 50 100 50 75 • In 2016 Schlumberger announced its • In February 2016, it became known that 70 40 80 40 intention to lay off 10 thousand employees, Halliburton would lay off 5 thousand 65 which constitutes 11 percent of the current workers, which is 8 percent of the current 30 60 30 60 workforce. 49 headcount. 20 45 40 20 55 35 • The company’s plans include adjusting the • These redundancies are due to a fall in 29 33 50 10 24 resource base and rationalising the asset 10 20 drilling operations and cost cutting. 45 base as activity levels in the oil and gas 0 0 0 40 market are expected to fall. 2013 2014 2015 2013 2014 2015

Positive trends • Market stabilisation, “new reality” in the economy • Growth in demand for local services • Strong interest from Asian investors

Oilfield services market • Key players continue to keep their market positions Customer pressure • Changes in the distribution of Internal obstacles • Requirements for regional demand • Lack of skilled labour continuous quality • Constant work to improve • Depreciation of enhancement and cost efficiency production assets and optimization • Increasing use of internal fixed assets sources of funding

Macroeconomic factors Source: 2016 Oil and Gas • Unstable oil prices Outlook Survey, company data, • Retention of the sanctions regime Deloitte analysis • Rise in (foreign) equipment cost • Complexities in using and acquiring new technologies and knowledge • Difficulties in raising external capital

© 2016 RO of the company “Deloitte & Touche RCS Ltd”. 14 Contact information Authors: Elena Lazko Steve Openshaw Almaty Anthony Mahon CIS Oil and Gas Leader Audit +7 (495) 580 96 00 Energy and Resources Leader, +7 (495) 787 06 00 [email protected] Caspian region [email protected] +7 (495) 580 96 00 [email protected]

Alexey Nesterenko Kelly Allin Kiev Artur Ohadzhanyan Senior Manager Audit CIS Oil and Gas +7 (495) 580 96 00 Energy and Resources Leader, +7 (495) 787 06 00 [email protected] West region [email protected] +38 (044) 490 90 00 [email protected]

Gennady Kamyshnikov Andrey Panin Baku Nuran Kerimov CIS Tax and Legal Energy and Resources Leader +7 (495) 787 06 00 Energy and Resources Leader, [email protected] Azerbaijan +7 (495) 787 06 00 [email protected] +994 (12) 404 12 00 [email protected]

Robin Matthews Global Rajeev Chopra Upstream Oil & Gas Advisers Energy and Resources Leader

+7 (495) 787 06 00 +44 775 785350 [email protected] [email protected]

© 2016 RO of the company “Deloitte & Touche RCS Ltd”. 15 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. DTTL is not directly engaged in maintenance clients. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Please see www.deloitte.ru/about for a detailed description of the legal structure of Deloitte CIS.

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