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 80 60 40 20 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. © 2016 RO of the company “Deloitte & Touche RCS Ltd”. 2 Despite the downward trend in the commodity markets, Russian companies have set a drilling record 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. © 2016 RO of the company “Deloitte & Touche RCS Ltd”. 3 Uncertainty in the market puts pressure on exploratory drilling. At the same time, companies are increasing meterage in production drilling 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. © 2016 RO of the company “Deloitte & Touche RCS Ltd”. 4 Horizontal drilling remains a key driver for meterage growth in 2015, directional drilling is growing more slowly 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. © 2016 RO of the company “Deloitte & Touche RCS Ltd”. 5 Western Siberia remains a leader in drilling volumes; however, the share of other regions has grown considerably over 2014- 2015 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.