Russia’s thirst for modern rigs able to drill in shale oil deposits heralds a $9 billion bonanza for manufacturers including National Oilwell Varco Inc. of the U.S. and China’s Honghua Group.
More than 57 percent of the nation’s 1,835-strong rig fleet is over 20 years old, according to VTB Capital research. Built to Soviet designs, many won’t be powerful or advanced enough for producers such as OAO Rosneft and OAO Gazprom Neft when they begin exploring Siberia’s shale rock, said Antony Crawford, Russia head for National Oilwell. The largest U.S. oil equipment supplier competes with Honghua and OAO OMZ for orders in Russia, the world’s largest energy producer.
“Russia’s rig fleet is too old, too light and it lacks agility,” said Olga Danilenko, an oilfield services analyst at Russian investment bank VTB Capital. Paying to move an old rig in a remote region is a big risk considering the likelihood of a breakdown and expensive logistics in providing parts, she said.
Rosneft and partner Exxon Mobil Corp. started exploring the Bazhenov shale this year, a Siberian formation as big as France that state geologists estimate contains enough oil to more than double Russia’s reserves. President Vladimir Putin wants it developed to help maintain production above 10 million barrels a day. Compared with conventional oil, shale needs more rigs. The machines also must be more powerful, driving unit costs to the middle of a $10 million-$60 million price range.
“New drilling rigs must be built,” said Crawford, whose Houston-based company plans a factory east of Moscow. “This issue represents a clear and present danger to Russia’s ability to maintain output during the next three to five years.”
Deliveries of new rigs will reach a five-year high of 105 units this year, according to VTB data. Still, older rigs are being retired at a rate of more than 400 a year, threatening a squeeze on capacity as drilling ramps up.
National Oilwell, which had $20 billion in revenue last year, may sell five rigs to Russia-focused companies this year, VTB said. It will compete with Russia’s OAO OMZ, owner of the Uralmash plant, a Soviet tank factory in World War II that became one of the world’s biggest rig builders during the oil boom of the 1970s. While production collapsed after the end of communism, it remains an important supplier.
Honghua Group, China’s largest exporter of drilling rigs, sees a need for more of its gear in Russia, Zhang Mi, chairman and president, said earlier this month in an interview. The company’s second-largest sales region is Russia, he said.
“Half the drilling rigs there are outdated,” Mi said through a translator at the Offshore Technology Conference in Houston. “They see a great need for new innovative equipment.”
The company has started a joint venture in Russia to meet demand, he said.
“Part of the production equipment is coming from China and part from Russia,” he said. “Together we are able to meet the demand in Russia.”
Honghua shares dropped 1.3 percent to close at HK$3.79 in Hong Kong trading today. National Oilwell Varco traded little changed at $71.50 in New York at 10:04 a.m. local time.
Last year Russia’s monthly count of rigs in operation ranged from a low of 717 rigs in February to a high of 978 rigs in June, according to data on REnergyCo’s website.
A lack of rig capacity hasn’t yet dented Russian output, which hovered near a post-Soviet record at 10.47 million barrels a day in March, and it may be early to talk about a drilling rig shortage, said Ildar Davletshin, an oil and gas analyst at Renaissance Capital.
“The talk about shortage has been ongoing for many years, but so far it has not materialized,” he said. “There is tighter balance for high-spec rigs that will be potentially in higher demand” as shale fields are developed.
Chinese, U.S. and German manufacturers seem capable of delivering required quantities of rigs, he said.
Rosneft and Gazprom Neft have paired with Royal Dutch Shell Plc, seeking to follow strategies used in the U.S., where blasting oil from rock in places like the Bakken shale in North Dakota reversed decades of production declines.
Because oil can be harder to extract from shale, rigs often need to turn a drill bit 90 degrees and continue penetrating horizontally. This is combined with a process called fracturing where water, sand and chemicals are pumped into a well to smash rock and increase oil flows.
A lack of modern rigs remains a key stumbling block to developing Bazhenov, Bernstein analysts including Oswald Clint wrote in a note yesterday. Hydraulic fracturing, or fracking, at horizontal wells in Russia breaks even at $90 a barrel without tax breaks, they estimated. Russia’s Urals export blend is trading at about $102 a barrel.
Rosneft and Gazprom Neft didn’t respond to requests for comment on Russia’s oil rig fleet.
In the U.S., 250 rigs are need to produce about 700,000 barrels a day at the Bakken shale, said Richard Anderson, chief financial officer of Eurasia Drilling Co., Russia’s largest rig operator. That gives an indication of how many rigs could be needed to to exploit the Bazhenov, he said.
Supplying that number of rigs at an average of $35 million would cost $8.8 billion.
“These rigs are not currently in the Russian drilling fleet, so they would need to be added,” Anderson said.
Rosneft, OAO Lukoil and Gazprom Neft are already snapping up services for horizontal drilling and fracturing for more profitable wells before producing a single commercial barrel from the Bazhenov. Rosneft will drill and fracture 50 horizontal this year compared to three last year. TNK-BP, newly purchased by Rosneft, will use the technique in almost half the wells it drills this year, a sixfold increase in just two years. Gazprom Neft will double wells using this technique.
Another concern is whether Russia has enough drilling power, according to Leonid Mirzoyan, chief corporate financial officer at C.A.T. Oil AG, Russia’s largest provider of fracturing services. The U.S. has built up about 25 million horsepower for hydraulic fracturing, mostly over the past five to seven years, while Russian has at best 850,000 horsepower, he said.
Production of so-called tight oil in Russia, including production from the Bazhenov and Priobskoye shales, could total around 200,000 barrels a day in 2018, according to the International Energy Agency, or IEA, mid-term oil outlook. That will create a steady demand for larger rigs.
“The number of drilling rigs in Russia that could drill a 7,000-meter vertical well bore and then shoot off and continue drilling horizontally for another 3 or 4 kilometers in extreme winter weather conditions is quite small,” National Oil’s Russia chief Crawford said in an interview. “I could probably count them on one hand.”