with Genadi Man, President, Man Oil
>b>Russia has classically been one of the most resistant cultures for clean technology. When the industry is booming in Europe why have you taken up the challenge of the Russian market?
It is precisely because of Russia’s former resistance to finding environmental solutions that we are here. The sheer scale of the environmental problem connected with sludge in Russia creates a huge opportunity for us. Because clean tech is new in the Russian market, Man Oil Group is in the privileged position of pioneering this industry. Moreover, recently we have also observed strong indications coming from the Russian government and President Medvedev in particular concerning the necessity of safeguarding our ecology. The ecological factor was the reason Man Oil Group was established and it is a good time to be in Russia.
The ecological factor has been growing in Russia over the last five years. Over this time, penalties have been introduced which last year amounted to US$3.5 billion. Although Russia is still far away from countries like Brazil and Australia in terms of their stringency in protecting the environment the country is starting to take waste seriously. These penalties will increase five-fold next year which will create problems for companies unless they find ways to address them.
The second positive indicator which brought us to the Russian market is economic and derives from the cost of oil production. Because of the depletion of Russia’s hydrocarbon resources producers need to invest increasingly large sums of money in oil production to sustain current levels of output. At the same time, if all the sludge that exists in Russia was cleaned and processed, it would likely generate the equivalent revenue of one year of oil export. Money is simply lying around on the surface of Russia stolen away in the sludge.
>b>The government may be creating financial disincentives but is this enough to change the mindset of the industry?
It is true that the most difficult thing to change in Russia is mentality and commonly accepted norms and standards. However, on 14th July this year, the first union of the Russian sludge industry met for the very first time. This is an indicator that the Russian industry is on the cusp of taking off and that mentality has changed enough for this industry to be profitable.
The main barrier to fully changing mentality is that the oil and gas industry invests no money for research and development. Scientific progress carries with it changes in commonly accepted standards. In Siberia, large oil companies are happy if their sludge is less than 10% of their hydrocarbon production. This is clearly unsatisfactory. In Europe where standards are higher, companies produce about 4,000 parts per million and some companies are hovering around 400 parts per million. A reluctance to invest means that Russia uses old technologies and for the price of nothing they get nothing in return.
The Russian government sometimes mistakenly thinks that it can create innovation simply by investing in government institutes. Oil companies themselves must carry the mantle of responsibility for bringing innovation to the Russian industry. They have to invest properly in research, machinery and people to get the job done. Clearly small companies make revenues of 2-3 million dollars cannot really make such investments. In Europe the financial instruments needed to finance ecological solutions are much better. However this is very much dependent on the economics of oil and companies must make sufficient margins per tonne for them to invest. Otherwise they will continue to use second-rate solutions which do not generate the required results.
How do the Russian producers rate in terms of their readiness to adopt innovative solutions?
Unfortunately conservative attitudes are still fairly pervasive. Man Oil Group has been in discussion with one of the largest oil companies in Russia who said they would only pay 8,000 roubles per tonne of sludge which is far below our ability to supply a service. This company will inevitably choose another sludge company but they cannot really do anything for this money and will not get the results that they want. Again the environment will be damaged and the client will remain unhappy.
We are in negotiation with Lukoil in Volgograd where the company has more than 200,000 tonneslots of sludge. Man Oil Group was requested to bring our equipment and show that we can provide a good solution. The trouble is that we have to transport a factory 60m by 40m rather than a machine to the location. And the offer price and terms are being discussed.Their offer of $3,000 was simply too low for us to perform the test.
However, to illustrate a successful partnership I would choose Man Oil’s deal with TNK-BP in Ukraine. TNK-BP takes the right approach in that they choose the best technology rather than the best price. Man Oil Group has had created a proven track record in taking their sludge and delivering three components: clean cake, clean water, and the maximum return of hydrocarbons. The industry cannot dangle their feet in environmental solutions; they must either jump in the water or not step in at all. We will make a show room with TNK-BP to allow competitors to see what we can accomplish.
All the main oil players have tried a number of techniques to get rid of sludge but nothing works. Some solutions just involve burning it which is hardly environmentally friendly. The potential of this market is huge it is just a problem of the inertia with some Russian oil companies.
You have established R&D facilities in Switzerland, Russia and Ukraine. How is your innovation different from your competitors?
In the industry, bioremediation is mostly done using bacteria an invention which began in Mexico. However the bacteria required to carry out this job are very expensive whilst some other bacteria are too slow at digesting the material to carry out the job in satisfactory time when outside of laboratory conditions. Man Oil Group has found a way to speed up results which is especially important in regions like Siberia where the window for carrying out the process is temperature dependent and can only be undertaking in the 4-5 months when the land is not frozen. Our competitors would need to repeat the process the following year. Man Oil Group’s advantage therefore comes with the efficiency of our work.
In terms of figures the standard system in the market which works in Russia can only process 5m3 per hour and will provide a 60-65% return of hydrocarbons. The remaining cake still containing a lot of oil is just dumped. Man Oil Group has technology delivers 95% return of hydrocarbons and delivers clean cake/turf.
No one really has the correct figures for the amount of sludge in Russia. There may be as much as 500 million tonnes of sludge in Russia at the moment. However, with our capacity we can do every deal. In the case of TNK-BP we had to process 150,000 tonnes of sludge and will stay 2.5 years to complete this. However for our competitors were to do the same they would need to stay 8 years. By this time the ground will be unworkable. Man Oil Group is able to put two of its sludge processing factories in a refinery whereas our competitors would have to put 10 to reach the same capacity. This is unworkable in the space.
The reason Man Oil Group’s solution is different is that we had a different philosophy at the start. This philosophy was based on the idea of ecology first and foremost. The previous targets involved producing the maximum quantity of oil from a given measurement of sludge. We wanted to protect the environment and return hydrocarbon to the industry. This drove us to seek more advanced innovations. Man Oil Group patented a product in Europe which allows micro organisms pre-existing in the earth to digest the hydrocarbons. Therefore we do not bring bacteria from a laboratory but instruct the bacteria already present to digest the hydrocarbons. We therefore work with the ecology and build our factory around this. An example of this success in Russia was with the Earth Development Centre in the city of Kharkov.
Given that you have already created a successful solution and have good capacity, what will your recent entry into the Frankfurt stock exchange bring to the company?
First of all, this move brings transparency. Our potential customers now know that we have well regulated accounts, we have a positive balance sheet and we fulfil our promises. This is important for growing trustful relations with the industry.
Secondly, it provides the company with the resources to further invest in R&D. Next year we are placing $5 million dollars in R&D just in Russia. No one else in Russia in the sludge industry has been able to match this commitment to innovation. The company looks to increase this amount every year.
Thirdly this investment will provide the resources for international expansion. Next month a new Man Oil Group project in bioremediation will begin in Romania. The company has just finished a test in Kuwait which gave excellent results. In Thailand some experiments have also been initiated. That plan is that when we fulfil our promises to the stock market investors will grant us more resources to develop the company further. One of the reasons for choosing a European Stock Exchange is because European investors are more aware of what we do and why we do it and can therefore promote this development. Establishing in Ukraine and Russia required a long process of licensing whereas it is much quicker to enter through M&As. The stock market should allow us to expand quicker in this regard.
You have started in Russia and CIS but seem to be expanding internationally. What is the process of this expansion?
Man Oil Group historically started in Ukraine with a technology producing professional, high-quality and excellent results for bioremediation. For the next couple of years the company will focus its expansion within Russia and CIS. At the same time, we will enter Kuwait and Romania next year and the company will expand to Africa as well. Ultimately the problem of sludge is not confined to Russia or CIS but present everywhere from Kuwait to Venezuela to the USA. This expansion process will also allow the company to grow and adapt to different conditions. Every sludge issue is slightly different and we will bring together the knowhow and experience of our projects around the world to create customised solutions for our clients.
The Russian oil and gas industry can sometimes represent a closed club. With your international background and experience rooted in another industry how do you find conducting business with these players?
Man Oil Group is in a nice position because every company in the industry needs the job done. The managers of large oil companies may to some extent represent a closed club, but this is exactly the same situation in France and the UK. These groups are formed on the basis of schooling and university elites. They do not represent a genuine barrier to promoting our product.
In other countries, there are market entry challenges to be overcome. For example in the Middle East in Kuwait, you need to have 5 years experience in the region before you can win a tender. America is paying $1bn to make Kuwait clean after the Kuwait war and 25 competitors are trying to get 16 million tonnes processed. Being blocked from winning tenders is frustrating because, none of these competitors have the right technology whilst Man Oil Group does. In comparison to this challenge, Russia is not as difficult. We have local partners in Samara for example who can supply us with employees and they will help us with the local relationship to the government.
Financing represents another barrier in the environmental sector. The Skolkovo institution recently declared that Russia must build a venture capital culture. This is the right move in my opinion. The best innovations come from countries where governments place increasing quantities of venture capital in industry. Israel in 2010 invested more in venture capital than France, England and Germany together; and as a result they have more companies on Wall Street than Germany and France together. There needs to be a platform of knowledge fuelled by venture capital.
Ultimately what is needed is an awareness of quality at all levels of industry. Once the shift of mentality in Russia finally converges on finding quality then there the industry will produce results like the Sukhoi fighter jet. It is the overall changes of mentality within people at all levels which really creates an effect. The mechanism to deliver quality is not yet present in Russia. In industry, quality will always win.
Finally, what motivates you as an entrepreneur?
I know how to develop businesses and how to motivate people and take pride in this work. Creating good financial results ultimately is less crucial to me than developing an idea.