with Michael Kelly, General Director, Trican Well Service
Trican has been at the forefront of the revival of Russia’s fracturing industry. Would you start by outlining this revival and how Newco Wells, Trican’s subsidiary, became one of the industry leaders here?
Fracturing is an important tool used by our customers when either drilling new wells or working on existing wells. The opportunity to provide this service exists in many reservoirs around the world, including in Russia. Previously, Russia went through a period of strong oil development with a significant number of fields in Western Siberia and other regions. At this point there was not such a strong need for enhanced oil recovery from these wells. Since then, those fields went into decline and fracturing was seen as a way to re-stimulate these wells and encourage additional production at a relatively low capital cost to the producing company.
The revival of fracturing started in the 1980s and 1990s with a number of different arrangements that were struck with some Canadian and American companies. The industry has now evolved but it started off with fracturing that was done by those companies with entitlement to a share of the produced oil, which of course proved to be expensive for the customer. However, over time as finances improved and capital budgets improved they started fracturing using the same type of model that is done elsewhere in the world, where oil field service companies are invited in and design a project frack it and get paid for the service they provide.
You say this is mostly Canadian and American companies. Have you seen domestic growth in this industry?
There has definitely been some domestic growth, certainly in the last few years. Hydraulic fracturing has been ongoing in Russia really for a long time, but the industry began to grow in the 1980s and into the 1990s. There are now a number of good companies. As with a number of industries you go through your ebbs and your flows, but there was strong demand in the 1990s and the 2000s as the industry started working over existing well stock.
During this time, one of the signals for Trican to increase our investment in Russia was when BP made their investment in TNK BP. One of the documents that BP produced estimated that they could increase the production of TNK-BP’s fields by 40% by just employing fracturing on their existing wells. This was a good signal to start bringing in equipment, which is what we did. A number of other companies also did this. All of the international players are well represented and it is therefore a highly competitive industry that offers good opportunities for growth. In Russia, as in all our markets, you have to manage during both the up-cycles and the down-cycles in order to succeed.
With regard to the new generation of greenfields being produced in 2013-2015, do you see this as having any effect on the need for fracturing in the Russian industry?
There are a number of factors that drive demand for fracturing. Greenfield development does not involve a lot of pressure pump services so we will do some cementing work but not a great amount during the initial. Typically companies will require other services first and it is not until you get down to later reservoir development that fracturing services come into play. However, as these greenfields start to develop they will open up new markets for us.
During this time, production companies still have to try and maintain their production levels. This means in some cases, as the reservoirs decline, that these companies are going to have to do start more work than they have traditionally done. In Russia this has led to the emergence of an interest in completion strategies that are very common in North America – horizontal completion with multi-stage fracking. These techniques have reshaped the demand dynamic for pressure pumping services in North America. If you look at the joint completion budget, pressure pumping services now make up a much larger slice of that pie than they would have done historically. In Russia, there is an interest in complex fracturing with customers looking at it and they are seeing if there is potential. There are a number of geological characteristics that you have to look at to know if this technology has good potential. However, if proven in the Russian industry, it will drive demand and more fracturing than what we are currently seeing.
Overall, what drives demand is the price of oil. This is an economically driven industry and if the price of oils stays at high levels I think we will see opportunities; if it falls I think demand will be curtailed and we will have to adjust our operations accordingly, just like we do everywhere else in the world.
Of the services we offer, fracturing is still the largest portion of our work. In Russia historically it is 80-90% of what we do. We do not see that dynamic changing tremendously in the foreseeable future. In North America we have a little bit more of a balanced portfolio. Although this dynamic is changing with the emergence of multi-stage fracturing.
Last year Trican celebrated 10 years of success in the market and you are predicted 8% growth in 2011. What is the current importance of the Russian market to the company?
Russia is the smaller part of Trican’s global operations. Right now the demand in North America, because of the emergence of the multi-stage fracks, we are seeing unprecedented levels of demand in North America. Unfortunately this is not yet the case in our Russian operations currently. Right now we are in a market where there is probably too much capacity for the amount of work going. This situation is great for customers, but it is more challenging for us.
The importance of having operations in different geographic marketplaces is that they will be influenced by different economic factors at different times. If you look from a corporate perspective you would like to have a little more of a diverse portfolio than just being a North American focused company, or a single commodity focused company – so we do not just provide services to just gas producers, nor do we provide services to just oil producers. We are able to assist in developing both of these reserves and we are able to do this in a number of markets globally.
Is your optimism for the Russian oil industry positive, or does it depend on too many factors to say?
The future of the Russian market is still one that we think will be positive for Trican. Energy represents an important contributor to the Russian economy. So I think the energy sector does, and will continue to have, an important role to play.
In the service sector, as with all reservoir development, will have a role in supporting the energy sector. The Russian market will take time to evolve. However, we are seeing higher levels of growing activity than we have seen in the past, which is a good sign. I think the current economic environment certainly provides positive stimulus for the energy sector and the government is supportive of companies developing new reservoirs to increase both oil and gas production.
The nature of any reservoir development is that over time it becomes more and more difficult to get the next incremental barrel of oil, which means that over time you need more services to produce the next barrel of oil. I think this is why companies like ours are excited to be here. We recognize that it is not a short term involvement but a long term proposition. At Trican we are prepared to invest in our people, our facilities and our operations.
Your annual report said that the inflation of costs for proppants and chemicals was driving up the cost of conducting fracking operations and the emphasis in 2011 is on cost-cutting. I was wondering how you were managing to implement this strategy to optimize your growth in 2011?
The challenge we have as an industry in Russia is brought about, in part, by the high level of demand in North America. All of our supply chain elements – whether it is building our equipment or buying component parts – are being stretched because demand is so high in North America; it is simply sucking in all the available supplies. That includes proppant which is one of the materials we use in our fracturing treatments which was being produced in Russia, but is now exported to the United States because the incremental value was higher.
In the middle of last year, we started seeing price increase. The suppliers in particular were trying to equalize the economic returns in both markets. So we saw a lot of upward pressure in the Russian market.
There is probably a little bit more equipment in Russia now than there is demand. So that means our ability to pass that price mark onto the customers is limited.
So the challenge for Trican is one that we are familiar with, such as cost control, making sure that we make good investment decisions, making sure that you work well with your suppliers and that they understand the challenges that you have.
You have conducted projects in Western Siberia, Yamalo Nenetz and the Volga Region. What is the project that best highlights your capabilities within the Russian market?
That is a challenging question to answer because quite frankly when you look at it all the projects are important to you for different reasons. We have had a long standing relationship with TNK BP and we have been a large service provider to them over the years for a number of different projects. We have grown to become a large supplier for Rosneft in a number of their different projects as well. We have a growing relationship with Lukoil which is also important. On the gas side, Gazprom up in the Urengoy area is certainly an important relationship.
The one thing that I think is important for companies to bring to the marketplace is world-class technology. Our Russian producers are no different than producers anywhere in the world in that they want to have access to the best technologies to give them the best results from their reservoirs.
To demonstrate this, we have been working in Eastern Siberia and there is a project we call Vankor. It is certainly an area we think will be increasingly important as Rosneft looks to that field to replace production from some of the older maturing areas. We have been involved in that project from the very early days. This past winter, during the winter season, we went up and did some of the first fracks on that project, which were important to our customer. It was good for us to be able to demonstrate some of our capabilities in this tough environment. I think that was a good project, representing what we think is a good combination of skills and ability to get the project done in challenging conditions and in supporting a technically challenging project.
Russian customers expect these international tried and tested innovations but how do you differentiate yourself from your competitors in winning tenders?
It is an ongoing challenge and not one that we face strictly in Russia. It is a challenge that Trican faces in all of its markets. So I think it is certainly nothing that is new to us. Each company focuses on what they feel are their strengths. One focus that we have in Trican is on customer service. I remember one of my early days with Trican speaking to my boss and asking the question, how was Trican going to compete against the large multinational companies? This was when Trican was a very small company operating only in Canada. He answered, we are going to remember that we are a service company and we are going to out-service our competitors. That is the challenge we have and as simple as it sounds, that is a lot of what we bring to the table.
Do you now have the structures in place to provide for all these projects in all these different regions?
There will be ongoing investment required to accomplish this. If you look at the geographic area we have to cover, it is vast. If you contrast with our operations in North America with those in Russia there is naturally a better ability to support bases that are relatively close to home in North America. In Russia, you do not always have this ability. We need to look at each project as an island unto itself which must be self-sufficient.
From that standpoint there is certainly a lot of preparation and thought that goes into logistics. Our managers are very experienced and you have to recognize that it takes a little bit longer to get things done working in more remote locations. You also might have to carry a little bit more inventory and spare equipment, people and resources.
This year you won a prize for being the best company in Russia from the Russian Duma. What were the achievements which made you deserving of this award?
It was an award we were very pleased to receive and appreciated it. I felt quite humbled to be able to go and accept it on behalf of all the work that our people do. We have been a long-time player in the Russian market and we have earned a good position. We work hard to keep it.
Trican’s original thrust was that we wanted to be a Russian company with Western technology. The vast majority of our employee headcount now in Russia are Russian citizens and that is very important to us. The days of having to employ people outside of Russia, are gone. Trican has a very able and capable workforce, that are not only a very important part of our company here, but an important part of our future.
My responsibilities with Trican extend beyond Russia and I have responsibilities for other areas of development. We are looking to grow our Russian employees, accumulating experience and building their know-how of operating in harsh conditions, remote locations and being able to draw on this employee base as we take the next steps in our international expansion.
I am always impressed by the effort our people will make to get the job done. It is incredible dedication to the company and we want to help them succeed.
You mentioned the big focus on service and the personnel. How does that influence your management style here in pushing Trican forward in Russia?
It is not really all that different than in other markets. I worked in Russia for a number of years back in the 1990s, returned about a year ago to take on the operations here. I replaced someone who started the company and was extremely well thought of by the employee base. So fortunately I had a strong position to step into which makes life easier. Also learning to understand cultural references and I think being respectful to cultural references is important. Respect the way services are done in Russia and understand that we are not working in Texas or Canada, instead we are working in Siberia. So you have to operate in the way the market operates here.
As a final message. What are your ambitions now for the Russian part of Trican?
I think Trican in the coming five years will continue to improve on what we have been doing. We will continue to invest in our operations and we will continue to expand to support our customers’ expansion plans. The nature of the service industry is that you are driven by your customers’ plans. I expect we shall be going further east and further north.
Five years from now I would like to continue to see Trican as a strong service provider in Russia, well respected for the business that we run, and well respected for the service that we provide and for the people we employ.