Jeffrey Allen, Tesco RF Company Limited
Release Date: 2011-07-08
In 2010 Tesco Corp recovered strongly enjoying global revenues of $378 million. As one of 23 countries where Tesco Corp operates, how would you sum up the strategic interest of the Russian market to the company and your performance expectations for 2011?As a global leader in both oil and gas production, Russia represents an extremely important country to Tesco Corporation. The size of the market, the geology and the temperatures are a perfect fit for Tesco’s experience and portfolio of products. In essence Russia is a natural fit for Tesco’s Canadian designed and manufactured equipment.
Until three years ago, Tesco had product sales, but no service presence in Russia. Within the last three years the company has grown rapidly. In 2010 Tesco experienced year on year 400% growth; in 2011 Tesco’s expected growth is 100% on year end 2010. The tremendous growth we have experienced is evidence of a technologically evolving market which is receptive of innovative proven drilling and casing products provided by Tesco.
The evolution of the market comes from new green fields and depleted brown fields requiring modern and efficient technology provided by Tesco to reach the reservoir. Tesco expects the demand for modern drilling processes such as CASING DRILLING™ to be in greater demand as the industry expands to locations with minimal infrastructure such as the Yamal peninsula, East Siberia, and Shtokman etc.
Across the drilling industry reduction of non-productive time is a significant measure of a service provider’s benefit to the general operation. Customers want to drill 24/7 and cannot afford to have breakdowns of equipment. If a top drive should stop working on a Shtokman-type project then the costs over a 24hr period for downtime can vary from $10,000 per day to in excess of $100,000. For this very reason, Tesco strives to eliminate non-productive time. Tesco’s main differentiation in the Russian market is our ability to increase our customer up-time vs down time ratios. The company can take drilling efficiency from a 30% down time to 99% up time or drilling time.
Although the company is generating strong growth, what would you highlight as some of the challenges of operating in the Russian market?
The Russian market comes with significant administrative, legal and accounting challenges that require careful planning from foreign direct investors such as Tesco Corporation. Secondly, Russian companies are not early adopters of technology, however when they do decide to adopt and witness the benefits of new innovative technologies there is a rapid increase in acceptance.
The third challenge for Tesco is turnkey drilling contracts which do not take into account the cost of new technologies. I expect a transition from turnkey contracts to Western style rig services contracts or integrated project management contracts; where specialized services are paid for as they are provided. Fortunately I do see the current turnkey modus operandi is slowly being replaced.
The fourth challenge is logistics. Importing items into Russia is costly, with landing costs in general adding a minimum of 50% on top of the purchase price. These costs are prohibitive for some companies and do determine to a certain extent the product mix and competitiveness of foreign direct investors in Russia.
The fifth challenge is corruption, which precludes Tesco from being a viable participant in some contracts. Tesco’s commitment to lawful and ethical business practices is firm, and we are very comfortable walking away from situations that do not meet our legal compliance standards. Hopefully as this market continues to mature we will see this problem diminish over time.
Mr. Campo of Integra confirmed to Focus Reports that Russian companies have a natural advantage in understanding this system. What are the partnership prospects in Russia for Tesco Corp?
Tesco Corp has not engaged in any Russian M&A activity to date. This does not however mean that we will only grow organically in the future. In fact, the company is always on the look out for potential partnerships. This can take many different forms across the company’s product lines. However, because the company is already performing well in the Russian market, the economies of scale would have to be significant. For Tesco to partner in Russian we must gain additional marketing or sales penetration and/or greater manufacturing capacity or an entirely new product line.
Tesco Corp’s CEO Julio Quintana highlighted the Top Drive segment as the key performer for the company last year growing at 8.5%. To what extent does your growth in Russia mirror that of the company across your segments?
Primary growth for Tesco in Russia also came from its top drive segment. In fact the company started in Canada 25 years ago as a top drive manufacturer and has helped revolutionize the global drilling market with our portable electric and hydraulic top drives. Today in Russia top drives still represent the company’s core strength. However, the company has also introduced our Casing Drilling and Casing Running to the global market, with very successful results. Tesco views its Casing Drilling and Casing Running segments in Russia as revolutionary technologies ready to take over from the Top Drive business as the primary product lines moving forward.
Tesco increased top drive rental capacity in Russia from six units in 2009 to 16 units in 2010. By early 2012, Tesco expects to have 20-22 rental units in country. The expansion of the rental asset pool proves that Tesco is willing to invest significantly in Russia. This investment in assets, inventory and our highly skilled technicians has enabled Tesco to maintain 99.5% uptime and 94% customer satisfaction..
Who are the customers you are principally working with and who are you looking for?
Tesco provides services for notable drilling contractors such as BKE, NOVA, INTEGRA, and Weatherford’s subsidiary drilling companies OBN and NVBN.
There is definitely a trend in the Russian market for the NOC’s to divest drilling assets. The divestment of the drilling divisions is primarily because they are asset and labour intensive; therefore if there are any inefficiencies they are costly to run. The specialist drilling companies which are spun off from the NOC’s and E&P companies are highly conscious of efficiency. These companies are going to be looking most at performance and non-productive time reduction. Tesco provides these companies with this service so they can achieve the efficiency and performance expected by their NOC customer. Tesco forecasts more customers will be brought into the market as Gazprom divests its drilling divisions. The end result will be a more competitive western style drilling market which absolutely suites the services provided by Tesco.
Tesco also expects further tax breaks and holidays in certain regions will incentivise E&P to expand infrastructure in East Siberia and other green field locations. For Tesco expansion into more green fields is also advantageous as our clients look to maximise returns by employing our innovative and efficient technologies.
Offshore production for Russia seems to be more talk than action at the moment. What do you see as your long term prospects in the offshore industry?
The offshore industry is typically high tonnage, but requires extended reach drilling and it is very expensive. Tesco can differentiate itself among suppliers with its casing running and Casing Drilling capacities, which have both been proven in offshore operations. Both casing running and Casing Drilling provide the customer with the means to efficiently and in a controlled manner drill through danger zones. Conventional drilling cannot always get through certain layers; Tesco’s Casing Drilling technology provides an innovative means for moving through these danger zones and provides for a safer, quicker and more reliable mechanism to reach the reservoir.
The Russian industry is new to offshore, how challenging will it be to engage with these oil and gas producers?
Typically western technology is required to achieve successful offshore programs. I expect Russian offshore greenfield developments to employ more international partners and follow the lead of the Shtokman project where Gazprom and Statoil have formed a joint venture. If I am correct we should see more of BP, Total, Statoil, ExxonMobil and Shell etc coming into partner with the NOC’s. These western companies have the experience and knowhow to execute and conduct efficient offshore drilling programmes The western partners of Russia’s majors will therefore be the ones taking advantage of western suppliers such as Tesco to ensure each and every project is a success.
As a result of cooperation with Western partners do you see a shift in the Russian mentality towards concerns for safety for example?
Russian drilling programs are becoming more and more efficient. With the drive for efficiency has come a requirement for a greater focus on safety—experience proves the two go hand in hand. Today there are many different products on the market requiring specialized knowledge and handling. Tesco equipment also fits into this category; as a result Tesco is taking the highest standards available and implementing them in Russia. This requires embracing Russian requirements (e.g. specialized rig building certificates) and Tesco/western requirements. Tesco prides itself on non-productive time reduction, perhaps the biggest component of our ability to reduce non-productive time is our devotion to safety and processes that eliminate unsafe practices.
Tesco Corp has been establishing itself in Russia over the last 3 years and you have been country manager here for the last 2 years. For the executive readers of OGFJ what would be your advice on setting up in Russia?
Firstly a detailed new country entry must be completed. It may take up to one year to develop a new country entry for Russia that meets the demands of your business and the Russian government. To enter the market without fully understanding the legal, financial, tax, human capital etc business requirements will significantly impede the growth of the foreign direct investment. Secondly you must take a risk when establishing yourself in the Russian market. It is imperative to invest strongly in quality and service with sufficient assets (equipment and human) and inventory to provide advertised performance. If advertised performance is not satisfied you will quickly fail. Conversely if you deliver the Russian market will provide fantastic growth opportunities and repeat business.
On a personal level from a business perspective the Russian market is both stimulating and challenging; it also offers great opportunity. Russia is also much more accessible than you expect, Moscow is a vibrant city, and it is possible to establish a good life here.
As a final message, what is your personal goal for what you want to achieve in Russia?
I have been seeking to create a Russian Tesco. There is a fantastic pool of human resources in Russia from accountants to engineers. It is my goal to advance all Russian Tesco employees so they can leave and work in other global locations. So far, we have had a lot of success in developing talented Russians into the Tesco leaders of tomorrow.
| Company: | Tesco RF Company Limited |
| Position: | Managing Director Russi and CIS Region |
| Country: | Russian Federation |