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The growth of oilfield services will be higher than the economy growth in a whole
KUDAIBERGEN Almas Shayikbekuly, the Chairman of Service Companies Association of Kazakhstan KazService answers Petroleum questions
– Almas, the Association KazService, which is chaired by you, consolidates oilfield service companies, working in different sectors of EPC services market. Therefore, it seems that you might know this market better than anyone. What are the main problems and hot buttons that you can see on it?
– Let’s first define the meaning of EPC services. In the west engineering school, from where this name is derived, EPC implies turnkey project implementation. There are engineering, purchases and construction itself. In the world ranking of EPC-contractors, annually assigned by the recognized international agency Energy News Record, we can see the domination of companies from Europe, USA and Japan. Although it may be noted that recently Chinese companies started entering into this ranking, and in the last rating from 100 of the largest EPC-contractors 21 firms were from China.
If you compare this list to Kazakhstan’s reality, it may be noted that among the above mentioned top-100 international contractors, more than 20 companies are being presented in Kazakhstan, which shows a great attractiveness of the local market, particularly in large projects that are actively working such as Fluor, KBR, Saipem, Bechtel, CCC, Gama, Tekfen and etc. For example, the situation in Russia radically differs from the one in Kazakhstan. In Russia in soviet time there existed huge construction holdings, which also actively continue to work now. On the contrary, it may be noted that due to the state policy in Russia for the recent years, there has been formed a basis of large local general contractor companies, such as “Stroytransgas”, “Stroygasconsulting”, “Stroygasmontazh”, which have billion USD turnovers. For example, “Stroygasconsulting” Company’s experience is interesting: it was created in 1994 and, during 18 years, it has grown to an industrial construction company with an annual income of more than $10 billion dollars (data for 2012).
Do we have local EPC companies? For the years of independence in Kazakhstan, there have grown some companies in civil construction, which already can implement complicated works, including designing and construct complex civil buildings. Road field has also formed a basis of national companies, which participate in such large projects, as “West China-Europe”. And what is the situation in the oil and gas construction?
General contracting works are related to works of high complexity. At the moment, in Kazakhstan there has been established a practice that proves that general contracting works are mainly performed by foreign companies, which also make efforts to attract their own “privileged” foreign subcontractors. But we are happy that recently there have been created in Kazakhstan group of local companies, which partially can implement EPC. From three letters of the word EPC, Kazakhstan companies have very successfully learnt to perform construction services, particularly when they constructing oil and gas objects.
Unfortunately, E and P are not so developed as joined complex of services. Certainly, there are companies which have purchases experts, but even they cannot manage purchases and logistics of thousand items at once. For example, I say that in a large project, particularly, in the construction of a new plant, there are used the cables of several thousand kilometers, more than 100 vessels under pressure, ten thousands valves, hundred kilometers of trunk pipelines, hundreds of pumps and many other things. And all this equipment has to be strictly supplied at specified time. Most of Kazakhstan companies haven’t learnt yet to thoroughly plan and manage purchases in such volume. Delay of any important equipment can significantly postpone construction, and this supposes extra charges and loss of profit for the customer.
Engineering of high technology projects is not so well-developed in our country, and, even my next phrase seems rough, our leading engineering companies work as second-guessed at large foreign engineering companies, more doing adaptation of foreign technologies to Kazakhstan standards and construction standards and regulations. What is the meaning of the usual engineering for the large western company? It is when you take such technology, say implemented in one of the fields of Africa, you use it in a project here.
To my point of view, the main problem that barriers full cycle development is the lack of enough human resources, especially for engineering and purchases. In large companies, an average engineer has more than 15 years of experience in different projects and in different parts of the world. Only in recent years we have had some new flow of new human resources to this sector. The second problem is the absence of cooperation between Kazakhstan companies. For example, western EPC companies have their own subcontractors on specialized works, and these companies go together to new projects in different part of the world. It means that EPC contractors cannot and must not perform everything by themselves, because part of works is submitted for outsourcing.
Regarding EPC-contractors, their policy is to develop their own subcontractors and suppliers as the contractor knows that the project may be stopped due to the fact that the subcontractor has no sufficient finances and/or competence. And EPC companies have target to grow their subcontractors. It is different in our country: where we mainly use “wild capitalism”, or “to squeeze until final drop”. In my opinion, Kazakhstan companies have to transfer to the phase of partner growing; I am not talking about the junior ones, but the partners as subcontractors, and we together should go on projects.
Recently there was a case of one large industrial construction company, which I won’t say the name, that worked in the project and have attracted subcontractors with minimal prices, in order to economize, but next day anyone wanted to work with this Company because project terms exceed the limits, and they were forced to attract a foreign specialized company, which executed the work at more expensive cost. The proverb “penny wise and pound foolish” – is effective also in our market.
The third problem is that there must be a developed industry, that EPC companies could quickly buy specific equipment, we unfortunately have a few plants issuing the technological equipment, complying with international standards.
– What is the volume of Kazakhstan oilfields service market and what are the perspectives of its development?
– Currently oilfield service is one of the largest sectors of Kazakhstan economy, and according to our estimates, the market volume comprises almost 1 trillion Tenge per year (about 3,3% of Kazakhstan GDP on condition of 2012). According to the Statistics Agency data, the oilfield services market in Kazakhstan (in 2011) was evaluated in the level of 800 billion Tenge of which for:
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services on installation, repair and demounting of drilling rig and appropriate services related to oil and gas mining, were accrued 130 billion Tenge;
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drilling services – more than 250 billion Tenge;
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for the rest services – more than 400 billion Tenge.
The market volume shows that from 500 large Kazakhstan companies not less than 15 % of firms are the representatives of oilfields service sector. Taking into account that the implementation of large projects has started in Tengiz, there was planned to extend these projects in Kashagan, Karachaganak and start new ones in Caspian offshore; therefore sector will rapidly grow.
– What share does have national oilfield service companies on the market? Are they competent enough to compete with foreign companies?
– Kazakhstan service market is non-uniform and doesn’t have such distinct borders as, for example, retail, agriculture or financial sector. But we can generally divide oilfield services market on three sectors by technological complicity, which I always take as example. The first one is the execution of basic works: construction of buildings, roads, transportation of simple loads, catering. Here the market is mostly developed by local companies, and few foreign companies. The second sector is the construction of onshore production facilities, transportation of heavy cargo, pipeline laying, carrying out of drilling works and others.
On this level is observed a domination of foreign companies, even there are also successful Kazakhstan companies such as “TengizService”, “Caspian Offshore Construction”, “NSS” “Tengizneftestroy”, “Isker”. Finally, the third sector comprises the execution of difficult and science driven works, as designing and construction (EPC contracts), deep-water and horizontal drilling, and others. In this case, a main part of the work and products is given to foreign projects such as “Schlumberger”, “Halliburton”, “Saipem”, “Gate”, “Enka”, etc. It should be noted that the higher the complexity is, than the higher margin will have it.
Kazakhstan market has great perspectives, and our companies have a great potential of taking a good and leading position in Kazakhstan market. Our companies are working hard to develop their capacities, and big amount of loans are given by the Government to improve and modify the machine-building plants, factories, and large companies. All depends on the amount of orders for large projects: if the orders will be presented, then Kazakhstan enterprises and economy in a whole will be developed.
– To your point of view, what is the state’s role in the market regulation of EPC services? How much effectively it executes its functions?