Interview with Rustam Rakhmatulin, Vice President, GEOTECH Holding, by prom-oil.ru
1. Rustam Rashidovich, could you talk about the history of GEOTECH Holding?
The Holding was established in 2006, when a number of companies active in the Timan-Pechora province were purchased. In the last 5 years, GEOTECH Holding has continued to expand, and now it is the largest exploration company in Russia. Currently, the Holding includes 15 companies operating in all the oil and gas provinces of Russia. They include 9 geophysical companies, as well as 3 drilling and 3 specialized data processing and interpretation centers. GEOTECH Holding is the only company that provides a full range of exploration services all over Russia: field and offshore seismic exploration, processing and interpretation of geophysical information, well logging; drilling and work-over, and production of the pulse electromagnetic sources Enisey.
2. The crisis was a difficult experience for many oil field services companies. How strongly did it affect your company and how did you recover after the crisis?
The crisis directly affected our company. 2009 was especially difficult. Due to the steep fall in exploration activities almost at the level of all field operators our portfolio shrunk by at least 20%. A number of our customers terminated contracts that had already been signed. Others cancelled the results of tenders that we had won or proposed reducing prices or terminating contracts. In addition, for the first time our contractors failed to deliver materials and equipment, which adversely affected delivery in our key projects.
Nevertheless, I can say that in general we successfully rode those rough waters and managed to produce near-target profit growth in 2010. This was explained by high efficiency in operation, mobility, the professional level of employees, and our excellent knowledge of the areas in which we operate and the investments we made in the pre-crisis period in the complete streamlining of our companies. Today we can say that the crisis provided invaluable experience of survival in critical situations and it showed that we chose the right direction for the development of our company in the coming years.
3. How do you evaluate the exploration market in Russia and what is your forecast for the coming years?
For field and offshore seismic exploration, data processing and interpretation, the exploration drilling market is experiencing moderate growth. The exploration drilling segment grows slightly more rapidly, the field seismic exploration segment expands more slowly but in general annual growth is 10-15%. The main customers are large Russian oil and gas companies - Gazprom, GazpromNeft, Rosneft, Surgutneftegaz, etc. However, their exploration costs have yet to return to their pre-crisis level. The share and significance of small and medium-sized field operators has significantly shrunk in the last three years at least by 2-3 times according to our estimates and is recovering very slowly.
In general I can say that the crisis significantly impacted the market. The most severe part of the downturn was witnessed in 2009 as I said before. However, the recovery started in 2010 and continued in 2011. If this continues at the same rate then it is possible that by 2013 the market will approach its pre-crisis, 2008 level.
4. Do you feel government support in such a situation? Is it really necessary?
We see government support. But we believe that it could be more active and financing could be more significant. Due to the crisis, investments in exploration significantly dropped. In addition, the crisis showed that private subsoil users are ready to make significant investments in exploration only when oil prices go up. Otherwise, they try to leave the market. This has a negative impact on the industry because of the ever-falling number of companies capable of providing high-tech services. To avoid this, the government should assume the role of a coordinator and replace private investors when they exit the market. This is also an issue of national security because exploration has a strategic importance for Russia. To be a global leader and to maintain oil and gas production at the high levels, new fields are necessary.
5. What do you think about the position of GEOTECH Holding in the exploration industry? What market share does the company control according to your data?
GEOTECH Holding is still the leader in the market, the largest company in the exploration sector in Russia. No other company has that number of crews and geographic presence. We operate in all regions of the Russian Federation and we have base and field crews in each federal district.
6. Do you feel competition from other Russian exploration companies?
Although GEOTECH Holding is a leader there are other major players in the seismic exploration market. The Holding performs almost three times more work than these companies but the technical level of the major players is approximately the same and significantly surpasses the technical level, HR, and technological culture of the remaining contractors. The reasons are evident. Large companies in the last 3 years have made significant investments in operations, improved performances, and quality of operations, while small companies have been struggling to survive mainly through dumping prices. This gap between major and small contractors has become evident and we see that our customers, the largest vertically integrated oil companies, also notice it and understand that their future depends on the quality of exploration. At the same time, despite the competition, each company has its own niche in the market and its own development strategy. Some focus on field geophysical services, others focus on expansion in the global market. Our company concentrates its efforts in two main directions: the first is performing exploration services for the largest Russian field operators in any region of Russia and the second is scientific and technical development and implementation of new technologies. It is very difficult for any one company to pull significantly ahead in exploration drilling, because existing companies are similar to a great degree and there is no evident leader.
7. Who are your key customers? What relations do you have with them and is there any specific character in industry communication?
Our company mainly focuses on the major Russia oil and gas companies – Gazprom, Gazpromneft, Rosneft, Surgutneftegaz, LUKOIL, RussNeft, NOVATEK and the territorial departments of Federal Subsoil Resource Management Agency. In addition we are quite interested in developing relations with stable and rapidly developing oil and gas companies with a high reliability index: Samara-Nafta, Irkutsk Oil Company, etc. As for the specific character of industry relations it is necessary to mention the problem of execution of agreements. The business of exploration companies has a seasonal character. Operations are mainly performed from November to March. Ideally contracts should be signed not later than in April-May for the following year to complete all preparation work and secure all permits. However, actually this is not the case. Tenders and the signing of contracts are often significantly delayed, resulting in additional expenses and increase in the cost of operations for customers.
8. You mentioned scientific and technical development and the introduction of new technologies. How do they manifest and are the latest scientific and technology achievements relevant in your market segment?
One of the most important factors affecting the competitiveness of a modern exploration company is its technological advantage. That is why we track all scientific and technical achievements in our sphere; we are in close cooperation with the leading Russian universities and support their research activities. In addition we make significant investments in modernization and continuous upgrading. Namely, we have implemented technologies that appeared relatively recently and were introduced by major global companies such as Schlumberger and CGGVeritas: for example, more efficient usage of vibration seismic sources and optimization of the use of telemetric equipment. We can say that currently GEOTECH Holding is one of the most technologically advanced companies in Russia, and we believe that this has been one of the factors that have allowed successful recovery after the crisis.
9. Do you focus only on others’ experience or do you also use equipment and technologies which are not used in other companies but are rather efficient?
We do not only use unique technologies we also develop them. I mean electromagnetic pulse technologies and Enisey sources. Such sources have a number of advantages in comparison with conventional vibrators and blasting. They are safe, environmentally friendly, cost-efficient, and they have a high signal quality. Currently, our sources are successfully used all over Russia, the U.S., Iran, Uzbekistan, and France. We presented our pulse sources at the EAGE exhibition in Vienna this year and received a positive feedback, including from the largest companies in the industry. Currently, negotiations are under way with a number of potential suppliers and customers.
10. As far as I understand your company is focused mainly on the domestic market. Do you plan to expand your presence in the regions and what challenges are typical for Russia?
We prioritize the Russian market because GEOTECH Holding is a Russian company. Currently, the growing markets of Eastern Siberia, Volga Region, and South of Russia are the most interesting for us. These are markets where we see the strongest potential in terms of reserves and investments. Now we are active in these regions, expanding our technological capacity and amount of work performed. Although I would note that our company operates and has crews in all regions of Russia.
Speaking about the challenges of doing business in Russia they are rooted in one basic problem: the low priority of exploration in the structure of costs with subsoil users and insufficient government participation in the resolution of the problems faced by the industry. Currently, the level of exploration activities is significantly lower than it was in Soviet times. Replenishment of resources is very slow. Subsoil resources are vastly underexplored. Exploration costs are first cut in case of a downturn and last to see increases in times of growth in oil prices.
11. You mentioned the professionalism of staff as one of the factors behind successful recovery after crisis. What principle do you use to hire personnel and incentivize them?
We bet on young specialists and their development inside the company. We developed special software that allows young specialists not only to have a job in the company, but also ensures their professional growth, carrier development, and long commitment to our company. We conduct phased work with young employees, which allows to identify the most promising employees and incorporate them in our succession pool. In addition they can count on active social support from the company including special salary increments and apartment purchases by the company.
In addition continuous training of personnel is very important for us because we believe that it is impossible to ensure sustainable high quality of operations without it. That is why every year our employees undergo training to improve their professional skills, become familiar with new equipment and technology, as well as advanced operations management practices.
Our main goal is to establish a system of partnership between personnel and management because we believe that that facilitates the professional development of each employee, which in turn is an element of the successful development of our company.
12. Could you share the long-term development plans of the company: any mergers or acquisitions?
At the moment, we plan no specific acquisitions. Our priority presently is the integration of the companies that currently constitute GEOTECH Holding. This is rather challenging and time-consuming work. The Holding has enough companies and seismic crews to conduct operations that can be contracted by customers in the near term. As I said before we are restructuring our assets, linking them to our regions of operations, upgrading, conducting modernization, focusing on improving productivity and logistics. Surely, we are looking at the assets available on the market and we are considering the possibility of purchasing. We currently have no desire to resolve the problems of other companies, namely, the debt burden. The main issue now is how a company can complement the structure of the Holding, what tasks it can resolve.