Interview: Eriell sees no risk to Russian drilling orders as long as price stays above $40/b

Moscow — Drilling company Eriell sees no risks to its orders in Russia from current oil prices, as long as they stay above $40/b, Eriell Russia head Vitaly Dokunikhin told S&P Global Platts.

The company saw a lot of orders dry up in 2016 after the oil price collapsed, but has now changed its focus to prioritize drilling complex wells at projects owned by Novatek and Gazprom Neft in the Russian North, leaving it more exposed to gas prices than oil prices, Dokunikhin said in an interview.

"Considering Novatek has aggressive production growth plans and low costs, at the current oil price we don't expect them to significantly cut their drilling plans; it's a similar situation with Gazprom Neft," he said.

"That is down to $40/b, that's when they may reconsider."

In 2016 when the sharp drop in oil prices hit Russian producers' drilling plans, Eriell's operations, which included contracts with Rosneft and Lukoil, were much more exposed to the oil price.

KEY PRIORITIES

Eriell plans to continue to focus on Russia, where it accounts for around 4% of the services market, and Uzbekistan, where it is the leading driller.

"In Uzbekistan there is a big economic boom and our business there is growing," Dokunikhin said. "Above all that's due to the government program to increase gas production."

Since taking office in 2016 President Shavkat Mirziyoyev has launched a wide-ranging reform program, including stimulating oil and gas production and making the industry more accessible to foreign partners.

Dokunikhin said the company is not currently seeking opportunities abroad, mainly because demand for its services in Russia and Uzbekistan is so high.

"We are always looking at options, above all in the Middle East," he said "We have good experience and when we have spare capacity and the economics are good, we'll look to go there."

He added that the company qualified with Saudi Aramco, but has not yet carried out any work for it as the commercial terms offered weren't attractive.

Eriell has also worked with Lukoil in Iraq, and Petronas and Gazprom International in Bangladesh.

RUSSIAN EQUIPMENT

Dokunikhin said Eriell is now only sourcing domestic equipment for its Russian operations, after the government granted a 2% discount on credit for purchasing Russian technology.

The discount was introduced to mitigate the impact of Western sanctions introduced against Russia in response to its role in the conflict in Ukraine. These measures restrict Russian companies' access to technology used to develop offshore Arctic, deepwater and shale oil projects.

"There is an industrial investment fund and it allows us to receive credit for roughly 2 percentage points cheaper than in the bank," Dokunikhin said. "So if we source from Uralmash it's cheaper, especially when you consider transport of Chinese equipment."

"If we could get credit from the bank at 10%, now we have it at 8%. Considering that an Arctic drilling rig can cost around Rb1.5 billion, twice as expensive as normal ones, it's a significant saving," he said.

Eriell is benefiting from Russian measures to protect the service sector, but has not been hurt by the sanctions themselves.

"Sanctions don't affect us because we don't drill offshore, we don't drill in those areas that are sanctioned," Dokunikhin said. "We actively work with the big four technological companies: Baker Hughes, Weatherford, Halliburton and Schlumberger."

LOGISTICAL RISKS

Dokunikhin said the company is seeing some logistical issues as a result of the coronavirus outbreak and its impact on industrial production in China.

"There is already a slight delay in delivery of spare parts from China due to the coronavirus, but it's not critical to our projects," Dokunikhin said. "Above all almost 50% of our fleet in Russia is produced at Uralmash."

He added that he thinks the company could source the parts from elsewhere if the situation worsens.

The spare parts are delivered via rail and road, supply routes that are continuing as normal despite the coronavirus outbreak.

Around 50% of the company's fleet was made in Russia and 50% in China, and the company no longer buys new rigs from China, Dokunikhin said.

Climate change is also having an impact on Eriell's logistics, as it works at many projects that are only easily accessible in the winter when freezing temperatures create temporary roads.

"So, when the warm season begins earlier as a result of climate change, this period is shorter, and for us it complicates logistics," he said, adding that each year is getting warmer and warmer.

"Earlier the winter season was maybe November to May, now it's from December to April. Sometimes every day counts because if you don't deliver the drilling rig, which is a very heavy piece of equipment, you would have to wait half a year to deliver it and that's a big loss," he said.