OFS Technologies CEO David Gadzhimirzaev: Russia actively increasing number of wells to rapidly boost oil production at right time
David Gadzhimirzaev
Photo: Tyumen Industrial and Energy Forum (TNF)
OFS Technologies, the owner of the former Russian assets of Baker Hughes, is into its second year. The company, whose share on the domestic oilfield services market is estimated at 10%, has become one of the parties involved in the process of technology localization in the industry. Last year, the company launched the construction of a large-scale production facility in Tyumen for rotary steerable systems, which are the essential equipment used in complicated well drilling. OFS Technologies President David Gadzhimirzaev told Interfax in an interview at the Tyumen Industrial and Energy Forum (TNF) about the progress in implementing this project, new plans for technology import substitution, and the prospects for Russian oilfield services amid Russia's oil production cuts.
Q.: We met with you here at the Tyumen Industrial and Energy Forum a year ago, when OFS Technologies launched the construction of a production facility for rotary steerable systems. At what stage is this project now?
A.: The construction of the Tyumen OFS Production Facility continues, but we had to move the date for commissioning the facility one year forward. We are now planning its launch for the third quarter of 2026. This has happened due to additional engineering and geological exploration work associated with ground waters under the construction site. Despite this, we are continuing to buy and obtain equipment for the future production facility, primarily domestic [equipment] or from friendly states.
However, since it is essential for us to launch production as early as next year, we have started building an additional rotary steerable system production facility in Tyumen, which we will launch in 2025. Hence, we are keeping our promise to manufacture equipment.
In addition, we launched a workshop for producing drilling bits and various elements for directional drilling equipment at our current facilities in March. These bits are of our own design, which is tailored to the needs of our customers, for certain geological complexities and wells. The equipment has already proved itself in the drilling process, showing record speeds of mechanical penetration with minimal wear. Here, we have also started manufacturing rotary steerable system components, such as deflector blades. This is a component, which helps you take a designated trajectory path.
We are also planning to produce equipment for smart well completion. This is already a high-tech segment, and this is precisely what we are setting up the future facility for.
Q.: Has the issue of component base for future production been resolved?
A.: We have already been producing spare parts from our partner suppliers, whom we ourselves have nurtured here in Russia. Components will be partially supplied from China. But we will be shifting our focus to local spare parts due to the fact that we will be launching production in Russia.
We have also started building a foundry shop as part of the Tyumen OFS Production Facility. This will be its third site. This is where we will be molding stages for electric centrifugal pumps, which we produce at our plant in Nizhnevartovsk.
However, we will still be purchasing some components for rotary steerable systems abroad, in China. In particular, these are microelectronics, which are not manufactured in Russia. If you ask me whether it is needed to set up their production in our country, I will answer that it is certainly needed. However, we do not specialize in the production of such equipment. We need it as a component for producing electronic circuit boards, the printing and repair of which, by the way, we have mastered at our facility in Noyabrsk. They used to be sent to Germany for maintenance, but after the sanctions were imposed, we learned to do it ourselves and we are now planning to expand our electronics production.
Q.: Are there any agreements on supplying the metals you need, or are there still difficulties? You raised this problem quite recently, at the 2024 St. Petersburg International Economic Forum.
A.: This is a very sensitive subject. Where we could localize raw materials from domestic suppliers, we have done so. At this point, we are purchasing some stainless elements in Russia, but we have to export a huge portion of them from China. These are magnetic steel, nickel, and chrome alloys. They can be bought in Russia, but at uncompetitive prices. It is cheaper for us to buy them in China, even with logistics costs taken into account. In this matter, we need the government's assistance in establishing cross-industrial collaboration with metallurgists, and we need to look for financial tools to encourage local suppliers.
Q.: What will be the capacity of the plant once it reaches full capacity?
A.: The design capacity of the plant is around 25 rotary steerable systems per year. This is a lot, if we talk about market needs. For [drilling] bits, we are targeting 300 pieces per year, for well completion equipment 600 pieces per year. This will be a truly large-scale production facility, which will include more than 50 various machine tools. In addition, it will be a base for maintaining the already existing stock of sophisticated oilfield service equipment.
If we interpret these figures in terms of meeting domestic demand, we will at least cover our domestic demand for our customers. We are also willing to work with our competitors from other oilfield service companies that use rotary steerable systems. This is essential for us to maintain localization of equipment on the domestic market, keep up the pace of drilling and reach longer horizons.
Wherever our technologies will be used, we stand ready to provide expertise. For this purpose, the company has launched several educational tracks to train specialists, as the equipment is technologically sophisticated.
Q.: The scaling up of the project has certainly resulted in an increase in investment, as well. If initially its implementation was estimated at three billion rubles, how much is it now?
A.: We now estimate the implementation of all of our investment plans at four billion to five billion rubles. The funding is coming from our operating activities. We invest almost everything we earn and do not use borrowed funds. This is difficult because we are lacking the required pace of project implementation, but high interest rates force us to use only our own money.
Q.: Maybe, you have considered other options for raising capital, for example, placing bonds or going for an IPO?
A.: IPO is a subject we are thinking about, but we have decided to give it up at this point, because our stock market is unstable in the current reality, and it has essentially become localized. However, in the future, we are interested in this as any major company, which is developing, becoming more horizontally integrated and versatile. The road to an IPO is difficult and long. At present, our priority is to launch our three new production facilities. As soon as we manage to do that, I think we will return to discussing the matter.
Q.: OFS Technologies reported a 48% growth in revenue and almost one-third increase in net profit at the end of last year. Do you expect this trend to keep on going this year?
A.: We are proceeding under the schedule: we do not expect a drop in revenue for the current year.
Q.: According to the Federal Statistics Agency (Rosstat)'s data, oil companies' expenditures for oilfield services rose 12% last year. The same dynamics were seen in the first half of 2024. At the same time, the country's production is declining under the pressure of the OPEC+ deal. What is the upward trend linked to? Is it a factor of inflation in the sector or the effect of deferred investment during the coronavirus pandemic?
A.: It is difficult to comment on these data, as there is a set of aspects here. Coronavirus has not only shifted investment to the right, but it has also changed global logistics, which is one of the cost components. A number of companies producing certain parts have raised prices several times, speculating on the lack of alternative markets. All of this affects the end customer represented by oil companies.
If we talk about the impact of OPEC+ output cuts, there is almost none. Lower production does not always result in lower drilling, as exploration of new reserves is ongoing. We are increasing the stock of wells so that the country would be ready to increase production at the right moment.
Q.: How are the needs of oil companies changing, given the increasing complexity of the resource base and the growing shift towards hard-to-recover reserves?
A.: We are still seeing a balance in our portfolio. Where subsoil users need high-tech drilling, they use it, and where low-tech drilling is sufficient, they use it. However, the trend towards high-tech drilling is taking shape as the number of complex deposits is on the rise. Besides, the operators are seeking to slash their costs on the current stock, which is reflected in their intention to drill long horizons.
Q.: And as far as offshore fields are concerned, we have recently seen companies pushing back their exploration plans. Do you see a decline in orders in this segment?
A.: The offshore fields in Russia are not limited to the Arctic. They also include Sakhalin and the Caspian Sea. Indeed, we see that investments in Arctic fields have been postponed. Nevertheless, if we talk about the waters of the Caspian Sea, the Sea of Okhotsk, and the waters of Sakhalin, there are enormous reserves there that need to be extracted. The economy of these fields has shown their profitability. Everything depends on technologies that need to be import substituted. If we are talking about the shelf, we need drilling platforms, drilling machines with a certain lifting capacity, compressors, top drives, and turbines. All of this, unfortunately, has a tremendous import component.
Meanwhile, if I am not mistaken, around 4% to 6% of Russian oil is produced on the shelf. At the same time, a huge part of the unexplored reserve is located onshore, where it is easier to lower the cost of a barrel raised to the surface thanks to new technologies. It was at the level of $60-$70 in the United States before the "shale revolution". Due to efficient work, it was reduced to $40-$45. We can do the same in Russia. Tax amendments are needed for scaling up. We need to stimulate our operators and give them certain financial tools.
Q.: So, do you support broadening the scope of the excess profit tax, too?
A.: I fully support both [Rosneft CEO] Igor Ivanovich Sechin and [Gazprom Neft CEO] Alexander Valeryevich Dyukov on this issue. They are really telling the truth.
