BurService Board Chairman Roman Zhdanov: Stabilization period is over, we now on way to technological sovereignty
Roman Zhdanov
Photo: Press-office
BurService is another major participant of the Russian oilfield services market. The company became a legal successor of all assets and contracts of the U.S.-based Halliburton after its departure from Russia. The organization has spent the past two years stabilizing its business in the new reality. Currently, the company is making plans to create its own industry equipment and is mulling over expanding its presence not only on domestic, but also on foreign markets. Chairman of the BurService Board of Directors Roman Zhdanov told Interfax in an interview following the Tyumen Industrial and Energy Forum (TNF) about the operations of the well-known company under a new brand.
Q.: After the spin-off into a separate company from Halliburton, BurService has been carrying out rather non-public activities. Could you tell us, please, what were the last two years for you? What did the management focus on?
A.: Immediately after the separation from Halliburton, we have elaborated a five-year strategy. Its short-term part implied a certain period of stabilization and was aimed at three main objectives. The first was to retain our core engineering and management staff, our competencies that were in our company at that time. The second was to adapt the processes to the new reality, in particular, to draw up various regulatory documents to pursue normal administrative and production activities. And the third objective is to maintain the quality of services provided to our customers at the same level as in the structure of an international company. Two years on, we can confidently say that we have coped with these objectives: the stabilization period is over, and now we are on the way to technological sovereignty.
The other part of the strategy is medium-term. It involves increasing investments, above all, in research and development for creating new technologies, in our own production, as well as in the development of our brand, to make it recognizable not only by representatives of the b2b segment, but also by job seekers and students. TNF is the first forum where we are so actively present, but we are confident that it will not be the last.
Q.: Halliburton's announcement of its departure from Russia was the most decisive among the representatives of the Big Four oilfield services companies. Do I understand correctly that the American company has no buyback option, and BurService is now writing its own history?
A.: We often hear this question, including from our customers, because they are worried about stability and continuity of services. I will answer this way: now we are the largest independent oilfield services company in Russia without any hidden liabilities.
Q.: Halliburton's business model was somewhat different from the other Big Four companies: the company focused on importing its equipment into Russia from third countries, from storage facilities around the world, rather than trying to localize production inside the country. It is clear that you are able to maintain the existing stock of equipment at your production bases, but how do you resolve the issue of its expansion?
A.: Back when we were working with Halliburton, we have undertaken a number of steps to localize certain spare parts, chemicals, materials, and some equipment. Often, unfortunately, our initiatives did not make it through the bureaucratic system, above all, corporate standards. And in this respect, it was certainly very difficult. If we talk about the period after 2022, we have achieved success in import substitution. We estimate that for some positions the localization level has reached 80% to 90%. These are primarily components in such segments as cementing, mud and drilling bit services.
As for more high-tech segments, unfortunately, the percentage of localization is lower, but we have a strategy for import substitution, and teams have been formed. There are research and development specialists who are actively engaged in, among other things, searching for analogues of spare parts, designing new instruments and tools, in particular, for directional drilling. Therefore, we are also looking for suppliers of components and equipment manufacturing capacity that are willing to meet our expectations in terms of quality.
Our goal is to localize technologies in the high-tech service segments, including directional drilling, to 85%-90% on average in the next three years. Although having the entire production cycle in one country in the context of the global economy is quite a complicated objective. If we achieve import substitution at 85%-90% on average across the company, including in high-tech segments, I think it will be a decent result, which will provide us with a certain sovereignty.
Speaking about the component base: if something can be imported and it is cheaper than own production, then consumers will buy it abroad regardless of the existence of production in Russia. However, given the problems that the country has faced in the last six months, I mean the problem with payments, which has significantly slowed the imports of spare parts, equipment and chemicals, it may be worth considering full substitution of such products with domestic analogues.
Q.: Do I understand correctly that you are planning to achieve the goal of import substitution within the company by developing partners rather than building your own production facilities?
A.: No, we are also considering the establishment of our own facilities. This is included in our strategy.
Q.: If it is no secret, what equipment are we talking about?
A.: This is a confidential question, but I can say that we are actively searching for and monitoring the market, looking for local technologies that we are interested in and that can complement our portfolio. We are actively interested in companies with high-tech production in Russia. And we are considering not only partnerships, but also the purchase of these companies.
Q.: Tell us about your order book. What dynamics do you see in the new history of the company?
A.: We are represented in all Russian oil and gas regions from Kaliningrad to Sakhalin. We are actively involved in tender procedures every year. This year, the active tender phase started in mid-summer, and the results will be summarized in late fall. However, as of today, we have already participated in 160 tenders of various customers throughout Russia. So far, we estimate the increase compared to the previous year at around 20%.
We have signed around 30 contracts with new customers since 2023. We continue to actively participate in tenders. The result of our work is reflected in our revenue growth: it has risen around 40% since 2022 despite all the challenges faced by the industry.
Q.: Have you managed to maintain long-term contracts of your predecessor? What major deals have been concluded already in the company's new history?
A.: We are Halliburton's successor in all obligations, including contracts. They either are fulfilled or are being fulfilled.
If we talk about new major deals, it is worth noting that we won two major contracts with well-known customers last year and this year. The first one is for directional drilling services using high-tech equipment. The second is for integrated project management, so-called IPM, at one of the country's promising deposits. These are multi-billion deals, which have substantially added to our order book.
Q.: Do I understand correctly that the change in your order book, among other things, indicates a shift in customers' needs towards high-tech drilling amid the worsening resource base?
A.: As you correctly noted, the demand from customers for high-tech services has been formed and continues to grow. We provide services in directional drilling, and we are specialized in high technologies in this segment. We have a whole range of tools: rotary steerable systems, logging system. There are niche tools such as UltraPulse, a high-resolution ultrasonic logging-while-drilling service, which helps us obtain accurate data during the drilling process and, subsequently, helps the customer select more efficient completion equipment and increase production rates.
We estimate that our market share in this high-tech segment is currently 12%-15% depending on the evaluation method, but given localization and import substitution plans that we have, we expect this percentage to grow dramatically in the coming years.
Q.: Are you already eyeing foreign markets?
A.: As of now, we are represented only in Belarus, and we provide remote consulting services to customers from Central Asian countries. This market is interesting to us, and we are planning to enter it in the near future. If this experience proves to be successful, we will study the possibilities of entering remote foreign markets, primarily, in the Asia-Pacific region.
Q.: Halliburton was one of the few companies that provided hydraulic fracturing services. After the departure of Western companies, we became extremely short of this technology in Russia. Do you continue to provide customers with this service?
A.: Unfortunately, back in the days of Halliburton, this business was very unprofitable, and therefore, a decision was made long before all the known events to sell this segment of business. We still have engineering potential, which means that we have people who are perhaps even the best specialists in terms of hydraulic fracturing design and engineering support. However, we unfortunately do not have the fleets and equipment to provide these services at this time, but we are actively exploring this market with the possibility of joining such projects.
Q.: You said that you are actively investing in research and development. Does that include the creation of hydraulic fracturing fleets?
A.: No, this will be difficult to localize something here, because almost all the hydraulic fracturing fleets that are in the country are of imported origin from the United States or China. It is clear that most of the fleets that are imported to Russia now are produced in China. This machine-building industry itself is extremely large. I do not think that we are ready to participate in this. Rather, the question is more to do with the machine-building industry in Russia. And I know that some companies such as Rosatom and several other corporations are actively engaged in developing domestic hydraulic fracturing fleets. We are still looking towards purchasing ready-made equipment as property.
Q.: According to the Russian Federal State Statistics Service, companies' expenditures on oilfield services are on the rise. They increased 12% in 2023. This dynamics was maintained in the first half of this year. Can this data be projected onto drilling rates in Russia, and do you see this indicator growing?
A.: We see that the number of drilling rigs in Russia remains at approximately the same level. We do not see any significant growth in terms of active drilling rigs. I think that the increase in drilling penetration is probably more linked to the complexity of drilling, to the depth of productive formations and horizons. In simple terms, we need to drill deeper and farther. This is a reference to hard-to-recover reserves, which will account for an increasing domestic oil production in the coming years. Here BurService is at the forefront in terms of technologies and experience required for this.
I will not give you exact data on our drilling penetrations, but if we talk about the number of drilling rigs, where we provide directional drilling, cementing and mud services, the increase is substantial. As for our revenue growth, approximately 20% of it has been achieved thanks to an increase in the volume of meters drilled.
Q.: Halliburton supplied a large range of digital technologies to Russia. Some of these licenses are still in effect, but without foreign maintenance. How do you solve this problem, since you are a legal successor to the American company in terms of software maintenance? Do you plan to create your own digital products?
A.: We have established a division called Digital Solutions, whose specialists provide full technical support for the software that was once provided by our previous owner. If we draw parallels with the past, previously all technical support, including software updates and writing plug-ins, was provided from abroad, but now we have a pool of programmers and developers who are doing this locally. They are also engaged in developing their own software both for commercialization and for use by internal services, because there is also a demand for software within the company.
We did not have a single programmer and developer in Halliburton's Russian division before, because all software was sold from there along with technical support. We now have a pool of more than 50 high-level Russian programmers and developers. As I said, the goal is to support the software that was sold to our customers and, of course, to develop new software for internal needs.
We cannot say that we have 100% localization yet, but we are advancing towards this. We already have software that is undergoing industrial testing. The process is not easy, because foreign companies have spent dozens of years creating these or those digital products, while we are talking about the literally "here and now" period.
If we are talking about cloud services, this is one good example of localization. In the past, our customers refused to use cloud infrastructure that was located outside of Russia for security and data confidentiality reasons. Halliburton had nothing to offer that was local. Essentially, all they offered was Amazon and Azure, because all the processes were customized for their infrastructure. There is no such problem now. We offer our customers the use of services from Yandex, Beeline, and other major Russian IT companies.
Q.: Is there a need for additional cooperation between the oil industry and IT companies to accelerate digitalization of the industry? Maybe, working groups need to be established at the government level?
A.: I think the government is doing enough. The privileges that are granted for developing the IT industry are the evidence that a lot of attention is paid to developing digitalization at the government level. We are planning to actively use all those tools and benefits that the government provides.
If we talk about collaboration with our competitors, I do not see much potential here. Competition is a good thing. At the same time, collaboration with customers is possible, because they are consumers of our software products. Here we are open to signing agreements, for example, on developing and implementing digital fields and digital drilling rigs.
Q.: Another problem that has been raised at almost every TNF session is the shortage of personnel in oilfield services. What solution to this issue do you see? Are you working on cooperation with vocational schools and universities?
A.: We are an integral part of the Russian economy, and therefore, we certainly feel the shortage of personnel. We have taken a number of measures to stop the outflow, and this has been the main goal for the last year and a half or two years. We have also established regulations to attract new specialists. This involves providing improved working conditions, social benefits and certainly financial compensation. Additionally, employees should clearly understand and see their career prospects. This also motivates employees and helps us maintain our human resources potential in the medium and long term.
A number of measures that we have undertaken, in our opinion, have helped us halt the drain of qualified personnel. Moreover, we have seen a positive trend in the growth of the company's staff over the last six to eight months: the outflow is declining and the number of new employees is increasing.
We are actively working with universities, and we are in touch with around 20 universities throughout Russia, holding events at them and funding educational programs. We hope that all of these measures will allow us not to experience a serious staff shortage.
Q.: Is it enough for you to cooperate only with Russian universities, or are you thinking of introducing educational programs in neighboring countries: Kazakhstan, Uzbekistan?
A.: I think that in the long term our main objective is, rather, to increase labor productivity. This concerns not only our company, but also the entire industry and the Russian economy as a whole. Labor productivity is not at a very high level as of today. I would like it to be higher, and then the problem of staff shortage will be partially resolved.
When I talk about low labor productivity, I mean that when the number of employees is expanded, the volume of work performed remains at the same level. The solution to this problem includes scaling up digital technologies to automate processes, introducing artificial intelligence that could address routine tasks, such as engineering calculations. Staff growth is not always an effective measure. In our case, we need to look for opportunities to reduce it.