The need for oil and gas companies to valorize their assets and focus on financial management has been understood by majors worldwide. It triggered a divestment movement of in-house service activities in the 1980s, inducing the fast growth of oilfield-service companies. Russia, as with the rest of the sector worldwide, has followed the same pattern of evolution for its oil and gas service industry, but at a much faster pace, and today the industry is reaching a stage of maturity highlighted by the level of competition raging amongst the different service operators present on its market. With $3- to $4 billion in turnover in the Russian oil-service sector, the cake is indeed appetizing. During the Soviet period, vertically integrated "production organizations" were in charge of oil production and had their in-house service companies. These oil majors initiated sharp restructuring programs in 1998-99, implementing new management standards, corporate governance guidelines and, as elsewhere in the global oil industry, started to divest their noncore activities, amongst which their service divisions. The main thrust of the reform process was to increase capitalization and reduce costs. This cost-optimization process, however, has not hit all Russian majors to an equal degree and business philosophies are sometimes radically opposite. Yukos has, for instance, created a service entity that is separated from the company's main activities and is selling its services to a number of local companies, themselves competitors of Yukos. The major has also entered a strategic alliance with Schlumberger. Thanks to technological exchanges, staff training and field cooperation, the Russian major was able to cut its oil production costs by a third and to optimize its associated service entities. The other majors are following the trend. Lukoil has also expressed its desire to divest part of its services, notably its drilling operations while it is relying more and more extensively on the services of external operators, notably leading local operator Petroalliance. Meanwhile TNK has also heavily divested its services, offering a string of acquisition opportunities to the industry. In the meantime, Surgutneftegas is willing to keep its service operations in-house, claiming that this allows them greater security and reliability in the still noncompetitive service sector. It is reckoned that oilfield-service companies, both foreign and domestic, are today fighting for only 25% to 30% of the market, the rest being in the hands of in-house service divisions, hence leaving ample room for growth in the market in the years to come. The strategic choice of keeping services or divesting them is a concern for the whole range of oil companies in the Russian federation. Many of the medium-size oil companies have chosen to keep their services operations and use their technical edge, nurtured through their operations on difficult assets, to develop competitive advantages that they can then market as a supplementary business to their oil production activities. The likes of Tatarstan's Tanefteotdatcha, which has specialized in oil-recovery enhancement techniques with success following the appliance of these techniques on its own fields, are selling their services to companies throughout Russia, both small to medium-size, with occasionally larger customers as well as international sales. "During a relatively small period of activity as independents, separated from state organizations with whom we were working previously, we have strengthened our competencies very quickly, due to the difficulties proper to our extraction patterns and the overall characteristics of our assets, in the face of rising levels of competition from local and global players," says Albert Shakirov, general director of Tatnefteotdacha, one of Tatarstan's leading producers and oilfield-service companies. "Today, our technical standards are high, and looking at the sharp increase in production levels in the last three to four years in the Russian federation, it is obvious that it has been a successful effort, notably for smaller players like us." Producing in the range of 500,000 tones of high-viscosity heavy oil from its two licensed fields (Elginskoe and Stepnoozerskoe), the company also managed an average of 40,000 tones of production increase per year since the beginning of operations (1996 and 1999, respectively, for each field). Tatnefteotdacha also works throughout the federation where it has performed more than 2,000 production-increase operations that allowed recovery of more than 3 million tones of oil. Its production increase techniques apply specifically to flooded reserves or reservoirs containing heavy fuels. Using more than 100 different technologies, of which nine are patented by Tatnefteotdacha (soon to be 14), the company also works in Kazakhstan and Vietnam, where reservoirs characteristics are close to that of Tatarstan. Examples of small to medium-size companies with high technical levels of their in-house services abound, notably in Western Siberia and Tatarstan, but the cost of keeping those activities bundled to the companies' core oil extraction activities requires developing market niches, if not integrated service market shares. And on this front, serious competition from pure service companies is already well established, with both foreign and local contenders. Global contenders Of these local integrated service companies who started competing with their international counterparts such as Schlumberger, Baker Hughes and Halliburton (also engaged in a strategic alliance with a Russian major, Tyumen Oil Co. aka TNK to work on the giant Siberian field of Samotlor), one Russian company stands head and shoulders above the rest. Petroalliance started operations in 1989 out of a Russian-U.S. joint venture engaged in geophysical surveys. The U.S. co-founder, Western Atlas, sold its stake following its merger into Baker Atlas (and after the 1998 financial crisis), but this didn't affect the company's growth and the expansion of its scope of activities. Specialized in integrated services during the exploration and development phases-from seismic surveys to reservoir modeling and from well-logging, perforation and vertical seismic profiling to well repair-the company has enjoyed a steady growth path. As of today, Petroalliance has been engaged in a large number of major projects mainly within the Russian federation. "Since the very beginning we understood that we were in the service industry, and therefore we didn't want to become involved with the licenses and pure production side of operations," says Alexander Djaparidze, president of Petroalliance. "The sort of model we were looking at back then was Schlumberger. Today, Schlumberger is telling everyone in Russia that Petroalliance is its biggest competitor and we can effectively compare our operations to theirs, whilst when we started, Schlumberger was an unreachable model." The company is now working closely with Lukoil, its de facto strategic partner, and has been engaged in operations in Western Siberia, the Timan Pechora region and on the Caspian Shelf. Nevertheless, the company's focus is and will be Russia, where the market potential is huge. It thrives on the successful development of a world-class sector, abiding by global standards of quality, competitiveness and strict norms of return on investment. Illustrating the maturity reached by Petroalliance is the cutting edge technology widely used by the company, which also has an office in Houston. Looking at the costs of Russian service providers, believed to be lower by 20% to up to 80% when compared with their Western counterparts and competitors, it looks likely that soon Russian services companies could be entering frontal competition with Western service organizations. Yet Djaparidze is maintaining a realistic stance: "In any project we are to be involved in, we want to assess it thoroughly, particularly for other markets than Russia, because these are completely new markets for us. In any case, we wouldn't go where competition would be tougher for us like West Texas for instance!" Another contender for global business to be watched is Zarubezhneft, Russia's public-sector operator dedicated to international operations. Zarubezhneft is very active in places traditionally or legally barred to U.S. players. The company is developing offshore fields in Vietnam (through VietSovPetro, a joint venture set up more than 20 years ago and extracting 3,000 tons of oil per day), Iran, Yemen, Algeria and Iraq. The specificity of this organization is the complete package developed along with local governments, with A-to-Z design of not only production schemes but complete turnkey oil industries, from state-owned upstream E&P all the way to downstream operations, including refining assets. Here again, operating in difficult conditions, the company is able to rival with the world's best standards of services and is a name to be reckoned with in the world of oil and gas. According to Nikolay P. Tokarev, general director of the company, "the experience accumulated over 35 years of operations is a great capital, but we are also glad to offer the investment security provided by our state-backing to any of our clients or partners. As the situation in Russia is now politically and economically stabilized and viable, this is a guarantee that can win us extra market edge." Unlimited opportunities? Some foreign players allied to the industry have also made successful forays in Russia as service providers. International Oilfield Equipment and Services (IOES) was established in Russia only five years ago, and today supplies equipment such as artificial lift systems, drilling rigs and production equipment to the Russian market. The company is also engaged in consulting services and recently started oil and gas field brokerage. Before coming to Russia, it was selling equipment in the U.K., Europe and North Africa. "Today Russia represents 50% of our market and we managed to survive the crisis by keeping a well-scaled base of operations here," says Adam Grozier, IOES general manager for eastern Europe. "Local major companies need companies like us for capital purchases, but are also rather heavy and slow in their procurement processes. We prefer therefore to work with foreign companies, notably small to medium-size, offering them a full-service package for their procurement, helping them through the certification pitfalls, contracts and financial procedures for their first deals until they are ready to go to the market themselves." Assessing the service market, he rates the Russian service companies highly: In the field of integrated service, the competitive threat is coming from the local actors. "Their standards have been increased tenfold and companies like Petroalliance are up and coming players to be watched carefully. We worked in cooperation with them and their operations were reaching the highest standards of quality. "For foreign players, market competition is rising and the margins are getting slimmer. Today, if you don't implement a Russian program in your company and cut costs, you cannot have a successful base for business in Russia anymore. But the market is huge and the future potential is vast." When looking at a map of Russia, including the largely nonexplored eastern Siberian Basin, one may nevertheless arrive at the conclusion that the market is large enough for everybody.