Russian oil companies seek stability of outsourced services

TNK-BP has announced a tender for service companies to supply and operate drilling rigs at its operations across Russia. In a break from the past, the company is now calling for a long-term contract in order to improve efficiency and operating costs.

It's standard in the global oil industry for producers to run multi-year contracts for materials and oil services, but contracts of this type are quite rare in Russia, where one-year deals are the norm. Inflation has been a key factor in this, along with the rapidly changing price for the commodity, which has made it difficult to agree on long-term prices for service provision.

But a longer term contract can enable the provision of better equipment and more predictable drilling costs, as well as improving operational performance by encouraging the contractor to invest more in its development.

“Our philosophy is that continuity allows us to become familiar with the contractor – they understand us, we can use technologies, we can work with them to apply those technologies in the best way and set ourselves some targets for performance improvement based on international benchmarks,” explains William Sams TNK-BP Vice-President for supply chain.

TNK-BP says the contract it is calling tenders for is likely to be worth more than $US 2 BLN. It plans to choose a number of contractors from Russian and foreign tenderers.

“We review all of the offers from all of the 20+ tenderers on the basis first of all of compliance technically with our minimum standards which we've carefully prepared and secondly on the basis of commercial terms. So first of all we look at the technical and operational offer, we look at the HSE offer from the contractor and if they pass this hurdle then we move to the quality of the commercial offer,” says Mr Sams.

Analysts say the move to longer term contracts reflects improved procurement practices by energy companies, who are outsourcing service activities. But they also note that now is the time to be calling for tenders.

“It's a very good hedging tool, because the market for oil field services will be growing within the next three to five years for around 10-15% per annum, which means that there will be more demand for the oil field services. Now it's a very good time to actually close into these long-term contracts the market for the services is consolidating, and now we have less companies, but they are bigger and with more core competence,” says Mikhail Belzer, A.T.Kearney analyst.

With the winning bidders being announced in October and expected to deploy in January the turn to longer contracts will soon be put to the test, and if it succeeds it will enable more efficient energy production in Russia with more stakeholders in making it work.