Russia to create oil services national champion to replace Western firms

By bne IntelliNews October 14, 2014

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Russia's president Vladimir Putin has approved the creation of a state-owned oil services national champion, intended to replace global giants such as Halliburton and Schlumberger, according to news agency RBC.

The move follows Western sanctions on Russia over Moscow's aggression in Ukraine that have banned EU and US companies from providing services to Russia's oil and gas sector in the Arctic, deep water or shale structures, the crucial next frontiers for Russia's energy sector.

However, critics fear the move could also damage existing successful private Russian oil service companies.

Natural Resources Minister Sergei Donskoi called in September for the creation of a national oilfield service company in response to a fresh round of Western sanctions announced on September 12. Donskoi said at that time that such a company would make US giants such as Schlumberger and Halliburton "grind their teeth."

That call obviously found response further up in the government. In a time of "sharply escalating international tensions," a national oilfield service company is crucial to help Russia keep its oil and gas output stable over the long term, Deputy Prime Minister Alexander Khloponin wrote in a letter sent to Putin later in September 2014.

RBC journalists now say Putin has stamped a copy of the letter as approved, although Kremlin spokesman, Dmitry Peskov, has refused to comment to media. According to Khloponin's letter, the new state company will comprise the assets of Rosgeologia, currently a government agency encompassing dozens of exploration service companies. Government stakes in a further 15 companies involved in shelf exploration could be transferred to the new national champion, Khloponin said in the letter.

Western oil field service companies account for only around 20% of the market in Russia, say analysts, but they own cutting edge technologies that their Russian peers still lack, but which are needed to open new hard-to-reach offshore reserves in the Arctic as well as in onshore shale structures.

It is not clear from the plan how a state-owned company could acquire such technology, especially considering it is likely to pay less competitive salaries than its private sector peers. "Russian companies can replace Western expertise but this will take time, as foreign majors have been developing their technology for decades," Sergei Pikin, an energy expert, told the Moscow Times.

Other voices in the government such as Deputy Prime Minister Arkady Dvorkovich have voiced skepticism over the need for such a state-owned company, given that there is already a strong private oilfield sectors sector in Russia.

Russia's private oil firms, which have in-house oilfield service divisions, may also be against the idea. Vagit Alekperov, majority owner and chairman of Russia's largest private oil company LUKoil, previously called the idea "unacceptable”.

 "Over the last 20 years we have formed the oil service market and expect a large amount of companies to work in it, which will increase competitiveness," Alekperov said, as quoted by TASS. The government has so far not allowed LUKoil to participate in Arctic shell exploration, reserving it for state-owned companies Rosneft and Gazprom.

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