Igor Stefanyshyn, director and the owner of Ukrburservice Drilling Company

Igor Stefanyshyn, director and the owner of Ukrburservice Drilling Company

Director and the owner of the Ukrburservice Drilling Company, Igor Stefanyshyn, told EXPRO about еру current state of things in the  Ukrainian oil&gas upstream, and why Ukraine should develop its own E&P service market.

Ukrburservice DC is the drilling market leader in Ukraine. Tell us about your business, how did it all begin?

Our company was established in 2003. We started to work as a company that provided supervising services. Later we purchased the first dull rig, Uralmash 3D 76; then a few more. Today we have 7 modernized Uralmash rigs and 2 modern drilling rigs with 450 and 650 tons capacity. Modernization was not easy. The loans have always been expensive.  2009 became crucial for us. Then we made a bet on the purchase of new modern equipment, and in 2010 purchased a drilling rig from the known Canadian company, NOV. At that time it was the most modern drilling rig among Ukrainian companies.  Back then foreign drilling companies, Saipem and Weatherford, were operating in Ukraine. They were an example for us and we also purchased a modern rig with top drive and diesel generator.

To start working on this unit, we sent 30 of our employees to Romania. There was the closest to Ukraine training centre. Our experts have mastered the top drive operations, BOP and other equipment. Later, these people trained others and formed three (for now) drilling crews which are able to work with high-tech equipment. Foreigners have worked on our rigs not for a single day. I have always relied on our people.

We immediately saw the results. Wells’ drilling speed increased and the customers began to adequately evaluate our work. Canadian rig was the first to operate on a daily rate basis. This is a more progressive approach, unlike the “turnkey” one, common for Ukraine. A daily rate order allows the contractor concentrate on the equipment operability, personnel qualification, operational safety, i.e. improvement of the work quality. A customer at the same time designs a well, plans budget and materials. The terms of deep drilling reduced by 2-3 times.

Later, in 2015-2016, Ukrainian company Discovery on our order manufacture a heavy (2500 HP) drilling rig with frequency regulation. This is a real 650 tons monster. We are not going to stop and have ordered another rig from them.

What is the private service market in Ukraine like? What are its characteristics?

Private service started developing only within the last 10 years. This is a very short period to compare us with Canadian or US companies. But if in the beginning the service segment fashion has been dictated by the foreign companies, now the local companies are about to catch up, and in some respects even surpassed.

Drilling fluids, cementing, directional drilling - local companies currently dominate in these areas, while foreign did not disappear. And almost all the CWO operations are performed by Ukrainian companies.

Gradually Ukrainian companies caught up with the foreign. For example, Geosyntez Engineering, Burova Tekhnika, SKS. These are known brands, providing quality services. Private geophysical, seismic companies, HF segment develop fast.

In general, Ukrainian service companies fully meet the needs of the local market. And there is a serious competition, because prices offered by Ukrainian companies are lower than that by the foreign.

Service became the option for investment; but it all happened gradually.  And the actual orders were placed by five to seven major private producers.

They gave impetus to the development of the private service market, since state drilling companies which originally performed the work, not even remotely met the standard requirements.

Now Ukraine has about a dozen private and drilling and CWO companies. The largest of them have up to 10 rigs each.

Drilling oil and gas wells is a very specific, and expensive, so to speak, craftsmen business. It must be loved. The risks are too high, and projects which failed and the lack of orders and large personnel headcounts should be accounted for. Thus drilling services is not usually interesting for the oligarchs in terms of getting quick profits and remains the sphere of interest for qualified drillers only.

What is drilling market size?

The service market exists within 15-20 heavy and medium drilling rigs. The public sector is much larger. It is represented by Ukrburgaz, drilling enterprises of Ukrnafta and geological companies. Private companies cover about a quarter of the drilling rigs market, but if you evaluate the efficiency, the situation in the private companies is better. A modern rig drills two wells per year. For example, only for our company within the last 5 years the footage is 20-30 thousand meters a year, totaling to 4-6 wells. Private sector hands over up to 20 wells per year. (Editor’s Note: This is almost half of the number of wells handed over by the state-owned companies. Given that private companies drill deeper wells, the total drilling scope for private companies is by a third bigger).

During its existence, our company drilled more than 50 wells, mostly wells deeper than 4000 meters. Of these, 20 wells were deeper than 5,500 m. The proportion of directional wells with 400-500 m doglegs in the past two years is about 50 per cent.

Today there are a lot of talks about the need to produce gas and the need to invite the foreign companies as the Ukrainian ones do not have modern equipment, etc. How do you see this problem?

Ukrainian companies never had large orders. Ukrgazvydobuvannya for instance never ordered services from us. Here is the answer to why Ukrainian companies are not equipped enough.

On the other hand, the market exists. It is impossible to ignore it. But it exists in terms of the existing today demand. Conventionally, there 10 drilling companies for 6 producing companies. It is quite a competitive market. Once the market of orders expands the market of services will increase immediately.

I think one of the challenges the state company Ukrgazvydobuvannya faces being a major player customer is giving the opportunity to develop to the domestic market, increasing demand for services. And I'm sure that very quickly we will be able to achieve the rapid development of both private and public service sectors.

You are Poltava company. What are the specifics and the advantages of Poltava?

Poltava and Kharkiv regions are the largest in terms of gas and oil production. Historically in Poltava, not Kharkiv, Chernihiv, or Lviv drilling and service companies were concentrated. The more of such companies are here, the more everyone wins. A certain cluster of oil and gas services has formed here. Any producing company in Poltava will find a full range of services. 3-4 of will offer downhole motors and jars, another 3-4 will provide drilling fluids services, 5-6 companies - drilling, another 4 companies - directional drilling and so on. I'm not even talking about the related services or adjacent sectors. The high concentration and healthy competition will make our region attractive for producers. Personally I try to promote this phenomenon and strongly support the young teams who are trying to enter the service market. There is even an idea to create an association of drilling contractors in Poltava to solve common problems together.

State Ukrgazvydobuvannya expressed its intent to upgrade its own drilling rigs, Uralmash 3D, 4E. Ukrburservice already has such experience. How do you assess the prospects of the upgrade?

We also began updating the Uralmash rigs. There were three stages of modernization all together.

The first was the change of the pumping block, duplexes were sent to scrap and instead triplex were installed. On the second phase we installed the modern system of mixing and treatment of drilling fluids. During the third we upgrade the rigs with new drilling tools, pneumatic and hydraulic slips.

We’ve got quite a powerful version of the drilling rig, which is able to work another few years. For example, one of the upgraded rigs is now drilling on Mekhedivske field. Spud was in early August, and in three and a half months we reached 4600 m with 5250 planned. Two heavy strings are designed for the well. It's a pretty fast drilling to Uralmash as previously these scopes had to be drilled for 9 months.

But however the modernized Uralmash is, installing the top drive system there is inefficient and not feasible in my opinion. A top drive is now the basic tender requirement for all customers.

Top drive is more efficient on modern “A” class drilling rigs A of similar, console type.

In Russia, there are examples where the top drive was installed on Uralmash. But they had to use short string joints, search for additional space for the rack, which reduced the possibility to drill deeper than 4,500 m. In addition, the top drive needs additional power, warm room for control to systems, etc. Uralmash is not fit for the purpose.

Thus modernization of Uralmash is possible only to a certain limit. If we want to move to the next level, we have to switch to a console-type rigs where rig up and rig down terms are much shorter, where there is an option to use of computer control systems; such that offer a wider operational range, higher load capacity and high reliability.

Thus the modern drilling rigs show significantly higher commercial drilling speed for the deep wells. In other words deep drilling is the future of gas production in Ukraine. We therefore bet on heavy and high-tech rigs.

Speaking about the purchase of new drilling equipment, what is better for Ukrainian companies? We continuously monitor the market of drilling equipment. Not for two months, not through the consulting firm… I regularly visit China, USA, Canada, Germany, Norway, study experience and offer. We have come to understanding of the best drilling rigs completions. We have abandoned the practice of buying drilling rigs from one source. We complete the rigs breaking them conditionally into 6-7 units. We buy equipment separately, directly from the manufacturers. This is more efficient and cheaper.

What do you think of Chinese equipment? Would you give some examples..?

I recently came back from China.  Chinese manufacturers of top drive systems amazed me, I love them. This young private company that in 2006 sold 300 top drives, including 60 which went to Russia. On the Russian market the Chinese even pushed behind such well-known American manufacturer of top drives as Tesco. They are also interested in Ukraine; they offer very competitive and reasonable conditions. However, for example, in the tender held by Ukrgazvydobuvannya they could not participate. They say that Ukrgazvydobuvannya included a term that generally excludes the participation of Chinese companies. Although the reality is that even if the American manufacturer of equipment wins, most components are still made in China and everyone understands it.

One thing is when it comes to protecting domestic producers, which is in Ukraine of sufficient quality also. For instance, the already mentioned Discovery or the Sumy Ukrnaftogazzapchastyny. Another thing is if an artificial barrier to the emergence of decent inexpensive Chinese equipment is placed.

I am not advocating the “poor” Chinese people. I just do not understand why the Chinese equipment, which the world uses, is banned in Ukraine?

What is the role of Ukrgazvydobuvannya on the service market?
Ukrgazvydobuvannya’s tenders and declaration on involvement of the drilling companies and the purchase of drilling equipment play an important role. Private firms have upgrade the equipment this year hoping that it will be put to outsourcing. It was a very positive signal even if a tender for some reason did not happen.

And, for example, tenders that have been held for the purchase of drilling equipment were won by Ukrainian companies which provided work load for their capacities. And it very good. Let the Ukrainian company develop. The money should stay here. Ukraine dos not have much. Of course, we cannot produce a top drive tomorrow, but what we produce must be ordered within the country, but at normal prices ensuring our producers are not abusing preferences.

What can you say about the tender announced by Ukrgazvydobuvannya to attract external drilling contractor?  Did you consider the possibility of cooperation?

I am impressed by the desire of Ukrgazvydobuvannya to conduct its business transparently and collaborate with the private sector. In general, the concept of right. It is necessary to carry out CWO, HF and drill reasonably. But it would be much more honest if the strategy of the company development is declared. It is not clear what is being established: a vertically integrated state monopoly or the prospect for privatization, including its subsidiary, Ukrburgaz. In the first case, cooperation with the private sector, in my view, is impossible. In the second I see a lot more prospects.

As for outsourcing, after the announcement of the tender it smelled money, big money. Nothing like Ukraine ever saw. “Lifting up” UAH 13 bln in a couple of years is a great temptation.

As I know the market, I see the increased number of candidate to “drill” without equipment or experience. The numbers are just too impressive.

But I personally see a lot of problems and risks in this tender, both political and administrative. For example, tendered HF works, announced yet at the beginning of the year has not yet started. The implementation of these intentions took almost a year. Hence the desire to start drilling outsourcing in January 2017 is astounding. Given that drilling is more difficult than hydraulic fracturing, not to say of the work scope.

I do not understand why someone would declare obviously unrealistic things. Among them is the need to increase production by 5 bcm in 4 years bringing it to 20 bcm. Energy independence would not benefit of that, because the need is much greater. At a time when gas prices are relatively low, it is more feasible to buy in Europe ... Ukraine is not Kuwait and not Western Siberia. We do not have such resources, and they should be treated with care to have enough for a rainy day, as they say. You need to direct maximum efforts not so much to production but for the growth of the reserves base, i.e. exploration and prospecting work. And as exploration is a high risks, investment shall come not from the state, but from investors. Instead we have a situation where the government plans to spend a lot of money to achieve some unclear goal. A lot of people understand that but do not want to talk about it as the temptation to get a piece of the big pie is great...
So I decided for myself not to support this Ukrgazvydobuvannya’s approach and express my opinion on the matter.

Ukrgazvydobuvannya announced it makes a bet on foreign companies. How do you feel about this approach?

Obviously, tender conditions, specifically a mandatory top drive system, close the way to most Ukrainian companies. I am very concerned about the threat of a large number of foreign drilling companies coming to Ukraine in course of the tender. After such invasion local service companies will be either closing or looking for work in Algeria, Morocco or Egypt. I see this as a big mistake.
Instead of attracting investment into the country, we pay billions abroad for works that could theoretically be performed by Ukrainian companies that are here paying taxes and creating jobs.

Claimed Ukrgazvydobuvannya’s tender will not contribute to market development. I see a very different purpose - to quickly increase production and report. This is a political problem.

In my opinion, ability and desire to invest 13 billion Hryvnia of state money should be directed to the development of domestic market. This is one of the components of economic growth.

And finally, do you believe in the future of the oil and gas industry?/ Now all companies have furious motivation for development. We feel that the industry is alive and has great potential for growth. Our scope of activity is in the midst of changes in Ukraine. It the opportunities that appeared due to Ukraine’s independence, including that from Russian gas, just need to be carefully and correctly used.