news feature

first break volume 27, September 2009

Impact of global financial crisis on

Russian oil and gas geophysics
Professor Nicolay A. Savostyanov (President, EurAsian Geophysical Society) takes a sobre
look at the effect of the world economic recession on oil and gas geophysics-related activities
in Russia.
The global financial crisis which hit
the Russian oil and gas industry, also
affected related sectors such as geophysical services and instrument making. The collapse of crude prices (down
to about $50 per barrel) broke the
growth trend in Russias service market
observed over the last few years: as a
result this years geophysical services
business will be substantially down.
Now, let us consider the current
situation in more detail. Obviously
geophysical data is basic to oil and gas
exploration. In 2007, Russia produced
over 9.4 mbopd (million barrels of oil
per day), with reserves additions in the
range of 2.192.56 mbbl.
According to Russian Ministry of
Natural Resources data, in 2008 oil
resource additions matched production, or even exceeded it. However, we
should ask how these additions were
derived? Mainly due to reserves reestimation in the currently producing
fields! In fact the recovery factor came

to rescue. In my view, no well-grounded

analysis of the actual recovery factor
increase in producing fields has ever
been made. So we are dealing with
virtual reserves additions.
No big discoveries, i.e. fields with
hydrocarbon reserves exceeding 3.65 billion barrels, have been made in Russia
recently. Some fields have been discovered in Russias Caspian shelf (Filanovsky
field, etc.) and in East Siberia (Vankor,
Talakan, etc.), but these are definitely no
giants and we will need several years
to put them onstream. Fields in the Arctic and offshore eastern Russia are still
future prospects. In 2008 the volume of
exploration drilling was about 850,000 m
while in 1988 the USSR drilled 9 million m
of exploratory wells. This year the figure
will drop to 520550,000 m.
Russia occupies eighth place among
oil-producing countries regarding proved
oil reserves (see Table) but the country
is world champion in oil production!
Strange, but this situation does not alarm

1.

Saudi Arabia

262.8

2.

Canada (incl. bitumen)

179.6

3.

Iran

136.5

4.

Iraq

114.6

5.

Kuwait

101.5

6.

UAE

97.8

7.

Venezuela

79.6

8.

Russia

59.9

9.

Libya

41.7

10.

Nigeria

36.5

11.

Kazakhstan

29.9

12.

USA

21.9

13.

China

18.3

Table Proved world oil reserves, bln bbl. Notes: Official data of Mineral Resources Committee, Russian
Council of the Federation, 2007. Converted from mln metric tons at the rate of 1 metric ton 7.3 bbl.

2009 EAGE www.firstbreak.org

our presidency and government, who are

involved in mending the socks of the
countrys economy using money from
the Federal Stabilization Fund, which
has been formed basically with money
from oil and gas sales in the times of
high hydrocarbon prices. Therefore, it
seems that the future of Russias oil and
gas industry, including new exploration,
is a minor problem for the countrys
parliament and government.
Mineral resources reimbursements
(e.g., 10 % for oil), obligatory for all
mining and oil/gas field operators, were
successfully eliminated by the State
Duma. Nowadays, oilfield operators
assignments for oil and gas exploration average 1.5%, while in the West
they are about 6%. According to the
Russian Ministry of Natural Resources,
millions of US dollars must be invested
in the coming decade to balance oil production and reserves additions. These
virtual reserves negatively affect the
status of the exploration sector because
Russian oil producers have no incentive
to start new discoveries. By the way,
Russias natural gas reserves are much
higher over 50 Tcm3 (trillion cubic
metres), i.e. the worlds first place!
Right now the relevance of exploration services is rather low. Yet Russian
geophysicists have been able to provide
additional services to their customers
in geological modelling of the fields
and, using these new services, not only
maintain their operation volumes, but
even increase them. This trend has continued since the 2009 global financial
crisis struck.
Speaking about the real volumes of
geophysical services, I should mention
that all assessments were estimated
using data provided by only a few geophysical contractors and instrument

39

news feature
manufacturers, since their operations
are still not very transparent due to
tough competition in the countrys
geophysical services market. Anyway,
if not too representative, these data
provide a general overview of the
current market situation and its basic
trends.
In the year 2008 the geophysical
services market totalled about RU60
billion. The number of seismic crews
was 220, and well-logging/perforation
crews over 2400. Overall volumes of
operations were the following:
n Well logging, perforation, and other
borehole jobs RUR32 billion
n 2D and 3D seismic RUR28 billion
In 2008 volumes of 2D seismic were
about 100,000 km, and 3D seismic
reached 33,000 km2.
3D seismic data were extensively
used, mainly in detailed exploration but
also field development and geological
reservoir modelling. In money terms,
more than 60% of seismic exploration
was dedicated to field monitoring and
detailed exploration.
Last year marine seismic operations were carried out by two major
contractors: OAO Sevmorneftegeofizika
(Murmansk) 6 crews, OAO Dalmormorneftegeofizika (Yuzhno-Sakhalinsk)
3 crews, and three third-party crews.
At least 75% of marine seismic was contracted by Western customers. Russian
oil and gas companies, both state-owned
and private, are not very active in the
development of the countrys offshore
(including use of seismic in offshore
areas) due to the lack of up-to-date
technologies in deepwater fields development and the need for huge capital
investment.
Recently, along with seismic, several
other geophysical techniques have been
introduced in hydrocarbon exploration
and prospecting: geoelectrical prospecting, gravity-magnetic surveys, geochemical studies, etc. In 2008 volumes of
these field operations increased slightly,
though their overall share in the exploration business never exceeded 56 %.
Speaking about crisis trends in the
geophysical business and, first of all, in

40

first break volume 27, September 2009

seismic exploration, this years operations are expected to fall dramatically.

Based on my interviews with major
market players, I believe there will be
less than 150 seismic crews operational
in the country (about 70% of the 2008
number). In money terms, the amount
of seismic exploration is difficult to
access in many ways it depends
on market price, which varies from
customer to customer and from contractor to contractor. Quite a number
of geophysical contractors are cutting
their prices in an attempt to take a
bite out of their rivals market share.
According to data obtained from 10
major geophysical market players, this
year we can expect a 3040% fall in
seismic exploration in money terms.
Marine seismic has been practically at a standstill due to the lack of
contracts and payment defaults from
customers for completed contracts
when the financial crisis finally hit
geophysical equipment manufacturers,
primarily seismic. For the time being,
the following trend is obvious: customers (oil producers, field operators, etc.)
are trying to improve their financial
standing by cutting geophysical service
contracts, and geophysical contractors
are cancelling their orders for new
equipment and instrumentation. This
means that equipment and instruments
manufacturers are the sufferers even
though Russian geophysical contractors
are using state of the art technologies
and software to provide high-quality
seismic, in terms of data acquisition and
processing, interpretation, and seismic
modelling.
At present, 85% of Russian seismic
crews are using Western data acquisition
systems produced by Sercel (France) and
ION Geophysical (USA) and, to a much
lesser extent, the GEO-X acquisition
system produced by ARAM, now part
of ION. Also, domestic telemetry systems produced by SKB SP (Saratov) are
in use; they almost match their Western
counterparts in performance, but are
one and a half times cheaper.
The financial crisis generated a dramatic fall in telemetry systems sales.
Waiting for the better times to come,

geophysical contractors prefer to operate the available equipment. It is difficult

to assess the real decline in the sale of
acquisition systems but, according to
manufacturers (including some Western
companies), the Russian market should
expect a 5070 % fall in sales.
Practically the same situation affects
the vibroseis market. In Russia shooting
still occupies 60% of seismic wave generation with the remaining 40% share
down to non-explosive sources (seismic
vibrators and impulsive sources), which
are mainly (about 60%) produced
domestically. Recently the leading Russian vibroseis manufacturer GEOSVIP
had no domestic contracts and was
producing equipment for its overseas
customers.
The total number of domesticallyproduced geophones in 2008 exceeded
one million with the leading Russian
geophone manufacturer being Oyo-Geo
Impulse (Ufa, Bashkortostan). Though
it is fully-controlled by its US-based
parent company, geophone production
and marketing are under local control.
The company produces authentic OyoGeospace geophones, which match the
highest international standards, but the
company is under pressure from Chinese
producers of cheaper analogues. Also,
in the domestic market, ION company
Sensor produces high-quality but expensive geophones.
Geophone production has already
fallen dramatically, and may shrink to
half the previous years total by the
end of 2009. This is partly as a result
of seismic contractors tryng to preserve
existing equipment in the field rather
than ordering new, a situation which of
course cannot last indefinitely if the quality of acquisition is to be maintained.
For the moment, well-logging operations share of the oil and gas geophysical
market exceeds 50%. Open-hole studies
were the basic aim of well-logging,
though at present over 60% of welllogging jobs are aimed at production
control and workover operations.
This situation has been caused by
the following: 1) reductions in exploration drilling where the integrated logging job is performed in the borehole;

www.firstbreak.org 2009 EAGE

news feature

first break volume 27, September 2009

2) unwarrantable cuts in well-logging

jobs while producing well studies. In this
case customers save some money, but
lose essential geophysical information;
3) emerging brand-new field monitoring
technologies (C/O logging, acoustic logging, hydrofrac control, casing cracks
detection, through-casing electrical
logging, etc.); 4) introduction of new
IOR and borehole treatment techniques;
and 5) use of top-notch perforation
techniques. At present, all of them are
in demand with customers, since they
provide fast, improved oil recovery.
The global financial crisis has impacted the well-logging sector. According to
data provided by several well-logging
operators, their activities will go down
2025 % due to substantial cuts in both
exploration and production drilling.
Also, we will see a 15% drop in producing well studies. The above percentages
are average and can vary depending on
the region and the company size, but a
number of small well-logging operators
are already bankrupt, though the majors
are still afloat.
Primarily, Russian well-logging oper
ators use domestically-produced equipment and downhole tools. Modern
technologies and components are used
in well-logging tools manufacturing,
which provide their high quality and
reliability and make them competitive
in the international market. Technical
skills of Russian researchers and engineers are of the highest level. Among
downhole tools manufacturers worth
mentioning are Neftegeofizika (Tver),
NPF Geofizika (Ufa), Geotron (Tyumen), Rialog (Krasnodar), PerfoTekh
(Moscow), and Luch (Novosibirsk).
They produce and supply to well-logging companies over 80 % of downhole
tools and perforators used in Russia.
However these companies will also
suffer, though they are trying to enter
new markets in the the former Soviet Union (Kazakhstan, Turkmenistan,
Belorussia, etc.).
Traditionally, oil and gas geophysics is characterized by huge amounts
of data processing and interpretation
with annual volumes reaching 10121013
bytes, which exceed other industrial

2009 EAGE www.firstbreak.org

sectors of Russia. About 8590% of

seismic data processing and interpretation software is bought in the West. It
provides high-quality data processing
and guarantees the competitiveness of
Russian seismic contractors. As to welllogging data processing and interpretation software, it is mainly developed
by local companies. Huge amounts of
geophysical data are processed with
field/reservoir modelling by both oil
producers and geophysical contractors.
For this purpose Western and local
software is used about equally.
In the current financial situation, the
amount of geophysical data processing
and interpretation is going down in step
with the fall in seismic and well-logging
operations.
Quite a number of problems affect
Russian service companies and geophysical contractors. The basic one is the
decline in field operations, not helped
by the non-payments by oil company
customers who are holding back money
from jobs already done and equipment
already supplied! Many geophysical companies have RUR millions in
accounts receivable, but find themselves
in a harsh financial situation.
Rivalry between Russian (or Russian
and Western) companies is tough and,
sometimes, we can see dirty play. Dumping prices and palm-oil money are
often the basics in tender fights between
Russian geophysical contractors. At the
same time, Federal controllers are usu-

ally shutting their eyes to this situation,

to put it mildly. It behoves the Russian
government to provide transparent geophysical tenders and bidding, as well
as the same rules for all market players. This can be achieved primarily by
improving the law, which should impede
inappropriate behaviour by some market players.
At present, there are seven or eight
big Russian and Western companies
active in the market and about 15 minor
players. In the last two or three years
several holding companies have been
established in Russia, which integrated a
number of well-known geophysical contractors, namely Geotek Holding, Integra Management, and Rimera Holding.
In principle, contractors merging should
positively affect geophysical services,
since for the big players it is easier to
survive in the current market situation.
For the moment, these companies are in
the process of formation, reorganization,
and personnel changes. An issue is that
they are headed not by geophysical professionals but business managers who,
despite their business acumen, often
do not comprehend specific features
of geophysical market. Moreover, their
personnel policy is sometimes wrong:
they often appoint the wrong people
with insufficient professional and/or
business qualities to top positions in
their companies.
In recent years a number of Western
companies have been attacking the Rus-

41

news feature
sian service market, including Schlumberger, Halliburton, and Baker-Hughes.
Schlumberger a few years back acquired
service company Petro-Alliance, which
in turn, bought a majority interest in
Pomorneftegeofizika and one of the biggest and most professional well-logging
contractors, Tyumenpromgeofizika,
along with the Kiev OKB company
(Ukraine). It has been suggested in the
media that Schlumberger may take
a controlling interest in Bashneftegeofizika, and Baker-Hughes has bought
Orenburgneftegeofizika.
The only positive aspect in all these
acquisitions is that the holdings provide
not only geophysical services, but also
drilling and workovers. Geophysical
services occupy just about 15% of their
turnover, athough the information value
of geophysical data is sometimes underestimated by their customers. The TNGGroup (Tatarstan) is among the biggest
and most competent Russian geophysical contractors. Tatar geophysicists were
able not only to survive the storms
of economic reform, but managed to
avoid the jaws of capitalistic sharks
and have been consistently increasied
the companys potential. Today, TNGGroup has more than 6000 employees,
several R&D and field divisions, and is
very active overseas.
Surgutneftegeofizika and Noyabrskneftegeofizika also seem healthy under

first break volume 27, September 2009

the wing of their parent oil companies.

Both are well supported and equipped
geophysical divisions of Russian oil
majors, Surgutneftegas and Gazpromneft
respectively. Those companies which are
state-owned (51% voting stock) have
been rather more limited but try to
maintain good old traditions of Russian
geophysics. None of them has gone into
the red so far, though few attempts to
set up state-owned geophysical holdings
have failed. It seems that the Federal
government does not want to pay any
attention to such a minor sector as
geophysical services.
A problem for Russian geophysical
research both basic and applied
stems from being funded from the
Federal budget. So far, veterans form
the backbone of the countrys geophysical R&D centres, and very few
young people join the staff. Most
of them either find their jobs in the
West or join Russian offices of major
Western contractors. VNIIgeofizika
formerly the major R&D centre is
practically non-existent because of
the severe reduction in its activities.
Market-oriented R&D feels a little
better: OAO NPF Geofizika, OAO
CGE, VNIIGIS, etc., but they have also
suffered from R&D cuts. The same difficulties have hit academic science and
R&D. The fact is that under-financing
of geophysical science and R&D is

severe. For example, in 2007 (before the

global financial crisis struck) financing
of well-logging R&D in Russia totalled
$20 million, while Schlumberger spent
$200 million the same year!
The next problem for Russias geophysical sector is education (universities and colleges). Early in the 1990s,
when economic reforms started in this
country, too many young geophysicists
moved overseas or to other businesses.
The situation is changing for the better,
though we still suffer from several problems in geophysical education. The basic
one is the ageing of university teachers
and professors: very few young people
choose a career of university professor
due to low salaries and, therefore, falling prestige of this profession. Also,
the move to Western type education,
which assumes three grades of degree
status (i.e. BSc, MSc, PhD), has caused
specific problems in the training process
of young geophysicists. In recent years
the availability of textbooks, technical
courses, and manuals in geophysics has
slightly improved, though some of them
are still hard to find.
Despite global financial crisis, Russian oil and gas geophysics is still afloat
and possesses high R&D potential, has
excellent field people and good, longstanding traditions. We will survive! Just
let us wait for the operational volumes
to increase

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