Our Take: Major Services Gap Awaits Russian Producers

The halting of new investments and technology deployment by Western oil-field services companies in Russia will cause significant — but not insurmountable — challenges for Russia’s domestic producers, if sustained. Longer-term plans to expand Russia’s oil, gas and LNG production will now have to navigate potentially lengthy processes to replace foreign technology and equipment, complicating corporate growth plans and potentially shaking up strategic priorities.

• Western services giants are hitting the brakes following the EU’s fresh ban on new investments in Russia’s energy sector, including oil and gas upstream and downstream and the liquefaction and regasification of natural gas. Halliburton and Linde are suspending future business and winding down existing operations, while Schlumberger, Baker Hughes, Technip Energies and Weatherford are halting new investments and technology deployment. The decisions follow the more rapid planned exit by several IOCs.

• Foreign firms account for less than one-fifth of Russia’s oil-field services market share, local analysts say, but their presence is felt most via technology transfer. Russia's Vygon Consulting estimates that foreign services provide nearly 60% of the high-tech solutions deployed in Russia’s oil and gas patch, making them key enablers of its growth prospects — particularly given the increasingly complex nature of remaining reserves. The country’s downstream is meanwhile heavily dependent on Western-made catalysts, equipment, and services.

• Western sanctions following Russia’s annexation of Crimea in 2014 already fostered a credible push to replace technology imports, particularly in areas around Arctic, deepwater and tight resource development, as well as downstream catalysts. But industry sources tell us full substitution remains a way off.

• Rosneft and Gazprom Neft started producing homemade catalysts, but output has yet to increase and performance questions remain. Russian oil producers have multiple deals with local entities to develop a domestic hydraulic fracturing fleet, rotary-controlled systems and other technologies, but replacements remain in the testing phase. More broadly, much has yet to be done to fine-tune the use of domestic equipment and ready it for commercial deployment.

• The challenge only gets bigger as a wider set of crucial technologies is compromised. For instance, Russia still lacks its own liquefaction technology for large LNG plants, with Novatek’s Arctic Cascade process struggling to scale up, mainly due to a lack of quality domestic equipment. Gazprom claims it will use technology produced jointly by itself and Linde at its Ust-Luga facility, but imported equipment needs may thwart those plans. Russia had been gunning to more than quadruple LNG export capacity by 2035, to up to 140 million tons per year.

• Russia’s output is not likely to see a near-term impact from the services pullback, sources say. But we see producer support of import replacement becoming a critical strategic objective longer term. Higher investment in the development of local services and technologies will likely accompany a greater domestic bias in capex plans. From a capacity standpoint, Rosneft is arguably most ahead of the curve thanks to work developing its own services unit that already handles more than 50% of its in-house needs.