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“Experience suggests that when companies focus on their core business they are able to deliver better performance”, says TNK-BP Chief Operating Officer Tim Summers. “And for TNK-BP that means the core business of producing and refining oil, and marketing the refined products to its customers. Our ultimate goal is to be a consumer, rather than a provider, of services”.
The way we were
The first waves of change started arriving in OFS almost five years ago. At the inception of the company in 2003, TNK-BP inherited 83 service companies employing 46,000 people in 14 business segments across six regions of Russia. These had arrived from the various heritage organizations which were brought together by the creation of TNK-BP. Nowhere in the new company, was the scale and diversity of the challenge to unify and streamline for efficiency and productivity, greater than in OFS. The size and complexity of this undertaking were addressed during two years of preparatory planning and deliberation.
The principal question then was: what do we want to do with OFS? What should it look like in the real oilfield services world and how do we best take it there?
The answers to these questions were reflected in the strategy for change which was eventually adopted and three essential elements that required transformation: culture, technology and people, and training processes.
OFS key facts
- 10% of Russia’s drilling and workover market
- 55% of TNK-BP drilling needs
- 28% of TNK-BP workover needs
- 45% of TNK-BP sidetracking needs:
2007 >150 wells
2009 E>250 wells - 2008 revenue c. $700 mln
The first step in delivering the strategy was designing “the two buckets”, as company insiders called them, one bucket with non-core assets, which were to be divested over time, and the second with those core service activities and enterprises that TNK-BP would keep and in which it would seriously invest to improve reliability, quality and competitive edge.
“Experience suggests that when companies focus on their core business they are able to deliver better performance”, says TNK-BP Chief Operating Officer Tim Summers. “And for TNK-BP that means the core business of producing and refining oil, and marketing the refined products to its customers. Our ultimate goal is to be a consumer, rather than a provider, of services”.
Three main criteria were established to determine which services were core to TNK-BP’s business.
Firstly, drilling and workover rigs were clearly critical to production. They were central to the company’s existence, sustainability and competitive advantage. Another consideration was the fact that TNK-BP accounted for 10% of Russia’s drilling and workover market, while the market was held tightly by the major oil and gas producers – hence, the company did not want to lose access to or control of this vital capability.
The second criterion assessed relevant technologies. Where the company could not keep up with these or had already fallen behind best in class, then provided there was enough competition in the market place, those services were to be outsourced.
And thirdly, if TNK-BP was the only owner of a service in a particular region, the company would not divest this as to do so would risk suffering abuse of monopoly pricing power by a third party services provider.
In implementing the second step of the strategy, the company established a team to divest all the non-core assets in an efficient, profitable and fair manner.
What this team managed to ensure was the continual employment of those employees in enterprises which were to be outsourced. Although no longer employed by TNK-BP directly, these staff work for companies (often contracted to TNK-BP) that treat these services as their core business, thus providing a more secure future than TNK-BP’s own OFS division could have offered.
The strategy has also worked well for those core services retained inside TNK-BP. “The bulk of our success is in what we decided to keep”, says Vincent Spinelli, Vice President Operations OFS, about the results of the transformation which has brought TNK-BP in the forefront of OFS innovation in Russia.
This understated confidence has developed over the last three years as the company has carefully, gradually and successfully implemented the daunting restructuring task.
Cultural revolution
Having chosen to retain the core drilling and workover services, TNK-BP’s OFS team needed to make sure these were best in class and were safer and more productive than the competition.
It was a considerable challenge to effectively instill a culture of excellence, efficiency and execution and become the Upstream business’s contractor of choice in competition with international and independent Russian contractors. Encouraging people to believe in that vision was not an easy task at the time as enterprises were being divested and the OFS staff head count was rapidly falling.
The secret of keeping people motivated, aligned and enthusiastic throughout this testing transformation remains a secret of the OFS leadership team, as the fact remains: nobody wanted to be divested.
Fighting for capital was another major test. TNK-BP has a rigorous internal process for capital allocation. Projects from different business streams must compete for funds, and as in most oil and gas companies, the bigger share of capital generally goes to maintaining production, license acquisition and greenfield development.
The first major OFS victory in the contest for capital was the rig upgrade program which directly resulted in material drilling efficiency improvements over the course of the past two years.
Investing in technology
“We managed to convince the shareholders that we had to invest in our drilling fleet”, Spinelli says. “We were the first to upgrade drilling rigs in Russia. We went to the rig manufacturers at a time when they were underutilized and rates were low. We upgraded 47 rigs of which 22 were major upgrades and 25 minor upgrades, for $220 million during 2005—2007. This was a very successful investment for the company. Upgrading rig rates today are
In collaboration with Technology stream, the OFS team has been successful in introducing and adapting technologies which are in use internationally but which have not yet become household names in Russia.
For example, TNK-BP was the first oil company in Russia to introduce extended reach drilling and commonly deliver 2,500—metre “step-out” wells – departures drilled laterally from the existing wellbore.
As the drilling has become more complex, the company’s productivity has improved roughly 3% year-on-year – representing $20 million of annual savings for TNK-BP’s Upstream business.
According to TNK-BP Chief Operating Officer Tim Summers, the Russian OFS sector faces two great challenges of performance and cost if it is to succeed. “The sector must raise its game to match the standards of international OFS companies and it must restrain the increase in costs to maintain competitiveness,” says Tim Summers. “We need to work with service companies to enhance productivity in order to constrain price growth by deploying better technology and through pursuing efficiency.”
Spreading the word
More than in most other TNK-BP activities, there was a pressing need in OFS to instill world—class processes, standards and systems – a business that had not changed for decades and which had received only minimal investment in that time. This realization was occurring across the entire Russian sector as a whole as TNK-BP commenced operations in late 2003.
So, the company recruited a number of experienced specialists from leading international service companies. They brought with them a deep knowledge of global best practices. As a result, the OFS team managed to build fit-for-purpose systems which had proved successful in different countries and different cultures and these were adapted to Russian oil realities.
These innovations included the unified “service delivery management system” (SDMS) and an advanced training approach for operational, technical, and field personnel.
The SDMS was further improved by a satellite-based communication and information knowledge hub called INFORM.
INFORM provides real time access to drilling data from every individual well being drilled or worked over. Downhole and surface information is transmitted to a central hub accessible to technicians, experts, specialists and managers across the company’s operations. This connects the company’s drilling and workover teams across Russia; engaging specialists in regional offices to analyze information collectively and provide valuable support to field operations.
INFORM has already proved itself a valuable trouble-shooting instrument. “It has minimized downtime and also allowed technical specialists in our bases, offices and headquarters to intervene before a problem becomes serious or even catastrophic”, Spinelli says, “Rather than having one pair of eyes on the rig looking at the data, you can have as many as required. It is an effective source of leverage and value”.
Such knowledge-sharing is also important in generating a safety culture in this potentially hazardous business. If there is a safety issue, the reasons behind it, and lessons learned are passed on to everybody instantly. After any investigation, incident analysis and recommendations are communicated to all rig masters working on TNK-BP activities who are then responsible to make ensure that each of their crew members reads and understands them.
INFORM has been in operation for about a year, and the objective is to cut the company’s non-productive downtime by as much as 10% — a material prize. Company professionals in OFS are sure this will become a system that others in the sector will emulate.
Bright future
TNK-BP’s OFS today comprises 6 drilling and workover companies, $700 million of estimated revenue in 2008 and 7,000 employees who are “loyal, keen on learning, motivated, and are security in their jobs”, according to Spinelli.
Whether OFS remains in-house or moves outside the company perimeter, the business feels the need to grow beyond working solely for Upstream and enter the 3rd party market in Russia. Initial steps have already been taken and this year work has already been performed for third parties. OFS leaders are now preparing a marketing organization to better understand the opportunities and the competition.
“I think our task now is to start doing more work for independent third parties — and this does not necessarily mean walking far away from TNK-BP. This is about finding natural ways of increasing efficiency when you work in a competitive market and feel somebody else breathing down your neck”, says Mikhail Osipov, Executive Vice President oil field services, TNK-BP, talking about the readiness of his unit to work for 3rd parties and compete for contracts outside TNK-BP. “Today we get 90% of our work from TNK-BP. Within three to five years, we could have
“We are now performing on a par with some of the leading players in the industry”, says Osipov, “For example, if you look at sidetracking, we have been number one in terms of efficiency at Samotlor – and that considering quite a few international service companies are working there”.
The OFS team is keen to take advantage of the booming service market, which has grown more than threefold over the last three years and is now worth $20 billion. “Demand for services is there”, Osipov sums up the objective for his team, “It’s important to be among the first in positioning ourselves and develop further”.
The leadership of TNK-BP’s OFS is clear that its future focus is going to be technology: innovative new technology in workovers and drilling, together with more intensive training so that OFS staff feel at home with cutting-edge equipment.
To be continued…
The story of transformation in TNK-BP’s oil field services division is not over yet. Just what the future holds is still to be decided. Many attractive options will be considered ranging from retaining OFS in-house, through selling part of it in an IPO, to making the unit completely independent. The primary goal for TNK-BP itself is to make sure that we have the most efficient and productive workover and drilling activities available. By all recent measures we are now well on our way.
Swimming lessons
Most of the non-core activities inherited by the company and divested over the past five years have had to learn to swim in fast moving, competitive waters.
As part of the legacy of the Soviet Union, the oil companies provided almost everything to those communities where they worked — which explains egg farms, butcher shops and a hotel in TNK-BP’s original OFS portfolio.
Other non-core services were more relevant to the company’s daily operations and included ESP repair facilities; transport; construction and infrastructure services; tubing repair services; cementing and catering. Many of them continue to work on TNK-BP contracts while many others have also expanded their customer base.
One success story is Orenburgneftegeophysica (ONGF), an Orenburg-based wireline logging and perforation company.
ONGF was divested by TNK-BP in summer 2006 in a closed tender. The winning bid was placed by leading international firm, Baker Hughes, which was seeking to enter the service market in the Volga-Urals area.
Baker Hughes then expanded the business and added some high technology services. Since divestment, ONGF’s physical volume of work has grown by 60% while its workforce has grown significantly from 275 people, with this year’s target set at more than 360. All new hires are locally recruited and they are being trained in operations and HSE (health, safety and environment) to international standards.
“This is the type of outcome we seek through our OFS divestment program,” says TNK-BP Chief Operating Officer Tim Summers. “As a customer, we now have access to improved services. And the local market now has a new player – a company that receives proper investment and management attention from the new owners, creates new jobs and sets a new standard in the regional market.”
In the last year, TNK-BP has sold three pump repair bases – one to Western company Weatherford and the other two to Russian companies. In each case, TNK-BP guarantees the new stand-alone operation a certain amount of initial business, and they in turn guarantee to set aside a certain amount of capacity for TNK-BP.
At Your Service (869 KB)