In Depth January 3, 2008, 5:00PM EST

The Stealth Oil Giant

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Schlumberger's technical knowhow let it compete with the majors James Hill

Russian Steps: Surveying a line-up of new wells for Rosneft in Siberia James Hill

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Schlumberger was a big player in Russia at the dawn of the oil industry in the 20th century, but it got the boot after Stalin came to power. Then, in the late 1990s, it formed an alliance with Yukos, at the time Russia's biggest private oil company, eventually dispatching 300 workers there and helping to kick-start flagging production. Schlumberger forged a similar deal with another massive private player, Sibneft. But as Yukos' owner Mikhail B. Khodorkovsky fell out of favor with the Kremlin, Russia chief Dijols knew he needed a far wider client base.

His solution: buy local services companies and bring their work up to Schlumberger's standards. Although Schlumberger is considered to have the best high technology in the industry, it lacked certain midrange skills. More important, the deals brought contacts and understanding of the Russian business landscape. Schlumberger's handling of Siberian Geophysical, which operates Pad 1b, is typical of its approach. Although Dijols says Siberian was in terrible shape when Schlumberger bought it from Yukos in 2004, the dozen Schlumberger executives parachuted into the company did little but observe for about a year. "It is like West Texas," Dijols says. "Everything is based on personal relations. People are very proud. You can't come and say, We will give you a lesson.'"

The company is gradually changing its old Soviet culture of blame. Luc Ollivier, a 50-year-old Frenchman, was installed as the boss of regional operations at Siberian Geophysical. He's trying to reward performance and, more critical, systematically eliminate mistakes rather than simply punish the people who make them. Ollivier says the company's veteran drillers have immense experience, "but they don't like to teach the young people." So he is working to forge better ties through daylong get-togethers that conclude with a beer bash. Ollivier says the pace of work is up by more than 30% in the past two years, and Siberian Geophysical's drilling revenues reached about $250 million last year, about double their level in 2006.

Ollivier spends 7 out of every 10 weeks in Nefteyugansk, a grim oil town stranded in the Siberian forests some 60 miles south of Pad 1b. He passes his days visiting rigs or doing paperwork in his small office, and his evenings in boisterous local eateries, where diners toast each other with chilled vodka and munch slivers of raw fish. Even though Ollivier is the chief, the local manager—a garrulous former driller named Victor Soldatov, well-known to everyone in Nefteyugansk—is the public face of the operation. He serves visitors tea and gooey meat-and-cheese sandwiches and regales them with stories of his business battles with local rivals and the dark days when Yukos went bankrupt. His tales may sound like so much bluster, but they keep local officials and executives from Rosneft, which snatched up the Yukos properties, entertained—and coming back for more. Soldatov "is great with clients," Ollivier says.

West Siberia may be just the beginning. Schlumberger is working offshore on Sakhalin Island in the Pacific. And it is gearing up for contracts in new areas, such as East Siberia, where the distances and lack of infrastructure are posing huge challenges to their operations. Bringing a rig to one site near what is considered the coldest place in the Northern Hemisphere took 2 1/2 months, with the final 600 miles on roads accessible only in winter. In the summer, the ice melts into a swampy steam bath, and as the mercury soars above 100F, workers must don netting to cover every exposed part of their bodies to ward off mosquitoes.

Gould is going out of his way to please his Russian hosts. Schlumberger built a training center in the Siberian city of Tyumen and has opened manufacturing plants there and in another city nearby to make submersible pumps and perforating guns that are used to open up wells after drilling. Schlumberger also has set up research centers in Moscow and in Novosibirsk, Siberia, employing 20 PhDs, and is sponsoring an additional 200 researchers at Russian universities.

These scientists have come up with innovative technologies that Schlumberger is putting to work in Russia and beyond. For example, a team in Novosibirsk has developed plastic fibers that help open channels in the rock and aid the flow of oil and gas, and a group in Moscow has come up with better ways to boost output of mature fields by more efficiently injecting water into wells. Schlumberger's early backing of research in Russia—it started in the late '90s, when money was scarce and few others were interested—has helped the company "establish a level of trust with universities," giving it priority access to some of Russia's best brains, says Vladimir Tertychnyi, a physicist at Schlumberger Moscow Research Center. "That's something money can't buy."

Reed is London bureau chief for BusinessWeek .