The biggest winner from Russia’s record oil production in the past five years hasn’t been OAO Rosneft (ROSN) or OAO Lukoil. (LKOH) The nation’s crude producers have been outperformed by the company they hire to drill their wells.
Eurasia Drilling Co. (EDCL), Russia’s largest oilfield services provider, has more than tripled investors’ money since 2008, helping founder and Chief Executive Officer Alexander Djaparidze build a $2 billion fortune. Rosneft, the biggest Russian oil company, has returned 53 percent in the period.
“While the Russian policy to slowly increase production levels remains in place, we will see the capex budgets of our clients growing and our drilling will continue to increase,” Djaparidze, a 58-year-old mining engineer from Russia’s Caucasus region, said in an interview in his Moscow office.
To wring every drop from depleted Soviet-era fields, producers are drilling miles-long horizontal wells through oil-bearing rock, a trend that’s stretching demand for Russia’s rig fleet. Eurasia is adding four land-based rigs a year and expects spending on drilling in Russia to rise 20 percent in the next two years to $26.5 billion.
“Eurasia should benefit from higher spending by oil producers, which are focused on arresting production declines at existing fields and developing new formations,” said Artem Kvas, an oil and gas analyst at Renaissance Capital in Moscow.
So far, the drilling is working. Russian crude-oil production has risen to a post-Soviet record of 10.52 million barrels a day in September, 6.9 percent higher than five years ago. President Vladimir Putin, reliant on oil as the biggest source of tax revenue, has pledged to maintain output, offering tax breaks to producers to develop new fields.
Eurasia, which now controls 29 percent of Russia’s drilling market, was created in 2004 from the in-house services arm of Russia’s second-largest oil producer, Lukoil.
Djaparidze worked with Lukoil founder Vagit Alekperov in the early 1990s when Russia’s oil industry was being being reforged from the state-controlled Soviet system. Djaparidze, the CEO in a services venture called PetroAlliance part-owned by Lukoil, led a management buyout of the company after Russia’s 1998 financial crisis. He sold to Houston-based Schlumberger Ltd. (SLB:US) in 2004 for $750 million.
At that point, Alekperov called Djaparidze and asked him to helm a buyout of Lukoil’s drilling unit, which he wanted to separate from the rest of the business to bring the company in line with global rivals. After restructuring, Eurasia went public in London in 2007. Djaparidze’s stake, about 33 percent of the company, is now valued at $2 billion.
Eurasia fell 4 percent in London trading today, the biggest decline in seven weeks, as the Djaparidze family trust is selling about 2 percent of the company at $40.50 a share, according to a person with knowledge of the matter.
The company confirmed that a sale had been taking place. The trust is selling shares to increase liquidity following feedback from investors at meetings last week, Maria Ignatova, a spokeswoman for Eurasia, said by phone.
Eurasia may consider buying the in-house drilling unit of Rosneft, which has about 9 percent of the Russian market, Djaparidze said. “We would only buy it if Rosneft came to us and said ‘we want you to buy’,” he said.
In the meantime, Putin-led tax cuts to stimulate drilling-intensive tight-oil exploration began this month. The Energy Ministry estimates that oil produced from tight formations such as the Bazhenov shale in Siberia may rise to 440,000 barrels a day by 2020 from almost nothing now.
If shale output takes off in Russia, Eurasia will be ready to increase investments to secure business, Djaparidze said.
“It will depend on the demand,” he said. “If it shifts and our clients want to drill more, I am sure we will purchase more rigs.”
Eurasia has no need to borrow to fund capital expenditure or dividends, he said. Dividends are planned at 25 to 30 percent of net income, which rose to $217 million in the first half. Eurasia paid out $102.8 million, or 26.9 percent, on 2012 profit of $382 million, according to data on its website.
Djaparidze also sees opportunities in the Arctic Ocean. Eurasia already boasts wells in the northern Caspian Sea, where temperatures dip as low as minus 25 degrees Celsius (minus 13 Fahrenheit), he said.
“One competitive advantage will be the fact that we currently operate under a zero-discharge policy today in the Caspian,” he said. Eurasia also has efficient logistics and specialized equipment already in the “onshore high north.”
Even so, it will need to find the right partner among other services companies.
OAO Gazprom Neft plans Russia’s first Arctic offshore production this year, while Rosneft has tapped Exxon Mobil Corp. (XOM:US), Eni SpA (ENI) and Statoil SA to begin exploring vast swathes of seabed to the country’s north.
“The challenge in the future will be the Arctic,” Djaparidze said.
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