Neftyania

Context

Your client is a small oilfield services company named ABC Oil in a country
called Neftyania, which has a population of 10 million. At present, the
company provides its services on the domestic market only, but the CEO is
contemplating expanding into other markets within the next 5 years as
Neftyania’s oil reserves are depleting.
ABC Oil provides a wide range of oilfield services to the country’s only oil
producing company, including drilling of oil wells, well servicing and repair,
and seismic surveys (undertaken with the aim of discovering oil reserves).
There are no other oilfield service companies in the country at present.
Satisfying Neftyania’s oil production industry’s demand for oilfield services
is our client’s priority.
ABC Oil’s CEO believes that its company has enough capacity to start
providing services in other countries within the next 5 years. The CEO asks
the team to analyze the feasibility of international expansion and to help
identify a list of the most promising target countries.

Further context

• What goal is the CEO pursuing?

The CEO has concerns that the country’s oil production will decline, causing
the demand for his company services to plummet, and is therefore looking
for ways to maintain the company’s profitability at its current level.

• Are there any barriers for expansion into other markets?

Yes, our client must treat the requirements of Neftyania’s oil company as a
priority and can only export resources to external markets if there is no
demand for them locally.

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Question 1
What factors should ABC Oil investigate to assess whether it should offer its
services in other countries?

ANSWER
Potential factors that could be investigated are:

Demand. Forecast of domestic demand for oilfield services:

• Analysis of Neftyania’s oil reserves and ABC oil’s production plans for the
next 5 years.
• Demand identification by type of activity (drilling, well servicing and
repair, seismic survey):
o Well servicing and repair – number of repair jobs and total work scope.
o Seismic survey – scope of work (in km and km2).

Supply. Analysis of client capacity: does it have negative/surplus

capacity left after covering domestic market demand:
• Analysis of the technical condition of the company’s equipment (age,
performance) and its ability to satisfy the oil producing company’s
physical demand for oilfield services (e.g., drilling – drilling rigs; well
services and repair – repair rigs; seismic survey – seismic equipment).
• Analysis of the company’s human resources for meeting the required
demand:
o Existence, and future retention, of the required expertise.
o Number of technical specialists.
• Comparison of the oil producing company’s demand with the client’s
capacity:
o In the case of a shortage – analysis of ability to close the gap (by
procuring/repairing equipment or hiring more people).
o In the case of a surplus – analysis of the opportunities for taking this
capacity to the external market.

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Analysis of external markets and creation of a target list of
countries for external expansion:
• Identification of the most promising countries depending on the number
of wells that would need to be drilled and/or maintained and the number
of seismic surveys that need to be conducted.
• Analysis of external factors (external policy and geopolitical situation in
the countries, logistics costs, etc.).

An excellent answer may also consider the following factors:

• Regulator’s impact on the oil production market in Neftyania (number of

production licenses issued, equipment age restrictions, government’s
industry development plan, environmental constraints, etc.).
• Potential threat of competition on the domestic market.
• Analysis of the company’s capacity to improve internal efficiency to
become more competitive on external markets:
o Internal & external benchmarking.
• Risks of the oil producing company failing to meet drilling and production
targets if oil reserves are not confirmed in Neftyania.

Question 2
The team has started assessing the client’s ability to cover Neftyania’s
demand for drilling operations 5 years from now. At present, the company
has 7 rigs, but in 5 years’ time, 3 of these will be retired upon expiration of
their useful life.
The client has provided information on the other four drilling rigs and their
anticipated performance 5 years from now in Table 3. Your team is asked to
assess the client’s ability to support Neftyania’s drilling plan.
Table 3
Drilling rig, no. Maximum rig uptime during a year, % Drilling speed, m/h
1 80 10
2 60 20
3 80 20
4 60 10

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Additional information (if requested):

• Maximum rig uptime – percentage of total time during a year when a rig
is drilling.
• Neftyania’s drilling plan.
Table 4
Well type Average well length, km Number of wells
Vertical 1.5 160
Horizontal 2.0 100

• Drilling is performed on a non-stop basis (no night/lunch breaks, etc.).

• The maximum load value factors in rig repairs.
A horizontal well is a type of directional drilling technique where an oil or gas
well is drilled at an angle of at least 80 degrees to a vertical wellbore.

ANSWER
A good answer may include the following:

Determination of demand for drilling (candidate must ask for

this information):

• Vertical wells = 1.5 km × 160 wells = 240 km.

• Horizontal wells = 2.0 km × 100 wells = 200 km.
• Total 240 + 200 = 440 km.

Determination of the total drilling meterage for all rigs, in km:

• Candidate must assume a year of 365 days.
• Determination of each rig’s total working hours:
o Rigs 1 and 3: 0.8 × 365 days × 24 h = 7,008 h.
o Rigs 2 and 4: 0.6 × 365 days × 24 h = 5,256 h.

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• Determination of each rig’s drilling meterage, in km:
o Rig 1: 10 m/h × 7,008 h / 1,000 m ≈ 70 km.
o Rig 2: 20 m/h × 5,256 h / 1,000 m ≈ 105 km.
o Rig 3: 20 m/h × 7,008 h / 1,000 m ≈ 140 km.
o Rig 4: 10 m/h × 5,256 h / 1,000 m ≈ 53 km.
• Total rig drilling meterage = 70 + 105 + 140 + 53 = 368 km.

Determination of capacity shortage in km:

• Drilling capacity shortage = 440 – 368 = 72 km.

• The drilling capacity shortage of 72 km is comparable with the annual
drilling meterage of a less than top-performing rig. The client should
procure new rigs and/or boost the capacity of existing rigs.

Question 3
After determining the shortage of capacity, your team has decided to come
up with ideas to increase drilling efficiency (to drill more). What possible
initiatives could be proposed to increase the maximum rig uptime and speed
in in order to achieve this goal?

ANSWER
A good answer may include the following:

Keeping in mind the previous question, effective drilling meterage in km may

be estimated using 2 parameters: drilling speed and maximum rig uptime.

Increasing the average drilling speed:

• Renovating rigs – replacement of rig parts or rig upgrade.
• Optimizing drilling rig utilization on wells (e.g., slow rigs used to drill
shallow wells).
• Improving the skills of rig operators.

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Maximum rig uptime:

• Optimizing well-to-well rig travel (e.g. by choosing an optimal route).

• Optimizing the rig up/rig down process.
• Preventive maintenance of equipment (reducing the number of
breakdowns).
• Improving rig operators’ performance (e.g., incentive programs).
• Hiring more hands in case of crew vacancies.

Question 4
The team is considering the option of investing in a new drilling rig for use
abroad. What is the rig payback period if it costs USD 10 mln?
Additional information:
• The payback period is the length of time required for an investment to
reach break-even point.
• Fee rate (cost of oilfield service company services for the parent
company – oil producer) – USD 30,000 per day.
• Operating expenses (ongoing cost of operating a rig, such as crew
wages) – 70% of fee rate.
• Rig uptime (paid time as a share of total calendar time) – 90%.

ANSWER
An answer may include the following:

A description of the approach to a solution:

• Payback period (years) = Rig cost / Earnings – Operating expense.
• Earnings = Daily rate × Rig load × 365 days.

Solution:

• Earnings – Operating expense = USD 30,000 × 0.9 × 365 × – 0.7 ×

USD 30,000 × 0.9 × 365 ≈ USD 3.0 mln.
• Payback period (years) = 10 / 3.0 ≈ 3.3 years.

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