Russia is showing the world that it does things in a big way at the Sochi Olympics. Now, at the opposite end of the vast country, Russia is aiming to be the next big player in the global shale oil revolution.
With the world’s largest reserves of shale oil locked in underground formations sprawling across Russia’s vast Siberian wilderness, the Eurasian giant — already a top world oil producer — has the most potential of any country to rival or surpass the United States in shale production in coming years.
Estimates of the amount of shale oil trapped in the Bazhenov formation in western Siberia alone range up to 2 trillion barrels, of which 22 billion to 360 billion barrels is recoverable today using hydraulic fracturing and horizontal drilling technologies developed by U.S. producers.
Those resources could far surpass Saudi Arabia’s legendary oil treasures and are at least as prolific as the Bakken formation in North Dakota that is feeding the boom in shale oil production in the U.S.
With so much oil at stake and Russian tax incentives enacted last year to tap domestic shale with an eye toward burnishing the Eurasian giant’s oil superpower status, major petroleum companies such as Exxon and Shell are rushing in and joining Russian energy giants Rosneft and Gazprom to establish stakes in the most potentially lucrative shale plays.
“The energy landscape is changing radically,” said Arjun Sreekumar, an analyst at the Motley Fool. “With world-class operators like Exxon and Shell on board to provide the requisite skills, equipment, and know-how to exploit shale formations like the Bazhenov, Russia could very well have a shale revolution of its own within the next couple of decades.”
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Shale developers in Russia face a few obstacles mostly stemming from the harsh Arctic climate, but the prospects for success at tapping Russia’s shale are better than anywhere else in the world outside the U.S.
“The sheer quantity of oil that is estimated to be contained inside of the Bazhenov Shale is nothing short of astonishing,” said one international investor operating in Russia, noting that while major oil companies are only beginning to enter the Russian shale market and get a fix on the exact size of Russia’s enormous shale resources, they most likely are several times larger than those discovered in the U.S.
“Clearly, this is a resource that neither the oil and gas industry nor investors should ignore,” he said.
Russia also has many of the advantages that have enabled pioneering oil companies in the U.S. to make a lucrative business of shale oil development, including the plentiful water resources needed to deploy fracking techniques. Russia also has an extensive infrastructure of pipelines and oil processing facilities that serve the oil fields in western Siberia that lie on top of the Bazhenov formation and are the main source of Russia’s oil production.
That puts Russia ahead of China, for example, where legal hurdles and water shortages in regions where China has big stores of shale gas pose major obstacles to development.
“Russia alone has the technology, infrastructure, water and political will to be the next revolutionary shale venue — not to mention a lot of sparsely populated space in which to drill without public backlash,” said Charles Kennedy of OilPrice.com.
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Although some analysts are cautious about predicting Russia’s success at shale development, given the many obstacles in countries outside the U.S., oil giant BP last month predicted that Russia will become the world’s second-largest tight oil producer behind the U.S. by 2035, with about 800,000 barrels a day.
Slow to warm
Despite its great potential, Moscow was slow to warm to the shale revolution, which appeared to pose a threat to Russia’s status as the predominant provider of natural gas and oil to much of Europe. More recently, however, Russian leaders have come to realize that their huge shale resources could help preserve and expand their energy empire.
Russia’s economy since the fall of the Soviet Union has been powered primarily by its energy resources, and the lion’s share of government revenue has come from energy taxes.
Premium crude prices close to $100 a barrel for most of the past decade has put a powerful weapon into the hands of political leaders, who have used the oil wealth for fundamental social needs such as income and pensions for a large segment of the population as well as luxuries such as the reported $52 billion that President Vladimir Putin’s government spent on Olympic venues and regional infrastructure improvements in Sochi.
Since the Cold War, Russia has used its critical role of supplying energy to Europe and China to wield political influence. Its shale wealth promises to enhance that status.
“If Russia is able to successfully plumb its Siberian depths for shale oil and gas, it could leverage its energy holdings towards its ambition of becoming a great power once again,” said Walter Russell Mead, a fellow at the Council on Foreign Relations and editor of The American Interest magazine.
Russians understandably were slow to awake to the treasure beneath their feet, he said. “Because Russia is already rich in conventional oil and gas, it’s felt little pressure to invest in unconventional reserves. But as its hydrocarbon production begins to stagnate, Moscow is realizing that shale energy might actually be worth looking into,” he said.
“Russia is just now drilling its first exploratory wells, so it’s still far too early to tell whether or not it will fall to the same pitfalls [as China], but it has a lot going for it,” he said. “Most importantly, it has the experience, service industry and infrastructure that comes with being one of the world’s major producers of hydrocarbons.”
On the negative side, Mr. Mead said, “Siberia’s remote location and cold climate won’t make drilling any easier,” although Russian oil producers have been contending with such arctic conditions for decades.
Also, “it looks like Siberia’s shale plays lack the clean ‘wedding cake’ geology that America enjoys, that allows for relatively simple and predictable horizontal well drilling,” he said.
The Bazhenov crude, much of it locked under Siberia’s permafrost, may not have undergone the immense heat and pressure that produced the shale oil in the U.S., he said, so it may not be “mature” enough to have commercial value.
Tax incentives for shale
Until last year, oil companies were able to retain only about $22 out of every $110 of the Urals-grade crude they produced in Russia. The rest went to the state in the form of export duties and mineral extraction taxes.
But Mr. Putin and the Duma eased rules for shale producers, reasoning that the cost of producing oil is far higher from shale than from conventional wells. A law enacted in July eliminated the mineral taxes on oil produced from Bazhenov and three other major shale fields for the next 15 years, giving a powerful incentive for development.
The tax regime “significantly changes the economics of Russian shale oil,” said the international investor, who spoke on background in order to discuss freely the developing market. “Moves such as this one show the Russian government’s dedication to increasing the nation’s shale oil production” partly to maintain Russia’s status as an oil superpower.
“One reason why the government is doing this is because the nation’s conventional oil production is declining,” he said.
Russia’s energy ministry has warned that the steady depletion of surface oil wells could reduce production from 10.1 million barrels per day in 2010 to 7.7 million barrels per day in 2020.
Given the tax incentives, major oil firms have been queueing up to establish stakes in Russia. This month, Russian energy giant Gazprom Neft signed an agreement with U.S. oil services firm Schlumberger to explore shale resources in western Siberia. As part of its technology-sharing agreement, Schlumberger is shipping equipment and drilling crews from shale drilling sites in the U.S. to Russia.
In January, a Russian venture between Gazprom Neft and Shell called Salym Petroleum Development announced plans to drill the first horizontal appraisal well in the Bazhenov formation near the southern town of Salym.
“We hope that the pilot project will allow us and our shareholders to make decision about moving to a large-scale development of Bazhenov formation in the Salym fields,” said Salym CEO Oleg Karpushin.
In December, Russia’s OAO Rosneft, the world’s largest publicly traded oil company that was at first skeptical about shale development, signed an agreement with Norwegian counterpart Statoil to explore the Domanik shale formation in the Samara region, near Russia’s southwestern border with Kazakhstan. The companies said the tax breaks provided a green light for the deal.
“If successful, we believe this could be a world-class shale oil asset,” said Statoil CEO Helge Lund.
Exxon Mobil, drawn to the Bazhenov because of the field’s similarity to the Bakken formation in the U.S., plans to start a $300 million drilling pilot project there with Rosneft this year.