USSR used to put great effort into crude oil production in large formations by not very common measures. In the far north of the RF, alongside the mouth of the Pechora river, there have even been experiments with various nuclear explosions. However, only sand could be melted as a result and turned into glass.
However, over decades Russian oil companies have come rather close to the development of huge stocks of shale oil. The most of these stocks lies within Bazhenov formation. This is a huge geological formation, which is situated in the heart of Siberia at the distance of about three thousand kilometers to the west from the capital.
Does shale oil in Russia have future? How can this influence prices at world stock exchange? These issues have been studied by the Analytics Team of “Russian News” and “Exchange News” of the “Market Leader”.
Perspectives of Shale Oil in Russia
Specialists are convinced that it is there that the largest stock of shale oil may be found. By some estimates, certain dense rocks may contain up to 100 billion barrels of produced oil. This is 5 times more than the set volume of stock in Bakken formation in the territory of North Dakota, which is the main driving power of US oil renaissance.
The majority of RF capital is hoping that Bazhenov formation will become the new pillar of Russian oil-producing sphere, thus making the country one of the main exporters of crude oil for a long time. Maintaining the production volume is rather important for sustaining Russian power and influence worldwide. Moscow is highly dependent on income from oil production, but ordinary stocks exceed very quickly. Three years ago Ministry of Energy of the Russian Federation warned that without considerable political and strategic changes, especially in taxation sphere, crude oil production may reduce from 10.1 billion barrels daily three years ago to 7.7 billion barrels daily by 2020. The RF is paying more and more attention to shale oil, considering it to be the most potential rescue means that will help to maintain the production volume and the position of the country on global arena.
“20 years on Bazhenov formation will become the main source of crude oil in the RF – even larger than formations in the Arctic Ocean,” states Leonid Fedun, vice-head of main oil company in Russia “Lukoil”, which has decided to work on shale fields. “This opens new opportunities for optimistic views on crude oil production during the next 50 years,” he added, “when last decade America started producing shale oil, oil-producing companies worldwide started looking for formations that could repeat the success of Bakken or other non-traditional formations in the States. Geologists started praising an Argentinean formation “Vaka muerta” and a basin in Chinese province Sichuan, considering them to be the main challengers.
What is more, in June 2012 Lukoil has started a buyout program having made a deal on buying its shares to the sum of 2.5 bln. dollars. The shares have been bought by an affiliate LUKOIL Investments Cyprus , which has thus increased its percentage in equity capital to over 10 percent. Before this Cyprian “daughter” used to own 9.19 percent of shares of the parent company. The shares will be kept on the balance of Cyprian “daughter” till the first half of 2015.”
The shares of the oil giant are currently traded at 2074.0 rubles per share, as admitted by the Analytics Team of OptionFair broker company (is included in Masterforex-V Academy rating of Forex brokers ):
“Nevertheless, Bazhenov formation has exceeded these formations by size. It is larger than 10-15 largest shale formations together,” admits Tom Reed, Director General of a small oil firm Ruspetro, which is registered at London stock exchange, “the company owns 120 hectars of the territory that belongs to Bazhenov formation. This fact has attracted many Russian and western energy companies. Almost all big companies of the RF, such as Gazprom Neft, Rosneft, Surgutneftegaz, and Lukoil have started exploring the region. Last year ExxonMobil and Rosneft formed a joint company in order to assess the total commercial potential of 23 sites of Rosneft, located in Bazhenov formation, the territory of which has exceeded 10 thousand square kilometers.”
Experience of “Shale Revolution” Held by Halliburton, Baker Hughes, and Schlumberger in Russia
Besides, the RF is starting to use the knowledge and experience of the companies that have initiated so-called “shale revolution” in the territory of North America. It became clear from Reed’s comments that RF branches of specialized oil-producing companies, such as Halliburton, Baker Hughes, and Schlumberger, bring the specialized technical equipment, drilling crew, and machines from Texan formations Bakken and Eagle Ford to Siberia, thus performing full-scale transition of technology from west to east. However, a lot remains unclear about Bazhenov formation. Searching crew is dissatisfied with changeability, for oil may be found in one borehole, whereas the other, drilled nearby, may give kerogen, hard organic material, which is a harbinger of gas and oil.
“The main question of maturation is whether Bazhenov formation is mature enough as a source of hydrocarbons,” admits Thane Gustafson, the author of publication on the history of oil industry in Russia “Wheel of Fortune”. “If it is not, we would have to wait for millions of years for it to reach the necessary condition,” summed up the specialist.
The experience of Lukoil shows the presence of such problems. An engineer Dmitry Belenikin, who works in the company’s Mid-Nazhym field, in the very heart of Bazhenov formation, admits that boreholes in this territory are characterized by only 4-percent return. At the same time, this percentage in ordinary fields equals to 30-35 percent. However, he has added that return may be easily increased. “We are currently at the very start of such process,” says Belenikin.
Mid-Nazhym field is located deep in Siberian taiga, which is a virgin wilderness of lakes, forests, and swamps, cloven by the powerful river Ob. Thick forests are inhabited by minks, wolverines, and moose. Climate is very severe here: in winter temperature drops to –40 С, and in summer gadflies and blackflies fill in the air. Belenikin finds it very hard to get to his working place. Going by car is only possible in winter when Ob freezes; in summertime helicopter is the only means of transport. Such trips are rather expensive. Nevertheless, transport expenses are not the only problem. Up-to-date machinery, necessary for oil production in Bazhenov formation, is so expensive that the cost of one borehole may reach 10 million US dollars. This is 5 times more than expenses on an ordinary borehole.
At the same time, because of high taxation Russian oil-producing companies do not have much motivation for using such expensive formations. It became clear from Reed’s comments that out of 110 US dollars of the cost of one barrel of Urals oil an oil-producing company is to the export duty of 55 US dollars and the mineral extraction tax of 23 US dollars. As a result, profit from one barrel equals to 22 US dollars. “This is a very small sum,” states Reed, “but, nevertheless, the situation has started to change gradually, for Moscow is introducing rather generous reduction of payments and delayed payments in order to encourage the development of oil-producing sphere. Russian Parliament has recently made a decision to exempt the companies that work in Bazhenov formation from mineral extraction tax. What is more, the issue of reducing export duty is being discussed. Profit may consequently increase to about 60 US dollars per barrel баррель, thus making Bazhenov formation more attractive from commercial point of view.”
“Bazhenov formation, which was opened in 1959 by Siberian geologist Fabian Gurari, has been created due to slow accumulation of plankton and other organic substances, which was happening during 5-6 million years in the region that used to be a deep sea basin. Solid shales have turned into a source bed for 85 percent of traditional oil-and-gas fields in the territory of Western Siberia; for example, such as the giant Samotlor, which made the USSR the main exporter of oil in the 70s. Oil-producing companies are held back by the fact that “Bazhenovka”, just like other shale fields, has low porosity and water permeability, thus making it difficult for liquids to flow down the rocks. Concrete block – this is what shale is considered to be,” says Chief Financial Officer of Eurasia Drilling Co. Richard Anderson, “this block is to be cracked to reach oil.”
“Oil is already produced in Bazhenov formation, but the production volume is not very high – only 40 million barrels,” says a Russian analyst of Wood Mackenzie consulting company Michael Moynihan. “This is rather consistent with the volume of 75 million barrels, which is produced from ordinary oil-bearing beds in the west of Siberia. But this is only a drop in the ocean,” he adds, “over time Russian experts have understood that this region has higher potential than predicted before. They have been persuaded by events that happened across the Atlantics. By the end of last decade it became clear that revolution is imminent in the energetic sphere of North America. Such methods as horizontal directional drilling and hydraulic fracturing have opened vast reserves of gas and over time oil, which used to be considered no-commercial ones. Gas production started growing rapidly, and the cost of gas in America has quickly dropped to the lowest point for the last decade. Oil production has also grown rapidly. In Bakken formation itself it became over 100 thousand barrels per day in 2008 and 1 million barrels per day last year. At that time the States have set an absolute record of annual growth of oil production since the time of its commercial production in the far year of 1859.”
Russian oil-producing companies were watching this with mixed feelings of admiration, fear, and envy. When US production started growing rapidly, it was remaining the same in the RF. Production volume has dropped heavily despite the considerable growth of corporate expenses. According to Gustafson, during the period of 2001-2005 the growth of production in the RF has amounted to 35 percent, whereas during the period of 2006-2010 it has grown only by 5 percent. This happened despite the fact that investment has increased 4 times during that time. Very soon it became clear to Russian engineers that they may stop stagnation by using American innovative oil-producing technologies for production in solid oil beds. Such reserves of oil that is difficult to produce are located in Achimov formation in the far north of Siberia, in Bazhenov formation, and in Volga-Ural region (Domanik).
“Shale Revolution” and Politics
“Russian politicians have come to the same conclusions. The head of the RF Vladimir Putin says that due to oil that is difficult to produce Russian production after 2020 may increase from 0.8 to 2 million barrels per day. When drilling is introduced into these formations, there will be one considerable advantage. In these regions oil is being swabbed for many years. Due to this the main share of the infrastructure has already been formed. Geological reserves in the Russian Federation are located on fully-equipped oil formations with oil-processing machinery, pipelines, roads, towns, and drilling crews,” admits Leonid Fedun from Lukoil company, “in these regions oil production has lasted for over 50 years. Besides, unlike the majority of European countries with reserves of shale hydrocarbons, the RF does not have strong ecologic opposition, which would be against fracturing technology. What is more, in poorly inhabited Siberia the majority of people live through oil production, by working in the sphere.
Actually, there already exists an opinion that producing oil in large non-traditional formations in the RF has more sense than focusing on exploration of the Arctic Ocean. It has become a new progressive boundary for Russian oil-producing companies, as such work is directly connected with the vast quantity of logistic and technical problems. Fedun says that he wouldn’t have invested “a penny” into such risky affair.
“Nevertheless, in order to start full-scale production, numerous factors are to be put together like a jigsaw. Although Western Siberia is the cradle of Russian oil industry, some experts suppose that its structure is to be considerably developed in order to answer the demand for shale production. However, by 2020 the RF is intended to produce the daily amount of 440 thousand barrels of oil that is difficult to produce from solid oil beds. It means that two hundred drilling units should work there, whereas there currently are no more than two,” says Richard Anderson from Eurasia Drilling company. He is certain that construction of railways, motorways, rolling equipment for delivery of chemicals, and hydraulic fracturing equipment to borehole mouths will take years. “At this point there are no means even for the start of random drilling,” he added.
Anderson believes that much time is yet to pass till the start of considerable production in Bazhenov and other non-traditional formations. However, at the same time there is certainty that the RF will have its own production of shale oil provided that there is the machinery required and foreign equipment. In this reference Gustafson adds that the RF has been following the traces of America for a long time, especially in the sphere of technical innovations. “When nuclear bomb was first used in the States, Russians have understood right away that they can do it – and so did they,” he added, “and this is a similar situation.”
Hydraulic Fracturing Equipment in Russian – Reason for Pride
Russian oil-producing companies are proud of their technological and technical achievements. Most of them claim that hydraulic fracturing method has been introduced by a Soviet geologist Yuriy Zheltovy, who made experiments in this direction in 50-60s. However, most western experts suppose that the first commercial works on hydraulic fracturing appeared in Kansas in 1946. The technology has, though, started being used in the RF only at the end of 80s, when an oilman from Alberta, the head of Canadian Fracmasters Ron Bullen has persuaded the soviet Ministry of Petroleum and Natural Gas to give him an opportunity to use hydraulic fracturing in boreholes in Western Siberia. According to Thane Gustafson, who works as a specialist of oil-producing sphere of the RF in Georgetown University in the USA, the results have proved to be so impressive that experiments during the times of Gorbachev have encouraged the formation of one of the first public firms.
Today the engineer Dmitry Belenikin from Lukoil company has to create most ingenious means for luring oil from refractory beds of Siberia. Shale oil is very difficult to produce, for it remains in bound condition, cracks are small, oil almost does not move, but experts have managed to create the technology for its most effective production.
In Mid-Nazhym field a mixture of water and air is injected under high pressure. This leads to a chemical reaction, as a result of which shale formation may be heated to 400 С. Consequently cracks enlarge and oil viscosity reduces. This makes it flow in the closest boreholes. Belenikin used to work on ordinary formations in the territory of Volga River basin, which is considered to be one of the oldest centers of oil industry in the RF. Despite the difficulties experienced in the territory of Siberia, he prefers working on “Bazhenovka”. “Up-to-date technology is applied here,” adds Belenikin.
Russian companies put high hopes on the fact that most modern machinery from the West, which is used for hydraulic fracturing of beds, will make it possible to open rich reserves of oil that is most difficult to produce in Bazhenov formation. They address for help to the specialized servicing firms in oil sphere, such as Halliburton, Baker Hughes, and Schlumberger. “Expert knowledge and experience is truly given by these guys,” says Richard Anderson, Chief Financial Officer of such big specialized company Eurasia Drilling Co., “vast resources are needed for drilling a borehole by the method of hydraulic fracturing.”
At the same time, the price of November futures of oil blend Brent Crude Oil has dropped by 1.13 dollar – to 108.09 dollars per barrel. The cost of future of light oil WTI has dropped by 1.5 dollar - to 103.50 dollars per barrel, as informed by the Analytics Team of GKFX company (is a member of Masterforex-V Academy rating of Forex brokers ):
