Russia looks to unconventional oil as oilfields age
The Bazhenov formation in West Siberia could be the world's largest oil reservoir. Will it deliver?
Russia, the world's biggest oil producer, needs a Bakken-style production bonanza of its own. West Siberia's conventional oilfields, the bedrock of decades of supply, are ageing. Output of around 11 million barrels a day (b/d) has already defied forecasts, but analysts expect it to ebb steadily away from this high-water mark in the next few years. Soon, the country will hand its position at the top of global crude supply to the US.
Unconventional oil, believes the Kremlin, could solve the problem, helping the country's energy industry meet a government target to keep output at present levels until 2030. And Russia has lots of unconventional oil. The US' Energy Information Administration (EIA) says the country holds the biggest endowment of shale oil in the world.
Light tight oil abounds in the Achimov and Tyumen reservoirs. But the Bazhenov, an organic-rich siliceous shale that rests between them at a depth of 2,700-3,100 metres in the Upper Jurassic strata, is the giant of them all. The play stretches across 4.1m square km of the central West Siberian basin. And it holds 75 billion barrels of recoverable oil, says the EIA. Wood Mackenzie, an energy consultancy, reckons the Bazhenov's oil-in-place figure is a staggering 1 trillion barrels.
Russia's government, which relies on oil-and-gas revenue to feed its budget, wants to see this tight oil start flowing quickly. While Gazprom, the state-controlled gas company, and many officials remain sceptical about shale gas - preferring to develop the country's bounteous conventional deposits - shale oil is another story. Gazprom's oil unit, GazpromNeft, is one of several large Russian firms hoping to exploit the Bazhenov. Vladimir Putin, the country's president, reckons unconventional oil could account for up to 2m b/d of oil after 2020, replacing lost output elsewhere. (Russia's energy ministry has a more modest target, of 1m b/d by 2025.)
But unlocking the Bazhenov's trapped oil will take some doing and, as in the Bakken, technology will be critical. Russian rigs, veterans of decades drilling and pumping conventional oil, are not suited to the kinds of horizontal wells and multi-stage fracturing (fracking) that will produce Bazhenov's oil. Explorers have drilled a number of short horizontal wells and experimented with some light fracturing, but there have been few long horizontal wells drilled and little multi-stage fracturing, says Duncan Milligan, a Russia analyst at Wood Mackenzie. So while a typical well in the Bakken might stretch 3,000 metres horizontally and involve 30 fracking stages, in Russia the distances have been a fraction of that, with just four or five fracks. Bringing these methods to the Bazhenov will be crucial, because its geology can differ enormously within a relatively small area. Two wells drilled a short distance apart offer up radically different profiles for development, says Milligan, and 80% of the play's production will likely come from just 20% of the wells. Depletion rates, as with all tight oil wells, will be high, too.
So a lot of wells will have to be drilled. That should prove a boon for services companies, because Russia will need a new workforce tooled up to frack and operate long horizontal wells - and a massive fleet of rigs to carry it out. James Henderson, of the Oxford Institute for Energy Studies, reckons that if Russia is to reach 1m b/d of output, the Bazhenov will probably need 1,800 wells in the 10th year of the development phase. This would require 275 new rigs to drill and maintain the wells, or a tripling of Russia's heavy-rig fleet. It will be costly. Henderson calculates that the outlay will come in at $1.5bn a year, or $15bn over the 10-year development phase.
Good in theory
With the need for such heavy spending in mind, Russia's government last year announced some tax relief designed to spur investment in unconventional production. A new sliding scale will govern the mineral extraction tax (MET), depending on whether the oil is, in the words of the tax regime, "hard-to-recover". For much prospective tight oil in Bazhenov, this effectively means output will be free of any levy. This sounds good in theory. But, notes Henderson, it may not be enough to bring the kind of investment the play needs - not least because lower taxes on production will not encourage investment by the services companies that are also needed.
There are some conceptual issues with the amended MET, too. Bazhenov is the source rock for most of West Siberia's 6.5m b/d of conventional production. So its oil will be chemically indistinguishable from conventional, cheaper-to-extract output. Figuring out which barrels will be exempt from the MET is a conundrum. Designating conventional oil to be hard-to-recover oil could be a tempting ruse for less honest firms. One proposal is to put testing equipment in each well. Inevitably, that would add to the production costs.
There's also the problem of Russia's onerous oil-export duty. It can leave producers earning just $40/b or so for their oil, despite triple-digit prices for Urals on the international market. Yet Henderson says a typical deep Bazhenov well could cost $8m-$10m. Wood Mackenzie calculates that production costs in the Bazhenov - capital and operating costs - will come in at $45/b. That corresponds roughly with other unconventional plays around the world, including the Bakken. But when the export tax is factored in, a Bazhenov barrel will barely break even.
Fixing the export tax to everyone's liking, though, will be difficult. Russia's finances depend on oil-export revenue, so the government will be loth to hand too much cash back to producers. But to protect its export market share, the Kremlin also needs the companies to bring the tight oil on stream. For now, there is little resolution in sight.
The bigger question mark hanging over the Bazhenov is whether Russia's oil industry has the right kind of developers to do the job. The Bakken's rise was a result of independent firms like Continental Resources and Hess seeking marginal gains - and quickly hiring the fleet-of-foot services firms that would drill the wells they needed. Small, incremental flows and the high risks of the play deterred the majors.
So far, though, the Bazhenov has predominately attracted only the biggest players. ExxonMobil and Rosneft are preparing to drill as part of a broader strategic partnership that also includes developments in the Arctic. TNK-BP, before Rosneft bought it, was also hunting Russian tight oil. Shell and GazpromNeft have a joint venture, Salym Petroleum Development, in the play. Surgutneftegaz and Lukoil are also exploring. Some of them are already fracking, as well as trying methods such as thermal treatment to open up the oil.
Not everyone thinks those companies, which are accustomed to big projects with long lead times and decades-long production, are right for the Bazhenov. Tom Reed, head of Ruspetro, a UK-based independent, told Petroleum Economist the play needs the kind of independents that fracked open the Bakken. "In the Bazhenov there has only been experimental-style drilling by the research and development departments of the big oil companies," he said. "In North America, these were not the guys who figured out shale oil. It was not Exxon(Mobil) and Shell that unlocked it and there's no reason to think it will be any different in Russia." Ruspetro, with a 300,000 acre position in West Siberia, is one of the few small players exploring the Bazhenov.
Reed thinks 'the independent trial-and-error kind of approach' is what will figure out the play. "At the moment there are tens of experiments going on when there could be hundreds."
A good dose of American entrepreneurialism would certainly help speed things along. But a free-for-all of private capital was never going to happen in Putin's Russian oil sector. Since 2008, foreign companies can only hold up to 49% of developments in fields with more than 70m tonnes. Smaller, tight oil focused firms could fly beneath the radar, pursuing individual projects for incremental gains. But it's another grey area, in which only the bravest private firms will feel comfortable. The Russian government prefers to deal with large international oil companies. Joint ventures between them and the Russian national oil firms, or those with the Kremlin's ear, are more likely.
And if ever there was a play made for the big firms, the Bazhenov is it. Development will require large project management and deep pockets. Smaller companies could have success on their blocks, says Wood Mackenzie's Milligan, "but unlocking the oil across the whole of the Bazhenov requires the majors". They should also be able to offer economies of scale, too, helping to drive down the cost of production.
The next few years will show whether that approach bears fruit. By 2015, Rosneft and ExxonMobil's pilot projects on 10,000 square km in the Bazhenov will be complete. By 2020, claims Rosneft, production will reach 300,000 b/d (TNK-BP, which Rosneft owns, has said it could bring on 50,000 b/d by the same date). GazpromNeft plans to start producing in 2015 and thinks about 35,000 b/d will be its eventual plateau.
Those numbers are speculative, but if the tax regime and services fall into place in the next few years and the drillers land some sweet spots, the Bazhenov could live up to its promise. Despite the new technology that will be needed, the play isn't starting from scratch. Thanks to decades of development of shallower, conventional fields in West Siberia, the surface infrastructure to process and pipe the oil is in place. With the will of the Kremlin behind them, Russia's big firms should soon be in the unconventional oil game.