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Don't hold your breath for Russian shale

The Bazhenov deposit holds a lot of oil, but a repeat of the American shale bonanza is by no means imminent

Russia's renewed efforts to stimulate a shale energy revolution have been dismissed by some as a "science project", despite the involvement of Gazprom, the state-controlled behemoth.

Gazprom Neft, the company's oil division, unveiled an ambitious drilling programme in late June, after announcing it is ready to move into the next phase of development of unconventional oil reserves in the Bazhenov play in Western Siberia, which is located below conventional sand-stone reservoirs. The company's target is to produce 73m barrels a year (200,000 barrels a day) of light oil from Bazhenov by the end of 2025.

But some analysts are less than impressed. They say Gazprom Neft's efforts have been limited to date and that results have been erratic, depending on where wells have been drilled.

"Unconventional sources of supply are merely a science project for now," says Ilkin Karimli, an energy analyst at Credit Suisse. "When it comes to developing Russia's shale potential, the so-called Bazhenov layer, there is still limited capital committed to it. More production history is needed to better understand the geology. Moreover, companies do not have access to the necessary technologies and, perhaps more importantly, they lack management expertise as well."

The Bazhenov formation shale oil layer is 10-100 metres thick, covering around 1m square kms of Western Siberia at a depth of roughly 2,000-3,000 metres. According to Gazprom Neft, shale oil reservoirs within the formation could amount to as much as 170bn tonnes (1.2 trillion barrels). The US Energy Information Administration estimated in 2013 that around 75bn barrels of oil might be recoverable with current technology.

73m b/y - Bazhenov shale target by 2025

But the plans of Gazprom Neft and other domestic players have been stymied by Western sanctions, which prohibit US and European companies from providing technology or services to Russian shale oil projects. When the sanctions were introduced in mid-2014, in response to Russia's annexation of Crimea in the Ukraine, several joint ventures planning to develop Russian shale were put on ice, including those between Gazprom Neft and Shell, Lukoil and Total, and Rosneft and ExxonMobil.

Russia has much of the required technology for enhanced oil recovery and for brownfield developments. Most of the biggest producers now drill horizontal wells with multi-stage fracks and there is no supply constraint. But Credit Suisse says sanctions on the sector are inhibiting development of deep-water and shale projects, like Bazhenov.

Western oilfield companies, such as Halliburton and Schlumberger, are reluctant to touch Bazhenov for fear of being sanctioned. That may change after Schlumberger agreed in July to buy a 51% stake in Russian peer Eurasia Drilling Company (EDC). The deal marks Schlumberger's second attempt to buy into EDC and the first US stake in Russia's oil and gas sector since sanctions. It may change things in the shale sector—but that's a long way off.

Going it alone

For now, Gazprom Neft is opting to go it alone and has completed a horizontal well in Bazhenov using home-grown equipment and contractors. The company even has a science and technology centre in St Petersburg, which is dedicated to improving drilling efficiency and starting production at Bazhenov.

Gazprom Neft is providing all the financing, but is partnering with an array of domestic experts, including those from the Moscow Institute of Physics and Technology, the Skolkovo Institute of Science and Technology, the Moscow State University and the Gubkin Russian State University of Oil and Gas.

The company said samples have been extracted from depths of up to 3,000 metres from 15 wells located throughout seven fields in the Khanty-Mansiysk and Yamal Nenets regions of Western Siberia. This material was then subjected to more than 2,000 laboratory investigations and experiments, resulting in nine patents and software licenses being obtained.

But analysts say Bazhenov output is likely to remain modest for the foreseeable future. "Gazprom Neft's multifaceted approach to enhanced recovery from depleted and tight conventional reservoirs has been successful, but large-scale production from unconventional deposits remains a long-term prospect," says Alexei Kokin, senior energy analyst at UralSib Capital.

To make Bazhenov work, Gazprom Neft is also banking on tax concessions and partial financing from the government, which have yet to be forthcoming—and may not appear in the near future either.

If you scratch beneath the surface, it doesn't seem as if the Kremlin is really that keen on advancing the cause of shale energy. Russia may fear that successful shale gas production at home might encourage the sector globally, which could provide unwanted competition for Russia's copious conventional gas supply.

In 2015, Igor Sechin, head of state-controlled Rosneft, warned delegates at an international conference in London that North America's shale oil revolution could crash, becoming the next "dotcom bubble". Investigations by the New York Times and the Guardian have reported that Russia is helping to fund anti-fracking movements in the Baltics, Romania, Poland and Ukraine.

Alexander Medvedev, deputy chief executive of gas monopoly Gazprom, has warned Europeans that they will never be able to replicate US success in extracting vast amounts of gas through fracking because of Europe's diverse geology and population density.

President Vladimir Putin has also said he is opposed to fracking on environmental grounds. In 2013, Putin remarked that fracking "poses a huge environmental problem". Places that have allowed it, he said, "no longer have water coming out of their taps but a blackish slime".

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