12-29-17 5:44 AM EST | Email Article
By James Marson 

KRASNOLENINSKOYE OIL FIELD, Russia -- This western Siberian oil field is called "Red Lenin," but its reserves have a distinctly American ring: shale.

The future of the Russian oil industry could lie in the vast Bazhenov shale formation, the largest in the world. Russia has become the biggest global producer of crude oil with almost no contribution from shale, a sometimes technically difficult and expensive resource to pump.

Only Americans have really gotten shale right so far, but the Kremlin is taking the first steps to unlock Russia's potential.

Companies like PAO Gazprom Neft are leading Moscow's drive to replicate the U.S. shale boom, experimenting with a uniquely Russian, state-controlled approach to fracking that contrasts with the free-for-all among independent producers in Texas and North Dakota.

"The Bazhenov is a huge prize," says Alexei Vashkevich, Gazprom Neft's exploration director.

The Kremlin is offering tax breaks for shale production and encouraging collaboration among companies and other players such as research institutes, hoping that fracking can help stave off a reckoning for its oil industry.

Mr. Vashkevich, who worked on the Bakken Shale formation in North Dakota for Hess Corp., said Russian shale will develop in a fundamentally different way from U.S. counterparts.

Russia's giant oil companies aren't renowned for the kind of risk-taking, innovation and speed at the heart of shale producers' success in the U.S.

"Here, 90% are big players with a culture of secrecy. Historically, we are slower," Mr. Vashkevich said. Other challenges include an underdeveloped services sector and extreme weather.

No significant shale production is expected before the mid-2020s. With the Bazhenov's complex and varied geology and other risks companies face here, executives and analysts are wary of making output forecasts.

"I don't think anyone is going to be jumping up and down in 2020 and saying [shale] is the savior of the Russian oil industry," said James Henderson, director of the natural-gas program at the Oxford Institute of Energy Studies, an independent research organization.

But the size of the Bazhenov -- which holds almost as much oil as all the known U.S. shale plays, according to the U.S. Energy Information Administration -- offers a chance for Russia to maintain its prized position as the world's top producer of crude in coming decades.

Developing shale is important to the ambitions of Russian President Vladimir Putin, whose government depends on oil and gas for around one-third of federal budget revenues. In Mr. Putin's 17 years as Russia's leader, crude has fueled spending that has underpinned his popularity at home and efforts to spread influence abroad.

Russia's main Soviet-era fields are declining, and the country will need new sources by the middle of the next decade if it wants to maintain its production, oil executives and industry analysts say.

U.S. and European sanctions over Ukraine have hurt Russian companies' ability to get the technology needed for hydraulic fracturing and horizontal drilling, the techniques used to blast oil out of shale formations. But sanctions aside, few countries besides the U.S. and Canada have had real success with fracking, an often high-cost technique that rewards entrepreneurial risk taking and benefits from a looser regulatory regime. Efforts have sputtered in China, Poland and Romania, while fracking isn't allowed in Germany and France over public concerns over the technique's impact on the environment, particularly drinking water.

Until recently, Russian oil officials had focused on new conventional projects and old Soviet fields, where they boosted production by making scores of small gains. The result was that Russia surpassed Saudi Arabia as the world's biggest producer of crude oil, pumping a post-Soviet record of over 11 million barrels a day in 2016. Improving output at conventional oil fields will remain an important piece of staving off decline in Russian production.

Gazprom Neft, Russia's fourth-largest oil producer, is seen as a leader in Moscow's drive to replicate the U.S. shale boom.

Gazprom Neft has revamped its approach to shale. Previously focused on a partnership with Royal Dutch Shell PLC, it is now moving ahead with new technologies to squeeze out oil from the Bazhenov and, hopefully, begin real production at the start of the next decade.

The company is working with technical universities and service providers on a methodical strategy. Mr. Vashkevich says it has drilled 18 wells of some 120 that he says it will need to find the sweet spot for the production rate and technology costs.

At a well pad on the Red Lenin field, reached by roads that turn to sludge in fall rains and freeze over in winter, a couple of engineers check progress at a site surrounded by seemingly endless forests. Much of the work is done at a gleaming drilling hub in the center of St. Petersburg, where the company's top minds monitor drilling.

Russian oil companies have an advantage that U.S. firms didn't have: The Bazhenov formation lies underneath existing oil fields, meaning much of the infrastructure to develop it is already in place.

Early results are promising, executives say: Gazprom Neft says it has achieved about half the daily production at wells that it needs for commercial production.

Still, even the company doesn't expect a production boom. It forecasts that shale oil from the Bazhenov could make up 2.5% of its total oil-and- gas production in 2025.

"It will take a little longer, but we'll get there nonetheless," Mr. Vashkevich said.

 

(END) Dow Jones Newswires

December 29, 2017 05:44 ET (10:44 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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