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Russia sees new benefits to shale extraction

Oil firms are importing technologies that will lead to a shale oil boom in Russia to rival what happened in the US
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First Published: Wed, Nov 14 2012. 05 29 PM IST
Valve wheels and pipework at the Beregovaya compressor station, part of the Blue Stream gas pipeline, a joint venture between Gazprom and Eni, in Russia. The Russian government is expected to propose to Parliament a hefty tax break for companies producing offshore and from tight oil deposits. Photo: Andrey Rudakov/Bloomberg
Valve wheels and pipework at the Beregovaya compressor station, part of the Blue Stream gas pipeline, a joint venture between Gazprom and Eni, in Russia. The Russian government is expected to propose to Parliament a hefty tax break for companies producing offshore and from tight oil deposits. Photo: Andrey Rudakov/Bloomberg
Updated: Wed, Nov 14 2012. 07 01 PM IST
Tallinsky, Russia
For decades, a little-known Cold War technological race played out between the US and Russia—a race not into space, but deep underground.
The superpowers were searching for a means of extracting oil and natural gas from highly impermeable geological formations like shale rock, a potentially abundant source of petroleum, as the shale boom in the US today is showing.
The long struggle in the US to unlock so-called tight rock deposits is well documented. The Soviet effort is less so, though it included, as in the US, a secretive programme that led to the detonation of a nuclear device in a tight rock formation, an engineering approach that ultimately failed.
The industry eventually settled on hydraulic fracturing— the technique of pumping a gelatinous liquid made from the flour of guar into a well. Guar is a starchy grain that grows in India. Under high pressure, this pudding-like mixture opens up cracks to release the oil and natural gas trapped in the rock more efficiently than any bomb.
Russia, the world’s largest energy exporting nation, had set aside its efforts to extract oil and natural gas from tight rocks because it had other reservoirs that were easier to tap. But it is jumping back into the race to pump so-called unconventional oil deposits.
“They have a tremendous amount of oil in the ground that is very accessible,” said Tom Reed, the chief financial officer for RusPetro Plc., an independent oil company that specializes in one type of challenging oil deposit in Siberia that stumped a generation of Soviet geologists.
The trick this time is not competition, but imitation. Oil service companies are importing technologies like fracturing for what some energy analysts say will become a shale oil boom in Russia to rival what has happened in North America.
“By necessity, Americans have gotten really good at squeezing the last drop of oil out of rock,” said Reed, a Californian who got his start in business in Russia trading distressed debt in the 1990s.
The Russian government has until now viewed the spread of such technologies from the US largely negatively, because of their implications for the European natural gas market: Large shale gas deposits in Poland and Ukraine threaten exports from Moscow-based Gazprom OAO, one of the world’s largest natural gas companies. Shale oil, in contrast, could be a boon for Russia.
Several oil companies operating in Russia, including RusPetro, have begun profitably extracting oil from shale rock and other difficult geological formations in Siberia, holding out hope that the type of advanced drilling techniques used in recent years in North America can be widely adopted there, too.
In another sign of the buzz around shale oil in Russia, Exxon Mobil Corp. is in a joint venture agreement with Rosneft, the state oil company, to drill test wells into a Siberian shale oil field. Statoil and Shell, also through joint ventures, are drilling or planning test wells in Russian shale beds. Lukoil has a pilot shale project.
Later this year, the Russian government is expected to propose to Parliament a hefty tax break for companies producing offshore and from tight oil deposits. The biggest beneficiary will be Rosneft.
The tax break is intended to make shale oil production viable in Russia.
It is expected, for example, to allow Rosneft to reclassify tight oil reserves, including Siberian shale, as economically recoverable. The additions could add 5 billion barrels to Rosneft’s existing reserves of 23 billion barrels of oil.
Because of this anticipated revaluation of tight oil reserves in Russia, Bank of America Merrill Lynch has advised clients to buy Rosneft stock.
The US Geological Survey estimates the overall supply of Russian shale oil in West Siberia at 80 to 140 billion barrels. Even a portion of that would add significantly to Russia's current conventional reserves of 67 billion barrels of oil.
There is one important distinction between the industries in the two countries. Small independent oil companies led the unconventional oil boom in the US, reversing the decline in the US oil output that began in the 1970s as fields were tapped out—the stage Russia is entering today.
Companies like Anadarko Petroleum Corp., Apache Corp. and Chesapeake Energy Corp. experimented with sites that larger companies considered too costly to produce. Over the years, costs dropped.
In the US, a swarm of risk-taking, privately owned small enterprises produces about 50% of the oil output, with the majors accounting for the rest.
Russia’s independent sector is so small as to almost go unnoticed. RusPetro, which pumps an unusual oil deposit in western Siberia known as a channel sand, listed shares on the London Stock Exchange in January and pitched investors on the idea of attracting a North American-style independent company to Siberia. Other small operators in Russia include Urals Energy Public Co. Ltd, PetroNeft Resources Plc. and Irkutsk Oil Co.
RusPetro stock has slumped along with the Russian market since the company’s initial public offering, but RusPetro’s oil output has grown steadily: it now pumps 6,100 barrels per day, up from little more than a thousand last year. Its proven reserves are 183 million barrels of oil; it has an operating loss today because of investment in new wells.
Above ground, the RusPetro field is a flat and featureless place of cedar and birch forests, looping streams of muddy, icy water and peat bogs. The Khanty, a native people, sometimes hunt there.
But below ground, the field, according to the company co-founder, Don Wolcott, an authority on Siberian geology and the former senior vice-president for Yukos Oil Co., resembles nothing so much as Texas.
The anvil-shaped licence area was the mouth of a Jurassic river 145 million to 220 million years ago. It left sandbars on its bank that became sandstone reservoirs. Wolcott first saw the seismic maps of the area at an auction in Moscow and decided to buy the site on the spot—later forming a company to do so—based on his knowledge of new technical possibilities in the industry from having worked channel sand reservoirs in Texas.
Tapping these tricky deposits is a business that does not seem suited to the blunderbuss approach of the state giants.
RusPetro is profitable when its geologists can successfully re-imagine the meandering contours of the old river, which flowed in lazy oxbows and broad reaches toward an ancient sea.
The goal is to hit the sandstone “lens” deposits of a curving former riverbank, with a well sunk from the featureless plain above. A well costs about $2 million (around Rs.11 crore).
“It’s like William Tell shooting an apple off his son’s head,” said Reed, the chief financial officer. “Because the margin between success and disaster is tiny, it works best if the one who is aiming has a personal stake in the outcome.”
Russian state companies have shown poor capital discipline. Gazprom’s capital outlays in 2011, for example, were about $42 billion, with the result of maintaining gas output at about the same level as the year before.
The RusPetro licence area also covers a part of the Bazhenov Shale, an oil-saturated layer underneath much of western Siberia, about 90 ft thick. This is also the target of Exxon’s pilot project with Rosneft. The Bazhenov is considered similar in its vast potential to the Bakken Shale in North Dakota, perhaps the most successful American oil shale patch. The Bazhenov, however, is far larger.
RusPetro is now in negotiations with DeGolyer and MacNaughton, a reservoir appraisal company, to add up its reserves. Those figures could tell the market that Siberian shale oil is now real.
If a nuclear approach had worked, the market might have made this discovery years ago. Russia tried creating cracks by detonating nuclear explosives in a tight rock formation in the northern portion of European Russia, called the Timan-Pechora Basin, according to a history of the Russian oil industry, Wheel of Fortune, by Thane Gustafson.
In total, the Soviet ministry of oil detonated 13 nuclear devices in oil fields under an experimental programme.
In the US, a government project called Plowshare, run partly out of what became known as the Lawrence Livermore National Laboratory, experimented with using nuclear blasts for civilian engineering purposes, and in 1967 it detonated a device underground in a shale rock natural gas reservoir at the Gasbuggy nuclear site in New Mexico, according to the department of energy.
The Soviet and American experiments with nuclear explosions in tight rock formations were failures, irradiating the fuel or vitrifying the rocks.
Today all that separates Siberia from sharing in a shale boom is government policy, Vyacheslav Bolshakov, the chief fracturing engineer at RusPetro, said in an interview.
The technological toolbox for producing oil from shale—horizontal drilling, hydraulic fracturing, computer seismic studies and other services and equipment—is available on the oil services market. But without tax changes, costs would exceed the return on oil produced.
“We have everything we need right here in Russia,” Bolshakov said, “except for profit.”
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First Published: Wed, Nov 14 2012. 05 29 PM IST
More Topics: Russia | shale | US | petroleum | oil |