Russian President Vladimir Putin is counting on Exxon Mobil Corp. to help drill oil fields in Siberia that may hold almost half the proved reserves of the U.S., extending the petroleum boom that underpins his power.
Russia, which slipped behind Saudi Arabia as the biggest crude producer, is looking to use Exxon’s hydraulic fracturing technology in a venture with Kremlin-run oil company OAO Rosneft. They want to wring “tight oil” from shale rock in west Siberia. The partners plan pilot wells in areas Rosneft said may hold 13.2 billion barrels of oil, a prospect Putin needs for Russia to keep supplying about 16 percent of global exports for another decade.
Putin plans tax incentives and joint ventures for Western partners so that Siberia’s Bazhenov shale formation can someday rival the explosive output of North Dakota’s Bakken shale that cut U.S. oil imports. He promised to unveil tax breaks by October that drillers say are needed to make Russian projects profitable, even as they cut into the state’s petroleum revenue that accounted for half of its $350 billion in income last year.
“If the government is serious about promoting tight oil production, it is within their grasp,” said Ronald Paul Smith, a Moscow-based oil and gas analyst at Citigroup Inc.
Smith said extraction taxes that were around $24 a barrel last quarter may need to be almost eliminated to stimulate output of what’s also called unconventional oil, squeezed from shale rock similar to the Bakken or Eagle Ford discoveries in South Texas.
Because the Bazhenov geology is proving more difficult than in much of the U.S., Rosneft is pursuing deals with Irving, Texas-based Exxon to use hydraulic fracturing, or fracking. They’ll target existing Siberian wells, some of which are 50 years old, that no longer produce much conventional oil.
The process typically injects millions of gallons of water laced with chemicals and sand underground to smash rock and unlock petroleum using vertical and horizontal drilling. It has driven the U.S. oil boom in the last decade leapfrogged it ahead of Russia as the world’s largest natural-gas producer.
Bazhenov’s geology is similar to North Dakota’s Bakken shale, where crude oil production has more than doubled in two years. As part of the alliance with Exxon, Moscow-based Rosneft in April said it acquired a 30 percent stake in a Texas tight oil project to gain experience with the technology.
“The in-place potential is enormous -- billions of barrels,” Exxon Chief Executive Officer Rex Tillerson said in an April 18 conference call. “The real issue is can we develop it in a cost effective way? -- same as the issue we have with tight oil and unconventional resources in North America.”
Exxon will be able to book reserves in a mature oil province without taking on the exploration or environment risk it faces in its offshore projects with Rosneft, which will require an initial $3.2 billion investment to explore in the Arctic Kara Sea and the Black Sea.
While Exxon and European rivals such as Statoil ASA have generated more media interest in their projects to develop virgin deposits in the Arctic by the 2020s, fracking Soviet-era Siberian wells may yield crude sooner.
Putin has pledged that Russian output, which in May was 10.34 million barrels a day, will remain stable until at least 2020, while conceding that tax revenue will fall as it gives incentives to stimulate production. The state has approached tax changes with caution. Oil and gas provided half of Russia’s income in 2011 and the Finance Ministry projects Urals crude needs to average $117 a barrel to balance the budget this year.
Rosneft and Exxon will have competition. Non-state Russian oil companies, including its second-largest producer OAO Lukoil and fourth-biggest OAO Surgutneftegas, also have resources in the billions of barrels in the Bazhenov formation.
“Lukoil is already using horizontal wells and multistage fracking to support its West Siberian production, and therefore may be the earliest, clearest beneficiary” of the tax breaks, Smith said. Lukoil subsidiary Ritek produces about 2,000 barrels a day from the Bazhenov formation in “experimental” projects, spokesman Vladimir Semakov said by phone.
Another competitor, Gazprom Neft, together with Royal Dutch Shell Plc plan to drill an extended reach horizontal well with multi-stage hydrofractures next year to tap tight oil at their Siberian Salym Petrolum Development venture, Gazprom Neft Deputy Chief Executive Vadim Yakovlev told journalists at June 8 press conference.
Shale in China
Russia’s government is wary about granting tax cuts to producing fields because it may be difficult for the Finance Ministry to monitor what qualifies for the lower tax. Offshore production is easier to identify and tax at a different rate.
Developing unconventional geologic formations around the world will become a “cash cow” for Exxon, Tillerson said at a March 8 meeting with analysts in New York.
In addition to the project with Rosneft, Exxon is exploring shale fields in China with China Petrochemical Corp. and has projects in Argentina’s Vaca Muerta formation.
Unconventional resources will eventually contribute as much as 40 percent of Russia’s total oil output, according to comments in April by Igor Sechin, who left the deputy prime minister job in May to become Rosneft CEO.
“This will be a giant leap forward of a scale comparable to development of oil production in western Siberia in the 1960s and 1970s,” Sechin said in New York during meetings with Exxon.
Russia accounted for almost 16 percent of the world’s exports, shipping 5.14 million barrels a day in December, according to the Joint Oil Data Initiative’s website.
Putin in early May called for discounts to the extraction tax for unconventional oil to increase Russian output of hard- to-reach crude from about 400,000 barrels a day to as much as 2 million barrels a day by 2020. The incentives center around a reduced crude extraction tax of anywhere from 50 percent to 100 percent, depending on the project’s difficulty. He ordered the government to draft a proposal by Oct. 1.
The mineral extraction tax for crude is based on the price of Urals, Russia’s benchmark export blend, and averaged 5,284 rubles a ton, or $23.77 a barrel, in the first quarter, according to Rosneft.
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