Russian oil and gas companies are rushing to tap challenging new reserves in the Arctic and offshore in a bid to keep the country’s energy output churning at 2013’s record level.
Russia’s government has introduced tax incentives for oil firms to develop the country’s shale oil and gas deposits, which are the world’s largest according to some estimates.
The push to tap fresh deposits comes after decades of production in conventional oil fields in Russia’s traditional production base in Western Siberia.
Russia, the world’s biggest energy exporter in combined oil and gas, saw oil output hit a post-Soviet record of 10.5 million barrels a day in 2013, up 1.4 percent from 2012, according to statistics from the Russian Energy Ministry.
Yet the shale revolution in the United States is causing shockwaves throughout the energy world, including among top exporters like Russia and Saudi Arabia. New recovery techniques have unlocked vast quantities of energy in the U.S., raising output at a historic rate.
The increase in U.S. energy liquids output “has been nearly unparalleled in the history of world oil,” the New York-based energy consultancy PIRA said in a report. “Only Saudi Arabia in 1970-1974 raised its production faster.”
PIRA has predicted that the U.S. will gain a widening lead over both Russia and Saudi Arabia in terms of total oil output until 2020, and maintain its lead past 2030.
Flattening output levels at home and increased competition from the U.S. have put pressure on Russian officials to unlock new reserves.
Arctic Shelf Reserves
Part of the solution, from the Russian perspective, is attracting U.S. expertise.
Russian oil major Rosneft has teamed up with U.S. partner ExxonMobil to tap offshore fields in Russian seas. The two firms are scheduled to begin drilling the first wells in the far-northern Kara Sea and in the Black Sea together this year.
Russian state-owned gas giant Gazprom also began producing oil from its offshore Arctic Prirazlomnoye field in December. Located in the far northern Pechora sea, 60 kilometers from dry land, the project employs an ice-resistant, super-reinforced stationary platform weighing 506,000 tons. It is the first such stationary platform to ever be used on the Arctic Shelf.
“We have pioneered the Russian Arctic Shelf development,” Gazprom CEO Alexey Miller said.
Tapping more difficult reserves will require higher capital commitments, however.
Upstream spending by Russian and former-Soviet Union companies may rise by 11 percent in 2014 to about $60 billion, led by the oil-focused Russian majors Rosneft, Lukoil and Gazprom Neft, according to an industry report written by analysts at Barclays.
“While all eyes will be on Rosneft and Exxon’s Arctic program, we note that there is an expected backlog of over 90 offshore Russian Arctic wells to be drilling by 2020. As a result, we expect meaningful exploration to move forward in the Russian Arctic regardless of this summer’s results due to the strategic nature of the reserves for Russia,” the Barclays analysts wrote. “Investments associated with developing the Russian Arctic have been estimated to be up to $100 billion over the life of the projects.”
While the shale revolution started in the U.S., it may soon spread to Russia.
Russia has the largest shale oil reserves in the world at about 75 billion barrels of technically recoverable reserves, according to the U.S. Energy Information Administration.
So far much of the attention has been focused in the super-massive Bazhenov formation, which spreads across some 570 million acres in Western Siberia.
Exxon and Rosneft are working together in Bazhenov, too.
“We are not only looking at new geographical regions of operation but are also studying the potential of difficult-to-produce reserves in traditional oil-producing regions,” Rosneft CEO Igor Sechin said in a statement, referring to the company’s partnership with Exxon.
London-based oil major BP predicted in January that while the U.S. will continue to lead in shale oil production, shale development will advance significantly in both Russia and Latin America over the next two decades.
“While the government is eager to boost shale production, questions remain as to if the recent tax moves will be enough to boost activity as there are still concerns around infrastructure and equipment, expertise, and a lack of mid-sized independents,” Barclays said.
“However, considering the strategic importance of shale in Russia… we think further concessions will be made to entice additional investment,” the analysts wrote.