Bazhenov Shale Formation

Brian Hicks

Written By Brian Hicks

Posted April 8, 2013

The Bazhenov shale formation is undoubtedly the world’s single biggest shale oil reserve. Estimates seem to be making it bigger and bigger by the day.

Now, Russia is looking to the Bazhenov to do for Russia what the Bakken shale did for the U.S.: big boom!

Thanks to the U.S. breaking ground in the exploitation of its unconventional resources, countries like Russia—with its massive deposit of shale and its once-shaky outlook on future production—are beginning to feel confident again knowing they might not lose their places in the oil hierarchy. Russia remains number two in production behind Saudi Arabia.

Hydraulic fracturing and horizontal drilling have revolutionized the oil industry by allowing the drilling, exploitation, and production of oil and gas that was thought to be impossible to reach—even just ten years ago.

But my, how things have changed.

The Bazhenov is so big that the scale of its enormity and potential is still a mystery, but Russian producers have reported that 551.16 million tons, or 3.5 billion barrels, of recoverable crude can be found, according to Reuters.

Drill PadTen years from now, the Bazhenov could yield between 1-2 million barrels per day; some estimates say it contains one trillion barrels in all—four times that of Saudi Arabia.

But bigger doesn’t always mean better, right? It may be five times the size of the U.S. Bakken, but the Bazhenov Goliath might also have a few Achilles heels to contend with.

The tax system is the one major question mark; with the cost of Bazhenov crude up around $40 a barrel, the state collects 90 percent of the revenue on each barrel, according to Reuters, essentially forcing producers to squeeze every last drop out of its cheaper conventional reserves instead of looking to develop the richer shale oil.

But now it seems that President Vladamir Putin is ready to unleash the dogs in an attempt to offset declining production by its mature fields, some of which have been pumping oil since the 70s. In general, the Russian economy is struggling and could use a boost of confidence.

Once the government does loosen its reigns, there are concerns about the positioning of the oil, much of which is said to be located beneath existing fields in impenetrable black clay. And there are those who state that Russia’s real problems lie with the hands of power—the state—and its lack of efficiency.

Regardless, the underlying issue is that Russian companies simply don’t have the technology to deploy the hydraulic fracturing and horizontal drilling operations that are needed to carry out large scale projects. This, again, circles back to the taxation issue—a possible reason that tax breaks are forthcoming.

The U.S. rejoices any news that Russia may soon be exploring its shale reserves, as more oil will keep the market price down and further reduce domestic dependency on the Middle East, and subsequently keep political ties in order.

Russian state oil company Rosneft Oil Co. (OTC: RNFTF), which recently became the biggest oil company in the world, is working with ExxonMobil (NYSE: XOM) to explore the Bazhenov.

Despite outdated Soviet legislation, which has caused problems for tight-oil drilling ventures in Russia, some operations are getting off the ground. Companies like Statoil ASA (NYSE: STO) have signed deals with Rosneft, and Royal Dutch Shell (NYSE: RDS.A) and Russia’s Gazprom Neft (PINK: GZPFY) have teamed up.

Lukoil is in the area as well, and the company is working on an innovative technique to extract hard-to-reach oil that involves blowing air down a well and igniting it. Simply, the heat allows it to flow through the well more easily for extraction, the Financial Times reports

Russia presently spouts out more conventional oil than Saudi Arabia, but its output is declining steadily—about 2 percent a year in some places. In exploring unconventional reserves, the main focus right now is to maintain production.

Still, many believe Russia will not see a boom like the one in the Bakken in the foreseeable future.


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