Shale Delayed By LNG And Arctic

BMI View: Limited progression on Russian shale oil projects highlights their unattractiveness next to Arctic and LNG developments. Despite vast potential resources, IOC interest and improved incentives, we expect slow progress on shale oil development and a greater focus to be put on Arctic exploration and LNG.

Doubts are emerging over the profitability of developing Russia's unconventional oil assets, with unfavourable policy a key restraint. Despite a number of major co-operation agreements, Arctic shelf exploration and liquefied natural gas (LNG) projects are taking precedence.

Russia is potentially sitting on the largest reserves of shale oil in the world, with the Bazhenov shale estimated to contain 74.6bn barrels of recoverable oil resources, according to an EIA study. In addition, the Russian government expect other potential shale plays in Western Siberia, including Domanik, Tyumen and Achimov, to offer considerable production opportunities in the next 20 years.

Peaking In 2016
Russia Oil Production

Shale Delayed By LNG And Arctic

BMI View: Limited progression on Russian shale oil projects highlights their unattractiveness next to Arctic and LNG developments. Despite vast potential resources, IOC interest and improved incentives, we expect slow progress on shale oil development and a greater focus to be put on Arctic exploration and LNG.

Doubts are emerging over the profitability of developing Russia's unconventional oil assets, with unfavourable policy a key restraint. Despite a number of major co-operation agreements, Arctic shelf exploration and liquefied natural gas (LNG) projects are taking precedence.

Russia is potentially sitting on the largest reserves of shale oil in the world, with the Bazhenov shale estimated to contain 74.6bn barrels of recoverable oil resources, according to an EIA study. In addition, the Russian government expect other potential shale plays in Western Siberia, including Domanik, Tyumen and Achimov, to offer considerable production opportunities in the next 20 years.

Insufficient Incentives

The untapped oil potential has been recognised by the Russian government and in September 2013 it brought in new tax breaks to incentivise the development of more technically challenging resources, including shale and the Arctic offshore. The Mineral Extraction Tax (MET) rate for projects on the Bazhenov shale was set at zero percent. However, according to calculations from Grigory Vygon, head of the SKOLKOVO business school Energy Centre, even with the tax incentives in place, production costs at Bazhenov projects would be more than double that of conventional oil projects. With exploration of the Bazhenov still at a very early stage there could be limited interest to investing heavily into the play while other more profitable opportunities are available.

Russian Upstream Remains Restricted

The Russian government also facilitated the entrance of major international technology leaders in order to support the domestic state-run companies with technical assistance. This saw ExxonMobil, Shell and Statoil all set up joint ventures stipulating co-operation in the areas of shale development.

Major Shale Joint Venture Deals
Russian Company JV Partner Areas Of Exploration
Rosneft ExxonMobil Western Siberian Shale
Rosneft Statoil Dominak Shale, Samara
Gazprom Shell Liquids Rich Shale - Khanty Maniysk
Source: Company Announcements

While this will bring greater technological knowhow to the country, Russia's upstream remains heavily state-influenced and closed to many other companies that could help it prosper. The US unconventional industry was not successful due to the involvement of supermajors, but because of the intense competition between smaller companies able to specialise in individual shale plays, maximising efficiencies. Shell recently sold its acreage in the Eagle Ford to local firm Sanchez Energy after failing to make a profit and causing the writing down of USD2.1bn in assets.

ExxonMobil and Shell also agreed wider reaching deals with Gazprom and Rosneft, including Arctic shelf exploration and LNG projects, and it appears that these areas will be prioritised. Both Rosneft and Gazprom have been more urgently looking to progress their latest LNG projects in Sakhalin and Vladivostok since Gazprom's monopoly on LNG exports was removed on December 1 2013. On June 5 2014, Rosneft also announced it is looking to move forward its plans with ExxonMobil to drill in the Kara Sea, highlighting its intent to aggressively move forward with Arctic exploration. The Kara Sea is thought to be particularly prospective for oil.

There has been no news from any of the companies on the status of co-operation on shale developments other than reaffirming commitment to the projects at the St. Petersburg International Economic Forum in May. This further highlights the priorities the companies are taking and that the higher rewards are expected to be from Arctic exploration and LNG, rather than shale oil.

More Oil Needed

We currently forecast Russian oil production to peak in 2016, though also expect production to remain above 10mn barrels per day (b/d) through to 2023. Russia is putting significant dependence on its Arctic exploration efforts in order to buoy oil production over the longer term. Gazprom's first offshore Arctic oil venture at Prirazlomnoye entered production two years behind schedule and after only operating for two months has announced a tender for a modernisation programme.

Peaking In 2016
Russia Oil Production

As Russia continues to struggle with more technically challenging projects, and increasingly supports production from maturing fields with greater condensate volumes, the need for new oil projects becomes more critical. As oil and gas developments become more technically challenging, we do not expect Russian majors to have sufficient capacity to take advantage of all the opportunities in the country. Russia could therefore face challenges with sustaining oil production above its 10mn b/d target post 2023.

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