BMI View : Gazprom ' s embrace of shale oil but not gas is a curious move , given the gas behemoth ' s dominance in gas production. Its dismissal of shale gas also seems to defy President Vladimir Putin's orders that the country take the shale gas revolution more seriously. However, it is a strategy that helps Gazprom diversify its portfolio away from an increasingly troubled gas market in favour of a less contentious and profitable oil one.
Gazprom Neft , the oil division of Gazprom , will launch a shale oil project in West Siberia. It will target the Bazhenov shale formation together with Anglo-Dutch major Royal Dutch Shell , in a 50-50 joint venture (JV) known as Salym Petroleum Development (SPD). SPD will explore the Upper Salym oilfield.
It is an interesting turn of events for the gas behemoth, whose CEO Alexi Miller had dismissed shale gas exploration and production (E&P) as 'irrelevant ' for the country. In contrast, Miller said on October 30 2012 that ' tight oil production is of considerable interest for Gazprom Group ' , as quoted in Russian news agency RIA Novosti. It pits the majority state-owned group at odds with President Vladimir Putin, who warned that shale gas production in North America could put Gazprom's gas exports at risk in a meeting of a commission for the fuel and energy sector in the same week.
Finding A Bakken At Bazhenov
The hydrocarbon s potential of the Bazhenov shale formation makes Gazprom's interest in it unsurprising. The Bazhenov play in the basin has been compared to the US' Bakken shale formation, and Bernstein Research estimates that its size is the equivalent of Texas and the Gulf of Mexico combined. In July 2012, oil production from Bakken hit 609,580 barrels per day (b/d). If Bazhenov replicates this success, it could add almost 6% to Russia's 2011 oil output and help the country sustain current production levels of about 10.3mn b/d.
At present, reserves depletion and the lack of investment , leading us to forecast that Russian oil output would stop recording post-Soviet highs and begin to fall from 2018 , reaching 10.2mn b/d by 2020. Exploration results from the Bazhenov formation by SPD and other players involved pose an upside risk to our oil reserves and production forecasts.
|Russian Oil Production ('000b/d) & Proven Reserves (mn bbl), 2011-2021|
Going Against The Czar
What is surpris ing is the priority that the gas behemoth has given to shale oil than to gas . Gazprom's gas strategy continues to be a relatively conservative one, choosing to focus on conventional gas production in Russia than on jumping in on the unconventional bandwagon ignited by the shale gas revolution in the US. The biggest gas investment it has announced in 2012 is a US$38bn development of the eastern Chayanda gas field and an associated pipeline ( see our online service, October 31 2012, 'Chayanda FID Creates Momentum For Eastern Gas Programme' ) - another conventional project.
This dismissal of shale gas is in line with Gazprom's belief that gas markets remain regional, and thus its core market , Europe , will fend off abundant and cheap North American gas supplies for a while. To tackle the Asian market, it is relying on liquefied natural gas (LNG) developments in its Far East to handle the American gas export threat ( see 'Rosy Future Rests Upon Political Verdict', October 11 ).
However, this is a view that is increasingly at odds with that of Russian political strongman President Putin, who believes that the shale revolution is 'real'. He has called on the Energy Ministry to 'present an adjusted general development scheme for the gas industry until 2030' - a clear expression of his lack of confidence in the current programme's ability to sustain Russian gas export dominance. Gazprom was specifically named to 'report on the key principles of its export policy', one which had been heavily reliant delivering West Siberian gas to European markets via pipeline exports.
The nonchalance towards shale gas that Gazprom continues to display , despite Putin's overt displeasure , is therefore striking. It is another sign of the state-owned giant's growing independence from the Russian government, after openly challenging the latter's unfavourable tax policies. The attention it has given to oil production - traditionally a domain of another state-owned firm Rosneft - also suggests that it believes it does not just need to diversify its markets, but also its portfolio of products.
Oiling The Gazprom Machine
The move into oil appears to be a better short- to medium-term strategy. Gazprom's profits from gas are squeezed and will continue to be as long as its traditional market, Europe, maintains pressure for it to adjust gas prices downwards ( see our upcoming Global Company Strategy on Gazprom). Whereas arguments for lower gas prices are supported by low Henry Hub prices in the US, oil prices have been less disputed. The more global nature of the oil market has made high oil pricing less prone to accusations of geographical arbitrage than gas prices have.
While we forecast that oil prices will fall in 2013 ( see 'Watching Politics For 2013 Direction', November 1), the price of Brent crude will still remain at historical highs, above US$100 per barrel.
|Elevated Prices Boosts Oil Project Economics|
|Price Per Barrel For Brent & Urals, 2000-2014 (US$)|
The less contentious nature of oil pricing means that it could be easier for Gazprom to profit from expensive oil E&P projects than gas ones.
In the next decade, while we expect that clean energy policies will see weaker growth in oil demand, the oil market will still be a strong one. The move into oil could help support Gazprom's profits while decreasing its reliance on gas. It would cushion some of the fallout Gazprom would most likely face from a slow European gas market while large potential Asian markets such as China continue to be wary of its high-priced gas supplies.
|Supply Tightness Brings Oil Riches|
|Global Oil Production & Consumption, 2000-2021 ('000b/d)|