By Jake Rudnitsky and Stephen Bierman
June 14 (Bloomberg) -- 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, having slipped behind Saudi Arabia last year as the
biggest crude producer, is looking to use Exxon’s technology in
a venture with the Kremlin-run oil company OAO Rosneft to wring
“tight oil” from the Bazhenov shale formation in west Siberia.
They plan pilot wells to locate deposits that Rosneft said may
hold 13.2 billion barrels of oil, a prospect needed for Russia
to keep supplying 16 percent of global exports another decade.
Putin’s hopes for Bazhenov to someday match the explosive
growth of North Dakota’s Bakken shale discovery that has cut U.S
imports hinge on him carrying out promised tax breaks by October
that drillers say are needed to make projects profitable. Tax
cuts however can reduce the state’s petroleum revenue that last
year accounted for about half its $350 billion in income.
“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 spur 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.
Fracking typically uses horizontal drilling while injecting
millions of gallons of water laced with chemicals and sand to
smash underground shale rock to unlock petroleum. It has driven
the U.S. oil boom in the last decade, leapfrogging the nation
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
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.”
No Environment Risk
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
multistage hydrofractures next year to tap tight oil at their
Siberian Salym Petroleum Development venture, Gazprom Neft
Deputy Chief Executive Vadim Yakovlev
told journalists at June 8
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
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.
Rosneft also plans an unconventional oil project with
Norway’s Statoil, which expanded into the Bakken last year
through the $4.5 billion acquisition of Brigham Exploration Co.
Statoil and Rosneft are studying tight oil prospects and high-
viscosity projects, which will also qualify for tax breaks.
Western Siberia includes many formations that hold hard-to-
recover oil in reservoirs with low permeability at depths of
from 8,000 feet to 10,500 feet, including the Bazhenov
formation, the Achimov formation and the Tyumen formation,
according to Rosneft.
“Today we are practically blind,” Grigory Vygon, director
of the SKOLKOVO business school Energy Center, which is planning
to present a study on unconventional oil next month. “Oil
companies have asked for tax breaks and will need them.”
For Related News and Information:
Rosneft news: ROSN RU CN
Exxon news: XOM US CN
Top Russia stories: TOP RUS
Top energy stories: ETOP
--Editor: Todd White, Will Kennedy
To contact the reporters on this story:
Jake Rudnitsky in Moscow at +7-495-771-7711 or
Stephen Bierman in Moscow at +7-495-771-7745 or
To contact the editor responsible for this story:
Will Kennedy at +44-20-7073-3603 or