The shale revolution caused a breakthrough in oil trade across the globe, making the United States one of the world’s most important oil exporters. In Russia this term has a negative connotation, but even that sate will have to go through a transformation if it wants to be successful on the hydrocarbon extraction and trade market – Mariusz Marszałkowski, editor at BiznesAlert.pl, writes.
Barbaric shale
During the 2019 conference „Russia Calling!” Vladimir Putin said that extracting shale oil was barbaric. „In places where shale oil technology is used people are deprived of access to clean potable water. We, in Russia don’t need this kind of extraction, even though it could bring economic benefits, because we have enough oil deposits both onshore and offshore. The fact is that the technologies used for producing shale oil are barbaric and destroy the environment,” he announced.
However, considering the data on Russian oil deposits and the present as well as future extraction, his words only belie what Russian oil companies are already trying to do.
Unconventional deposits
In the Russian nomenclature unconventional sources (including shale) are called TrIZ -Трудноизвлекаемые запасы, i.e. deposits that are difficult to recover. There is no one basic definition of this term, one can only refer to the definition in one of the regulations of Russia’s natural resources ministry from 1998, according to which „the deposits that are difficult to recover are those resources whose economically beneficial extraction could be pursued only through the usage of methods and technologies, which require bigger financial outlay and operating costs in comparison to traditional methods.” This definition is very ambiguous and difficult to apply to today’s circumstances. However, Russian institutions responsible for preparing extraction strategies and forecasts, which use this ambiguous definition, are sounding the alarm bells. Already today about 70 percent of all defined oil reserves in Russia fall into the category of TrIZ. According to Russian research from the 90s, the difficult reserves include fields, which are characterized by oil that does not have regular characteristics, or deposits whose geological features make traditional extraction impossible, as well as oil in depleted oil fields and deposits that are located far away from existing infrastructure.
„Easy” oil is running out
According to Rosendra, a Russian agency for mineral resources, oil in the A + B + C1 categories in Russia amount to over 18 billion tons. Just to put this in context, in 2020 Russia extracted 512 million tons of oil. These reserves have been examined by, among others, observing the physical flow of the oil or continuous extraction. Now and again the results of the research on Russia’s oil deposits published by Rosendra are challenged. Either way, Russia’s oil deposits are huge. However, the problem is that about 12 bn tons (66 percent) belong to the TrIZ category. The deposits that are currently being exploited are depleted at 60 percent. The majority of the deposits are easy to explore, they have an uncomplicated geological structure and do not require big financial or technological investments.
In recent years Russia also failed at covering the drop in extraction through discovering new oil fields. In 2019, 59 new deposits were discovered, but they were qualified as „small” (between 1 and 10 m tons). In the first half of 2020, 11 new oil fields with a total of 30 m tons were discovered. A report for the entire year has not been published yet.
Despite the lack of new deposits, the total reserves of oil in Russia increased thanks to bigger investments in oil recovery technologies from deposits that were running out. This means, the actual oil reserves are growing, but so is the cost of production, while the quality is dropping. In the near future replacing fields may turn out to be increasingly more difficult due to declining funds for exploration. Since 2015 oil companies have been increasing their investments in exploration for new fields from RUB 251 bn (USD 3.4 bn) to RUB 314 bn (USD 4.3 bn) in 2019. In 2020, due to the dropping oil prices and the coronavirus pandemic the total investment outlays spent to that end dropped to RUB 250 mld, i.e. a level from before 2015.
According to Russia’s energy ministry, as of 2022 extraction from existing deposits will start dropping because of depletion. By 2035 oil extraction may go down to 310 million tons (6.4 barrels per day), which is over 40 percent less than the record-breaking 2019 when over 560 tons (11.5 barrels a day) were produced. The situation looks the worst in Western Siberia, where extraction may drop from over 330 m tons in 2019 to 180 m tons in 2035. This is especially important considering the fact that today Russia exports over 5 million barrels per day. The rest is used for domestic purposes.
Shale to the rescue
These problems could be solved by investing in extracting unconventional oil, i.e. the previously mentioned TrIZ’s. According to the U.S. Department of Energy, Russia ranks first in the world when it comes to unconventional oil deposits. These reserves are estimated at at least 30 billion tons, but may be as high as 150 billion.
The main deposits of Russia’s unconventional oil are located in Western Siberia, in the Bazhenov, Abalak, Vasyugan and Akchimov formations. It should be noted that describing shale oil as „difficult to extract” is incorrect, as the rock formations are only a part of difficult oil deposits. For instance, Gazprom Neft extracts oil from the so-called oil rim, which is unconventional. The oil rim is a „thin” layer of oil, which surrounds an underground deposit of natural gas. Its extraction is classified as difficult, because it requires custom technology and equipment.
The biggest unconventional source (and classified in the TrIZ category) in Russia is the Bazhenov formation. It is over 2 million square kilometers large. The oil-carrying rocks are at 2-3 km below the surface and are distributed in 20-30 meters long intervals. According to Gazprom Neft’s conservative calculations the formation contains at least 760 m tons of extractable oil. However, the total amount of oil tn that area is between 18 and 60 billion tons. The formation was discovered in 1959, but the plan to actually extract oil there was put together only in the 21st century. In 2012 Gazprom Neft together with Royal Dutch Shell started a joint venture to develop one of the deposits in the Bazhenov formation. The company was called Salym Petrolum Development and was supposed to have extracted unconventional oil near the town of Salym.
Another western company, which wanted to engage in developing unconventional formations in Russia was ExxonMobil. The company was planning joint projects with Rosneft. The company’s name was Trizneft and was supposed to search for and extract oil from the Bazhenov formation.
The end of cooperation, beginning of subsidiarity
These grand plans were thwarted by the consequences of Russia illegally annexing Crimea and starting a war in eastern Ukraine. In reaction to those events the EU and the US imposed sanctions on Russian entities, people and economic projects, including those in the energy sector. Since then western companies have not been allowed to cooperate with Russian entities on projects in the Arctic, or on developing unconventional oil deposits. Apart from not being able to cooperate, the West was also not allowed to deliver equipment and technology required to pursue any work in Russia.
Consequently, the cooperation on the Bazhenov formation ended as well. Since then the burden fell on Gazprom Neft, which has become a leader in implementing unconventional projects in Russia, also because it was forced to substitute its imports with domestic products. Gazprom Neft’s CEO stated that over 90 percent of the company’s import was replaced with products manufactured in Russia. However, detailed information on which items could not be replaced with domestic production is not available. According to the ministry of energy, half of western appliances used in the oil and gas sector have been by now replaced with Russian products. The replacement levels are the lowest in such key segments as seismic research, drilling equipment, steering systems and fracking equipment. The production capacity is insufficient and so is the technological ability of Russian manufacturers to produce drilling rigs and offshore exploration and production oil platforms.
Gazprom Neft claims that in 2022 the extraction of oil from the Bazhenov formation will become economically profitable, i.e. the price will drop to RUB 8.5 thousand per ton, which is about USD 16 per barrel. By 2025 the production is to reach at least a million tons a year. However, it is difficult to say how accurate these assurances are. According to media reports from 2015, profitable oil extraction from the Bazhenov formation was supposed to have happened already in 2017. The plan was to extract over a million tons of oil in 2020. That did not happen.
Today unconventional oil constitutes only 8 percent of Russia’s annual output, which is about 44 m tons. The government strategy says that in order to maintain the level of oil production from 2019, in 2025 the participation of TrIZ and offshore oil should go up to 25 percent.
Considering the current pace of replacing foreign equipment, the plan may not come through, which will not only impact Russia’s image, but most of all it will undermine its budget, which still heavily relies on profits from oil. Another problem is the fact that Russia failed to act when it still had the time to invest. Instead of investing in demanding, but promising unconventional oil deposits, the Kremlin preferred to wage a media war against American shale. Time is key here, as many analysts, including those in cahoots with oil companies, claim that we have already passed the so-called „peak oil” point, i.e. the peak in the world demand for oil. Every year, the coming of the energy transition and development of green technologies, including those related to e-mobility, bring us closer to a steady drop in demand for high emission fuels such as oil or coal. Therefore, it may turn out that in a decade or so, when Russians will end their investments in TrIZ’s, the oil price will be a lot lower than it is today, which is why the investment will never return. Time will tell.