Exxon Fracking Siberia to Help Putin Maintain Oil Clout
Russian President Vladimir Putin is counting on Exxon Mobil Corp. (XOM) 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.
Tough Geology
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.
Tillerson's Outlook
"The in-place potential is enormous -- billions of barrels," Exxon Chief Executive Officer Rex Tillerson said in 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."
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.
Lukoil Competition
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 Petrolum Development venture, Gazprom Neft Deputy Chief Executive Vadim Yakovlev told journalists at June 8 press conference.
Shale in China
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.
Russian Exports
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's website.
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.
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