Russia joins global dash for shale in policy volte-face
Officials at the Kremlin are no longer dismissing shale's promise as a mirage
By Ambrose Evans-Pritchard, in St Petersburg
7:00AM BST 26 May 2014
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Russia can deploy modern 3-D seismic imaging and computer technology, but lacks the service industry and the fast-moving wildcat culture that lies behind America's success, as well as a tax system fit for purpose
Russia is launching a strategic drive to unlock its shale oil wealth as crude output stagnates and reserves run low in the West Siberian fields, aiming to replicate America's technology leap in a near total reversal of policy.
The Kremlin has launched an "action plan" to master fracking methods and lure investors into the Bazhenov prospective, a shale basin the size of France to the east of the Urals. Officials are no longer dismissing shale's promise as a mirage. "We are clearing away the administrative barriers to exploration. This is the urgent challenge we are now facing," said Kirill Molodtsov, the deputy energy minister.
The US Energy Department estimates that Russia has 75bn barrels of recoverable shale oil resources, the world's largest deposits. The Bazhenov field is 80 times bigger than the US Bakken field in North Dakota, which alone produces 1m barrels a day.
BP joined the scramble on Saturday by signing a deal to explore for shale in Volga Urals with Rosneft, even though Rosneft's chairman Igor Sechin is on the US sanctions list.
"I see BP investing in other projects. We are very pleased to be a part of Russian energy complex," said BP's chief executive, Bob Dudley, adding that he had been urged by President Vladimir Putin to start fracking in Russia.
BP owns a 19.75pc stake in Rosneft, though it has been a passive partner until now. The move marks a deeper commitment to Russia.
Andrey Kuzyaev, head of Lukoil Overseas, said Russia has drifted badly and woken up to a changed world. "We're lagging by ten years. Our traditional reserves are being exhausted. This is the reality for our country and it's a threat," he told the St Petersburg Economic Forum.
Russia has a late-mover advantage. It can deploy modern 3-D seismic imaging and computer technology, but it lacks the service industry and the fast-moving wildcat culture that lies behind America's success, as well as a tax system fit for purpose.
"In Russia a horizontal well-bore of 1.5km costs $15m to $20m. In the US the costs have gone down from $8m to $3.5m for the same length of well. It's simply not possible to transplant technologies from the US and transport them to East Siberia or the Volga. There are no standard solutions. I hope it won't take twenty years to fulfil the shale revolution in Russia," he said.
Eric Liron, Rosneft's vice-president, said Russia has a long learning curve head. "We have some of the best scientists in the world but we've been lazy. We didn't conquer unconventional oil and gas because we didn't need to," he said.
The key for Russia is oil rather than gas, which has to compete with cheap coal for use in power stations. Crude is much more profitable. It trades at $105 a barrel compared to an equivalent price of $30 for natural gas in the US and $60 in Europe.
Mr Putin changed his view on shale in late 2012, losing patience with Russian energy managers slow to grasp the significance of surging US energy output for the whole world. It has led to a glut of US coal, which has spilled over into Europe, and it allows liquefied natural gas intended for the US to go to Asia instead.
He warned that US shale was becoming a "serious rival" , and ordered a top-down review last year. His concerns were echoed by Rosneft's Mr Sechin, the chief architect of Russia's energy policy. This has pitted them against Gazprom officials who continue to talk of a "shale bubble" that will soon burst as costs ratchet up.
Grazprom's chief executive, Alexey Miller, still appears defiant, ridiculing shale at the forum as a last resort for countries with nothing else left. He compared normal gas drilling to scooping water out of a lake with a bucket. "What the Americans are doing is trying to squeeze water out of a rock on the shore," he said.
Russia is at a juncture where it needs foreign joint ventures and skills to bring fracking costs to a commercially viable level. Above all it needs the front-line wildcat explorers who have made it happen in the US, but these are precisely the sorts of companies most likely to stay away until as long as the Ukraine crisis freezes Russia out of the global capital markets.
BP has deeper pockets and a history of coping with political tangles, but it is in a delicate position in Russia. It is doubling down to protect the exposure it already has, and doing so with the threat of further sanctions against Russia still on the table.
Mr Dudley had to walk a political tightrope in St Petersburg. While he did not appear on any panel with Mr Sechin, he did answer a question as a member of the audience that was clearly intended to elicit BP's stance on the political crisis.
He delighted the crowd by appearing to rebuke the West. "We work in a world today where politicians all too often only can look eighteen months out before the next election, and there are countries like Russia in agreements with China that are looking out 25, 40, or even 50 years. That's what we have to do as companies. These kinds of relationships that we have with Russia and Rosneft are not transactional, they are strategic partnerships based on mutual benefit and trust," he said.
"Those were very correct words from Mr Dudley," said Igor Sechin.
BP owns a 19.75pc stake in Rosneft, though it has been a passive partner until now. The move marks a deeper commitment to Russia.
Andrey Kuzyaev, head of Lukoil Overseas, said Russia has drifted badly and woken up to a changed world. "We're lagging by ten years. Our traditional reserves are being exhausted. This is the reality for our country and it's a threat," he told the St Petersburg Economic Forum.
Russia has a late-mover advantage. It can deploy modern 3-D seismic imaging and computer technology, but it lacks the service industry and the fast-moving wildcat culture that lies behind America's success, as well as a tax system fit for purpose.
"In Russia a horizontal well-bore of 1.5km costs $15m to $20m. In the US the costs have gone down from $8m to $3.5m for the same length of well. It's simply not possible to transplant technologies from the US and transport them to East Siberia or the Volga. There are no standard solutions. I hope it won't take twenty years to fulfil the shale revolution in Russia," he said.
Eric Liron, Rosneft's vice-president, said Russia has a long learning curve head. "We have some of the best scientists in the world but we've been lazy. We didn't conquer unconventional oil and gas because we didn't need to," he said.
The key for Russia is oil rather than gas, which has to compete with cheap coal for use in power stations. Crude is much more profitable. It trades at $105 a barrel compared to an equivalent price of $30 for natural gas in the US and $60 in Europe.
Mr Putin changed his view on shale in late 2012, losing patience with Russian energy managers slow to grasp the significance of surging US energy output for the whole world. It has led to a glut of US coal, which has spilled over into Europe, and it allows liquefied natural gas intended for the US to go to Asia instead.
He warned that US shale was becoming a "serious rival" , and ordered a top-down review last year. His concerns were echoed by Rosneft's Mr Sechin, the chief architect of Russia's energy policy. This has pitted them against Gazprom officials who continue to talk of a "shale bubble" that will soon burst as costs ratchet up.
Grazprom's chief executive, Alexey Miller, still appears defiant, ridiculing shale at the forum as a last resort for countries with nothing else left. He compared normal gas drilling to scooping water out of a lake with a bucket. "What the Americans are doing is trying to squeeze water out of a rock on the shore," he said.
Russia is at a juncture where it needs foreign joint ventures and skills to bring fracking costs to a commercially viable level. Above all it needs the front-line wildcat explorers who have made it happen in the US, but these are precisely the sorts of companies most likely to stay away until as long as the Ukraine crisis freezes Russia out of the global capital markets.
BP has deeper pockets and a history of coping with political tangles, but it is in a delicate position in Russia. It is doubling down to protect the exposure it already has, and doing so with the threat of further sanctions against Russia still on the table.
Mr Dudley had to walk a political tightrope in St Petersburg. While he did not appear on any panel with Mr Sechin, he did answer a question as a member of the audience that was clearly intended to elicit BP's stance on the political crisis.
He delighted the crowd by appearing to rebuke the West. "We work in a world today where politicians all too often only can look eighteen months out before the next election, and there are countries like Russia in agreements with China that are looking out 25, 40, or even 50 years. That's what we have to do as companies. These kinds of relationships that we have with Russia and Rosneft are not transactional, they are strategic partnerships based on mutual benefit and trust," he said.
"Those were very correct words from Mr Dudley," said Igor Sechin.
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