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Page added on March 31, 2013

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‘Red Lenin’ leads Russia’s oil revolution

Geology

To find the cradle of Russia’s coming oil revolution, look no further than “Red Lenin”.

This is the name of the oilfield in West Siberia that is at the cutting edge of efforts to harness Russia’s vast reserves of unconventional crude, and engineer the same kind of shale boom that has changed the face of US energy.

The field – known as Krasnoleninskoye in Russian – was an enigma to Soviet geologists in the 1970s and 1980s. They knew it contained oil, but its geology was so complex that they had no idea how to extract it.

Now there is a solution. Horizontal drilling and hydraulic fracturing, or “fracking” – the same techniques that have driven North America’s shale gas surge – are being used to unlock Red Lenin’s potential. TNK-BP and Gazprom Neft are both putting together drilling programmes for the field.

It is a story that is being repeated across West Siberia. The region is home to one of the largest accumulations of unconventional oil in the world – the Bazhenov shale – and the race is on to extract its riches.

“The Bazhenov is our Bakken,” says Leonid Fedun, vice-president of Lukoil, referring to North Dakota’s hugely-productive Bakken Shale. Oil output from North Dakota’s Bakken is doubling every 18 months and the field is now responsible for 10 per cent of total US production.

The hope is that by developing regions such as the Bazhenov, Russia will offset the sharp declines seen at its mature fields, the workhorses of West Siberia that have been in production since the 1970s.

Energy consultancy Wood Mackenzie estimates the Bazhenov – which is the source rock for some 85 per cent of West Siberia’s conventional reserves – has around 2tn barrels of oil in place, five times more than the Bakken’s in-place number.

But it is still far from unclear how much of that is recoverable. Some exploration drilling has taken place there since the 1960s, but many wells came up dry and others had variable flow rates.

The problem is a lack of consistency. Normally, in an oilfield, wells drilled near each other perform in a broadly similar way. That is not the case in the Bazhenov. There, one well would flow oil, while another would find kerogen – a solid organic material that is a precursor to oil and gas. This makes it hard to predict where the “sweet spots” are for drilling.

“It’s going to be a challenge to produce over such a large area with such a high degree of heterogeneity,” says Niall Rowantree, an unconventionals analyst at Wood Mackenzie.

Some, however, are already trying.

Rosneft and ExxonMobil are to jointly explore the area as part of the co-operation deal they signed in 2011. Royal Dutch Shell and Gazprom Neft are working together on tight oil – light crude in non-free flowing formations – as part of their Salym joint venture.

Lukoil, which has come up with a new technique to get at hard-to-extract oil, is also operating in the area. Its method involves blowing air down the well and igniting it, creating heat which reduces the viscosity of the oil and allows it to flow to the well.

The costs of such advanced technologies are high. However, oil executives say the Bazhenov is still cheaper to drill than Russia’s other untapped resource – the rich oil and gasfields under the Arctic seabed – because the area in which it is located is already the centre of Russia’s oil industry.

Mr Fedun said it would be much cheaper for oil companies to exploit Russia’s onshore shale reserves than the oil in its remote Arctic oceans. Recently, big foreign companies such as ExxonMobil, Statoil and ENI have signed deals with Rosneft to drill for oil in Russia’s ice-strewn northern seas, but experts warn the logistical challenges of operating in such remote, hostile locations are huge.

But Mr Fedun said Royal Dutch Shell’s problems in the waters of Alaska, where it has spent nearly $5bn and has yet to complete a single well, were a cautionary tale for the industry.

“If someone asked me to invest money in Arctic exploration and development, I wouldn’t give a kopeck,” he said. “We have many more investment opportunities that carry less risk.”

“You don’t have to build pipelines, water pipes, electricity, or bring workers,” explains Mr Fedun. “Everything is ready.”

In addition, the Russian government has acknowledged that help is needed. It has proposed a 100 per cent waiver of mineral extraction tax for the Bazhenov.

Even so, analysts think much more will have to be done. Many believe the government needs to slash Russia’s oil export duty, one of the most onerous taxes on oil producers. “The export duty is a real stumbling block,” says Mr Rowantree.

Whatever happens, it will take years for Russia to experience a shale boom on anything like the scale of the US.

“We need time,” says Mr Fedun. The Americans started experimenting with tight oil about 10 years ago, he says, but only began producing in earnest in 2009-10. “For us, it will also take about five years,” he says. “But we have the reserves, and sooner or later we will get them out.”

FT



3 Comments on "‘Red Lenin’ leads Russia’s oil revolution"

  1. BillT on Sun, 31st Mar 2013 11:34 pm 

    Interesting. Most of the world’s oil that is left is in places unfriendly to the Empire. But most of it will also be too expensive to ever be recovered. The world is choking on $120 oil now and $140 oil would bring on a financial freeze/collapse in the Western world. Interesting times!

  2. DC on Mon, 1st Apr 2013 12:01 am 

    Why do the 1% keep referring to fraking as ‘advanced technology’?. If they could do it 100 years ago, Id hardly call that ‘advanced’ anything. Unless, to the FT, O&G urinal and so on, advanced really means, dirty and expensive.

  3. Arthur on Mon, 1st Apr 2013 9:07 am 

    Some day the oil age will come to an end… but not now.

    Siberia, 10% of the world’s land mass, is virtually empty. No citizens complaining about tap water on fire and the one and half environmentalist that does exist can be ‘disciplined’. Maybe the Russian oil production plateau can be extended well into the 2020’s. Demand is garanteed.

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