Why the Next Shale Oil Boom Could Be in Russia

Laying claim to what could be the world’s largest shale oil reserves, Russia stands out as one of the most likely candidates to foster a shale oil boom.

Jan 19, 2014 at 12:00PM

The U.S. shale oil boom of the past few years has fundamentally transformed global oil markets and materially reduced America's dependence on foreign sources of oil. Since 2008, U.S. crude oil production has surged by nearly 60%, thanks to a combination of horizontal drilling and hydraulic fracturing that has allowed energy producers to extract oil from dense shale formations.

But the U.S. isn't alone in its bounty of shale oil. Russia may, in fact, possess the world's largest reserves of technically recoverable shale oil. Let's take a closer look at some of the companies hoping to exploit Russia's shale riches and the challenges and opportunities they may face in the years ahead.

Russia's massive shale potential
According to the U.S. Energy Information Administration, Russia holds an estimated 75 billion barrels of technically recoverable shale oil -- the largest recoverable reserves in the world. These reserves are largely concentrated in Western Siberia's Bazhenov formation, as well as in northern Siberia's Achimov formation and the Domanik formation in the Volga-Urals region.

The Bazhenov shale, which spans an area of roughly 570 million acres, about 80 times the size of North Dakota's Bakken shale, has attracted the most attention so far. With initial estimates suggesting that it could be the largest shale oil deposit in the world, companies including Royal Dutch Shell (NYSE:RDS-A) and ExxonMobil (NYSE:XOM) have rushed in to get a piece of the action.

Shell has joined forces with Russia's OAO Gazprom Neft and earlier this month began drilling the first of five horizontal wells in the Bazhenov, after three years of assessment that involved drilling vertical wells and taking well logs and cores. Exxon, meanwhile, teamed up with Rosneft, Russia's state-owned oil giant, back in 2012 to jointly develop the shale -- a process that will involve first conducting a pilot program to assess the commercial potential of the reserves.

Challenges and opportunities
Despite the Bazhenov shale's tremendous potential, however, major challenges remain for the companies so eager to exploit its oil riches. The most important are high transport costs resulting from the play's remote location and relatively high operating costs caused by the complexity of shale development. According to Lukoil, well costs in the Bazhenov's Sredne-Nazymskoye field can exceed $10 million per well.

That's notably higher than well costs in the Bakken, where operators have slashed expenses considerably over the past few years and are now spending as little as $8 million per well. Kodiak Oil & Gas (NYSE:KOG), for instance, expects to spend roughly $8.9 million per Bakken well this year, down sharply from an average of roughly $12 million per well in 2012, while Continental Resources (NYSE:CLR) reckons that its average Bakken well this year will cost about $7.5 million, down from $8 million as of the end of the third quarter.

To be sure, however, well costs in the Bakken during its earliest years of development also routinely exceeded $10 million per well. So it's quite possible that costs in the Bazhenov can be brought down to more manageable levels over time, as Exxon and Shell gain a better understanding of what drilling techniques work best in the play and optimize accordingly.

On the plus side, drilling in Russia has its share of advantages, including the existence of a large infrastructure network. Since most of the identified shale formations lie in parts of Russia that have been producing oil for decades, the necessary pipelines, storage, and processing facilities are already there.

Furthermore, shale development in Russia is unlikely to witness the degree of environmental backlash that has hampered shale exploration programs in the U.K., for instance, since much of the development will take place in remote and sparsely populated regions of Siberia.

The bottom line
Thanks to Russia's massive reserves of shale oil and its relative advantages in exploiting their potential, BP (NYSE:BP) has identified the region as one of two that is most likely to replicate the success of the U.S. shale revolution, with the other region being South America. Still, if Russia is to achieve its target of 440,000 barrels per day of shale oil production by 2020, significant additional investment will be required because of the greater capital- and service-intensity of shale drilling.

But with world-class operators like Exxon and Shell on board to provide the requisite skills, equipment, and know-how to exploit shale formations like the Bazhenov, Russia could very well have a shale revolution of its own within the next couple of decades.

OPEC's worst nightmare
While Exxon, Shell, and their integrated oil peers are turning to riskier shale exploration projects to help offset declining production from their mature fields, one energy company continues to mint profits. Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour. (That's almost as much as the average American makes in a year!) And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click here to uncover the name of this industry-leading stock, and join Buffett in his quest for a veritable landslide of profits!

Fool contributor Arjun Sreekumar and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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