Since the 1990's, Russian crude output has shot upwards, providing support for its developing economy. But as Russia gets older, so do its oilfields. With output declining from mature regions such as the Urals-Volga, Russia needs to find crude elsewhere to keep up output for the decades to come or it runs the risk of cutting its emerging growth story short.
Western Siberia accounts for two-thirds of Russia's oil and gas output, which mostly comes from mature fields. In order to maintain Russia's standing, several wet gas projects are currently under way. What's really exciting about Siberia is the possibility of commercial development of the Bazhenov shale formation.
Neighbors team up
Royal Dutch Shell (NYSE:RDS.B) and Gazprom have embarked on a multi-year quest to unlock shale oil hidden underneath Siberia. With plans to complete five horizontal wells over the next two years, Shell is hoping to bring its experience from North America across the ocean.
If successful, Shell will be at the forefront of the global shale revolution as it unfolds over the next decade. The U.S. saw the birth of this boom, but oil majors are taking the knowledge they've gained in the U.S. and are carrying it around the globe.
The joint venture between Shell and Gazprom is utilizing 3D seismic imaging, vertical well tests and other means to gauge just how much oil is laying in the ground. Shell isn't alone, however, as ExxonMobil (NYSE:XOM) is slapping down $300 million to team up with Rosneft and develop a different part of the Bazhenov field.
So far, the bar has been set very high, with some analysts saying that the shale formation could hold as much oil as has been produced in Russia's entire lifetime. We need to wait and see what Shell's wells turn up, but expect plenty of upside from the area.
So now, Russia has a choice: If it allows Shell and ExxonMobil to proceed freely, then Russia's energy sector could receive a much-needed shot in the arm. Without major growth in oil and gas output, Russia's economy would struggle to maintain its rate of growth. If Russia interferes with Shell and ExxonMobil's operations, then it could snuff out what would have been a great thing for the country.
An unbreakable love
Even as America and Russia disagree over various issues, ExxonMobil remains very committed to the country. Over the past three years, ExxonMobil's total output has continuously declined, which is why it's pouring billions into Russia to find sources of growth.
The fracking partnership in Siberia could be very promising if expectations are met, but ExxonMobil doesn't want to put all its eggs in one basket. In two different joint ventures with Rosneft, Exxon is going to drill its first wells in both the Arctic and Black Sea this year. While it will take a few years for these various projects to be completed, ExxonMobil is planning out a better future with upstream growth.
Russia is leaning heavily on its mature fields, and the days of continuous production growth are nearing an end. In order to remain a major oil player in the future, Russia will need new oil and gas fields to exploit. By bringing in the expertise of these two oil majors to unlock hundreds of billions of dollars worth of hydrocarbons, Russia will be able to continue supporting its economy with increased oil and gas output.