Royal Dutch Shell (NYSE:RDS-B), along with its partner Gazprom Neft, recently began a pilot well project to explore the potential of the Bazhenov formation, which could be the world's largest deposit of shale oil. 

While large-scale development may still be years away, this event is very promising due to the large potential numbers associated with Bazhenov.

Promising play that may yield great dividends
The Bazhenov formation, which is based in Western Siberia, covers 570 million acres, or the size of Texas and the Gulf of Mexico combined. Bazhenov's gargantuan size makes it 80 times the size of the United States' most famous shale play, the Bakken in North Dakota. 

Some analysts estimate that Bazhenov may contain as much as 100 billion barrels of recoverable oil, making it larger than Saudi Arabia's largest oil field, Ghawar.

When fully developed, Bazhenov could be a game-changer.

Leonid Fedun, vice-president of Lukoil, said that in 20 years, Bazhenov could produce more oil for Russia than the Arctic. Sanford Bernstein analyst Oswald Clint estimates that Bazhenov could produce 1 million barrels a day by the year 2020, or 10% of Russia's current production rate. 

In addition to the field's large potential, developing Bazhenov has other benefits. Bazhenov already has significant oil infrastructure on top of it due to its proximity to other mature oil fields. Many pipelines run across the shale play, so if oil and natural gas are produced, they will be readily transported to refineries. 

Russia has also introduced a sliding scale of tax breaks to promote the development of Bazhenov. Because of the field's large potential, oil super-major ExxonMobil (NYSE:XOM) will soon start a $300 million pilot project in a different part of Bazhenov with partner Rosneft this year.

The bottom line
Russia's oil production from existing fields is declining. Russia's energy ministry said that oil production could fall to 7.7 million barrels a day by 2020 from around 10 million barrels a day today if new incentives were not established for developing Russia's other energy resources.

Maintaining oil and gas production is very important to Russia. Revenues from oil and gas production generate over half of state budget revenues. The country also needs ample oil and gas production to play a leading role in geopolitics. Because Russia needs Western technology and know-how, Western oil giants have a golden opportunity.

Russia is geopolitically stable compared to other investment destinations such as Iraq or Africa.The country has shown that it can work with Western companies to produce win-win scenarios. 

A recent example would be BP-TNK, the joint venture created by BP (NYSE:BP) and local Russian partners in 2003. With an $8 billion investment, BP realized gains of $12.5 billion in cash, $19 billion in dividends, and a 19.75% stake in Rosneft, Russia's largest oil company. 

Considering the size of Bazhenov and the political calculus behind it, the recent event could foreshadow much better things to come for Royal Dutch Shell. The company may realize the same scale of benefits BP did with BP-TNK in the future.