Joe Parson in Strasbourg -
With the oil price falling to $85 and Western sanctions kicking in, Russia’s dreams of exploiting its huge shale oil resources are about to be shattered.
The US Energy Information Administration in 2013 estimated that Russia holds the world’s largest shale oil reserves at 75bn barrels of recoverable crude oil, giving rise to hopes in Moscow the country could mirror the massive shale boom in the US and help offset dwindling output from mature fields in West Siberia. Shale oil is liquid crude trapped within geological shale rock formations that have not merged into a conventional reservoir. Because this oil is trapped in small and disparate pockets within porous shale rock, exploitation of these formations requires a combination of horizontal drilling and multiple-stage hydraulic fracturing, or fracking – technologies that were refined during the US shale boom.
The price of Russian crude is historical closely tied to Europe’s Brent oil price, which as of October 15 was trading at a four-year low of $85.27 a barrel. Russia’s own export blend price averages only 1.5% below Brent, thus it's rapidly approaching the $80 break-even price for Russia’s shale projects to be economical. Some analysts assert that the breakeven price for these projects is actually above $90, given unforeseen expenditures and lessons learned from exploiting the US Eagle Ford and Barnett shale deposits.
As if the economics weren’t bad enough, sanctions have forced US and European companies to halt or reduce their shale development plans. Russia could seek to leverage its domestic expertise, though this will likely delay production estimates by several years. As such, the previous goal of producing 1m barrels of shale oil a day by 2020 is not likely to be reached until 2025 at the earliest.
Nails in the shale-coffin
Since Russia began throwing its military weight around Eastern Europe in March, the EU and US have walked essentially hand in hand in their sanctions policy against Moscow. Sanctions have effectively restricted Western companies’ participation in Russia’s Arctic and shale sectors. These sanctions are compounded by restrictions already in place that will limit the transfer of technologies developed on US projects.
Before the Western sanctions were imposed, a slew of companies were involved in the Russian oil sector, most notably ExxonMobil, Shell, Total, BP and Statoil.
Total’s CEO, Christophe de Margerie, commented on September 22 that its joint venture with Russia’s independent major Lukoil has ground to a halt due to the sanctions. Salym Petroleum Development (SPD), a longstanding Shell and Gazprom Neft venture, has likely already fulfilled initial exploration and development investments and so might be insulated from the sanctions in the near term, but Shell announced it is no longer able to continue work with SPD. Although BP and Total could resume certain generic geological exploration activities, the companies have shown no indication they intend to violate the spirit of the sanctions.
Meanwhile, Rosneft’s continued participation in ExxonMobil’s US operations is unlikely given the controversy over the latter’s continued operation within Russia’s Arctic. On October 10, Norway effectively cut off Statoil’s potential involvement by announcing its support for the EU’s latest round of sanctions imposed on September 11, which included the sanctions on oil and gas technologies.
The oil price has actually been on a downward trend since 2001. This is a catastrophe for a 2014 Russian budget that relies on an average oil price for the year of $100. Bloomberg analysis says the oil price would have to rally for the rest of the year near $117 in order to average out third-quarter declines, while The Economist claims Russia might require an average oil price in 2015 of $110 to balance the budget.
Prior long-term forecasts of rising oil prices relied to a large extent on assumptions that demand in Northeast Asia was set to continue growing – an assumption that has since been undermined.
The collapse in the oil price poses a very distinct threat to Russia’s nascent shale sector. Rosneft has frequently compared its shale deposits to ExxonMobil’s operations at the Texas Eagle Ford shale deposit. Analysis by The Oil Drum, a website devoted to energy issues, put the actual break-even price for shale oil produced at Eagle Ford above $90 a barrel. If these comparisons are substantive, then Russian projects are in peril. Without government support, outside investors are not likely to stick with Russia projects in the near term.
Last year, Gazprom Neft’s head of Geological Research said that the break-even price for Russia’s shale is $60-80. The break-even price includes the amount of money necessary to cover day-to-day operating costs as well as initial capital investment. The break-even price is likely a very low-end estimate given that even Rosneft estimates for only operating costs range up to $40 per barrel.
Many of Russia’s domestic oil companies have some experience in both horizontal drilling and fracking, which are also used to exploit conventional deposits of oil and gas, but few believe this will be enough to make up for loss of Western knowhow and technology.
Surgutneftegas, a conservative oil company with murky ownership and suspected strong ties to the Russian leadership, has been exploring potential shale deposits in West Siberia, but any economic discoveries have yet to be announced. Some suspect that recent legal actions by the Russian authorities against conglomerate AFK Sistema and its owner over the controversial acquisition in 2004 of the oil company Bashneft could be driven by Bashneft’s advanced experience in fracking. Bashneft’s production from fracking in 2013 was double that achieved at Rosneft’s most successful Samotlor field.
And Kremlin plans to create a national oil services company is unlikely to substitute Western expertise in exploiting unconventional oil and gas. Indeed, the entry of a government-favoured services company could well create obstacles in attracting necessary outside expertise within the conventional oil sector.
In the medium to long term, it is likely that if Western sanctions persist, then exploration licenses that have been granted to foreign companies but which are not currently being exploited will be revoked. It is possible, though unlikely, that Russia could revoke these licenses as a retaliatory measure to Western sanctions.
Russia might be able to supplement Arctic investment from Asian companies, but there is no such near-term alternative for the shale oil sector.
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more