Make Way For Russia's Impending Shale Oil Boom

by: Power Hedge

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For the past few years, one of the headline stories in many energy blogs, articles, and even the mainstream media has been the rise of North American shale oil production. This method of oil production, properly termed tight oil extraction, relies on using hydraulic fracturing techniques to extract light crude oil from formations of shale rock. The rise of production in shale oil has brought prosperity to such regions as the Bakken Shale in Montana and North Dakota, the Niobrara Formation in Colorado, Nebraska, Kansas, and Wyoming, and the Barnett and Eagle Ford Shale in Texas. These formations and others in the United States contain enormous quantities of oil, so much so that the development of these resources is expected to turn the United States into a net exporter of oil by 2030. In 2013, the U.S. Energy Information Administration estimated that these deposits and other tight oil deposits in the United States contain a total of 58 billion barrels of oil.

However, there is another tight oil play located outside of the United States that greatly eclipses all of these. That deposit is known as the Bazenhov Shale. The Bazenhov is located in West Siberia in Russia, approximately 2,000 miles to the east of the Russian capital of Moscow. The overall region covered by the formation is quite extensive, including much of Western Siberia and even extending to as far north as the Kara Sea and Novaya Zemlya.

Source: Wikipedia repost of an image originally from the United States Geologic Survey

The Bazenhov Formation formed from an extensive sea that existed in the area during the Jurassic and Cretaceous periods. This is the period when paleontologists believe that the largest of the dinosaurs lived on the Earth. At its greatest extent, this prehistoric sea covered more than one million square kilometers and over the course of its several million-year existence it deposited numerous trace minerals and organic materials into the organic-rich siliceous shales located on the seafloor. Over time, these organic materials eventually turned into crude oil and remained deposited inside the shales.

The sheer quantity of oil that is estimated to be contained inside of the Bazenhov Shale is nothing short of astonishing. Unfortunately, the estimates of its size also span quite a wide range. According to Wood Mackenzie, one of the most respected research and consulting firms in the energy and mining industry, the Bazenhov Shale formation contains approximately two trillion barrels of oil in place. The U.S. EIA estimates that the Bazenhov Shale contains 1,243 billion barrels (1.2 trillion barrels) of oil with 74.6 billion barrels of this total being technically recoverable using today's technology. The Russian government agency Rosendra (Russian Federal Subsoil Agency) estimated in 2012 that the Bazenhov Shale formation contains from 180 to 360 billion barrels of recoverable oil. Finally, the Russian oil company Rosneft (OTC:OJSCY) estimated that the formation contains a mere 22 billion barrels of oil. Rosneft's estimate, by far the lowest of the group, is still enough to make this formation the equal of the Bakken Shale in the United States. All the other estimates make the formation several times the size of all the tight oil formations in the United States combined. Clearly, this is a resource that neither the oil and gas industry nor investors should ignore.

The Bazenhov Shale is not as developed as the tight oil plays in the United States are. In fact, for the most part, it is not developed at all. One reason for the lack of development here was due to Russia's oil taxation regime. According to Tom Reed, former CEO of Ruspetro (OTC:RUSPF) who was interviewed for an article in the September 26, 2013 issue of the Financial Times,

"of every $110 of Urals crude, producers pay about $55 in oil export duty and $23 in mineral extraction tax, leaving revenue of just $22 per barrel."

As I discussed in a recent article on Ruspetro, it is significantly more expensive to extract oil from tight oil formations such as the Bazenhov shale or other shale formations than it is to produce oil conventionally. This factor makes Russia's high tax regime, which worked fine when levied on the nation's conventional oil production, a significant handicap for the development of the Bazenhov. In fact, this tax rate makes the development of this tremendously large resource uneconomical given current oil prices.

However, the Russian government is determined to change this. In July 2013, Russian President Vladimir Putin approved a law that would significantly reduce the nation's Mineral Extraction Tax on oil resources extracted from low permeability formations such as oil shale. The Mineral Extraction Tax is one of two taxes that the nation applies to wellhead revenue, or on revenue that is brought in before an exploration and production company is even able to pay its expenses. Therefore, the reduction of this tax will increase the amount of revenue that an oil company actually realizes from every barrel of oil that the company extracts from the ground. This move significantly changes the economics of Russian shale oil.

Moves such as this one show the Russian government's dedication to increasing the nation's shale oil production. One reason why the government is doing this is because the nation's conventional oil production is declining. In 2010, the Russian energy ministry warned that the nation's oil production could fall from 10.1 million barrels per day in 2010 to 7.7 million barrels per day in 2020. This scenario, if it plays out, could have significant negative effects on the nation's government revenues as Russia is quite dependent on its oil revenues as a source of funds for the government. The development of the nation's resources is also a vital part of Russian President Vladimir Putin's strategy to expand the nation's international influence and so encouraging the development of the Bazenhov would also be an important part of this long-term plan.

There are some ways that an investor may be able to profit from the development of the Bazenhov shale. The most logical way is to invest in the shares of those companies that are actively developing the region. Two of these companies are Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (RDS-A) which have teamed up with Russia's own oil giants Rosneft (OTC:RNFTF) and OAO Gazprom Neft (OTCQX:GZPFY), respectively. Investors may also wish to invest in a much smaller but more focused operator such as Ruspetro, which operates exclusively in Russia's shale oil-producing regions. However, that company represents a risky and speculative play due to its weak balance sheet. Additionally, oil well services companies may benefit here. Schlumberger (NYSE:SLB), for example, has a technical partnership with Ruspetro to assist in the development of the nation's shale oil deposits and is actively shipping equipment, technology, and drilling crews from the Bakken and Eagle Ford shales to assist in building the necessary infrastructure in the area and to provide support to well operators.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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