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Stock Market Trend Forecast March to September 2019

Gazprom to Produce Shale Oil

Commodities / Oil Companies Nov 04, 2012 - 07:27 AM GMT

By: Pravda


As soon as the United States launched a campaign to promote shale, this type of energy stopped being trendy. The new trend is shale oil, and "Gazprom", as an avid trend-follower, will produce it. The reserves of this type of oil are twice as large as the reserves of conventional oil. This means that the potential profit calculated in the minds of the gas industry, would grow significantly.

Recently, a real shale revolution was close. U.S. Secretary of State Hillary Clinton even set out on a tour of Europe to explain to its residents what a great alternative to natural gas shale was. The land is teeming with slates, Hillary urged her European counterparts, and "Gazprom" keeps tightening the hold on the necks of the poor consumer.

Hillary knows what she is talking about. The production of shale gas in the United States is growing, providing energy to the American industry that is trying to rise from the ashes of the global economic crisis. The Secretary of State neglected to mention that production of shale gas is only half the battle. Its consumption has very limited space, export and transportation of shale oil is a time-consuming and expensive undertaking, especially when it comes to long distances such as North America. Not to mention the fact that environmentalists will appeal to all courts of the world if oil companies drill a couple of wells somewhere in the Old World. The capital costs of production will make this type of fuel extraordinarily expensive from the get-go.

Shale oil, on the other hand, is a different story. In spite of the Americans, the Russian gas monopoly announced its plans to start its production because dangerous shale gas has never been and will never be relevant for Russia with its ample energy resources. In terms of the composition, it is a mixture of mineral rock - quartz or feldspar - with organic matter, resins. The proportion of organic matter in the rock may range from 10 to 65 percent. The estimates of the world's resources differ greatly. The matter that some will consider a contaminated organic rock will be considered by others as empty and inferior, but still slate. Sometimes high-quality slate will be mistaken for coal, because the distinctions are very blurred.

The Board of Directors of a subsidiary of the Russian gas monopoly, "Gazprom Oil," decided to give shale oil a try. The company, together with Shell, will develop Bazhenov oil field. Experts believe that the cost of production of conventional oil in Russia today is three to seven dollars per barrel, and non-traditional - about $20. However, the reserves of conventional oil inexorably decline, and investment in design and technology needs to be made now.

The problem is, even the "advanced" America does not have advanced technologies for shale oil. But Russia, as always, has an alternative way. Even if the Americans manage to achieve lower production rate per well of shale oil, they will not work in the permafrost of West Siberia. This means that first of all, funding for new developments should come from the state, because without its support the plans will never be implemented.

"Gazprom Oil" already has optimistic expectations. The company plans to produce the first substantial volumes of oil from the Bazhenov Formation in 2021 and in 2022-2025 the production will exceed one million tons per year. The quality of the oil will be close to Brent with few impurities, which already significantly raises the price per barrel. Among Russian brands, only Arctic Light can boast quality of this level, but it is not produced at export scale at this time.

If "Rosneft" and "Surgutneftegaz" slowly start working at Bazhenov Formation, the flagship of the global gas market "Gazprom" cannot stay at the bottom of the list of the trendy mining companies. All of them should remember that because of extremely low permeability, thinness of the layer, and unpredictable oil potential, it will be very difficult to work on the vast territory of the Bazhenov Formation. If Mother Nature is not going to easily give up its underground wealth, the potential cost of the development must be seriously considered.

Ilona Raskolnikova

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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