Russia's brownfield assets are in steep decline, and the country will need an additional 1.5 mb/d of output by 2020 from new greenfield projects to keep overall Russian liquids output flat at current levels of 10.9 mb/d. There are various avenues for production growth from the exploitation of the South Kara, Barents and Black Sea (where tax incentives are being provided by the Russian administration to encourage investment) to tight oil. However, the offshore projects are unlikely to translate into higher output before 2020, hence the focus on tight oil where growth will be quicker, at least partially offsetting declines at brownfield projects.
The Bazhenov tight oil formation in Russia is often touted as the next big thing when it comes to tight oil production outside the US, comparable to the likes of Bakken. But some estimates call for Russian tight oil production to be at 1 mb/d by 2020 from current levels of less than 50 thousand b/d, which would put Russia broadly at par with the US in terms of development pace. However, pilot projects that began last year show that the geology in Russia exhibits many well-known challenges, from heterogeneous rocks, high decline rates and high costs. First results show initial flow rates from wells varying from 75 b/d to 2,000 b/d, and output in year 2 is on average only 30% of year 1 production. The results also show year 3 output falling to only 20% of the initial flow rates, before a long decline output tail.
Moreover, the extremely critical service sector is challenged. Our findings reveal that not only will it be difficult to build enough new rigs (or some old rigs will be freed up to work on unconventional reservoirs), but the oil service industry may be reticent to invest heavily until it fully understands what the future of the unconventional oil industry in Russia may be. A peak activity level of 220 rigs would need to be actively drilling new wells to maintain output at or just above 1 mb/d. If one then includes a 25% contingency to allow for rig downtime and maintenance one can estimate that up to 275 new rigs might need to be constructed over the next ten years to meet an aggressive Russian unconventional oil production target.
Despite the recent changes, the current tax system in Russia may not be enough. The existing revenue-based royalty and export tax regime is applied to every barrel equally, from first production to final depletion, making no allowance for profitability. Thus, to incentivise investment in tight oil, a bill has been passed which attempts to give tax breaks to a broad range of ‘hard-to-recover' oil. As a result, the IRR of a standard shale well increases from -5% to +7%, but with most companies setting their hurdle rate in the 15–20% range, this would not be enough to justify investment, highlighting the major problem with the MET tax break.
A number of other issues could also hinder development of tight oil in Russia, such as geopolitics, a corporate landscape dominated by a few large players, the law of strategic reserves, licensing laws and environmental and water issues. Overall, we forecast that Russian tight oil production will rise steadily in the medium term, but will be unlikely to surpass 0.3 mb/d by 2020. This will go towards offsetting decline rates at existing fields to keep total liquids production steady at around our estimated 10.8 mb/d by 2020, slightly below the current 10.9 mb/d (crude and NGLs).