Rostec to join technology development project for Bazhenov tight oil formation

Rostec, a Russian state-controlled high-tech industrial holding, has announced its plans to explore business opportunities and participate in developing new technologies and equipment for Bazhen tight oil project in Khanty-Mansi autonomous district, reports Interfax news agency.

“Rostec is our strategic partner,” says Alexey Zabozlaev, vice-governor of Khanty-Mansi autonomous district. “We will cooperate with Rostec on several regional projects, including the development of the Arctic Urals region and the tight oil Bazhen project.”

Rostec manages a large portfolio of high-tech industrial companies operating in military, communications, transportation and other sectors. The company was set up in 2007 in order to facilitate the development, production and export of high-tech industrial products in Russia. Rostec’s portfolio includes such companies as Kamaz, Russian Helicopters, Kalashnikov Concern, High Precision Systems, United Engine Corporation and many others.

Earlier this year Gazprom Neft, a Russian oil and gas major that holds several licenses for tight oil exploration and production at Bazhenov formation, reported that by 2021 the company would invest 7.5 billion rubles (around $120 million) in R&D, aimed at developing new technologies for the project, reported TASS. Kirill Strezhnev, head of Bazhen project at Gazprom Neft, said that the dedicated enterprise, Bazhen Technological Centre Ltd., would be set up by August 2018. Under its umbrella, around 15 companies would be formed, each of them aimed at developing a particular set of technologies for the project. Gazprom Neft also invited other Russian oil and gas majors to join its R&D efforts.


Gazprom Neft’s R&D centre. Image credit: Gazprom Neft

In May 2017 the Ministry of Energy of Russia granted Gazprom Neft’s project of “Developing Domestic Technologies and High-technology Equipment to Develop Reserves at the Bazhenov Formation” the status of a national project. The company intends to develop technologies for multi-stage horizontal wells construction, as well as strategies for producing light shale oil using thermochemical oil recovery method.

The “Bazhenov formation” is a geological formation in Western Siberia that covers an area of approximately one million square kilometres, running to depths of 2,000–3,000 metres. Gazprom Neft estimates oil reserves of the Bazhenov reservoir at 100–170 billion metric tonnes. The reserves of Bazhenov Formation are classified as unconventional, commonly known (even though technically incorrect) as “shale oil”.

Initially, Gazprom Neft planned to produce shale oil at Bazhenov formation jointly with Shell. However, the international major withdrew from the project in 2014 following the E.U. and the U.S. sanctions that prohibited the supply of technologies and equipment for shale oil exploration and production projects in Russia. Another international major that cancelled its participation in Bazhenov formation development was Total. In May 2014 Total and Lukoil formed a joint venture to explore for and produce tight oil on four licence blocks at Bazhenov formation that covered the area of 2700 square kilometres. However, in 2015 Total withdrew from the project due to the sanctions. According to industry analysts, Total’s participation in the project was crucial because it had hydraulic fracturing technologies needed for shale oil production. Mikhail Cherevko, the chief engineer for one of Gazprom Neft’s drilling unit, said to Financial Times that western oilfield services companies, such as Schlumberger and Halliburton, “are [also] afraid to touch the Bazhenov as if it was on fire”.

Alexey Vashkevich, exploration director at Gazprom Neft, says that the main limiting factor for the project development is the sanctions-based technology restrictions, listing kits for multi-stage fracking, pumps and well completion systems as the main equipment shortages. There is currently no Russian equipment of sufficient quality to replace western supplies. “The experience we have gained is quite positive, but we cannot go ahead with large-scale development of the Bazhenov because we are held back by the problem of equipment,” he said to FT. Industry experts agree that due to the lack of available technologies the large-scale development of the Bazhenov project will be postponed for at least five years.

However, Gazprom Neft is widely regarded by analysts as being the Russian oil company with the most advanced in-house shale technology, so the company is determined to develop resources of Bazhen alone. “It’s not a question of will we do it or not: it’s a question of time,” says Alexey Vashkevich. “It might take a little bit longer but we will get there.”

Engagement of Rostec in developing new technologies for the Bazhen reflects the importance given to domestic shale oil production by the Russian government. While production at mature conventional oilfields in Western Siberia is decreasing, development of the region’s unconventional resources would allow Russia to keep its oil production at the current level and remain one of the largest oil exporters in the world. As in the case of shelf projects, sanctions imposed by the western governments on Russian unconventional oil sector in 2014 would most likely trigger the active development of domestic technologies for shale oil production, including horizontal drilling and hydraulic fracturing. For example, import-substitution plans of the Russian government are aimed at reducing the share of foreign companies in the directional and horizontal drilling segment from 60-83% in 2014 to 40-60% in 2020. We can expect that the sanctions will halt development of tight oil resources in Russia in the short-term, however, in the mid- to long-term perspective western oilfield service companies risk to lose a significant share of the Russian market.


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