There's a common perception that American manufacturing is in deep decline. Adjusted for inflation, America actually manufactures about twice as much today as it did in the 1970s. It is, of course, unlikely that the United States will again be the manufacturing powerhouse that it was during the 1950s and 1960s, nor would it necessarily want to be. But many factors are suggesting that the US industrial sector will gain market share over the coming decade. The present manufacturing boom is driven by a unique combination of factors. These include the well known key U.S. competitive advantages of flexible labor market with high level of innovation and productivity, large internal market and political stability but there is also a new kid on the block. It is the rising energy self-sufficiency. It is due to discovery and production of shale gas and oil on a massive scale. This has in turn significantly lowered the domestic energy costs in the US and spurred massive investment in petrochemical and chemical industries.
Shale gas was first. After shale gas, the attention of the industry turned to tight oil. Tight oil are previously uneconomical and inferior oil deposits which now become accessible with use of the same or similar new technologies which facilitated the extraction of shale gas. All across the North American continent, the new horizontal drilling and hydraulic fracturing, or fracking, for tight oil has suddenly made United States the fastest-growing oil producer in the world, with Canada close behind. US oil production grew at the fastest pace in at least six decades last year as crude oil trapped in formations such as North Dakota’s Bakken shale has been extracted. Oil output from Bakken is doubling every 18 months and the field is now responsible for 10 per cent of total US production.
Now it seems that Russia wants a piece of this action, too. Russia is the world’s second-largest oil producer after Saudi Arabia with annual production of some 10 m barrels/day. But it has had some worries to contend with recently (apart from quickly transferring their private stash out of Cyprus which was foremost on the agenda of its decision makers in the last weeks). The headline numbers belie the fact that for the past twenty years Russia has largely been coasting on the oil field development of Soviet times. Now the Soviet-era legacy is running down. Its western Siberian oil fields, such as Priobskoye, Samotlor, Mamontovskoe and Salymskoe, the workhorses which have been in production since the 1970s, are very mature. They have seen sharp declines in production over recent years. In fact, they have been in decline since 2007 and production is predicted to contract by some 6% or more p.a. until 2020. Gas industry is in no better shape. Gazprom , the previously omnipotent state-controlled natural gas giant, has been stumbling and struggling. The company that has long monopolized the market has failed to adjust in time and to technological progress. Liquefied natural gas from the Middle East, Norway’s encroaching on its dominance in Europe and failure to conquer the 10% of US market it had targeted due to the sharp decline in US natural gas prices, are all biting hard. The company has been losing market share and was forced to renegotiate several of its material long-term contracts such as that with Poland and (14,07 EUR, 0,50%) in 2012 which caused its profits to fall 12% y-o-y in 2012. That is challenging as Gazprom faces a crippling debt burden. Alexey Miller, its CEO, is allegedly falling out of favour with President Putin and (1 1750 CZK, 0,43%) Medvedev even recently suggested that Gazprom may have its export monopoly status rescinded.
As Russia’s prosperity is so massively dependent on the oil and gas industry (50% of state revenues come from oil & gas), it is indeed a worry. President Putin went about it in a typical Russian way and decreed he had a goal of keeping Russian oil production at 10m barrels/day until 2020. That is only realistic if vast new oil and gas reserves are tapped. As the production from new reserves is likely to be more expensive, the industry simultaneously needs a waiver of Russia’s onerous mineral extraction tax for the drilling companies as well as a waiver or overhaul of equally debilitating export duties on oil & gas. Both have been promised to companies which drill in Bazhenov.
Bazhenov is Russia’s Bakken. Leading global energy consultancy Wood Mackenzie estimates that Bazhenov Formation in Western Siberia – which is the home for some 85 per cent of West Siberia’s conventional reserves – has about 2 trillion barrels of unconventional or tight oil in place. That is five times more than the estimate for Bakken. In Bazhenov, Russia is gearing up for its own shale oil boom. The magnitude of these unconventional resources, a large and experienced oil industry and little environmental opposition, that so hampers similar efforts in Europe, should all help with it.
ExxonMobil and Russian state oil company (5,55 EUR, 0,00%) are spearheading the new phase of exploration of unconventional oil in Bazhenov as part of the co-operation deal they signed in 2011. is the new Kremlin darling. It is headed by Igor Ivanovich Sechin, nicknamed by some Western observers the Russian Rockefeller and by Russian press “Darth Vader” and “the scariest person on Earth”. The company has under his stewardship transformed from a minor Russian state-owned player which failed to be privatized three times because nobody wanted to buy its second rate assets, to recently become the largest oil producer in the world when it beat (4,51 GBP, 0,60%) in the race to acquire TNK-BP, BP’s long-term Russian joint-venture.
Royal Dutch (24,51 EUR, 0,39%) and Gazprom Neft, Gazprom’s oil subsidiary, are working together on tight oil – light crude in non-free flowing formations – as part of their Salym joint venture. Lukoil , Russia’s biggest private producer, which has come up with a new technique to get at hard-to-extract oil, is also operating in the area. Its method involves blowing air down the well and igniting it, creating heat which reduces the viscosity of the oil and allows it to flow to the well.
The costs of such advanced technologies are high. However, oil executives say the Bazhenov is still cheaper to drill than Russia’s other untapped resource – the rich oil and gasfields under the Arctic seabed. You don’t have to build pipelines, water pipes, electricity, or bring workers as everything is already there in Bazhenov.
Whatever happens, it will take years for Russia to experience a shale boom on the scale of the US. Tight oil, as the Russian proverb has it, “is not like just walking across a field.” (prochazka ruzovou zahradou). Tight oil typically requires approaches carefully tailored to each oil field, an innovative combination of technologies, much trial and error, and strict cost control. The “tight oil revolution” in the United States has been mostly the work of small and medium-size companies.
This doesn’t really fit with the Russian reality where independent companies account for barely 5 percent of total oil production, and state regulations frequently stand in the way of new techniques. The scale of the Arctic off-shore development which the Russian oil industry has been gearing up for, requires big companies. So Russia spent a decade rebuilding into a large state-owned oil champion, first by allocating it with the seized assets of Yukos in 2004-05 and now by pushing for its involvement in the TNK-BP deal. Now, its decision-makers should be better off encouraging the widest possible variety of innovative companies and approaches. But we are talking about Russia, so that may not be happening.
There are other challenges, too. For example, Russia’s shale-oil deposits sprawl over territory twice the size of the U.S. discoveries. There are great uncertainties about the geology. It is also still far from unclear how much of that is recoverable. When exploration drilling took place previously, many wells came up dry and others had variable flow rates. Normally, in an oilfield, wells drilled near each other perform in a broadly similar way. That is not the case in Bazhenov. This makes it hard to predict where the “sweet spots” are for drilling. “The Bazhenov is a pig in a poke,” says Thane Gustafson, Georgetown University professor and a senior expert on Russian oil. “It’s going to take a lot of tapping and poking before we know what its potential is.”
It’s going to be a challenge to produce over such a large area, with such a high degree of heterogeneity and within the industry set up which Russia has. But Russia badly needs such a success.