The Bakken has been highly profitable for U.S. shale oil production, but this Russian formation challenges that.
When it comes to domestic oil production, the Bakken shale formation in North Dakota and Montana is the darling of the United States.
In 2010, Bakken wells were producing 260 thousand barrels per day. In August 2011, production had jumped to 445 thousand barrels per day just in North Dakota.
And at roughly 14,000 square miles in area, the Bakken has the potential to continue raising this output.
North Dakota has essentially stolen the spotlight with shale oil production.
But Russia is threatening to take that away.
The Bazhenov formation in Western Siberia is said to be 80 times the size of the Bakken.
A report by analyst Oswald Clint put it at an estimated 2.3 million square kilometers (888,340 square miles). The formation is huge.
And drilling has been occurring for over 20 years. But there have been problems.
First off, the oil is located within the shale, and with the drilling techniques in play, production was only occurring on oil that had leaked out of the rock.
To make it an effective endeavor, drillers are going to need hydraulic fracturing, or fracking (the process of injecting pressurized mixtures of water, sand, and chemicals into horizontal wells to break apart the rock).
And secondly, the extraction taxes on petroleum are so high that it almost would not be profitable.
In the first quarter of 2011, these taxes were approximately $24 a barrel. A tax break is necessary to facilitate drilling, but taxes account for a huge portion of Russia's petroleum revenue.
Besides, the Russian company with a huge stake in the formation, OAO Rosneft, is not familiar with hydraulic fracturing techniques.
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Exxon Mobil (NYSE: XOM) and OAO Rosneft entered an agreement on Friday to begin drilling in the Bazhenov, as well as another Siberian shale formation called the Achimov, in 2013.
Rosneft turned to Exxon Mobil for its experience in fracking. Exxon will be in charge of exploration and drilling, and it will eventually receive a 33.3% stake.
In turn, Rosneft will obtain stakes in some of Exxon's North American holdings, including a 30% stake in the Eagle Ford formation, in order to observe and learn the fracking and horizontal drilling process.
After all, Exxon has been involved in the resurgence of domestic oil and gas production that has boomed in the U.S. in recent years due to fracking. Working alongside the company, Rosneft can gain the necessary experience.
Of course, there's still the problem of high taxes.
Russia's President, Vladimir Putin, has promised to carry out tax breaks by October of this year. This is a necessary step in making the Bazhenov profitable.
“If the government is serious about promoting tight oil production, it is within their grasp,” said Ronald Paul Smith, a Moscow-based oil and gas analyst at Citigroup Inc.
The government seems serious. With the Exxon partnership and promised tax breaks, it has all the necessary measures in place. It's just a matter of carrying them out.