When “Revolution” Is Simply History Repeating Itself

By Pat Davis Szymczak, February 1, 2014

rest of the world for that matter. The state owns the mineral rights and, for the most part, only state-owned companies have the right to produce those minerals. Private hydrocarbon producers who get involved, do so at the behest of the state. 

And like it or not, there is no “right or wrong” in either system – they are just different and each has positives and negatives. Let’s look at the definition of another word: ethos. Again, I refer to Wikipedia where I found this: ethos is from a Greek word meaning “character” that is used to describe the guiding beliefs or ideals that characterize a community, nation, or ideology.”

In the U.S. system, based on private ownership, the ethos is to produce hydrocarbons as quickly as possible so as to pay back your investment and start making profit. I personally like that idea. Individuals become rich, build private businesses that create more jobs, and the state collects more taxes to support the overall public good. 

But I also see wisdom in the ethos of other nations – including Russia – which view the state as the guardian of the country’s natural resources. Once you frack a well, there isn’t much more you can do to keep it producing. Production rises as a result of the frack; it peaks and then declines again. Since the reservoir surrounding the well has been reduced to rubble, there is nothing that can be fracked again. 

That is why the “frack till you drop” model works so well in the U.S. where all involved – oil company, landowner, government – measure success in short-lived production gains. 

In the 1990s, Russia’s most Western-leaning private oil majors, Yukos and Sibneft (today part of state-owned Rosneft and Gazprom Neft respectively), fracked their West Siberian fields heavily. This was necessary to reverse the decline in West Siberian production that had begun in the 1980s and was seriously affecting state revenues. 

However, the fracking activity that kept West Siberia in business, also killed reservoirs in the sense that, after the initial post-frack peak in production, it became impossible to sustain hydrocarbon flows.  In a way, the “to frack or not to frack” debate in Russia in the 1990s resembled the centuries-old tug-o-war between the Slavophiles and the Westernizers.

And so here we go again. 

West Siberia is again in decline and that decline must be reversed to sustain state revenue. How to do it? Companies will need to start fracking to flush hydrocarbons out of reservoirs with low permeability – tight, hard-to-produce reservoirs. That’s why the state has issued tax incentives to make it more economical for companies to produce oil and gas from difficult reserves.

Does this mean the “shale revolution” has come to Russia? No. It means that state-run companies such as Rosneft, which took over Yukos; and Gazprom Neft, which acquired Sibneft, will have a lot more technology flashbacks to the 1990s. And if development of unconventional resources really becomes a state imperative, it might mean