Big Oil's Next Boom

The U.S. has witnessed a huge fracking boom in the past decade. Many big oil companies arrived late to the game and overpaid for assets, but the second time may be the charm. By heading overseas to sparsely populated regions of Eastern Europe, the big international oil companies can partner with local governments without being subject to heavy regulations.


Russia Crude Oil Production Chart
Russia Crude Oil Production Chart

Russia Crude Oil Production data by YCharts

U.S. production of hydrocarbons has sharply increased in recent years, and Russia would like to do the same. Russia makes a pretty penny by exporting natural gas and crude oil to its neighbors. Western Europe detests the idea of fracking and its potential environmental effects, but it is happy to buy hydrocarbons from Russia. The growth of U.S. fracking has Russia worried that cheap American energy exports will eat up Russian market share. To deal with the threat Putin wants Western firms to come over to Russia and help develop the nation's own tight oil resources.

Russia recently established special tax breaks to encourage tight oil resource development. Back in 2012 ExxonMobil and Rosneft got together to start fracking in Siberia. Rosneft is 19.75% owned by BP , so the deal is effectively an ExxonMobil-BP-Moscow joint venture.

Russia's development of its tight oil fields is a big positive for ExxonMobil and BP. The Energy Information Agency estimates that Russia has largest amount of technically recoverable shale oil resources in the world. Russia comes in ninth place in terms of nations with technically recoverable shale gas resources, but other factors swing the situation in Russia's favor. Russia has lax environmental laws, making it easy to drill in the country.

A couple years ago ExxonMobil decided to shell out $40 billion on the North America natural gas fracker XTO Energy. ExxonMobil overpaid for XTO Energy as it bought the company just before natural gas prices fell, but now it has the necessary experience and resources to bring fracking overseas. The 51-49 Rosneft-ExxonMobil tight oil joint venture in Western Siberia is great evidence that ExxonMobil is moving forward.

ExxonMobil has little debt with a total debt-to-equity ratio of just 0.13, but it needs to grow its upstream production if it wants to keep growing its revenue by least 4% per year. Bringing Russia's tight oil fields online will help the company maintain its top line and bottom line growth. In the long run decreasing share buybacks to put more cash into long-term investments is a wise choice that will help maintain ExxonMobil's cash flow.

Russia plays a very critical role for BP as well. The company's reserve growth has taken a hit after its recent asset sales, but Russian production helps to maintain profits. In Q3 2013 BP's share of Rosneft's production was 965 thousand barrel of oil equivalent per day (mboepd), a critical asset for BP considering that its total production for the quarter was 3,200 mboepd. If BP wants to keep giving 5.6% dividend increases then it is needs Rosneft to grow.

The Ukraine
Russia is not the only Eurasian nation looking to open up its fracking potential. Chevron recently signed a big deal with the Ukraine to help the nation develop more of its own resources. The deal starts with Chevron shelling out $350 million for initial exploratory work over the next couple years. The rosy picture sees a possible $10 billion investment over the entire course of exploration to extraction, but these numbers are probably on the optimistic side. Chevron had big hopes for Poland before regulatory setbacks came in.

Regardless, getting past the environmental objections should be easier in the Ukraine than in Poland. The Ukraine is not part of the European Union and it does not need to please Brussels.

Chevron is in a similar position to BP and ExxonMobil. It needs to bring new production online. Taking on Eastern Europe's political risk is the price of growth. In Q3 2013 Chevron's production was practically flat, increasing just 3 mboepd to 2,585 mboepd from the previous quarter. Chevron has a low total debt to equity ratio of 0.13 and a healthy profit margin of 10.6%. It should not have any problem financing further Ukrainian development if exploratory drilling is successful.

Final thoughts
Environmental fears make fracking in the European Union a very challenging proposition. By focusing on Russia, ExxonMobil and BP have found a good way to increase their upstream volumes and gain access to reserves under the control of national oil companies. Chevron has the capital and knowledge to bring new shale resources online, and the Ukraine holds more promise than Poland thanks to its lack of European Union influence. Big oil needs growth, and Eastern Europe is very promising.

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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