Abstract: In order to solve the technical problems such as borehole instability and environmental pollution faced by conventional oil-based drilling fluid in the shale oil working area of Subei Basin during drilling, a new control method of borehole stability was put forward, featuring external waterproofing and internal expansion control by studying the mechanism of borehole instability. The technical measures of “dominant plugging + strengthened inhibition + wetting reversal + reasonable density” was developed, and the key additives such as deformable micro-nano polymer plugging agent, shale wetting reversal agent, and crude oil emulsifying dispersion viscosity reducing agent were developed. Finally, a high-performance water-based drilling fluid system, SM-ShaleMud-II, was established. The high temperature and high pressure filtration loss of the drilling fluid system was less than 6.0 L, and the extreme pressure lubrication coefficient was less than 0.12, which could effectively reduce the weakening degree of the mechanical properties of the reservoir shale. The drilling fluid was applied to 10 wells in the shale oil area of Subei Basin, ensuring borehole stability and smooth casing running and achieving good application results. The successful development of high-performance water-based drilling fluid, SM-ShaleMud-II, provides an effective technical means for low-cost and green development of unconventional shale oil and gas.