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Freie Stellen Text
Gastwiss. Programm Text

2. Energy in Russia

(Dr. Manuela Troschke)

2.1 The need for change

2.1.1 The supply problem
2.1.2 The demand problem
2.1.3 The investment problem

In 2010, Russia accounted for 6% of world total reserves of oil and 23% of world total reserves of gas. Assumed constant production volumes, stable future national and international demand and utilisation of all proven reserves, Russian oil reserves will be depleted in 17 years and gas reserves in 72 years. Coal reserves will be sufficient for decades as well. While this sounds quite comforting to the ears of energy importers, compared to other energy exporting nations, Russia is clearly worse off. The supply side will not be able to grant stable production of primary energy carriers over the next decades, the demand for energy is growing in line with the economic catch-up process of the country. Tasks of the future include diversification of the energy mix on the one hand and a decoupling of energy demand and economic growth on the other hand. While the experience of industrialised countries shows that this is a long way to go, time is pressing for Russia.

2.1.1 The supply problem

The first critical point on the supply side is the quality of proven reserves in Russia. The notion of "proven reserves" depends on whether explored deposits can be recovered with reasonable certainty (90% probability). Current geological knowledge, existent technology and current prices of energy as well as needed technology and infrastructure play a decisive role. If a deposit does not meet the requirements any more, it has to be re-qualified into a prospective or forecast resource. In Russia, the exploitation of many proven reserves is on the edge of profitability at the moment, especially for newly discovered deposits. While other energy nations producing from deposits whose peak productivity levels are already in the past can shift production to sites of comparable quality, Russia cannot.
For oil, the big deposits which are operating since Soviet times show depletion ratios of about 60%. With production costs at these sites estimated to be 85 USD per ton in 2010, compared to other countries, Russia - even nowadays and for already developed deposits - is a high-cost producer. New deposits are in an even more unfavourable situation since they are located in challenging areas which are difficult to access due to geography, climate and technical reasons. Additionally, the quality of the new deposits is lower, with higher percentages of sulphur contained and substantially higher amounts of associated gas in the sites. Notwithstanding the diminishing time horizon for easy oil, Russia overtook Saudi Arabia and became the world's biggest oil producer in 2009. However, in absolute numbers, production slowed down from peak levels of 2007, what might be attributed to the high marginal tax rates summing up to about 90% that have been imposed upon the oil industry. With the national tax regime unchanged, the majority of new oil fields will be unprofitable, and a rise in oil production by 13-14% till 2030 as envisaged in the Energy Strategy of Russia will be hard to achieve.
For gas, the situation is comparable to that for oil with respect to depletion of the old fields, with giant Western Siberian fields depleted by 65-75%, and with respect to the location and quality of new deposits. All of them are in remote and/or offshore areas; many come with low pressure and high percentages of condensate and helium. However, profitability of production in the Russian gas sector is much higher than in the oil sector, with production costs at minimal levels of 15 USD/1000 cbm, projected to rise to 28 USD by 2030. While Russia has been the world's biggest gas producer for decades and has enough capacities to keep that position, the problem of future gas is on the transportation side. Connecting new remote deposits to the existing pipeline system requires huge long-term investments which might be foregone if energy demand is shifting away from carbon sources. Liquefaction, an alternative bearing less fix costs, requires new skills, new technology to be purchased from abroad and port and sea infrastructure that bears political risks. Since the relevant long-term decisions are not made, a supply-crunch seems to be a realistic scenario for gas (Energy Efficiency in Russia: Untapped Reserves).
For coal, the resources are enormous, but they are also concentrated in Siberia and the Far East with European production fading out. Russian coal is generally of minor quality regarding the energetic content. Moreover, coal production sites are worn-out and accidents in coal mines are frequently reported. Although many loss-making mines have been closed down already, the sector is not profitable and depends on subsidies. Since coal production technology was completely driven down after the break-up of the Soviet Union, the sector now is completely dependent on imported technology and upgrading production is extremely expensive.
The upstream sector of energy production - electricity and thermal production and distribution and the petroleum industry - is in a poor technical condition. Production plants are old, dirty and energy inefficient, losses along distribution lines are extremely high - according to official data provided in the Energy Saving and Improvement Energy Efficiency for the Period up to 2020 programme (in Russian) - 14% to 19% for thermal energy and 20% for electricity, including technical losses. The processing depth in refineries is extremely low if compared to international standards and does not satisfy internal demand for high quality refined products. Overall energy security in Russia is satisfying, but regional imbalances and problems with energy quality are high, and they intensify. The supply problem turns to a demand problem.

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2.1.2 The demand problem

Russia is a growing economy and the world's third largest consumer of energy. It is spending more energy for a unit of its economic output than most countries of the world. According to the World Bank/IFC, in 2005, Russia's energy consumption equalled 0.42 kilogram of oil equivalent per USD of GDP, what ranked the country at worrisome place 12 out of 121 countries. National demand for all sources of energy according to the Energy Strategy of Russia is projected to rise by 45-65% till 2030, with demand for oil and gas rising by 30-50% and 37-45% respectively, and that for electricity by 85-130%, caused by a change in consumption patterns.
In addition to the substantial increase of national demand, Russia has to meet export obligations from long-term contracts, especially in the gas sector. These contracts fade out over the next decades and will increasingly be substituted by spot-market deals on the liquefied natural gas markets; but due to low diversification and competitiveness of the economy, Russia cannot afford to abandon energy exports as long as they are the backbone of the economy. The Energy Strategy of Russia for the Period up to 2030 plans a rise in overall energy exports by 13-14% with a substantial rise in gas exports while oil exports stay stable.
To satisfy the internal and external demand projected by the government, the problems at the supply side have to be solved in the nearest future, which in turn causes an acute investment problem.

To top The investment problem

The amounts of investment needed to cope with the deteriorating conditions in the Russian energy sector clearly demonstrate the need for change. Investment is needed at all stages of the production-transport-supply cycle: existent production equipment has amortisation rates of 60% (oil), and 80% (gas); existent oil and gas pipelines are outdated and account for losses of about 5-7% in oil, and percentage assumed to range between 2-4% in gas (World Bank 2010 report Lights out?); the situation in the downstream sector is comparable. Large upfront-investments are needed to put new fields and techniques into operation, to build up the necessary social infrastructure, and to build new transport infrastructure. According to the Energy Strategy of Russia, investments in the range of 2.3-2.7 trillion USD are required over the period 2009-2030 to implement the necessary measures. The World Bank 2010 study Lights out? states that reaching the gas production target alone would require yearly investments of 15 billion USD - but in fact throughout 2001-2008 only 4.5 billion USD have been spent on annual average.
It is unclear who will finance these investments. Although the Energy Strategy of Russia for the Period up to 2030 assigns the central role to the state, it does not contain concrete governmental financing measures; budgetary sources might be dedicated to the accompanying measures in the science or infrastructure sector mentioned in the programme. Own sources of enterprises, no doubt, exist in the exporting upstream enterprises of the oil and gas sector. However, during the last decades, to a large part, the money earned has been channelled to purposes other than exploration, upgrading and long-term investments in the own national sector. It is hard to see why firms behaviour shall change substantially with the regulatory surrounding unchanged. In downstream enterprises and in electricity and thermal production and distribution, there are little capacities for self-financing of investments as long as final consumers do not pay cost-recovering prices and/or do not pay their bills fully. Attracting FDI into the sector is a choice for new projects especially in the field of exploration and transportation of oil and gas, but the stakes that foreign investors can hold in strategic industries like oil and gas have limits ranging from 10% to 25%.