Energy Transition

Russia Wakes Up to Green Reality

Copyright © 2021 Energy Intelligence Group

There are no longer discussions in Russia about the energy transition and net-zero targets being a reality. The main unknowns are when and how these changes will happen. Although Russia's hydrocarbons-dependent economy faces huge risks and losses, there could still be big opportunities, including the creation of new technologically advanced production systems and industries.

Carbon neutrality by 2050 could mean for Russia a 72% decline in crude oil and gas condensate production by the middle of the century, while output of gas and coal would go down by 52% and 90%, respectively, German Gref, CEO of Russian state-controlled Sberbank, said.

Speaking at the Eastern Economic Forum in Vladivostok last week, he said analysis carried out by the bank showed that energy exports would drop by $179 billion by 2035 from about $250 billion that Russia received in 2019 and by $197 billion by 2050 as a result of the energy transition. Per capita income would decline by 14% and the state budget's loss would amount to 5 trillion rubles ($68 billion) by 2035.

The only way out is "the green one," believes Anatoly Chubais, President Vladimir Putin's envoy on sustainable development. But it will require the colossal restructuring of the Russian economy as a whole, as well of the state regulation system, including taxation, customs, external economic activities, credit-monetary systems and others.

The government is well aware of the challenges and following a number of behind-closed-door discussions of the issues with Prime Minister Mikhail Mishustin earlier this year, 10 working groups were set up to come up with response measures.

The government is also to approve by the end of the year a strategy for low-carbon development, the draft of which has been prepared by the economic development and trade ministry. It envisages four scenarios -- inertia, base, intensive and aggressive -- that differ by the speed of decarbonization and the required financial means.

The first two scenarios do not envisage carbon neutrality, while the remaining two target it by 2050 and 2060, respectively. The latter would also mean the reduction of coal in the country's energy balance to 5% from 13% and the increase of nuclear energy to 37% from 20%. Both of them also envisage introduction of the carbon tax, one of the most sensitive issues for the government, which is still seeking an answer to the question of who will pay for the energy transition. Moscow is still to decide which scenario to choose.

Producers Rise to Challenge

Russian oil companies are ready for the challenge, said Gazprom Neft CEO Alexander Dyukov. They have the resources and the will to take it on, he added.

Dyukov is sure that there could be quite a lengthy period of time when the old and new energy patterns would coexist. The aim of the oil producers is to remain efficient even in a market of declining demand. Gazprom Neft also sees its targets as reducing its carbon intensity, having a flexible investment portfolio and diversifying into petrochemicals, hydrogen and carbon capture utilization and storage. With a lot of depleted fields, there are big opportunities for pumping carbon dioxide back into reservoirs.

Although Dyukov believes that the oil industry still has one or two investment cycles, it is also necessary to pack its portfolio with projects with faster cost-recovery periods.

Deputy Energy Minister Pavel Sorokin said the government should support the competitiveness of Russian companies in the race against other oil and gas producers that also want to monetize their reserves before demand goes down. He pointed to rising production costs in Russia and said that about half of Russia's current oil reserves are uneconomic under an oil price of $50 per barrel. The government could provide tax stimuli for their development but it needs to accept that there won't be a windfall income from the oil industry any more.

International Cooperation

Energy transition issues require joint international efforts, Russian officials emphasize. Cooperation with Opec-plus remains important as an "overly enthusiastic" push for a fast energy transition could result in underinvestments in traditional oil projects and a volatility in prices, according to Dyukov. He said that much would depend on the producer group's actions.

Moscow also needs to agree with Europe on the recognition of Russia's verification system of CO2 emissions and of natural sinks' absorption capacities, as well as the national trading carbon system it plans to develop. According to Economic Development Minister Maxim Reshetnikov, Moscow aims to secure international recognition by the end of 2023.

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