Russia should rethink its role in new energy economy

Global gas market remains oversupplied and renewables only makes up a small part of the country's energy mix

A Russian pipe laying vessel, Akademik Tscherskiâ, anchored in the harbour in Sassnitz, Germany. The vessel hsa been laying sections of the Nord Stream 2 pipeline under the Baltic Sea. Companies involShow more

Russia’s energy sector has so far come through the pandemic better than some might have expected. Cooperation in the Opec+ deal has shored up oil revenue and the rouble. But the country’s longer-term outlook is cloudy, both in petroleum and its unstrategic approach to new energy.

After the brief price skirmish with Saudi Arabia in March, Moscow has been a cooperative partner in the Opec+ framework. As usual, it has mostly but not completely complied with agreed production limits. Oil prices have recovered above the budgetary break-even price of around $42 per barrel, while the rouble has settled about halfway between the pre-pandemic rate to the dollar and the worst of the crisis in mid-March.

The coronavirus pandemic has hit Russia hard, with the fourth-highest number of cases worldwide, although numbers have been steadily falling since June. The economy shrank 8.5 per cent in the second quarter – bad, but not as bad as expected and better than some countries.

The turmoil following the disputed re-election of president Lukashenko in neighbouring Belarus is a reminder of the challenges that Vladimir Putin faces. Belarus is an important transit route for both Russian oil and gas, earning a healthy mark-up on refining discounted crude supplies.

So the overall picture in Russia is of a country muddling through difficult times. Plans for the massive oil and gas sector are reasonably sensible and achievable in themselves. But there is a huge gap in appreciation of the challenges of the new energy economy, and Russia is far behind some of its Middle East competitors in grappling with the issue.

The realignment of the gas industry continues. Liquefied natural gas shipments from the Arctic, often using the north-east passage to Asia through newly ice-free waters, have been an impressive success. But overall gas exports have fallen from 199 billion cubic metres last year to an expected 166-167 billion cubic metres this year, because of the impact of the pandemic as well as competition in a heavily oversupplied world market. Exports by pipeline to China began in December, but are still small compared to sales to Europe and Turkey.

A new pipeline, Turkish Stream, began delivering to that country in January, as part of its strategy to bypass Ukraine. But Ankara’s large gas find in the Black Sea on Thursday might diminish its need for Russian supplies. The other part of the Ukraine avoidance strategy, the Nord Stream II pipeline under the Baltic Sea to Germany, is 94 per cent complete. But it is beset by US sanctions on its pipe-laying vessels, and in a race to finish before legislation is signed in December.

The Russian gas sector is increasingly exposed. Methane leaks and flaring give it a high carbon footprint, while demand in its main market, Europe, will fall in competition with renewables and improved efficiency. In March, the Energy Ministry ordered its main energy companies to look seriously into hydrogen, which could be generated from excess nuclear or hydro-electricity, or from gas, and blended into the country’s gas pipelines.

Otherwise, low-carbon energy is almost entirely confined to nuclear and hydropower. State-owned Rosatom has built up a significant portfolio of reactor construction worldwide, including El Dabaa on Egypt’s north coast –where construction is supposed to begin next year – Iran, Belarus, Turkey, Bangladesh, India, China and elsewhere, as well as floating nuclear power plants for deployment to remote areas. These are largely supported by generous financing packages from Russia’s sovereign wealth funds.

Russia last year had just 0.1 gigawatts of wind and 1.1GW of solar power from its total generating capacity of 253GW, absurdly low given its vast territory. It is a negligible player in new energy technologies such as advanced batteries or electric vehicles. It is only a second-tier miner of the materials of the energy transition, such as cobalt, graphite and rare earths.

It has not taken climate change very seriously. Under the Paris Agreement, it promises only greenhouse gas emission cuts it already made in the post-Soviet collapse, and a relatively low 4.5 per cent renewable target by 2024. Its unambitious long-term climate plan, released in March, has the country becoming carbon-neutral only well after 2050. April’s 2035 energy strategy sees new and low-carbon energy as threats to be countered, not opportunities to seize.

In June, melting permafrost led to the collapse of a tank, spilling 21,000 tonnes of diesel into a Siberian river. This was a reminder of the rapid climate change in Russia’s frozen north, opening up the northern sea route but undermining roads and pipelines.

The country, however, is not as badly off as some petro-states, but remains highly exposed to future global climate policy reducing demand for hydrocarbons. Until the price collapse, oil and gas made up about 40 per cent of federal budget revenue and more than half of export earnings.

It has many advantages in principle for economic diversification: a strategic geography that is core to weighty neighbour China’s belt-and-road initiative; a great range of non-fossil fuel natural resources including metals, uranium, timber and grain; some $165 billion (Dh606bn) of sovereign wealth holdings; stable and conservative macroeconomic management; a large and well-educated population and a legacy of science and technology.

Adapting to a low-carbon or post-peak oil demand world should be easier than for the major Middle Eastern exporters. But GDP per capita has hardly budged since the financial crisis, and ambitious plans for a technology-led future have run into corruption, the drag of sanctions, an overbearing state and the continuing lustre of gargantuan infrastructure projects in remote regions. Stuck between oil and ice, Russia needs fundamental changes, not fixes, to meet the energy future.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis