Alexander Novak, Minister of Energy Russian Federation, Chair of Scientific Coordination council magazine «Energy policy»
The Energy Ministry’s efforts to promote the fuel and energy complex and the sectors within it invariably focus on a number of priority areas as designated by the President and the Government. They primarily include building up the hydrocarbon resource base, implementing infrastructure projects, diversifying export potential, lifting administrative barriers, improving the legal framework, increasing the availability of energy sources, the domestic development of technologies, including digital technology, and promoting international cooperation. These and a number of other key goals have become the main benchmark of the country’s energy policy. We see that priority performance indicators for various sectors within the fuel and energy complex as outlined by the country’s leadership five to seven years ago have either been achieved or will be achieved soon. In this regard, 2019 may be one of the most seminal years for the development of Russia’s energy sector and can pave the way for the Russian energy sector breaking new ground and reaching new heights.
Strategic planning
In view of instability in international energy markets and the sanctions pressure, the signing in May 2019 of the presidential executive order approving the Energy Security Doctrine of the Russian Federation was particularly important. Taking into consideration the ongoing international and domestic developments, this national security strategic planning document sets out priority goals in ensuring energy security and ways to achieve them and, in particular, provides for establishing an energy security risk management system.
Taking into account the provisions of the doctrine, as well as the instructions of the country’s leadership, the draft Energy Strategy of the Russian Federation to 2035 – the main strategic planning document for the energy sector – has been finalised. It identifies development goals, plans and vectors for the Russian energy sector; it lays out the main goals, indicators and key measures to address them.
These documents will help achieve a structurally and qualitatively new situation in the energy sector and thus add new momentum to the socioeconomic development of the country in general.
Palyanovskaya area of the Krasnoleninsky field in West Siberia
Russia and the world
In the context of a globalised world economy, when the largest effect in any industry can be achieved exclusively through joint efforts, Russia’s Energy Ministry places strong emphasis on promoting international cooperation and coordinating efforts to balance the global energy market. The OPEC+ Declaration of Cooperation has been a successful example of this kind of cooperation for several years. In July, the decision to voluntarily adjust output was extended until 31 March 2020. Importantly, the participating countries invariably reaffirm their commitment to this arrangement, making sure that the joint actions within the OPEC+ format guarantee the stability and predictability of the global oil market.
Cooperation in the energy sector with the Eurasian Economic Union (EAEU) member states is important for Russia. The presidents of the five EAEU countries signed a protocol in May on creating a common electricity market. The protocol will make it possible to benefit from the advantages provided by the parallel operation of the member states’ energy systems at a qualitatively new level. Next year, the EAEU countries will continue to form common markets for gas, oil and petroleum products.
In 2019, multilateral meetings were held as part of the Gas Exporting Countries Forum, the World Energy Congress, and the G20 summit of heads of state and government. Efforts are being made to expand bilateral cooperation with a number of countries. Russia’s intergovernmental commissions have had meetings with representatives from Algeria, Iran, Turkey and Qatar. A record number of bilateral events with Saudi Arabia, one of our leading partners in the Middle East, were held over the course of the year. The Russian President’s official visit to Saudi Arabia was an important milestone for bilateral relations offering an opportunity to discuss cooperation on the global oil market, the development of bilateral relations, and to sign a number of documents.
The resumption of negotiations with our Ukrainian partners in the Russia-EU-Ukraine format on the terms for continuing Russian gas transit through Ukraine after 2019 was particularly notable.
Oil cushion
Amid the volatility on world markets, the Russian oil industry has been demonstrating a sustainable upward trend for many years now. According to preliminary forecasts, 2019 production will be slightly higher than last year’s, amounting to 556–560 million tonnes.
This year, the biggest Russian oil companies began production at more than ten important fields, the largest of which is West Erginskoye in the Khanty-Mansi Autonomous Area – Yugra with recoverable reserves reaching 23 million tonnes of oil. The most advanced technologies are being used to efficiently extract tight oil in the Erginsky project, including real-time horizontal directional drilling and multi-stage hydraulic fracturing. The full-scale development of the Achimov deposits has begun; these reserves are estimated at 35 million tonnes of oil in the drilling area, and are also classified as hard-to-recover.
Another noteworthy event was that this year the Bazhen Technology Centre in Yugra was the first to perform an 18-stage hydraulic fracturing (HF) in the Bazhenov horizon with a record number of stages, speed and volume of fluid injected into the rock for the Russian oil industry. This technology increased the inflow of Bazhenov oil by 120 percent.
Simultaneously, efforts continue to be made to prevent a drop in production in conventional oil-bearing regions, to attract additional investment to the industry, and, consequently, to avoid a shortfall of Russia’s tax revenues. Russia has introduced a new taxation system effective from January 2019, a tax on additional income from hydrocarbon production, or additional income tax (AIT), aimed at redistributing the fiscal burden on subsoil users and moving the heaviest burden to later stages of project development. The AIT is being applied to pilot groups of oilfields; within two to three years, we will analyse the result and will possibly extend the AIT to the entire industry.
As an additional incentive for the oil industry, a roadmap on oilfield development and production growth is being implemented; it includes a series of activities through 2022. The first stage started this year involved an inventory of oilfields; it is expected to provide an estimate of cost-effective recoverable oil reserves to be used as a benchmark to assess economic efficiency of their development. The results of the inventory are planned as part of an effort to improve the fiscal legislation aimed at levelling out profitability of development of various oil reserve categories. The assessment of the existing differentiation of tax regimes for oil exploration, prospecting and production is nearing completion. After that we will be able to work out approaches to the development of appropriate incentives.
I must note that during the past year, the industry faced difficulties related to the substandard quality of oil delivered through the Druzhba pipeline to Belarus, Ukraine, Poland, Germany, the Czech Republic and Hungary. It is important that all the parties involved – the Energy Ministry, the Government, Transneft, oil companies, and oil consumers – showed commitment to constructive cooperation to mitigate the consequences. As a result, the quality of oil was restored and supplies resumed as soon as possible. Appropriate steps were taken to punish the perpetrators and prevent similar situations in the future. The Energy Ministry is continuously monitoring the quality of oil in the Transneft system. Importantly, despite the difficulties encountered, in the end Russia showed that it is a reliable partner and supplier, responsible and committed to consumers, and has the resources to quickly deal with an emergency, always ready for dialogue and compromise. I am sure this is very important for the long-term relationship with our partners.
The implementation of new oil pipeline projects continued along with the modernisation of existing ones. The capacity of the ESPO pipeline’s Taishet-Skovorodino leg has been increased to 80 million tonnes per year, and the Skovorodino-Kozmino leg, to 50 million tonnes per year. Major pipelines that transport oil to refineries in the Krasnodar Territory have been upgraded.
As for the domestic market for petroleum products, we expect oil and gas condensate primary refining volume to be slightly below last year’s level. The depth of oil and gas condensate refining will remain at the level of the same period in 2018. According to our estimates, petrol production will increase by 2 percent to 40.2 million tonnes.
As you may remember, on 1 January 2019, Russia launched a unique tax system unparalleled in the world to stimulate the industry and reliably provide the domestic market with fuel – the reverse excise tax on oil with a damping component. This system makes it possible to level off the influence of sharp spikes in oil and petroleum product prices and ensures stable fuel supplies to the domestic market. With the damping mechanism, agreements with oil companies to limit the rise in fuel prices, which had been in effect until July 2019, were no longer needed. Today we can confidently say we have chosen the right strategy: the fuel market in the Russian Federation is stable, and the rise in fuel prices is far below the inflation rate at 2.7 percent against 3.7–4 percent in October 2019.
We are confident that fuel prices will remain stable throughout 2020, taking into account the expected increase in inflation. As an economic measure, the damping mechanism helps reduce the volatility of domestic fuel prices, so even if we encounter a sharp spike in oil prices, as some experts are now warning, it will pose almost no risk for the domestic market, because the increase in the discount in the prices for petrol and diesel fuel on the domestic market against the export netback will be levelled off by a simultaneous increase in damping coefficients.
Focus on natural gas
In view of past and anticipated global events, it is the natural gas industry that arouses the greatest interest in 2019. Let me start with LNG market development. We see impressive success here. We expect this year’s LNG exports to increase 44 percent to around 39 billion cubic metres.
These results are largely due to the Yamal-LNG plant reaching full capacity in late 2018. As of the end of the third quarter 2019, the plant has shipped over 300 loads of LNG totalling about 22 million tonnes and 65 loads of gas condensate totalling 1.6 million tonnes since December 2017. The Cryogas-Vysotsk plant in the Leningrad Region started LNG shipments this April with deliveries for the domestic market as motor fuel and as natural gas supplies to consumers, and to foreign markets in northern Europe, Scandinavia and the Baltic states.
A final investment decision has been made on the Arctic LNG 2 project. The first facility at the plant is scheduled to open in 2023–2025. According to NOVATEK, the plant will produce 19.5 million tonnes of LNG per year. In addition, the comprehensive plan to develop LNG production in the Yamal Peninsula will be continued next year.
The key infrastructure projects have entered the completion stage. The Power of Siberia main gas pipeline is already in service. It carries gas from the Irkutsk and Yakutia gas extraction centres to Russian consumers in the Far East and to China via the “eastern” route. In 2014, Gazprom and China National Petroleum Corporation (CNPC) signed a 30-year Sales and Purchase Agreement for 38 billion cubic metres of gas annually via this pipeline. Power of Siberia is another example of our reliable business ties and mutual understanding with our Chinese partners while our concerted work made it possible to complete the project ahead of schedule. We expect Power of Siberia to provide further impetus to the exploration of gas extraction sites in Yakutia.
The first pipeline of the TurkStream is ready to go into service. This is another project with our strategic partner, the Republic of Turkey. Nord Stream 2 pipeline construction is proceeding on schedule, thanks partly to Denmark’s timely permits to build a section of the pipeline in its exclusive economic zone. This is further confirmation of the economic validity of the project and of the interest of our European partners in guaranteeing energy supplies.
The extraction of natural gas is being stepped up to ensure reliable distribution to our foreign and domestic consumers. It is expected to increase by 2 percent this year, to about 740 billion cubic metres, compared to the record-setting previous year.
Work continues to expand the gas distribution network in Russia’s regions. Gas distribution access is expected to reach 70 percent by 1 January 2020, with 73 percent in cities and 62 percent in rural communities. The use of natural gas as a motor fuel is expanding. By the end of the year, we expect the number of natural gas filling stations to increase by a quarter compared to the previous year to 500 stations, whereas the volume of natural gas used as motor fuel will exceed 900 million cubic metres this year.
Non-resource exports
The petrochemical industry is making rapid headway. The launch of the Russia’s biggest modern petrochemical plant, Zapsibneftekhim, has been a landmark of 2019. It is one of the top five global investment projects in this industry. The plant’s products will play a big role in the development of non-resource exports and replacement of the current polymer imports, mostly from China and Europe.
The roadmap on the development of Russia’s petrochemical sector until 2025 was adopted in February 2019. It provides for a set of measures to further improve the mechanisms of government regulation in the petrochemical industry, including financial, tax, tariff and customs and other regulatory support measures.
By implementing the measures envisaged by the roadmap we intend to create the conditions for increasing the use of liquefied hydrocarbon gas and ethane as raw materials for the petrochemical sector, building up the production of industrial polymers and their exports to dynamic markets. On the whole, the programme for supporting the petrochemical industry will facilitate the development of new large-scale production lines, which will in turn become the foundation for import substitution on the domestic market and growth of non-resource energy exports.
Based on the results of 2019, we expect that the amount of hydrocarbon raw materials to be processed into petrochemical products will reach about 11 million tonnes. By 2025, this figure will increase to 23 million tonnes and to 28 million tonnes by 2035.
«Black Gold»
The coal industry continued to make progress in 2019. By the end of the year coal extraction and exports are estimated at last year’s level of 440 and 210 million tonnes, respectively, whereas expected investment in the coal companies’ fixed assets will stabilise at 2018 levels, at around 140 billion roubles.
New coal extraction centres continued to be developed as did coal-related transport projects. The third stage of the Vostochny Port, a completely automated coal complex in the Free Port of Vladivostok, was launched this year to enhance the export potential of the coal industry. A private investment project, the largest in the Far East, on coal transhipment from rail to ship doubled terminal capacity from 25 to 50 million tonnes.
In 2020, we will continue to work at resolving current issues in the coal industry including improving working conditions, stepping up the safety of mining operations, reducing industrial accidents and injuries in the coal industry, and improving commodity markets mechanisms for selling coal products. As a separate goal, we are also considering assistance in streamlining transport logistics and expanding the application of long-term tariffs on coal shipments as well as increasing railway tonnage capacity.
21st century energy
The power generation industry continued to grow and demonstrated high levels of reliability in 2019. Power generation in Russia is expected to increase to 1.10 trillion kWh, consumption to 1.08 trillion kWh, and installed capacity to 253.6 GW by the end of 2019.
Power generating capacity and electric grid facilities are continually upgraded and new ones are being built. New units have gone online in the Tula Region, the Chechen Republic and the Krasnodar Territory. The Tavrida and Balaklava TPPs were launched in the Republic of Crimea thus ensuring long-term operation of the peninsula’s power system which is isolated from Russia’s Unified Energy System.
Russia’s Unified Energy System has been expanded since 1 January 2019 for the first time in Russia’s modern history with parts of Eastern Siberia and Yakutia connected to the Unified Energy System. This will improve national energy system reliability.
We are seeing improvements in energy infrastructure accessibility every year. Russia ranks seventh in Getting Electricity on the World Bank’s 2019 Doing Business rankings (five positions up from 2018). With regard to the Power Supply Reliability Index, Russia has been on top of the list with 8 points out of 8 for the fifth consecutive year.
The transition to long-term tariff regulation in the electric power industry continues. The Federal Law On the Electric Power Industry was amended in August to create a basic platform for transitioning to long-term tariff regulation in the electric power industry and to imposing restrictions on regional authorities regarding their ability to set tariffs for electric power transmission, which will allow the regulator to have a comprehensive influence on tariffs in the regions and to increase the investment appeal of the country’s electricity grid.
A new mechanism for the competitive selection of investment projects for thermal power plants based on the long-term capacity market was launched to upgrade fixed assets and improve generating equipment efficiency. This programme will help upgrade 41 GW of the thermal power plants’ generating capacity by 2035 and overcome a range of macroeconomic challenges such as improving the reliability of the fixed assets by 16 percent, to draw investment in amounts up to 1.86 trillion roubles, and to create a steady demand for the production of power generating equipment. The main conditions for this mechanism include the highest possible localisation of major generating equipment. A selection of 15 GW by 2025 has already been carried out.
The use of the “alternative boiler house” method is expanding in the heating energy market. Three more regions joined the heat supply price zones in 2019. Potential participants in a new heat market model include 25 municipalities. If they are assigned to heat supply price zones, the expected total investment amount could reach 145.4 billion roubles.
Reliable power distribution to consumers is the electric power industry’s main goal now and in the future. By 2035, we expect electric grid losses to decrease from the current 10.4 percent to 7.3 percent, the number of technical disturbances to be cut by about 50 percent, and power supplies to households in the event of outages to be resumed within about 30 minutes on average instead of the current 2 h 25 minutes.
We also need to streamline the tariff burden on consumers and increase the industry’s internal efficiency. Cross-subsidies, increased payment discipline and dealing with excess power reserves will be addressed in the process. In addition, we need to promote competition and market relations and continue with the industry’s digital transformation.
In 2019 power generation in Russia is expected to increase to
1.1 trillion kWh, consumption to 1.08 trillion kWh, capacity
to 253.6 GW
«Clean» energy
Measures to support electricity generation from renewable energy sources have been in place for several years now. Efforts in this sphere have been focused on promoting renewables on the wholesale and retail electricity markets, as well as incentivising the manufacturing of equipment for renewable electricity generation. Today, renewable energy sources, including hydropower plants, account for about 17.2 percent in the overall energy mix. Most importantly, Russia has created a comprehensive research and manufacturing complex, enabling the country to develop, introduce and produce power generation equipment for working with renewable energy, as well as train qualified staff for this economic segment.
Having already demonstrated its efficiency in domestic electricity generation facilities, Russian photovoltaic technology has made an important step in 2019 by expanding into foreign markets. In fact, Russia launched deliveries of its solutions to European and Asian countries. While research and industrial competences are only beginning to take shape in the wind power sector, a number of facilities are already making components for wind turbines.
It has to be noted that there are plans to extend the support programme for renewable energy until 2035. This means that beginning 2036 renewable energy will not need any subsidies anymore, and will start to pay off, enabling it to operate under wholesale market mechanisms.
Fuel and energy complex of the future
The hydrogen energy sector has substantial development potential. In the future, hydrogen as an energy source could play a key role in meeting the global demand for clean and affordable energy. In this sector, Russia has all the competitive advantages it needs in order to emerge as the leading power on the international hydrogen energy market. In fact, this country has excess capacity, is close geographically to the potential hydrogen consumers, and has a functioning transportation infrastructure. Russia’s Energy Ministry has initiated efforts to put this potential in hydrogen energy to effective use. A working group has been established in 2019 to draft a roadmap for the development of the hydrogen energy sector in the Russian Federation.
The introduction of digital solutions and smart energy services already plays a significant role in the development of the Russian fuel and energy sector.
The implementation of the EnergyNet roadmap as part of the National Technology Initiative (NTI) continued in 2019. It is designed to facilitate the development of Russian smart energy integrated systems and services. There is a plan, approved in 2018, of ongoing measures to improve the legislative framework and remove administrative barriers for the implementation of NTI’s EnergyNet initiative in terms of facilitating market access for operators involved in new types of entrepreneurial activity and bringing innovative business models. This document provides for the implementation of integrated pilot projects for testing these new mechanisms.
Among them there is a pilot project underway to create supply and demand aggregators for the electricity markets. It helps consumers reduce their electricity bills, while enabling technology companies to acquire new competences. There are a number of other projects in the pipeline to develop active energy complexes, electricity supply to isolated and remote territories, use systems for electric power storage and delivery to the power grid, as well as consumer services based on blockchain technology and smart contracts.
In terms of technological development, the future of the fuel and energy complex lies with the digital transformation of its sectors. In order to ensure that these processes benefit from all-round support, the Russian Energy Ministry is carrying out the Digital Energy project. It is designed to facilitate the introduction of digital technology, establish the norms and regulations in this area and create a single IT environment for the fuel and energy complex. This requires the key participants from across all sectors to come together and create competence centres. Today, the oil and gas industry and the electric power sector have centres of this kind. Companies operating in the fuel and energy complex are expected to express their shared and consolidated vision on the sector-wide comprehensive digital transformation in the Digital Transformation Concept for the Fuel and Energy Complex, with proactive efforts to draft it already underway.
Having up-to-date and accurate data is essential for delivering on the digital transformation and, in general, for planning in the fuel and energy complex. The State Information System for the Fuel and Energy Sector already makes this possible. The first stage in its introduction was completed in October 2019. This system is designed to ensure that users benefit from the latest data, forecasts and analytics, which in turn is expected to make decision-making at various levels more efficient.
Tech made in Russia
In 2019, Russia’s Energy Ministry continued its efforts to reduce the dependence of the fuel and energy complex on imported equipment and technology.
Russian-made refining catalysts accounted for 63 percent in the oil refining industry as of the end of the third quarter of 2019, according to preliminary data, which amounts to an increase of 31.8 percent compared to 2014, while in the petrochemical industry the share of petrochemical catalysts rose 34.2 percent compared to 2014 to 72.7 percent. Imports of industrial polymers are estimated at 13.3 percent of the total output.
A number of measures were adopted in 2019 to enhance Russia’s energy security and facilitate the development of advanced domestic technology for the energy sector. In particular, this included the adoption of roadmaps to incentivise the development of new oil fields and extraction sites, localising equipment for medium and large-scale LNG production, oil and gas chemical complex development, as well as ensuring that electric energy sector companies transition to a model whereby it is mandatory for them to purchase Russian-made electronics and software.
By 2035, electric grid losses will decrease from the 10.4% to 7.3%, the number of disturbances to be cut by 50%, and power supplies to households to be resumed within 30 min. on average instead of 2 h 25 min.
Environmental agenda
In 2019, the Russian Federation joined the 2016 Paris Climate Agreement, a milestone instrument for reducing greenhouse gas emissions around the world. In order to mitigate the human-induced climate impact related to the fuel and energy sector, Russia’s Energy Ministry has already embarked on a series of initiatives. This includes efforts to improve energy efficiency, expand the use of natural gas, promote industrial modernisation, implement innovative materials, develop green transport and make fuels more eco-friendly. In addition, building on the international experience Russia launched the transition to the best available technology in order to promote sustainable energy use.
Russia is committed to furthering its efforts in implementing environmental protection policies, while being mindful of avoiding placing an excessive burden on businesses or undermining the positions of Russian companies on the international markets. In this context, in order to resolve climate-related issues, conditions have to be put in place for ensuring the sustainable development of high-technology manufacturing in Russia so as not only to mitigate human impact related to the fuel and energy complex, but also enhance the competitiveness of Russian companies internationally.
Having Russia’s Energy Ministry advance along these lines of action is critical for keeping up the momentum in the fuel and energy complex, which in turn is essential for satisfying the current and future energy needs of the national economy, as well as that of every Russian citizen. The only way to deliver on this objective is to consistently improve performance across all systems within the fuel and energy complex. This is the only way for us to unleash as much as possible the potential of these sectors domestically and strengthen their positions on the international energy markets, where Russia, as a rewarding and reliable business partner, has every chance to expand its foothold.
