Prospects for the oil and gas complex in the East of Russia

Alexey MASTEPANOV
Head of the Analytical Center of the Energy policy and Security (IOGP of the RAS),  a member of the Directorate Council of the IES,  DES., professor of the Gubkin University,  academician of the RANS
e-mail: amastepanov@mail.ru

.The article deals with the formation of the oil and gas industry in the east of Russia in  the framework of the development of energy cooperation with the countries of East Asia. The role  of East Asia in the world and the main factors that will determine the most important areas of  energy cooperation in this region are shown. It was concluded that after the restrictions caused  by the coronavirus epidemic and the economic downturn, the main countries of the region will  continue to increase demand for energy. In these conditions, the volume of export of hydrocarbons  from Russia will be limited by the possibility of their production and transport in our country.
Keywords: energy cooperation, East Asia, Russia, oil, natural gas, energy demand and consumption,  development forecasts.

Northeast and Southeast Asia is one of the largest macro-regions on the planet and, at the same time, the most dynamically developing geopolitical space that is consistently attracting the center of gravity of the world economy and politics. This region is a virtually limitless market for energy products and services. It is difficult to imagine a better example of a potential mutual assistance on the global scale in the field of economy and energy than this geographical space of East Asia where some countries are rich in energy, minerals and other natural resources while others have the most advanced technologies and still others have vast labor resources¹.  The potential of such a cooperation is far from being effectively used.

Regional fuel and energy crossflows provide only a minor portion of East Asia’s energy consumption. According to the energy, this region today is a set of isolated markets that have little interaction with each other and don’t have a deep regional cooperation.  For Russia, whose east is rich in various natural resources² but has not been sufficiently developed yet, a cooperation with the neighboring states of East Asia is particularly interesting in general. 

The most important area of the energy policy of most East Asia countries is an improvement of the existing energy consumption structure, which has become especially relevant in the last decade. There are many reasons for this, but the most important are the following:

• the need to reduce the dependence of Asian economies on oil imports from traditional suppliers in remote regions. The instability in the Middle East, the explosive situation in Nigeria and Libya, the sanctions against Iran have given a particular significance to this reason; ·
• the need to respond to the challenges that humanity faces in connection with the climate change, to achieve the goals set by the Paris Climate Agreement, to form a low-carbon energy industry; ·
• the need to improve the environment, reduce harmful emissions into the atmosphere, improve the quality of air basins and use cleaner power sources.

Energy cooperation between East Asia countries in the long term will be determined by the totality of fundamental and temporary factors (Fig. 1).

The notable fundamental factors in terms of the need to respond to the challenges of environmental pollution and global climate change include the continued growth of the population and economy.

The temporary factors that will impact the global economy development at least for the next 3 to 5 years include the notorious “gray and black swans”: trade and price wars, the collapse of global oil prices, the coronavirus pandemic and the global economy recession. It was them, together with fundamental factors, that created a “perfect storm” situation for the oil and gas industry, which, in all likelihood, will persist in the short and medium term.

Together, these processes and phenomena will be the most important external conditions and factors for the development of the oil and gas complex of Russia.

An analysis of the available estimates and forecasts of energy consumption in East Asia suggests that after emerging from the current crisis and overcoming the economic downturn, the main countries of the region will keep increasing their demand for energy. And they will demand not only renewable sources adequate to the energy transition but also hydrocarbons.

For the developing economies, and most of the East Asia countries belong to this category, it is not the problems of global climate change that come to the fore, but the problems of economic growth and overcoming energy poverty. Therefore, the support for a complete rejection of carbon power resources in favor of political ambitions, and the energy transition is primarily a political goal, means additional difficulties in solving pressing problems for most developing countries. The shortage or high cost of power resources can negate the very prospect of economic growth for them and the achievement of at least a minimum level of well-being for their population.

Moreover, a consumption of hydrocarbons will not collapse overnight in developed economies either. A rejection of hydrocarbon energy is a process stretched out in time and developing unevenly, therefore, oil and especially natural gas will remain one of the main sources of energy in these countries for a long time to come.

As a first approximation, the possible scale of the prospective growth in the energy needs of East Asia countries can be judged by such indicators as population growth and its average per capita energy consumption.

Thus, according to estimates by the UN Department of Economic and Social Affairs, published in 2019, the total population in East Asia by 2050 may increase compared to the expected population in 2020 depending on forecast option³ in the range of 64.6 to 171.7 million people [5] (Fig. 2).

Even with the current level of per capita primary energy consumption in these countries (roughly about 2 tons of oil equivalent), this is equal to an increase by 2050 of 130-340 million tons of oil equivalent a year, respectively. Shall we assume that per capita energy consumption in the region will reach the current level of developed OECD member countries (4.12 toe/person [7]) by 2050, then the total consumption of primary energy in East Asia will be about 9.9-10.4 billion tons of oil equivalent, taking into account the expected population growth. At the same time, the entire population of the planet is currently consuming about 14.3 billion tons of oil equivalent [7].

The growing demand for energy at East Asia countries in the context of an insufficient resource base will be increasingly satisfied by imports of oil and gas.

As a result, the volume of hydrocarbon exports from Russia will be limited not so much by the demand from Asian markets as by the possibility of their competitive production and transport in our country. It is this premise that underlies further analysis of the development opportunities for the oil and gas complex at the east of the country. Other fundamental factors in the development of oil and gas production at the East of Russia are the possibilities of the mineral resource base of the industry to be discussed later and the successes of the technical progress (Fig. 3).

The prospects for the development of the oil and gas complex of Russia for the next fifteen years are determined by a number of adopted and developed regulatory legal acts of the country in the field of energy [8–11], including the Energy Strategy of Russia until 2035 approved by the government on June 9, 2020 [12].

The energy strategy is based on the need to accelerate the transition to a more efficient, flexible and sustainable energy characterized by optimizing the spatial distribution of energy infrastructure. As part of this optimization in Eastern Siberia, the Far East and the Arctic zone of the Russian Federation, it is planned to form oil and gas mineral resource centers, oil and gas chemical complexes and to expand the infrastructure for the transportation of energy resources. As a result of implementation of all these measures, Russia will become a leading player in the markets of the Asia-Pacific region, whose share by 2035 should reach 50% in the total volume of exports of Russian energy resources.

The main indicators of development of the country’s oil and gas complex in accordance with the Energy Strategy are shown in Table 1.

There are still no official documents defining the areas, goals and objectives of the country’s oil and gas complex development for the period up to 2050. There are only some elaborations and predictive estimates of research institutes, consulting structures and experts, whose results vary in a wide range and do not provide a complete picture of the future development of the industry. The main, most reasoned of them fit into the range of two scenarios: current policies and conditions, high resources and high capabilities.

The current policies scenario assumes that the economic situation in Russia will not undergo significant changes, economic sanctions and the high volatility in global oil prices will remain, with an average of $45-60 per barrel at permanent prices. At the same time, the developed countries of the world will actively implement the energy transition concept.

The high opportunity scenario assumes that the forecast period will feature:

• the necessary funding will be provided for geological exploration resulting in qualifying as reserves at least a half of the already known oil and gas resources at the East of Russia;
• the necessary transport infrastructure (a network of main oil and gas pipelines, seaports and transshipment points, development of the Northern Sea Route, etc.) will be provided at the east of the country and in Russia as a whole; ·
• there will be consistently high global oil prices (at least $80 per barrel at permanent prices); ·
• Western sanctions on Russia will be lifted and the country will receive free access to the world financial resources, technologies and competencies; ·
• as a result of global warming, navigation over the Northern Sea Route will become year-round.

The high uncertainty of the upcoming development makes the estimates at the level of 2040–2050 rather unreasonable.  In both scenarios, the strategic objectives of ensuring the development of the oil and gas industry throughout the entire considered projection i.e. the period until 2050 are:

• structural transformation of the industry in terms of increasing the share of hydrocarbons produced using secondary and tertiary methods with an growth in recovery rates;
• increase in the structure of products with a high degree of processing; changes in the structure of investments towards an increase in the share of expenditures for R&D and innovation;
• development of transport and industrial infrastructure of the Far East, Eastern Siberia and the Russian Arctic zone;
• minimization of the negative impact of extraction, production, transportation and consumption of hydrocarbons on the environment, climate and human health.

Possible levels of prospective development of the oil and gas industry at the East of Russia primarily depend on capabilities of the industry’s mineral resource base. 

According to the data and estimates of the Ministry of Natural Resources and Environment of Russia (State reports “On the condition and use of mineral resources of the Russian Federation” [13, 14]), the Russian reserve base  of liquid hydrocarbons allows the country to look into the future with confidence.  Technologically recoverable reserves in Russia as of the beginning of 2019 amounted to 29.8 billion tons oil and 4.1 billion tons of condensate. Prospective D₀ category resources are estimated at 13.9 billion tons of oil and 1.9 billion tons of condensate. According to the Ministry of Natural Resources, it can be expected that about a quarter of these resources in the future will be moved to commercial categories of reserves, based on the results of geological exploration Prospective resources of oil and condensate of D₁+D₂ categories, whose reliability is much lower, are estimated at 43.9 and 11.3 billion tons, respectively.

A significant part of the explored oil reserves and resources is just at the east of the country. Their distribution over the main regions and seas of Russia is shown in Fig. 4.

In accordance with such a territorial distribution of resources, the relocation of the main oil and gas producing centers of the country will continue in the eastern and northern directions in the years of the considered projection. The main part of the explored reserves and resources of natural gas is also located at the east of the country (Fig. 5).  It is here, at the East and North of Russia, where new export-oriented oil and gas production centers will be formed on the basis of the resources of the Gydan and Yamal peninsulas, the water zone of ​​the Kara Sea, the Leno-Tunguska, Leno-Vilyui, East Arctic, Laptevo-Sea, Okhotsk and other oil and gas basins. Oil production in Russia at the level of 2040–2050 with a favorable situation at the global and domestic markets, i.e. under the scenario of high resources/high opportunities, may amount to about 570–590 million tons per year, including about 120 million tons at the East of Russia (Table 2). To ensure this level of production, it will be necessary to significantly increase oil reserves, particularly in Eastern Siberia and the Far East.

Such an increase in oil production will make it possible to keep increasing the scopes of its export, which may reach 340 million tons by 2050, including up to 170 million tons per year to the Asia-Pacific countries. Supplies of petroleum products to this region will also grow significantly.

Naturally, the volume of oil production and exports will be significantly lower under the scenario of current policies and conditions.  In terms of gas production, Russia currently has no constraining factors in terms of the resource base. The strategic objective of the gas industry development for today and in the long term is a comprehensive development of existing gas production centers and creation of new ones. Prospective levels of production will be determined by the needs of the main energy and gas markets in Europe and Asia Pacific countries, as well as by domestic demand for gas fuel.

However, a significant increase in natural gas production across Russia as a whole is not to be expected beyond 2035, not even under the high opportunity scenario. At the same time, gas production at the east of the country under this scenario may increase by 2050 by more than one and a half times compared to the level of 2035 recorded in the Energy Strategy.

With regard to liquefied natural gas, in accordance with the logic of the development of gas markets during the considered period, its production is expected to grow at a rate that significantly exceeds the growth in gas production.

The export of natural gas, both pipeline gas and LNG, will significantly increase in the high resource/high opportunity scenario, especially to the Asia-Pacific countries. Moreover, a rapid growth of export gas supplies to the east is also expected under the scenario of current policies and conditions (Table 3).

In general, a large-scale economic, scientific and technological cooperation of Russia with the countries of East Asia and the Asia-Pacific region may significantly alter the entire economic map of the East of Russia in the future (Fig. 6).

The main areas of such cooperation could be:

• development of oil and gas production and processing in Russia, in particular, through implementation of large international projects;
• development of export-oriented transport infrastructure;
• joint creation of technologies that ensure an efficient development of various oil and gas types, transfer of unconventional hydrocarbons from the category of resources to the category of reserves, as well as a deep hydrocarbon refining.

Naturally, first of all we count on such cooperation – both bilateral and multilateral – with our neighbors at the East of Russia.

The high uncertainty of the upcoming development makes the estimates at the level of 2040–2050, provided in the article, rather approximate. Depending on combinations of various conditions and the considered scenarios, the production and export of oil and gas, including those to the countries of East Asia, may widely vary. But these assessments show the main thing: the capabilities of Russia. Time will show how these capabilities will be realized.

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