There is no need to rush to part with hydrocarbons, it is necessary to develop renewable energy sources along with traditional types of energy

In recent years, the Russian fuel and energy complex has faced new challenges, such as energy transition, risks of global consumers abandoning traditional hydrocarbon resources, massive lockdowns due to the coronavirus pandemic, and so on. Russia’s Energy Minister, Nikolai Grigorievich Shulginov, spoke to the Energy Policy journal about the challenges facing Russian energy industries in these conditions – and how they will be addressed.

E.P: The world energy sector is going through a period of energy transition. Developed countries have announced the phasing out of carbon energy in favor of renewable energy sources and hydrogen. How will this affect the Russian sectors of the fuel and energy complex; how should Russia prepare for this?

N. G. Shulginov: In our work, we are primarily guided by fundamental documents such as the Program for the Social and Economic Development of Russia, the Energy Strategy until 2035, general arrangements for the development of the oil and gas industries, and others. But they need to be regularly updated because policy documents must take into account emerging trends. Moreover, events are now developing on an increasing scale: the desire for carbon-neutral energy and a carbon tax has become an urgent agenda item for many countries. One cannot ignore the energy transition, but one must understand that by 2035, neither Europe nor the United States will completely get rid of hydrocarbons and traditional energy resources will continue to play a significant role.

It is also necessary to analyze the experience of the past winter, when against the backdrop of severe frosts, there was a surge in demand for traditional types of fuel. It’s not a good idea to rely solely on the sun and wind without newly-developed energy storage systems, since this implies the need to constantly maintain a reserve of traditional generation and reserves of traditional fuels.

Ashalchinskoye field, Tatneft

E.P: That is, Russia shouldn’t be thinking about phasing out the oil industry and abandoning oil exports yet?

N. G. Shulginov: Thinking about abandoning oil exports would be wrong. There is no need to rush to part with hydrocarbons; rather, it is necessary to develop renewable energy sources along with traditional types of energy. We need to strive for our nuclear power to be officially considered carbon neutral. Moreover, the leaders of seven European countries have already turned to the European Union with a request to recognize nuclear power as clean. This opinion is also held in the United States.

It should be noted that despite the powerful lobby on the part of “green” activists, on April 21, the European Commission (EC) officially confirmed that in the future, it may include nuclear power on the list of industries in which investments contribute to the energy transition. However, this will only happen if the EC research center report, released this March with positive conclusions on nuclear power, is approved by the Euratom expert group and the EC Scientific Committee on Health, Environment and Emerging Risks.

Competition is currently on the rise among different energy sources: oil, pipeline gas, LNG. This opens a new window of opportunities to take advantage of.

In addition, our oil companies, such as LUKOIL, Tatneft, Rosneft and other companies, are actively developing their low-carbon development strategies and even talking about the possibility of achieving carbon neutrality by 2040–2050. So, we should not stay away from these processes.

E.P: If we’re talking about the near future, what volume of oil and gas production should be expected by the end of the year?

N. G. Shulginov: Actually, it’s a thankless job to talk about plans in conditions of great uncertainty. To answer this question, you need to understand how the world economy will recover, what impact the past cold winter will have on the market, and whether there will be new waves of lockdowns. We should be committed to ensuring that the results of 2021 are at least no worse than the results of 2020, and if possible – even a bit better.

E.P: At the end of last year, severance tax and export duty exemptions for extra-viscous oil and oil from depleted fields were canceled. This year, the Ministry of Energy and the Ministry of Finance returned to this issue and proposed making these fields subject to excess profits tax from 2024. Is this enough for companies to maintain the profitability of existing projects and achieve the development of new ones? What other groups could be made subject to the excess profits tax?

N. G. Shulginov: The cancellation of severance tax and export duty exemptions actually worsened the economics of these projects. According to our estimates, the loss of investment in the development of extra-viscous oil fields in 2021–2025 could amount to about 200 billion rubles. Therefore, the introduction of an excess profits tax for this group of fields from 2024 is being discussed. Work is underway on criteria for this category of reserves. In any case, our position is that the allocation of a new group for hard-to-recover oil should be carried out at the latest in 2024, but it is possible to consider an earlier transition to excess profits tax.

E.P: But what about the depleted fields, which also stopped receiving tax benefits from 2021?

N. G. Shulginov: From 2021, they can be included in the third group of fields subject to the excess profits tax. In addition, they are eligible for an investment tax deduction from January 1, 2024. Despite this, however, there could still be a negative effect from the change in taxation. Here, we need to think about the criteria and work out the issue of separating such sites into a separate group within the framework of the excess profits tax.

E.P: If so, perhaps it’s worth taking a broader look and spreading the excess profits tax system to the entire oil industry as a whole? And will the excess profits tax not repeat the history of the severance tax and export duties, when a simple tax system eventually turned into a patchwork quilt of benefits for various fields?

N. G. Shulginov: I believe that, in general, it is necessary to gradually expand the groups of fields classified as subject to excess profits tax. This tax system allows us to optimize costs and financial results, which is a step forward for our companies. However, we shouldn’t do it all at once. It is necessary to see how the excess profits tax will show itself over several years of operation, while gradually expanding the groups of fields.

The system, indeed, turns out to be complex and many-tentacled. But we have a lot of different fields: mature, large, small, with light oil, with viscous oil, with hard-to-recover oil. It’s hard to account for everything with a single formula; therefore, on the one hand, we need to look at the development features, and on the other hand, we have to equalize the conditions. We need to be consistently taking into account all the difficulties along the way. It is very important to prevent a decline in production – it is necessary to increase production and develop new oil and gas regions.

E.P: One of the key goals of state policy in the oil refining industry was to increase the depth of refining, the development of petrochemistry and gas chemistry. Are the current measures sufficient? Do they provide an opportunity to increase the profitability of refineries?

N. G. Shulginov: Indeed, the development of refining, petroleum, and gas chemistry is one of the priorities of our work. This year, the Ministry of Energy has already signed 14 agreements with oil refineries on the provision of an investment coefficient to the reverse excise tax on oil from 2021. Investments under these agreements may amount to about 800 billion rubles by 2026.

To support the production of gas chemistry products, a reverse excise tax for LPG and ethane will start being imposed from 2022. It will be applied in two cases: if a petrochemical company launches new processing capacities of at least 300 thousand tons of raw materials, or if the company is ready to conclude agreements by the end of 2022 on investments of more than 65 billion rubles by the end of 2022. This will also be a significant contribution to the development of the industry.

If we add up all the incentives, the volume of investments until 2030 is estimated at about 800 billion rubles as related to oil refining and more than 2.5 trillion rubles as related to petrochemicals.

E.P: The fuel market in Russia is fairly balanced – there are no shortages. However, the situation with the Khabarovsk oil refinery showed the strong dependence of the Far East on the operation of a particular refinery and the degree of its readiness for emergency situations. What systemic measures can be taken to reduce this dependence?

N. G. Shulginov: After the situation in Khabarovsk, some systemic measures were taken to provide the domestic market with fuel and stabilize prices. The volume of exchange sales of gasoline was increased to 11%, diesel fuel – to 7.5%. It was also decided to adjust the indicative price for gasoline in the damper formula. In 2021, it will decrease by 4 thousand rubles per ton, next year – by 2.7 thousand rubles per ton. In addition, the issue of banning exports of gasoline is also being discussed.

E.P: Has the idea of subsidizing fuel transportation to the Far East been developed? If so, what funds will be used for this, and how many subsidies can be allocated?

N. G. Shulginov: The Ministry of Energy sent a proposal to the government to establish a preferential tariff for the transportation of fuel to the Far East. Deputy Prime Minister Alexander Novak supported it, and at a meeting with him, this proposal was approved. It is currently at the next stage of consideration.

E.P: Based on the outcome of the situation in the Far East, is it worth reaccelerating the process of launching the construction of another refinery, i.e. FEPCO?

N. G. Shulginov: Of course, FEPCO is a very important project for the region and the country. The discussion of the construction of this complex is already underway in more detail. The project requires support measures, including financing the construction of external infrastructure from governmental sources with partial reimbursement of these costs by the investor, or the extension of benefits for the ASEZ. Such discussions with the Ministry of Finance are underway and a consensus has already been outlined on some issues.

E.P: One of the main tasks in the gas industry is the gasification of Russian regions. What, in the opinion of the Ministry of Energy, is the most effective way to finance the construction of the “last mile”: the “common pool” method, through excise tax, through turnaround resources, or regional debt? When will the final decision on this issue be made?

N. G. Shulginov: Vladimir Putin, the President of the Russian Federation, in his annual message to the Federal Assembly instructed the Government of the Russian Federation to develop a clear plan for the gasification of households in cooperation with the regional authorities. The approved gasification roadmap formulates all the necessary points for the creation of an integrated regulation system that will ensure the fulfillment of the task of accelerated gasification, bringing gas to the consumer. I can say that people definitely won’t pay for the connection of the “last mile,” that is – for bringing the pipe to the boundaries of the land plot. Responsibility for this will now be borne by the Single Gasification Operator, which will simplify and speed up the connection process.

E.P: How serious is the competition between Russian pipe and liquefied gas on the European market from the standpoint of state interests and budget losses? Is there a need to reduce the level of this competition, especially in the context of energy transition and LNG capacity development plans?

N. G. Shulginov: Of course, there is competition in the global pipe gas and LNG market – this cannot be denied. But first and foremost, it’s competition between Russian gas and LNG from the USA and Qatar. When a pipe has been operating for a long time and gas supplies are stable, this in and of itself becomes a competitive advantage. The notion of competition between Russian pipeline gas and LNG is rather far-fetched. Not all European countries are connected to our gas pipelines, so it’s good that, for example, Spain has the opportunity to purchase Russian liquefied gas. In addition, the mobility of LNG supplies allows NOVATEK, for example, to quickly reorient supplies to Asia when prices rise sharply there.

So, while there is a window of opportunities, we need to develop the LNG market – develop Yamal and Taimyr.

E.P: By the way, about Yamal. What proposals for the development of gas resources in Yamal (including wet gas) are the most optimal in the Ministry of Energy’s view? Is it worth creating the Yamal gas chemical cluster, directing gas to the domestic market, or creating liquefaction capacities, ethane extraction, and gas chemistry development in the Far East?

N. G. Shulginov: Several scenarios are currently being considered. The highest-priority options look like the development of gas chemistry, as well as the possibility of using the resource base to enter new markets, that is – LNG production, increasing its volumes to meet Russia’s strategic goals, which are aimed at achieving production of 120-140 million tons per year by 2035. All of these projects are currently in development and are undergoing a thorough analysis.

E.P: What outcome awaits us for Nord Stream 2? Should we wait for a new round of sanctions, when the pipeline is finally completed and preparations for gas supplies begin?

The cancellation of tax incentives has deteriorated the economics of the development of extra-viscous oil fields. Loss of investment in the development of such projects in 2021-2025 may amount to 200 billion rubles

We must not stand still – we have to develop new technologies for the production of hydrogen.

We are faced with an ambitious task – controlling 20% of the hydrogen market – and it’s non-negotiable

 N. G. Shulginov: Our position has not changed. Europe is largely interested in this gas pipeline. Russian President Vladimir Putin, in his message to the Federal Assembly, noted that this is a purely economic project that is not related to the political situation at all. In addition, construction is at the final stage, and Russian Deputy Prime Minister Alexander Novak recently reiterated that the gas pipeline will be completed this year.

E.P: How likely is the scenario of using Nord Stream 2 to supply a mixture of natural gas with hydrogen?

N. G. Shulginov: This is a complicated topic and it hasn’t been fully explored. To date, there are no standards for the construction of such pipes or mix proportions. We are studying all possibilities to maximize asset performance.

E.P: Russia is actively announcing plans to increase exports of hydrogen. Thus far, however, we have no real projects for the wide industrial production of this gas. To what extent will we be able to fulfill the stated plans, and what needs to be done to this end? N.G. Shulginov: Hydrogen production technologies are not new; almost every refinery can produce it. Another matter is the necessity of studying the issues surrounding the large-scale production of hydrogen, its storage and transportation. Its production can be developed on the basis of natural gas or nuclear power. In this regard, Russia has many development opportunities.

The main thing is that we mustn’t stand still – we have to develop new technologies for the production of hydrogen. We are faced with an ambitious task – controlling 20% of the market – and it’s non-negotiable. For now, it’s difficult to say how and at what price “blue,” “green” hydrogen will be sold, since there is no market as such – it’s still just emerging. At the same time, Russia plans to be present in the markets of all types of hydrogen in order to close all niches.

We live in an interesting time, a time of the energy revolution, and it is important to immediately take a stable position and stake it out.

E.P: How will this revolution affect the coal industry? What development prospects does it have?

N.G. Shulginov: We have diversified energy sources, which is the basis of independence and reliability, as well as ensuring national security. In this regard, both the country and the world need coal. We plan to continue developing the coal industry until 2035 to fully meet the needs for coal in our economy and increase its export supplies, primarily to the countries of the Asia-Pacific region.

I would like to note that at the same time it is necessary to strive to ensure the maximum environmental friendliness of the production and use of coal. For example, China is now introducing coal-fired plants with СО2 capture systems, as well as with an efficiency factor of 10% higher than those of the plants that have been in operation for many years. The increased efficiency allows achievement of the same performance in terms of power generation with less coal consumption. And in the near future, China will not close them, since these capacities should pay off.Don’t forget that the demand for coal is growing in the countries of Southeast Asia, and this is a promising direction for increasing supplies.

E.P: But in order to increase the supply of coal to Asia, it is necessary to expand the Baikal-Amur Mainline and Transsib railways. How quickly can this be done, taking into account the possibility of providing funds to Russian Railways from the NWF? What volume of coal exported in the direction of the Asia-Pacific Region should be set in the investment agreements of coal miners and carriers? Will the “take or pay” principle be introduced?

The Ministry of Energy proposes a new discounted rate for fuel transportation to the Far East

If we add up all the incentives, the volume of investments until 2030 is estimated at about 800 billion rubles as related to oil refining and more than 2.5 trillion rubles as related to petrochemicals.
If we remove the cold-winter factor, then in terms of energy consumption, we are going 2.5% above 2020. If the trend continues, the indicators of 2019 will be exceeded by approximately 1%

N. G. Shulginov: The task of increasing the throughput and carrying capacity of BAM and Transsib to 180 million tons in 2024 was set by the President of Russia. It is currently being addressed – including through the development of railway infrastructure and the necessary electric power supply. We are also faced with the task of the next increase in the volume of traffic after 2024. These tasks for the further development of transport and energy infrastructure are still being worked out.

Agreements between shippers and the railway carrier are provided for by applicable legislation and can be concluded, but these are not investment agreements. At present, the issue of filling such agreements with the appropriate content is being considered using the example of additional volumes of coal transportation from Kuzbass in the eastern direction as compared to the level of 2001.

As for the “take or pay” principle, it is still difficult to say how it will be implemented – the issue is still being worked out. We have not gained much experience in its usefor railway transport.

E.P: Will the pre-pandemic level of electricity demand be restored in Russia by the end of 2021? If so, what energy consumption is expected by the end of the year?

N. G. Shulginov: Based on today’s situation, I can say yes it will. The first three months of 2021 were very cold. If we remove this factor, then we are going about 2.5% higher than last year. If the trend continues, the consumption indicators of 2019 will be exceeded by approximately 1%.

E.P: How strong will the effect of a sharp rise in prices for metal products be for the energy sector? Should we expect a sharp increase in the investment programs of energy companies? What mechanisms of government price stabilization can the Ministry of Energy offer?

 N.G. Shulginov: When prices for metal products start to rise, causing the costs of energy companies to climb, investment programs to increase and the timeframes for project implementation to be pushed back, the resulting questions are first put to us. Therefore, we drew the government’s attention to this situation. We believe that some kind of regulatory mechanism is needed to stabilize metal prices on the domestic market. We have not received an answer yet.

But we do not set ourselves the task of reaching a certain share of renewable energy sources in the country’s energy balance.

As for the amount of support, we are currently at the stage of negotiations on this issue with the Ministry of Industry and Trade. We believe that it is necessary to ensure a figure of 350-360 billion rubles. Indeed, the first renewable energy support program had more funding, but now we’re observing a significant reduction in the cost of building renewable energy generation facilities. And with a smaller amount of financing under the second program, investors will be able to E.P: Is it worth developing renewable energy sources in Russia, taking into account the huge fossil resource potential and the high cost of these projects? What will be the main parameters of the RES support program in Russia? Will the previously announced support funds in the amount of 306 billion rubles be sufficient?

N.G.Shulginov: Of course it is. At least in order to develop competencies, to export technologies and products. RES generation is the most relevant in the remote regions of Russia – especially in combination with diesel generation and good energy storage.

build more capacities: about 7 GW versus roughly 5.5 GW in the first program.

In general, a good energy balance has been formed in Russia from the ecological standpoint. Taking into account the production of nuclear power, the operation of large hydroelectric power plants, the share of “clean energy” production in our country is 40%.

E.P: But this is where discrepancies arise, since European countries in their climate policy, including when issuing “green” certificates, do not take into account nuclear energy and large hydropower. Will we seek international recognition of the “purity” of these energy resources?

N.G. Shulginov: We will. That’s precisely the task we face. We plan to enter international platforms and prove, negotiate, conduct research on the absorptive capacity of our forests, on the carbon neutrality of nuclear power.

E.P: The Far East premium, despite changing its parameters until 2028, continues to draw a lot of criticism from consumers in price zones. Will its reform be continued?

N.G. Shulginov: It’s more difficult to ensure the economic development of the regions of the Far East than, for example, the regions of central Russia. Their vast territory and relatively small population lead to the fact that for the development of business, it is partly necessary to artificially create suitable conditions. Therefore, through the price premium for the first and second zones of the energy market, we contribute to the region’s development. And this is a normal global practice.

It should be noted that the premium will be gradually reduced. It will remain in the same volume only for those categories of consumers that play a decisive role in the economy of the region, for example, residents of the ASEZ. Together with the Federal Antimonopoly Service (FAS), by the end of the year, we will adjust the standards for reducing the premium.

E.P: What amount of funds for the modernization and construction of new generation facilities can be compensated by consumers of non-price zones in the future? Have you already determined the selection parameters for Far Eastern facilities? What benchmarks for the price, payback periods, and climate impact will be laid down?

N. G. Shulginov: The government approved a list of four power plants with a total capacity of up to 1.3 GW (Khabarovskaya CHPP-4, Artyomovskaya CHPP-2, Yakutskaya state district power station 2, Vladivostokskaya CHPP-2). The preliminary capex for them is about 143 billion rubles at current prices; however, this figure may be adjusted based on the results of project development.

Projects will be financed through a capacity price premium and in the non-price zones of the wholesale market. But given the scale of the Far East and the established 15-year refund period after the commissioning of each of the facilities, the tariff will increase by only 0.75%.

At the second stage, it is planned to expand the Neryungrinskaya and Partizanskaya state district power stations of RusHydro and retrofit the Primorskaya state district power station of SUEK. A feasibility study is underway for them. The implementation of all these projects will contribute to the development of the Far East, and this, by the way, represents a third of the country.

In addition, the Ministry of Energy has developed a concept for competitive selection for the right to build generation facilities with a capacity of up to 456 MW in the Bodaibo district of Irkutsk Region. The competition will be technologically neutral, i.e. it is possible to build different types of generation facilities. The revised parameters and selection estimates will be determined shortly, but already today, we can say that they will be insignificant for consumers.