RUSSIA AND THE ENERGY TRANSITION
Nelli Sharushkina and Nadezhda Sladkova - Jan 08, 2021
Russia -- once hesitant -- has begun laying plans to adapt to the long-term challenges of the energy transition. Although Russia is better positioned than most other oil-exporting countries, the process still won't be easy. Energy Intelligence analysis shows that Russia'a efforts must fit with immediate priorities of surviving Covid-19, maintaining revenues and managing Opec-plus relations. In addition, ties with the West remain raw, while Russia pivots to the east. After a shift in the government's energy transition thinking in 2020, Russian oil companies have begun making some initial moves and must now do more to set out concrete plans in 2021.
Unlike some oil-producing countries with weaker institutions, Russia has greater capacity to adapt to the energy transition, with a strategy for now built around seeking to maximize oil and gas revenues while pivoting to new markets and regions as decarbonization proceeds. But despite signing emissions pledges into law in 2020, Russian policy efforts remain slow. Figures like Deputy Premier Alexander Novak argue that, even as developed economies target net-zero emissions by 2050, fossil fuels will be needed for much longer. Russia aims to boost revenues from its oil and gas resources, minimizing risks of stranded assets, by focusing on top projects like Rosneft’s 2.3 million barrel per day Vostok Oil project. Seen as vital for the Russian oil industry, with wider economic benefits, questions linger over the $100-plus billion Arctic scheme’s costs. Another Kremlin-backed goal is boosting petrochemicals, led by Sibur, whose plans include its Amur project, designed to serve Asian markets.
Covid-19 and fiscal pressures are further complicating Russia’s energy transition efforts. Russia must balance longer-term growth goals with its immediate budget requirements. Covid-19 has strained Russian finances, highlighting risks around social unrest, even if President Vladimir Putin’s position remains robust. But 2024 national development goals have been delayed, slowing economic diversification efforts. For now, Russia is aligned with Opec, but recent meetings have revealed significant differences with Saudi Arabia. We see growing tensions in Russia’s Opec-plus relations, as Moscow is more relaxed than others with $45-$55 per barrel oil prices. Russian officials remain skeptical about lasting cooperation, envisaging moving -- once the market is balanced -- to simply exchanging information with Opec rather than participating in production agreements.
In addition, Moscow’s relations with the West will likely remain strained, with the energy transition an added factor. President-elect Joe Biden’s administration looks unlikely to reset ties with Moscow, given the legacy of Donald Trump’s Russia-related scandals and claims of Russian involvement in the SolarWinds cyberattacks. Potential further US countermeasures could include targeting the Swift financial system and Russia’s sovereign debt, while doubts grow over extending the New Start arms control pact. Moscow sees US sanctions as a means to make Russian oil less competitive versus US shale. Likewise US efforts to block the Nord Stream 2 gas pipeline to Germany are similarly seen as favoring US LNG. Russia’s delicate European relations -- strained by the poisoning of opposition leader Alexei Navalny -- will be tested further by the energy transition, as the EU advances carbon border tax plans. Even so, underlying energy and commercial ties point to continued cooperation between Russia and the EU.
Russia is increasingly turning east to Chinese energy markets. As relations fray and demand prospects from Europe and other developed economies dwindle, Russia is boosting ties with China, aided by Putin’s affinity for strongman leaders. Growing energy links include Russian use of Chinese rigs in the Arctic and Chinese investment in Russian LNG projects. Moscow is eyeing over 130 billion cubic meters per year of China gas sales -- up from 5 billion cubic meters planned in 2020 -- via proposed pipelines like Power of Siberia 2, plus increased LNG sales. But Beijing has struck tough deals on prior gas sales, while China's 2060 net-zero emissions goal, announced last year, raises questions over future oil and gas demand. Elsewhere, ties to Mideast producers Saudi Arabia and the United Arab Emirates will likely stay focused on balancing oil market cooperation and rivalry, while Moscow’s regional security needs shape volatile relations with Turkey.
Faced with Moscow's new energy transition policies, Russian oil and gas companies must adapt to survive -- but they have few concrete plans yet. They face pressure from international investors, and growing climate concerns in key EU markets, which could impact Gazprom’s gas sales to Europe as well as Russian-owned refineries in several EU countries. Russian oil majors have begun moving to address energy transition pressures, with Rosneft now unveiling a goal to cut upstream emissions intensity 30% by 2035 as others, such as Gazprom Neft, Lukoil and Tatneft, mull similar moves. Top Russian oil and gas companies may shun large-scale renewables investments, but they still need to lay out fuller plans for the transition. Alongside forestry, we expect more focus on blue hydrogen from natural gas, in line with the state’s newly announced road map. We are also watching Russian companies’ plans for emissions trading, to help exporters offset carbon -- although EU buy-in will be vital for this to succeed.
Nelli Sharushkina is Moscow bureau chief for Energy Intelligence and Nadezhda Sladkova is a senior correspondent. This article originally appeared as part of the Energy Intelligence Premium service.