Announcement of a series of analytical reports «The fuel and energy complex of Russia» - 2021

The National Energy Security Fund announces its traditional series of analysis reports dedicated to the central issues of Russian fuel and energy sector development.

Subscribers will be given a detailed account of the state of affairs in the sector, its key problems and possible “points of growth”, changes in government regulation of the oil and gas industry. Medium-term development scenarios for the industry will be presented.

The year 2020 has been a dark one for the oil and gas sector: a collapse in demand and prices, dramatic increase in competition on the global market, a restart of the OPEC+ deal on tough terms, serious pressure from the “green agenda”, new sanctions, aggressive discussion of the fate of hydrocarbons and investment conditions for new projects.

Neither, however, will 2021 be easy.

Oil companies are getting ready for three blows: low prices, production restrictions, and new tax treatment. In the gas sector, they have to fight for export markets and somehow finish Nord Stream 2, among other things, while not forgetting Putin’s instruction to finally establish gas supply to every community in the country, free of charge.

The “green transition” is pressing hydrocarbons ever more aggressively. Europe is preparing a new cross-border carbon duty and declares abandonment of hydrocarbons in favour of hydrogen and other kinds of fuel and energy.

Oil and gas are coming under pressure – but that makes it all the more interesting to analyse the industry’s responses to changing reality.

The sources used include NESF files, industry statistics, data from oil and gas companies, laws and bills, nationwide and regional media outlets, files from conferences and round table discussions.

The series consists of eight reports , to be published in April 2021 to January 2022 ã.

1. Russian Oil Production and Export with Low Prices and OPEC+

(May 18, 2021)

The pandemic has done the oil market huge damage.

After a brief but devastating price war the OPEC+ countries had to undertake unprecedented new reductions. However, the price of oil remains very low because of weak demand. Battles for markets continue between the “cartel members” and the “non-aligned”. Everyone expects the opponent to yield first.

To us, however, the most important question is what awaits the Russian industry. The obligations under OPEC+ restrict production; Russian export is sagging under pressure from the Americans and Saudis; and at the same time it is unclear how the industry will be raising production to the previous levels if the OPEC+ deal is somewhat relaxed after all. Voices are heard more and more often that production from old fields is no longer necessary and that new projects should be launched – leaving aside the matter of how much time this process will actually take.

A crucial moment is coming for the Russian oil industry: the matter is decided whether the multi-year co-operation with the Saudis has been justified and whether Russia has a real chance to regain its markets in the EU and in Asia. The “deal party” and the “price war party” will continue trying to convince Putin that they are right.

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2. Hydrogen as New Energy Hope

(May 31, 2021)

The subject of energy transition is moving swiftly to the foreground. The EU “green plan” is becoming one of the headliners there.

Hydrogen has lately been added to the green agenda. The reason is obvious: the “green world” is being built on foundations of green electricity which they have not learnt to store in the required commercial quantities to date.

Hydrogen appears to be a solution to the problem. The European Union is already speaking about hydrogen as the future of global energy. To what extent are such plans justified, considering that even in Europe a fully-fledged hydrogen market does not exist so far? Meanwhile, the EU is busy differentiating hydrogen by colour, saying it will only admit “green hydrogen”.

Russia has also started thinking about hydrogen production and is even writing a hydrogen strategy of its own. The problem is it cannot expect to export green hydrogen cost-effectively. And they are not waiting for methane-derived (“blue”) hydrogen in Europe.

So who is lobbying for the hydrogen subject in Russia? Can one say that hydrogen export will become a way towards a more devious liberalisation of gas export?

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3. "Hydrocarbon Rush" to East: Current Status, Medium-term Prospects

(July 12, 2021)

Gradual decline in the use of hydrocarbons in Europe is already an obvious trend. Only the rate of this process can be debated.

Russia’s main hope is now Asian markets. Russian hydrocarbons entered them late enough. Today, however, Russia is already a fully-fledged player on this market.

The ESPO oil pipeline operates at full capacity; LNG is supplied from Sakhalin as well as Yamal; and gas supply has begun to China by pipeline.

However, there are quite a few issues on the Asian front.

How quick is the exploitation of gas resources in Eastern Siberia and will the first gas contract with China be fulfilled? Are the plans for Power of Siberia 2 realistic as they in fact suggest building two major gas pipeline systems? Will Russian oil and gas be able to compete in the Asian market and how adequate are forecasts for its development? Finally, how the Asian partners have performed during the period of sanctions – what role have they played as investors and suppliers?

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4. Arctic: Breakthrough Territory or "White Hole"?

(August 30, 2021)

The Arctic is turning rapidly into Russia’s main energy bet.

How Arctic projects are managed; who the main beneficiaries of this affair are; whether incentives to Arctic projects are justified; how foreign investors are lured; how production really goes on in the Arctic region; whether the plans are realistic for the Northern Sea Route and whether it will indeed become a new “Suez Canal” – these matters we will attempt to clarify.

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5. New European Carbon Tariff: What Is in Store for Russian Suppliers, How Russia Will Respond

(October 25, 2021)

Europe’s green course has proved to be not about ideology as much as about expropriating money from hydrocarbon suppliers. That is the reason why the so-called carbon border adjustment mechanism has been invented.

The EU intends to begin to put a duty on goods with a high carbon footprint as soon as 2022. Russian oil and gas are obvious possible financial victims.

Preliminary estimates show that the new climate tax will take 2-3 dollars off every barrel of oil exported to the EU. Brussels has made up an unsophisticated method to add to its budget. The question is how Russia will respond after all.

Hydrocarbon producers are looking urgently for an answer to this challenge seeing it in developing Russian forests and ecosystems with a capturing capacity and in carbon capture, utilisation, and storage (CCUS) technology.

The fight will be hard and it is crucial to understand the positions of both parties and evaluate how realistic the declared approaches are.

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6. Fiscal Policy in Oil and Gas Sector: Squeezing Last or Chance to Restart Industry?

(November 30, 2021)

The state’s tax policy for the oil and gas sector is beginning to cause one to be nervous.

Every year the financial division of the Cabinet announces being ready to introduce stable rules of the game, but every year again sees their radical revision.

The autumn of 2020 was not an exception: concerned about the loss of revenue because of the coronavirus, the Finance Ministry decided to raise levies seriously on companies, removing incentives to super-heavy oil and other brownfield projects and “tightening” the additional income tax (AIT) terms.

In the end it was presented as an “oil sector clean-up”: incentives were allegedly taken away from projects that ought to have been closed long ago. But then again, the Finance Ministry announces being ready to support new projects in Russia and therefore begins actively to drive oil companies towards the AIT regime.

It is, however, very much open to question if really comfortable conditions for investment have been created.

For example, the unexpected love of AIT is not, by any means, connected with the desire to attract funding to difficult projects, but with the understanding occurring to the Finance Ministry that AIT will benefit the state budget more than mineral resources extraction tax (MRET) breaks.

As a result, a very serious subject arises: Russia needs to think about how to recover production after major restrictions, but so far the industry has only seen confiscatory decisions. At the same time the Cabinet has the task of keeping fuel prices in the domestic market at an acceptable level, which also demands adequate tax measures. In the gas sector, too, it is unclear how to couple the task of collecting more tax revenue from the industry with looking for sources to finance development of the national gas supply system.

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7. Gazprom: Challenges New and Old

(December 27, 2021)

Gazprom is seriously overloaded again.

The prices on gas markets are far from recovering; and the construction of new infrastructure to transport gas to Europe has turned into a colossal headache and political combat.

European politicians keep on insisting on diversification of suppliers and reduction of Gazprom’s share.

Meanwhile, the Russian government keeps on promoting aggressive development of Russian LNG projects, notwithstanding the fact that LNG export from Russia increasingly obviously “eats away” some of the European market from export by pipeline.

But then again, debate on restructuring Gazprom has faded somewhat. However, the transfer of power that has begun in Russia prevents the chiefs of state-controlled companies from feeling relaxed.

Putin has launched a “gas supply to all” process which has actually become a new national project. What is it, however: a guarantee against division or a new headache and bureaucratic trap for Gazprom?

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8. Regulation of Oil and Gas Sector in 2021 and Prospects for 2022

(January 20, 2022)

It is our tradition to finish the year with a concluding report that sums up the main events and trends of the year.

In it, we will analyse preliminary production results, the key government decisions concerning the industry, the fight for property, and changes in export policy; and of course, you will find in it a forecast for the industry’s development in the medium term.

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