Russia’s new energy policy: modernisation of oil refineries, tax reduction for Fuel and Energy Complex

Change of previous energy awaits us in 2030-2040 — new Strategy is needed

In early June, the Russian government ordered to approve of Russia’s Energy Strategy through 2035 (further the Strategy). The document signed by Russian Premier Minister Mikhail Mishustin (Realnoe Vremya has at its disposal) recommends Russian regions to go by it, not the previous strategy adopted as early as 2009 (though 2030) that lost its force.

In the next six months, the Russian Ministry of Energy must provide a plan of measures to fulfil the new Strategy, which was divided into two stages: until 2024 and from 2025 to 2035. Before talking about the strategy itself, the authors of the document recognise that though the Russian Federation occupied a unique place in the 20^th century “simultaneously as a big producer, consumer and exporter of all types of hydrogen energy resources as well as one of the world leaders in nuclear energy and hydro energy,” it is time. Today both world and Russian power engineering have processes that would likely bring to a change of the previous order in the 2030-2040s. To help the economic development of the country and reinforce the role of the Russian Federation in world energy further, “an accelerated transition (modernisation leap) to a more effective, flexible and sustainable energy will be required”.

Structural diversification, decentralisation, digital transformation...

This ambitious leap includes, first of all, “structural diversification”: hydrogen energy will be complemented with non-hydrogen centralised energy supply, which will be decentralised, export of energy resources — export of Russian technologies, equipment and services, the range of application of electrical energy, liquefied natural gas and gas and motor fuel will expand.

Secondly, the leap includes digital transformation and intellectualisation of sectors of the Fuel and Energy Complex (FEC).

Thirdly, optimisation of the location of energy infrastructure within which “oil and gas and feedstock centres, oil, gas and chemical facilities” will have to be created in Eastern Siberia, the Far East and in the Arctic zone, while Russia will become “the leading player in Asian-Pacific markets”.

…and agenda named after Greta Thunberg: refusal of low hydrogens and ban on not eco-friendly and ineffective technologies

The fourth element can notionally be named after Greta Thunberg: it envisages a reduction in the negative environmental impact of the FEC’s sectors and their adaptation to climate changes. In the end, the Russian Federation can make a considerable contribution to the transition to low hydrogen development of the world economy, conservation of the environment and opposition to climate changes. At the same time, it is noted that nowadays nuclear energy, water energy and other renewable energy sources account for more than a third of electrical energy generation, natural gas has about 50%.

At the same time, the document itself talks about problems of the coal sector and notes not only a reduction in domestic demand for coal and its competition with natural gas but also “an international campaign against using coal on the pretext of the environmental agenda”. In the next 15 years, Russian authorities will start looking at production safety in the coal sector (regular accidents in mines brought to this decision too).

First of all, the section of coal fields will be licensed, they allow production in the safest mountainous and geological conditions. Mines with ineffective capacities and low workforce productivity will be excluded from operation. We will also note that according to the Strategy the state will be ready to impose a ban on the production and use of energy ineffective pieces of machinery, equipment, buildings, manufacturing processes, which is to keep the growth of greenhouse emissions and in general reduce the amount of harmful emissions into the environment by organisations of the Fuel and Energy Complex.

The Strategy also envisages the creation of a national system to monitor and report on greenhouse emissions, including from energy facilities. The share of disposed of and decontaminated residues in the total quantity of residues in the sectors of the Russian FEC is to grow from 52,6% to 85% by 2035.

The uniqueness determines the special position of the FEC as well as the importance of the new Strategy. So to date, the share of the Fuel and Energy Complex in investments in working capital is about 30% of the total amount of investments in the working capital of the Russian Federation, about 40% in incomes of the federal budget, over 50% (oil dependence) in Russian exports (in monetary terms) with less than 4% (!) of workers in the sectors of the FEC compared to the total number of the population employed in the economy. The amount of production and energy generation outstrips domestic consumption, which determines the exports: more than 1,9 times in oil, 1,5 times in gas, 1,8 in coal, 2,6 times in diesel fuel, 1,1 times in petrol.

Oil production will start to go down by 2035, while there is no money for structural changes in FEC

Despite the seemingly glittering state of affairs, the FEC has tough challenges it will have to face. Among them, it is a slower growth pace of the world economy, change in the consumption pattern and lower demand for products of the FEC, reproduction of hydrocarbons and, as a consequence, conservation of oil prices at a low level (by the way, many experts predict this). Moreover, as it has already been said above, the domestic market doesn’t have enough demand for innovative development, while the external market and black gold rate fluctuations make the FEC directly dependent on the world economic situation, what this spring manifested.

It is supposed that the amount of oil production in the Russian Federation will rise from 555,9 to 555-560 million tonnes in 2024 and go down to 490-555 million tonnes in 2035.

In addition, many organisations of Russia’s FEC are critically dependent on imports of technologies, equipment, software in some promising areas of energy development. The sector doesn’t have enough investment resources for structural changes because the growth of tariffs is restrained in energy, complications in long-term borrowings from foreign investors and weak development venture lending, the authors of the Strategy note.

The unpredictability of external conditions and factors influencing the development of energy, including conditions and factors of culture, social changes, international relations, scientific discoveries and innovations. The authors of the document also pay attention to structural changes in the sector inside the country. Production centres shift to northern and eastern regions of the Russian Federation (with more than an 80% rise in their share), while the concentration of economic growth and energy consumption by 60% moved to the European part. This causes an “unprecedentedly big and constantly growing amount of more expensive long-haul overland fuel transportation”.

Support for construction of new oil refineries, production of hard-to-reach oil and appearance of SMEs

Russian authorities in the end must work in several areas. Firstly, to provide a stable growth of energy supply in all segments of the FEC, secondly, provide domestic demand, thirdly, react to external requests. So a package of key measures to provide stable and growing oil production in favourable conditions includes the transformation of the taxation system from turnover taxes to taxation of financial performance (that’s to say, income). It is necessary for the growth of investments in the sector.

Particularly, to stimulate the development of mature fields and launch of small fields and hard-to-reach reserves. The state promises to create conditions to develop SMEs too until 2035. Yes, vertically integrated companies will be dominating the market until 2025. However, because of a worse structure of crude hydrocarbon reserves and the necessity of innovations and flexibility, the role of precisely small and medium-sized oil and gas companies will go up.

While the completion of the programme aimed to modernise oil refineries envisaging a launch of over 50 secondary oil refining units and achievement of the technological level of oil refineries of industrially developed countries must become the main measure to perform necessary tasks in the oil sector — needs for oil light products in Russia must be provided by 70% by 2035 (now a bit more than 62%).

Federal authorities promise companies that build new units for secondary refining public support including tax support if they aim to produce commodities with a high added value. As for Tatarstan, this refers to companies of TAIF GC, Tatneft companies with its TANECO. The profitability of oil refineries themselves will increase, first of all, thanks to automation and modern digital technologies. However, the state promises also to smooth sudden fluctuations of oil product prices in the Russian market keeping “market pricing principles”.

It is up to the Russian Ministry of Energy to imagine this in practice with potential pressure of Russian car owners. The proposal to improve Russian “heavy” oil high conversion technologies and stimulate processes of high conversion of oil residues in Russian oil refineries applies to Tatneft too, this refers to high sulphur and super viscous oil. The creation of stable tax conditions and state supporting measures for the construction of new gas and petrochemical units includes access to concessionary financing. Among the measures aimed at foreign markets, the Russian government offers to organise a fully-fledged sale of Russian oil brands at Russian and foreign exchanges, create common oil and oil product markets of the Eurasian Economic Union and, which is important, to provide a necessary quality of oil in the system of main oil pipelines (we should remind you of last year’s scandal with low-quality oil that got to Belarusian oil refineries).

It is important news for Tatarstan and the republic’s petrochemistry that the state will focus on a cluster-based approach to the creation of centres for hydrocarbon high conversion with a production nucleus in the form of big pyrolysis capacities (from 0,6 to a million tonnes of ethylene and more) and consecutive production of plastics, rubbers and organic synthesis products, their processing into semi-finished products and end products for the consumer market.

Six clusters were named promising — North-Western, Volga, Western Siberian, Caspian, Eastern Siberia and Far Eastern “located near feedstock sources and outlets”.

Gas motor fuel consumption in Russia is to grow 10-13 times

Liberalisation, a transition to the regulation of wholesale gas prices to market pricing mechanisms are also supposed in the gas market, but still except the population and categories of consumers who are equalised to them. The share of gas sold for market prices is to increase by up to 40% by 2035 (now it is 33%). With the compulsory provision of the activity and tariff of gas monopolists, public regulation will remain in gas transportation via main gas pipelines and services to store gas in underground storage rooms.

By 2035, the gradual removal of cross subsidisation of gas supply to different Russian regions and different groups of consumers is expected too. The state promises to increase the effectiveness of production, transportation, storage, sale and use of liquefied natural gas (LNG) and even liberalise exports through legislation and tariff setting: its production volume is to increase from 19 million tonnes to 80-140 million. An LNG cluster on the Yamal and Gyda Peninsulas must be created in the Arctic zone in 15 years with specialised centres (hubs) for transhipment and sale.

In general the small production of LNG must become an instrument to provide energy security to the territories of Russia’s non-European part. To increase gas motor fuel consumption, including LNG, the government in the Russian Federation in general will stimulate its production and sale through tax regimes as well as consumption through stimulation of producers of machinery. It should be noted that this refers both to Tatarstan and gas-powered KAMAZ lorries in particular.

Transport methane consumption is to grow from today’s 0,7 billion cubic metres to 10-13 billion.

Russia intends to make a gradual transition by 2035 to use Russian supervisory control and data acquisition and software in key facilities of the Fuel and Energy Complex and main information infrastructure facilities of the Fuel and Energy Complex.

Production and main gas transportation isn’t a priority anymore — what is expected from the Strategy

If the Strategy is anyway implemented, by 2035 there must be a full transition to “new-generation energy with a focus on new technology, highly effective use of traditional energy resources and new hydrocarbon and other energy sources” and hydrogen energy must develop. An increase in the production of energy resources will almost stop from 2030. And the development of the FEC will mainly embark on a course of qualitative improvement and enhancement of the effectiveness of export supplies and domestic consumption of energy resources. As maximum, innovative energy projects on the Yamal Peninsula, regional energy systems and energy-intensive plants in Eastern Siberia and the Far East will develop rapidly.

In the latter case, this will significantly increase direct and indirect (through energy-intensive products) Russian energy exports. Priorities can shift in this case from production and main fuel transportation (like today) to its “high conversion with the use of high technologies to meet domestic demand and enter world markets with products of high conversion”. The authors of the document think that the growth of processing of resources will cause additional demand for products and services of such sectors as construction, transport, industrial and social infrastructure.