An Uncertain Future, But Laden With Golden Opportunities For Investors Willing To Take The Risk…
The future of the energy industry is shrouded in mist. No one knows for sure which energy technology or for that matter which energy source will eventually succeed in the global market place and drive out competing technologies, as there are too many factors at play. One thing most people in the energy industry can easily agree on is that Russia has until now been one of the world’s most enduring energy superpowers. Fossil fuels still constitute an important part of the global energy landscape.
Russia is irreplacable to global energy markets, because Russia is one of a handful of nations that can ensure there is enough energy to meet primary energy demand in industrialized nations. Few countries in the world can even match this incredible portfolio of Russian energy supplies and its sheer abundance.
Russia is rich in coal, natural gas and crude oil. With so many different resources, Russia stands in stark contrast to other energy producers whose energy supplies are rapidly diminishing, almost at breakneck speed. Other countries are often constrained by geology and by geopolitics. But Russia is rich in so many natural resources and able to exploit these resources.
Unfortunately, these resources are not evenly distributed across the whole of Russia. Looking at a map, it appears one specific area has more resources than any other. There is a point of convergence where these resources are to be found, that convergence of different recoverable resources hovers over Siberia. Some resources are located in the Far East. It seems as if the Russian geology has predetermined, or set in stone a huge price tag in terms of logistics. It costs a lot to bring these resources to market. Resources may be plentiful, but transport costs are humungous. They are a huge expense to producers.
Resources may be recoverable, but because of where they are located, they cannot be exploited without committing to projects to the fullest extent. The actual decision-making process takes a considerable amount of time. Geography does permeate and redefine a great many aspects of the energy industry, and in that business environment Russian energy companies nail down their investment strategy. Considering costs, deciding on which technology to use in an endavor, which one is best suited to extract resources out of the ground, is a lengthy process. One has to ascertain what will be the ROI for project. Investments have to be made, in technical equipment and in technical infrastructure. CAPEX and OPEX for Russian energy projects always remain high.
One has to account for the fact that although many of these projects will eventually succeed commercially, it may take a long time for Russian energy companies to balance their cash flow, because globally, oil prices have fallen steadily. To a lesser degree, this has to do with the booming shale oil and shale gas industry in the U.S., which I believe won’t last indefinitely. It also had to do with reduced oil exports from Saudi Arabia, among other things.
In her article, Astrasheuskaya (2018) extrapolated why the decline of global oil prices has played such a big role for Russian oil businesses and why it is so important to take another look at oil prices and what oil prices can tell us about the Russian oil industry. I would add that oil prices dropped significantly at the end of 2014 and at the beginning of 2015, which has had major repercussions for oil producers such as Gazprom and Rosneft. It has effected their company’s profitability, and although the price fall may be short-term, it has effected company’s bottom line.
Having said that, the Russian oil industry is not the only energy sector in Russia that has to carefully weigh the costs when making an investment. To this day, we see that the construction and maintenance of electricity transmission lines is a pricey endavor in Russia.
Gas pipelines are very long-term investments. Ragsdale (2010) reports that Alaskan pipelines have a lifespan of about 35 years, more or less. Alaskan pipelines, like Russian pieplines, operate within a difficult climatic environment which increases costs considerably. Let us assume we find an audacious investor who can handle such a big risk himself: If he makes an investment for 20 to 30 years for the entire project lifespan, then he would certainly require a lot more coordination beforehand so that when the project actually starts, he knows no time will be lost. Because every day the pipeline does not deliver what it has promised, it costs the investor a lot of money. The upside is that Russia offers huge potential for growth in the resource sector and that is why I wanted write this article in the first place. There is a lot of potential in the resources sector that has not been tapped.
East Asian countries are more and more dependant on Russia to meet their own energy needs. In the last few years, energy imports from Russia to East Asia have increased by a considerable amount, and this has allowed these countries to diversify their energy supplies away from the Middle East. This makes a lot of sense given Russia’s relative geographical proximity of East Asian countries like China, Japan, South Korea.
We have seen the first inklings of this just a few years ago. We saw a very significant uptick of energy exports from Russia to China and Japan. We now see Russia’s energy exports to East Asia truly blossoming and repositioning the Russian energy industry towards the East. Energy matters continuely shape and then reshape the economic relations of nations. Herberg (2018) reported on the importance of Russian gas exports and how this has shaped international relations between China and Russia. We now see the emergence of strong economic links binding these two powerful countries to each other in energy matters.
Russian Energy Production Will Grow Significantly 2020 – 2040
Russia is currently the largest energy exporter in the world. Russia’s oil and gas production has the potential to grow considerably over the next two decades, due to Russia’s relative abundance of energy.
At this point I should add that significant investments have been made in the last years to improve Russia’s oil and gas infrastructure. This will effect world oil markets in a way few people actually realize. As we move toward peak oil globally, most countries will look for alternative sources of energy. It is yet unclear how big Saudi Arabia’s energy reserves really are. But as it looks like right now, there is a lot of pressure in international oil markets, where different players compete for market share. This has been reported on by Watkins (2019) extrapolating how much the build-up of this additional new capacity through new pipelines such as the Power of Siberia has begun to reorient Russian energy policy and its energy exports to East Asia and to China in particular.
I have to point out that this is a dramatic shift in global energy trade links and it will most likely lead to a readjustment of energy flows. Global energy trade will strengthen its links to East Asia, and presumably China will be the focal point of global energy demand. Russia’s energy exports were bound up with Western Europe. As Aris (2019) mentions in an article, the Power of Siberia has now been completed and gas will flow through the pipeline by early December, 2019. A 30-year contract has been signed. That is of enormous significance and cannot be understated.
According to Paraskova (2018), Russian oil reserves may peak very soon. This may also effect Russian energy exports. To keep gas flowing and oil continuously pumping, Russia will have to make huge investments in its oil and gas infrastructure to hold current production levels steady.
There are, of course, other energy resources that Russia can exploit. Gas production is growing even stronger then oil production in Russia right now. Russian coal production levels could be much higher then they are now, this becomes evident simply by looking at coal reserves of the Russian Federation. In a previous article I have mentioned that Russia has some of the largest coal reserves in the world, and the potential of Russian coal production is below its true potential. Although coal-to-liquid (CLT technology) is currently not as attractive because there are other cheaper fuels available, this could change very quickly when the oil price picks up. Increasingly, renewable energy sources compete with coal, and this may explain why coal production in Russia grows slower.
Mining In Russia And Energy Infrastructure: Russian Coal Industry
Since the start of the industrial revolution coal was, and still is, a critical part of the energy industry. Russia plays a key role in this sector as it is one of the leading coal exporters. As Grachev (2018) explains in his article, one of the biggest problems has been for a long time to attract capital to large-scale mining projects. This includes open pit mining that can take up to a decade to reach their maximum production level. In addition, mining requires huge amounts of energy which increases costs further.
Only risk-takers win. Opportunities abound.
Will Renewable Energy Structurally Change Russian Energy Industry?
Renewable energy is certainly an attractive proposition for the Russian energy industry and Russian economy as a whole. We have to keep in mind that Russia is self-sufficient when it comes to energy. Russia does not rely on other countries to meet its energy needs so the question if Russia has to use renewable energy in its energy mix is a different one to that of countries in Western Europe. Countries in Western Europe face the problem of diminishing fossil fuel reserves, oil and gas in particular, as offshore oil and gas production in the North Sea is gradually being phased out.
The European Union member states need to import oil and gas from Russia so they can ensure there is base load power supply to provide industry and commerce with enough electricity at all times, throughout the year. The same cannot be done with wind and solar energy. Russia could jump in where fossil fuel supplies are needed to provide base load power and provide heat, in order to fill the gap with renewable energy. Russia is able to fill in this gap because renewable electricity cannot be stored more effectively on such as large scale. Technology may fix this problem, how to store electricity effectively with a good EROI, but a commercially-viable solution is a long way off as far as I can see.
Whereas Western Europe is dependant on energy imports from Russia, Russia faces no such constraints and can export its energy surplus elsewhere if it so chooses.
What Contribution Will Nuclear Power Make To Russia’s Future Energy Industry?
The floating nuclear power station, Akademik Lomonosov, is a remarkable achievement where Russia has demonstrated its strength in science and research. Floating nuclear power stations have first been build decades ago, their reemergence shows that nuclear power continues to be an important component in Russia’s energy industry. It is a huge leap forward for Russia’s energy industry, because floating nuclear power stations are able to supply entire cities with enough energy. They can supply energy to industrial sites, mining sites, oil platforms, and to industrial plants that do not have any connection to the electricity grid of their own. Energy can be supplied relatively cheaply in places where electricity transport would lead to high CAPEX and OPEX.
Floating nuclear power stations can ensure there is a stable electricity supply, but at a lower cost then what industry would have to pay for other energy sources. Floating nuclear power stations are flexible, perfectly suited for oil exploration and oil production in the Arctic. In addition, Russia has some of the largest deposits of uranium. Nuclear power may have its place in the Russian energy industry.
Aris, B. (2019) ‘Gazprom’s Power of Siberia gas pipeline to China is finished’, Intellinews.com, Berlin, 14 March. Available at: https://www.intellinews.com/gazprom-s-power-of-siberia-gas-pipeline-to-china-is-finished-157956/ (Accessed: 24 08 2019).
Astrasheuskaya, N. (2018) ‘Russian oil groups hit sweet spot as profits surge’, Financial Times, Moscow, 18 November, Available at: https://www.ft.com/content/622e933a-e76b-11e8-8a85-04b8afea6ea3 (Accessed: 24 08 2019).
Grachev, S. (2018) ‘Should we expect a crisis in the Russian coal industry?’, MINING.COM, 23 April, Available at: <https://www.mining.com/web/expect-crisis-russian-coal-industry/ (Accessed: 25 08 2019). Herberg, M. (2018) ‘Introduction: The Emerging Russia-Asia Energy Nexus’, The National Bureau of Asian Research, 12 December, Available at: https://www.nbr.org/publication/introduction-the-emerging-russia-asia-energy-nexus/ (Accessed: 24 08 2019).
Paraskova, T. (2018) ‘Russia’s Peak Oil Production Could Be Just Three Years Away’, Oilprice.com, 20 September, Available at: https://oilprice.com/Latest-Energy-News/World-News/Russias-Peak-Oil-Production-Could-Be-Just-Three-Years-Away.html (Accessed 24 08 2019).
Ragsdale, R. (2019) ‘Big Risk, Bigger Rewards: Life expectancy climbs as pipeline ages’, Petroleum News, 14 February, Available at: http://www.petroleumnews.com/pntruncate/842644601.shtml (Accessed 24 08 2019).
Watkins, S. (2019) ‘Russia Squeezes Out Saudis In Asia Market Share Race’, Oilprice.com, 29 July, Available at: https://oilprice.com/Energy/Crude-Oil/Russia-Squeezes-Out-Saudis-In-Asia-Market-Share-Race.html (Accessed 24 08 2019).
Many thanks for the shared interest in the energy world!
This article is just meant to inform the reader of recent developments in the energy industry at large and to share knowledge and insights with a wider audience. The author does not put forth investment recommendations.
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