Russia needs a flexible energy strategy that takes into account the long-term decline in real oil prices

The Russian oil and gas industry today faces a number of serious internal and external challenges. External ones include an increase in the level of competition in world markets due to technological breakthroughs in the production of unconventional hydrocarbons. North America is experiencing dramatic growth in the production of tar sands, tight oil, shale gas and condensate. Since 2011, every year the production of liquid hydrocarbons in the United States has increased annually by 1 million barrels per day, which is why in 2014 there was an oversupply of oil on the market.

It was this overproduction against the backdrop of declining demand growth that triggered the collapse in oil prices at the end of last year.

Low prices for hydrocarbons are an obvious challenge for both the Russian oil and gas industry and the Russian economy. In the long term, it is possible that prices for energy resources, primarily oil, will decline in real terms, which is associated with increased energy efficiency in consumption, the development of alternative energy sources, and high inter-fuel competition, primarily in transport.

The development of LNG trade is changing the situation in regional gas markets. With the emergence of new producers from America, Australia, and North Africa, the LNG market will become global, and this will change the principles of pricing. Gas trading becomes similar to oil trading; the price level changes due to the elimination of arbitrage opportunities between markets. As a result, gas prices in the Asia-Pacific region will decline, which jeopardizes the economics of many Russian gas projects aimed at this market.

And of course, a new challenge for Russia in 2014-2015 is financial, economic and technological sanctions. Priorities regarding long-term and expensive projects, such as work on the shelf, geological exploration (GRR), production of hard-to-recover reserves (TRR), are shifting towards maintaining production in brownfields.

Internal challenges are traditionally considered to be the deterioration of the state of the mineral resource base, the increase in the share of hard-to-recover reserves, the insufficient volume of geological exploration and the increase in profitable reserves. Against the background of production successes in North America, the main drawback of the Russian oil and gas industry clearly emerges - the lack of its own production technologies and equipment for hard-to-recover oil and shelf, as well as deep processing technologies, production of high-quality petroleum products, and liquefaction of natural gas.

By and large, today we do not have effective analogues of imported equipment.

Against the backdrop of the imposed sanctions, this shortcoming can play a key role in the development of the oil and gas industry, so today one of the main tasks is import substitution of equipment and technologies.

There are also certain negative trends associated with changes in the structure of the industry. Concentration is increasing, and the independent producer sector is gradually disappearing. The gas market is dominated by three main players, while the share of state-owned companies is increasing in the oil market.

Against this background, the instability of the regulatory system and the uncertainty of state policy look especially depressing. Thus, the rules of the game regarding taxation are constantly changing; there is no long-term policy regarding oil taxation, transportation tariffs and energy prices, primarily gas. This has an extremely negative impact on the investment climate and on the competitiveness of Russian oil and gas companies compared to global players in the face of external challenges.

Today, the Russian Ministry of Energy is preparing to update a number of strategic documents - this is the Energy Strategy until 2035 and two General Schemes (oil and gas). When preparing these documents, the state needs to decide on the optimal configuration of industries. To do this, it is necessary to overcome a number of “forks”, in particular regarding the role of state-owned companies and the level of competition. How should the state view the oil and gas industry - as a donor or an economic driver? In other words, should we maintain high and unstable taxes and lower energy tariffs, or should we create favorable conditions for investments that, through a multiplier effect, will help the development of related industries and the Russian economy as a whole?

It is obvious that in conditions of high uncertainty of external factors (oil prices, demand for energy, production of competitors), it is necessary to have a flexible energy policy that takes into account different scenarios for the development of the global world market. It is necessary to have a basic scenario for the development of industries, as well as a plan “B” in case of a favorable change in circumstances, and a plan “C” in case of the most unfavorable dynamics, a kind of insurance measures.

All this should be recorded in the Energy Strategy, which should become a full-fledged document of energy policy, and not a set of declarative postulates and assessments of balances of fuel and energy resources. In particular, it should be accompanied by a roadmap of activities providing for the development and implementation of the necessary regulatory legal acts within the foreseeable future, and not shift the point of making key decisions for 2020.

Master plans for the development of the oil and gas industries must show appropriate balances depending on external conditions and the regulatory system, the need for investment and the economic prioritization of projects. The conversation about which document should be approved first is important for bureaucrats, but has no practical meaning. In my opinion, they should be developed simultaneously, since one cannot be done without the other. The choice of forks cannot be made without detailed assessments at the level of general schemes, and the basic scenario cannot be made without an optimal energy policy.

In our opinion, the basic scenario for the development of world energy should include a global decline in real prices and demand for oil through the serious development of alternative energy and competition in certain sectors. It is possible that gas will at some point become a serious alternative to oil as a motor fuel or as a source of electricity production for electric vehicles.

From the point of view of the Russian Energy Strategy, gas projects are becoming a higher priority than the expensive projects of the Bazhenov formation or, especially, the Arctic shelf.

It is well known that Russian production potential has not been fully realized; the resource base allows increasing gas production to 1 trillion cubic meters per year, and oil production to 600 million tons. However, the persistence of a situation of limbo in relation to key forks or denial of existing trends, such as changes in pricing principles in the gas market or technological advances and changes in the principles of making investment decisions in oil production as a result of the shale revolution could lead to Russia either making incorrect strategic decisions or making mistakes with them.

Today it is necessary to organize a full-fledged discussion regarding what this or that regulatory decision may lead to. Thus, a lot is said about the target model of the gas market, issues regarding gas prices are discussed, the question can be raised about whether the export and transport monopoly on gas is maintained or not, how this can affect prices and the gas balance. It is quite obvious that the choice of model will have consequences for all market participants - for the budget, companies, Russian and foreign consumers.

For example, excessive emphasis on the development of pipeline transport, the creation of unequal conditions for companies, and a decrease in the level of competition - all this can lead to the fact that we will not be able to fit into the new global energy balance, lose the competition and lose foreign markets. In this regard, it is necessary to make decisions not only on the construction of such facilities as the Power of Siberia and, possibly, Altai and Turkish Stream, but also to more actively develop LNG projects.

Thus, the main task of the Russian Ministry of Energy in preparing strategic documents is to organize serious work to assess the consequences of certain decisions. As a result of the calculations, it is necessary to formulate scenarios and a strategy for the development of the fuel and energy complex in the changed conditions, supplement it with meaningful regulatory measures that must be implemented in the next five years, and begin to consistently implement this energy policy.

Russian fuel and energy complex: development scenarios