200 Years of the Russian Gas Industry: Strategy and Prospects

24.10.2011

Over the past 20 years, the industry has been using facilities created during the Soviet era, and has only built a few new ones. The majority of its assets is obsolete and need to be repaired and upgraded. Humanity is starting to save resources by using energy efficient technology, alternative fuels, and renewable sources of energy.

The strategic objectives of the Russian gas industry are laid out in the government-approved national energy strategy through 2030. In general terms, the industry should ensure an adequate supply of energy, preferably at reasonable prices, to the national economy and to households. It should also provide opportunities for export and reserves. Considering the global changes that are taking place, the industry must also modernize its assets, adopt more advanced technology, cut losses, and achieve a series of other goals.

It should be understood that over the past 20 years, the industry has been using facilities created during the Soviet era, and has only built a few new ones. The majority of its assets is obsolete and need to be repaired and upgraded. Humanity is starting to save resources by using energy efficient technology, alternative fuels, and renewable sources of energy. Natural gas is expected to act as a bridge from the old energy industry to the technology of the future, because it is convenient to use and relatively clean in terms of greenhouse gas emissions. Russia’s energy industry should be restructured to meet these goals. New energy efficiency programs have been added to the energy strategy. In other words, there is a huge potential for modernization and innovation in the energy industry, the gas industry in particular, within the context of Russia’s modernization and transition to innovative development.

Russia produces an enormous amount of energy, accounting for nearly 10% of the world’s primary energy. This is huge – for comparison, China consumes 16.5% of the total figure, and Germany 2.8%. About half of the energy generated in Russia is used on the domestic market, and the other half is exported. In other words, Russia exports nearly 200% of Germany’s annual energy consumption, which is a massive amount. The world spends approximately 1%-1.2% of its GDP on energy, while Russia’s spending on energy exceeds 4%, which means it has less to spend in other areas. The energy industry that Russia inherited from the Soviet Union is truly enormous.

Russia produces about 600 billion cubic meters of gas, about one-third of which it exports; it produces 300 million metric tons of coal and exports one-third of it; and some 500 million metric tons of oil and petrochemicals, and exports two-thirds. Furthermore, the biggest manufacturing projects in Russia are considered medium-sized in the oil industry, and the biggest projects in the oil industry are medium-sized or small in the gas industry. The inertia of investment in the gas industry is huge – it takes a great deal of time and money to implement a project, but then they remain in production for half a century. There can be no quick projects in the gas industry – few projects cost less than $10 billion, and each project stage is time-consuming and expensive, but our new deposits (Yamal and Shtokman) or pipelines (Nord Stream) will last for a very long time.

The bulk of exported Russian gas goes to Europe, and will continue to do so. Liquefied natural gas (LNG) from the Sakhalin projects is delivered to Japan, and natural gas will be supplied to Vladivostok and Khabarovsk in mainland Russia. There are plans in the works to build pipelines to Korea and China. This eastern direction is being developed not as an alternative, but as an addition to European destinations. It cannot be said that Europe will become a second-class customer. Even though the bulk of Russian gas exports will continue to go to Europe, an increasing quantity will go to Asia.

There are a number of problems in the Russian gas industry, both in domestic and export areas, which require immediate attention. The domestic problems have to do with a major northward shift in gas production through the development of the Shtokman and Yamal deposits, which are huge gas fields with a high commercial potential. Yes, an increasing amount of gas will come from Russia’s eastern regions, from Siberia, but all of it will go to Asian customers – Sakhalin LNG will be delivered to Japan, eastern Siberian gas will be exported to China. Russia will not cut back on its deliveries to Europe in order to satisfy its Asian customers; rather, for delivery to Asia, it will produce gas at new deposits in Siberia. So it is the northern regions that are most likely to represent the future of the Russian gas industry. The production of gas there is very difficult because of the vast distances and the severe climate, and is therefore very expensive, and so the biggest problem is to make sure that these projects run efficiently. Another task is to encourage the development of oil companies, and other companies that produce gas. And the third element is the volume of flared associated gas – up to 20 billion cubic meters, which is quite a lot. There are government resolutions in place that directly stipulate a reduction of losses in gas flares, but diminishing gas losses by 95% is a large-scale and difficult job. First of all, you need to collect the gas. Second, increased gas production will also increase the share of wet gas, which means you have to consider methods of collecting it separately from other types of gas, not for flaring or export, but for processing before using it for chemical production. This is a very expensive process, and the share of this gas will grow in the future. This is why there are such big opportunities for the introduction of new technology in the gas industry. And finally, there is the major problem of domestic gas prices – consumers want energy to be cheap, but efficient production is impossible without profitability. For example, turbines at gas-fueled thermal and combined heat-and-power plants should be replaced with more efficient modern equipment, whose efficiency would reach up to 70%.

The gas industry needs to make big investments in new deposits, and also in equipment repair and upgrade. There is a lot of explicit and specific work to do in the industry, but it has other objectives as well, such as connecting new customers, including households, to the supply network. Also, we must not forget about other sources of fuel and renewable energy, because pipes cannot be laid everywhere. There are many opportunities to reduce energy consumption in Russia, but this is a separate issue. In my opinion, we should be investing in energy efficiency, rather than project development and gas production and delivery. This way, in the foreseeable future, the gas industry could be expected to focus on energy efficiency at the gas production and delivery stages, while households and businesses should try to use gas more efficiently. Our gas deposits are located very far away, and getting it is very expensive. 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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