Russia’s oil & gas sector in global energy transition

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Title: Russia’s oil & gas sector in global energy transition
Author: Simola, Heli ; Solanko, Laura
Organization: Bank of Finland
Department / Unit: Suomen Pankin nousevien talouksien tutkimuslaitos (BOFIT)
Bank of Finland Institute for Emerging Economies (BOFIT)
Series: BOFIT Policy Brief
Series number: 7/2021
Year of publication: 2021
Publication date: 25.5.2021
Pages: 53
Subject (yso): öljy; maakaasu; hinnat; vienti; tuonti; ulkomaankauppa; tuotanto; energia; kivihiili; pakotteet
Keywords: Bofit-kokoelma; Venäjä; energiasektori; Kiina; uusiutuva energia; ilmastonmuutos; energiamurros
Other keywords: Russia; oil; natural gas; energy transition
Abstract: The past two decades have witnessed a major transformation of global energy markets. While growth in energy demand now comes from emerging economies, and technologies critical to oil and natural gas production have seen dramatic advances, the biggest changes in global energy markets lie ahead. For countries to meet their ambitious climate goals, demand for conventional energy sources must fall significantly and be accompanied by a massive shift in investment to renewable energy sources. Such changes can have major implications for the Russian economy, which depends heavily on oil and gas. This brief provides an overview of the latest trends in Russia’s oil & gas sector in the context of evolving global energy markets.
Table of contents: Abstract ....... 4 1. Introduction ....... 5 2. Cornerstone of the Russian economy...... 6 2.1 Oil & gas account for large shares of industrial output, exports and government revenues ..... 6 2.2 Economy reacts quickly to oil price changes ...... 7 2.3 An average level of oil dependence by international standards ...... 8 3. Modest outlook for production and export of oil ...... 9 3.1 A top oil producer and exporter ....... 9 3.2 OPEC+ production ceiling agreement has restricted oil production ....... 10 3.3 Oil output expected to decrease over the long term ...... 11 3.4 Lower growth in oil exports ....... 12 4. Low demand growth keeps natural gas production in check ...... 14 4.1 Natural gas production fluctuates with demand changes ....... 14 4.2 Gradual decline in Gazprom’s dominance ....... 16 4.3 Natural gas is Russia’s domestic fuel of choice ...... 17 4.4 An end to natural gas imports ...... 18 5. Pipeline gas exports ....... 18 5.1 Bleak prospects for demand growth in Russia’s main markets ....... 18 5.2 Politicization of new pipeline projects ....... 20 5.3 New markets in Asia ...... 21 6. Yamal success fuels Russia’s quest to enter LNG top tier ...... 22 6.1 Export deregulation leads to output growth ....... 22 6.2 Ambitious growth plans ...... 24 7. Coal production and exports still rising ..... 25 7.1 Coal makes a comeback ...... 25 7.2 China’s rising demand supports coal exports ...... 25 7.3 Impressive growth plans ...... 26 8. Oil & gas crucial to development of Russia’s Arctic territory ...... 27 8.1 Gas megawarehouse ...... 27 8.2 The Arctic territory’s vast, hard-to-reach resources ..... 28 8.3 Northeast Passage navigability advances exploitation of Arctic resources ...... 28 8.4 Climate change poses significant challenges to Arctic territory production ....... 29 9. Western sanctions hit the energy sector...... 30 9.1 Limited access to financing....... 30 9.2 Increasing challenges to oil projects...... 31 9.3 Pipeline projects in the balance...... 32 10. Global efforts to mitigate climate change could hurt Russian exports...... 33 10.1 Climate change still not a priority in Russia...... 33 10.2 The EU’s ambitious climate policy...... 34 10.3 Can other markets make up for lost EU demand? ...... 34 11. Modest progress in economic diversification efforts...... 35 11.1 Why is oil dependence a problem? ...... 35 11.2 Production structure has remained nearly unchanged...... 36 11.3 Minor progress in diversifying exports...... 37 11.4 Tighter integration with international production chains could support economic diversification..... 38 12. Looking to Asia....... 39 12.1 China’s growing importance as an economic partner...... 39 12.2 Trading on Chinese terms...... 39 13. Russia’s struggles to reduce dependency of its public economy on oil & gas revenues..... 40 13.1 Managing oil & gas revenue is challenging....... 40 13.2 Frequent changes in oil taxation ....... 41 13.3 Greater stability for natural gas taxation....... 43 13.4 Fiscal rule and oil fund are used for management of oil & gas revenue...... 43 14. New and renewable energy sources....... 45 14.1 Russia and hydrocarbons ....... 45 14.2 Subsidies for wind and solar…with domestic content requirements..... 45 14.3 Is blue hydrogen the answer?...... 46 15. Conclusion ...... 47 References....... 48
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