Expert opinions, FORECASTS

Green energy and future of Russian oil

The ongoing global transition to green energy raises questions about the fate of oil companies. It suffices to look at the philosophy behind the new energy transformation, which is to do without hydrocarbon energy sources, to realize that for oil, gas and coal businesses the tale is told. Energy profiles may be changing slower or faster but this process won’t stop. Oil and gas companies should not be seen as victims though. This energy “rearmament” opens up new prospects for international energy giants.

Up until 2019, alternative energy was an issue only raised in the context of alternative investment with very distant prospects. Global warming has been in the public eye since 2006; however, even in early 2020, the majority of investors were still either unaware of the term “ESG” (environmental, social and corporate governance) or ignored it. A new attempt was made in 2020 to launch a global energy reform. It is too soon to tell if the attempt will be a success but, unlike previous efforts, this time it has truly reached a global scale.

Green energy and its impact on the oil and gas industry

One of the ways to demonstrate serious intentions and convince the public that the proposed path has no alternative is to attack prominent members of the outdated system. That is why major and then small oil and gas companies found themselves in the firing line. Regulatory bodies from developed and large economies not only adopt framework programs to pursue a de-carbonized economic model; they also strive to expedite these plans. Restrictions and sometimes direct bans on investment into oil and gas projects force companies to get rid of hydrocarbon assets to avoid sanctions or multi-billion penalties.

Companies that represent renewable energy cannot boast of a stable net profit so far; they can only offer prospects to investors. But what is preventing today’s giants from offering the same prospects as those from the “green youth”? Oil and gas companies are in a more advantageous starting position than their counterparts. They have a business that generates net cash flow, and despite the expected decline in production, this flow will generate profits for at least another 5-10 years, with high oil prices likely to be maintained by a supply shortage. In addition, oil and gas companies have access to capital markets, infrastructure, well-developed logistics and popular brands; they only have to accept new rules of the game and start a new life.

This is exactly what the world’s giants are doing now — they are transforming from global oil and gas operators into global energy companies. Rather than putting money in search and development of deposits or modernization of processing, they are directing their investments into wind and solar power generation, electricity storage technologies, and hydrogen production and storage. In addition, companies are investing in technologies for end-users, who need to be motivated to accelerate their transition to renewable energies.

Problems that green energy solves

The global climate issue is considered to be the major driver of the green transition. However, the sole idea of ​​a green planet — as well as fears of a catastrophe in the distant future — cannot force people and companies to promptly switch to new types of fuel. This requires an economic component, which consists of two aspects.

The first aspect is strategic. The transition to renewable energy sources will make consumers independent of any suppliers. Active investments in renewable energy generation and storage technologies will make this energy relatively inexpensive, which will allow us to forget such concepts as energy crisis and energy price fluctuations.

The second aspect is tactical. Currently, green technologies are expensive — as well as the energy obtained through them. To accelerate the transition, renewable energy sources must be cheaper than conventional energy, and there is no better way to achieve this than through setting high prices for coal, oil and natural gas.

Along with environmental and climate issues, the global energy transition helps solve the economic issue. Boosting economic growth requires increasing investments — however, there are no reasons for this anymore. Previous investment cycles have created excess capacities; consumer capacity has reached its limit that makes further growth possible only through intentional stimulus.

Launching a new long-term investment cycle requires a new idea: decarbonization of the economy and a change in the energy balance structure, which will trigger a total revamp of the entire world economy. Major changes will affect not only the energy industry but other sector as well, with new resources, technologies, logistics and consumption patterns to be required.

In order to advance, rather than fade away, this process needs to achieve critical mass. Currently it is at its early stage; the lack of administrative incentives will make it quickly stall and go back to the niche of alternative investments. This is the reason we are observing politicians and officials’ increased activity, as well as media interest and investors’ irrational behavior. This will go on until the transition to a green economy becomes a mass trend which will start evolving on its own.

Russia’s role in global transition to green energy

As a major exporting country, Russia has found itself in a really complicated situation. The renewable energy doctrine envisages maintaining high prices for hydrocarbons — which, as it would seem, favors the domestic economy. However, taking stimulation efforts through high prices for conventional energy require discouraging investment in this sector. Carbon tax is the way to make investments in oil and gas economically unattractive even with high market quotations. For exporting countries, paying this tax is like shooting themselves in the foot as payments will go to accelerate decarbonization of the EU economy, which will lead to abandoning energy imports. Therefore, solving the problem of calculating carbon footprint, a key component of the tax, is a vital task for us. To this end, we need to pursue an active dialogue with the EU, the United States, China, and the entire global community. The lack of clear rules does not allow Russia to actively engage in efforts to invest in a new technological re-equipment.

Yet, even in the conditions of elevated uncertainty, Russian companies do not sit idle; they make efforts to launch pilot projects on renewable power source generation and improvement of technologies to reduce greenhouse gas emissions, as well as projects on production of hydrogen, ammonia, electric and hydrogen-powered transport, and development of new sources. The only thing obviously missing is a state-level formalized strategic program, which would determine the country’s role in the new world energy balance, its goals and objectives. Without such a program, Russian companies’ projects may remain at the pilot stage for too long, lacking interconnection. If we now fail to engage in the actively developing new world market, efforts to enter it later will cost us much more.

Yet, fitting into the concept proposed by foreign partners does not mean we have to blindly follow their choice. We have directions which, if properly developed, will allow Russia to remain among the world’s top energy suppliers, and help the domestic oil and gas sector survive and continue to advance. These areas include hydrogen as a key source of energy in the new EU energy concept, and ammonia as a way of hydrogen transportation and storage. The second development area is new resources. The task of total carbon footprint reduction in the global economy requires creating new materials for all production sectors. For this reason, gas- and petrochemical industry may become a driving force for the Russian economy in the immediate future — while technological breakthroughs in this area will open the door for the development and distribution of 3D printing technologies and related machine tool industry.

To some extent, the acceleration of green transformation imposed on us is a challenge. Yet, for the first time in the post-Soviet era, we now have an actual chance to reform our resource and export-oriented economy to make it based on production and technology. Russian oil and gas companies have everything to take advantage of this opportunity and become high-tech conglomerates, such as S. Korea’s Samsung and SK Group.

By Andrey Dyachenko, Chief Analyst for Macroeconomics and Oil Markets, Petroleum Trading

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