The Russian oil market might be affected by a “black swan” – an unforeseen event with potentially damaging consequences, RusEnergy partner Mikhail Krutikhin warned at a meeting of the FBK economic club Coronavirus, Crisis and Other Black Swans 2020.
The problem is not the shrinking demand due to the growing popularity of decarbonization; it is not the overabundance of supply in the global markets either. The problem is Russian companies’ reluctance to rigorously invest in the development of new reserves because of the long payback periods and ever growing costs of production.
This situation may begin affecting Russia’s revenues from oil exports. In 2019, oil and gas revenues accounted for about 40% of the federal income.
“We are now using up the last barrels of oil that is cheap enough to extract. Our oil business is shrinking,” the expert says.
When an oil company begins operating a new field, the payback time is expected to come 7 or even 15 years later, Mikhail Krutikhin explained. It is difficult to plan operation for such a long period because, for example, over the past three years, tax conditions for the industry have changed 22 times.
“Nobody k nows what will happen in 15 years. The planning horizon is as short as six months, three years at the most. Nobody will invest in this,” the expert noted.
Instead, companies continue to operate the oil fields that are already in production where they employ the latest production technology. The well network is growing denser. However, this only appears to be a temporary solution.
More oil remains in reserves that are hard to reach. An economically sound production requires a significant price hike as well. The expert estimates that the price per barrel must remain at least over $80. The oil production in the Arctic will only be feasible at $150 per barrel.
Mikhail Krutikhin recalls a forecast made by the Russian Energy Ministry several years ago. The ministry estimated that by 2035, the oil production in the country could lose 40% − exactly because the fields in operation will be exhausted. Another prognosis to remember is the 2016 Global Energy Outlook by the Energy Center at the Skolkovo Moscow School of Management (the research was conducted in cooperation with the Russian Academy of Sciences’ Energy Research Institute – ed.).
Krutikhin further specifies that at the time, experts tried to determine which industry could replace oil and gas when it comes to maintaining Russia’s role in exports in the global market – but never found an answer. Hypothetically, hydrogen could now become Russia’s new export area, he suggests.
“Europe, our long-established oil and gas buyer, is quickly moving towards de-carbonization. Hydrogen technology and hydrogen utilization are taking the top priority.”
Among other, this type of production could develop thanks to excessive electric energy in the country. Natural gas could also be used for hydrogen production. Thanks to new technologies, the prime cost of hydrogen production could drop by 50% within two years, the expert predicts.
“It could be a gorgeous export product. We would be able to provide markets with completely clean energy,” Mikhail Krutikhin says.
In the long run, hydrogen’s role in the global energy system could in fact be equal to the role of gas and coal, according to the 2019 Global and Russian Energy Outlook by the Skolkovo Moscow School of Management and the Russian Academy of Sciences’ Energy Research Institute.
By Olga Blinova