April 30, 2021 Read More →

Energy transition threatens Russian exploitation of Arctic fossil wealth

OilPrice.com:

The collapse of the Soviet Union was a geopolitical victory for the United States and a disaster for Russia which suffered politically, economically, and socially. Although citizens enjoyed more individual freedoms, the quality of life decreased substantially as state institutions collapsed and basic services disappeared. In the early 2000s, Moscow started exerting more influence over its mining sector which increased the state’s income substantially.

The production of raw materials from Russia’s rich soil of which oil is by far the most important has provided the resources for the modernization of the society. Therefore, Moscow must maintain a steady supply of exports and revenue. According to a government strategy document cited by Kommersant, it is likely that the pre-pandemic level of oil production won’t be matched.

Russia’s oil industry was able to reach a post-Cold War record in 2019 when the sector produced 11.3 mbpd which is approximately 560 million tonnes. Production has decreased substantially due to the Covid-19 pandemic. Nevertheless, Russia’s free-floating exchange rate helped cushion the negative effects of decreased sales because oil deals are usually executed in dollars.

Moscow has put high hopes on the development of its Arctic region. In its quest for energy dominance, companies are given significant tax exemptions to lower costs and lure the right business people to the north. Energy giant Rosneft, for example, has announced the massive Vostok project that will create 130,000 jobs and allow access to around five billion tonnes of oil. Rosneft intends to produce 30 million tonnes by 2024 and eventually 100 million by the end of the decade from this project alone. 

A major threat to Russia’s position is the energy transition and the electrification of societies. This could offset the demand for fossil fuel products. Although hydrogen is slowly creeping into Moscow’s strategy, the bulk of the Russian energy industry’s efforts remains with fossil fuels. According to Dmitry Loukashov, VTB Capital’s deputy head of oil and gas research, “While international oil [majors] are falling over themselves in their business transformation potential to become ‘clean,’ Russians are unlikely to compete with them in this renewables drive.”

[Vanand Meliksetian]

More: The Biggest Threat To Russia’s Arctic Oil Ambitions

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