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Energy Transition

The "energy transition" refers to a gradual worldwide change away from fossil fuel production and consumption to renewable energy sources and nuclear power. In recent years, revenue from oil and gas has become a much smaller part of the government’s budget. With hydrocarbons being such a significant part of the Russian economy, moving into the green energy market is regarded as being of the utmost importance.

Russia could be left with almost $2 trillion in worthless hydrocarbon assets if major economies hit their net zero targets over the coming decades. “The low-carbon transition could lead to a period of global financial and political instability due to the combination of deep structural change, widespread financial loss and reorganization in financial and market power worldwide,” a group of researchers from British universities said in a landmark paper, published Thursday in the journal Nature. Their calculations show more than half of Russia’s estimated $3.9 trillion stock of fossil fuel assets — such as oil and gas rigs, pipelines, extraction facilities and other infrastructure to support the country’s vital energy sector — would become “stranded,” or effectively worth nothing, by 2036.

Due to differences in how fossil fuels are accounted for, official estimates of the share of the fossil fuel sector in Russia’s GDP vary from around 10 percent to 25 percent. Fossil fuels accounted for over 60 percent of Russia’s export value in 2018. Taxes and other fees on fossil fuel production and consumption generated 23.6 percent of the general government revenue in 2017, amouting to 7,336 billion rubles or US$126 billion. Dividends from Gazprom, Transneft and Rosneftegaz also contribute to the federal budget. Fossil fuel revenues amount to roughly three times the amount spent each year on arms purchases by the Ministry of Defense, and roughly twice the Ministry's entire budget.

Oils prices declined from about $80 / barrel in 1980 to about $25 / barrel in the 1990s, smothering Russian military spending in that decade. Yegor Gaidar held several government positions in Russia and was Boris Yeltsin's acting prime minister in 1992. He played a major role in Russia's economic transition out of communism. In his book "Collapse of an Empire", Yegor Gaidar argued that the Soviets had used revenues from energy sales to prop up struggling sectors such as agriculture, which was so thoroughly ravaged by hyperindustrialization that the Soviet Union became a net importer of food. When oil prices dropped in the 1980s, that revenue stream diminished, and dependent sectors suffered heavily. Cash shortages and economic inflexibility triggered the chain reaction of political disintegration.

Energy transition to green energy and decarbonization in Russia is not new, and means a structural transformation of the global energy balance. Despite the wealth of the country in hydrocarbon energy sources, Russia supports the aspirations of the world community to combat climate change. In 2016, the Russian side signed and adopted the Paris Climate Agreement in 2019, and as part of its implementation in November 2020, the President of the Russian Federation issued a decree on reducing greenhouse gas emissions.

In July 2021, former deputy prime minister Anatoly Chubais revealed that the global rejection of hydrocarbons could cost Russia 10 percent of its GDP, a result that he called “more than serious.” Chubais currently worked as President Vladimir Putin’s representative on sustainable development and coordination with international organizations. Chubais was Chairman of the Board of Management Company Rusnano. Rosnano is developing and commercialising new technologies, including those in the field of renewable energy.

Chubais had repeatedly warned that the global economy's abandonment of hydrocarbons could cost Russia dearly if it did not start restructuring its economy. At the same time, in June 2021 he said that the country would be able to maintain the status of a great energy power if it replaced the export of hydrocarbons with the export of hydrogen.

The rejection of hydrocarbons in the energy sector is a real trend, but the global energy transition will take 20-30 years. This was stated by Anatoly Chubais. Chubais noted that a peak in coal consumption can be observed at the moment, and a decline will begin in the near future. The 2030s is the world's oil consumption and the 2040s is the world's peak in gas consumption. Chubais added that earlier estimates of the future of the energy industry were controversial, but today a consensus has been reached among analysts on this topic.

“Export is that vulnerable zone through which Russia will inevitably get the impact of the global energy transition. (...) The consequences of the energy transition for Russian exports will be colossal. My personal estimates - while these are my personal estimates, not confirmed by anyone - we are talking about ten percent of GDP. This is more than serious,” Chubais said 26 July 2021.

Putin had spoken more regularly about climate change, encouraging businesses around the country to cut down on their emissions. Speaking last year to the Valdai Club think tank, he called for an end to “unrestrained and unlimited consumption,” noting that tensions regarding climate change had “reached a critical point. ... It affects pipeline systems, residential districts built on permafrost, and so on,” Putin explained. “If as much as 25% of the near-surface layers of permafrost – which is about three or four meters – melts by 2100, we will feel the effect very strongly.”

In June 2021, Deputy Prime Minister Alexander Novak revealed that Russia was already changing tack, noting that 60% of all energy generation capacity commissioned in the country in 2020 was either solar or wind power.

The Russian government is to create a set of working groups to help the country’s economy adapt to the global energy transition, as the international demand for hydrocarbons decreases due to the development of alternative sources. That’s according to a source cited by Moscow business daily RBK, which revealed that Prime Minister Mikhail Mishustin put First Deputy Prime Minister Andrei Belousov in charge of the new initiative. At the initial stage, the working groups will identify the risks and opportunities of the global energy transition for the Russian economy, with the plan to assess all scenarios and work out the optimal route for the country to take. The groups would focus on scientific support, adapting the already-existing industry, restructuring energy projects and protecting the environment.

The Russian Ministry of Energy is confident that the global crisis will not change the structure of fuel consumption and by 2050 in the world hydrocarbons will retain the lion's share of the global energy balance. At this time, the growth in demand for renewable energy sources (RES) and hydrogen will continue. “Of course, we must understand, speaking about renewable energy sources, about hydrogen, that hydrocarbons will not go anywhere. Even by 2050, they will have the lion's share in the global energy balance,” said the former head of the RF Ministry of Energy Alexander Novak, who was appointed Deputy Prime Minister of the Russian Federation. Yes, it is possible that Europe will have a different energy balance. For this, it is important today to understand what conditions will be in order to provide the entire globe with energy."

According to Novak, in the future, the share of hydrogen in the energy balance may reach up to 25%. But Russia is ready to change the energy balance. Recently, Russia and partners from Germany agreed to sign a memorandum on joint research on hydrogen energy. "Therefore, we are here also for Europe, ready to be, including partners," - said Novak.

Potential volumes of hydrogen export from Russia to the world market, according to expert estimates of the Russian Energy Agency of the Ministry of Energy of Russia, may amount to 10-20% of the international hydrogen trade market, or up to 0.2 million tons in 2024, 2-7 million tons in 2035, and 7.9–33.4 million tonnes in 2050, depending on the rate of decarbonization of the global economy and growth in demand for hydrogen in the global market.

Strategic initiatives and key measures for the development of hydrogen energy in Russia for the medium and long term are defined in the developed concept for the development of the industry. In particular, the document provides for the creation of a scientific and technical infrastructure in the country - engineering centers and landfills, the main activity of which will be a full cycle of creating technologies for obtaining, storing, transporting, using hydrogen from the level of scientific research to the stage of their commercialization.

At the same time, one of the primary tasks should be the development of competitive technologies for the production of hydrogen both from fossil raw materials, primarily natural gas, and by electrolysis of water on the basis of nuclear power plants and renewable energy facilities.

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Page last modified: 19-12-2021 19:00:07 ZULU