Russia’s oil and gas exports rise despite uncertainties, expert says

Russia’s oil and gas exports have continued to rise despite multilateral Western sanctions and an energy strategy that is not being aggressively pursued, the director of the Moscow School of Management’s Energy Center told a Washington audience. “It’s said that Russia is never as strong, nor as weak, as it appears. I believe it’s important to keep an open mind about all possibilities,” Tatiana Mitrova said during a May 2 discussion at the Atlantic Council.

The country supposedly has a five-part energy strategy through 2025 with goals to sustain its global oil and gas position, diversify its markets with a pivot to Asia, make energy available and affordable for domestic customers, strongly reduce energy intensity, and develop a strong renewable energy sector, Mitrova told her audience. Only the first two goals are being actively pursued, she said.

“I frankly don’t see it as a strategy,” Mitrova admitted. “When we look at Russia’s economy, energy is an important part. Hydrocarbons still represent the biggest share of its federal budget, but their share has dropped from 50% to 40%. There is no consistent long-term plan, and many decisions are driven by short-term adaptations. There is no clear consensus.”

Yet Russia’s crude oil exports climbed 6% during 2012-16 despite sanctions, and production is very high historically, Mitrova noted. But as its reserve base deteriorates due to financial and technical sanctions, crude production will begin to deteriorate, she warned.

Access to financing

A second speaker, Elizabeth Rosenberg, a senior fellow and director of the Energy, Economics, and Security Program at the Center for a New American Security, agreed that Russia’s oil and gas sector has coped well in recent years despite sanctions, currency weakness, falling prices, and other problems.

“The 2014 sanctions had a significant impact overall, although less so in energy,” Rosenberg said. “They seemed to affect the general financial environment more than specific companies. Valuations were all over the map, which made some traders wonder about Russian energy companies’ access to financing.”

Questions about sanction impacts since 2014 seem to have receded into broader inquiries about choices Russian energy companies can make, Rosenberg said. “Is the effort to create more indigenous technology by 2025 going to make it available when it’s needed, particularly offshore?” she asked.

Richard Morningstar, founding director and chairman of the AC’s Global Energy Center and who also participated, said, “Sanctions, to this point, haven’t had a huge effect, and the Russian energy economy seems to be doing quite well. But I wonder what experts think about impacts from further sanctions, particularly those involving the Nord Stream 2 natural gas pipeline project.”

That question has grown after German Chancellor Angela Merkel recently linked continuing Ukraine’s role as a transit point for Russian gas bound for Europe with avoiding further sanctions, Morningstar added.

“Her statement will start serious negotiations,” Mitrova responded. “Yesterday, the first part of the Turk Stream project was announced without waiting for sanctions to be lifted. Europe will continue to need gas. Russia is ready to supply it.”

But Mitrova also cautioned that the country’s oil output could begin to drop if more domestic oil field equipment manufacturing capacity isn’t developed. “By 2025, 5% could be lost. That might reach 10% by 2030. But it would be far from a collapse if domestic technologies are development and oil and gas trade with China grows,” she said.

If sanctions are intensified

Ariel Cohen, a senior fellow at the AC’s Eurasia Center who moderated the discussion, noted that a recent paper by Mitrova “lays out a case that Russia is doing well on energy despite sanctions, thank you very much. The Novatek [LNG] project is moving ahead, but I wonder how long this would continue if sanctions were intensified. I sometimes suspect that Russia’s ultimate energy strategy actually is in [President Vladimir V.] Putin’s head.”

Cohen then asked Morningstar if existing increased sanctions against Russia could be used to make the government change its positions on Syria and Ukraine. “As the sanctions stand now, no,” Morningstar replied. “But the possibility that they could grow might make investors question whether financing will be available for Rosneft’s future projects in other countries, for example. Russia clearly is present already in India, Venezuela, and elsewhere.”

Mitrova said the sanctions’ latest version did not mention Russian projects in other countries, but they did raise questions about projects that were more marginal than commercial. “From 2014, Gazprom enjoyed special sanctions treatment to preserve European energy security, but this is changing,” she said.

Cohen also said he was surprised to learn the previous day that most of the UK’s power baseload now comes from renewable sources, and companies there are cancelling thermal generation projects. “Admittedly, this is driven by government policy, but it’s showing up elsewhere in unit, which could…effect…Europe’s demand for gas,” he said.

“I think it was a mistake to dismiss renewables,” said Mitrova. “Russia’s energy strategy, which was submitted 2 years ago and still hasn’t been formally approved, did not consider them. It does emphasize flexibility and adaptation. That makes it more reactive than proactive, but so far things are going fine.”

Mitrova said it was surprising when Russian gas exports to Europe grew by 30 billion cu m in a single year. “With such high European demand, I don’t see any way Ukraine’s transit role can be ignored, even with all these new pipelines. This will have to be negotiated, of course,” Mitrova said. “But Europe’s phasing out coal and losing much of its Netherlands offshore production raises demand questions, although policy-driven renewables capacity growth could change the equation.”

Contact Nick Snow at [email protected].