ABSTRACT
Energy production holds a central place in the economic and political life of the Russian Federation, as the country is a leading energy-producing country, ranking first in the world in gas production, third in oil production, fifth in hydro and nuclear generation, and sixth in coal production. The reform and re-emergence of this key part of the economy are integrally linked to the country’s overall economic transformation and recovery, due not only to the energy sector’s direct impact on gross domestic product (GDP) and overall value-added in the economy, but also to its importance in foreign exchange earnings and Russia’s fiscal stability. Similar to the overall economy, however, Russia’s energy sector initially experienced a sizable decline coincident with the launch of Russia’s transition from a centrally planned to a market-type economy, although after bottoming out in 1997, it has since been rising. 2000 was a very good year for Russian energy production, with aggregate 214primary energy output rising by 2.1 percent; oil production climbing by 6.0 percent; coal production up by 3.5 percent; and electricity generation increasing by 3.8 percent; however, natural gas production declined, falling by 1.1 percent.
Broadly speaking, energy sector reforms over the past decade have typically lagged behind those in the economy at large. But increasingly, the outcome of general economic reforms will depend to a large extent upon the success of those in the energy sector. If properly managed, Russia’s energy resources can help accelerate the economic reform process; if poorly managed, it can easily hinder that process.
Russia’s principal energy policy document is the Energy Strategy of Russia to 2020, which was officially approved by the government in November 2000. 2 The Energy Strategy states Russia’s priorities for its long-term energy policy and the mechanisms for its implementation. The Strategy is set within the context of a resumption of economic growth in Russia, and there is a broad concern that, given the poor state of the Russian energy sector, it may not be able to provide for both increasing energy demand within Russia as well as generate the energy exports needed to sustain economic growth. Thus, the Strategy continues to emphasize improvements in energy efficiency and reform of energy pricing structures.
The Energy Strategy’s projections for energy supply to 2020 are based on a major change in energy policy outlook. It expresses major concern over the energy security risk from what is deemed to be too high a dependence on natural gas. The Strategy envisages a change in the fuel mix such that the share of natural gas in total primary energy consumption decreases from about 50 percent in the late 1990s to 42 to 45 percent in 2020. In its place, the share of coal is planned to increase from 17 to 18 percent in the late 1990s to 22 percent in 2010 and to 21 to 23 percent in 2020. Nuclear energy is also slated to increase, expanding to 6 percent in 2020 from current levels of 5 percent, while oil’s share in primary energy consumption will remain practically unchanged. The Strategy projects primary energy production in Russia in 2020 in a range of 1,525 to 1,740 million metric tons of coal-equivalent (mtce) (1,068 to 1,218 million metric tons of oil equivalent [mtoe]). 3
However, PlanEcon’s most recent energy forecast for Russia 4 takes an entirely different tack. It does not view the large dependence on gas as a particular cause for concern; instead, this is viewed as a natural consequence of Russia’s massive reserves of natural gas. The PlanEcon forecast projects total output of primary energy in 2020 in Russia at a much higher level than in the Strategy (1.446.3 mtoe, 46.7 percent higher than the 2000 figure), combined 215with less energy consumption, and therefore higher energy exports. In particular, coal production is expected to resume its long-term secular decline; oil output is expected to continue to recover (albeit slowly); and gas production is anticipated to turn around shortly, due both to improvements in the domestic investment climate (reflecting higher prices and toughening payment conditions) and to more buoyant demand from expanding economic activity in the region. Thus, natural gas is expected to garner a steadily rising share of Russia’s energy production over the next two decades, reaching 58.3 percent by 2020. Over the entire 2000–2020 period, aggregate primary energy output in Russia is projected to increase at an annual average rate of about 1.9 percent in the PlanEcon forecast.
For the most part, this forecast presumes the implementation of the bulk of the measures outlined in the proposed Putin-Gref reform program. This program includes general reliance on market forces and mobilizing private investment, strong elements of commercialization and marketization in the reform of the “natural monopolies” in the gas and electric power sector, particularly in terms of price reform, and the prospects of fairly strong economic recovery.
In PlanEcon’s energy forecast, Russian oil production is projected to grow at an average rate of 1.4 percent per year over the entire 20 year period to 2020, to reach 392.7 million metric tons (mmt) in 2010, and then 423.2 mmt by 2020. The official Russian Energy Strategy to 2020 envisions oil output at 335 mmt in 2010 and 360 mmt in 2020, an average annual rate of growth over the 20 year period of only 0.5 percent. The Strategy’s overall oil production forecast seems far too conservative given what was achieved in 2000 (e.g., higher investment, expanded drilling, more new fields) and the changes in the investment climate that are likely to be realized over the next few years.
Despite Gazprom’s current worries over its ability to produce gas in the future (a key feature of the Strategy’s outlook), in PlanEcon’s view, the decline in Russia’s gas output is largely an organizational/institutional issue related to the lack of incentives to invest rather than a question of reserves or even the capacity to mobilize investment. Thus, with the current direction of reforms in the gas sector (albeit quite modest), production is likely to be able to turn around relatively quickly to support rising gas demand. PlanEcon projects Russian gas output in 2005 at 642.6 billion cubic meters (bcm), expanding to 797.0 bcm in 2010 and 1,030 bcm in 2020; gas output growth is forecast to average 2.9 percent per annum over the 20 year period.
In contrast, the Russian Energy Strategy, because of its goal of diminishing the domestic economy’s reliance on gas, projects gas output at only 655 bcm in 2010 and a mere 700 bcm in 2020. Furthermore, the expanded production is largely geared toward higher exports, while domestic consumption is envisioned as remaining relatively flat over the next two decades.
The Energy Strategy takes the view that energy consumption in Russia has become too unbalanced in favor of gas. In particular, the Strategy calls for greater use of coal and nuclear power to meet the increased demand for electricity. The Strategy projects a decline 216in the share of gas in Russian primary energy consumption to about 40 percent by 2020, led by a decline in the share of gas in fuels use by the electric power sector from the current 62 percent to 51 percent by 2020. Concomitantly, according to the Strategy, the share of coal in primary energy consumption will rise slightly over the 20 year period, to about 22.5 percent by 2020.
PlanEcon’s view is that coal and nuclear are not only intrinsically much more expensive than gas, but also come with enormous environmental liabilities. Therefore with huge reserves of relatively economic and clean natural gas, we forecast that Russia’s reliance on coal for power generation and process heat is likely to wane further. The declining relative importance of metallurgy in the country’s aggregate economic output should also serve to reduce the share of coal in primary energy consumption as well. Thus, by 2010, PlanEcon projects that the share of gas will be up to 57.1 percent, and that it will rise further, to 60.6 percent, by the end of the forecast horizon in 2020.
Russian coal production, in energy equivalent terms, is projected to slowly decline over the forecast horizon in the PlanEcon forecast (−0.5 percent per year on average). In contrast, the Energy Strategy envisions coal production rising to 320 mmt in 2010 and over 400 mmt in 2020. In the Strategy, major technological breakthroughs are postulated in coal production, processing and transportation that result in declining costs, and therefore end-user prices, of coal. In PlanEcon’s view, such a prognosis seems highly unlikely, particularly the geographic locus of both production (increasingly concentrated in Siberia) and energy consumption (in European Russia).
The projected level of primary electricity production in the current PlanEcon forecast envisions the completion of only six new (1,000 MW) nuclear units during the forecast period, including four before 2005. The recently approved Energy Strategy calls for the completion of five new units (which were already well advanced in construction during the Soviet period) before 2005, identifying these as the cheapest generating capacity (in costs per MW or per kWh) that Russia could bring on stream. PlanEcon concurs in this assessment mainly because of the sizable investment that has already been sunk into these units. However, PlanEcon does not consider the Strategy’s longer term plans for further nuclear expansion beyond these initial units to be realistic.
On the demand side, PlanEcon projects that the growth in primary energy consumption will lag well behind the trend in aggregate economic activity. Primary energy consumption is projected to rise at an average rate of only 1.7 percent per year over the 20 year period.
The projection of primary energy production and consumption provides a forecast for their difference, or net energy exports for Russia. Russian net energy exports reached a trough in 1993 at 302.8 mtoe, a decline relative to 1990 of 24.4 percent. Net energy exports are projected to rise to 565.3 mtoe in 2020, an increase of 55.5 percent above the level of 2000. This is projected to be comprised mainly of oil and gas, with gas surpassing oil in importance in the export mix by 2015.
