Minister of Energy of Russia - on plans for the development of the industry and the prospects for the Far East

Nikolay Shulginov: Russian fuel and energy complex has adapted and is ready to go to the East.

Minister of Energy of Russia - on plans for the development of the industry and the prospects for the Far East

The Russian energy sector is facing unprecedented sanctions in 2022. If at first the situation seemed critical, then over time, it seems that the Russian fuel and energy complex still managed to adapt and find a new balance point, redirecting supplies to other countries. How the industry is feeling now, about plans for its development and the prospects of the Far East in an interview with TASS, Russian Energy Minister Nikolai Shulginov spoke at the Eastern Economic Forum (EEF).

— Dear Mr. Shulginov, the situation for the Russian fuel and energy complex is now quite difficult, especially because of the sanctions. In your opinion, is the oil and gas industry coping with the pressure now?

- We cope. Of course, there are difficulties with the reconfiguration of logistics schemes and maintenance of equipment, but the oil and gas complex adapts to the pressure. Now we can say with confidence that the companies fulfill their obligations: they fully meet the needs of the domestic market and the terms of export contracts.

— Should we expect an increase in investments in the fuel and energy complex this year?

— If you had asked me at the beginning of the year, I would have been happy to announce the companies' ambitious plans to increase capital investments. But life is changing. Therefore, now the task is to provide current plans, including adaptation ones. There will be investments for this.

Will the fuel and energy complex be able to adapt when the EU embargo on oil imports comes into force in December and on the supply of petroleum products in February 2023?

— Yes, we will adapt and find solutions in December and February. It is clear that we are experiencing problems, but we are overcoming them, turning traffic flows from west to east. Another important task is to ensure the work of the internal market. Now everything is stable, there are no problems with deliveries, prices are in place. We are following this.

- Now the possibility of banning insurance of sea transportation of Russian oil is also being discussed. How serious a blow could this be for the Russian oil industry?

— We are exploring the possibility of using a number of local insurance companies from friendly countries. Another option is the creation of a new insurance company, but then mutual recognition by the countries of this organization is needed.

— A company established in Russia?

- Including.

— You mentioned the redirection of energy flows to the east. How successful do you think it is?

“It's not a quick process. Of course, we also have swift victories. For example, by October we will expand the capacity of the port of Kozmino for cargo transshipment in the amount of up to plus 7 million tons, as well as the infrastructure leading to it. In addition to the Asia-Pacific region (APR), the Middle East is promising for us. But we are also looking at other areas, such as Africa.

— The issue of redirecting gas supplies seems to be a top priority. Is the possibility of their more accelerated implementation being discussed?

- Now the design materials for the start of construction of a gas pipeline to China through Mongolia are almost ready. Companies discuss these topics.

— Should we expect an increase in oil production by the end of the year? What will happen to the gas?

— Oil is now on the rise, but at the end of the year, production is likely to be slightly lower than last year — by about 2%. For oil refining, we expect a decrease of eight percent, based on today's trend. There will be about 262 million tons per year.

As for gas, there will be a decrease of approximately 7%. Pipeline exports will fall, liquefied natural gas (LNG) will remain at the level of last year.

— What fate awaits coal?

— Since the beginning of the year, we have observed a decline in production by about 0.7%. At the end of the year, it will already be about 6% compared to the level of 2021 due to the impact of the embargo on the supply of coal to the EU. We will provide the domestic market with coal in full.

It also inspires optimism that there is interest in our coal. China, India, and the Middle East are increasing its purchases, so we do not expect a strong drop. There are logistical restrictions, and they may not allow reaching the level of last year, but it is already possible to get closer to it.

- Will energy consumption increase?

- Energy consumption of the entire industry, small and medium-sized businesses, the population, the own needs of power plants, taking into account losses in electrical networks, is now growing by 1.9% compared to last year. Against the backdrop of the heat, we overcame the summer historical maximum. I think that we will hold on to a growth rate of approximately 1.5% by the end of the year.

The eastern fate of Russian gas

— We discussed the reduction of gas exports. In the future, the EU plans to abandon these supplies altogether ...

— To do this, they must be sure that they can do it by 2027. The very situation with spot prices confirms that it is not so easy. Europe has no one to rely on except the Americans, who are increasing LNG production.

I think that the coming winter will show how real their belief in the possibility of abandoning Russian gas is. After all, this will lead to a halt in the industry, including chemical and gas generation. It will be a completely new life for the Europeans. I think that, most likely, they will not be able to refuse, it is too much for them.

— Does Russia have any plan B to keep the volume of Gazprom's supplies for export? Will we be able to compensate for these falling volumes?

- According to the plan, the capacity of the Power of Siberia-2 gas pipeline should be almost 50 billion cubic meters per year. We will increase the capacity not only of pipelines, we will increase the production of LNG - it is mobile, and it is well bought on the world market. We will change our policy and strive to maintain basic production volumes. We do have reserves.

— Does it mean that the share of LNG in Russia's energy production will grow?

- Yes it means.

- And it will go to the ATP?

- Including. Until 2030, we expect an increase in LNG production to 80-100 million tons against the current 30 million tons. That’s  significant growth.

— If we talk about LNG, will the existing R&D incentives for equipment manufacturers be enough to create Russian technology for large-tonnage LNG production?

“We need to develop this together with companies, work with the Ministry of Finance. The decision must be made at a different level and based on other arguments.

- But do you think that it is necessary to increase the subsidy?

- Yes. But more work needs to be done on this.

The fate of Russian hydroelectric power plants

— Dear Mr. Shulginov we cannot but ask you about the topic of hydropower, which is very close to you. The President of Russia instructed the Ministry of Energy to study the issue of building four anti-flood HPPs in the Amur River basin. At what stage are these projects now and when can they be built?

- I can really talk about the hydroelectric power station indefinitely, but I will try briefly. The first order for their construction was given by the Ministry of Energy following the catastrophic flood in 2013. Design and survey work then showed their low efficiency against floods and the high cost of construction, so the order was withdrawn.

Work on this issue resumed last year. For this, priority sites were identified that have the best anti-flood effect: 400 MW Nizhne-Zeyskaya HPP and 100 MW Selemdzhinskaya HPP.

At the moment we are focusing on these two stations, but the issue of funding, alas, has not yet been resolved. RusHydro or another company should have had a guaranteed return on investment mechanism. In the meantime, we expect that the construction of the stations will begin in 2024, in which case the commissioning will take place in 2029-2030.

— Is there any other reason to build these HPPs besides the anti-flood effect?

— We have an order from the president, according to which we must maintain the share of hydroelectric power plants in the energy balance of the Russian Federation. It is logical that for this it is necessary to build additional hydro generation. But I note that this is not only and not so much for the anti-flood effect. Here we do not agree with those who say that the construction of a hydroelectric power station will be able to protect the territories of the cities of the region from flooding. It is important to understand that the tributaries of the Amur - Zeya and Bureya - give out only 30-40% of the total volume of water flow in the lower reaches of the Amur. And up to 60% of the water flow comes from the Chinese rivers - the Songhua and Ussuri. Therefore, we can build a hydroelectric power station, close everything with reservoirs, but there will be no expected effect. But this does not mean that there is no need to build hydroelectric power generation. Necessary. Including in order to cover the growing electricity consumption.

— Is there a rough estimate of investments in the construction of anti-flood HPPs? In theory, this is not the cheapest pleasure ...

“According to our calculations, four plants need 360 billion rubles in 2021 prices.

- Impressive. What funding source options are being considered - NWF, companies' own funds?

I have already partially answered this question above. I will put it this way: we believe that in the Far East it is necessary to create investment attractiveness and develop market relations. Therefore, I hope that a mechanism will appear through which it will be possible to interest investors.

- Were adjustments made to the projects of these plants against the backdrop of sanctions pressure on Russia?

- No. Equipment and hydro turbines are produced in Russia, both large and small, for small HPPs. Therefore, Russia has no problems with hydro-construction. Moreover, we have already envisaged measures to offset the negative consequences of the imposed sanctions.

- In your opinion, has Russia retained the competence to build a large hydroelectric power plant? Do you believe in her future?

- Of course. To understand this, just look at its history and the development opportunities of this industry. Historically, we have paid tremendous attention to hydropower, as our country is among the world leaders in terms of hydropower potential. We also retained the knowledge and competencies, engineering staff, and the ability to design such stations. But there is also an alarming note here: if we do not continue to build a large generation, then these frames may disappear.

But we build them anyway, don't we?

— Small hydropower plants, yes. But among the projects of large hydropower generation, only Nizhne-Zeyskaya 400 MW can be mentioned. In general, we have prepared a schedule for the construction of new HPPs until 2040, which includes eight projects with a total capacity of 4.7 GW and capital investments of about 961 billion rubles. But it still needs to be approved.

Far Eastern perspectives

— The Far East includes Sakhalin and production sharing agreements. What is the fate of these projects now?

- All necessary measures have been taken on Sakhalin-2 to prevent deterioration of its work. An operator, Sakhalin Energy, has been created. As far as I know, some companies will participate in it. Therefore, I do not expect any problems with this project. The operator is working, the project is functioning.

As for Sakhalin-1, the story is already more complicated, since production was stopped, from our point of view, under a far-fetched pretext. We are now awaiting a decision. Work is underway to restore the activity of the enterprise. Work is underway with the operator and consortium members to restore production as quickly as possible. I think everything should become clear soon.

— Do you expect any companies to withdraw from the Sakhalin-2 project? Has anyone reported this?

— We know that some companies have declared their desire to join Sakhalin Energy. No one officially announced the release, but I think clarity will appear in the coming days.

будут ближе?

— Is it possible to introduce a mechanism for selling Sakhalin-2 LNG for rubles?

- At the moment, there are no such discussions, as well as in general on the transfer of LNG trade to rubles.

- In the Far East, the issue of the price of gasoline is traditionally important. Have you managed to reach an agreement with the Ministry of Finance on this issue?

— We are completing this work with the Ministry of Finance. There is some consensus on the amount until the end of the year.

- And if you look more globally, do you think it is necessary to extend the adjustment of the damper for 2023, or is it worth abandoning this mechanism altogether?

“It’s definitely not worth it to give up the mechanism. No matter how criticized the damper, he showed that he was able to control supply volumes and keep prices. We believe that there should be a damper further. This is not a subsidy, but the maintenance of the status quo with a period before the tax maneuver, when the reduction in domestic prices was achieved through export duties. Now, with its abolition, the damper makes it possible to compensate for the difference between the world price and the domestic one only to those who supply to the domestic market, while the budget receives compensation from the severance tax.

How to connect East and West?

— At the last Eastern Economic Forum, you said that the energy systems of Siberia and the East should be united. Is this issue still on the agenda?

- Of course. We have an instruction from the president, and we have already prepared a construction schedule. By 2028, we plan to combine 220 kV networks, and later 500 kV. Here, the project of the Russian Railways Eastern Range and the construction of network facilities for it help us a lot.

After its implementation, the task is greatly simplified, since we will only have to continue building networks to the East. As a result, we will get an exchange power flow of 350–450 MW, which will ensure a reliable energy supply to consumers, transfer electricity from the Far East to Siberia during low water periods, and extend market pricing mechanisms for electricity.

- The Far East is traditionally a difficult region for the autumn-winter period. Are additional measures being taken to ensure a reliable energy supply this coming winter?

— Yes, we have adopted appropriate programs. For example, 15 billion rubles have been allocated for these purposes only for Primorye, and 39.3 billion rubles for Sakhalin. We pay special attention to the operation of thermal power plants and strive to modernize them. As for fuel supply, today the reserves are at the level of 140-150% of the standard indicators. So yes, you are right, we pay special attention to the Far East.

- That is, it is possible to please the inhabitants of the Far East, they will have a calm winter?

“We do our best to do this, but there are also extreme weather conditions. We cannot guarantee the operation of the grid complex under abnormal loads, for example, during hurricane winds or in conditions of non-design icing. However, we are preparing, we are doing everything possible to ensure that repairs and all planned activities are completed on time. We must get through this winter without major power outages.

- We started talking about the fate of the world market, I propose to finish with a more global issue, but about Russia. When will the Energy Strategy until 2050 be ready and what role will the Far East play in it?

— We are now in the process of postponing the deadlines for its preparation: from September 15, 2022 to mid-2023. Now there are a lot of uncertainties, and it is important for us to make an up-to-date and optimal strategy.

As for the Far East, it will play a key role in the Russian energy sector - the Power of Siberia-2 will go through it, the expansion of the Eastern test site, the development of coal mining, the development of the gas potential of Eastern Siberia, as well as the gasification of the Trans-Baikal, Irkutsk Territories, the Jewish autonomous region, Buryatia.

The mere connection of the gas supply system with the Power of Siberia and the Sakhalin-Khabarovsk-Vladivostok gas pipeline will radically change the picture of the economy of the Far Eastern Federal District.

So there are great prospects ahead for the Far East. I am sure about that.

— East and West of Russia will be closer?

- Definitely!