Research Group on 'Russia in an Era of Great Power Competition"' FY2021 － #2

"Research Reports" are compiled by participants in research groups set up at the Japan Institute of International Affairs and are designed to disseminate, in a timely fashion, the content of presentations made at research group meetings or analyses of current affairs. The "Research Reports" represent their authors' views. In addition to these "Research Reports", individual research groups will publish "Research Bulletins" covering the full range of the group's research themes.

Introduction

The European Green Deal, launched with the appointment of European Commission President Ursula von der Leyen in December 2019, and the economic stagnation caused by the spread of COVID-19 have made European member countries united together to further promote greenhouse gas reduction policies as a stimulus to the economic recovery. As a result, 'A hydrogen strategy for a climate-neutral Europe' and 'EU Strategy on energy system integration' were presented in July 2020, based on the European Reconstruction Fund agreement and a multi-year financial framework through 2027, and moves toward zero net emissions and decarbonization in the region by 2050 are rapidly accelerating. In September 2020, China declared its intent to achieve zero net emissions by 2060 and Japan set a similar target for 2050.

As a consequence of the internationally increased interest in hydrogen as a new energy source and the relevant strategies developed in Europe, where is the most lucrative and inevitable hydrocarbon market for Russia, Russia had no choice but to incorporate the Hydrogen energy into Russia's long-term energy strategy. The Russia's Energy Strategy to 2035, which was revised and approved in June 2020 after 11 years, added a new item -- Hydrogen energy -- reflecting developments of discussions and directions in Europe. In late July, the Ministry of Energy prepared the 'Hydrogen Development Roadmap from 2020 to 2024', that laid out a policy of having Gazprom and Rosatom take the initiative in launching pilot projects for the hydrogen production and its fuel use, respectively. Watching over these developments in Russia, it would seem that, rather than seeing the hydrogen as an enemy that replaces oil and natural gas, Russia (via Gazprom and Rosatom) is pursuing research on the processes for producing the climate-neutral hydrogen that Europe desires (turquoise hydrogen and yellow hydrogen), and is promoting hydrogen as a new business oppurtunity that can be sold withmore than natural gas prices.[*]¹ The Roadmap has given particular priority to Gazprom, which possesses the world largest natural gas resources, the cheapest and most stable source of hydrogen, as well as a natural gas pipeline network capable of transporting natural gas and hydrogen to Europe, and Rosatom, the key producer of hydrogen generated through electrolysis powered by nuclear energy that can serve as a climate-neutral hydrogen for Europe. On the other hand, Novatek, an independent gas producer whose main business is LNG, and major oil companies such as Rosneft and Lukoil have been left out of government policy. However, they are trying to respond to this decarbonization trend with their own interpretations.

Current Status of Decarbonization Efforts by Oil and Gas Companies in Russia

In August 2020, the state-run Rosneft, Russia's largest oil producer, responded agilely to the government's move and began its own work on the Carbon Strategy in order to release by the end of the year. However, it started to assert the importance of long-term oil production and development of clean production technologies since the beginning of that autumn, and Rosneft's published Carbon Strategy at the end of the year did not prove ambitious enough. The company is trying to fend off criticism by launching a partnership with its major shareholder BP on environmental technology cooperation amid claims that its strategy conflicts with that of BP, which has announced drastic cuts in hydrocarbon production.

The private firm Lukoil, the second-largest company in Russian oil industry, has appointed Vice President for Strategic Development Leonid Fedun to oversee its efforts to address climate change, and has been pro-active in disclosing information about decarbonization initiatives. But it remains cautious about hasty decarbonization., stating "Russian oil companies should focus on the forest sinks capasity of CO2 and CCS rather than focusing on the expensive and meaningless development of alternative energy technologies". He also noted that "offsetting carbon emissions is possible in Russia, which has the world's largest forested area; and it should match Europe by introducing a carbon trading system by 2025", drawing attention to the potential of the forest sinks and the need to promptly introduce a carbon trading system in response to Europe's Border Carbon Adjustment Mechanism.

Novatek, Russia's second largest gas producer after Gazprom, has the greatest interest in, and commitment to realizing, decarbonization, CCS and hydrogen (including ammonia transport as the hydrogen carrier) among Russian companies. Underlying this is the fact that it has, for better or worse, been left out of the government's framework on the development of hydrogen energy. Therefore, in order to pursue carbon-neutral LNG and hydrogen in keeping with economic rationality, the company has been developing its own initiatives in rapid succession and pushing forward in implementing projects.

Gazprom, the world's largest gas company, is notably focusing on methane pyrolysis (turquoise hydrogen), which requires little new capital expenditure and produces hydrogen from natural gas with fewer carbon dioxide emissions. While it has the advantage of possessing an existing infrastructure of pipelines, it has begun to recognize that hydrogen production can be economically carried out in the vicinity of demand areas and markets without changing its current business model of transporting natural gas. Based on the ties established in Sakhalin-2 Project, Gazprom has been pursuing a strategic partnership with Shell in the field of new energies, and working to strengthen these ties by selling Yamal LNG cargo, the first carbon-neutral LNG in the Atlantic trade, to Shell (Dragon Terminal in UK).

In addition, Gazprom Neft, a Gazprom subisidiary responsible for oil exploration and production, has announced that it will be reviewing its strategy but it continues to hold to its target of increased fossil fuel production. Tatarstan-owned Tatneft announced in February 2021 its plan to be carbon-neutral by 2050, becoming the first oil and gas company in Russia to declare itself committed to carbon neutrality. However, Tatneft has not denied the possibility of boosting its fossil fuel production in the medium term, and it remains unclear how the company will achieve the target of carbon neutrality by 2050.

Russia is said to have eight vertically integrated oil companies, two companies specializing in the gas industry, and approximately 200 small and medium-sized oil companies. However, only the aforementioned companies have announced climate change countermeasures and carbon strategies at present, and almost all of them have set targets for increasing fossil fuel production.

Actions of the Russian government

When enacting the Law Concerning the Reduction of Greenhouse Gas Emissions (Decree No. 666) that defines emission reduction targets, President Vladimir Putin said, "While the development of cheap and abundant oil and gas continues, Russian oil and gas companies must invest in decarbonization in order to be 'green' in accordance with the Paris Agreement." However, Russia counts carbon sinks by the world largest forests areas known as 'Taiga', so the bar for achieving that goal is not very high at all. President Putin has also directed the Russian government to formulate a strategy for the country to achieve socio-economic development in a climate-neutral manner by 2050, while Deputy Prime Minister Alexander Novak made it known that he would be announcing a strategy for reducing greenhouse gas emissions by the end of 2021 and revealed that the Russian government is currently formulating a "New Energy" strategy focused on addressing climate change and reducing carbon emissions from the fuel energy industry. In addition, Russia is scheduled to introduce greenhouse gas emission regulations in 2022. So far, the Russian government has been accelerating in rapid-fire fashion to devise strategies for cutting greenhouse gas emissions.

A project originally launched by Sakhalin Oblast Governor Valery Limarenko as a flagship and promotional pilot project to make the Sakhalin region carbon-neutral by 2025 has been sublimated into a project involving the central government. The initial plan was to create a hydrogen cluster and establish an international consortium with Rosatom, Air Liquide (France) and Air Products (US), among others, and the Ministry of Economic Development and the Sakhalin Oblast Government are working on a concrete road map that will include Russia's first carbon trading pilot project. The detailed measures, projects and challenges of such a road map will likely become clearer in future.

In response to the worldwide trend toward decarbonization and, in particular, to the European border carbon tax mechanism that will have a direct impact on oil and gas producing countries, an instinct for self-preservation has prompted the Russian government to turn its attention quickly to the country's forests, Russia's greatest existing asset (Russia alone accounts for one-fifth of the world's forested area). The logic being asserted here is that, if Russia is to be regarded as a single national entity, then the absorption of carbon dioxide by forests in Russian territory is equivalent to "emission rights" that Russia should enjoy, meaning that there is no reason to subject it to a border carbon tax.

Summary

2020 was a year in which the COVID-19 triggered the attention to hydrogen energy as a stimulus for economic recovery and the substitution as a new industry for fossil fuels industry. This wave from Europe, in turn, prompted countries around the world to take a major step toward decarbonization.

Although there is an optimistic outlook that hydrogen will be price-competitive with fossil fuels over the medium to long term as the hydrogen industry develops, oil and gas producing countries, seeing an worldwide energy transition to hydrogen as a new business opportunity for exports of hydrogen in addition to oil and natural gas, are setting out to develop the necessary production and the ways of transport. Having revised its long-term energy strategy for the first time in 11 years, Russia in June 2020 responded sensitively to this global trend by launching specific projects centered on Gazprom and Rosatom to participate as a supplier in the new "hydrogen game" the world has set in motion. Major oil and gas companies that mainly produce crude oil such as Rosneft and Lukoil, Novatek, the country's second-largest natural gas producer, have been left out of this game but they are adopting distinctly different approaches from the ambitious decarbonization strategies being pursued by some major European and American companies, seeking instead to find cleaner and more efficient ways to extract oil and gas and setting targets for maintaining or even increasing fossil fuel production. Possessing the world's most extensive forest assets, Russia is also attempting to counter the border carbon tax mechanism that Europe is considering introducing by by claiming its forests sinks as "emission rights" that Russia should deserve.

*This is an English translation of the original Japanese version published on June 30, 2021.