Energy challenge and the future of Russia

Pyotr Khomyakov

Doctor of Technical Science, Professor

The long-awaited event took place in St Petersburg in November 2006 – the second energy unit of the Northwest Heat-Electric Generating Station has been launched.

The launch of this unit has been giving important hopes as St Petersburg is experiencing increasing problems with the heat and power supply. The launch ceremony was attended by the Russian Energy System CEO Chubais, who has been boosting the technical characteristics of the new power unit affirming that it meets the latest demands.

Chubais has left. And the energy unit has been shut down a week later. In some districts of St Petersburg the hot water was cut off together with the electric power. So the energy unit fault has not passed unnoticed by the average citizen.

Another reason for the public attention to the scandal was the presence of the Petersburg governor Matvienko at the grand opening.

So what was the reason for shutting down the unit that has just been so solemnly opened? Primitive shortage of gas. There quota for the gas supply to the unit has not been granted. In order to launch the second unit the first one has been temporarily shut down. The first unit that supplies energy mostly to Finland. This desperate situation could not last longer then a week.

That is why the second unit has been shut down, while the first one was relaunched. The Russian northern capital city has sacrificed its own heat and power supply in its neighbour favour.

The scandal has revealed some interesting details. It turned out that the situation has been clear long time ago. But the efforts of neither Chubais, nor Matvienko – the person in attendance of Putin, nor, finally, Putin himself – who is apparently concerned with the problems of his home city – were to no avail.

The mission is impossible. Physically impossible. Gasprom has just no extra gas for St Petersburg. And no political determination will help.

The Nature itself has imperiously intruded Russian short-sighted policy that had been long led without taking any technical, resource and environment realities into account.

However, has only St Petersburg found itself in a critical situation? No. The entire Russia has turned to be in the energy crisis. In 2006 the period of energy superfluity that has started in 1991 has come to the end, and the energy deficit period started.

Figure 1 shows the energy consumption forecast for Moscow made by the Industrial Management Institute of the Russian State Administration Academy. According to the forecast the energy deficit in 2010 will be around 30% - if the GDP does not grow with the rate declared by Mr.Putin, and 50% - if Moscow tries to fulfill the ambitious plans for doubling of the GDP.

Figure 1: Moscow electricity load VS available capacity

Figure 1

It is obvious that the energy shortage does not allow for the notorious doubling. By the way, the energy is neither sufficient for mere backing the existing level of industry.

For there are no reserves for increasing the energy supply to Moscow. Presently the deficit is filled by the energy transfer from other regions. But the carrying capacity of the electric main lines of the Russian Center is close to its limit.

So Moscow will have to pinch its energy requirements to the limits represented by the vinous graph. And that means that the industry growth in Moscow is going to be suspended.

But not only in Moscow. There were 4 energy-deficient regions in Russia in 2005. In 2006, there were 16.

However, the situation can go far beyond. According to the Russian Energy System forecast the energy shortage is going to aggravate.

Is there any way out? Theoretically, yes. The full-scale reconstruction of the energy works and, we will dare to say, the mass construction of the new stations. And that requires investments.

In this issue unpopular Mr. Chubais is absolutely right. But are the energy projects attractive for the investors?

Once again – in theory – yes. In practice – no. Indeed, the payback period even for the most effective energy projects in Moscow exceeds 10 years. For the average projects – 15 years.

Not to mention the less developed regions of Russia. Too unattractive for investors.

Only the rise in the electricity charges can make the Russian energy industry attractive for the investors. The inevitability of such rise is being acknowledged by all interested parties. The question is - how much the rise will be, and when it will occur. 

It often appears that maximum socially acceptable rise in charges is 2-times by 2010. However it is not enough even for backing the energy industry at the existing level. The industry experts talk about 2.5 times rise as minimum.

In order to make the energy industry attractive for the investors the charges have to be risen at least 3 times by 2010.

Sounds rather pessimistic for the consumers.

However the pessimism of the Russian Energy System may seem more then moderate.

Because most of even sceptical Russian energy forecasts do not fully allow for the developments in the gas industry. Meanwhile the real situation within the gas industry is charachterised by the following figures.

Gasprom plans to increase the gas exports to Europe by 30% by 2010.

This can be achieved due to (a) the production increase, (b) cutting of the Russian internal supplies down, and (c) cutting the exports to the CIS and Baltic countries down.

But the production increase is not being observed. It is generally known that most of the Russian gas fields have entered the phase of falling production.  The total production is not rising during the last several years, though Gasprom tries to manipulate figures in order to conceal the scope of the fall.

We acknowledge that the fall is insignificant yet, as the Russian gas monopoly does manage to hide the problem so far.

But the fact that there is no production rise can be stated with confidence.

However Gasprom is trying to convince it’s internal and external counterparts that there will be no production decline. On the contrary, the production rise after putting into operations the new gas fields – mainly in Yamal peninsula – is expected (Figure 2).

Figure 2: GASPROM production forecast by 2010

Figure 2

Meanwhile the boosted launch of the new gas fields is far from realization. Due to the global warming, the engineering-geological conditions of production and – to the greater extent – gas transportation in Yamal are rapidly aggravating, which makes putting these gas fields into operations very problematic.

The author knows for certain that the engineering solutions for these problems have not been found yet. Consequently, there are no design decisions. That means that putting these gas fields into operations is out of the question.

But that means that there will be no production rise by 2010, while the production fall will happen (Figure 2, see the production volume without the surplus from the new fields).

And the fall will be not less then 10% from the level of 2006. This fall will not be compensated even by the cessation of the gas exports to the CIS and Baltic countries. 

Now Gasprom is provoking a number of countries for breaking off the contracts. For some countries it is possible without any detriment for Gasprom (e.g. for Georgia). But for the countries like Ukraine, this scenario will not work as Gasprom is dependant on the gas transit via Ukraine.

In view of the aforesaid only the reduction of the internal supply remains. And, first of all, at the expense of the Russian Energy System. Because no one can cut off the gas for the settlements without the risk of social outbreaks.

Thus the Russian Energy System is being forced to cut off the consumption of gas. Many energy works will be transferred to the standby mode using the reserve fuel, which is either black oil or coal. It is clear that the standby mode is far from optimal, and the cost of energy after this transition is about to increase.

Let’s return to the gas problems. The social tension due to the desperate domestic gas market condition is going to increase even if the current volume of supply is retained.

Because the domestic gas charge including transportation will be USD 175 for 1000 cubic meters by 2011 (Gasprom wholesale price of USD 125 plus the profit of the dealer companies), which is more then 4 times higher then now.

We would like to stress that this figure has already been planned and approved. It is just not being broadcasted for the understandable reasons.

So the situation for the Russian Energy System is even more critical then it was seen a year – year-and-half ago, when the forecast of the 2.5-3.0 times rise in electricity charges had been made public.

It is necessary to say that such electricity and gas charges increase will inevitably cause the social tension and political instability. This, in its turn, will increase the risks of the long-term investments – in the energy industry, first of all.

And that will require compensations of the risk to the investors.

How this can be achieved?

Only by the greater increase in the electricity charges. Moreover, preferably by constant increase. It will provide for the growth of the energy companies stock and make the industry attractive for the investors – at least, for the speculators.

So the rise in electricity charges comparable to the rise in gas price by 2011 is a very credible forecast.

To sum up, the gas and electricity charges will rise at least 4 times by 2011.

Even so, the energy faults are still not improbable since the power works can not perform error-free using the reserve fuel and under the on-going reconstruction. Moreover, even the constriction of the gas offtake does not guarantee the scheduled supply – as we could witness it on the example of the Northwest Heat-Electric Generating Station.

Now let’s compare the aforesaid tendencies with the Russian economic policy developments.

In 2008 the Russian Energy System will cease to exist and will be split in a number of private companies. At the same time in 2009 the strict state electricity charges regulation will be revoked. This revocation is still settled in quite indefinite terms, but generally bears a strong resemblance to the “currency corridor” (the method of the exchange rate regulation by setting the margins for the fluctuation) of 1997-1998.

Which was broken through in the default of 1998. The experts have no doubts that the new “electricity charges corridor” will be broken through in the same manner in 2010-2011.

Only in the case of the 4-times price inflation the energy industry becomes profitable and attractive for the private capital.

What a coincidence – by this time the energy industry will be privatized. It is not unlikely that the stake is made on attracting speculative capital for gambling on the rapidly growing energy companies stock.

Joining the WTO takes the special place in these forecasts. Many opponents of this decision appeal to the irreceivability of equalizing the domestic energy prices to the world level.

But the price inflation will happen anyway. Without WTO. And the mass perception will connect it with the fuel and energy crisis, but not with joining the WTO.

It is also being argued that joining the WTO will cause mass insolvency of the Russian industry. But the Russian industry will be ruined by the exorbitant energy charges and by the unscheduled supply, when the factories will be deenergized under the first frost – and without any WTO.

Once again, the prevailing view will connect the bankruptcy of the domestic industry with the energy crisis.

While the foreign competitors will come to the Russian market that has already been “prepared” by the energy crisis. It is probable that they will come as the “saviors”.

So here the forecasts agree as well.

And, finally, the latest news. Russian minister Kudrin has just forecasted the new default around 2010. At the same time many experts are being surprised by the fact that the approaching default has been unconvincingly based on the forecasted world oil price reduction in 2010. Any predictor can confirm that such oil market forecast is highly unlikely. 

But the default forecast is correct. And it is based not on the mythical oil price reduction, but on the fully realistic plan for the rise in gas and energy charges.

All correct. The 4-times rise in gas and energy charges will cause hyperinflation and, as follows, the ruble devaluation.

Reasoning from the above we can assume that our forecasts are not so exclusive. The part of the Russian elite fully comprehends what the country is facing in 2010-2011.

That is (a) the energy crisis, (b) hyperinflation, (c) mass insolvency of the domestic industry, (d) mass unemployment and (e) physical disintegration of Russia due to the rise in transport costs that are dependant on fuel and energy charges.

The system crisis is evident as minimum.

It is important that like in case of the Northwest Heat-Electric Generating Station neither “political determination” nor “close attendance to President” will help. If the gas and energy is physically lacking, no President will manage to obtain it.

Maybe that is one of the reasons that personally Putin does not strive for the third presidency term? Who needs the Russian presidency in 2010 – 2011.

But if it is true, if now days the most far-seeing part of the Russian elite is already reluctant to be in power in the turmoil of 2010, then tomorrow this reluctance will be general. And the Russian elite will be neither capable for nor interested in controlling the country.

That is a much more dramatic situation then Lenin’s classical formula of the revolution prerequisite – “the elite is incapable to rule, the masses do not want to obey”.

In view of the aforesaid the basic issue of the modern geopolitics and world economy is in serious doubt.

Is Russia able to be the guarantor of the energy security of Europe at all? Indeed, the gas production falls. It is not certain whether the authorities of Russia and Gasprom will manage to meet their current European export commitments at the expense of the domestic supply and by suspending exports to CIS.

The planned European exports increase is just totally irrelevant.

And considering the tremendous political risks of 2010-2011, when the change of the Russian regime, or, moreover, the total chaos and losing the control over the country are highly probable, any  long-term “guarantees of the Russian part” are just out of the question.

Is it being realized in Europe?

Not yet, as it seems to us. Otherwise European policy concerning Russia would be different.

It is another issue though.


Notice: In view of the aforesaid the sudden death of the Turkmenian leader seems very suspicious. Well, what if someone’s problems are being concealed from the world by taking control over the Turkmenian gas? What if Turkmenbashi was the opponent of these plans?

About the Author:

Pyotr M. Khomyakov, Doctor of Technical Science, Professor

Born in 1950 in Moscow. Started his career as the junior geologist.

Worked in geological exploration and geological engineering expeditions, served in the Soviet Army. Graduated the Geography and Mechanical – Mathematical faculties of the Moscow State University. Since 1981 worked in the Academy of Science of the USSR, State Planing Committee and the Russian Academy of Science. Was engaged in the studies in state administration automation, environmental and resource backing of stable industrial development, regional management. Was engaged in a number of global problems projects. Author of more then 70 scientific articles and 7 monographs.

Since 1991 simultaneously with the scientific work takes active part in social and political activity, engaging in journalism and political analysis. Was the expert of the Supreme Council of the Russian Soviet Federative Socialist Republic. Consulted a number of Russian political parties. Was the political expert of General Rohlin.

Worked as the analyst and commentator in the Russian News Agency, ITAR-TASS and International Information Corporation. Is widely known for his articles in the Russian newspapers and magazines.

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