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Crisis and oil. Perspective of ethnologist Dmitry Nesanelis

Report of ethnologist, Director General of the Fond "Regional Policy" Dmitry Nesanelis at the Syktyvkar BarCamp-2015 caused a lot of questions and comments of participants. The scientist made a prediction that domestic oil companies will restore cooperation with foreign partners after lifting of sanctions against Russia. Thereat now it is necessary to invest in training staff and science. "7x7" publishes transcript of report of Dmitry Nesanelis.

Yesterday, July 4, a well-known economist, an expert on regional development Natalia Zubarevich delivered a brilliant report at BarCamp. Later an excellent historian, journalist and public figure Nikolai Svanidze also had an amazing lecture. I fully agree with the pessimistic observations, conclusions and projections of my Moscow colleagues.

Zubarevich and Svanidze rightly emphasized that a systemic crisis in Russia has obviously emerged a few years before the events in Eastern Ukraine and around Crimea. It really happened. Stagnation and decline in production, the budget imbalance, narrowing of the field of competition, an effective but crude and immoral propaganda of many Russian mass media — all of these warning signs of life designated neither yesterday nor the day before yesterday... In this regard, speakers rightly accentuated that the coming crisis in Russia is not a segment of the global, international crisis, it’s our internal problems generated almost exclusively by domestic factors and causes.

The situation is different with the sharp fall in oil prices. This phenomenon is of a global nature. It is caused by numerous factors which lie outside the Russian Federation.

Let’s mark the key factors that led to the fall of prices on the oil barrel. Firstly, it is the rapid development of alternative energy, especially solar and wind, in the United States and partly in Western Europe. Over the past five years, technological progress has led to falling of the cost of megawatt hour on solar and wind installations decreased on about 70-80%. Now it is sometimes from $ 37 to $ 72 (in the territories of increased solar activity and wind), it is comparable to the price per megawatt hour on conventional thermal power stations working on gas. The large-scale production in Iraq's and proven oil reserves on the shelf of Venezuela (which took the first place in the world upon this indicaton) is the likely reason number two for the price fall. Another factor is a widespread adoption of the energy-saving technologies in developed countries and, therefore, lower consumption of gas and oil (this trend is observed in China, which is particularly important).

But the most important thing is a large-scale oil and gas shale revolution, which occurred due to a technological breakthrough in the United States. As a result of a shale gas and oil output the largest consumer of hydrocarbons has become not an importer but exporter of oil in 2014. In the future, this trend is likely to increase.

 

 

Five years ago, the majority of experts, relevant government officials and oilmen of Russia and some other countries (eg, Venezuela) believed that "a shale oil" is a US bluff for speculation. It turned out that they were wrong! Then almost all of our energy community (even in 2012) at a price of  $110 per barrel of Brent was convinced that the prices of $150 and even $170 are not far off... Perhaps the only major skeptic was Alexei Kudrin, who, analyzing the given and other (including the alleged decline in consumption in China) factors rather accurately predicted the time and rate of the oil prices reduction. In this regard he called to structural reforms and the launch of a real diversification of the domestic economy. Kudrin was not heard, but now, when everybody’s ready to listen, train, as they say, is already departed...

The question is, what to do in a situation of falling of the world oil prices. Last August futures trading on the London and New York Stock Exchange recorded price for a barrel of Brent at $57.21; optimistic forecast gives $74 within two or three years, although probably it looks not too convincing. Comfortable price for the Russian budget is not less than $ 95-100.

The negotiations of the United States and E3+3 with Iran, in spite of the tough stance of Israel, move successfully. Lifting the embargo would allow Iran to increase the daily oil exports of 1.1 million barrels (up to 2, 3 million) as soon as possible. This is an additional argument in favor of maintaining oil prices at around $ 58-65 per barrel in the medium term.

Saudi Arabia (SA) successfully compensates the drop in oil prices by a significant increase in production. SA has the opportunity, there is a shallow oil lying, destination from the fields to the Arabia Gulf terminals is rather short, the number of remaining recoverable reserves exceed 36 billion tons.

It would be naive to assume that the collapse of the world oil prices is a result of "collusion" of the US companies and the Saudis. In my opinion, the situation is completely the opposite. One of the additional reasons for the fall in prices is a tough competition between modern American technology production of shale oil (quality) and boundless reserves of Saudi oil (quantity).

In Russia, such compensation is not possible for many reasons. Last year, Russia produced 526 million tons of oil, this year, production is expected to reach 525 million. Experts estimate that in 2016 the volume of the Russian crude oil is likely to fall more noticeably. The decline in production in the fall of prices may adversely affect the national budget, the development of the real sector of the economy and social well-being of the Russian society.

 

 

What measures can mitigate the situation? At a time when sanctions cut off our oil companies from the long and relatively cheap Western loans, investments in maintaining and development of domestic oil and gas sector could be found in the revision of the defense budget when sequestration of inefficient articles and released funds could be directed through the state Sberbank and VTB to development of the oil and gas industry and infrastructure.

Perhaps the main hydrocarbon hope of Russia is the Arctic offshore. However, only one (Sakhalin) of the ten joint (and very promising) offshore projects of Rosneft and Exxon Mobile, prepared in 2011-2012, is currently being implemented. The rest were folded after the events in Eastern Ukraine and the imposition of sanctions.

In this situation, it is advisable to urgently revise the Russian legislation and to open the way to the Arctic shelf not only to the state (Rosneft and Gazprom) but also to private companies. I am talking particularly about LUKOIL. Perhaps the company of Vagit Alekperov has the richest experience of a successful offshore drilling (Caspian, Black and Baltic Sea) among the Russian structures. Combined with powerful technological and financial capabilities that experience gives LUKOIL a reason to vigorously participate in the development of oil deposits of the Arctic shelf. However, it should be mentioned this is necessary that LUKOIL significantly improves the environmental component of its production activities in the Timan-Pechora (the Komi Republic and NAO). Now it causes fair concerns of the Save the Pechora Committee, Greenpeace and other environmental organizations.

Cautious optimism in this regard calls attention to environmental issues and safety on the part of Alexander Leyfrid, the newly appointed Director General of LLC "LUKOIL-Komi" (LK). This is complemented by the company and its current leadership willingness to support a major social and Environmental Forum in Usinsk (August 2015). A recent development of a dialogue between LUKOIL and environmental community.

It is not superfluous in this context to recall the scale environmental disaster that occurred in April and May 2013 at the production facility "Rusvietpetro" (RVP) near the village of Kolva and the cognominal river in the vicinity of Usinsk. It is noteworthy that Valery Klinchev, who headed RVP after that, achieved a sharp increase of environmental standards at the enterprise. This suggests that the role of a "human factor" is crucial in such cases. This is probably true for "LUKOIL-Komi".

Eventually the sanctions adopted in response to the events in Eastern Ukraine will be softened, and then disavowed. Then cooperation between Rosneft and Exxon Mobile oil production in the Barents and Kara Sea will be completely or partially restored, perhaps this project will involve Statoil Hidro & Eni. It is likely that in the light of what has been said earlier Lukoil will also be able to work on the shelf, which, given the long and positive history of partnership with the American Conoco Philips, has high chances of finding a high-tech Western partner.

In this context, it seems particularly important to start preparing for the resumption of international cooperation in the Arctic today. This requires, first and foremost, serious investments in science, research and applied research, education, training of future engineers, technologists, specialists in offshore drilling, as well as environmentalists and anthropologists who provide humanitarian support of production activities in the Arctic. It is also necessary to invest in the development and testing of advanced, comparable to the Norwegian and American offshore oil extraction technologies. This will allow to move closer to international standards in the index of recoverability coefficient of hydrocarbons.

The basic institutions of higher education in this regard could be, perhaps, the Mining Institute, the University named after Gubkin, the Northern Arctic Federal University (CNPF), Syktyvkar State University named after P. Sorokin, Ukhta State Technical University.

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Related material

Internet magazine offers readers to get acquainted with statistical information on the production of oil in the northern European territories in 2014. Interactive infographics is available at patchworkbarents.org. The highest rates are in the Komi Republic and Nenets Autonomous District.

 

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