In some way, volatility on the oil market in 2020 resembles a rollercoaster ride. While some experts say the oil barrel price will slump to $10 soon, the others believe it will instead rise above $50 or even higher. According to IMF analysts, coronavirus pandemic will cause a global recession that could surpass by far the financial crisis of 2007-08. Economies of commodity-exporting countries are expected to be hit the most severely. Talking about Russia, it is hardly a secret that in 2019 the share of oil and gas revenues accounted for more than 40% of the federal budget of the country.
So can we call a rich raw-material base literally 'the Resource Curse'? How soon is the end of the hydrocarbon era? And what energy sources will take the place of fossil fuels? In his interview to 'Forpost', Vladimir Litvinenko, Rector of Saint-Petersburg Mining University and a leading industry expert, gave the answers to these and many other questions. Vladimir Litvinenko is an author of numerous scientific articles, with an example being the article exploring resource potential of the Ural-African transcontinental oil and gas belt.
- In 1993, British economist Richard M. Auty used the term 'the Resource Curse' to describe the phenomenon he explored - how countries with abundant natural resources often develop more slowly than others. Ever since there has been told a lot that Russia needs to overcome this dependence to be able to stand in line with the world's leading economies. Prof Litvinenko, what is your personal opinion on the matter?
- Russia is a country with an extractive economy. Raw materials are our competitive advantage, based on which the Government should form a growth strategy. In the next 30-40 years, we must use natural resources as a driving force for the development of our country. We should not, however, think that we will hit the dead end. Our subsoil riches is the reserve needed for the transition to a post-industrial economy. Besides, each state would prefer to have its own resources so as not to depend on supplies. As examples, Canada and Australia, both possessing rich raw-material bases and actively developing them, are among the most highly-developed countries, providing their inhabitants with high-level incomes.
As for declining prices, the trend will reverse once the pandemic is over. The demand for hydrocarbons will be back to its former volumes, and the prices go up consecutively.
- What is the effect of fossil fuels on eco-systems? Has not their negative impact on the environment already been proven? And wound not the further development of wind and solar energy be the better option?
- The transition the energy industry is currently going through is in itself a good thing. It is also an inevitable part of humanity's civilisational progress. But with that said, we will not make this transition today or tomorrow. It will not happen. The technology levels we have reached so far are not yet sufficient enough to sustain it. Therefore, in the next 30-40 years or even more than that, no other energy source will become a proper replacement for fossil fuels. I also believe that criticism of hydrocarbons, the same as of their impact on global warming, is somewhat exaggerated. Greenhouse gas emissions do not result from anthropogenic factors only, but also natural ones.
- Are there enough hydrocarbon reserves in Russia for the 30-40 years ahead?
- All experts agree that we will not run out of coal, oil and gas reserves in the next 150 years or even more. However, we should bear in mind that notable price fluctuations lead to physical losses of raw materials. If prices fall or, on the contrary, go up by 20-30% in one month, we have losses. Because we need to adjust the storage and transportation techniques we use. Price fluctuations affect economic indicators as well; companies end up either cutting jobs or sending some of their staff on compulsory leave.
Price volatility on the global markets leads to losses of raw materials, sometimes up to 20% of material is lost. Many ships, which were supposed to carry LNG, are now used as storage facilities since LNG production is still running, but there is no demand for liquified gas. Moreover, selling it at the current price is entirely unprofitable. As a result, the tankers remain in neutral waters while their energy is wasted on refrigeration units keeping the gas cool.
Let us take another example. As prices drop, many companies are forced to stop production. Though they can do it rather quickly, it may take as long as a year to re-activate wells. That much time is necessary to rework a well and resume normal oil production rates. There is a way to increase oil recovery by using specific blends, but, one way or another, significant losses are unavoidable!
Global hydrocarbon reserves are vast for now, but we must use them carefully, as we would with oxygen or water. If water disappears, no oil will be needed. If oil and gas go, we will have nothing to replace them with.
- Production costs are continually growing. Will there be a moment when they become too high to extract hydrocarbons profitably, in particular, if the prices remain as low as they are now?
- Both production and shipping costs have risen significantly - if combined, they are at least a few times higher than, so to say, 20 years ago. Back then the price of one oil barrel was enough to cover the costs of producing almost a hundred barrels, while today it would at most offset the costs of making 30 barrels. We are expecting expenditures to further grow in the long run. Thereby the industry will need investors ready to accept certain risks.
The United Nations Sustainable Development Goals, among others, include ensuring everyone's access to affordable, reliable and modern energy sources. It is essential here to understand that as of now, about a billion people globally - mostly in Asia and Africa - have no access to electricity. They cannot turn on the TV or computer, nor they can charge a mobile phone. If we want these people to have such opportunity, we will be obliged to extract hydrocarbons for many years to come - most notably natural gas, which is, by the way, considered an environmentally-friendly fuel in Europe. Its use in both business environments and at homes is highly welcome.
Russia has a substantial raw materials potential to develop this sector of the economy, particularly in terms of LNG industry development, with annual production volumes potentially reaching from 140 to 160 million tons in the next ten years. There are no doubts that the global LNG market will continue growing. By 2040, global gas consumption is forecasted to increase by almost a third, and our country must be ready to play a leading role in the energy business.
