In Russia, oil and natural gas provide both wealth and deep national pride. With global demand for fossil fuels set to decline, how will Russia adapt?

The small West Siberian city of Khanty-Mansiysk, home to just over 100,000 people, is Russia’s unofficial capital of oil. The town is surrounded by some of the most extensive oilfields in the world, which shape not only the region’s geology but its economy and identity.

The relatively short history of oil in Khanty-Mansiysk has transformed this part of Russia. The Samotlor oil field, Russia’s largest, was discovered in the 1960s to the east of the city and fast became the source of the area’s considerable wealth. Khanty-Mansiysk sits within the Tyumen region, which often ranks second in Russia for wellbeing and socioeconomic development, after only Moscow.

In this part of Russia, oil is an important source of not only money, but pride. Since the 1960s, oil workers and engineers have been praised and featured as heroes in novels and movies. The local Museum of Geology, Oil and Gas is a major architectural landmark of the city. In the city’s airport, one can see photographs of oil workers and engineers from various decades through the 20th Century, including of Russia’s first president, Boris Yeltzin, meeting workers on an oil field.

Amid such a celebration of this fossil fuel, one could imagine that the realities of climate change haven’t yet percolated to the heartland of Russia’s oil.

But in the last few years, that has begun to change. This year, one of the city’s major oil forums, “Oil Capital”, which took place in March, paid particular attention to climate, with panels and discussions dedicated to decarbonisation. Local officials, companies and scientists tried to understand what the future of Khanty-Mansiysk, and of Russia, might be in a new low-carbon world.

“The climate agenda has been a topic here for a few years by now, ever since Russia’s Climate Doctrine was adopted in 2009,” says Irina Akhmedova, associate professor at the Oil and Gas Institute of the Yugra State University. The Climate Doctine was Russia’s first political document to outline a basis for climate regulation. “However, it is not an easy topic, especially as we are such a mono-specialised region.”

Deep oil

Oil and gas make up 80% of Khanty-Mansiysk’s economy. Overall in Russia, oil and gas provided 39% of the federal budget revenue and made up 60% of Russian exports in 2019. The share of all fossil fuel rents (the price of fossil fuels minus the cost of producing them) amounted to 14% of GDP that year, according to a forthcoming paper by Igor Makarov, a researcher at the Higher School of Economics in Moscow.

Despite the deep entrenchment of oil and gas in its economy, Russia is very much aware of the climate crisis and has made some moves to integrate it into current and future policies. In late September, the government created a number of special cross-ministerial working groups to prepare the economy for the global energy transition. These groups will forecast risks and opportunities for Russia, with their findings feeding into an action plan to be created by the end of 2021.

“The global economy is focused on a gradual transition to low-carbon energy,” said Russia‘s prime minister Mikhail Mushustin, during a meeting with ministers in late September. “This is already a new reality. We need to prepare for a phased reduction in the use of traditional fuels – oil, gas, coal.”

Shortly before world leaders gathered for the United Nations’ recent climate talks in Glasgow (COP26), the government adopted a long-term low carbon development strategy which foresees the country reaching carbon neutrality by 2060 or before. Obligatory carbon reporting for large emitting companies was introduced earlier in 2021. Companies within Russia can also now adopt voluntary emission reduction projects and trade their emissions. (The only exception so far is the Sakhalin region in the Far East of Russia, where a more legally binding emission trading scheme is being drafted.)

Slow transition

At the same time, many climate experts warn that Russia’s emission reduction target for 2030 remains very weak. This target foresees an emissions “reduction” of 25-30% by 2030 from 1990 levels, but Russia’s current levels of emissions are already around 30% below the 1990 levels if forest sinks are not included, and about 50% if forests are included. This means that in reality, Russia’s low-carbon development strategy plans at least a 0.6% increase in emissions from today’s levels by 2030. The international research group Climate Action Tracker says Russia’s policies and actions are “highly insufficient” for a 1.5C pathway, and closer in line with a 4C world.

Both the government and companies are taking an optimistic view of the prospects of oil and gas sectors in the short-term. “In the next 20 to 30 years, industries related to oil and gas will remain one of the pillars of Russia’s economy,” says Alexey Miroshnichenko, first deputy chairman of Russia’s state development bank, VEB. “Even in the long term, renewable and conventional energy sources will coexist.”

Nevertheless, traditional industries will have to undergo “a serious transform  ation” in order to meet the goals of the Paris Agreement, Miroshnichenko adds. Together with the Ministry of Economic Development, the VEB created Russia’s first system of green finance in September, which aims to help financiers decide which projects are sustainable.

It comes as little surprise that there is a reluctance in the oil and gas industry towards a fast phase-out of the fuels. Speaking at a side-event at COP26, Sergey Vakulenko, a representative of one of Russia’s largest oil companies, Gazprom Neft, argued that oil and gas would still be needed even in the new low-carbon economy. Renewables might be enough to cover the majority of demand, he said, but traditional fuels would still be used as a back-up.

Peaking pressure

Some experts question how long Russia’s fossil fuel industry will remain a viable prospect. “Gas, which many are pinning their hopes on as a transitional fuel, will last for 10 to 15 years [as an economically viable fuel],” says Evgeny Kuznetsov, a Russian venture investor and chief executive of Orbita Capital Partners. “This period may not be enough to return investments in new large-scale gas projects.”

But others say the industry is not likely to abate any time soon. Thane Gustafson, professor of political science at Georgetown University in the US and author of the book Klimat: Russia in the Age of Climate Change, expects that world demand for fossil fuels will continue to grow through the 2020s. At the same time, supply constraints arising from decreasing investment in fossil fuels will keep energy prices high, punctuated by periodic spikes in prices, as we are seeing today.

What can be the basis of the new, post-fossil fuel Russian economy?

But in the early 2030s that picture will begin to change, he says, with the influence of climate politics, technological change and the clean energy transition becoming dominant. He expects world demand for oil to peak and begin to decline around this time due to the spread of electric vehicles and political limits on petrochemicals. Renewables will increasingly displace coal, he says, while gas demand will remain high but cease to grow.

“The impact of climate change [action] on Russia over the next 30 years is going to be very largely external,” says Gustafson. “It will rise because of trends and forces that are running outside Russia and over which Russia has in fact very little leverage.”

Changes inside Russia, such as the increasing cost of oil extraction as oil fields deplete, will have some impact, he adds. But the growth of electric vehicles, the continued spread of renewable energy and the progress of green legislation particularly in Europe, such as the European Green Deal, will all put external pressure on Russia, he says.

“Russia has very little control over that,” says Gustafson. “Russia will be a ‘taker’ of world trends, rather than a ‘maker’. And that must be, of course, a difficult realisation.”

This puts Russia in a vulnerable position, says Kuznetsov. He believes that after the current energy crisis, a drop in demand will accelerate Europe’s planned reduction in fossil fuel consumption. The result could be a large number of competitors vying for a shrinking market, driving prices down.

Vladimir Chuprov, a project director at Greenpeace in Russia, agrees that if other countries follow up with real actions on their Paris Agreement pledges, Russia will experience declining demand for coal and oil before 2030. However, in 2050 the Russian economy is still likely to be based on at least some revenue from natural gas exports, he says. Within Russia’s domestic supply, he sees gas, along with nuclear, playing a leading role.

But by 2050, the Russian economy will no longer be able to rely on oil and gas exports and will need to find new sources of income, adds Chuprov. “That would be especially hard for the regional economies,” he says. “People will start migrating within Russia.”

Energy after oil

The question is, what could be the basis of the new, post-fossil fuel economy in Russia?

“This is definitely the billion-dollar – and more – question,” says Anna Korppoo, a research professor at the Fridtjof Nansen Institute in Norway. Korppoo has been researching Russia’s climate policy for more than 10 years and recently co-authored a report on a just transition away from coal in Russia.

There are several contenders that could take the place of fossil fuels in a clean Russian economy. One option would be new sources of energy for export such as renewables, hydrogen or nuclear and potentially even decarbonised fossil energy with carbon capture and storage.

Speaking at Russia’s side-event at COP26, the Russian Ministry of Energy representative Pavel Sorokin touted increasing forest sinks and carbon capture and storage as priorities for the Russian fossil fuel companies, followed by further reduction of emissions.

Sorokinalso emphasised the importance of producing green hydrogen (hydrogen made cleanly by splitting water using an electric current) as well as “blue” hydrogen, which is produced from natural gas but uses carbon capture and storage to attempt to reduce greenhouse gas emissions. However, scientists have doubts about how sustainable blue hydrogen actually is, warning that greenhouse gas emissions from blue hydrogen can be high, particularly due to the release of fugitive methane. (Read more about the growth of sustainable hydrogen.)

As the world’s largest producer of nuclear power plants, with plans to develop new nuclear technologies for export, Gustafson is optimistic about the prospects for Russia’s nuclear industry. “That has been quite a story – the creation and revival of [the state corporation] Rosatom has led to a very big rise in the construction and sales [of nuclear technologies] outside Russia,” he says. “Russia currently has strong advantages in civilian nuclear technology compared to the United States or France or the UK.”

Environmental activists in Russia, however, are more sceptical about plans to develop nuclear energy further as a climate solution, emphasising that nuclear energy is expensive, and that spent nuclear fuels and waste are currently stored and not further dealt with. The Russian Social Ecological Union has also said that Rosatom and Russian authorities have put pressure on environmental activists, who have faced charges and persecution for anti-nuclear campaigns.

Responding to these claims, a spokesperson for Rosatom says that “Rosatom is open to dialogue and cooperation with different environmental organisations”, and that representatives of Russia’s largest environmental organisations take part in Rosatom’s Public Council.

“Nuclear energy is indispensable for achieving carbon neutral goals,” Rosatom’s spokesperson says, adding that technological solutions to process spent nuclear fuel and turn it into new fuel for nuclear power plants are “at an advanced stage” in Russia. They give the example of Rosatom’s Proryv project, a fast neutron nuclear reactor and a facility to process the spent fuel will be built on the same site. After reprocessing, the spent fuel will be turned into fresh fuel, in a system intended to gradually become independent of external energy supplies.

Nature’s resources

There are many other options besides nuclear for decarbonising Russia’s economy. Kuznetsov says that Russia could become competitive in the production of other low carbon technologies, such as equipment for smart energy grids and new heating systems. Another avenue is agriculture.

“That’s really been a remarkable story for anybody who remembers the state of agriculture in the Soviet period,” says Gustafson. “Right now, Russia is once again the world’s largest exporter of wheat.” Total revenues were about $25bn (£19bn) in 2019, he adds, and Russia aims to increase that to $45bn (£34bn) by 2024 through agricultural reforms. “That seems entirely realistic, or plausible at any rate,” says Gustafson.

Another option could be expanding into sustainable forestry and wood-based products, given its ample woodland resources. Russia is home to more than one-fifth of the world’s forests (approximately 7.6 million sq km/2.9 million sq miles), and the country’s boreal forests, known in Russia as the taiga, represent the largest forested region on Earth, at approximately 12 million sq km (4.5 million sq miles), larger than the Amazon.

Russia is already an exporter of wood and wood products such as sawn wood and veneer sheets, though there has been criticism that these products are not sourced in a sustainable way. But sustainable wood-based packaging and textile materials could become an important new sector for the Russian economy, said Paola Deda, the director of forest, land and housing division at the United Nations Economic Commission for Europe, speaking during a forestry-themed event at COP26.

Greenpeace Russia’s Chuprov also sees the potential in sustainable forestry, including use of trees which grew on abandoned agricultural lands in the last decades, following the demise of the Soviet Union. According to Greenpeace estimates, since 1985 around 760,000 sq km (290,000 sq miles – an area larger than France) of former agricultural land suitable for forest growth has been abandoned in Russia for economic reasons.

Much of this abandoned agricultural land (around 500,000 sq km/190,000 sq miles) could be used for diverse kinds of forestry, according to Greenpeace. Around 60% of that land is already overgrown with forests, but Greenpeace argues the remainder could be used to grow more trees.

Forests growing on former agricultural land are one of the most important resources for the potential development of rural areas, through the creation of jobs and the sustainable production of economically valuable timber, according to a recent study published by a Paris-based think-tank Climate Chance, of which this reporter was also an author. They can also provide environmental benefits, such as increasing local resilience against natural disasters. Using planted forests for economic purposes might also help save intact primary (old-growth) forests from deforestation and unsustainable logging.

With the world facing increasing global shortages of fresh water, forests, fish and arable land Russia’s resources could provide a whole range of important ecosystem services, says Makarov, from biotechnologies and sustainable fish farming to responsible tourism to regenerative agriculture. Mining minerals needed for the development of renewable energy could also become a new source of wealth for Russia, he adds.

To make all this possible, though, more changes are needed, says Nelya Rakhimova, coordinator of Coalition for Sustainable Development of Russia who led a civil society review of the implementation of the UN’s Sustainable Development Goals in Russia in 2020. “If Russia decides to follow the clean energy and economic transition, it will not be possible without the implementation of all aspects of sustainable development – economic, environmental and social.” To make the most of not just Russia’s natural resources, but its people, “we need fundamental freedoms, the rule of law and open courts”, says Rakhimova.

Rakhimova considers this a “main barrier” to the development of Russia. “If we had an open dialogue with the state, if the basic rules for the adoption of laws and their implementation were in place, then the process of the energy transition itself and the formation of future Russia would be at a completely different stage,” she says.

If one thing is certain, it is that if Russia is to adapt to the global trends in clean energy, new industries are going to have to take centre stage in its economy. With their experience of economic transformation based on natural resources, Russia’s oil regions may soon find themselves with another role to play.

“Here in Khanty-Mansiysk, we need to develop a new economy, based on knowledge and science,” says Tatiana Minayeva, a researcher at the Center of Wetlands Conservation and Restoration, at the Russian Academy of Sciences’ Institute of Forest Science. “We already have a foundation for that, laid during the oil boom era.”

Data research and visualisation by Kajsa Rosenblad