A new global energy reality is emerging. The era of the hydrocarbon – which propelled mankind through the second stage of the industrial revolution, beyond coal and into outer space – is drawing to a close. The stone age ended not because we ran out of stones. The same with oil and gas.
We have now entered the era of the renewable energy resource, whereby zero-emission electricity is generated via near unlimited inputs (solar radiation, wind, tides, hydrogen, and eventually, deuterium). Cutting-edge, smart electric grids, utility-scale storage, and electric self-driving vehicles – powered by everything from lithium-ion batteries to hydrogen fuel cells – are critical elements of this historic energy transition.
Each of these technological trends will displace demand for Russia’s primary source of budget revenues: fossil fuels.
The transition will have major consequences for the status-quo leaders of the hydrocarbon age: from Moscow to Caracas, and from Teheran to Riyadh. The Russian Federation, which today is the world’s largest gas exporter and second most prolific oil producer, is one such player which must ‘adapt or die’ over the next 15-20 years. Indeed, Russia derives 40% of its revenue from oil and gas sales, making it a de-facto petro-state. It, and other hydrocarbon revenue dependent nations, must accept their new reality, and react decisively, if they hope to survive in the age of renewables.
This means that the Kremlin’s current strategy of pivoting East towards energy-hungry Asia markets – as we see with their Power of Siberia gas pipeline to China and the East Siberia – Pacific Ocean pipeline (ESPO) to the greater Asia Pacific – is myopic at best. As China is joining the developed countries and trying to curb emissions, it will limit imports of Russian hydrocarbons.
Even Germany, which is on the receiving end of Russia’s controversial Nord Stream II gas mega-project, has already declared that the purchases of Russian gas will start declining after 10 year’s time per its national Energy Transformation agenda. The so-called Energiewende policy aims to cut greenhouse gas emissions (GHG) some 40% by 2020, by 55% by 2030, and up to 95% in 2050, compared to 1990 levels. This does not jive with increased imports of Russian fossil fuels.
The impending energy transition
The industry’s best estimates put global peak demand for hydrocarbons between 2030 and 2040, after which we will witness a dramatic drop-off in needs for oil and gas. In Europe, Russia’s primary hydrocarbon export market, peak demand for fossil fuels is already behind us.
EU projected energy demand and mix
Eurostat 2018
As we have already seen in Europe, hydrocarbon demand will be driven by declining renewable energy costs, government policies, new technologies, and companies’ shifts in strategies to prepare for the new energy age. Structural changes in fossil fuel supply, demand, energy mix, and prices will follow accordingly.
Internal combustion automobiles, which account for upwards of 50% of global oil demand, are ceding market share to electric vehicles (EVs) every year. In 2017, electric vehicles accounted for 1.3% of the global automotive market – up from 0.8% in 2016. Last year was the first year that over 1 million EV units were sold. Falling costs in battery storage technology, when coupled with renewable generation like solar and wind, have led to cost-competitive power generation in the in the $20kWh – $40kWh range on an LCOE (levelized cost of electricity) basis, putting them on par with combined cycle natural gas plants and even beating most nuclear power.
According to Wood Mackenzie’s research, close to 20% of global power needs will be met by solar or wind by 2035, displacing the equivalent of roughly 100 billion cubic feet per day of gas demand. By 2040, oil demand displaced from electric vehicles (EVs) will double to almost 6 million barrels per day. It’s worth mentioning that since 2010, solar photovoltaic costs have fallen 80%, while at the same time more mature technologies, like onshore wind, have seen costs fall about 30%.
Wood Mackenzie also predicts that after 2035, increasing adoption of renewable generation and electrified transport will make them the default choice across many energy systems around the world. Indeed, half of all new power plants constructed globally will be either solar or wind, or a hybrid combination with storage. On top of this, 50% of all additional miles traveled by road will use an electric vehicle. The merging of other technologies such as autonomous and shared driving will accelerate this rapid uptick.
Russia’s present-day energy woes
Even absent the impending energy transition, Russia suffers from a number of serious threats caused by global trends in energy generation. The increase in global hydrocarbon reserves, the oil and gas boom resulting from America’s Shale Gale, and a downtick in OECD energy demand are putting intense pressure on Russia’s fossil fuel economy.
Unbridled corruption, economic sanctions due to the 2014 war with Ukraine, a shrinking population, relatively low life expectancy, insufficient investment in Research and Development (R&D) and rising domestic prices for basic goods are significant challenges to Russia’s economic resilience.
Among the solutions to these challenges may be a deep government reform which would include improvements in the investment climate through a boost to the rule of law; a curb on corrupt and overbearing law enforcement; a welcoming environment to small and medium business; development of tourism; thriving of innovation and venture capitalism; and a further boost to agriculture.
But since the Putin administration demonstrates no interest in such reforms, it will be up to the next generation of the Russian leadership to achieve all that – or preside over the further decline of their country.
Russia is said to be never as strong as it seems or weak as it appears. The end of the hydrocarbon age will put Russian toughness to the ultimate test.
James Grant contributed to this article
