Russian oil firms edge towards energy transition

The country's largest oil firms are starting to develop strategies for a lower-carbon future, but output growth remains the priority, writes Oksana Yablokova

Russian oil firms are stepping up efforts to address the carbon intensity of their operations and hinting at the possibility of shifting strategies to prepare for energy transition — but most expect continued investment in oil production growth to remain at the heart of their spending plans.

Russia's fifth-largest oil producer, Tatneft, is the country's only oil firm so far to target net zero CO2 emissions by 2050. It plans a 10pc reduction in greenhouse gas emissions by 2025 and a 20pc cut by 2030 from current levels. But leading state-run oil producer Rosneft highlighted its 2035 carbon-management plan in its 2020 financial results conference call this month, outlining targets to eliminate flaring of associated gas by that date and cut upstream emissions intensity by 30pc.

The firm reiterated these plans, first unveiled in December, after being asked whether it is aiming for net zero emissions by 2050, as BP, Shell, Total and Tatnefthave pledged. Rosneft insists that its own goals are more tangible. But, unlike its leading private-sector shareholder, BP, Rosneft does not plan to reduce hydrocarbon output in the next 10-15 years, instead intending to invest in projects that it says have a low-carbon footprint, such as Vostok Oil in the Arctic, on which the company started work last year. Rosneft's management admits that some mature assets in southern Russia have a large carbon footprint, but they hope that the firm's recent divestment of mature assets in west Siberia, Timan-Pechora and Sakhalin will bring its CO2 emissions down to 4mn t/yr.

Russia's second-largest state-run oil firm, Gazpromneft, plans to announce a new long-term development strategy this year, with energy transition issues at its centre. "We assumed this as a possible scenario back in 2017, but now we see that it is becoming the main one," head of strategy and innovations Sergei Vakulenko says. Gazpromneft will expand the share of gas projects in its portfolio to more than 50pc by 2025 to ensure gas production growth, he says. The firm is predominantly a crude producer, but the share of condensate and gas in its output has risen in recent years as it develops new fields in the Yamal-Nenets region, most of which contain crude, gas and condensate.

The company also has pilot wind and solar projects in Russia and a commercial wind farm in Serbia. And it sees potential in the development of hydrogen projects, given that the gas is already produced at its refineries. While planning energy transition-related changes to its long-term strategy, Gazpromneft also sees the possibility of a new cycle of oil price growth. "There has been under-investment in the oil sector for a number of years, with upstream spending falling to a quarter of 2014 levels," Vakulenko says. Natural declines in crude output could soon outpace the demand decline, creating a supply deficit, he says.

Climate concept

Gazpromneft currently operates in line with a long-term strategy approved in 2013, aiming to keep oil and gas output at 2mn b/d of oil equivalent (boe/d) and maintain a reserve replacement rate of more than 100pc until 2025. The firm was on track to hit its 2mn boe/d target last year, but missed it by 100,000 boe/d because of Opec+ production restrictions. After 2025, Gazpromneft aims for production growth of 2-3pc/yr until 2030.

Leading Russian private-sector oil company Lukoil's president and co-owner, Vagit Alekperov, says his company will soon present a revised long-term strategy that will take into account "all contemporary challenges". The firm last week said it plans to present the concept of its climate strategy in March. But Alekperov also said last week that calls to give up oil are "pointless" and the "time has not yet come for that".