Chapter 5

What comes next: modern world and the perspectives of the Russian oil industry sector

Фото: Российский государственный архив кинофотодокументов

Представляет: специальный проект «ИСТОРИЯ НЕФТИ»

This text is an excerpt from a book by M. V. Slavkina "Russian production", published with the aid of "Rosneft" company.

What role can the native oil industry play at the current stage of the country's development and what role should it play? With the restoration of hydrocarbonaceous capabilities this question becomes increasingly important. Modern Russian economics largely depends on oil and gas production and export, as well as on international state of energy supplies market trends. Against the backdrop of dynamic development of the materials sector this dependency continues to grow. The share of the oil and gas sector in the tax revenue (speaking only of two kinds of taxes - the subsoil tax and customs duties) amounted to 22,2% in 1999, 30,7%120 in 2003 and 47,5%121 in 2008. While the necessity to reduce Russia's hydrocarbonaceous dependency has been actively discussed in the recent years, in reality this dependency only increases. In 2011 46,3% of the state's revenue was made by the oil sector alone.

It's a bit more difficult to calculate the share of the oil industry in Russia's in gross domestic product. Despite the existence of official data, it is considered debatable due to methodological reasons. For 2004, for instance, Goskomstat gives the number of 9,1% for the oil sector share in the GDP, the World Bank however counts it as 30%, the Higher School of Economics - 20,4%, Centre for Energy Efficiency representatives consider it some 32,7%122. In January 2012 Vladimir Putin stated that "more than a quarter of Russia's GDP is the result of international sales of oil, gas, metals, wood, other primary and first-processed products"123. Therefore, given the variety of calculation methods, in our opinion such parameter as the share of the oil industry in the GDP should be approached with a critical eye.

The issue of the methods of the oil revenues usage is in he focus of attention of executive powers, political parties and the expert and scientific community. Russia's ambitious goal in the beginning of the XXI century is complex modernization that should form a modern economical, social and political system that would secure the country's dynamic development124. The essence of modernizing changes is usually regarded in the postindustrial context when the priority of development should be given to the economics of knowledge and the most significant productive resource should be information125. Innovative development is acknowledged as the base of a modernization breakthrough for Russia126. In the variety of this term's interpretations127, by innovations one traditionally sees accomplishments of the human mind, such as discoveries, inventions, academic and constructive solutions, that can be put to use in improvement of the effectiveness in this or that sphere.

Multibranch modernization approach that focuses on the possibility for different countries to modernize in heir own ways with regard to national identities is the most in demand in our days128. One of such special factors for Russia, that makes our position rather unique, is a large resource of hydrocarbons, namely oil and gas. This natural factor defined the formation of one of the world's largest oil industries, that has been securing the country's leading positions in the fuel and energy sphere for the greater part of the XX and the beginning of the XXI centuries.

The national experience proves the oil industry's influence on modernization processes to be variative. There is, on the one hand, the positive example of the first two post-war decades, when the oil industry was a prominent employer of innovative technologies and equipment and stimulated modernization of the country's economics in general (let's not forget transport development, industrial breakthrough in construction and mechanization in the villages). On the other hand, Russia has a negative experience of the 1970-1980's as well, when the rapid growth of the oil industry that followed the development of West Siberia along with positive world market trends lead to conservation of inefficient elements of the economic system, nonperformance of modernizing changes and hydrocarbonic dependency, colossal oil export revenues were being spent primarily on provisions and consumer goods.

Any direct analogy with the recent past for the current stage of oil industry's and modernization processes' interplay would naturally be an inappropriate manipulation of historic material.

Speaking of the 1950-1960's scenario, it is important to understand that in those days the oil complex functioned predominantly for meeting the country's energy demands and was not a strategic financial factor of development. The petrodollar phenomenon appeared later.

The 1970-1980's experience imitation also looks dubious. Let's mark the principle differences, characteristic of the country's ecomonic development in the 2000's. Firstly, Russia is currently developing with a substantial balance of foreign trade. Compared to the 1990's when export and import amounted to nearly equal volumes, starting with 1999, the surplus of exported supplies becomes increasingly well marked. Secondly, the import structure itself has undergone substantial changes too. Machinery, equipment and transport vehicles are one of the largest external procurement items (31,4% in 2000 and 52,7% in 2008). In the meantime the share of food and agricultural stock import is permanently decreasing (21,8% in 2000, 13,2% in 2008), as well as that of clothes and footwear (5,9 and 4,3% accordingly)129. Thirdly, one must admit that in the recent years Russia has managed to cease to be dependent on grain import and since the beginning of 2000's gradually became a large net grain exporter. In this regard, there is reason to believe that using oil and gas money to purchase food and clothing abroad is unlikely to repeat itself in the beginning of the XXI century. Analogies for the "oil-for-food" rate are not to be expected.

A populist way of the use of oil resources to address many social issues is a more likely threat. In society, we hear calls to direct hydrocarbon revenues to improvement of the pension system, increase wages of public sector employees, state support for education, health and housing and communal services. Pressing social problems must surely be dealt with and it is the most significant part of state policy. However, the path of another "social eating away" of petrodollars seems a dead end in the long run. Historic experience of the 1970-1980's shows that without timely modernization and carrying out of appropriate reforms, hydrocarbon revenues in the short term are able to compensate for the general inefficiency of the economic system, but it leads to even greater distortions and deep economic crisis in the end.

In contrast to these approaches an alternative viewpoint has developed itself, actively supported by Alexei Kudrin, Minister of Finance (2000-2011), who defended the idea of the accumulation of oil revenues in special funds that should minimize the risks of the economy and be directed to maintaining macroeconomic stability and fight against inflation. Although such paradigm caused a lot of criticism in terms of management efficiency, the policy of formation of such an instrument has been justified during the world economic crisis of 2008-2009. Let's recall that the formation of the Stabilization fund began since 2004. Federal Law "On Amendments to the Budget Code of the Russian Federation with regard to the creation of the Stabilization Fund of the Russian Federation» № 184-FZ, was adopted on 23rd of December 2003. The purpose of the formation of the RF Stabilization Fund was to ensure the balance the federal budget should the price of oil be reduced below the reference price130. On February 1, 2008 the Stabilization Fund was replaced by the Reserve Fund (designed to ensure the performance of the State's obligations in the event of reduction of oil and gas revenues to the federal budget)131 and the National Welfare Fund (as a mechanism of pension protection for the long term)132.

Each one of the above mentioned scenarios is aimed at solving specific problems, however, all of them depend on the same thing - that a certain level of oil revenues would be maintained and they would remain the determining factor in the development of the country. A fundamental factor, however, is not being taken into consideration. The level of oil revenues depends not on the world prices for hydrocarbons alone, but also on the amount of the oil produced. In their strategic considerations Russia's executives proceed from the fact that the level of oil production in 2030 must be kept at a level not less than 530 million tonnes133.

After the "turbulent nineties" Russia has largely restored the production capacity and regained the status of the world's hydrocarbon leader. However, the beginning of the XXI century finds the oil industry facing new challenges, determined by a number of organizational, economic and natural geological factors, and dynamics of the oil industry and the country's position on the world hydrocarbon market depend on the reaction to these challenges. Russia either responds to them and retains her status as an energy power, or will have to face the decline of the hydrocarbonic production and the reduction of its share in the global oil and gas market.

New perspectives for the oil industry can lie primarily on the path of intensive development, which implies an innovative base. According to expert estimations, more than 60% of today's oil resources are considered hard to recover reserves134. Hard to recover reserves (HTR) are the reserves of deposits (oil fields, development objects) or parts of deposits with physical properties or geological conditions, comparatively unfavorable for extraction. Development of such reserves requires higher expenditure of material, money, labor, and most importantly - innovative technology, special equipment and reagents135. HTR's can be classified into three groups.

According to expert estimations, more than 60% of today's oil resources are considered hard to recover reserves.

New perspectives for the oil industry can lie primarily on the path of intensive development, which implies an innovative base. According to expert estimations, more than 60% of today's oil resources are considered hard to recover reserves134. Hard to recover reserves (HTR) are the reserves of deposits (oil fields, development objects) or parts of deposits with physical properties or geological conditions, comparatively unfavorable for extraction. Development of such reserves requires higher expenditure of material, money, labor, and most importantly - innovative technology, special equipment and reagents135. HTR's can be classified into three groups.

Firstly, it's oil resources and supplies located in parts of the strata and formations characterized by extremely low pore filtration characteristics of pore collectors. They currently account for about 10% of Russia's total output of oil. But balance sheets record these resources as recoverable, and different energy strategies and forecasts are based on this assumption. Russia will be threatened by collapse in production over the next ten years, if innovative technology does not open a way to their recovery.

Secondly, we are talking about extra-heavy oil. This problem has been pressing since the first years of the "Second Baku's" development. Heavy oil extraction is nearly impossible without finding technological approaches to applying heat to the reservoir, that could reduce the viscosity. Industrial technologies however are still absent. This is the most significant and crucial of the innovations we need today. Meanwhile, the heavy oil reserves are located in the most infrastructurally convenient locations which may partly offset the operating costs.

Thirdly, one must also consider the gas-oil, oil and gas fields, i.e. resources with complex fluidal structure. They are concentrated in the north of the Tyumen region - in YNAO and partly on the territory east of the Yenisei. Reserves of a number of fields in Eastern Siberia are also characterized by natural reservoir heterogeneity. There is a pressing problem of the efficiency of such objects' development, that requires new methodic and technical approaches.

В начале XXI века российские компании сотрудничают с мировыми лидерами в сфере нефтегазовых технологий (например, компании ExxonMobil, Shell, BP, Statoil, ENI и др.) и привлекают зарубежные сервисные компании. Разумеется, сотрудничество и перенос передовых разработок на отечественную почву — процесс необходимый. Однако очевидно, что Россия, как крупнейший участник мирового энергетического процесса, должна сама занимать сильные технологические инновационные позиции и обладать нефтяной независимостью. Ни в коем случае нельзя допустить, что в случае какого-то принципиального осложнения международной ситуации зарубежный сервис вышел бы из нашей страны, и отрасль оказалась беспомощной.

At the beginning of the XXI century Russian companies cooperate with world leaders in the field of oil and gas technologies (for example, companies like ExxonMobil, Shell, BP, Statoil, ENI, etc.) and bring in foreign service companies. Cooperation and transfer of advanced developments on domestic soil is of course a necessary process. However, it is clear that Russia, as the largest member of the global energy process must itself take a strong position in technology innovation and have oil independence. To see the industry helpless, should any principle aggravation of the international situation have foreign services leave the country, must on no account be allowed.

The modern challenge puts Russian oil industry face to face with the task of implementing such volumes of innovative procedures that would not be possible without complex development of the domestic industry. We're talking here about metallurgy, mechanical engineering, chemical industry, IT et cetera. Here, for example, the question of horizontal drilling alone entails innovative development of the production chain: we need domestic pipes of a fundamentally new quality, new models of domestic drilling machines, we need domestic navigation equipment that can provide a complex trajectory of penetration. In the context of the beginning of the XXI century it is the oil industry that could be an important customer and consumer of domestic innovative industrial products, especially with regard to positive examples of such interaction of the oil development and industry that our history has already seen. Once again, we recall the successful experience of the post-war years, when the rapidly growing oil complex acted as a powerful engine of science, metallurgy, construction technology and mechanical engineering development. Or a an older example of the XIX century's oil boom. There are precedents to be remembered.

The most important prerequisite for innovation revolution in the oil industry is the transition to the implementation of the Arctic megaproject. Today, there are quite different estimates of hydrocarbon potential of mineral resources within the Arctic seas. Nevertheless, despite the difference of opinions on this matter, it is obvious that this potential is high enough to become the new largest base of Russia's oil development. This particular feature of the Arctic mega-project combines the idea of both extensive (expansion into new territories), and intensive growth - the use of brand new and, quite frankly, unprecedented approaches and technologies. The extreme severity of the geographic and climatic conditions, difficult ice conditions put forward requirements, fundamentally new even in comparison with successful projects on the Sakhalin shelf. Environmental standards of working in the Arctic are extremely high. The slightest damage to the fragile Arctic biocenosis can have drastic consequences. All this requires very high competence.

"I think that the technological solutions developed for Arctic projects will surpass anything that we've seen so far - said Lorenzo Simonelli, the president of a subsidiary of GE General Electric Transportation. Arctic conditions are forcing us to expand horizons. Is the oil and gas industry ready to develop the continental shelf?" Even today national companies can already boast some results. In the spring of 2014 OAO "Gazprom" has shipped the first batch of oil produced in the Prirazlomnoye field in the Pechora Sea about 60 km away from the coast. This autumn brought the following news: "Rosneft" has successfully completed the drilling of the world's northernmost Arctic well "Universitetskaya-1", the results of which was the discovery of oil in the East Prinovozemelsky-1 license area in the Kara Sea.

The "Rosneft" company, that experts call the locomotive of the Arctic project, owns 26 license areas in the Arctic shelf with total resources exceeding 38 billion tons of oil equivalent (they account for 78% of the Arctic licensed areas territory). Huge sums of money are planned to be invested in their development - about 400 billion $. And not just to invest, but in fact to carry out a large-scale modernization of the entire chain of the production process and its service segments. We are speaking here about re-establishment of the scientific study of the Arctic, infrastructure development, construction and production of special equipment, training of highly qualified professionals and creating of new vacancies

The said processes have already been launched. In particular, the Arctic engineering research centre that has conducted several research expeditions has been established, new modern weather stations have been opened on the coast of the Novaya Zemlya archipelago and the Uyedineniya island, there also has begun the formation of the industrial and shipbuilding cluster in the Russian Far East, the core of which will be a new shipyard - the shipbuilding complex "Zvezda" in the city of Bolshoi Kamen (supply vessels, icebreakers and complex marine engineering, including self-submerge and semi-mobile drilling rigs will be produced here), building of plants for submarine valves, concrete blocks production, a heliport for several dozens of aircraft. Here's another factor, very important for the Arctic shelf development: "Rosneft" research centre laboratories are working on special technologies to produce plastic, withstanding the temperature of 44 ° C, as well as fuel and oil for aviation and marine equipment, that doesn't freeze at –60 ° C.

According to analysts, the Arctic project can be a catalyst for a major evolution of "Rosneft" into a sort of incubator for the development of national service industry, a technological "hub" linking FEC with such industries as the power secor, mechanical engineering and transportation. "In fact, the development of the Arctic shelf is a national development project, with no other equal to the scale" - writes the "Kommersant" newspaper. "It's no coincidence that in April, President Putin decided to establish a special state authority for implementation of Russian policy in the Arctic. According to experts, the Arctic project will not only revitalize the polar regions, but will also promote the re-industrialization of the country and will lead to a so-called 'hydrocarbon' technological revolution"136.

«По сути, освоение арктического шельфа является национальным проектом развития, равного которому по масштабам на данный момент просто не существует, - пишет издание «Коммерсант». – Не случайно, в апреле президент Путин принял решение о создании специального государственного органа для реализации политики России в Арктике. По мнению экспертов, арктический проект не только позволит оживить полярные регионы, но и способствует реиндустриализации страны, приведет к так называемой «углеводородной» технологической революции».

At the beginning of the XXI century the "grasp" of the oil complex for innovation is becoming increasingly apparent. In this regard, the issue of formation of a new type of economy - resource and innovation - is brought to the modernization agenda. What is this new economy?

Economic scholars often regard this kind of model in a rather general form, seeing the resource sector, on the one hand, as a financial sourse for development of innovative production, and as a raw material base for development of manufacturing industries on the other. According to A.O. Baklanov, for instance, "The foundation of resource and innovation strategies lies in directing primary resources to the processing complex based on their additional production or reorientation of exports to domestic needs. Accompanied by adequate tax and customs arrangements, his will consistently raise additional demand for investment goods industries, industrial infrastructure, as well as for industrial and housing construction. Revenue growth from the expand of employment in these sectors will raise demand and increase production of consumer goods. The total production growth will increase the tax base and tax revenues, which will significantly increase government expenditures on science, social sphere, strengthening of law enforcement agencies and improving the country's defense potential. In the future, these changes can serve as a strong prerequisite for advancing increase in high-tech industries output"137.

The idea of the resource and innovation economy with regards to the oil and gas aspect has received an informative content in the works and speeches of the RAS academician A.N. Dmitriyevsky138, that have outlined the following model: maintaining production capacity involves innovative changes in resource industries, which in turn determines a radical modernization of providing industries - metallurgy, chemistry, electronics; in addition, the resource sector produces financial flows for innovation. Historic analysis of our national development experience shows that such a symbiosis is possible and necessary, and periods of its prosperity coincide with the time of the most successful modernization in economy and the social sphere.

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