On Tuesday February 13, University of Houston Professor Michael J. Economides released a report claiming that Russia faces a huge shortfall between natural gas supply and demand in the next three years. Prof. Economides certainly timed the release of his report well, as hundreds of the world's most influential energy executives (including Gazprom Deputy Chairman Alexander Medvedev) are in Houston this week for the annual Cambridge Energy Research Associates conference.
Robert Amsterdam, an attorney for jailed Yukos executive Mikhail Khodorkovsky, has republished excerpts from Prof. Economides' article in The Energy Tribune on his blog. Mr. Amsterdam cites the report as further evidence that Russia cannot be trusted as a reliable supplier of energy to the world. Prof. Economides apparently shares this view. In a September 2006 Energy Tribune article, he condemned Russian foreign policy in recent years as "energy imperialism" and declared that "What Nikita Khrushchev tried to do with nuclear weapons during the Cold War almost half a century ago, Vladimir Putin is doing with oil and gas today."
Meanwhile, Russia is continuing to take steps to head off a potential crunch between supply and demand. The first, and most controversial part of Gazprom's strategy was raising prices on natural gas deliveries to Russia's neighbors. While conservation is usually described in the West as a good thing, Gazprom's price increases on Georgia, Ukraine and Belarus were mostly condemned by Western pundits as cases of politically motivated blackmail. The second part of Gazprom's strategy is, admittedly, the most politically tricky task - the state-owned monopoly plans to increase domestic natural gas prices paid by Russian industries and power plants. The third step necessary to head off Prof. Economides gloomy scenario is promoting alternative sources of energy for a Russian power grid still overwhelmingly dependent on cheap natural gas.
Map produced by the CIA in 1982 showing coal and mineral deposits in the Soviet Union
Source: The Perry Castaneda Library at the University of Texas at Austin
As Russia Blog reported in November 2006, only the United States has more coal reserves than Russia, and this makes coal the logical choice to meet new electricity demand from Russia's growing economy in the next few years. The news from Russia this week leaves little doubt that coal is going to be a major part of Gazprom's plans for domestic energy diversification. Yesterday RIA Novosti reported that Gazprom has inked a major joint venture deal with SUEK, Russia's largest coal producer, to supply many new coal-fired power plants in Russia.
This merger will allow Gazprom to save on gas supply to thermal power plants by using its "own" coal instead, making it possible to increase or at least sustain exports. It is no secret that the current Russian gas output can hardly meet growing domestic demand and honor export commitments. The new coal business and power generation will be especially profitable for Gazprom in the next few years, while domestic gas prices - still regulated by the government - stay far below those of exports.
The Industry and Energy Ministry estimates Russia's gas shortage this year (given international commitments) at 4.2 billion cu m. By 2010 it could reach 27.7 billion cu m and by 2015 - 46.6 billion cu m. Meanwhile, Russia has the world's second largest coal reserves and produces almost 300 million metric tons annually, with a possibility to boost production to 400 million metric tons by 2010 (it produced 426 million metric tons annually in the late 1980s).
Given all that, the "coal instead of gas" strategy is a logical move intended to reduce power-generation tensions during the "gas break." First Deputy Prime Minister Dmitry Medvedev confirmed as much, saying "The new company will allow us to balance the use of coal and gas in power generation"...
What is domestic power generators' attitude to the initiative? RAO UES is also striving for diversification. The holding confirms that at present, coal accounts for 25.9% of its energy and gas for 70.6%. By 2010, the ratio is set to change drastically: 65.6% from coal and 31.1% from gas. It turns out that electricity produced from coal is cheaper, although coal power plants are more expensive to build.
The company's CEO, Anatoly Chubais, has repeatedly confirmed the strategy of moving toward the use of coal. In the last six years, RAO UES has put into operation only one coal unit, at the Khoronor power plant, with a capacity of 215 MW. However, in the next five years it intends to put into operation 2,000 MW worth of coal generation units and another 20,000 MW in 2011-2015.
As we also reported last November, Russia's switch to coal will not happen without controversy. Although China is the world leader in coal-fired power generation, relying on the high-carbon fuel for more than 75% of its electricity, it is a safe bet that Russia is far more likely to be criticized internationally for building a new generation of "dirty" coal-fired plants than the Middle Kingdom. The U.S. gets 50% of its electricity from coal and may rely on coal more in the future if natural gas prices in North America remain violatile.
In many respects, Russia faces the same conundrum as the United States - building many new reactors will take several years, while fossil fuel plants can be built to meet consumer electricity demand relatively quickly at a much lower cost than nuclear power. In Russia as in the U.S., gas-fired power plants are cheaper to build than coal fired generators, but are more expensive to operate in a time of unpredictable natural gas prices. Nevertheless, natural gas burns cleaner than coal, and releases fewer pollutants and greenhouse gasses into the atmosphere.
Click here to read the full RIA Novosti story.