24 September 2020
How Russian business can capitalize on Europe’s energy transition
By 2050, the European Union is going to be climate neutral and carbon-free. To take advantage of it in the future, Russian oil and gas suppliers need to create their own innovative value chains.
Florian Willershausen, Director of Creon Capital, a Luxembourg-based company managing the Creon Energy Fund. The Fund invests in green technologies, renewable energy and logistics projects. The Fund is the core part of Creon Group, a strategic consultant in the transition to sustainable development and integration of ESG factors.
Even the most powerful, stable and confident companies can benefit from watching their competitors. And Russian carbon exporters should take a closer look, for example, at the oil giant Royal Dutch Shell. The company has been investing in synthetic fuels and lubricants, renewable energy sources (RES), and more recently in hydrogen production.
Back this year, Shell plans to launch a “green” hydrogen plant in Germany – entirely generated from RES. The plant is expected to supply 1300 tons per year for the German refinery in Wesseling. But these plans are just a beginning to an even more ambitious project in Eemshaven, Netherlands, where Shell together with gas operator Gasunie and the port operator of Groningen intend to build a 10 GW hydrogen plant. For comparison: 1 GW is the capacity of one modern nuclear power plant unit, which is sufficient to supply electricity to about 12,000 households. The plant in Eemshaven will be able to produce up to 800,000 tons of green hydrogen annually, and the huge energy requirements for its production will have to be met entirely by offshore wind farms, which are also to be built.
Certainly, it is too early to bury the “traditional” hydrocarbons – oil and gas. Demand for these energy resources will remain for decades to come. But their market will not grow as fast as it used to. Instead, competition in the energy market – primarily with renewables – will increase exponentially, while demand for carbon will gradually decline.
So far, hydrogen is produced by steam conversion (or reforming) from light hydrocarbons, primarily from the same natural gas that Europeans buy in Russia. However, if the trend for renewables continues, Europeans will soon start producing and even exporting “green” hydrogen themselves, and Russia, as a supplier of carbon raw materials, will inevitably begin to lose market shares. This process will accelerate as soon as the EU starts to switch street, commercial and rail transport from diesel to green hydrogen. And these plans are already being implemented.
From raw material suppliers to value-added suppliers
For Russian energy giants, the situation is not yet very critical, and the plans to introduce a CO2-neutral economy in Europe are still subject to adjustment. For instance, the speed at which RES solutions are being introduced in the energy sector depends on number of factors: investment support, the availability of technology and raw materials, and market demand. The production of “green” hydrogen based on RES is an excellent case: it is positively accepted by society, supported by governments and investors, and it is really “green”. However, the technologies needed for «green» electrolysis are very expensive, and the electricity generated by wind turbines is also needed for other equally energy-intensive solutions, for example, recharging electric cars, which in European cities are increasing. All these factors open up opportunities for Russian energy companies to take part in creating new value chains – not only in Russia, but also in Europe.
Strategically, it would be high time for Russian companies to offer cleaner alternatives, such as the production of green hydrogen from Russian natural gas for industrial use. BASF and three German refineries with Rosneft’s participation are widely using “grey” hydrogen, which is produced from methane with CO2 emissions. Carbon capture or storage during production is technically feasible. And having long-term contracts with industry and investing in relevant technologies, Rosneft would be able to implement “green” hydrogen production projects, that Europeans strongly support.
Ultimately, Russia’s role may prove to be key in shaping EU energy policy in a more substantive way. How it works in practice is demonstrated by Russian LNG producer Novatek. The company has invested not only in the construction of an LNG offloading terminal in Rostock, Germany, but also in the associated network of fueling stations for trucks. Strategically, this is a very forward-looking step. Diesel trucks have recently been pushed out of European urban zones due to harmful aerosol pollution, while CO2 emissions from LNG as a fuel for trucks are 20% lower and NOx (nitrogen oxide) emissions are almost zero. As a result of the declining cost of LNG and gradual development of the gas station infrastructure, truck engines on LNG are becoming more attractive not only environmentally but also economically viable.
By developing a long-term LNG business in Europe, Novatek has clearly demonstrated how to create value chains based on innovative ideas and benefit from it. This concept is based on the simple idea that it is time for Russian companies to abandon the commodity supply model that Europeans will buy one way or another due to the lack of alternatives.
The new energy market reality is relevant not only for Germany, but also for other EU countries, including Italy, where Creon Capital will develop an energy cluster in the Tuscan port of Piombino. In the light of growing demand of the Italian market for hydrogen and LNG, this cluster will make it possible to develop new Russian energy projects in Europe. After all, gas remains Russia’s main export product – at least as long as it is in demand as an energy carrier.