The Far East will become a leader in the fuel and energy industry in upcoming years

The Far East, which has become a new center of industrial development, is gradually turning into one of the leading producers and exporters of oil, gas and coal in the country. Active development of new deposits and construction of processing plants is underway. The macroregion holds enormous reserves of energy resources in its depths, and even the negative trend of recent years in connection with the lower cost of raw materials is not affecting the vector of its development.

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The Far East might not play the leading role in Russia’s fuel and energy industry, conceding that to Siberia, but it shows a strong positive trend as the main center of new industrial development in the country. The macroregion’s share in the country’s oil production is about 4.4%. Gas production is at approximately the same level and amounts to about 5%. The macroregion accounts for 8.7% of all coal exports, and there was an overall 18.1% increase in coal production in 2015, up to 6,165.7 thousand tons. However, the Far East remains in last place for electricity production among Russian energy zones, with a 4.5% share (47.7 billion kW/h). At the same time, the very important transit role of the Far East, through which exports of oil and coal from other regions of the country pass, especially from Siberia, should not be forgotten. Indeed, oil transportation through the unique Eastern Siberia-Pacific Ocean pipeline is constantly growing, and the capacity of coal port terminals in the Primorsky and Khabarovsk Territories is being expanded. 

In recent years in the Far East fuel and energy sector, special emphasis has been placed on the production of liquefied natural gas (LNG), which has become a kind of «calling card» of the macroregion. The most successful project is the first LNG plant in Russia, built as part of the «Sakhalin-2» project (in which Gazprom and Shell are engaged). In 2015, the volume of LNG production in the framework of the «Sakhalin-2» project came to 10.8 million tons.

As for future LNG projects, Rosneft plans to build the «Far East LNG» plant, although the company has already encountered certain difficulties at the stage of idea development. For example, the year 2015 was marked by lawsuits between Gazprom and Rosneft. As a result, Rosneft decided to choose another location for «Far East LNG» and now plans to place it in the Khabarovsk Territory, near the De-Kastri oil terminal. Furthermore, in the Primorsky Territory another Gazprom project for the production of liquefied natural gas, «Vladivostok LNG», was planned. However, due to the unfavorable economic situation, this project has had to be postponed. At the same time, plans for construction of of a new third stage of the existing LNG plant on Sakhalin, which remains the flagship of the industry, are being implemented.

In addition, the government of Russia recently suggested the building of new plants for liquefied natural gas production on Sakhalin and along the route of the «Power of Siberia» gas pipeline to Japanese companies. However, the situation on the global LNG market has become more challenging. The revenues of Sakhalin Energy, the operator of the «Sakhalin-2» project, from LNG exports continues to decline. In the first half of 2016 the company received $ 1.7 billion, which is 34% less than during the same period last year. In these circumstances, it is looking for new markets (for example, China) and is not abandoning plans to expand production.

Meanwhile, the Far East is gradually becoming a major producer and exporter of «conventional» natural gas, which previously had only local significance. The «Power of Siberia» gas transportation system, which is now under construction and will cross the territory of the Irkutsk region, Yakutia, the Amur region, the Jewish Autonomous Region and the Khabarovsk Territory, has become the main project there. The system will deliver gas from Yakutia and Irkutsk gas production centers to Far Eastern consumers and for export to China. Delivery is set to begin in 2019. The total length of the pipeline will be around 4,000 km, with a design capacity of 61 billion cubic meters of gas per year. The principal field of the Yakutia gas production center is the Chayandinskoye oil, gas and condensate field, containing large reserves of natural gas. Its development  will turn Yakutia into one of Russia’s leading gas-producing regions.

At the moment, project is being implemented according to the schedule; in 2016 construction of 400 km of pipeline is planned. However, Gazprom, which is implementing this project, is believed to be facing difficulties with its financing. With the slowdown of China’s economy, there may also be problems with the sale of natural gas. However, «Power of Siberia» has not yet had serious difficulties which could prevent the implementation of the project. Moreover, construction of the Amursky gas processing plant in the Svobodny district of the Amur region, which will be a resident of «Svobodnenskaya» Advanced Special Economic zone (ASEZ), is starting. The plant is to become the largest in Russia and one of the largest in the world, with a design capacity of up to 42 billion cubic meters per year.

Offshore oil production is another area of consistent development for the Far Eastern fuel and energy sector. The Far East has become the main center of Russian offshore production, which is also its unique feature. The main producer, the Sakhalin region, continues to increase production (last year it grew by 14.3%), which during the first half of 2016 came to to 9.6 million tons, including gas condensate, which is 13.3% more than during the same period. However, the proportions of the main projects in Sakhalin are changing. A decline in production is expected on the «Sakhalin-2» project in accordance with the development plan for the Piltun-Astokhsky field. At the same time, production growth is planned on the «Sakhalin-1» project.

New prospects of oil industry in Far East are connected with the development of more remote areas of shelf, primarily in the north of the Sea of Okhotsk, near the coast of the Magadan Region. As in the case of the gas industry, the Far East is focused not only on the extraction and export of raw materials. The development of oil refining in the Far East (which for now is concentrated in the plants in the Khabarovsk Territory) will be facilitated by the «Eastern Petrochemical Company» (VNHK) complex in the Primorye Territory, controlled by Rosneft. It will become the basis for the future «Petrochemical» ASEZ.

The coal industry of the Far East is developing and increasing production and export. Yakutia remains one of the main points of growth in this industry. Firstly, production at the Elga deposit of the Mechel company is increasing. In the first half of 2016 the company increased coal  production on this deposit by 8% compared to the same period last year, up to 2 million tons. Despite the known financial difficulties of Mechel, this project continues to be implemented, but with the participation of state-owned banks (primarily Gazprombank). Secondly, another major industry player, Colmar, is preparing for the launch in Yakutia of the Inaglinsky integrated coal mining and processing works, which is a part of the priority investment projects supported by the state. Last year, it received state support for infrastructure development in the amount of 560 million rubles. In the summer of 2016, the «Inaglinsky-1» coal preparation plant was put into operation, and designs for «Inaglinsky-2» and «Inaglinsky-3» plants are being prepared.

In addition, coal companies, working for export contribute to the construction of large port terminals, mainly in Khabarovsk Territory. The Siberian Coal Energy Company and Sahatrans (Volga Group) are engaged in increasing the capacity of the coal terminal in the Bay of Muchka in Vanino port, which will make it possible to deliver up to 24 million tons of coal per year to Asia-Pacific countries by 2020. The Sahatrans project is also one of the projects supported by the federal government.

Other regions of the Far East are also gradually becoming major coal producers. The Australian company Tigers Realm Coal Limited, which will develop the Fandyushkinskoe Field coking coal deposit  (this project is being implemented on the territory of the «Beringovsky» ASEZ), plans to expand its presence in Chukotka. Completely new opportunities for the coal industry of the macroregion could be opened by the development of the Gerbikano-Ogodzhinsky deposit in the Amur region, which is seen as part of the powerful coal-energy project of Russia and China, focused on electricity production and its export to the neighboring country.

However, high electricity rates still remain an acute problem in the macroregion. The cost of electricity in the Far East, which is an isolated energy system, is in the range of 3.34 rubles per kilowatt/hour to 9.2 rubles, while the average rate for the country is 3.19 rubles. Conversion of generation in the Far East to cheaper gas fuel has started recently. And in general,  development of  the energy sector in the Far East is proceeding with a serious delay. The regions have a problem of retiring capacity, which the projects of RusHydro and its subsidiary JSC RAO ES East are meant to resolve. At the moment they are carrying out construction of four new power facilities in the Far East: a thermal power station in Sovetskaya Gavan in the Khabarovsk Territory, Sakhalin state district power station-2 (1st stage), Yakutsk state district power station-2 (1st stage), and Blagoveshchenskaya thermal power station (2nd stage) in Amur region. In addition, structures of Rosatom are planning to install a floating nuclear power plant (FNPP) off the coast of Chukotka, which will be able to replace the decommissioned Bilibino NPP.

In part the problem of power supply in the Far East can be solved using its powerful hydropower potential. RusHydro is constructing the Nizhne-Bureya hydroelectric power station in the Amur region, the launch of which is scheduled for December 2016. Installation of two additional hydraulic units is planned at the Ust-Srednekanskaya HPP in the Magadan region. However, the  long-standing idea of making the Far East a major exporter of electricity (primarily to China) is still just an idea (like the project for an energy bridge connecting Sakhalin with Japan).

Meanwhile, the federal government is working on various options for reducing energy rates in Far East, whose high level hinders economic development and increases the cost of any production in the macroregion. However, the final decision on this matter is still pending. Construction of new energy bridges and power lines, which are necessary for the implementation of major raw materials projects (in particular, an energy bridge connecting the Magadan Region and Chukotka) is also planned.

The development of alternative  power generation in Far East during recent years should be noted. It will provide remote areas with energy and reduce its cost, and in addition, replace the retiring diesel power capacities.  OJSC RAO ES East is working hard in the Far East to create alternative power generation; it has built 13 solar power plants and three wind power generation facilities in the period of 2013-2016. Recent projects include a solar power plant commissioned in 2015 in Batagai village of the Verkhoyansk district in the Sakha Republic (Yakutia), with a capacity of 1 MW, which is the largest of its kind beyond the Arctic Circle. In May, Sakhaenergo (a subsidiary of Yakutskenergo, which is a part of OJSC RAO ES East) began construction of solar generation sites in three remote and inaccessible villages in Yakutia. For the Republic, development of renewable energy sources is indeed very important, as due to the use of diesel power stations in the Arctic zone of Yakutia, average electricity rates are twice those in the central areas.

In addition, wind-power engineering is gradually developing. For example, OJSC «RAO ES East», in conjunction with Japanese companies Komai Haltec Inc and Mitsui & Co, built wind parks in Ust-Kamchatsk of the Kamchatka Territory and Novikovo village in the Sakhalin region in 2015. Yakutia’s government is implementing a joint project with Komai Haltec Inc for the construction of an experimental wind park with a capacity of 1 MW in the arctic village of Tiksi.

Meanwhile, Kamchatka has another unique resource - geothermal energy, which provides for about 40% of the electricity needs of the region. Preparations are now underway for the launch of a new well, which will increase the capacity of the Mutnovsky Geothermal Power Plant, one of the main producers of electricity of the Central Kamchatka generation system. It should be noted that the topic of alternative energy in the Far East is at the center of the federal government’s attention. In the spring of 2016 Deputy Prime Minister and Presidential Plenipotentiary Envoy in the Far Eastern Federal District Y. Trutnev emphasized the importance of geothermal energy in Kamchatka and called for further development of this type of renewable energy in the region.

Thus, the fuel and energy sector of the Far East has been developing successfully in recent years, gradually transforming the macroregion into one of the leading manufacturers and exporters of oil, gas and coal in the country. A number of major projects of the Far Eastern fuel and energy sector are taking place in Advanced Special Economic zones or have the status of priority investment projects supported by federal authorities. The Far East has also its own distinct specialization, such as the production of LNG, and offshore oil and gas extraction. Difficulties in the development of the fuel and energy sector were connected both with the financial problems of individual business players and with external factors of the changing situation on the world energy market. In general we can say that the industry has been resistant to challenges and has adapted to the existing conditions. Meanwhile, the problem of high electricity rates, which seriously limit the potential of the Far East’s economy, is yet to be solved.