Why Russia must reform its energy sector

GlobalPost

Russia must urgently reform its energy sector if it is to remain a global player in the energy markets, according to experts and business leaders speaking at the St. Petersburg International Economic Forum.

"Russia needs to recognise the changing drivers for energy intensive industries and products," Maria Van der Hoeven, executive director of the International Energy Agency, said at a panel discussion on Russian energy efficiency.

"A lot [of energy supply] does come from Russia, but that period is drawing to a close, we see that from the shale gas revolution in the US So something has got to change." The shale "revolution" in the UShas forced down energy prices globally and increased competition for Russia as a supplier of energy.

Nonetheless, oil and gas still account for a large and increasing share of Russian exports, making up around two-thirds of total exports in 2012. According to Fitch Ratings, Russia is the most oil-dependent of the world's 10 largest economies, with oil and gas accounting for 50 percent of federal government revenues and up to 20 percent of gross domestic product.

Speaking at the Forum, Russia's deputy prime minister, Igor Shuvalov, said Russia's dependency on oil and gas revenues was "huge", and that this needed to change. Reducing Russia's dependency on energy exports is a key priority for the government, along with modernizing the country's aging infrastructure and economy overall.

Van der Hoeven added that Russia was particularly wasteful in how it utilized its energy resources. "There's enough oil and gas [in Russia], but you can use it in a more efficient way, especially as it fosters economic growth and raises industrial competitiveness," she said.

Russia's energy minister, Alexander Novak, agreed that greater energy efficiency would boost the economy, and said the government needed to introduce regulations and incentives to encourage companies to become more energy efficient. "We should not be afraid of [doing] that," Novak told the panel. He denied that Russian energy companies might be reluctant to invest in modernizing, but added: "Strict standards and rules are needed, as well as motivation." Jean Pascal Tricoire, the chief operating officer of Schneider Electric, concurred, saying that Russia needed to invest in energy efficiency technologies now, rather than in the future.

"If you want to win business tomorrow you need to be far more competitive on your consumption today. You are operating in the international markets," said Tricoire."Russia is the fourth largest [carbon] emitter on the planet, but now the reputation of your company and your ability to sell your products, is based on carbon efficiency and modern, clean technologies." He added that Russia was the fourth largest market for Schneider Electric.

The chief executive of Norwegian gas and oil giant, Statoil, agreed that Russia needed to become more energy efficient, but remained confident in the country's long-term domestic demand, despite its economic slowdown.

"Longer-term we believe there will be economic growth and we base our investment on this view. Economic growth always translates into higher energy demand, but economic efficiency is important," Statoil CEO Helge Lund told CNBC in St. Petersburg.

"It does not make sense for an oil and gas com to only look at the short-term, we have to make investment decisions based on our long-term views," Lund said, adding that demand from emerging markets such as Russia and China would remain "key drivers" of the global energy market.

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