Anna Tikhonova's Blog

Legislative framework of Russian APG flaring

June 7, 2016
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For now, what makes flaring a legitimate issue on the Russian agenda is the embarrassment of the Russian government for the internationally broadcasted satellite images of APG released in Siberia that “challenges China’s Great wall as the most visible man-made phenomenon that can be seen from space.” Thus, the legitimacy and relevance of the matter is currently framed by the international community (i.e. is mostly top-town), however in future it is likely to depend on the relationship established between the State, oil and gas industry, and Gazprom.  

Environmental risk management platform of Equatorial Principles calls for international banks to finance only those projects that have well-established CSR and concern for environment. There is only one Russian bank, Otkritie, who joined it so far, thus, the positive effect of the initiative is mostly accounted for by international banks who finance environmentally friendly projects in Russia. European Bank for Reconstruction and Development also assists oil companies in finding means to increase APG utilization. Being a party to the UN, Russia is also obliged to report on its annual level of emissions, being highly encouraged to do so by WWF. At the same, Russia did not join the second commitment to Kyoto Protocol having claimed that it “would be neither scientifically, economically, nor politically effective”, whereas its Joint Implementation flaring-reduction program died out due to collapse of the price for carbon credits which were converted by Russia to ERUs and subsequently sold to Japan as a quota for gas emissions. For a number of years Russia remained incompliant with Montreal Protocol and even today it demands “specific preferential regime” with regards to ODS emissions such as APG.    

As we see, while being encouraged by various international institutions to reduce flaring, Russia still finds excuse not to respect the imposed regulations. Thus, APG statistics should be gathered by Federal Tax Service under the oversight of an independent international observer. It would be relevant to cooperate with foreign agencies such as NOAA whose satellite data Russia currently relies on in order to exclude opportunity to produce results reminiscent of wishful thinking rather than real numbers. Adoption of foreign legislation on APG similar to Clean Development Mechanism could help introduce a cap-and-trade national emission trading system and a carbon market that would help small and big oil producers share the burden of fees paid for released volumes of APG, encouraging them to bring the number down to minimum.    Approximately 40% of recoverable oil reserves in Russia are characteristic of APG content, whereas the oil fields that are responsible for flaring are mostly concentrated on the territory of West Siberia, between Yamalo-Nenetsk and Khanty-Mansiys regions. The underlying reason for flaring rather than the gas usage for energy purpose is the lack of nearby markets and sparse population with its insufficient local gas demand. Thus, in order to avoid flaring in these particular regions it is necessary to install relevant technology (gas-to-liquid, for instance) and redefine the value chain starting from gas collection and treatment as well as processing and transportation. In order to reach the 95% goal for existing production sites, Russia would need to invest about $4.5bln with $9.5bln of additional investment necessary to ensure 5% APG flaring in the newly developed fields. Altogether these numbers account for 7% of 2016’s Federal Budget without taking into account the envisioned 16% deficit in the current year.  

Despite the collective socio-economic loss from unrealized opportunity to collect and utilize APG, one can suggest that the ability to avoid heavy investment was individually beneficial to oilfield operators. In reality, however, the inability to invest in flaring reduction presents a lack of long-term strategic vision typical to the companies of the Russian hydrocarbon sector. Apart from “clothing and shoes, in addition to packaging materials and parts for household appliances and medical equipment” that could be produced using the polymers obtained in the process of APG processing, one should not neglect typical features of the economies of scale that are applicable to Russian natural gas sector. In other words, flaring reduction projects (infrastructures to produce diesel from GTL; LPG and dry gas from APG, methanol production for EOR and etc.) could provide investors with minimal average rate of return of 7%. Thus, Russia should explore the opportunities given by its federal system in order to elaborate on national legislation which would vary in its intensity from region to region. In other words, flaring reduction targets should vary depending on the production rate of an oil field, existing infrastructure and geographical location: populated areas, for instance, should face higher flaring reduction goals than offshore zones.   Another legislative loophole that produces incentives to flaring is the Decree No. 858 that formally establishes Gazprom’s monopoly of exports routes. While “oil producers are obliged to sell dried stripped gas (from processing APG) in the domestic market,” they are unable to establish long-term third-party-agreements with Gazprom who often refuses access to its pipeline technically justifying it by being ‘at full capacity.’ It is imperative to support the suggestion of Ministry of Industry and Energy of 2007 calling Gazprom to give APG priority in accessing its UGSS27 network, elaborating legal provisions similar to the Federal Law on Electricity of 2010 that ensures priority access of APG and its derivatives to national electricity grid. Oversight of Federal Anti-monopoly Agency and Tariff Service is, thus, required to monitor the situation and enforce Gazprom’s legal compliance regarding TPA.

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