To flare or not to flare? Russian APG case.

Historically, APG (associated petroleum gas) was considered to be a waste byproduct rather than a valuable fuel what entailed a wide-spread practice of venting and gas flaring popular with most gas producing countries. While venting usually presupposes a “direct release of natural gas in the atmosphere” flaring accounts for the “burning of natural gas in an open flame.” There is a number of safety reasons which could justify adherence to this practices during the process of crude oil extraction, however, it is more and more difficult to accept this business-as-usual model, especially if concerns about the climate change are taken into account.

Today, Russia remains the world’s first oil and second gas producer and accounts for 27% of the world’s total annual flaring of 110bcm as is estimated by NOAA. Speaking about flaring, it is important to note that not only it contributes to pollution and global warming, but accounts for the loss of economic value stemming from the inability to maximize export volumes, use it for EOR or even local electricity generation. The estimates from IEA reveal that by flaring the volume equivalent to 20% of its total gas exports to the OECD countries, Russia encounters a loss of $5bln each year. Given the bounty of Russia’s resource endowments and its ambition to increase production from the greenfield projects (such as in Sakhalin or in the Arctic offshore), it will be increasingly difficult for it to avoid international stigmatization regarding its not-so-well developed energy-efficient approach to resource management and production.

In 2007, in his State of the Union address, Russia’s President Vladimir Putin recognized that 20bcm of annual flaring in Russia, which equals 30% of European annual gas consumption, must come to an end. Later on, Russian government announced its goal to cut carbon dioxide emissions by 25% from 1990’s levels by 2020 and Putin introduced Decree No.7 setting a 95% APG utilization as a goal. Even though these goals were realistic, the consequences of the 2008 economic crisis considerably complicated Russian effort to deliver on its environmental commitment. Nevertheless, APG flaring became a hot politically charged issue and the Decree No.7 (that came into force in 2012) increased the fine for undue flaring of 1000 cubic meters of gas tenfold. However, it provided little specifics on monitoring and enforcement activities and thus, Russia, unlike other major gas producers of Central Asia such as Kazakhstan, Azerbaijan and Turkmenistan, did not manage to sustain progress in flaring reduction in the past 5 years, even though she was moving in the right direction from 2006 to 2010 when she cut flared volumes from 50bcm to 34bcm, respectively. For this reason, in 2012 Russian Ministry of Natural Resources and Environment suggested that 100-fold increase of “penalty fees for those who burned more than 5 percent of the produced APG” has a higher potential to make companies comply with the legislature.

In 2014 CREON Energy jointly with WWF encouraged 19 oil companies to provide statistics on flaring, with 11 of them joining the initiative. Also, in 2015, for the first time in its history it was Russia that hosted Global Forum on gas flaring organized under the umbrella of the World Bank’s GGFRP. The loans from the World Bank can help Russia gain money and technology in order to process APG what is particularly important today in the atmosphere of the remaining Western sanctions. It is also a good moment for Russia to re-orient itself from the expensive (also due to sanctioned and restricted technology transfer) offshore Arctic projects, dedicating time and available resources to commercialize flared gas.

As we see, there are top-down governmental as well as bottom-up signals from energy producers to tighten scrutiny on ecological responsibility, operational transparency and resource management. The devil, however, is still in detail and the question of enforced compliance with the legislative decisions is still relevant given that state initiative to impose fines was followed by a “joint letter to the president signed by the heads of five oil companies, such as Lukoil, Gazprom Neft, Surgutneftegas, as well as Bashneft and Tatneft” to express opposition. For now, Russian environmental strategy is primarily focused on adaptation rather than mitigation, what can be explained by the weak existing legislation and regulatory system as well as underdeveloped market mechanisms in hydrocarbon industry that favor monopoly practices and keep gas price artificially low. Midstream infrastructure remains limited and at a current APG price there is little incentive for companies to invest into gas processing plants to facilitate electricity generation and dry gas sales instead of flaring. The issues concerning flaring are, thus, two-fold: the legislative framework on flaring itself, upstream regulations of natural gas production and utilization as well as contractual and fiscal system governing petroleum industry. Additionally, these legislative and fiscal provisions should focus not only on the supply side (i.e. APG producers) but on the demand side as well. It means that apart from taking measures to discourage flaring per se, it is important to encourage the development of projects that aim at APG utilization.