The Russian government is struggling to get its long-awaited 2050 Energy Strategy into place after extreme sanctions imposed following the invasion of Ukraine has force a complete overhaul of the country’s energy sector.

Work on the strategy is facing multiple delays as it navigates a dynamic and rapidly changing global environment as the west continues to impose new sanctions on Russia’s energy business on a weekly basis. The strategy, which President Vladimir Putin called for two years ago, has yet to be reviewed by the Russian parliament and approved by the government.

According to Yuri Stankevich, the deputy chairman of the energy committee of the State Duma, the lower house of the Russian parliament, the draft strategy may finally enter wide public discussion this autumn.

In the first year of the war, an energy crisis in Europe sent prices skyrocketing and earned the Kremlin and all-time high current account surplus of $235bn. However, as the twin crude and oil sanctions came into force at the end of that year, the surplus shrank to $51bn in 2023 and more recently in December 2023 the US started to impose the more effective smart sanctions that have taken some 10% of Russia’s shadow fleet, used to deliver oil to its Asian customers, out of service.

The strategy needs to deal with all these problems, as well as the necessity to build new costly infrastructure for rerouting energy supplies and reorientate Russia’s pipeline network from west to east, amongst other challenges.

Sanctions against Russia are still intensifying, particularly as the US is increasingly targeting Russia's plans for LNG expansion and its future oil production projects. Recent punitive measures targeting the Arctic LNG-2 project and contractors involved in the Vostok Oil mega-scheme underscore the increasing pressure on Russia’s energy ambitions.

As the global outlook on oil and gas demand shifts, with more advocates for a gradual energy transition, the Russian government must also contend with declining revenues from its oil and gas sector due to rising costs.

Stankevich has suggested focusing more on improving the quality of production rather than quantity. However, Russia faces a major challenge on this score after the West imposed technology sanctions on Russia to cut it off from key inputs that were previously sourced in the West.

The Arctic LNG-2 project has been particularly hard hit as it relies on complicated parts that are produced by only a handful of firms in the world, all of them under the control of the US.

The power generating sector has also been hard hit as the gas turbines used in most power stations are almost all produced by the German firm Siemens that has also withdrawn from Russia, leaving Russian power companies without a source of spare parts.

Key priorities identified in the strategy include stimulating investment in refining, petrochemicals and power generation, while also renewing attention to national climate targets, technological sovereignty, and specialist training.

Inflated gas plans

Recent goals included in the energy strategy draft, published by Vedomosti, have raised eyebrows among experts. The draft proposes ambitious gas production targets, envisioning an increase from 922bn cubic metres in 2030 to over 1 trillion cubic metres by 2050. This is a significant leap from the 638bcm recorded in 2023, a year in which gas production fell by 5% compared to 2022, Energy Intelligence reports.

Gas export targets are similarly ambitious, with projections of 359bcm in 2030 and 421 bcm in 2050 – nearly tripling the 145 bcm exported in 2023. These figures include 183bcm of LNG by 2030 and 245bcm by 2050.

Analysts, however, view these targets as overly optimistic. Russia’s gas exports peaked at nearly 221bcm in 2018, and the likelihood of achieving these targets without significant sales to Europe is doubtful. Projects like the Power of Siberia 2 pipeline to China and a controversial plan to export over 100bcm per year via Iran to South Asia are seen as highly uncertain.

The LNG export goals are particularly questionable given the hurdles facing projects like Arctic LNG 2, with nearly all planned ventures now subject to sanctions. Analysts predict that Moscow may need to scale down its LNG ambitions significantly due to these challenges.

More balanced perspectives, such as those presented by the Institute for Energy Research (IER) of the Russian Academy of Sciences, suggest that gas exports exceeding 270 bcm per year will be difficult to achieve without access to European markets.

Modest oil ambitions

Projections for Russian oil production are less controversial, with expectations that output will not exceed 10.8mn barrels per day by 2050. However, by then, more than 60% of production is anticipated to come from hard-to-recover reserves, which are more expensive to extract. The IER report suggests that maintaining high production levels will require flexible tax regulation to support the development of these challenging reserves. As a result, state budget revenues from the oil sector could decline by up to half due to the increased need for state support.

While crude oil and gas condensate exports are not expected to decline, shipments of refined oil products may decrease as key customers develop their own refining capacities and shift toward crude imports.

According to IER projections, Russia's overall revenues from oil, gas, and coal exports could drop dramatically – from $315bn in 2021 to $142bn in 2035, and further down to $114bn by 2050.

The gas industry will also require a significant review of taxation policies to continue functioning stably. Massive investments will be needed in new infrastructure, technological upgrades, domestic grid expansion, and the development of challenging reserves and gas processing. These needs could create further fiscal challenges for the Russian state budget.

As the Russian government grapples with these complex issues, the delayed 2050 Energy Strategy will need to strike a careful balance between ambition and realism to ensure the long-term sustainability of the country’s energy sector.