How to Reduce the APG Flaring in Russia?

The stagnation of the economy is no reason to lower ecological requirements for oil companies.

On September 9 and 10, Khanty-Mansiysk hosted the Global Forum on the gas flaring reduction solutions, organized by the World Bank’s Global Gas Flaring Reduction Partnership (GGFRP). The event is conducted once every three years, and this month it was taken place in Russia for the first time. The development of the public private partnership intended to use associated petroleum gas (APG) effectively was the central topic of the Forum. Participants also exchanged knowledge and experience in this sphere.

The Forum allowed the Russian business community to gain partnership with foreign companies and the World Bank in order to acquire the money and technologies that are necessary for the processing of APG. The World Bank’s loans are especially attractive, given the fact that most Russian oil companies no longer have access to the international capital market. The APG processing could turn into a new element of the business strategy for those oil companies that were planning to drill in the Arctic, but have lost the opportunity due to updated US and EU sanctions. The export of technologies used for the deep sea drilling of the shelf fields, for example, was banned a year ago. However, it is still legal for Westerners to supply the equipment designed to process hydrocarbons produced on the land oil fields.

The processing of APG can make a profit. The evidence is not only in the experiences of the Western countries, but also those of the leading Russian petrochemical companies. For example, Sibur processes APG to get polymers such as polyethylene, polypropylene and polystyrene, as well as PVC and chemical rubber. These polymers are used to produce a number of goods, including clothing and shoes, in addition to packaging materials and parts for household appliances and medical equipment. However, many companies still regard APG not as a valuable raw petrochemical material, but as an unwanted product that need to be burned in flares. That is why Russia has always topped the list of the world’s APG-flaring countries. Thus, in 2011, Russia accounted for 26.7% of the world’s flaring of APG.

Over the last several years, the Russian expert community has taken several steps to shed light on the problem of the APG flaring. Since 2009, the World Wide Fund for Nature (WWF) in Russia has regularly published a report on the rational use of APG. And since 2010, the same topic has been discussed by the leading Russian companies and regulatory authorities at the annual APG conference, which is organized by CREON Energy.

In 2014, WWF-Russia and CREON Energy released the oil and gas companies’ ecological responsibility rating, developed as a part of the Common Sense project. The rating measures the quality of companies’ ecological management, as well as the environmental impact and transparency of those companies that produce oil and liquid gas in Russia. It’s worth mentioning that 11 of these 19 companies listed in this rating system provided statistics on their APG utilization levels — this is the highest level of transparency among the criteria for the second section of the rating, and proof that public pressure has had an effect on these companies: most companies are now much more transparent with their statistics regarding the usage of APG.

The government has also taken some important steps to stimulate the processing of APG. Thus, in 2012, it enacted a regulation numbered 1148 that established penalty fees for those companies that burned more than 5 percent of the produced APG. These penalty fees should have been calculated with a formula that contained a multiplying ratio: in 2012, the latter amounted to 4.5; by 2014, it had risen to 25. Unfortunately, these measures have not forced oil companies to revise their attitude toward APG; most of them still regard it as a burden that needs to be escaped. The evidence is a joint letter to the president that was signed in February by the heads of five oil companies, such as Lukoil, Gazprom Neft and Surgutneftegas, as well as Bashneft and Tatneft. The letter contained a proposal to lower the multiplying ratio that is used to calculate those penalty fees mentioned above, as a means of curbing the crisis.

What can the government do to reduce APG flaring during the crisis? First, it should not change the requirements for the oil companies pertaining to Regulation 1148: the crisis is no excuse to lower ecological standards. Second, the Federal Tax Service should be given the function of gathering statistics on APG. For this purpose, it is necessary to abolish a zero mineral production tax rate on APG, as well as to introduce a symbolic tax with a rate of 1 RUR per 1,000 cubic meters of APG. These measures will not raise the tax burden significantly, while the oil companies will have less opportunities to hide APG statistics. The distortion of these statistics is a fact — there is no other explanation for why Rosstat’s data on APG differs so drastically from that of the World Bank’s Global Gas Flaring Reduction Partnership (GGFRP); the latter uses satellite monitoring for statistical purposes. There is no such statistical difference in any other country that produces natural and associated petroleum gas.

Third, the government should stimulate those regions that are rich in natural resources in order to provide tax exemptions and preferences for companies that build gas refineries. The Tyumen Region, for example, already uses these tax mechanisms, and other subjects of the Federation could soon follow its example. Fourth and finally, the government ought to adopt foreign legislation that regulates the use of APG. The Cabinet can implement the experiences of not only the Western countries, but also those of the former Soviet republics. For example, in the mid-2000s, Kazakhstan launched a number of programs to support the rational use of APG. Consequently, between 2006 and 2010, the volume of the flared APG decreased by more than two times (from 3.1 to 1.3 bln cubic meters), while the volume of the produced oil and natural gas increased by 22.8% (from 64.9 to 79.7 mln tons) and 38.5% (from 27 to 37.4 bln cubic meters), respectively. It would be beneficial if this were more in demand in Russia.

Alexey Knizhnikov  –  WWF-Russia,  Head of the Extractive Industry Program
Fares Kilzie – CREON Energy, Chairman of the Board of Directors