Russia’s coal industry may yet emerge from the shadow of natural gas to fulfill its potential thanks to the insatiable energy appetite of China. To reach this potential, investment needs to be made in infrastructure in order to nurture its efforts to compete against its rivals. But with emerging economies expected to drive a surge in global coal demand, the Government of Russia and private investors are starting to take notice.
The International Energy Agency (IEA) has predicted that a tripling in energy usage in emerging economies will cause global coal demand to increase by 60% from 2008 to 2035. The consumption of coal is growing faster than any other energy source, due to its importance as the primary electricity source in emerging markets. The most notable of these countries is China, which consumes almost every second tonne of coal produced globally.
Russia’s 157 billion t of proven reserves make up 19% of the world’s total, and rank third in the world after the US and China. It is currently the fifth largest global producer of coal and the third largest exporter of coal behind Australia and Indonesia.
The Energy Research Institute of the Russian Academy of Sciences forecasts that the country’s coal output may rise 32% to 420 million tpa by 2030 under a conservative scenario and up to 540 million tpa under an optimistic scenario.
The Government’s policy objective needs to be balanced against the observation that domestic coal supply in Russia faces strong competition from gas, which is both readily available and relatively low-priced. The extent of growth in Russian domestic coal sales will be most significantly impacted by future gas prices and the development of other energy supply sources.
Location, location, location
Nearly 75% of Russia’s proven coal reserves lie in the coal basins to the east of the Ural mountains. Given Russia’s immense size, it is expensive to move coal from mine to market. Transport costs are a significant factor impacting the competitiveness of coal.
As its traditional customers in Europe wean themselves off coal as an energy source, Russia will increasingly move from the Atlantic to the Pacific coal export markets. This will bring Russian coal producers into competition with the other suppliers to the Asian markets, such as Australia. Russia’s attractiveness as a supplier will depend upon the reliability of its supply and the competitiveness of the cost.
In its World Energy Outlook 2011 (WEO), the IEA noted that the Russian authorities had identified adequate rail and port capacity, as well as efficient management of the logistics, as key strategic priorities for the Russian coal industry.
The infrastructure challenges facing the industry are significant. Extensive reliance is placed on rail transportation for domestic supply and to move coal from the mines to the export ports in the Far East and on the Baltic and Black seas. The primary rail link is the Trans-Siberian Railway – the longest railway in the world, extending from west to east across the southern portion of the country – while several railways serve the coal-producing regions of south-central Siberia.
The development of railway infrastructure is a significant issue for new mines. It is not uncommon that arterial railway lines of hundreds of kilometers in length need to be constructed by the Russian coal companies in remote regions of the Russian Far East in order to move the mined coal to market. The capital cost challenges this involves are huge and development projects may only be feasible if industry participants can share the infrastructure cost burden.
Railway capacity, especially locomotives, is also an issue. Generally, the industry is looking for improved performance from Russian Railways, which is a state-owned monopoly. This included greater efficiency (for example, turnaround times) and more transparency into setting of railway tariffs.
Russia’s coal export sector potential stems not only from its considerable reserves but the strategic position of the country’s mining sector in the Far East of the nation, which, with the further development of its freight transport network, offers it easy access to some of the world’s main coal demanding nations. The top three global coal import nations as determined by the IEA – China, Japan and South Korea – are on the doorstep of Russia’s Far East region. As Russia’s coal supply chain develops, the country’s coal exports may grow to rival the world’s top two current coal exporters: Australia and Indonesia.
The liberalisation of Russia’s state rail system may offer investment opportunities for mining companies. Other nations, including Australia and the US, have had large-scale private investment in rail and port infrastructure in recent years as miners boost exports to emerging markets hungry for coal.
Public-private partnerships (PPP) are another option in the field of increased corporate involvement in Russian infrastructure spending. At present the PPP is only being tested, but it is already clear that the future development of rail, road and other transport infrastructure will extensively involve this mechanism. In the port sector, private investors are already playing a significant role, contributing more than a half of all capital expenditure. Investments by different market players clearly need to be co-ordinated so that new capacity being introduced on road, rail or port can be served, but this is well understood by all market players including the Government.
This article is adapted from the World Coal March 2012 regional report. Subscribers can log in to read the full article here.
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