Russia has announced plans to lend Hungary $14 billion at below market rates to finance the construction of additional nuclear energy production units at the existing Paks nuclear power station.
The announcement is one more piece of evidence showing that Russia continues to diversify its income by exporting nuclear power stations to as large a market as possible. It is winning sales competitions by providing as complete a product as the customer desires. The components of a deal for a nuclear power plant project available from Russia include manufactured parts, engineering services, construction, operations, maintenance, fuel, used material handling and finance.
Recent offerings to countries without nuclear experience or a domestic infrastructure, including Turkey and Vietnam, include a full build, own, operate model. The host country doesn’t need to do anything other than to provide a site and agree to purchase the electricity from the plant once it is operating. At the other end of the deal spectrum, like those with US nuclear power plant operators, Russia’s only participation is to provide enriched uranium.
Some of the nuclear plant export include ancillaries that have little or nothing to do with nuclear energy. Russia and India have a number of wide ranging deals that link a large number of nuclear power plant sales with sales of fighter aircraft, aircraft carrier refurbishment and even a few submarines.
There are liability law-related challenges that are slowing the expansion of the Russian-Indian nuclear power plant trade, but the close involvement of the Russian government provides a path towards resolution that is not available to other suppliers interested in the Indian nuclear market.
Nuclear power plants are long term, valuable assets that provide reliable, emission free electricity for many decades. The rub is that they also require a substantial amount of capital investment before there is any product to sell.
For a government like Russia, which has a history of long term planning and economic integration, decision makers have apparently decided that the capital investment is worthwhile. The capital investment is not a pure cost; the money that customers spend to buy the goods and services associated with nuclear power plant development provide exceptional employment opportunities for Russian citizens.
Russia’s decision to invest in nuclear energy capabilities is a brilliant strategic move befitting a nation of chess players. It recycles an unexpectedly large revenue stream provided by selling oil and gas into assets that will provide long lasting power. Russia’s decision to use recently expanding oil wealth to fund its movement towards nuclear energy provides a stark contrast to the way that America, the home country that I love and served for 33 years, is choosing to spend a similarly large and unexpected revenue stream from selling oil and gas extracted from within its national boarders.
Russia and the United States both occupy land masses that are well endowed with natural resources, especially oil and gas. Both are in the top three producers in the world for those vital and valuable energy commodities. In round numbers, both Russia and the United States produce about 10 million barrels of oil per day and something close to 25 trillion cubic feet of gas per day.
The two countries have a nearly opposite paradigm for taking advantage of their natural resources endowment.
In the US, most of the revenue associated with selling materials extracted from the ground within national borders end up in private hands; taxes and royalties are a relatively small portion of the total price paid by customers for the products. According to the GAO, the federal government’s non-tax revenue from oil and gas production is roughly $10 billion per year. The People of America’s Oil and Gas Industry calculate that their employers provide $31 billion “in revenue to the U.S. Treasury via income taxes, royalties, rents and other fees”, a figure which includes the GAO’s $10 billion in non-tax revenue.
Some might think of $31 billion as a large number of dollars, but in comparison to the total oil and gas revenue figures, it is tiny. Though there are a number of variables, a good guess is that total annual revenue from sales of domestically extracted oil and gas is somewhere close to $400 billion. Federal coffers thus get less than a tithe from domestic oil and gas sales.
Aside: Here are the back of the envelope calculations supporting that guess. $300 billion (9 million barrels per day x 365 days per year x 95 dollars/barrel = $312 billion). Natural gas revenues add another $80-$100 billion (25 TCF x 3.50 per MCF = $87.5 billion) for a total of roughly $400 billion. End Aside.
In Russia, the majority of oil and gas revenue falls under state control, either through national ownership of companies like Gazprom, Rosneft and Transneft or through high taxes and royalties levied on the output from the few multinational companies who have concessions to produce from Russian-owned reservoirs. The Energy Information Agency’s Russia overview states that 52% of Russia’s total federal budget came from selling oil and gas.
In round numbers, RIANovosti reports that Russia’s federal budget is $400 billion per year, indicating that the government counts $200 billion per year from oil and gas sales towards its annual budget. However, the Russians understand the volatility of oil and gas prices, so they do not count all of the revenue in good years as available for the annual budget.
Instead, Russia directs “windfall” revenues that come when prices and production are above a planned level into the Russian Reserve Fund. By current law, oil and gas revenues that exceed 3.7% of planned Gross Domestic Product (GDP) for a given year are directed into the Russian Reserve Fund. The Reserve Fund has a legislated balance cap of 10% of GDP.
The most recently reported balance of the Reserve Fund was $38 billion as of late February 2013. During the period from 2008-2010, the Russian government drew heavily on the Reserve Fund, spending down the balance from a peak of nearly $65 billion in May 2008 to a low of $8 billion at the end of 2010. It is enlightening to note the temporal alignment between fund balance reports and this graph of European (Brent North Sea) oil prices.
When the Russian Reserve Fund balance hits its limit, any additional funds are transferred to the National Wealth Fund, whose mission is to provide support to the pension system of the Russian Federation, supplementing the resources provided by pension savings of Russian citizens. The latest reported balance on the National Wealth Fund is $24 billion.
Some observers have accused Russia as being a “petrostate” that sells only oil and gas and produces few other marketable products, but Russia’s current leaders recognize that steps must be taken to reduce dependence on volatile hydrocarbon income. Here is a quote from a December 10, 2013 article in Russia Today that describes future plans to expand the base of the economy.
Russia’s Prime Minister lauded state plans to boost industrial production, and refutes accusations the economy is running on petrodollars.
“There is a widespread belief that Russia’s only strength is oil and gas, that we live off of oil export revenues and produce nothing. Actually, this statement doesn’t reflect the real picture of our economy, which is based on manufacturing and where industrial production plays a very important role,” Medvedev said on his video blog Tuesday.
In November 2013, Kirill Komanov, deputy director-general of Rosatom, gave an extensive interview to NucNet during which he made the following thought provoking statement:
Nearly 50 countries are considering the possibility of implementing national nuclear power programmes. All of these countries are potential customers. Rosatom is implementing projects to build 28 nuclear power units, including 19 units outside Russia. We also supply nuclear fuel for 76 reactors in 15 countries.
In contrast to its economic rival, the US is spending its current income from oil and gas. The only identifiable investment in nuclear energy projects from the federal government is roughly $700 million in research and development. None of the heavily touted loan guarantees or other incentives that have been promised have begun flowing. Four reactors are under construction in a two US states that have far seeing public utility commissions, but the primary reactor vendor is a company with a venerable US name and more than 80% foreign ownership.
We’ve spent tens of billions of federal dollars on wind turbines and solar panels, many of which have been imported from other countries. We produce about as much oil as Russia, but they export about 60% of their production; we consume everything we produce and import about 45% of our consumption.
Russia apparently recognizes that power is an important business opportunity. They are not attempting to supply solar panels and wind turbines internationally or even domestically. Though I might have overlooked it in my research, I could find no evidence of a production tax credit or a feed in tariff arrangement for renewable energy in Russia. I have found, however, a very strong program of decarbonization that is based on a doubling of domestic hydroelectricity and an increase in nuclear generation from the current 16% to approaching 50% by 2050.
There is one more energy related investment that Russia rarely mentions outright and for which hard evidence is a little difficult to uncover. It is beneficial for Russia to sell as much oil and gas to its lucrative export markets as possible. One way to achieve that goal is to discourage its gas and oil customers from using competitive power sources – like nuclear energy.
That strategic move makes sense to game players, but not to most straight shooting engineers. The same country that does so much to support its own nuclear energy industry also invests in efforts that discourage others from using non-Russian nuclear energy.
One way to uncover Russia’s investment in nuclear energy discouragement is to review RT coverage of the events at Fukushima, paying particular attention to the coverage that the network has provided to people like Chris Busby and Arnie Gundersen. Another way is to understand the implications of Gazprom’s investment in Gerhard Schroeder, the German chancellor who arranged the initial plan for his country to phase out its nuclear plants.
Ironically, the event that is often cited as a primary reason the nuclear phaseout (also known as the Energiewende) achieved such public popularity was a scary accident at a Russian built nuclear power plant. It’s sadly amusing to see how Russia’s nuclear industry is benefiting from Germany’s reaction to Chernobyl.