The Fuel and Electricity-Generation Sectors

4.3.1 Overall output trends

The fuel and electricity-generation industries provide essential inputs for every industry and almost every household. For this reason and because of high demand in export markets, the output decline in this sector has been smaller than elsewhere;

production of primary energy products decreased by only 13 percent from 1991 to 1994, and currently accounts for almost one-third of total industry output.

The level of energy production achieved between 1993 and 1994 filled the domestic energy needs and allowed some increase in the export of oil and gas (State Committee on Statistics, 1995a). Simultaneously, the structure of fuel production changed: the share of natural gas increased from 45 percent in 1992 to 49 percent in 1994 with a decrease in oil (from 35 percent to 32 percent) and coal (14 percent to 12 percent).

Petroleum-refining output fell more sharply than the output of other energy products (a 25 percent decline from 1992 to 1994). There was a shift in the mix of exports to crude oil at the expense of more expensive refined products. In 1995 the composition of output began to shift back toward more refined products.

Most enterprises in this sector are still in a difficult financial situation despite relative stability in sales. Money receipts have lagged behind production, as

enterprises in other sectors have failed to pay their fuel and electricity bills. As a result, solvency in the fuel industry (especially in oil extraction) has fallen drastically. Financial indicators in 1995 did not improve, showing that the sector has remained stagnant (Institute for Economic Forecasting, 1995). Many enterprises in the oil industry introduced limits on the extraction of crude oil in 1994 because customers were unable to pay. Oil production in 1994 was only 80 percent of the 1992 level.

The level of oil extraction was affected by the fall in exploration and the depletion of oil deposits. To address this problem, the oil industry needs more efficient technologies for both the extraction and production of its product. It must also renovate refining equipment. To increase the value of oil exports, as well as domestic consumption, there must be improvements in the quality of petroleum products and increases in the output of low-ethyl gasoline, low-sulfur diesel fuel, and motor fuels all of which are in demand.

The natural-gas industry is the most prosperous sector of Russian industry.

Its exceptionally good natural-resource base has permitted stable levels of gas extraction. Yet even here, financial limitations have postponed the introduction of new extracting capacities and the construction of pipelines, compressor stations, gas-processing plants, and other facilities. A serious problem has been the loss of gas in transportation, a waste which is much greater in Russia than in the United States. Government support and private investments will be required for the creation of a system of sales, transportation, and processing of natural gas that meets world standards. The development and reclamation of a new gas-extracting region on the Yamal Peninsula will also require extensive investment (Vorontsov, 1995).

Coal output has declined by 20 percent from 1992 to 1994, reflecting a decrease in demand from domestic electricity-generating stations, ferrous metal production, and export markets. Rises in the price of transportation has forced up the price of coal. Revival of demand by the ferrous metallurgy sector in 1995 increased the demand for coal for coking, but this gain was largely offset by the decline in the demand for coal in electricity generation. Many coal fields have become unprofitable, yet coal extraction by strip mining, the cheapest source, is only about half of coal output. The measures undertaken to reconstruct the coal industry began in 1995, and involve the gradual reduction of deep mining in favor of strip mining and the shutdown of unprofitable mines.

In electricity output, Russia ranks second in the world after the United States.

There was some reduction in electricity output (by 13 percent between 1992 and 1994 and an additional 2 percent from January to September 1995). The struc-ture of the electricity-generation industry is changing. Electricity output from hydroelectric-power stations increased by 6 percent from January to August 1995,

Table 4.11. Percentage distribution of R&D expenditure in fuel and electricity-generation sector by industry and source of funding in 1994.

Funds from Non- Private

enterprise Budget budget Enterprise nonprofit Foreign R&D units funds funds funds funds funds Total

Electric power 7.7 37.5 27.0 27.6 0.1 0.1 100.0

Oil industry 7.8 17.2 22.5 51.4 – 1.2 100.0

Gas industry 6.4 1.1 28.1 63.9 – 0.5 100.0

Coal industry 4.4 38.4 40.9 16.1 0.3 – 100.0

Author’s calculations; discrepancies in totals are due to rounding.

while output by nuclear and thermonuclear power stations decreased by 1 percent and 3 percent, respectively. Nuclear power stations in Russia provide 13 percent of electricity output compared with 22 percent in the United States, 24 percent in Japan, and 34 percent in Germany. A great deal of electricity in Russia is generated by natural gas, which is the cheapest source of energy.

4.3.2 R&D and innovation

The fuel and electricity industry ranks third among major sectors in total industry R&D, and its R&D intensity is higher than that of some branches of manufacturing.

The sector’s R&D personnel declined by 58 percent from 1990 to 1994.

Despite the personnel decline, powerful political and administrative support has enabled this sector to keep most of its research institutes intact; the number of R&D institutes declined from 188 in 1990 to 182 in 1994. The orientation of research institutes to meet the needs of enterprises has strengthened. Approximately 35 percent of enterprises in the oil and gas industries contracted out R&D during the 1992–1994 period; this was the highest level of this indicator in the Russian industry. R&D in the fuel and electricity-generation sectors is more dependent on enterprises’ financing and less dependent on government support than R&D in other sectors. The share of financing from enterprises is very high in natural-gas (64 percent) and oil (51 percent) industries, while budgetary contributions to these enterprises are the lowest (Table 4.11).

The coal industry is the exception. Enterprises contributed only 16 percent of the coal industry’s R&D funds, while the share of federal funds, both budgetary and non-budgetary, totaled 79 percent. The coal industry is the lowest among Russian industries in innovation activity, with only 12 percent of enterprises introducing innovations in 1994.

Enterprise financing increased the flexibility and productivity of research in-stitutions, but also forced them to reduce their size. The average number of R&D personnel per unit decreased from 408 in 1990 to 235 in 1994. The sector’s share in industry R&D expenditure increased from 7 percent in 1989 to 8 percent in 1994, while its share of R&D personnel fell from 7 percent to 5 percent (Tables 4.5 and 4.6).

In the sector as a whole the share of applied research increased from 43 percent in 1989 to 50 percent in 1994, a trend contrary to that in most other sectors. Applied research was financed both by federal sources and by R&D-performing institutions.

The Ministry of Fuel and Energy finances a considerable part of its R&D within the framework of the Fuel and Energy Program approved by the Russian government in 1994. Due to budget constraints, the program’s R&D financing was small in 1994. In 1995 it was assigned the following R&D tasks:

To develop a Russian energy strategy.

To increase energy savings.

To improve gas-power engineering.

To create high-capacity electricity transmission between Siberia and European Russia.

Actual funds for the federal program on energy are much smaller than was requested by the Ministry of Fuel and Energy, and not enough to obtain substantial results. The Ministry on Science and Technology Policy (MSTP) also finances two government S&T programs devoted to fuel and energy. The objectives of the programs are to introduce ecologically clean power engineering and to promote technologies for development of complex fuel and energy resources in Russia.

These two S&T programs are examples of joint public and private financing of industry-oriented R&D. In addition to nearly R3.5 billion allocated to them by the MSTP in 1994, associations of gas, coal, and oil industries and others spent R9.8 billion of their own funds. This pattern of public–private funding is an effective form of investment in industrial R&D in the transition period, and should be used in the future when the private sector becomes a significant source of financing for R&D.