Report Highlights:

As one of the world's leading producers and exporters of oil and gas, biofuels have an insignificant share in the overall energy production matrix of Russia, with an estimate of only 1.2 percent, and biomass accounting for only 0.5 percent. The development of the biofuels sector has never been a priority for the government in the past, and currently with the strong focus on development of the import substitution program, it will be even less of a priority. No major breakthrough is expected at least in the short-term. Wood pellet production and exports will likely continue to grow, driven primarily by increasing demand from Europe and increasing local consumption.

Executive Summary:

Since the August 2014 food embargo, one of the major focuses of the Russian government is to further develop the agricultural sector. The goal is not only to cover the gap of imported products, but also to increase local production to the levels outlined in the Russian Food Security Doctrine by 2020. The development of the biofuels sector has never been a priority for the government in the past, and currently with the strong focus on development of the import substitution program, it will be even less of a priority. No major breakthrough is expected at least in the short-term.

Moreover, given the current economic conditions in Russia, development of the biofuels sector is not likely to get much attention or resources from the Government of Russia. The Russian Ministry of Economic Development (MED) has indicated that the Russian economy will decline in 2015. With a presumption that average annual oil prices will equal $50 per barrel, MED expects GDP to contract by 2.8 percent, consumer prices to rise 11.9 percent, and real wages to decline by 9.6 percent over the course of 2015. VTB Capital reportedly estimates that 40 percent of Russian income was spent on foodstuffs in 2014, up from 36 percent in 2013. However, MED forecasts disposable income to decline 6.3 percent over 2015. Given the economic volatility in the market, and the fact that food prices of June 1, 2015, have increased 20.2 percent year-on-year, it remains to be seen to what extent Russian consumer demand will continue to contract.

The Russian government has outlined as a national objective the goal of Russia becoming 40 percent more energy-efficiency by 2020. While there have been previous attempts at the federal level to promote the production of biofuels, there are also a small number of activities at the regional level. The number of innovative projects aimed at production of alternative energies has increased in the past years, such as those from plant cellulose (including wood or oilseeds) and agricultural wastes, along with production of biofuel raw materials for export (including fuel pellets, rapeseeds, and rapeseed oil) supported by the regional administration and investors. The emerging Russian biofuels industry's export orientation, specifically wood pellets, is driven by continued growing demand from Europe and Asia. However, the production of biofuels still remains small and has almost no impact on Russia's overall domestic grain and oilseed prices.

Due to its abundance of petroleum and natural gas, Russia produces a small amount of biofuels and has minimal domestic demand. According to experts, Russian biofuel production will not be fully developed in the next 10 years, as the sector is not considered as a national priority. Different sources estimate that renewable energies, including biofuel, represent 1.2 percent of Russia's total energy production, with biomass consisting 0.5 percent. While there are no official statistics that measure what share of total energy production biofuels account for, it is estimated that biofuels make up 5 percent of Russia's heating energy and 1 percent of its electrical power.

The Russian Ministry of Energy reports that the volume of technically accessible renewable sources of energy in Russia is estimated at 24.2 Btoe. The share of electricity generated by renewable sources accounts for only 1 percent, while the share of thermal energy generated from renewable resources represents 5 percent or 3000 million Gcal. At present, Russia utilizes only 30 percent of its economically viable hydro-energetic resources.

The Russian Ministry of Energy also reports that there are no government-backed biofuel projects in operation at this time. The majority of biofuel ventures in Russia are supported by regional governments or financed by foreign investors. In most circumstances these projects are in the pilot phase and produce just enough biofuel to generate heat/electricity for their own facility, or for the production of organic fertilizer from agricultural waste. Currently, there is no industrial production of either bioethanol or biodiesel in Russia, except for several facilities that are operating in the regions and are supported by the regional administration or private companies.

There is also vast potential for exploiting agricultural waste in Russia. However, there are only a few modern agricultural plants that can utilize agricultural waste efficiently. Different experts estimate total annual agricultural waste in Russia from 600 to 800 million MT which is equivalent to 80-90 Mtoe.

Bioethanol/Biodiesel Projects

In March 2015, the Ministry of Economic Development of the Russian Federation (MED) approved amendments to Federal Law "On State Regulation of Production and Turnover of Ethyl Spirt, Alcohol Products Containing Spirt and Limitations of Consumption of Alcohol Products," developed by the Federal Service for Regulation of Alcohol Market. MED supported the idea of defining bioethanol and motor bioethanol as an individual product. The documents include a more specific definition of bioethanol identifying that motor oils that contain no more than 10 percent of bioethanol are not subject to regulation as products containing spirt. Also, it exempts the production of bioethanol as an additive to motor oil from excise taxes. The Russian bioethanol community has been lobbying for many years for this exemption. However, there is no indication of when the amendments may get final approval from the government. According to the Russian Biofuels Association, if enacted, the potential for expansion of bioethanol production in the near term will increase up to 2 million MT. This expansion would be primarily for use as an additive. And, the potential for expansion for the use of bioethanol production for blending with 95 percent fossil gasoline (B5) could increase up to 5 percent. However, without strong support from the federal level, these targets are unlikely to be achieved.

Experts believe that the production of ethanol from cellulose could be a possibility in the future. Currently the JSC "Corporation Biotechnology" in cooperation with State Corporation "RosTechnology" has a program on construction of bioethanol production facilities from cellulose. One of the plants under construction is located at the JSC "Eastern Siberian Biotech Plant" in Irkutsk oblast (former Tulunskiy Hydrolyzed Plant). The facility will be used more like an experimental station for production of cellulosic ethanol from forestry processing wastes. The facility is planned to produce 30,000 MT of biobuthanol, 100,000 MT of wood pellets, as well as yeast and acetone. The estimated project investment is $20 million.

Currently, the Russian government is focusing on import substitution as a primary objective in the near-term. There are government measures in place to support local agricultural producers and infrastructure to increase the volumes and quality of locally produced food products. Development of the bioethanol and biodiesel sectors is low priorities for the government.

Thus, on April 20, 2015, by amendments to Federal Law # 93 "On Federal Budget for planned period of 2015 – 2017," the subsidies allocated initially for partial compensation of interest rates on credits received for construction, reconstruction and modernization of bioenergy facilities, and processing of biotechnological products, as well as subsidies for implementation of perspective innovative projects in agriculture in the framework of subprogram "Technical and technological modernization, innovative development" under the Federal program "State Program for the Development of Agriculture and regulation of market of agricultural products and raw material for the period 2013-2020," will be cut by almost 1 billion rubles ($180 million) and redistributed to other agricultural production programs.

The denaturated (technical) ethanol industry is mostly concentrated in the Volga Valley region in Russia. The JSC "Neftekhimia" company is the dominant producer of this product accounting for more than 90 percent of overall denaturated ethanol production in Russia. Russia is self-sufficient in the production of this product and exports account for about 40 percent of production. In CY 2014, the major destination markets of HTS220710 Ethyl Alcohol, denaturated, of an alcoholic strength by volume of 55 percent is Finland at 53.0 million liters, followed by Turkey, almost 14 million liters. Analysts report that the production will continue to experience a stable growth in the mid-term as a result of strong demand from Europe and Baltic Republics, and Asian countries. The growth of ethanol production in Russia will be driven primary by the demand of the chemical industry rather than fuel production. Russia will unlikely be developing ethanol for fuel until the GOR has taken serious steps in supporting the industry by developing regulatory base and policy measures to support local producers.

Biomass

The government of Russia has identified the development of Russia's domestic forestry sector as a necessity, and production within this sector is expected to substantially increase by 2020. While not a priority, the Federal Forestry Agency considers biomass production as the main alternative for Russia's developing biofuel sector. Russia has huge potential for biomass production; however, due to the large supply of high-value fossil fuels, and lack of government incentives for businesses to utilize wood waste, only large wood processing facilities are interested in the commercial production of biomass. In addition, due to the Russian government's focus on import substitution and investing into production agriculture and infrastructure, experts do not anticipate an increase in development of biomass production.

Industry experts also agree that individual regional plans aimed at increasing biofuel production should be considered. The only significant industrial biomass factory is the thermal electricity station "Beliy Ruchey" operating in the Vologda oblast. Its energy capacity is estimated at 6 MWh. The local administration in Komi Republic has stated that it is supportive of biomass development projects. In 2013, the International Co. Metso, was reported to have supplied technological equipment for wood waste utilization to a processing facility in Syktyvkar. The project initially planned to start operating in 2014; however, it was delayed due to the economic situation in Russia. Experts doubt that it will be in operation by the end of CY 2015. The capacity of the electrical station is 4 MWh with annual burning of forestry waste of 83,200 MT.

The Russian Forestry Agency sets total allowable cut at 670 million cubic meters, however only 193.3 million MT was actually harvested in 2014. The total annual volume of wood waste from logging in Russia is estimated at 14-15 billion MT, which is equivalent to 8 billion toe. Today, the majority of wood waste occurs due to limited access to special equipment and modern technologies, as well as a lack of interest from the Russian government and foreign investors in further processing. Current resources of fuel wood is estimated at 90 million cubic meters, including firewood – 51 million m3 (63 percent); crown, stumps, bark – 15 million m3 (15 percent); wastes from sawmilling – 12.7 million m3 (12 percent); wastes from veneer production – 4.1 million m3 (5 percent); wastes from cellulose and paper production – 4.2 million m3 (4 percent).

The "BioChemPlant" Co., Ltd., located in Kirov, is the only plant currently in Russia producing ethanol from nonedible raw material, such as waste from lumber production. In addition, the plant also produces wood pellets. The facility plans to start production of biomethane from the hydrogenation of the carbonic gas formed in the course of fermentation of yeast. This technology creates "green gas." The company "Biochemical plant" together with the Russian center of science «Applied chemistry» in St. Petersburg produces the technology for green gas, and in the near future is expected to produce 4 million м3 this fuel.

In addition to the potential for development of biomass production, forestry producers and researchers stress the potential for utilizing peat as an alternative source for the development of biofuels. According to researchers, Russia owns up to 47 percent of the world's peat resources. In the 1970's, the share of peat in total production of energy in the USSR was estimated at 27 percent, currently its share is minimal and accounts for 0.27 percent. The energy potential of peat, calculated in oil equivalent, is higher than total gas and oil reserves and is estimated at 68.3 billion toe. Annual peat growth in Russia is estimated at 260-280 million MT, however, only 1.2 percent of resources are being exploited and utilized now. The Russian Ministry of Energy developed a draft law that includes peat on the list of renewable energy resources. If approved, it will provide for financial support from the federal government for the development of power energy.

Biogas

Experts from the Institute of Energy Strategy estimate that due to vast supplies of agricultural wastes, food processing wastes and municipal wastes 66 billion m3 of biogas and 112 million MT of high value granulated fertilizer could theoretically be produced in Russia. In addition, experts estimate potential production of electricity from biogas is 121, 200 GWh, and heat – 169, 344 GWh. In 2012-2013 two large state corporations "GasEnergoStroy" and "BioGas EnergoStroy" were planning to build 50 biogas power stations in 27 Russian regions with total capacity of 120 MWh. However, so far there are four major biogas projects in 3 regions that are operating in Russia. Currently there is no government program to stimulate construction of biogas facilities in Russia. The main reason is high initial expenditures for an energy unit. The first biogas station, with a capacity of 600 KWh, has been in operation since 2009 at the livestock farm in Medyni, in Kaluga oblast. The project started in cooperation with the company Lipp, Germany. The thermal power capacity is 300 KWh /hour and electrical capacity is 200 KWh/hour.

In 2013, Kuryanov aeration station, the largest sewage treatment plant near Moscow, launched a minithermal energy station operating on biogas. It allows for reduced emissions of harmful substances into the atmosphere by 5,000 MT annually and generates 60 percent of needs for heat energy to the sewage treatment facilities. The annual biogas production at this plant is 28 million m3. Currently there are 2 biogas stations in Belgorod oblast. Belgorod is one of the leading regions in swine production with a large amount of agricultural waste. The first station "Baytsury" is a pilot project supported by the regional administration. The investments are estimated at 25-30 million Euros. The station capacity is 500 kWh with further plans to increase capacity to 1,000 KWh. Swine manure and corn silage are being used for biogas. The annual production of biogas is estimated at 1,918,000 m3. Another biogas station in Belgorod is "Luchki" and has been in operation since July 2012. The station processes 42,400 m3 of wastes from the meat processing facility "Agro-Belogorye", including meat processing waste, swine manure, sewage wastes and corn silage. The station annually generates 19.6 million kWh, heat energy of 182,00 Gkal, as well as 66,800 m3 of fertilizers. The company is planning construction of greenhouse that will use heat generated from the biogas station.

Wood Pellets

The growing interest from the European Union for biofuel, particularly wood pellets, will continue to be a major incentive for Russia to increase production of wood pellets. Currently, Russia is the third largest exporter of wood pellets to the EU, after the United States and Canada. The EU is the world's largest wood pellets market, with consumption of about 17.5 MMT of pellets in 2013. Based on the EC mandates and Member State incentives, the demand is expected to expand further to nearly 21.0 MMT in 2015. Consumption forecasts for 2020 range from 50 – 80 MMT according to the European Biomass Association. Future consumption will however, depend on a range of market factors, and in particular Member State incentives.

According to Rosstat (Russian Federal Statistical Service), Russia produced 878,000 MT of wood pellets in 2014, nearly doubled from CY 2012. A significant drop in wood pellets production in Russia in 2013 attributed to the temporary suspension of operations at Russia's largest wood pellet facility - "Vyborgskaya Forest Corporation" - during the beginning of 2013. Trade sources report that this was due to an interruption in input supplies and legal issues. However, since 2014 the factory is reported to be back to its normal operation. Vyborgskaya Forest Corporation is the largest wood pellet producer in Europe with a total installed capacity of 1 MMT of wood pellets, annually. However, to date the facility operates at 50 percent capacity, due to an unstable raw material supply. Sources report that production statistics for wood pellets is not accurate. The statistics primarily capture large-capacity factories, and mid-sized and smaller facilities which operate as part of larger wood processing plants, do not report their production. Inaccuracy of statistics for production of wood pellets also contributes to the high difference in production in CY2013 and CY 2014. As a result Post believes, the actual wood pellet production is higher than reported by RosStat. Other large processing facilities JSC "Lesozavod-25", "Biogran" in Karelia with annual capacity of 25-30,000 MT, and DOK "Yenisey" and "Novoyeninskiy forestry processing facility" in Krasnoyarsk kray, with annual capacity of 40,000 MT are planning to increase their production driven primarily by strong demand in Europe and South Korea.

There are a number of new processing plants that have been in operation since late 2014, or are planned to start operation in 2015:

1) The Pellet Facility in Igirma, Irkutsk oblast, with annual capacity of 30,000 MT; 2) The ZAO «Lesozavod-25» (belongs to the Group of "Titan" Companies), with annual capacity of 60,000 MT; 3) The new, joint Russian-Austrian investment project, "Hasslaherles" in Novgorod oblast with annual capacity of 20,000 MT; 4) The Company RusForest, pellet facility located in Arkhangeslk oblast with annual capacity of 100,000 MT.

Although overall production is increasing, due to industry consolidation and rapid expansion in larger processers, the total number of processing wood pellets facilities in Russia has been shrinking recently. Trade sources report that the number of processing facilities in Russia in 2010 was 145, but it is estimated to have dropped to 100 plants in 2014. It is expected that larger businesses will continue to absorb smaller wood pellet producing facilities as the latter cannot compete with the larger, vertically integrated facilities that have permanent supplies of raw materials and a better understanding of the market. Experts believe that the small and medium pellet processing facilities will shrink as they are not cost efficient for producing wood pellets for export. Total annual production capacity is reported at approximately 3.0 MMT.

The majority of wood pellet facilities are located in the Northwest, Central and Volga regions of Russia. The North Western region is the leader in production, where 60 percent of the forests of European Russia are located. The top ten pellet production facilities have 92 percent export share of the total Russia wood pellet industry, and remaining 7 percent is destined to South Korea.

In 2015, the production of wood pellets is expected to rise about 15 percent due to mostly continued strong EU demand, competitive export prices and increasing local production, new processing capacities, as well as the Russian government's call for increased efficiency in the forestry sector.

In the mid-term, domestic demand for wood pellets is forecast to increase at 10-20 percent annually. In the local market wood pellets are in demand by private heating stations and municipal housing, primarily in heavily forested areas where traditional sources of energy are not accessible. Production of wood pellets is, in most cases, cheaper than gas. According to the National Bioenergy Union, a number of regions, including Moscow oblast, Karelia and Nizhniy Novgorod, Republic of Mari El, and Arkhangelsk oblast, have implemented initiatives to transfer local heating stations from coal or residual oil to wood pellets. However, lack of domestic standards for pellets, poor transport infrastructure, lack of warehouses, and the product's seasonality will all negatively impact the wood pellet market's development in Russia.

The Russian Customs Service reports exports of wood pellets from Russia in 2014, at 880,000 MT, or more than 18 percent higher than in 2013. The leading export destination for these products was Denmark at 382,000 MT, followed by Sweden at 218,000 MT, and Italy at 57,000 MT. Europe will continue to be the largest importer of Russian wood pellets. In 2015, 4 more new wood pellets facilities are being constructed in Irkutsk oblast with total estimated annual capacity of 500,000 MT. When in operation, Russia will be increasing exports to Asian countries as well, because of the proximity of these new processing plants to the border.

Near-term foreign demand for wood pellets is likely to increase by 10-15 percent. Some EU experts estimate that Russia's share of the EU's total 2014 import market of wood pellets is 18 percent. Russia has export potential and European pellet demand will likely stimulate an increase in Russian production. However, Russia will require large investments in order to upgrade its facilities and expand its production capacity. Domestic demand can also absorb some of the increased, near-term production.

Rapeseed Market

A significant amount of the rapeseeds exported from Russia and used in the EU to produce biofuels. FAS/Moscow estimates exports of rapeseed in MY 2014/15 at 150,000 MT. From July 2014 through February 2015, Russia exported 134,400 MT of rapeseed. During the same period Russia exported 255,400 MT of rapeseed oil. Both exports were stimulated by the soft ruble, and exports of seeds, in addition, by gradually decreased export duties. The scheduled decrease in the rapeseed export duty was on September 1, 2014. However, domestic crushing capacity continues to grow, and exports of rapeseed oil are forecast to grow faster than exports of seeds.

Notes on Statistical Data

Bioethanol and biodiesel production in Russia is very small. There are no official data for these products in Russia. Russian official statistics on fuel use by industry sectors either are not available or differs from the data provided by trade sources and some energy companies and corporations. Also wood pellet production statistics is not very accurate. FAS based estimates on fuel projections on a number of sources, including Ministry of Transport, Ministry of Energy, Industrial Union "Energy Efficiency and Savings", as well as trade sources, media and general economic situation in the country with propriety government objectives. Production and trade data for wood pellets is based on GTA, Official Russian Federal Customs Service, and estimates of the FAS posts in EU. FAS Moscow revised PS&D for wood pellets to be consistent with EU FAS Post data and forecasts. Also Post based its estimates on figures of National Biofuels Association, sources from research, analytical institutions as well as agricultural trade sources.