GROWING WEST EUROPEAN DEPENDENCE ON NATURAL GAS FROM THE USSR

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000100200002-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 21, 2016
• Document Release Date: September 16, 2008
• Sequence Number: 2
• Publication Date: August 1, 1980
• Content Type: REPORT

Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
National Secret
Foreign
Assessment
Center
Growing West European
Dependence on Natural
Gas From the USSR
Secret
ER 80-10462
August 1980
Copy 2 0 V
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
National
Foreign
Assessment
Center
Resources Branch,
Secret
ER 80-10462
August 1980
Dependence on Natural
Growing West European
Gas From the USSR
An Intelligence Assessment
Research for this report was completed
on 31 July 1980.
This paper was written by
Industries Resources Branch
Soviet Trade Branch, Office of Economic
Research. Comments and queries are welcome and
should be addressed to the Chief, Industries and
25X1
25X1
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Yugoslavia
Belgrade *
_ /" Sweden
:Groningen _ _ 4--
Black Sea
Gasfield
-Existing gas pipeline c
Lx~rl Syria
Finland
Caspian
Sea
Gor'kiy
/ Shadrinsk
helyabinsk
Kartaly Novosibirsk\ \
Novokuznetsk
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
Secret
Growing West European
Dependence on Natural
Gas From the USS
Key Judgments Moscow is planning to build a major gas export pipeline to Western Europe
that will be the biggest East-West project ever undertaken and a financial
bonanza for the USSR. If the gas is priced at the equivalent of current crude
oil prices, annual earnings from the new line of $8 billion would pay off the
project investment in a year or two. By the late 1980s, income from Soviet
gas deliveries to the West will be worth 1 million b/d of crude oil, assuming
oil-gas price parity.
The USSR will have to buy nearly all the pipe, compressors, and valves for
the pipeline from the West at a cost of about $6 billion. Most of this amount
is expected to be financed by Western government guaranteed credits at
concessionary terms.
Moscow's West European partners in the project will get several billion
dollars in orders for pipeline equipment, a needed boost in employment, and
relatively stable long-term gas supplies. But their heightened dependence on
Soviet gas will increase Moscow's leverage on them and reduce their
flexibility in dealing with the USSR.
Given the scale and technical complexity of the proposed pipeline and the
fact that negotiations with the West on equipment contracts, credits, and
gas prices will be difficult, we do not believe the pipeline will be ready before
the late 1980s.
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Approved For Release 2008/09/16: CIA-RDP08S01350R000100200002-3
Secret
Growing West European
Dependence on Natural
Gas From the USSR
Plans are now under way to build a large-diameter,
high-capacity gas export pipeline from West Siberia to
Western Europe that would be the biggest East-West
project ever undertaken. The deal will be a financial
bonanza for the USSR. With the new line's shipments
of 3.9 billion cubic feet per day (cf/d), total Soviet gas
exports to the West by 1990 will be 6.4 billion cf/d, the
energy equivalent of 1 million b/d of oil. If the gas is
priced at the equivalent of current crude oil prices,
annual earnings from the new line would be $8
billion-enough to pay off the project investment in a
year or two. Moreover, Moscow's costs will be reduced
by the concessionary export credit terms the West will
offer to support Soviet equipment purchases.
Moscow's West European partners will get several
billion dollars in orders for pipe compressors and other
equipment for the pipeline, as well as a needed boost in
employment in these industries. In addition to this, the
West Europeans will have the advantage of relatively
stable gas supplies. But their heightened dependence
on Soviet gas will increase Moscow's leverage on them
and reduce their flexibility in dealing with the USSR.
The prospective participants hope to have the project
completed and fully operational by the mid- 1980s.
There are several major technical decisions to be made,
however, and the scale and technical complexity of the
effort will require a long construction period. More-
over, negotiations with the West on equipment con-
tracts, credits, and gas prices will be long and difficult.
Although a mid-1980s startup is technically feasible,
we do not believe the pipeline will be ready before the
late 1980s. Meeting the mid-1980s target would reflect
a sense of urgency on both sides, and require
uncharacteristic speed by Moscow during contract
negotiations and equipment procurement.
State of Play
The project was first broached by the Soviets in 1978
The Soviets moved slowly
at first, but discussions have intensified since the
beginning of 1980. Although the heightened activity
this year probably indicates progress in planning the
new pipeline, the timing and level of publicity also
reflect Moscow's efforts to undermine Western eco-
nomic sanctions by dangling a major new project
before its major Western trade partners.
According to the Soviet Gas Ministry, the pipeline's
completion is a major objective of the 11th Five-Year
Plan (1981-85). Deputy Chairman Gvishiani of the
State Committee for Science and Technology has
pushed hard for the project. West German Chancellor
Schmidt and Brezhnev agreed at the Moscow summit
that West German firms and Soviet organizations
could open preliminary negotiations on the project,
although negotiations had been under way for several
months. The summit declaration may constitute for-
mal Soviet approval of the project. A new round of
talks began in late July when a Soviet trade delegation,
led by Deputy Foreign Trade Minister Osipov, visited
West Germany, Italy, and France.FI 25X1
The Undertaking
The project calls for building a large-diameter, high-
capacity gas export pipeline from West Siberia to
Western Europe. Many technical questions are not yet
decided, including the pipeline's route, operating
pressure, system capacity, and size of the compressor
units to be used. In any case, the pipeline will push the
state of the art to new levels. Not only will it be the
longest single gas pipeline ever laid-4,400 kilo-
meters-but at 4.8 billion cf/d it would have the
greatest capacity of any ever built. By comparison, the
2,700-kilometer Orenburg pipeline to Eastern Europe
has about half the capacity and compressor stations.
25X1
The Gas Supply
The USSR is the world's second largest gas producer
at 42 billion cf/d and has abundant gas reserves in
West Siberia. At least six fields there are known to be
supergiants, that is, with reserves in excess of 35
trillion cubic feet each. The two most likely candidates
for the head section of the pipeline are the Urengoy
and Yamburg fields. Urengoy is probably the world's
Approved For Release 2008/09/16: CIA-RDP08S01350R000100200002-3
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
largest gasfield, with reserves of some 250 trillion
cubic feet. Production should hit 5.8 billion cf/d this
year and by 1982-83 is scheduled to reach 15.5 billion
cf/d-more than the combined production of the
Netherlands and Canada last year. Because large-
scale development of the Urengoy field is already
under way, it would be the easiest field to tap for this
project. The Yamburg field, 400 kilometers to the
north, also has been mentioned as a possible source of
supply for the gas pipeline.
Yamburg gas is earmarked for export. Tapping the
undeveloped Yamburg field will be difficult and
expensive because of a total lack of infrastructure,
more complex permafrost conditions, and a greater
distance to markets. It would be easier to expand
production at Urengoy by the amount needed for the
new pipeline.
The location of the western terminus of the proposed
pipeline is also uncertain. The most likely location
would be Brest on the Polish-Soviet border. Under this
variant, the pipeline might serve Warsaw and Berlin on
its way to West Germany, where it would tie in to the
West European gas net. A more southerly route
through Czechoslovakia is also under consideration,
exiting the Soviet Union at Uzhgorod and paralleling
existing export lines. The Soviets may be weighing the
relative gas needs of the East European countries
before making a final route determination. The East
European countries through which the pipeline passes
reportedly will receive about 1 billion cf/d of the
pipeline's throughput as a transit fee.
Technical Factors
To achieve the desired throughput capacity of 4.8
billion cf/d the pipeline will have to operate at higher
pressures than is normal, even in the West. Most Soviet
large-diameter pipelines operate at 55 to 75
atmospheres (805 to 1,100 psi) and Western pipelines
are only now moving to a pressure of about 100
atmospheres (1,460 psi). The new line calls for a
working pressure of 100 to 115 atmospheres (1,460 to
1,680 psi), requiring thicker walled pipe and more
powerful compressor stations. Moreover, the gas will
have to be cooled where the pipeline crosses permafrost
areas both to prevent frost heave, which could rupture
the pipeline, and to prevent melting the surrounding
permafrost areas. The Soviets are now building an
experimental chilled gas pipeline, but nothing on the
scale of the proposed pipeline has ever been tried
before.
Equipment Imports and Credit Needs
Since the USSR does not produce the high-strength,
large-diameter pipe or the powerful compressor
stations that will be used on the pipeline, it will have to
buy nearly all the equipment for the pipeline from
Western suppliers. This includes 3.5-4.0 million tons of
pipe, 220 ball valve units, and 200 gas turbines.
Although Moscow has approached most major suppli-
ers of pipeline equipment for this project, the West
Germans have taken the lead in recent negotiations.
Mannesmann is bidding to be the major pipe and
equipment supplier. A West German press report
indicates that the firm also wants to be the general
manager for the project and even to take a substantial
role in supervising the construction. Deutsche Bank is
putting together a syndicate of banks to finance the
deal.
Western companies are eager to supply Moscow's pipe
needs for the new line and have ample capacity to do
so. The Soviets could have more difficulty lining up
compressor suppliers. Moscow may have to turn to US
firms, which are the world leaders in compressor
design.
. Three 25-
megawatt (MW) (33,000 horsepower) gas turbines
will be needed at each of the 41 compressor stations
along the line. About 80 turbine compressor units of 10
MW capacity will be required in permafrost areas to
cool the gas to 00 Celsius. The total compressor power
needed for this project (4,000 to 5,000 MW) will equal
about one-third of the entire compressor power the
Soviets plan to install in 1981-85.
We estimate the hard currency equipment costs at $6
billion: $3 billion for compressors, $2 billion for pipe,
and another $1 billion for valves, construction equip-
ment, and other items. This total is roughly one-half
the $11-13 billion estimate generally quoted for the
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3 -- -
d
25X1
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
Secret
cost of the entire project. The higher amount includes
construction costs that will consist mainly of Soviet
ruble expenditures.
One press report accords Mannesmann
a substantial role in the management of the project,
but we doubt the Soviets would agree to this. A more
probable arrangement would be to use Polish labor and
supplies.
If Poland or any
other East European country participates in the new
pipeline, they probably will want some of the natural
gas.
USSR: Gas Exports (million cubic feet per day)
for Hard Currency
Austria
232
232
523
France
194
387
1,355
Belgium
0
0
581
Netherlands
0
0
484
Total
1,994
2,749
6,428
Both the Soviets and Western bankers are insisting on
Western government guaranteed credits for the
project. Based on the hard currency equipment cost
estimates above, the credit requirement would be $5
billion, which will come from countries in roughly the
same proportion as equipment contracts. Deutsche
Bank reportedly is already discussing financing ar-
rangements with 20 West German banks and at least a
dozen other European banks. Even this number of
banks would have difficulty in raising all or most of the
funds required without the help of Western govern-
ment assistance.
Soviet Gas Exports On the Rise
The USSR exported about 4.5 billion cf/d of gas in
1979, second only to the Netherlands; about 45
percent went to Western Europe and the rest to
Eastern Europe. Hard currency gas earnings totaled
$1.4 billion. Shipments to the West are scheduled to
rise about 30 percent in 1980, to nearly 2.6 billion
cf/d. Deliveries to the West are based on eight
compensation agreements that the USSR signed
with Austria, France, Italy, and West Germany
between 1968 and 1975. These agreements
permitted the USSR to purchase about 9 million
tons of large-diameter pipe and other gas-related
equipment, financed by long-term, government-
backed credits at low real interest rates. To repay
these loans, the USSR agreed to long-term gas
delivery contracts, some of which extend to
25X1
Since 1975, the USSR has refused repeated requests
by European countries for new long-term gas
agreements. Discussion of the new pipeline signals a
reversal of Soviet policy and probably reflects a need
to lay the groundwork for large increases in hard
currency gas sales to compensate for anticipated
sharp declines in hard currency oil sales. The timing
also coincides with the completion of the Orenburg
project, which preempted considerable manpower
and financial resources, and with the beginning of
the new five-year planning period. F 25X1
Other contracts that the Soviets signed in 1975 for a
total of 1.1 billion cf/d to West Germany, France,
and Austria by 1985 apparently are now void. The
exports were tied to construction of a new pipeline in
Iran (IGAT 2), which was to deliver 1.6 billion cf/d
to the USSR. Construction of the Iranian pipeline
was halted after the revolution, and prospects are
slight that it will now be completed.F~ 25X1
2000.
Estimated.
: Scheduled under current contracts, except those contracts under
Iranian swap agreement are excluded.
' Projected assuming full deliveries under the new pipeline deal.
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
The new deal envisions exports to Western Europe
of approximately 3.9 billion cf/d. If the 3.9 billion
cf/d figure is agreed upon, the six countries slated to
get gas under the pipeline deal would receive the
following amounts (in billion cf/d):
West Germany 1.0
France 1.0
Italy 0.7
Belgium 0.6
Netherlands 0.5
Austria 0.3
Adding these deliveries to existing contracts-and
assuming that the Iranian swap deal does not
materialize-Soviet gas deliveries for hard currency
in 1990 would reach 6.4 billion cf/d, compared with
2.0 billion cf/d in 1979, and only 0.7 billion cf/d as
recently as 1975.
The Soviets should reap a financial bonanza under
the new gas deal. Gas prices are expected to soar in
the 1980s as exporters seek to close the price gap
between gas and liquid fuels. The average price of
Soviet gas sold for hard currency in 1979 was
equivalent to about $11 per barrel of crude oil or
only about one-third the current oil price. The 1979
gas price was discounted so steeply from crude
prices because of the lag built into Soviet gas pricing
formulas. Gas prices in 1980 will rise sharply to
reflect last year's runup in oil prices. By the time the
deliveries through the line begin, most of the gap
will have been closed. Moreover, gas earnings
should be even greater because crude oil prices
should be considerably higher. At the equivalent of
current crude oil prices, the 3.9 billion cf/d of new
gas exports would earn Moscow $8 billion a year in
hard currency. The earnings would liquidate the
hard currency cost for the project in a year or two,
even with substantial allowances for inflation and
cost overruns for equipment.
The extra gas earnings will go far toward offsetting
the projected fall in oil exports in the 1980s. Oil
sales of $9.6 billion accounted for nearly half of the
USSR's 1979 hard currency earnings. Gas earnings
should rise rapidly through the 1980s because of
rapid price increases and some gains in volume
under existing contracts. In part because of a decline
Comparison of Crude Oil
and Natural Gas Prices
1F.O.B. official sales price.
2Cost at national border per barrel of oil equivalent.
in oil exports, natural gas earnings should overtake
oil revenues in the next several years. By the time
the new gas project is completed and reaches full
capacity-the late 1980s-total scheduled natural
gas sales of 6.4 billion cf/d at the equivalent of $32
per barrel will earn $13 billion annually. Moreover,
the gas revenues would make substantial oil pur-
chases possible. Assuming oil-gas price parity, the
income from gas deliveries will be worth
1 million b/d of crude.
Western Europe and Soviet
Gas Dependency
Western Europe depends on Soviet gas supplies for
less than 10 percent of its needs. West European gas
production, however, is not increasing as fast as
consumption, and it is expected to peak by the mid-
1980s because of the decline of the Groningen field
in the Netherlands. This field currently supplies
more than half of the EC's gas imports. Although
increased North Sea production will offset this
decline to some extent, gas supplies in Western
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
Secret
Europe will become exceedingly tight in the late
1980s.
The dependencies are higher for individual coun-
tries. Nearly 50 percent of Austrian gas supplies, for
example, comes from the USSR. Soviet gas supplies
are also important to Italy (25 percent), France
(14 percent), and West Germany (16 percent).
Moscow's leverage as a significant supplier of
natural gas has made some countries reluctant to
impose economic sanctions on the USSR because of
Afghanistan.
The shipment of an additional 3.9 billion cf/d
through the proposed new pipeline would raise the
Soviet share of Western Europe's gas supplies to 20
percent by 1990. Dependency on Soviet gas in the
six countries would reach nearly 30 percent by 1990
with a low of 13 percent for the Netherlands and a
high of 72 percent for Austria.
European Perceptions
The vulnerability of Western Europe to Soviet gas
supply interruptions has become a cause for concern in
While some Europeans worry about increased reliance
on Soviet energy, the prevailing attitude seems to be
one of acceptance. In terms of total primary energy
supplies in Western Europe, Soviet gas makes up only
1.5 percent. With the new gas deal, the Soviet share
would reach 3.5 percent by 1990. Moreover, alterna-
tive sources of gas supply are few-and in some cases
believed to be less reliable. Recent events have placed
Soviet Gas' Share of Consumption Percent
in Selected Countries
Austria
46
72
Belgium
0
40
France
14
33
Italy
25
31
Netherlands
0
13
West Germany
16
26
Imports of Soviet gas as a percent of domestic gas consumption.
: Assumes capacity deliveries from the pipeline project. Gas
consumption in 1990 based on individual country forecasts to the
International Energy Agency. Does not include Soviet shipments
under defunct swap arrangement with Iran.
long as possible.
in doubt several future sources of gas supplies. The
trilateral deal with Iran is considered to be a dead
issue-removing more than]. I billion cf/d from
future gas supplies to Western Europe. The Algerians, 25X1
disappointed with the resistance to their price de-
mands, have stopped construction of the Arzew LNG
facility that was to liquefy gas earmarked for West
Germany, France, Sweden, Belgium, and the Nether-
lands. The energy policy in The Hague is directed at
preserving domestic gas as a strategic reserve and is
designed to extend the life of Dutch gas reserves as
The Schedule for the Project
The timetable discussed in press articles about the
project appears overly optimistic. The participants
have stated that they expect construction to be
completed by 1983 and the line to be fully operational
by 1985-86. We believe that a more realistic schedule
would not have the line operating at full capacity
before the late 1980s. Planning is still in a preliminary
stage, with many basic decisions yet to be made. The
technical specifications, pipeline route, and construc-
tion arrangements are fundamental questions requir-
ing Soviet decisions. While it seems certain that the
project will receive Moscow's full approval, if it has not
already, the unresolved questions will require wide
coordination among several Soviet ministries.F 125X1
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
 Approved For Release 2008/09/16: CIA-RDP08S01350R000100200002-3
Once the pipeline details are firmed up within the
Soviet bureaucracy, specific negotiations with the
Western firms can move ahead. Although both sides
appear eager to see the deal through, the technical,
commercial, and financial negotiations promise to be
arduous and lengthy. The scale and technical complex-
ity of the pipeline will require Western firms to surpass
past achievements. The commercial negotiations could
take years if past Soviet negotiating practices are
repeated. The Soviets are notoriously tough and
laborious bargainers, especially on big contracts.
A West European consortium of state-owned gas
suppliers is being put together to arrange the large gas
purchase. Firms expected to be involved include:
OEMV (Austria), Gaz de France, Gusunie (Nether-
lands), Distrigaz (Belgium), ENI (Italy), and several
West German firms-Ruhrgas, Thyssen Gas, Deut-
sche BP, and BEB, an oil and gas company owned
jointly by Shell and Esso. These gas firms can expect a
hard Soviet line in gas price negotiations. The Soviets
already have hinted that they want a formula based on
lighter grades of liquid fuels instead of the cheaper
residual fuel oil to which most existing gas contracts
are linked.
The West European governments will have to approve
the project. The credit amounts required are too great
for commercial banks to lend without the explicit
backing of their governments. The current amount of
West German guarantees, for example, is $4.9 billion;
the gas project will require a substantial increase in
commitments that will need legislative approval. Some
of the likely equipment and steel suppliers are at least
in part government owned. The governments generally
favor the project, but bureaucratic delays in approval
are possible.
Approved For Release 2008/09/16: CIA-RDP08S01350R000100200002-3
 Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3
Secret
Secret
Approved For Release 2008/09/16: CIA-RDP08SO1 350R0001 00200002-3