International Energy Biweekly Review

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A001200050006-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: December 16, 2016
• Document Release Date: September 21, 2004
• Sequence Number: 6
• Publication Date: December 14, 1978
• Content Type: CABLE

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 International Energy
biweekly Review
Secret.
H;~ap}ravea r-or Keiease zuu4i~uizts : c.:iH-KUNtsu i uuruzHU --
Assessment
Center
r:~~ rE~r~ a-vz~^s
13 1~ecerrafrer lss
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INTERNATIONAL ENERGY BIWEEKLY REVIEW
.. _ __~ _
13 December 1978
Overview .............................................................................................
Renewed strikes by oil workers caused Iranian oil production to fall to
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USSR: Oil Problems Worsening
Recently announced plans for 1979 reveal that the annual increase in oil
output next year will be about 400,000 b/d, the smallest increase in the
past decade and the lowest rate of growth-3.6 percent-ever reached.
OPEC Countries: Falling Exports, Rising Imports .???
The OPEC current account surplus will plummet in 1978 due to re uced
world demand for OPEC oil and escalating import price inflation. As a
result, foreign investment by the cartel will slow and foreign borrowing will
increase.
Canada: Status of Joint Petroleum Storage Project .
Ottawa is supporting efforts to locate 100 million barrels of storage for
the US Strategic Petroleum Reserve in eastern Canada.
East Asia: Oil Development Prospects on the Continental Shelf
The first major steps toward revealing the oil potential of the East Asian
continental shelf have been taken with China's recent decision to pursue
offshore exploration with foreign help and last June's Japan -South
Korea exploration agreement.
i
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Tanker Charter Rates Reach Four-Year Highs
Voyage chartering by shippers building up inventories before the antici-
pated 1979 OPEC price increase and alarge-scale reduction in short-
term tanker availability have contributed to the rise in charter rates for
crude shipments.
Moscow's concern over the slow progress of offshore development of oil
and gas has resulted in the centralization of operations.
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Iranian oil production and exports are again down sharply as a result of renewed
strikes by oil workers, falling to about 1.2 million b/d and 600,000 b/d, respectively,
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estimate the cumulative loss in Iranian of pro uction since ate Octo er at a out 1
million barrels.
The emphasis on production during the strikes has held maintenance activity to a
minimum since late October. Even if the labor situation soon improves, much work
will be needed before productive capacity can be resto: ed to prestrike levels of 6.6
million b/d,
The strikes have halted Iranian gas exports to the USSR and resulted in
dangerously low domestic stocks of kerosene and distillate fuel oil. The National
Iranian Oil Company NIOC is now trying to make spot purchases of products in the
international market.
Sorne suppliers of Iranian oil who planned to cancel their force majeure notices
when liftings began to return to normal in November have now decided to keep these
notices in effect. Spot prices have firmed again.
Nevertheless, Free World oil inventories still appear adequate, at least for several
weeks, to cushion consumers against the sharp decline in Iranian oil supplies. Although
total Free World output in fourth quarter 1978 will not reach levels expected by
international oil companies, increases from other sources, especially Saudi Arabia, will
partly offset the Iranian shortfall.
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Still, the oil companies and many oil consumers will be reluctant to draw down
inventories given the current uncertainties over Iranian supplies. For example,
Ayatollah Khomeini, the leader of the religious opposition, has threatened a cutoff of
oil deliveries, if opposition forces gain power, to countries that continue to support the
Shah. Thus, companies and consumers will continue to lift as much as they can get
elsewhere even after an OPEC price increase goes into effect in first quarter 1979.
* * x~ * :~
The seven Arab members of OPEC-Saudi Arabia, Kuwait, Algeria, Libya, Iraq,
Qatar, and the United Arab Emirates-have an opportunity to discuss informally the
oil price issue again this week in Abu Dhabi during a ministerial session of the
Organization of Arab Petroleum Exporting Countries (OAPEC). OPEC will convene
formally in Abu Dhabi on 16 December when the decision on next year's oil prices
will be made.
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Recently announced plans for 1979 reveal that the annual increase in oil output
next year will be about 400,000 b/d-the smallest absolute increase in the past decade
and the lowest rate of growth-3.6 percent-ever recorded. Moreover, this new goal
implies that there will be very little growth in average monthly oil yields beyond that
achieved in October 1978 and that production will peak soon, perhaps even in 1979. If
the Soviets achieve their planned growth in industrial output of 5.7 percent in 1979,
the growth in domestic oil consumption will probably exceed the rise in domestic oil
output. Less would then be available for export. It is unlikely, however, that the
industrial production goal will be met and exports will likely remain at about the
1977-78 level of 3.2 million b/d.
Oil production in the current plan period has continued to grow, but at sharply
decreasing rates-from 5.9 percent in 1976 to about 4.5 percent in 1978. The average
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USSR: Crude Oil Production
Million b/d
10.0 J M J S D J M J S D 1 M J S D J M J S D
1976 1977 1978 1979 Plan
annual increase in output during 1971-75 was 6.8 percent. The 1978 goal was
originally set in December 1975 at 11.6 million b/d and revised downward in
December 1977 to 11.5 million b/d. Actual output in 1978, based on monthly
production data through October, will approximate 11.4 million b/d. The 1979 plan
now calls for an output of almost 11.9 million b/d, nearly 3 percent lower than the
12.2 million b/d established in late 1976. The planned increase of about 400,000 b/d
would be the smallest absolute rise since 1969 and the lowest rate of growth-3.6
percent-in the period after World War II. The shortfall in 1978 and the further
slowdown in growth planned for 1979 reflect the continuing decline in output from
the older oil producing areas west of the Urals and the peaking of large West Siberian
oilfields earlier than expected.
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The Outlook for West Siberia
West Siberia has provided all of the growth in Soviet oil production in recent
years and is the only maior region from which output increases can be obtained
through the early 1980s. The supergiant Samotlor oilfield has accounted for a large
Year
Total
Annual
Increment
1970
....................
7.06
1971
....................
7.54
0.48
1972
....................
8.01
0.47
1973 .
....................
8.58
0.57
1974
................. _.
9.18
0.60
1975
....................
9.82
0.64
1976
....................
10.39
0.57
1977
...........:........
10.92
0.53
1978 z
................
11.42.
0.50
1979 ~
................
11.86
0.44
' Including gas condensate.
a Estimate.
~ Plan.
Total
Annual
Increment
Samotlor
Annual
Increment
0.63
0.09
0.90
0.27
0:20-
0.11
1.25
0.35
0.42
0.22
1.75
0.50
0.78
0.36
2.33
0.58
1..22
0.44
2.96
0.63
1.73
0.51
3.63
0.67
2.20
0.47
4.37
0.74
2.56
0.36
5.04
NA
0.67
NA
2.70
NA
0.14.
NA
share of West Siberian and national output growth during the past five to six years, but
probably reached peak production this year. Other large, older fields in West Siberia
also have reached their peak and some are beginning to decline.
In many West Siberian fields, the most productive reservoirs were produced first.
Although these reservoirs have not been fully exhausted, most remaining reserves lie in
less productive reservoirs and will require much additional drilling. Poor permeability
(essentially a measure of the ease with which oil flows) is the central problem. For
example, the least intensively worked reservoir at Samotlor is the AVI. Permeability is
low and test well flows have been correspondingly poor-18 b/d. In comparison, the
most intensively worked reservoir-the BVB-has high permeability and well flows of
200 b/d. The situation is similar at other giant fields in West Siberia.
At the Ust'Balyk field, the oldest giant oilfield in West Siberia's Surgut region, the
bulk of production has come from the upper reservoirs, the BS,, BS2-3, and BS,. These
reservoirs peaked in 1972, and water cuts of 40 percent have been reached, The BSIo
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reservoir, which contains 38 percent of the field's total oil-in-place, holds most of the
remaining oil. Permeability in this reservoir, however, is very low and test flow rates
amount to only 6 b/d. Problems also were caused by the treatment of the three
reservoirs as a single network of producing wells. Production and water flooding were
uneven, and additional drilling to produce more oil f rom the individual reservoirs will
be necessary.
Development of the smaller West Siberian fields to compensate for the leveling
off of Samotlor's output is lagging behind plan. Originally, 62 new oilfields were to
have been developed during 1976-80 in West Siberia, but the number now has been
scaled down to only 22 or 23. Serious infrastructure problems, such as the lack of
roads, pipelines, and electric power lines to these distant new fields, have hampered
their exploitation and probably have caused the Soviets to reduce development goals.
Ten new oilfields were put into operation in 1976-77; eight were to be developed in
1978, leaving only 4 to 5 fields planned for development during 1979-80.
Domestic Consumption and Exports
The increase in oil production planned for 1979 will not be sufficient to meet
both domestic and export needs if the Soviet economy grows as fast as planned. Based
on the historical relationship between oil consumption and industrial growth in the
USSR, the 5.7 percent growth in the latter planned for 1979 would require about
500,000 b/d of additional oil for domestic consumption, that is, 100,000 b/d more
than the planned increase in production. In such an event, the shortfall would likely be
taken out of oil exports. It is unlikely, however, that the economy can grow as fast as
planned. Industrial growth of about 4 percent is a more realistic outcome in our
estimation. Such industrial growth would require oil consumption in 1979 to rise by
about 400,000 b/d and enable Moscow to maintain oil exports at about present levels
while satisfying domestic oil requirements.
At the Central Committee plenum in November, Brezhnev admitted that no
important energy savings had been made. In the 1979 plan, energy production is
scheduled to grow at about 1.4 million b/d of oil equivalent, with the largest share
slated for natural gas. However, as domestic demands for liquid fuel continue to rise,
only limited opportunities appear likely for oil savings. Some substitution of natural
gas for oil as a fuel for thermal power plants and some industrial boilers is possible,
depending on the extent of the urban gas distribution network. Such savings would
result primarily in increased supplies of residual fuel oil, but the petroleum products
in short supply are the light distillates-gasoline, jet fuel, diesel fuel. Secondary
refining capacity is inadequate to convert larger quantities of residual fuel to the
desired light products.
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The Gas Alternative
Moscow apparently intends to push gas production harder than originally
planned during the next two years to compensate for slower-than-expected growth in
oil production. The 1979 gas production target-14.3 trillion cubic feet (tcf)-is an
ambitious one, requiring growth next year of about 8.4 percent and an absolute
increase of 1.1 tcf, the largest annual rise ever. Gas output in 1978 is running about 7,5
:percent above last year and should reach 13.1 tcf for the year, slightly above plan.
Next year's growth will come primarily from two fields-Urengoy in West
Siberia and Orenburg in the southern Urals region. Urengoy with 175 trillion cubic
feet of proved plus probable reserves may be the world's largest gas field. It began
producing in May of this year and should yield about 0.5 tcf by yearend. Plans called
for boosting production by about 0.4 tcf in 1979 but this goal has probably been
revised upwards to help meet the higher national targets. At Orenburg, new
production capacity recently added could boost 1979 output by as much as 0.5 tcf
above this year's level of 1.2 tcf.
Moscow's 1979 gas target appears unreachable for several reasons. Growth is now
concentrated in a single region-Northern Tyumen Oblast-where the physical
difficulty of developing new deposits and the transportation distances involved are
unprecedented. Second, planning is extremely taut and the failure by other sectors of
the economy to provide adequate housing, roads, river transport, railroads, and
electric power is hindering the development of new West Siberian fields. These fields
are being counted on to offset declines in the older gas producing regions in the
Ukraine and North Caucasus. Third, plans for building adequate pipeline capacity are
not being met. Even if the pipe can be laid on time, delays in the installation of the
necessary compressors will significantly limit pipeline throughput capacity. During
1976-77, for example, only 25 percent of the planned compressor capacity was
Beyond 1979
The recently announced plans for 1979 provide a clear indication that the Soviet
oil production goal for 1980-12.4 million to 12.8 million b/d-cannot be met. The
plan suggests that Soviet oil production will peak soon, perhaps even in 1979. But even
i:f output grows in 1979-80, peak production will be about 12 million b/d and will
begin to decline rather sharply two or three years thereafter. The basic reasons for this
estimate are:
? Older fields in West Siberia are being produced beyond maximum
efficient rates.
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? Development of new smaller fields in West Siberia is lagging badly.
? Output in older major oil producing regions such as the Urals-Volga is
declining and the decline will accelerate.
? Drilling requirements to offset depletion are mounting more rapidly than
the Soviets can manage.
? Exploratory efforts have been zznsuccessful in locating major new oil
discoveries that could have a signif icant effect on oil output through the
mid-1980s.
The increased emphasis on gas production is likely to boost 1980 output to 15.2
tcf, near the upper end of the five-year-plan target of 14.1 tcf to 15.4 tcf and some 0.4
tcf more than we originally estimated. At this level of production, roughly an
additional 200,000 b/d of oil equivalent would become available for domestic
consumption and export, Moscow could and probably would use this "surplus" gas in
several ways: by substituting gas for oil domestically to the extent technically possible;
by exporting more to Eastern Europe to maintain required supplies of energy if oil
deliveries cannot be increased; and by selling more to the West to offset a leveling off
or potential drop in hard currency oil sales.
OPEC COUNTRIES: FALLING EXPORTS, RISING IMPORTS
Most OPEC countries have suffered a serious deterioration in their current
account positions in 1978 because of reduced world demand for OPEC oil and import
price inflation. The rise in import prices has resulted primarily from the depreciation
of the dollar against the currencies of the other industrialized countries and
secondarily from domestic inflation within supplier countries. As a consequence of
these unfavorable developments, most OPEC countries will slow down their foreign
investment and increase their foreign borrowing.
The overall current account surplus of the OPEC countries is expected to drop to
less than $6 billion in 1978, down 80 percent from the 1977 level. The surplus will be
roughly $3 billion in each half of 1978.
Saudi Arabia, faced with declining oil export earnings and rising import
expenditures, will account for more than 36 percent of the decline in OPEC's surplus
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OPEC Countries: Estimated Current Account Balances, 1977 and 1978
Billion US $
-0.8
Venezuela
37
-0.9
Nigeria
-3.8
-0.7
Ecuador
-0.7
Negl~
Gabon
-0.7
Indonesia
Qatar
Libya
Iraq
United Arab
Emirates
Iran
Kuwait
Saudi Arabia
OPEC
0.7
0.6
l 4.6
4.7
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from 1977 to 1978. The same factors plus serious domestic turmoil will move the
Iranian current account into balance or even produce a small deficit in 1978 after a
$4.6 billion surplus in 1977. Venezuela and Nigeria will each see their deficits grow by
$2.9 billion. In Venezuela, the primary cause will be rapidly rising import expendi-
tures; in Nigeria, declining oil revenues as well as increased import spending are
taking their toll. Among OPEC countries, only Kuwait and Algeria will improve their
current account positions this year.
ls7s
Assumed oil prices rise Jan 1979
1977 1978
1st Half 2nd Iialf 1st Half 2nd lIalf Year Year ~O
Exports (f.o.b.) .............. 72.3 73.7 67.1 73.1 146.0 140.2 199.5 150.9 157.3 163.8
Oil .............................. 67.5 68.9 61.7 67.6 136.4 120.3 132.3 138.7 145.2 151.6
Nonoil ....................... 4.8 4.8 5.9 5.4 9.6 10.9 12.2 12.2 12.2 12.2
Imports (f.o.b.) ............ -39.3 -44.8 -46.8 -51. -34.1 -98.6 -112.7 -113.8 -114.9 -115.9
Trade balance .......... 33.0 28.9 20.3 21.3 61.9 91.6 31.8 37.1 42.5 97.8
Net services of private
transfers ................ -13.2 -14.1 -15.8 -16.5 -27.3 -32.3 -35.5 -35.6 -35.6 -35.6
Freight and insur-
ance ...................... -5.9 -6.7 -6.5 -7.2 -12.6 -13.8 -13.9 -14.0 -19.2 -14.3
Investment income
receipts _.. ......_.. 4.3 4.3 4.7 4.7 8.5 9.5 9.6 9.7 9.8
Other ....................... -11.6 -11.6 -19.0 -14.0 -23.3 -28.1 -31.1 -31.1 -31.1 -31.1
Grants .............._....._.... -2.1 -2.7 -1.8 -1.8 9.8 -3.4 -3.4 -3.9 -3.4 -3.4
Current account
balance .. _......... 17.7 12.1 2.6 3.0 29.8 5.6 -7.2 -1.9 3.5 8.8
Oil Exports
Slack world demand for OPEC oil, partly reflecting growing output from the
North Sea, Alaskan North Slope, and Mexico, cut OPEC export earnings sharply in the
first three-quarters of 1978. Oil exports of nearly all cartel members. skyrocketed in
the fourth quarter, however, as liftings increased in anticipation of a January 1979 oil
price hike. Total OPEC oil revenues in 1978 will be an estimated $129 billion, down
$7 billion from record 1977 levels. OPEC's oil exports are projected to drop by 1.6
million b/d in 1978, to 28.0 million b/d.
The impact of the softer oil market has varied widely among OPEC countries:
? Saudi Arabian oil export earnings will drop by an estimated $3.3 billion in
1978.
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ys~~
Total: 29.6
Million b/d
ys~8
Total: 28.0
Million b/d
Kuwait.
t. 7.6%
Iraq
8~3%
Saudi Arabia
28.7%
Iran
17.0%
? Iran will lose an estimated $2 billion in oil revenues this year. The oilfield
workers' strike in the fourth quarter is a maior factor in the Iranian shortfall.
? Nigerian oil revenues will decline $1.5 billion in 1978 as a result of sluggish
first quarter demand for high-quality crude.
? Stepped-up sales will raise the oil export revenues of Iraq, Kuwait, and
Qatar above 1977 levels.
There were small changes in the export shares of individual cartel members in
1978. Oil production restrictions-ceilings on production and/or share restrictions on
liftings of light crude-have been imposed by Saudi Arabia and the United Arab
Emirates. On the other hand, the reduced Iranian oil liftings have resulted in
increased exports by some producers, especially Saudi Arabia. Overpt?icing of crude
resulted in slack sales in Kuwait, Ecuador, Algeria, Libya, and Nigeria early in the
year; they then adiusted price differentials between their crudes and Saudi benchmark
crude, and exports picked up.
Nige
ria
%.
8.5
Nigeria
3.0?/
"' `3.6%
4.9
Venezuela
8.9%
Libya
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Nonoil Exports
The value of OPEC nonoil exports, including reexports, will be $11 billion in
1978, roughly 8 percent of total export earnings. Increased sales of liquefied natural
gas will nearly triple Algerian nonoil exports. Kuwaiti nonoil exports will grow almost
30 percent because of increasing reexports of manufactured goods and, to a lesser
extent, growing fertilizer sales. In Indonesia and Venezuela, nonoil exports will grow
more slowly. Declining market prices of cocoa and coffee had a large negative impact
on Nigerian and Ecuadorian nonoil exports, respectively. The value of nonoil exports
from Nigeria will stagnate after increasing by 50 percent in 1977; Ecuadorian nonoil
exports will fall in 1978.
Imports
In 1978 the value of OPEC imports is expected to rise by 17 percent, to $99
billion. Both the amount and the causes of import spending growth vary widely among
cartel members; some even will experience a decline in the real value of imports:
? Increased development spending will raise imports over 20 percent from
1977 levels in Iraq, Saudi Arabia, the UAE, Qatar, and Venezuela.
? Spiraling import price inflation will cause nearly all of the 15 to 20 percent
growth in import expenditures in Indonesia, Kuwait, and Libya this year.
? In Iran, dock worker strikes and internal political unrest hampered import
offloading in the fourth quarter of 1978, and imports will be only about 14
percent above the 1977 level.
? Algeria, Ecuador, Gabon, and Nigeria will constrain import spending in
1978 in order to hold down their current account deficits.
Import prices for OPEC countries rose 14 percent in 1978, They were particularly
hard hit by exchange rate changes because oil revenues are collected in dollars. The
depreciating dollar accounted for 80 percent of import price inflation; inflation in the
developed countries accounted for the remainder. Import volume will only grow 3
percent this year.
Service Expenditures
We estimate that combined OPEC deficit on invisibles in 1978 will be $32 billion,
$5 billion above the 1977 level, Growth in expenditures for freight and insurance,
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foreign technology fees, interest payments on debts, and net private remittances will
f.ar exceed the increase in investment income receipts.
For -most OPEC countries, freight and insurance costs will remain level. In Saudi
Arabia, however, an improved internal transportation network and an easing of -port
congestion (the- latter holds for Iran also) should lower these- costs, while Nigeria
continues to be plagued by severely congested ports. As a result of the diminishing
surplus, investment income receipts for OPEC countries in 1978 will rise -less rapidly
than in 1977, increasing only $1 billion, At the same time imports of other services will
rise 20 percenf on the average. In Gabon, Iran, Kuwait, Qatar, and Saudi Arabia, other
service payments will increase more than 20 percent owing to large imports of foreign
technology and services for infrastructure development, while Venezuela's expendi-
tures will grow by one-half because of burgeoning payments for debt service and
travel.
Surplus for Investment
With OPEC's sharp current account dropoff in 1978, its ability to finance capital
outlays will diminish. Nonetheless, the investable surplus will contract less rapidly
than the current account, due to OPEC's increased borrowings in international capital
markets this year. Total loan commitments to OPEC countries in 1978 include $13
billion in publicly announced syndicated bank loans,
Probably only $6-$10 billion worth of these
As in previous years, OPEC countries will use the bulk of their available funds to
add to official foreign asset portfolios. New OPEC official foreign investment will
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probably be between $6 billion and $10 billion in 1978, down from $32 billion in 1977.
The proportion of surplus OPEC funds placed in short-term assets is likely to increase
as OPEC governments ajust their asset portfolio to compensate for increased import
costs and the fall-off in oil revenues. A slowdown in private foreign investment from
OPEC countries is also likely in 1978. Other uses of surplus funds will include OPEC
subscriptions to multilateral aid institutions and amortization of past foreign borrow-
ings, especially by Algeria, Indonesia, Iran, and Venezuela.
Prospects for 1979
The outlook for the OPEC current account surplus in 1979 will depend primarily
on the pricing decision made by the cartel at its regular ministerial meeting in Abu
Dhabi this week. OPEC's current account balance in 1979, for example, could fall to a
$7 billion deficit if prices are frozen, or rise as high as a $9 billion surplus, if a January
15-percent increase is established. The situation in Iran will also be a key factor.
All major components of the OPEC current account are projected to increase in
1979. OPEC oil revenues could range from $132 billion to $152 billion depending on
the price increase. The volume of oil exports in 1979 is expected to rise by nearly
700,000 b/d from the 1978 level, to about 28.6 million b/d. In any case, oil revenues
will comprise more than 90 percent of total export earnings, OPEC imports are
anticipated to rise to $113-$116 billion in 1979-up some 14 to 18 percent from 1978,
reflecting both a 6.5- to 8-percent increase due to import price inflation and a 7- to 9-
percent growth in import volumes. The net services deficit will probably increase by
10 percent to $36 billion reflecting continued growth in development-related services
and debt service and slackened growth in investment income.
Without a 1979 oil price increase of at least 10 percent, OPEC as a whole will
almost certainly become a net borrower of funds next year. Loan receipts will
probably approach $15 billion as cartel members continue to rely on external
financing to deal with balance of payments problems and pay for capital-intensive
development projects. Asset accumulations will decline if the current account surplus
falls from the already-low 1978 level.
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Negotiations on storage of a portion of the US strategic petroleum reserve (SPR)
in Canada are moving ahead. Ottawa supports efforts to locate a 100-million-barrel
storage site in eastern Canada as a means of attracting investment and generating
employment in the economically depressed Maritime Provinces, Tax and rental
income from the project would supplement strapped provincial budgets.
The Proposal
The SPR program of the United States calls for storage of 500 million barrels of
oil by yearend 1980 as an emergency reserve. A proposal to increase the level to 1
billion barrels by the end of 1982 is under active consideration by the administration.
Joint US-Canadian petroleum storage studies were undertaken as a result of discussions
held early this year between Prime Minister Trudeau and Vice President Mondale,
Initially one of the three 100-million-barrel sites currently proposed is expected to be
used but a second site could be added at a later date.
Any one of the three could supply a month's emergency supply for eastern
United States. Canadian reports identifying issues, sites, and specifications were
completed last July. A final US decision on a Canadian site originally expected before
yearend has been postponed until mid-1976.
Canada has no immediate need for its own emergency oil storage facilities.
Current Canadian stocks-128 million barrels-are equivalent to six months' imports,
Moreover, recent oil and natural gas discoveries in western Canada can be quickly
exploited if the need arises. Still, an option to use part of the storage facility probably
would be attractive to Canada.
Proposed Storage Sites
An international consortium headed by Wabanex, a Canadian company, has
proposed adapting an abandoned iron mine on Bell Island near St. John's, Newfound-
land. Originally proposed as an emergency storage facility for refineries in eastern
Canada, the mine could hold up to 100 million barrels of crude and products.
Construction costs for the project which would include a marine terminal and separate
storage areas for 10 million barrels of refined products are estimated at roughly $300
million;* annual operating costs are forecast at $5 million. Onsite feasibility studies
conducted in late 1975 show that the mine, which extends partially under the sea, is
liquid tight. The surrounding water is deep enough to handle supertankers and is
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Proposed Canadian Sites for US SPR Program
Employment
Annual Required for
:Storage :Capital Operating Distance Construction
Capacity Cost Cost from Man-Years
(Million (Million (Million New York Permanent-
Site Location. Barrels) US $) US $) (nm) Direct Indirect Employees Remarks
Wabanex; Bell Island, 100 300 5 1,142 1,000 3,000 50 Uses an abandoned iron.
Newfoundland mine. - Requires .con-
strucfion of dock. fa-
cilities Eor VLCCs but
no dredging. Proposal.
includes - 10 million
barrels of oil product
_ - storage -
Home 0i1, .Canso 100 375 5 701 200 600 50 Uses solution mining-
Straits, Nova Scotia techniques io develop
salt domestorage._Re-`
quires construction of
dock facilities for-
- VLCCs and extensive
dredging:. Proposal in-
eludes no product
storage,
Domtar, Kingsville, 30 (1981) 290 5 720 200 500 50
-Nova Scotia 100. (1984)
Uses solution mining-tech-
techniques to develop
salt dome storage, Ex-
isting VLCC docking;.
facilities and - onsite
temporary'. storage.
Proposal includes 3
million.` barrels.- `of
produet storage.
normally ice free 46 weeks a year. Canadian sources estimate potential employment
benefits at 1,000 man-years in direct construction and an additional 3,000 man-years
in indirect project-related activities, Fifty permanent employees would be required
for operation of the completed storage site.
Home Oil Company, Ltd., heads a consortium that proposes storing 100 million
barrels of crude oil in salt caverns near the Canso Straits, Nova Scotia. This site is 400
nautical miles closer to New York than the Wabanex site. Under the Home proposal,
labor-saving solution mining techniques would be used to construct salt dome storage
chambers. No oil product storage is planned. Canadian Government officials estimate
overall costs at $375 million. This total is higher than for the Wabanex project because
VLCC (very large crude carrier) docking facilities and harbor dredging operations will
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Canada: Potential Strategic Petroleum Reserve Sites
l
W
hingio ~# a
~
be required. Direct and indirect employment on construction of the proiect totals 800
man-years, with 50 permanent workers required to operate the facility.
Atlantic
Dcean
The third proposal, by Domtar Inc., calls for a salt dame facility near Kingsville,
Nova Scotia, a few miles north of the Home Oil site. Phased development of the site
wauld allow storage of 30 million barrels by 1981 and 100 million barrels by yearend
1984; costs of construction are estimated at $290 million. Tanker access would be
provided from existing VLCC facilities at Gulf Oil's Point Tupper Refinery nearby.
An existing 3-million-barrel storage tank at the refinery, now underutilized, would be
available for temporary storage. Some 700 man-years of employment would
provided by construction activities; 50 workers would be required for operation.
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EAST ASIA: OIL DEVELOPMENT PROSPECTS
China's recent decision to pursue offshore oil exploration with foreign help and
last June's signing of a Japan -South Korea offshore exploration agreement xepresent_
the first major steps toward unveiling the oil potential of the East Asian continental
shelf. China has been at the center of numerous bilateral jurisdictional disputes that
have slowed comprehensive surveying and development of this area. The bed beneath
the seas of East and Southeast Asia is one of the most promising oil-bearing areas of the
largely unexplored offshore regions in the world.
Background
The countries of East and Southeast Asia exhibited little interest in the
continental shelf until 1968, when a UN-sponsored geophysical survey reported that
the area contained potentially rich petroleum deposits. Spurred by the results of the
survey and- rising oil bills, many- coastal nations in the region made expansive claims to
the neighboring continental shelf -and offshore islands; most of -these 'claims over-
lapped. These states -also delineaEed concession zones and initiated ambitious oil
exploration programs.
Chinese Policies
In 1970, China reacted to these moves by staking general claims to the seabed and
resources of the entire East Asian shelf. Peking also-laid claim to the Senkaku Island
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East Asia: Oil Development Prospects on the Continental Shelf
Major Area of Oil Prospects
[~ Continental Shelf
Joint Development Zone (JDZ)
- Hypothetical Chinese Claim Line
? ? ~ Hypothetical China-Taiwan Median Line
t?nlt
air
Thailand
China
C`1 ~r
is=nn-i
PARACEL
dSLANDS
Malaysia_
Sarawak
"" South
;'Korea
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group in the East China Sea and the numerous island groups, reefs, and shoals in the
South China Sea. The PRC's broad-brush claims have entangled it in a number of
jurisdictional and territorial disputes of varying intensity:
? With South Korea over a large area of the Yellow and East China Sea
continental shelf, in particular an area of the shelf that is to be jointly
developed by South Korea and a an called the Joint Development Zone
(JDZ).
? With Japan over the Senkaku Islands and the East China Sea shelf,
? With the Philippines over part of the Spratly Island group and the
surrounding shelf resources. Manila has been aggressively pressing its claims
to the Spratlys, especially in the northeast part of the archipelago where the
Philippines has expanded its military presence and drilled for oil.
? With Vietnam over the Paracel and Spratly Island groups and surrounding
shelf resources. The PRC threw South Vietnamese forces off the Paracels in
January 1974, and the islands have since been a sensitive diplomatic issue
between Hanoi and Peking.
? With Taiwan over maritime disputes that are an outgrowth of a more
deep-seated problem-who is the rightful government of China
? With Malaysia over the Tseng-mu reef, a series of underwater shoals near
the coast of Sarawak described by the Chinese as the southernmost part of
China, The Chinese-drawn claim line cuts across Malaysian-awarded off-
shore concessions just north of the Sarawak offshore oilfields. The disagree-
ment thus far has been limited to private expressions of concern by Malaysia;
Peking has voiced no specific objections.
While affirming its own expansive claims, Peking has refused to dignify other
countries' claims by going to the negotiating table. At the same time, the PRC has
balked at specifying its ambitious maritime claims beyond periodic ambigious
statements. The resultant uncertainty has set back the offshore exploration and
development programs of Japan, Taiwan, and South Korea, in particular. Other
countries also have had to take Peking's claims into consideration when planning
offshore programs. China has not, however, criticized North Korea's declaration of an
economic zone in Korea Bay.
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During the past year, Peking has contracted for purchases of Western technology
and concluded contracts for survey and exploration ships, modern offshore drilling
rigs, and support ships that will enable China to extend test drilling to many of the
disputed areas. Peking has even discussed participation in offshore development of the
South China Sea with US and other foreign oil companies. China and the Japan
National Oil Company (JNOC) also reached agreement in principle last July to
cooperate in joint oil exploration and development in two undisputed areas-the Po
Hai and at the mouth of the Pearl River in South China's Kwangtung Province.
These Chinese initiatives signal a reconsideration of the government's adherence
to the ideal of self-reliance and a desire to develop promising areas of the shelf as soon
as possible. It is not yet clear, however, where China will deploy its newly acquired
technology. Foreign oil companies will balk at drilling in disputed areas. China
probably feels similarly constrained and will more likely concentrate its drilling in the
next few years to close-in locations in Po Hai and along the South China coast rather
than in the deep water areas still under dispute.
Japan and South Korea
After eight years of controversy and debate, Japan and South Korea are going
ahead with the joint development of a mutually claimed area offshore the southern
Japanese island of Kyushu. The two countries signed a treaty for joint development of
the area in January 1974. The Koreans ratified the treaty in 1974, but in Japan the
debate continued into 1977 because of the influence of strong opposition by China. It
took another year and Japanese passage of special enabling legislation that specifies
detailed procedures for implementing the treaty before the exchange of ratification
instruments could take place.
The two countries will share equally both the costs and the oil or other natural
resources discovered. Japan's Ministry of International Trade and Industry estimates
ultimate recoverable reserves at about 800 million barrels of crude oil and 9.2 trillion
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cubic feet (1.6 billion barrels oil equivalent) of natural gas. Assuming a 12-year
recovery period, the Japanese share of the crude would be some 85,000 b/d,
equivalent to about 2 percent of current imports of crude; South Korea's share would
amount to about 17 percent of current crude imports. Although questions concerning
fishery compensation and environmental pollution must be answered before actual
drilling operations begin, participants are looking forward to a startup by next
South Korea appears willing to proceed unilaterally with drilling activity
regardless of any possible protests by China.
A future Chinese protest cou orce apan to c oose one o
two unp easant a ternatives-decline to participate fully in the ioint activity, thereby
antagonizing Korea, or proceed with drilling and risk Chinese displeasure.
Exploration and Production
Because the most promising geological structures lie under disputed waters, little
more is known today about the shelf's oil potential than in 1968 when the UN study
was released. The most successful exploration activity has occurred near shore in
undisputed waters along coastal Sarawak and in China's Po Hai Gulf.
The extensive Malaysian continental shelf lust off the coast of Sarawak and Sabah
encompasses a large number of sedimentary basins containing small oil-bearing
structures. Offshore Sarawak was extensively explored by Shell in the late 1960s, and
by 1972 five fields were producing 90,000 b/d. Since then, several commercial
exploitable discoveries have been made off Sabah: newly opened fields in Sabah
increased Malaysia's production to 180,000 b/d in 1977.
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? Japan so far has refrained from oil exploration in areas of the shelf subject
to conflicting jurisdictional claims.
? The Philippines discovered oil of f the coast of Palawan in 1976 and 1977
after a long series of unsuccessful drilling efforts. The discovery stimulated
exploration activity, but the process of proving commercial reserves should
delay significant production until the early 1980s.
? The embryonic Vietnamese offshore exploration program came to a halt
with the fall of the Saigon government in 1975. The presence of hydro-
carbons is undisputed and Hanoi is seeking foreign assistance, but reserves
cannot be quantified until drilling resumes, perhaps in early 1979.
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TANKER CHARTER RATES REACH FOUR-YEAR HIGHS
Charter rates for crude oil shipments have risen to their highest levels in more
than four years. The high rates reflect both intensified voyage chartering by shippers
building up inventories before the anticipated 1979 OPEC price increase and, through
July, a large reduction in short-term tanker availability, due to record laying up of
tankers. High tanker demand and therefore high charter rates will probably persist
even after a decision is made on OPEC prices at the beginning of the year because of
~
stockpiling against the possibility of an extended shortfall of Iranian crude.
Rate Trends
The Mullion Index-reflecting tanker charter rates worldwide for crude oil-
reached Worldscale 166 during the week ending 8 December, three times the 1978
low and the highest level since April 1974. During the previous week, the average rate
for very large crude carrier (VLCC) shipments of crude on the key Persian Gulf-
European route, which dipped to $3.25 a ton in May, rose to $11.26 atop-the highest
13 December 1978 SECRET
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Weighted Average for VLCC
Voyage Charters Persian Gulf
to UK/Continent
l i~ i l i (~ I ((i _i 1t_~L~.~~a!L~~ 1.?...t~t._1
JAN FEB MAR APR. MAY JUN JUL AUG SEP OCT NOV DEC
i. These Indexes apply only to charters for the carriage of so-celled "dirty" cargoes which Include crude oil end
heavy petroleum products such ea residual fuel oil.
2. A table of oil shipment coats on various trade routes for a standard tanker with fixed parameters (size, epeetl,
fuel consumption, manning requirements, etc.) used on the tanker market to express voyage charter rates.
3. This Intlez reflects ell rates eveileble to the compilers ([he London tanker brokerage Mullion end Company) for
single voyage charters of tankers In all trades agreed [o (flxetl) during the week In question entl ell previously
ilxed single voyage charters still In effect an Fride of that week.
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level since December 1973. The average dropped to $10.39 a ton last week; at this
rate, most VLCC owners are making a substantial profit.
Demand Situation
Worldwide demand for chartered tankers in the first six months of 1978 was
below corresponding 1977 levels, largely because of reduced trading. The first
indication of a maior upturn in demand was the flurry of chartering for voyages from
the Persian Gulf to Europe in the first week of August to carry a record 4.3 million
tons of crude, u reatly from an average of less than 1.3 million tons in the preceding
weeks of 1978.
Chartering also picked up in all other mayor loading areas. Voyage charter
volumes during August through October reached levels not previously achieved during
Worldwide Tanker Voyage Charter Volume
1975
1976
1977
1978
First Quarter ..................................
34,218
61,507
112,502
88,560
January
16,119
17,297
34,087
29,499
...........................~.......
February
10,358
21,698
38,011
30,181
...
March
7,742
22,512
40,404
28,880
Second Quarter ..............................
39,464
75,974
103,959
94,009
.......................................
April
11,414
22,638
37,440
29,823
.....
........................................
Mav
11,664
27,254
33,165
31,123
......
... .
June
16,386
26,082
33,354
33,063
.....................
........................
d Quarter
Thi
54,936
81,230
98,749
112,809
........
r
....................................
July
17,096
29,559
32,427
32,
.........
...............................
August
18,810
27,212
31,145
40,718
.. .......
September ...................................
19,030
24,459
35,177
39,536
Fourth Quarter ..............................
51,630
102,058
100,947
October
15,573
32,510
31,244
43,601
November ~
16,565
33,579
37,921
................................
December
19,492
35,969
21,782
....
Total ..............................................
180,249
320,789
410157
that period. Uncertainty generated by the cutback in liftings from Iran caused weekly
charter volume from the Gulf to Europe to fall below a million tons at the end of
October before picking up briefly when Iranian output rose in late November.
Chartering volume from other loading areas, such as the Mediterranean and the
Caribbean, has been more stable than that out of the Persian Gulf, averaging close to 6
13 December 1978 SECRET
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million tons per week since mid-July, Supplies of available tankers waiting for business
did not dry up as early in these areas as they did in the Gulf.
Tanker Supply
Tanker chartering rates have also been strongly influenced by a maior drawdown
in the short-term supply of tankers waiting for business. Between January and the end
Short Term Availability of Oil Carryng Tonnage
Change
31 January
31 July 1/31-7/31 31 August
30 Sept 31 Oct
Total fleet ................... 379
375 - 4 375
374 373
Minus tonnage not avail-
able on short notice for
oil trade ........................ 58
79 21 76
69 63
Laid-up .................... (38)
(54) (16) (51)
(46) (40)
In dry cargo trade .. (16)
(21) (5) (21)
(19) (19)
In repair .................... (4)
(4) (4)
(4) (4)
Tonnage available on short
notice for oil trade .... 321
296 -25 299
305 310
Carrying oil .................... (317)
(295) (-22) (298)
(304) 309
Waiting for business-' .. (4)
(1) (-3) (1)
(1) (1)
of July, oil tanker tonnage available worldwide* decreased by 25 million dwt and
unused operational tanker capacity nearly disappeared. This reduced availability
reflected a shrinking in size of the world fleet due to dwindling deliveries of new ships
and record scrappings,** the accumulation of an unprecedented 54 million dwt of oil
carriers in layup at the end of July, and a 5 million ton increase in tanker capacity
Improvements in rate levels after July, however, have brought many ships out of
layup. Tonnage availability has also been increased by the transfer of small tankers
and combination carriers from the grain trade back to oil. As a result, even with total
fleet tonnage diminishing at about a million dwt per month, the operational fleet
available for oil movement is probably back to its January 1978 level of 320 million
tons. Still, most owners have responded with caution reactivating ships only when
they have had charters booked.
* Including both tankers engaged in the oil trade and operational tankers waiting for business,
**scrappings of tankers reached record highs in 1976 and 1977 of 10 million dwt. The total for 1978 as of mid-
October was 12.6 million dwt.
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High levels of tanker demand and voyage chartering are likely to persist in early
1979 as buyers continue to stockpile against a possible long-term cutoff of Iranian
crude. Nevertheless, with tankers continuin to move out of la u some easing of
charter rates is likely,
In a move to speed up exploitation of offshore hydrocarbon resources, Moscow
recently established the Main Administration for Exploration and Development of
Offshore Oil and Gas Fields, "Glavmorneftegaz," in the Ministry of the Gas Industry.
The new organization-80,000 strong-will be responsible for all offshore exploration,
construction, drilling, and production activities. These functions previously were
fragmented among several ministries.
The centralization of offshore operations reflects Moscow's concern over slow
progress in offshore development. The potential for growth in Soviet oil production
beyond the mid-1980s rests largely in the Arctic offshore regions and in deep
structures in the Caspian Sea. Timely development of these areas will require effective
internal planning and administration of large-scale projects incorporating Western
technology, equipment, and services.
The new administration will be headed by Yuriy Zaytsev, an engineer with a
strong technical background in petroleum exploration and production and with
administrative experience both in the oil and gas ministries. He served for four years
as Chief of the Main Administration for Petroleum Production and for the past five
years as Deputy Minister of the Gas Industry, a position he apparently will retain
along with his new responsibilities.
The restructuring of offshore oil and gas responsibilities was in the works for
about a year. There apparently was considerable politicking over leadership and
organizational subordination. We do not know why Glavmorneftegaz was placed
under the gas ministry-which has done no offshore work-rather than the more
experienced oil ministry, unless the decision was meant to be a politically motivated
vote of confidence for Sabit Orudzhev, Minister of the Gas Industry. There is clearly
more Soviet interest in finding offshore oil than gas.
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