INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000400050009-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: February 2, 2011
• Sequence Number: 9
• Publication Date: December 2, 1983
• Content Type: REPORT

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Directorate -Sftrat,
International
Economic & Energy
Weekly
DI IEEW 83-047
2 December 1983
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International
Economic & Energy
Weekly
iii Synopsis
1 Perspective-International Oil Market: Tough Time Ahead for OPEC?
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
15 International Financial Situation: Drop in Key Debtor Reserves
17 International Financial Situation: Banking Regulatory Policies
19 Near-Term Oil Market Outlook
25 Oil Stocks and Government Policies of Industrial Countries
33 Prospects for Cuts in Soviet Large-Diameter Pipe Imports
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2 December 1983
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International
Economic & Energy
Weekly
Synopsis
Perspective-International Oil Market: Tough Time Ahead for OPEC?I 125X1
Divergent producer interests are straining OPEC's eight-month-old production
accord, and prospects for a weak recovery in oil demand will add to the cartel's
problems in the months ahead. OPEC's problem of dividing its shrunken
market could be eliminated quickly, however, if Iran and Iraq carry out
threats against oil-related targets in the Persian Gulf.
International Financial Situation: Drop in Key Debtor Reserves 25X1
This article is part of a special series on the economic and political aspects of
the international financial situation. The article examines the foreign ex-
change reserves of 10 key debtor countries, which fell by $3.2 billion during
the first 10 months of 1983.
International Financial Situation: Banking Regulatory Policies
This is another article in the special series on the economic and political
aspects of the international financial situation. It examines the mixed signals
banks have received from regulatory agencies over the past year.
The oil market has softened in recent months in response to overproduction
and continued weak consumption. Even if consumption rebounds in response to
a sustained economic recovery in the OECD, we expect soft market conditions
to persist at least through mid-1984 unless OPEC members adhere to present
production ceilings.
Falling consumption, high interest rates, declining oil prices, and prospects for
ample supplies have triggered a sizable reduction in industrial country oil
stocks. Although oil inventories remain adequate for projected consumption
needs, the erosion of the commercial stock cushion over the past few years and
uncertainties regarding the disposal of government-owned stocks have in-
creased the market's vulnerability to a major supply cutoff.
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DI /EEW 83-047
2 December 1983
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Prospects for Cuts in Soviet Large-Diameter Pipe Imports
Imports of Western 1,420-mm-diameter pipe by the USSR could drop from an
annual average of 2.2 million metric tons during 1981-85 to as little as 500,000`
tons a year during 1986-90 as a result of a slowdown in oil and gas pipeline
construction and increased domestic production of pipe in the Soviet Union. A
substantial drop in Soviet imports of 1,420-mm pipe would most affect Japan
and West Germany.
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2 December 1983
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International
Economic & Energy
Weekly
Perspective International Oil Market: Tough Time Ahead for OPEC?
Divergent producer interests are straining OPEC's eight-month-old production
accord, and prospects for a weak recovery in oil demand will add to the cartel's
problems in the months ahead. Spot oil prices have come under downward
pressure in recent weeks because most OPEC states have been producing
above their assigned quotas despite repeated calls for compliance from OPEC's
monitoring committee. Moreover, Iran, Iraq, Nigeria, and Venezuela report-
edly intend to ask for higher allocations at the ministerial conference on 7
December, even though present market conditions do not justify higher
production. OPEC's problem of dividing its shrunken market could be
eliminated quickly, however, if Iran and Iraq carry out threatened actions
against oil-related targets in the Persian Gulf.
Despite a modest resurgence in oil consumption in the United States and
Japan, oil demand remains sluggish in other non-Communist countries where
economic activity has yet to rebound. The strength of the dollar is depriving
other major consumers of the benefits of the oil price drop because oil prices
are denominated in dollars. Most industry analysts now anticipate only a slight
increase in demand next year, with a good chance that a seasonal dropoff in oil
use in early 1984 will put OPEC in a bind similar to the previous two years.
OPEC's own market assessments developed this fall for the cartel's monitoring
and long-term strategy committees reached similarly pessimistic conclusions.
Indeed, Saudi Oil Minister Yamani has commented that demand for OPEC
crude in second-quarter 1984 will be about 1 million b/d below OPEC's
existing 17.5 million b/d ceiling. Production drops in Saudi Arabia and
Nigeria in early November combined with further softening of spot prices
suggest that OPEC output may already be receding from its recent peak of
19.2 million b/d in September.
OPEC's awareness of its market problems has not paved the way toward a so-
lution. Instead, competing interests have divided the cartel on the best means
to confront the soft market. The sparsely populated Arab nations on the
Persian Gulf, led by Saudi Arabia, are principally concerned with maintaining
a long-term market for their enormous oil reserves. These states are more
disturbed by a loss of market share than recent price erosion, which they
consider temporary. This group is wary of price hikes that tend to lessen
demand for their crude, and is firmly against any price increase in the next
year or so. Most other OPEC countries have large populations relative to their
oil reserves and face pressing revenue needs. These nations want to maximize
short-term earnings by pressuring the wealthier Gulf producers such as Saudi
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Arabia to absorb a larger share of the slack in the market. Some have been
openly critical of Saudi Arabia's aggressive marketing tactics in recent
months. We believe the Saudi actions have been aimed at keeping prices soft.
Political rivalries are further contributing to tensions in OPEC, especially
those arising from the Iran-Iraq war. Iraq recently responded to an Iranian de-
mand for a higher production quota with a similar request. Iran, which wants
to limit the revenues of Iraq's Persian Gulf supporters, is arguing for a price
increase that would require further curbs on production by the Arab states in
the region.
OPEC's next chance to resolve its conflicts will be the ministers' conference
next Wednesday in Geneva. Members will probably consider a variety of self-
serving proposals; none currently has enough support to win approval. The
need for OPEC to adopt new production and pricing measures in the months
ahead will depend largely on consumption trends. We believe continued
production restraint will be needed even if a small increase in consumption
occurs. Unless OPEC reaches an effective production-sharing agreement, the
cartel could be confronted with another price drop early next year
As OPEC struggles to cope with the soft oil market, rising tensions between
Iran and Iraq threaten oil market stability. Baghdad continues to brandish
recently arrived French Super Etendard jets and other weapons against
Iranian oil targets, including Iran's crude export facilities on Khark Island.
The sinking of a Greek freighter north of Khark last week may signal that
Baghdad is closer to such attacks. Tehran claims it would counter a disruption
of its own exports by halting all oil flows from the Gulf and has threatened to
retaliate against Iraq's Arab financial backers.
Any action that disrupts the flow of Persian Gulf oil or results in damage to oil
facilities in the region could quickly tighten supplies. How fast and how high
prices would be bid up during a disruption would depend in large part on
market perceptions about the size and duration of the supply loss. While about
8 million b/d of oil surplus production capacity is available worldwide, only 3
million b/d of this total is outside the Gulf. Commercial oil stocks are
adequate to meet expected consumption needs; destocking over the past two
years, however, has eliminated most of the cushion previously available to
offset a supply disruption.
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2 December 1983
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Energy
Australians Pushing The Hawke government recently established a Coal Council with representa-
Coal Exports tives from federal and state governments, mining companies, and unions that
will examine export marketing problems stemming from weak demand that
could last until the end of the decade. The Council is considering establishing a
national coal marketing board to negotiate coal contracts for individual mines.
It may also undertake a mission abroad to identify potential markets in order
to diversify exports away from Japan; that country will most likely remain
Australia's largest customer.
Despite the slack world coal market, Australia-which already accounts for
one-fourth of the world's seaborne coal trade-is continuing to increase coal
export capacity. By 1990 export potential could nearly triple to 220 million
metric tons, according to a survey of mining companies recently published by
the government. Nearly 85 percent of the increase would be steam coal for
electric power generation.
Australia: Coal Export Potential
Million metric tons
Total
81
127
220
Steam coal
29
63
144
Coking coal
52
64
76
Dutch Gas Sales Dutch gas sales during the first nine months of 1983 are up 4 percent
Rebound compared with year-earlier levels-reversing a downward trend begun in
1979. Declining gas sales and a worsening domestic fiscal situation prompted
The Hague early this year to reverse policies aimed at conserving domestic
resources and to authorize additional gas exports. Export sales are up 1
percent, with a 10-percent jump in third-quarter exports offsetting a decline in
sales during the first half of the year. West Germany, the largest Dutch
customer, recorded an 8-percent increase in gas use during the third quarter.
On the domestic front, gas sales are up 8 percent because of increased
industrial use and a near doubling of gas use in electric utilities following a
government decision to supply power stations with extra gas at coal parity
prices.
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Oil Problems in Extensive damage to Lebanon's main oil installation at Tripoli has severely
Lebanon limited Lebanon's oil storage capacity and may result in gasoline rationing
north of the Awwali River. Parts of the installation have been burning since
the onset of heavy fighting between Palestinian groups in early November.
Twenty-seven of the facility's 36 tanks and about 35 million gallons of fuel
have been destroyed, according to the US Embassy. The Medreco oil facility-
located at Sidon-is currently operating, but its location behind Israeli lines
renders shipments to central Lebanon, including Beirut, spotty at best. The
remaining storage depot, located at Dura and close to Beirut, has a capacity of
only 10 days of products at present consumption levels, according to Lebanese
Government officials, making the timely receipt of fuel shipments essential.
With little room for building reserves and the likelihood that repairs - to the
Tripoli facility will take up to one year, fuel rationing in the Beirut area is a
strong possibility.
Caltex Indonesia's largest oil producer, Caltex, has acceded to Pertamina's demand
Production-Sharing for new production-sharing terms, including a government share of 88 percent
Terms With Indonesia of Caltex's output. This compares to the 85-percent share in force for all other
contracts. According to Minister of Mining and Energy Subroto, negotiations
are continuing on other aspects of the Caltex agreement, but he expects to sign
the contract shortly. Under its former concession-type contract, Caltex
retained management authority and split profits with Pertamina. Now output
will be split and Pertamina will exercise decisionmaking authority. Pertamina
had long made known its intent to seek a larger share of Caltex's output when
the 20-year-old contract expired on 27 November; so far the Indonesians have
not indicated they will seek larger shares from other contractors.
Lagging Gas Production Despite the inauguration of Thailand's second natural gasfield in late October,
Threatens Thailand's gas shortfalls are hindering efforts to replace imported oil and threatening
Industrial Expansion industrial expansion. Initial production of 400,000 cubic meters per day from
the new field is projected to rise at most to 1.1 million cubic meters per day
(mcmd). This will not make up the shortfall from Thailand's larger gasfield,
which is producing 4.5 mcmd, far short of the 7.1 mcmd originally expected.
Although other small fields are expected to come on line in the next few years,
total gas production is likely to fall far short of the 21 mcmd Bangkok had
hoped would fuel a heavy industry complex. Thailand already has put some
projects on hold, and foreigners are reluctant to participate in the remaining
petrochemical and fertilizer investments.
Norwegian Oilfield Norsk Hydro-operator of the Oseberg oilfield-has won the support of the
Development Plans Norwegian Petroleum Directorate (NPD) for its plan to develop Oseberg using
Finalized two platforms. Statoil, a member of the field's operating committee, had
argued for a less-expensive single-platform option, but the NPD supported
Norsk's development proposal because this will allow initial oil production to
be accelerated by one year to 1989. Oseberg's recoverable oil and gas reserves
are estimated at 900 million barrels and 70 billion cubic meters, respectively,
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and oil production is expected to peak at about 200,000 b/d in the early 1990s.
Gas will be reinjected in the initial production phase in order to maximize oil
output and later is expected to be exported through the new Statpipe system.
Philippines Commercial The Philippines' largest commercial creditors apparently have settled on a debt
Loan Rescheduling rescheduling formula that may be unacceptable to Manila's 370 to 400 smaller
commercial creditors. the proposed arrange-
ment would extend payments falling due through the end of 1984 on medium-
and long-term foreign debt over a seven- or eight-year period, while providing
up to $1.5 billion in new commercial loans. The agreement also would seek to
maintain short-term credit lines at the levels of October 1983 for 12 to 18
months-a move that the smaller banks reportedly would resist. Resolution of
the short-term loan issue is crucial for Manila, because its short-term foreign
debt is almost $11 billion. If smaller banks resist maintaining short-term credit
lines at the October level, formal rescheduling of the short-term debt will be
required for Manila to avoid another liquidity crisis in 12 to 18 months.
Egypt's IMF Talks A decision by the Egyptian Government to postpone an increase in subsidized
on Hold bread prices has prompted the IMF to cancel a scheduled negotiating trip to
Cairo. Doubling the price of bread is a Fund prerequisite for a $300 million
standby agreement. Egyptian Prime Minister Muhi al-Din has indicated to US
officials that the price rises will probably be postponed until after the People's
Assembly elections in April of next year.
Bread price subsidies are symbolic of Egyptian Government policies that the
IMF and foreign donors find objectionable. The current retail price of bread-
equivalent to less than a penny per loaf-represents only 12 percent of the cost
of production. Similarly, large subsidies exist in the energy sector and for other
basic staples. Failure to come to agreement with the Fund will dim chances
that Egypt can secure an accommodation with Paris Club members on debt re-
scheduling and may cause aid donors to take a harder look at future aid
requests.
Taiwan Preparing To Taiwan's effort initially will consist of 49 banks, about one-tenth the number
Allow Offshore Banking in Hong Kong and one-third the number in Singapore. Taiwan's Ministry of
Finance and Central Bank expect the offshore banks will help reduce Taiwan's
costs of acquiring foreign capital for investment projects and will enhance
Taiwan's status in the international financial community. In addition, Taiwan
hopes to exploit the uncertain status of Hong Kong to attract business.
Although Taiwan has strict foreign exchange controls for domestic banks, they
will not apply to the offshore banks.
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Global and Regional Developments
East Germany and Bonn and East Berlin agreed in mid-November to renew their accord on postal
West Germany Sign and telecommunications services that lasts through 1990. East Germany will
Communications receive 200 million marks (DM) annually (about $75 million) to maintain and
Accord improve mail and telephone service as well as an advance on future payments
of DM 100 million toward the cost of equipment improvements. The money
will be paid before the end of the year. The previous agreement, which expired
at the beginning of this year, brought East Berlin DM 85 million annually.
The two sides also agreed to construct a fiber optic telecommunications cable
between West Germany and West Berlin at an additional cost to Bonn of DM
15-20 million.
Bonn probably hopes momentum created by this agreement and other recent
contracts will sustain overall intra-German relations during the period of INF
deployment. East Berlin, still having trouble lining up trade credits, is
concerned about safeguarding future inflows of hard currency from Bonn
before it has to join in any Warsaw Pact political countermeasures to the INF
deployment. The East Germans may also hope to use the new communications
agreement to spur negotiations on other economic issues such as the status of
their money-losing rail system in West Berlin.
France Seeks Improved In late November, French Foreign Trade Minister Edith Cresson claimed she
Trade Balance With the had won assurances from the Soviets to step up orders for French goods. Soviet
USSR officials failed to give the specific assurances Cresson had sought, however,
and the details of the proposed contracts remain to be negotiated. Soviet
exports to France in 1982 (almost all energy) totaled about $3 billion, while
France sold only half that amount. Despite some improvement in the 1983
trade balance, Paris is becoming increasingly concerned about the sudden fall
in Soviet capital goods contracts-$125 million this year as opposed to $625
million in 1982. Meanwhile, with Soviet gas exports due to begin next year
through the new Siberian pipeline, Paris fears the current trade gap will
worsen. France will continue to press the Soviets for new orders but probably
will find it difficult to obtain substantial increases in capital goods contracts
because Soviet trade demands have been largely fixed under the current five-
year plan
EC High-Tech Program The EC Research Council recently agreed, in principle, to implement an R&D
program aimed at strengthening the competitiveness of West European
information technology in an attempt to catch up with the United States and
Japan. Final agreement to fund the program, however, could be delayed for
several months because of EC budget disputes. The ESPRIT program- the
European Strategic R&D Program on Information Technology-is the Com-
munity's principal cooperative research effort to support basic research
activities of business and academic institutions. It is intended to improve the
EC's technological base in advanced microelectronics, computer software,
advanced data processing, computer integrated manufacturing, and office
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systems. The plan, however, will not fund product-oriented research efforts.
The program is scheduled to cost $1.3 billion over the next five years with an
equal share of the funding provided by the EC budget and the private sector.
All countries support the research plan and none has raised objections to the
amount of funding. Adoption of the ESPRIT program probably will be
delayed, however, until the overall EC budget problem is solved. The budget
issue is,on the agenda for the EC summit in Athens on 4-6 December but prob-
ably will not be resolved for several months.
Australia Moves To Australia, with a record wheat crop expected this winter, is courting Middle
Sell Bumper Wheat East and Communist country markets using aggressive sales tactics. The
Crop Australians expect to harvest about 20 million metric tons of wheat, almost tri-
ple last year's drought-blighted crop and 2 million tons above the previous
record. A high-level trade delegation is currently visiting the Middle East and
is emphasizing Australia's agricultural exports, particularly wheat. The
Australian Wheat Board (AWB) has offered grain storage technology and pest
control systems to the USSR, has undertaken the construction of wheat silo
complexes in Egypt, is helping Iraq set up a cereal testing laboratory, and has
offered India free grain storage in return for purchase of 1.5 million tons of
wheat.'
These tactics are paying off. The AWB announced a sale of 1.25 million tons
to Iraq in early November and 2 million tons to Egypt. In mid-November,
Australia sold 1.5 million tons of wheat to the Soviet Union, the largest
contract ever signed between the two countries; Australia hopes to sign a long-
term wheat supply agreement within the next year. Total Australian wheat
exports are expected to reach 11.5 million tons this marketing year (July/
June), up by 26 percent over last year. US wheat exports, on the other hand,
are expected to fall to about 38 million tons, 5 percent below last year's
already reduced levels.
National Developments
Developed Countries
Forecasters Optimistic In contrast to pessimism earlier this year, private economic research institutes
About Japanese Growth in Tokyo are now confident that Japan's real GDP will meet the government's
Prospects growth target of 3.4 percent during the fiscal year ending 31 March 1984. Ex-
port demand in recent months has been stronger than expected, forcing
upward revisions in forecasts. We believe the institutes' optimism will help
keep economic performance from becoming a political issue in the forthcoming
lower house election campaign.
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Looking ahead to fiscal year 1984, the private forecasters are predicting real
GDP growth of between 3.7 percent and 4.4 percent. Domestic demand is
expected to revive somewhat next year without harming export performance.
The institutes disagree, however, over the current account balance. Nomura
Securities is projecting a $1 billion decline in the surplus, while Daiwa
Securities foresees a $7 billion increase-to $29 billion.
West German The state prosecutor's plans for bringing corruption charges against Economics
Economics Minister Minister Lambsdorff may force Chancellor Kohl into an early and unwelcome
To Be Indicted cabinet change. The prosecutor's announcement Tuesday follows a lengthy
investigation of Lambsdorff-the main architect of the government's free
Although Kohl would prefer to postpone
a decision on this issue, he will come under attack from the opposition and
media if Lambsdorff does not quit. Lambsdorff's departure probably would
not bring major changes in economic policies. Uncertainty about the econom-
ics portfolio, however, will dampen steadily improving business confidence. A
minister of less stature than Lambsdorff might have greater difficulties
promoting the government's free market policies with domestic and EC
interest groups.
Major Layoffs Despite modest economic recovery in most West European countries, tradi-
Continue tional industries such as steel, shipbuilding, and autos continue to layoff
in Western Europe workers. In recent months, manufacturers in West Germany, France, and
Italy have announced planned layoffs totaling an additional 22,000 workers.
West Germany's largest steel manufacturer, Thyssen, plans to reduce its
work force by 8,000 workers by 1985. The Italian shipbuilding firm Fincan-
tieri plans to reduce its work force by 7,000, and the French automobile
manufacturer Peugeot intends to cut more than 7,000 assembly line workers,
technicians, and managers. These layoffs continue the declining trend in
manufacturing employment that began in the early 1970s. Manufacturing
employment in Western Europe has dropped 15 percent since 1970-a loss of
6.2 million jobs. Although economic recovery should slow the decline in
manufacturing employment, traditional industries in Western Europe will still
face high labor costs and intense competition from abroad.
Portugal Revises President Eanes has signed a decree law that will make it easier for firms to
Labor Laws obtain government permission to lay off workers temporarily and to shorten
working hours. Since the 1974 revolution, the required government authoriza-
tion to take these actions rarely had been granted. The new measure will
provide relief to private-sector companies that cannot meet payrolls and in
some cases will prevent bankruptcy. The new law, however, could have an even
greater impact on public-sector enterprises. The Soares government now has a
green light to trim excess labor from bloated public-sector payrolls. Portuguese
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trade unions oppose the new law, but they lack sufficient power to dissuade
Lisbon from pushing ahead. Ministry of Labor officials have indicated to the
US Embassy that additional revisions are in the works that will ease other re-
strictive labor laws
Greece's Credit Rating Some international bankers have recently downgraded Greece's credit rating,
Jeopardized as according to the US Embassy in Athens, and a few lending institutions have
Economy Worsens begun to reduce their exposure in Greece. The bankers are questioning
Greece's ability to finance its ballooning foreign debt. The debt-which has
grown by $1.6 billion this year to $11.6 billion, including an estimated $1
billion in short-term credits-is expected to rise in 1984 to $13.2 billion. The
debt service ratio, at present 23 percent of earnings from exports of goods and
services, most likely will reach 25 percent next year. Adding to Athens's
difficulties are its domestic economic problems; inflation and unemployment
rates are running at 20 and 10 percent, respectively, while real GNP is
expected to decline 0.2 percent this year.
has pledged to reduce Greece's dependence on the West.
The latest OECD draft survey of the Greek economy concludes that Athens
must reduce consumption and substantially increase productive investment
and exports if it is to avoid serious debt servicing problems. The Papandreou
government is not likely to take the OECD's advice, however, because it wants
to avoid real reductions in personal income and public-sector spending. Barring
new policies, Greece could be forced in the coming years to seek official
financial assistance. This would be an embarrassment for a government that
Less Developed Countries
Mexico To Release Treasury Minister Silva Herzog has announced that firms acquired when the
Nationalized banks were nationalized last year will be returned to private ownership soon,
Companies according to press reports. The minister made the statement in response to
questions from opposition party members during a presentation to congress last
week. Stiff opposition from labor groups, who wanted to assume control of the
firms, and from leftist parties is probably responsible for the long-delayed
decision on the companies' future. We believe attempts to return these firms
will have mixed results because the financially strapped private sector may not
have sufficient cash to buy them. The move, however, would reassure private
business that de la Madrid's pledge of no further nationalizations is sincere.~ 25X1
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Mexico Announces New Mexico City recently boosted farmgate price guarantees and announced new
Price Measures for direct subsidies for food processors as part of its effort to help hard-hit farmers
Food Producers while shielding urban workers. Guaranteed prices for 13 agricultural products
were increased an average of 120 percent over October 1982 prices, according
to press reporting. Processors of basic foodstuffs, including tortillas, bread, and
cooking oil, will receive new subsidies totaling over $1 billion in the next year.
Commerce Secretary Hernandez said that the additional income from recent
gasoline and diesel price hikes would be used to partially fund these subsidies.
In most cases, Mexico City did not pass price increases through to the
consumer, although retail prices of milk and eggs were boosted in part to
alleviate chronic shortages. The government reiterated that consumer prices
for basic foods would be linked to minimum wage increases.
These subsidy and price support measures are a part of the administration's
National Food Program announced in mid-October. The program aims to
increase production and improve distribution of basic foodstuffs. We believe
Mexico will have difficulty meeting its targets, however, because farmgate
price hikes during the past two years have been substantially below inflation,
foreign exchange shortages have cut imports needed by agricultural and food
processing firms, and budget restrictions and administrative problems have
prohibited credit expansion. At current inflation rates, the recent price hikes
will be eroded quickly, and we believe Mexico City most likely will be more
concerned with holding the line on consumer prices than with boosting
domestic agricultural production.
New Economic Prime Minister. Seaga has scheduled parliamentary elections for 15 Decem-
Program Prompts ber-nearly two years early-in response to the opposition party's uproar over
Jamaican Elections economic measures taken last week. Kingston announced a 40-percent devalu-
ation of the Jamaican dollar in conjunction with its decision to abandon its
IMF Extended Fund Facility (EFF). Jamaica has reached preliminary agree-
ment with the Fund to replace the EFF with an $80 million, 15-month standby
loan and a $70 million Compensatory Financing Facility. For the most part,
private investors have welcomed the measures, which include the dismantling
of import controls on essential goods and allow interest-bearing foreign
currency accounts. The inflationary impact on consumers will be cushioned by
temporary subsidies on basic food imports. Although Seaga's election is
assured because of an opposition boycott, strikes and civil disturbances may be
fomented in protest. If unrest occurs, it would undercut the short-term impact
of the new economic policies by stimulating investor uncertainty, discouraging
peak season tourist reservations, and disrupting the important bauxite and
shipping industries.
Secret
2 December 1983
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Secret
Sudanese Development The future of two major development projects in southern Sudan is threatened
Projects Threatened by recent dissident activity. In two separate incidents in mid-November, rebel
groups kidnaped 11 foreign workers. The rebels demanded that Chevron stop
oil exploration and cease construction of an oil export pipeline and that
Compagnie de Construction Internationale (CCI) curtail work on the Jonglei
canal. Although Chevron and CCI did not agree to the rebel demands and the
hostages were released, dissident operations against the pipeline and canal
could easily delay the projects and raise construction costs. Many of the
companies' skilled employees are refusing to work because the rebels have
threatened further attacks. Both projects are slated for completion in 1986.
The pipeline will provide critical foreign exchange earnings for Sudan, and the
canal will increase Nile water flows to both Sudan and Egypt.
Libyan Consumer Price Tripoli's cost-trimming fiscal policies are cutting deep into the Libyan
Increases consumer's pocketbook Over the past 12
months consumer food subsidies have been reduced an average of 25 percent,
Salary increases have also
been postponed for the year. We believe the regime has adopted these steps to
constrain disposable income to forestall further discontent over reduced
consumer imports. Qadhafi's pervasive security service and a politically timid
population weigh against discontent over prices and shortages reaching a
regime-threatening level.
Yugoslavia's Appeal for The Yugoslavs, in a meeting last week with major Western government
Financial Aid creditors, informally requested $500 million in new funds and an equal amount
for debt relief in 1984. The participants tentatively agreed to form two
working groups to begin discussions in January. One group, headed by the
French, will handle debt refinancing. The second, chaired by the IMF, will
deal with Yugoslavia's more general economic difficulties. The tentative
format accommodates Yugoslavia's desire to avoid a formal meeting of the
Paris Club, but official creditors are likely to follow Club guidelines for debt
rescheduling. Some governments are unwilling to repeat the special financial
rescue package for this year, and Belgrade's request for new funds seems
certain to meet stiff resistance from these governments.
Yugoslavia's Energy Electricity shortages of 15 to 25 percent are disrupting industrial production
Situation and threatening to become a political issue. The shortfall results from drought
that has reduced reservoirs to their lowest levels in 60 years-hydroelectric
power accounts for 40 percent of electricity-and from fuel oil shortages at
thermal plants. Conditions could worsen if overtaxed coal-fired plants and the
Krsko nuclear power plant experience breakdowns. In addition, the Winter
Olympics in February could cause a temporary crunch in some areas when
power is diverted to the Sarajevo area. Belgrade has tried to improve the
11 Secret
2 December 1983
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situation by using scarce hard currency to import additional fuel oil, by
drawing down federal fuel reserves, and by importing electricity on long-term
swap arrangements. In addition, Belgrade increased electricity prices by 16
percent in early November. A major improvement is unlikely, however, until
next spring when snow runoff fills reservoirs.
Romania's Economic Bucharest is taking steps that will cause living standards for workers to
Problems become worse and could lead to widespread unrest during the coming winter.
President Ceausescu announced last Friday that the government has approved
measures to cut by 50 percent all domestic energy consumption not directly
tied to production. The power problems are caused by a fall in hydroelectric
generation because of drought, a drop in natural gas output, and reduced oil
imports to save hard currency. Many regions are starting to experience severe
electrical power shortages that have closed factories and idled workers.
Western press reports from Bucharest say the leadership has urged consumers
to stop using vacuum cleaners, washing machines, and refrigerators in an
energy-saving campaign unprecedented in postwar Romania. In addition, the
regime reportedly will close all schools for the month of January.
The government also intends to impose-sector by sector during the next
several months-a complex wage system tying salaries more closely to plan
fulfillment. Strikes by miners-one of the first groups affected-took place at
one or more mines in September in reaction to pay cuts resulting from
production shortfalls.
Ceausescu is shifting the burden to consumers in an attempt to protect
Romania's shaky industrial sector and to repay hard currency debt as quickly
as possible. Consumers, however, already are beleaguered by falling living
standards, the worst food shortages since World War II, and earlier energy
cutbacks and price hikes. The new energy measures will bring hardship to
many Romanians, and the new wage program could result in take-home pay
cuts for many as new groups of workers are added on the first of each month
through the winter. The security forces have thus far been able to intimidate
the disgruntled populace. Nevertheless, the new measures-particularly if they
lead to severe dislocations-could provoke spontaneous protests that might be
difficult to control.
Soviets Demand Better The Soviet Union has mounted a major effort to enforce quality standards on
Quality Goods From the goods it imports from Eastern Europe. According to the Hungarians, the
Eastern Europe Soviets are now using Western quality standards. Moscow reportedly has
threatened to halt shipments of Soviet raw materials and stop paying for meat
purchases with hard currency if Hungary does not fulfill its obligations to
provide high quality goods. the Soviets
have often pressured foreign trade organizations an monitored quality control
on goods intended for the USSR. Bulgarian computer components and
foodstuffs that did not meet quality standards have been returned.
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Secret
For their part, the East Europeans have long complained about the quality of
Soviet goods they receive, and the most financially pressed argue that exports
to the West are critical to their hard currency position.
25X1
Sofia normally gives first priority to Western countries,
25X1
which receive the highest quality goods in exchange for hard currency or trade
credits. Bulgarian state enterprises have been accustomed to sending the
Soviets second-quality goods that are not sold domestically. The Hungarian
official said Budapest has not fulfilled agreements with the Soviets, because it
has sold higher quality goods-originally intended for the USSR-to the West
for hard currency. While an increase in such practices in the wake of greater
East European hard currency requirements probably prompted the Soviet
crackdown, it is doubtful how long Moscow can sustain its quality control
effort. The USSR has traditionally accepted inferior goods from its East
European allies and previous efforts to change the situation have not had
lasting success.
Battle Brewing Over The GATT textiles committee later this month will consider China's request to
China's MFA Status join the Multi-Fiber Arrangement, the GATT forum that establishes guide-
lines for bilateral textile trade agreements. In its petition, China claims
entitlement to "treatment equivalent to that accorded to other participating
developing countries with similar levels of economic development." This
statement suggests that Beijing wants to be accepted into MFA as a "small
supplier," a category that would permit China during future bilateral negotia-
tions to demand a minimum 6-percent annual growth rate for its textile
exports. Many developed nations that have had textile trade difficulties with
China are likely to oppose the Chinese claim and instead recommend giving
China "large supplier" status, which carries no minimum growth rate. Beijing
likely will press its claim and stimulate yet another textile controversy.
Shortfall in Recent reporting from Phnom Penh, the UN, and the US Embassy in Bangkok
Kampuchean Rice Crop confirms that Kampuchea's 1983 main rice crop will be smaller than last
year's 1.7 million metric tons, but there is disagreement on the size of the
shortfall and the impact on the 1984 food supply. Phnom Penh claims that
planted acreage as of 30 September was slightly greater than at the same time
in 1982, offsetting somewhat the impact of this year's floods and drought.
Furthermore, the government claims that reserves of corn will mitigate any
rice shortage. The US Embassy in Thailand believes that food shortages,if at
all, will develop in the second half of 1984. On the other hand, UN officials,
including Commissioner for Kampuchean relief Sir Robert Jackson and Food
and Agriculture Organization representatives, predict that Kampuchea will
need at least 100,000 tons of relief aid to avoid starvation next year. As long as
Phnom Penh remains relatively positive, however, Jackson's appeals to poten-
tial food donors most likely will go unmet.
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Secret
Drop in Key Debtor Reserves
This article is part of a special series focusing on
the economic and political aspects of the interna-
tional financial situation.
The foreign exchange reserves of 10 key debtor
countries fell by $3.2 billion during the first 10
months of 1983. We estimate that reserves for
these countries in October stood at $22.6 billion,
continuing a downward trend since 1980 when
reserves totaled $47.9 billion. Although the ratio of
reserves to average monthly imports-an important
measure of a country's liquidity-has remained at
about three and a half months since late 1982, the
stability of this indicator results primarily from
sharply lower imports caused by import restrictions
and other austerity measures.
The major debtors have undertaken IMF programs
or other policies to slow the reserves drain, but only
Mexico has been able to sharply build reserves
while remaining within IMF guidelines. Venezuela
and Nigeria, hoping to avoid IMF-imposed auster-
ity measures, have relied on foreign exchange
controls and accumulation of arrearages to com-
mercial creditors to reduce their reserve draw-
downs.
Among the key LDC debtors:
? Brazil's official foreign exchange reserves proba-
bly totaled $3 billion in October, although we
believe liquid reserves are substantially below this
amount. Reserves fell sharply early in 1983 as
foreign banks withheld promised financing and
the IMF suspended its support when Brasilia
went out of compliance with the IMF-approved
economic austerity program. The decline contin-
ued until late summer when Brazil instituted
centralized foreign exchange controls. The recent
IMF agreement will encourage bankers and gov-
ernments to provide $9 billion in new money and
export credits. It is hoped that these new funds
coupled with a large trade surplus will permit
Brazil to meet its debt service obligations and
ease pressures on reserves.
? The $400 million rise in Venezuela's foreign
exchange reserves to $7 billion in October, in our
judgment, gives a false impression of the financial
health of that country. As an alternative to an
IMF austerity program, Caracas on its own has
slashed imports, imposed exchange controls, and
chosen not to meet principal payments on public
foreign debt. Arrearages on private-sector debt
grew to $700 million by early November, accord-
ing to Embassy reporting. We doubt these poli-
cies can be sustained for long, and it is likely that
after the December elections Caracas will come
under increased economic pressure to seek debt
relief and an IMF austerity program.
? We estimate that Argentina's liquid foreign ex-
change reserves fell to about $200 million in
October, a drop of more than $2 billion since the
beginning of the year. Nearly one-half of the
decrease occurred in September and October,
largely because the government paid $700 million
against arrearages in September, according to 25X1
press reporting. Argentina currently is in a
de facto payments moratorium and is using strict
exchange controls to rebuild reserves. In our
assessment, the liquidity crunch is unlikely to
ease until the IMF and the new government of
President-elect Raul Alfonsin agree on a new
standby program.
? Mexico's reserves, which were nearly depleted in
February, now total about $3.5 billion primarily
because of the sharp decline in imports and the
strong austerity measures undertaken this year.
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Key Debtors: Foreign Exchange Reserves a
Total
37.2
45.9
47.9
40.7
25.8
22.6
Argentina
5.0
9.4
6.7
3.3
2.5
0.2
Brazil
11.8
9.0
5.8
6.6
3.9
3.0
Chile
1.1
1.9
3.1
3.2
1.8
1.4
Indonesia
2.6
4.1
5.4
5.0
3.1
3.5
Mexico
1.8
2.1
3.0
4.1
1.0
3.5
Nigeria
1.9
5.5
10.2
3.9
1.6
1.0
Philippines
1.8
2.3
2.8
2.2
1.7
0.3
South Korea
2.8
3.0
2.9
2.6
2.8
2.0
6.0
7.3
6.6
8.2
6.6
7.0
2.4
1.3
1.4
1.6
0.8
0.7
a Total reserves less gold.
b Estimated through October.
So far in 1983, imports have run at about one-
half the 1982 level. The current account surplus
is expected to reach a record $3.6 billion this
year, according to our estimates. The internation-
al financial community is regaining confidence in
Mexico and this should help the Mexican Gov-
ernment secure the $3.5 billion in new financing
from commercial banks it is seeking for 1984.
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Secret
International Financial Situation:
Banking Regulatory Policies
This article is part of a special series focusing on
the economic and political aspects of the interna-
tional financial situation.
Banks lending to debt-troubled countries have re-
ceived mixed signals from regulatory agencies over
the past year. While regulatory agencies in OECD
countries are trying to encourage continued private
capital flows to debtor LDCs, they have a legal
duty to monitor bank soundness and safeguard
investor and depositor interests. Bankers have com-
plained about being pulled in different directions
whenever regulators have supported rescue efforts
while at the same time stressing concerns about
exposure.
Recent Regulatory Actions
Measures that commercial bank regulators have
undertaken at least partly in response to the 1982-
83 international debt crisis fall into three areas:
? Improving the quality of information regulators
receive on worldwide activities of banks.
? Increasing bad debt reserves.
? Lowei ing the ratio of loans to bank capital.
Information. Regulators have devoted most of their
effort to improving the flow of information so they
can more effectively monitor the exposure and
soundness of individual banks and better coordinate
their own activities with bank regulators in other
countries. The major push for improved informa-
tion has come from banking supervisors of the
major OECD countries working in the Bank for
International Settlements' Committee on Banking
Regulations and Supervisory Practices. Last June
the group reformulated its international bank su-
pervisory guidelines in an attempt to eliminate gaps
in reporting that have developed as a result of the
rapid internationalization of banking. In particular,
the committee focused on the need for supervisory
authorities to monitor a consolidated balance sheet
incorporating both the parent and its offshore
operations.
The EC has moved to improve information on
lending. A directive, approved by member states in
June, proposes that credit institutions be required
to report on a consolidated basis. The directive
obliges member states to introduce national legisla-
tion on this issue within two years. The directive
also proposes to eliminate legal obstacles to the
exchange of information on banking operations
among EC member states. The West German
Finance Ministry has responded by proposing legis-
lation that would require banks to report consoli-
dated balances and would make it easier for West
German regulators to share information with bank
supervisors in other countries. According to Embas-
sy reporting, the West German proposals are ex-
pected to come into force by 1985
25X1
25X1
Bad Debt Reserves. General bad debt reserves
based on debtor performance are required in most
countries, and sometimes specific reserves are re-
quired for individual loans or problem debtors. So
far this year Switzerland and Japan have altered 25X1
policies in this area. In October the Swiss Federal
Banking Commission asked Swiss banks to set
aside bad debt reserves voluntarily for problem
debtor countries amounting to 20 percent of out-
standing loans. The financial press has reported
that the action stems from the Commission's belief
that a number of Swiss affiliates of foreign banks
have inadequate provisions against sovereign risk.
Managers of some of these foreign banking opera-
tions in Switzerland have objected to the new
guideline, which is stricter than those of parent
countries. Nonetheless, virtually all banks in Swit-
zerland will probably treat the recommendation on
bad debt reserves as binding.
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The US Embassy in Tokyo reports that since
March the Ministry of Finance has encouraged
banks to establish larger bad debt reserves against
overseas lending. Banks are permitted to place in
the new reserves between 1 and 5 percent of
outstanding loans to problem debtor countries. At
present, banks may deduct from taxable income 0.3
percent of all lending as a bad debt reserve. The
new reserves can be applied to debtors that fall one
month behind in principal or interest payments or
have arranged or requested rescheduling.
Capital Ratios. Among the OECD countries, only
West Germany has recently moved to lower the
ratio of loans to bank capital. Legislation proposed
by the Finance Ministry would limit by 1988 a
bank's consolidated lending to 18 times capital-
the ratio now required for unconsolidated report-
ing. Leading bankers have criticized the capital
ratio proposal, noting that current consolidated
ratios can be as high as 24 to 1. They have
suggested a ratio of 20 to 1 as less likely to restrict
domestic or international lending.
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2 December 1983
Concerned that overreaction could threaten lending
to debtor LDCs, most OECD banking regulators in
1983 have acted cautiously while reviewing policies
and improving the quality of information available
to them. Some have taken measured regulatory
actions while others are only now evaluating bank-
ing policies:
? The Bank of England is reviewing the adequacy
of information on bank exposure as well as
supervisory practice and country risk analysis.
? Canada's Inspector General of Banks has said
that guidelines on capital requirements will be
issued.
As long as concerns over bank soundness stemming
from global debt problems remain, slow and cau-
tious implementation of additional controls is like-
ly. While it is still too early to assess the effects of
tighter regulatory practices, some bankers predict
difficulties in maintaining adequate levels of inter-
national lending.
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Secret
Near-Term Oil Market Outlook
The oil market has softened in recent months in
response to overproduction and continued weak
consumption. Even if consumption rebounds in
response to a sustained economic recovery in the
OECD, we expect soft market conditions to persist
at least through mid-1984 unless OPEC members
adhere to present production ceilings. A seasonal
drop in demand for OPEC crude oil next spring-
perhaps to as low as 15-16 million b/d-will force
the cartel to develop an acceptable allocation
scheme among members or risk further price de-
clines. Nonetheless, conditions in the Middle East
remain unsettled, and market conditions could
change quickly if Iran and Iraq follow through on
recent threats to escalate attacks against oil tar-
gets.
Recent Consumption Trends
Oil consumption continues to fall, albeit at a
declining rate. Preliminary data indicate non-Com-
munist oil consumption in the third quarter de-
clined by about 1 percent from year-earlier levels.
This marks the smallest quarterly decline since
consumption turned down in late 1979. Consump-
tion trends among major regions, however, vary
widely. Oil consumption in the third quarter in
Japan and the United States rose by 2 percent and
1 percent, respectively. In contrast, sales in West-
ern Europe declined by 5 percent. Depressed
demand in Western Europe reflects sluggish eco-
nomic growth and strength in the US dollar, which
has increased fuel prices in local currencies.
Partial data for the fourth quarter indicate that the
consumption decline may be bottoming out. Oil use
in the United States was about 2 percent above
year-earlier levels during the October-November
1979
3.0
0.9
0
-2.6
0.3
1980
-8.7
-6.8
-8.6
-8.1
-8.0
1981
-6.5
-7.5
-4.0
-5.6
-6.0
1982
-6.7
-2.6
-4.3
-7.6
-5.4
1983
-6.5
-3.3
-0.9
25X1
25X1
period. October sales in West Germany and Italy
rose 6 percent and 2 percent, respectively, although
oil use in France declined by 7 percent. Based on
data supplied by major oil companies to the Inter-
national Energy Agency (IEA), oil sales in member
countries are expected to show a 2-percent rise over
year-earlier levels during the fourth quarter.) 25X1
Inventory Destocking Slows
Industry efforts to pare excess inventories contin-
ued in the third quarter. Although non-Communist
inventories rose by about 1 million b/d in the third
quarter, the rate of buildup was less than half the
normal seasonal rate. We estimate that non-Com-
munist oil stocks on land at the end of September
approximated 4.1 billion barrels, or about 91 days
of forward consumption. Nearly 500 million barrels
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Non-Communist Primary Oil Stocks on Land,
End of Period a
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
1978
3.6
3.7
3.9
3.9
1979
3.5
3.8
4.2
4.3
1980
4.3
4.6
4.8
4.6
1981
4.5
4.6
4.7
4.6
1982
4.3
4.2
4.3
4.3
1983
4.0
4.0
4.1
a Estimates include government-owned stocks in Japan, West
Germany, and the United States that have increased from 62
million barrels in first-quarter 1978 to about 495 million barrels at
end of third-quarter 1983. The increase amounts to about 10 days
of forward consumption.
b Estimated.
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
74
76
74
69
72
78
81
82
91
99
97
93
101
104
100
96
97
98
97
96
93
93 b
91 b
of this total-11 days of supply-represent govern-
ment-owned stockpiles. The commercial stock por-
tion measured in days of supply has declined to a
more normal operating range. Nonetheless, some
industry sources believe there is room for further
inventory drawdowns early next year.
Preliminary figures indicating production drops of
200,000 to 300,000 b/d in both Saudi Arabia and
Nigeria in early November suggest that OPEC
crude production may have peaked in September at
19.2 million b/d, 1.7 million b/d above the cartel's
self-imposed ceiling. OPEC production had
climbed by more than 2 million b/d since the
second quarter, reflecting in large part the slow-
down in company efforts to pare excess inventories.
Saudi production rose most sharply-output in
October was 1 million b/d above its implicit quota
of 5 million b/d-as Riyadh continued its war
relief assistance to Iraq in the form of crude sales to
Baghdad's customers.
Some industry analysts believe
Secret
2 December 1983
high Saudi production reflects a strategy to pre-
clude a premature lifting of OPEC quotas by
keeping spot prices soft.
Bad weather reportedly forced Iran's main crude
export terminal at Khark Island to close for several
days, causing a cutback in production in October.
Qatar, on the other hand, reportedly raised its
output 100,000 b/d above September levels, joining
several other OPEC members in producing over its
quota. Non-OPEC production also continues to
rise, largely because UK production set a new high
in September of almost 2.5 million b/d, roughly
200,000 b/d above second-quarter levels.
Market conditions have put downward pressure on
spot prices in recent months. With the exception of
a short-lived upturn in October in response to
Middle East war rumors, spot prices have trended
downward since late August, and most spot prices
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Secret
OPEC: Crude Oil Production, 1983
Total
17.5
16.8
19.2
18.7
19.0
Algeria
0.725
0.6
0.6
0.6
0.6
Ecuador
0.2
0.2
0.2
0.2
0.2
Gabon
0.15
0.2
0.2
0.2
0.2
Indonesia
1.3
1.4
1.4
1.4
1.4
Iran
2.4
2.3
2.6
2.5
2.4
Iraq
1.2
0.9
0.9
1.0
1.0
Kuwait
1.05
0.7
0.9
1.0
1.1
Libya
1.1
1.1
1.1
1.1
1.1
Neutral Zone
b
0.4
0.5
0.5
0.5
Nigeria
1.3
1.4
1.2
1.4
1.3
Qatar
0.3
0.3
0.3
0.3
0.4
Saudi Arabia
5.0 c
4.4
6.2
5.6
6.0
United Arab Emirates
1.1
1.2
1.2
1.2
1.2
Venezuela
1.675
1.7
1.7
1.7
1.7
a Preliminary.
b Neutral Zone production is shared equally between Saudi Arabia
and Kuwait and is included in each country's production quota.
c Saudi Arabia has no formal quota; it acts as swing producer to
meet market requirements.
are now below their official levels. Arab Light
crude in late November approximated $28.05 per
barrel. African Light crudes have declined from
$31.00 in late August to $28.90 per barrel, or about
$1.10 per barrel below official prices. Only a few
heavy crudes have remained at or above official
prices. In response to the weak market, the Soviet
Union recently lowered the contract price of its
decision to adjust the crude oil production ceiling of
17.5 million b/d until the OPEC ministerial meet-
ing next week in Geneva.
Oil Market Outlook Through Mid-1984
crude oil by 50 cents per barrel to $29.00.
OPEC efforts to stem the slide in spot prices have
been ineffective. Following an October meeting in
Vienna, the OPEC Monitoring Committee sent
telegrams to eight OPEC members admonishing
them for exceeding their production quotas. The
message had little effect since most violators con-
tinued to exceed their quotas through mid-Novem-
ber. The Committee also agreed to defer any
The near-term demand outlook will depend princi-
pally on the pace of the economic recovery in
OECD countries, inventory patterns, and seasonal
weather factors. In our base case scenario, we
forecast a modest increase in oil consumption be-
ginning in the fourth quarter in response to the
continued economic recovery and further erosion in
real oil prices. As a result, we expect non-Commu-
nist oil consumption to record a 1- to 2-percent gain
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Spot
28.35
28.90
Official
29.00
29.00
Yield
27.85
28.80
Nigerian Bonny Light
Spot
29.75
30.20
Official
30.00
30.00
Yield
29.41
31.03
Kuwait Medium
Official
27.30
Yield
26.96
Ekofisk
Spot
29.60
30.65
Official
30.25
30.25
Yield
28.67
30.24
Non-Communist Oil Supply
and Demand, Base Case
I II
III IV
I II
44.6
42.7
42.7
45.3
46.0
43.0
Inventory change
-3.8
-0.9
1.4
-1.0
-1.9
0.4
Production b
40.8
41.8
44.1
44.3
44.1
43.4
Non-OPEC
24.1
24.2
24.7
24.7
24.7
24.8
OPEC
16.7
17.5
19.4
19.6
19.4
18.6
a Excluding refinery gain.
b Includes natural gas liquids.
29.00
28.80
28.55
28.65
28.05
29.00
29.00
29.00
29.00
29.00
29.21
29.95
28.67
29.23
28.26
30.75
31.00
30.30
29.90
28.90
30.00
30.00
30.00
30.00
30.00
31.05
32.00
30.38
30.89
29.95
30.85
31.25
30.10
29.90
28.75
30.25
30.25
30.25
30.25
30.25
30.45
31.25
29.65
30.14
29.23
over year-earlier levels through mid-1984. Our
consumption forecast is in agreement with most
recent industry projections of the near-term out-
look.
The existence of ample surplus capacity worldwide
and prospects for continued price weakness have
caused oil companies to reduce the amount of oil
held as stocks to meet seasonal consumption needs.
As a result, we have adjusted upward by about 1
million b/d our estimate of oil production require-
ments to fill consumption needs during the winter
months to offset the lower stock drawdowns that we
anticipate.
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2 December 1983
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Secret
Weather patterns also have a significant impact on
oil use in the Northern Hemisphere. The extremely
mild weather last winter, for example, reduced oil
use by roughly 500,000 b/d, according to some
industry estimates. Our base case scenario assumes
normal winter weather; if a very cold winter should
occur, oil use could be about 500,000 b/d above our
base case estimate.
Under our base case conditions, we expect oil
consumption to approximate 45.3 million b/d in the
fourth quarter, rising to about 46 million b/d in
first-quarter 1984. We estimate that demand for
OPEC oil, including about 1 million b/d of natural
gas liquids, will approximate 19-20 million b/d.
With the expected seasonal decline in consumption
to about 43 million b/d in the spring, we estimate
demand for OPEC oil at about 18.5 million b/d
during second-quarter 1984
Although a rebound in oil consumption would help
underpin oil prices, the availability of some 8
million b/d of spare productive capacity should
keep oil prices soft. Even at these higher levels,
demand is insufficient to allow most OPEC coun-
tries to produce at desired levels. As a result, we
believe continued production restraint will be need-
ed to maintain the current price structure.
Should the expected rebound in oil consumption
fail to materialize, oil producers will have a diffi-
cult time preventing further oil price declines. If oil
use continues to fall at recent rates, companies
would be saddled with excess inventories next
spring, potentially reducing demand for OPEC
crude oil to about 15.5 million b/d-about 2
million b/d below the current production ceiling.
Given the growing financial pressures on several
producing countries and the political animosity
between some members, OPEC could be hard
pressed to accommodate such a sharp drop in
demand. Should OPEC fail to reach an effective
production sharing agreement, a further cut in
nominal prices early next year would probably be
required. Under these conditions, we believe the
possibility of a downward price movement would be
Producer Cooperation
Barring a stronger-than-expected rebound in oil
demand, the key to the near-term price outlook will
be producer cooperation. Given recent experiences,
we believe OPEC will have difficulty establishing
an effective production sharing scheme at the
upcoming OPEC ministerial meeting. Indeed, sev-
eral members, including Iran, Iraq, Nigeria, and
Venezuela, have already indicated that they will
seek higher individual production quotas, according
to press reports.
Saudi Arabia must play a major role in establishing
an effective quota
the Saudis are annoyed with criticism of their
recent output increase and dissatisfied with their
role as a swing producer.
several Saudi officials have expressed
concern about the slow recovery in oil demand and
have hinted that further price cuts might be advis-
able. Unless Riyadh is willing to assume a major
share of the burden in cutting back output next
spring when demand weakens, we believe OPEC
will be unable to reach an effective production
allocation scheme and avoid downward price pres-
sures.
Any meaningful cooperation on production sharing
from non-OPEC producers is unlikely until OPEC
members themselves exhibit more discipline. Brit-
ish National Oil Company's general manager re-
cently denied industry speculation that the British
Government would soon implement plans to reduce
crude production from North Sea fields. The UK
Minister of State for Energy in a written reply to
parliamentary questions said the United Kingdom
will not take steps to restrain North Sea oil produc-
tion until the end of next year at the earliest.
Despite some formal exchanges on cooperation with
OPEC, Moscow continues to demonstrate market
flexibility as evidenced by its recent price cuts.
Mexico is the only major non-OPEC producer now
restraining output.
considerable.
Secret
2 December 1983
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I
25X1
I
25X1
25X1
25X1
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Although our forecast and those of most industry
experts point to continued weakness in the oil
market over the coming months, the volatile situa-
tion in the Middle East could cause a rapid turn-
about in the market. Iraq's deterioriating economic
situation, coupled with the recent acquisition of
French Super Etendard aircraft with Exocet mis-
siles, could prompt Baghdad to initiate attacks
against oil shipping in the Persian Gulf in an effort
to bring an end to the conflict with Iran. Such
action might induce Iran to carry out its oft
repeated threat to retaliate by closing the Gulf to
shipping or striking out against the oil facilities of
Iraq and its Persian Gulf allies
Should disruptions in the Persian Gulf occur, the
world oil market could tighten quickly and cause at
least a temporary runup in spot prices for several
reasons:
? Uncertainty regarding the extent of damage to
the oil industry in the Gulf and the length of any
supply disruption, including the possibility of
further attacks on oil facilities.
? A minimum of available surplus capacity in non-
Communist countries is outside the Gulf; only
about 3 million b/d of the present surplus of 8
million b/d is located outside the region.
? Commercial stocks have been drawn down to
near normal levels and there is little surplus to
offset a disruption; government-held stockpiles
might not be used initially to prevent price run-
ups.
Secret
2 December 1983
While sizable runups in oil prices are likely during
a major disruption of Persian Gulf oil supplies, we
cannot predict how high prices would rise or how
long such increases would be sustainable. We be-
lieve the key factors under any circumstances are
industry and public perceptions of the disruption
and the timing of such an event. Based on our
analysis of previous disruptions, any supply curtail-
ment that occurs during the early winter months is
likely to have a much greater impact on prices than
one that occurs late in the winter heating season.
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Oil Stocks and Government Policies
of Industrial Countries
Falling consumption, high interest rates, declining
oil prices, and prospects for ample supplies have
triggered a sizable reduction in industrial country
oil stocks.' Since 1980 total oil stocks in the
industrialized countries have declined by about 500
million barrels as increases in government-owned
stockpiles have only partly offset the decline in
commercial stocks. Measured in days of forward
consumption, commercial inventories at the end of
third-quarter 1983 have dropped to near the levels
recorded in the 1978-79 period. Moreover, world
market conditions and budgetary constraints have
slowed purchases for government stockpiles and
relaxed the level of compulsory stockpiles in some
countries. Although oil inventories remain ade-
quate for projected consumption needs, the erosion
of the commercial stock cushion over the past few
years and uncertainties regarding the disposal of
government-owned stocks have increased the mar-
ket's vulnerability to a major supply cutoff.
Oil consumers hold stocks for two primary reasons:
? To meet expected operating requirements, includ-
ing the need to balance seasonal fluctuations in
consumption.
? To ensure against unexpected delivery shortfalls
or surges in demand.
Primary inventories are stocks held by major com-
panies and refiners. Government-owned stocks are
also included in primary stocks, although they are
outside normal commercial channels.
The exact stock level of an individual company is
determined by its expected future needs as well as
by any miscalculations that occurred in balancing
past supply and demand. Factors influencing deci-
sions on the level of stocks to be held include:
? Expectations about future supply availability,
particularly stability in certain key oil-producing
nations.
? Estimates of future consumption levels including
the strength of economic recovery.
? The level of interest rates.
? Expectations about future price movements.
? Government policies that dictate the maintenance
of mandatory stock levels.
Expectations of a decline in oil prices, lower oil
consumption, high interest rates, and surplus pro-
ductive capacity all have provided incentives for oil
companies to reduce inventory levels.
Although inventory accumulation resumed in third-
quarter 1983 at about 1 million b/d, the buildup
was only half the normal third-quarter rate. We
estimate that total primary oil stocks including
government-owned stocks in the industrialized
countries stood at about 3.2 billion barrels-about
93 days of forward consumption at the end of
September. Commercial stocks, including compul-
sory stocks, approximated 2.7 billion barrels, and
government-owned stocks in West Germany, Ja-
pan, and the United States totaled approximately
500 million barrels. This is roughly the same total 25X1
level as in the 1978-79 period. Then, however,
commercial inventories averaged about 3 billion
barrels while government-owned stocks averaged
only slightly more than 100 million barrels.
25X1
a large portion of
25X1
commercial stocks-about 55 days of consump-
tion-represent minimum operating stocks needed
Secret
DI IEEW 83-047
2 December 1983
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Stocks including
government owned
United States
1,263
1,369
1,507
1,513
1,446
1,490
66
74
87
95
96
97
Canada
153
147
172
173
131
102
79
75
90
101
84
64
Japan
392
437
509
491
467
423
69
78
97
103
98
87
Western Europe
1,215
1,339
1,515
1,410
1,293
1,162
79
90
110
106
107
94
Of which:
France
214
229
269
229
205
157
78
92
103
104
106
80
Italy
158
166
196
188
180
156
73
77
94
94
101
85
United Kingdom
152
168
170
147
134
116
75
87
107
93
84
71
West Germany
227
226
299
302
276
268
77
91
124
128
126
120
Total OECD b
3,023
3,292
3,703
3,587
3,337
3,177
72
80
97
95
100
93
Government-owned
stocks c
United States
47
91
93
199
278
361
2
5
5
12
18
23
Japan
0
33
33
54
70
79
0
6
6
11
15
16
West Germany
44
44
53
55.
55
55
15
15
22
23
25
25
Total OECD
92
168
179
309
402
495
2
4
5
8
12
14
Stocks excluding
government owned
United States
1,216
1,278
1,414
1,314
1,168
1,129
64
69
82
82
77
74
Canada
153
147
172
173
131
102
79
75
90
101
84
64
Japan
392
404
476
437
397
344
69
72
91
92
83
71
Western Europe
1,171
1,295
1,462
1,355
1,238
1,107
76
87
106
102
102
90
Of which:
France
214
229
269
229
205
157
78
92
103
104
106
80
Italy
158
166
196
188
180
156
73
77
94
94
101
85
United Kingdom
152
168
170
147
134
116
75
87
107
93
84
71
West Germany
183
182
246
247
221
213
62
76
102
105
101
95
Total OECD
2,931
3,124
3,524
3,278
2,935
2,682
70
76
92
87
88
79
a End of period.
b Excluding Australia and New Zealand.
c Excluding Sweden.
to ensure a smooth functioning of the distribution stocks that provide added flexibility to meet season-
system. Another 15 days represent compulsory al as well as unexpected changes in demand. These
stocks that companies maintain to meet govern- provide only a small cushion, however, to cope with
ment requirements. The balance of about nine days a major supply cutoff.
of consumption represents usable commercial
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2 December 1983
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Secret
OECD: Third Quarter Oil Stocksa
:: Commercial
: :Government owned
OECD 1983
82
81
80
79
78
United
States
Western
Europe
West
Germany
United
Kingdom
a OECD excluding Australia and New Zealand.
b Days of forward consumption.
Y-A
LEA Stockpile Goals
targets were met or exceeded.
The decline in net imports in member countries
after 1980 caused the IEA to become concerned
that the reduction in the volume of mandatory
stock requirements could result in inadequate
emergency reserves once demand increased. As a
result, the IEA Governing Board agreed in Decem-
ber 1981 that IEA members should not let stocks
fall below the equivalent of 90 days of 1980 net
imports, except where lower oil consumption re-
flected long-term structural changes. In December
1982, the Governing Board again revised the calcu-
lation of net imports, this time to include the
average net imports of the preceding three years.
According to the IEA, oil stocks for the 21 mem-
bers was 2.8 billion barrels at the end of second-
quarter 1983, about 12 percent below the 1980
volume levels. At midyear total IEA stocks equaled
153 days measured in days of net imports during
the previous three years. Among member countries
only Spain, Portugal, Turkey, Belgium, Luxem-
bourg, and Ireland recorded stock levels below the
90-day commitment. Preliminary third-quarter
data indicate these countries remained below the
Following the 1973 oil embargo, the 21 member
countries of the International Energy Agency (IEA)
agreed to an emergency stockpiling program that
would require stocks to reach at least a 90-day level
of net imports by 1 January 1980. Emergency
stocks are defined as total oil stocks (crude and
products) minus a 10-percent allowance for stocks
unavailable for use. Originally the number of days
of emergency reserves was to equal physical stocks
divided by the previous year's level of net imports.
Procurement and storage of the stockpile were left
to the discretion of individual countries. With the
exception of Turkey and Luxembourg, the 1980
90-day commitment.
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Million barrels
Days of net imports
Million barrels
Days of net imports
1979
1980-82b
1,372
178
1,308
255
163
1,105
99
742
466
93
425
96
1,196
128
969
106
26
126
23
118
50
99
34
81
45
152
36
170
348
121
282
123
32
122
26
106
12
93
7
69
17
Portugal
20
93
18
74
Spain
91
92
84
80
Sweden
66
119
44
96
Switzerland
42
149
43
166
Turkey
9
38
14
47
United Kingdom
170
614
117
Australia
34
173
37
219
New Zealand
9
136
7
93
a Stock levels and net imports are adjusted according to IEA
definitions.
b Average net imports for 1980 through 1982.
Major Government-Owned Stockpiles
? Public storage corporations set up with govern-
ment assistance to finance or administer energy
Although oil inventory goals have been set up by reserves.
the lEA for member countries, individual govern- ? Government requirements that the oil industry
ments have instituted a variety of stockpile policies maintain emergency reserves.
to meet their commitments. There are three basic
forms of stockpile programs in the industrialized Some governments have adopted more than one of
countries: these programs. The responsibility for procuring
? Government-owned stockpiles intended for civil-
ian use.
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2 December 1983
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Major Industrialized Countries:
Storage Programs
stocks that would be wholly government-owned and
funded. The SPR totaled 361 million barrels at the
end of September 1983 and is expected to increase
by about 68 million barrels in 1984. The current
objective of the program is to accumulate 750
million barrels by 1991. The crude oil is stored
underground in salt domes or mines and is in
addition to reserves maintained by commercial
Govern-
ment
Reserve
Public
Corpora-
tion
Industry No
Minimum Program
Storage
Ireland
X
Italy
X
France
X
Japan
X
X
Luxembourg
X
Netherlands
X
X
New Zealand
and storing oil stocks has been given to commercial
firms in most industralized countries. These firms
maintain physical control over stocks and carry the
financial burden of storage, although concessions
are granted in some countries. Despite the lack of
direct government control over stocks in most coun-
tries, all member governments can exercise control
during an emergency either by law or as a result of
"gentlemen's agreements" with the oil companies.
In three countries-the United States, Japan, and
West Germany-the government itself has become
a major stockholder through the purchase and
storage of crude oil.
United States. Until 1975, all oil stocks in the
United States except military requirements were
controlled by commercial firms with no government
involvement. As a result of the Arab oil embargo in
1973-74, the government decided to establish a
Strategic Petroleum Reserve (SPR) to procure oil
firms.
Japan. Tokyo's stockpile program requires the pe-
troleum industry to maintain 90 days of product
equivalent of the previous year's consumption with
the Ministry of Trade and Industry (MITI) respon-
sible for setting annual objectives. In 1977 the
government decided to develop its own stockpile
with the objective of acquiring an additional 63
million barrels of oil stocks by early 1983. The goal
subsequently was expanded to acquire 189 million
barrels by 1988. Purchases began in 1978, and by
September 1983 the government-owned stockpile
held 79 million barrels. In late October, the govern-
ment announced plans to buy an additional 7.86
million barrels by yearend and may purchase a
similar amount early next year.
West Germany. Bonn initially required refiners and
importers to meet the IEA stockpile objective even
though the government had been accumulating a
separate strategic stockpile since 1970. In 1978
responsibility for compulsory stocks was shifted to
the Compulsory Storage Corporation (EBV), a state
corporation. EBV was required to purchase a 65-
day supply of oil based on the previous year's
consumption and acquire sufficient storage capaci-
ty for these supplies. In early 1983, EBV stocks
stood at about 117 million barrels. The government
also requires refiners to hold an additional 25 days
of stocks as working stocks. In addition to these
compulsory stocks, the government's strategic
stockpile currently contains 55 million barrels with
an ultimate goal of 73 million barrels. Budgetary
constraints have prevented Bonn from adding to the
strategic reserve since 1981.
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Government Storage Programs
Present Size
30 Sep 83
(million bbl)
Planned
Size
(million bb!)
Target
Date
Type of
Oil Held
Storage
Sites
United States
361
750
Unknown
Crude and
products
Rock caverns and tanks
a Target date flexible. Government buys oil when budgetary
circumstances allow.
b Size of stockpile is an estimate.
Very large crude carriers; the oil will be moved to on-land storage
tanks or special floating storage islands during the 1980s.
Stockpile Programs in Other Countries
Companies operating in France must maintain
stocks equivalent to 90 days of the previous 12
months' inland sales; the government has expressed
no interest in maintaining a separate strategic
reserve. A French Government rule that took effect
on 1 September eliminated a seasonal factor in
calculating mandatory middle distillate stocks.
According to industry sources, this rule change,
combined with industry annoyance at recent gov-
ernment moves to hold down product prices, led to
a 120,000 b/d inventory drawdown in September.
Increasing domestic production has enabled the
United Kingdom to reduce stock requirements. Oil
companies maintain the bulk of oil reserve stock-
piles. There are no announced stockpile programs
in two other major oil-producing countries, Canada
and Norway.
The Italian Government requires oil companies to
maintain 90 days of emergency oil stocks. After
introducing legislation in 1981 to build a govern-
ment-owned stockpile of 7-15 million barrels, inter-
est in the program has waned as a result of soft
market conditions and a need to limit government
spending.
Secret
2 December 1983
Belgium relies on oil companies to meet IEA
objectives. Private petroleum companies are
obliged under a 1965 law to hold stocks equivalent
to 90 days consumption based on the previous
year's consumption rate. Stock requirements are
specified for gasoline, diesel, and residual fuel oil,
but companies retain the option of varying the mix
of these stocks based on conditions set forth by the
government. In a crisis, control of Belgian stocks
would pass to the National Emergency Sharing
Organization. The government presently has no
plans to build a government-owned stockpile.
In Sweden, industry is required to hold stocks equal
to 110 days of the previous year's consumption.
Government-owned stockpile levels and target
goals are a closely guarded secret. According to one
industry estimate, however, the government stock-
pile is scheduled to reach about 45 million barrels
or 90 days of consumption by the end of this year.
In Switzerland, compulsory stocks are equivalent to
180 days of the previous year's consumption and
are held by industry. Oil companies in the Nether-
lands are required to hold stocks equivalent to 90
days of the previous year's consumption, and oil
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traders are required to hold an additional 70 days
of stocks. According to industry sources, the public-
sector corporation ICOVA also has acquired 30
days of supplies, including a mix of crude and
products.
Commercial stocks have declined sharply since
1980 and could decline further in the coming year,
given the prospects for continued weakness in oil
prices and ample surplus productive capacity. Com-
mercial stocks as measured in days of forward
consumption are now approaching levels that exist-
ed before the outbreak of the Iranian revolution,
which precipitated the most recent runup in oil
prices. Should another major supply disruption
occur, we believe companies will have little cushion
available in the form of usable stocks to offset
reduced oil flows.
We believe government-owned oil stocks will con-
tinue to grow despite budgetary constraints. As a
result, government-owned stocks could play an
important role in offsetting any future oil supply
disruption. So far, however, government's have not
announced specific plans that would indicate how
they would use strategic stocks during an emergen-
cy. Because of the absence of such plans, one senior
official in a major oil company has stated that he
views government stockpiles as inaccessible and
that his company would react as if these stockpiles
did not exist. Without specific disposal plans, we
believe the relatively large government stocks prob-
ably will do little to calm market fears during a
major supply disruption.
31 Secret
2 December 1983
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Secret
Prospects for Cuts in Soviet
Large-Diameter Pipe Imports
Imports of Western 1,420-mm-diameter pipe by
the USSR could drop from an annual average of
2.2 million metric tons during 1981-85 to as little
as 500,000 tons annually during 1986-90 as a result
of a slowdown in oil and gas pipeline construction
and increased Soviet pipe production. We estimate
that annual 1,420-mm-pipe requirements will prob-
ably decline by about 800,000 tons. The startup
and expansion of output at a new pipe mill at
Vyksa, which will use domestic steel, should add
some 500,000 tons to Soviet capacity of 1,420-mm
pipe. Additional capacity for 1,420-mm-pipe pro-
duction at Khartsyzsk will probably increase from
400,000 tons in 1982 to as much as 800,000 tons by
1990 but will depend on imports of high strength-
low alloy (HSLA) steel plate.
Background
At the start of the 1960s, the Soviets relied on
imports of large-diameter pipe. Soviet production
was almost negligible-about 50,000 tons a year of
1,020-mm pipe-an amount sufficient to support
construction of less than 200 kilometers (km). In
1962 NATO embargoed exports of large-diameter
pipe to the USSR in an effort to delay construction
of an oil pipeline to Eastern Europe because the
pipeline would enhance Soviet military capabilities.
The embargo probably delayed completion of the
"Friendship" oil pipeline by about one year. More
importantly, however, the embargo accelerated So-
viet efforts to boost capacity to produce large-
diameter pipe. By 1965 the Soviets produced nearly
700,000 tons of 1,020-mm pipe.
Soviet production of large-diameter pipe increased
steadily during the late 1960s and 1970s, reaching
about 2 million tons per year by the end of the
decade. While the USSR can manufacture the steel
plate and strip used in 1,020-mm- and 1,220-mm-
pipe production, nearly all of the 1,420-mm pipe
currently produced in the Soviet Union for high-
pressure gasline service (about 400,000 tons) is of
single-wall construction using HSLA steel plate
imported from the West. (As the diameter of pipe is
increased, maintaining the same operating pressure
creates additional stress, and the strength of the
steel must be increased.)
Pipe Requirements and Imports for 1981-85
On the basis of Soviet media reports, we estimate
that the Soviets will lay about 20,000 km of
1,420-mm pipelines during 1981-85, requiring
about 2.6 million tons of pipe per year. To meet
these goals, annual imports of 1,420-mm pipe will
probably average about 2.2 million tons during this
period, and HSLA plate imports for domestic
1,420-mm-pipe production will average 400,000
tons per year. Thus, the Soviet Union will be almost
totally dependent on the West, primarily Japan and
West Germany, to meet its 1,420-mm-pipe require-
ments. Annual hard currency expenditures for this
pipe and HSLA steel plate will amount to about
$1.3 billion.
Pipe Requirements During 1986-90
We estimate annual Soviet domestic pipe require-
ments will fall during 1986-90 because of a slow-
down in the construction of gas pipelines and the
absence of new large-diameter oil pipeline con-
struction during this period. We believe that annual
Soviet requirements for 1,420-mm pipe will drop to
about 1.8 million tons per year during 1986-90,
compared with about 2.6 million tons per year
during 1981-85. Similarly, annual requirements for
1,020- and 1,220-mm pipe probably will fall to
about 1 million tons per year during 1986-90,
compared with about 1.3 million tons per year
during the current five-year plan.
Secret
DI IEEW 83-047
2 December 1983
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USSR: Installation of Large-Diameter Pipeline
per Five-Year Period
1971-75
1976-80
Plan
1981-85
Estimate
1986-90
Total
7,935
17,482
27,811
30,374
36,400
28,000
Oil (1,020-1,220 mm)
1,300
3,400
8,000
6,900
3,200
NEGL
Gas (1,020-1,220 mm)
6,635
14,082
16,103
12,474
13,200
14,000 a
Gas (1,420 mm)
0
0
3,708
11,000
20,000
14,000
We believe the USSR will construct no large-
diameter oil pipelines during 1986-90.' Oil produc-
tion is increasing at less than 1 percent per year
and probably will peak and begin to fall later in the
1980s. If this estimate is correct, major additions to
the pipeline network will not be required. With the
completion in 1985 or 1986 of a new West Siberian
oil pipeline (currently under construction), the us-
able throughput of the West Siberian oil pipeline
network will increase to about 8.9 million barrels
per day. This capacity should be more than enough
to transport the 7-8 million b/d that we estimate
will be produced in West Siberia in 1990.
to the Soviet minister in charge of pipeline con-
struction, the total cost of the gas export pipeline
will amount to about 15 billion rubles (about $20
billion). The Soviets also face limits on the amount
of gas that can be absorbed in the domestic econo-
my. Construction of storage and distribution sys-
tems is lagging, limiting the opportunities for in-
creased gas use.
Even if Soviet construction of 1,420-mm pipelines
slows as we expect, the pace of construction will
still be rapid. Specifically, during 1986-90 the
Soviets may build four or five pipelines, each about
3,000 km in length, compared with six such lines
during 1981-85-a pace of pipeline construction
In contrast to oil production, gas production most
likely will increase. We estimate that annual pro-
duction will amount to about 595 billion cubic
meters in 1985 and will increase to roughly 710
billion cubic meters in 1990. Thus, the need for
new gas-pipeline construction will continue through
1990. We estimate that the Soviets will need to lay
about 25,000 km of new, large-diameter gas pipe-
lines during 1986-90, of which about 14,000 km
will be 1,420 mm in diameter.
Our estimate for 1,420-mm pipeline construction is
about 30 percent less than the planned 20,000 km
for 1981-85. Some Soviet economists have com-
mented that the growth of gas production in West
Siberia may slow because the cost of pipeline
construction in West Siberia is so great. According
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2 December 1983
unmatched worldwide.
Soviet Pipe Production Capacity During 1986-90
At the same time that Soviet requirements for
large-diameter pipe will be declining, domestic
production will be increasing. We believe Soviet
production of 1,420-mm pipe suitable for use in gas
pipelines may rise by as much as 900,000 tons, to
1.3 million tons per year by 1990. The startup and
expansion of output at the new pipe mill at Vyksa
(near Moscow) should add some 500,000 tons to
Soviet capacity for production of 1,420-mm pipe.
In addition, the capacity available for 1,420-mm
pipe production at Khartsyzsk will increase from
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400,000 tons to as much as 800,000 tons. Produc-
tion at Khartsyzsk, however, will probably depend
in large part-and perhaps entirely-on imports of
steel plate from the West
The new mill at Vyksa will produce 1,420-mm pipe
of a multilayered construction in contrast to the
single-walled pipe imported from the West or pro-
duced at Khartsyzsk. The multilayered pipe will be
produced from ordinary low-carbon steel sheet-
which the Soviets can manufacture-in contrast to
the HSLA steel plate used in single-walled pipe for
high-pressure gasline service. The multilayer tech-
nology is far behind Western state of the art, but
US metallurgical experts believe the Soviet pipe
will work as planned. Because of increased metal,
energy, and welding requirements (the pipe is about
50 percent heavier than Western pipe), this kind of
pipe would be prohibitively expensive to manufac-
ture in the West.
Construction at Vyksa has proceeded rapidly and
should be completed by 1985. The Soviets have
announced that the plant will produce 250,000 tons
of pipe in 1983. Pipe production schedules provided
to a Western firm indicate final capacity of about
500,000 tons per year of conventional pipe equiva-
lent.'
Until recently, the Khartsyzsk plant produced
mostly 1,020- and 1,220-mm pipe because the
demand for pipe of this size was great. We foresee
that, with a decline in demand for 1,020- and
1,220-mm pipe, Khartsyzsk may be able to devote
some, if not most, of its capacity (about 800,000
tons) to production of 1,420-mm pipe. The Khart-
syzsk plant has the fabrication equipment to pro-
duce 1,420-mm pipe. It only needs the steel plate
with the requisite strength and ductility. According
to media reports, the Soviets intend to expand
production of 1,420-mm pipe at Khartsyzsk-cur-
rently about 400,000 tons and relying on imports of
HSLA steel plate-using domestically produced
steel plate during 1986-90.
3 Because multilayered pipe is heavier than conventional pipe, we
have expressed annual production at Vyksa in terms of an equiva-
lent weight corresponding to the amount of pipeline that could be
Secret
2 December 1983
The USSR's track record, however, indicates that
it will, at best, develop the capability to produce
HSLA steel plate for civilian consumers slowly over
the 1986-90 period. Soviet technical journals indi-
cate that limited production of HSLA steel plate
for use in 1,420-mm pipelines began in 1978 at the
Azovstal' Steel Works. The Soviets, however, are
still importing HSLA plate for pipe production,
suggesting that they have not worked out all the
problems in large-scale production of HSLA steel
plate
During 1986-90, about 800,000 tons of capacity
will be available at Khartsyzsk for 1,420-mm-pipe
production. If unable to produce adequate amounts
of high-quality HSLA steel plate during 1986-90,
the Soviets will have to increase steel plate imports
substantially from the current level of 400,000 tons
per year to meet the requirements for expanded
1,420-mm-pipe production at Khartsyzsk.
Hard-Currency Impact
The expected cutback in total imports of large-
diameter pipe and steel plate would help Moscow
meet other priority import requirements. We esti-
mate, for example, that annual Soviet hard curren-
cy expenditures for 500,000 tons of 1,420-mm pipe
and 800,000 tons of steel plate for manufacture of
1,420-mm pipe during 1986-90 could drop to as
little as $500 million a year (at 1982 prices)
compared with $1.3 billion a year during 1981-85.
The substitution of purchases of steel plate for
imports of pipe is attractive because the price of
steel plate per ton is only about half the price per
ton of 1,420-mm pipe. Since our estimates indicate
that the USSR will be able to increase its total
hard currency imports little if at all in the second
half of the decade without a sizable runup in its
hard currency debt, a cut in pipe imports would
help Moscow significantly.
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Secret
Soviet Union: Projected Annual Imports of
Steel Plate and 1,420-mm Pipe
0 1981-85a 1986-90b
a Projected.
b Estimated.
Political vs. Economic Trade-Offs
In the period to 1990, imported 1,420-mm pipe and
HSLA steel plate probably will continue to be
technically superior to the Soviet-made pipe and
plate and-when all aspects of pipeline construc-
tion and operation are factored in-cheaper. We
believe, however, that the Soviets will go ahead
with the large-scale manufacture of 1,420-mm
pipe, even at substantial economic costs, reflecting
Moscow's ongoing concern about possible vulnera-
bility to Western economic sanctions and a desire
to conserve hard currency
The Soviet decision to proceed with manufacture of
multilayer pipe illustrates Moscow's penchant for
self-sufficiency through import substitution. US
experts who have studied the technology employed
at Vyksa have commented that if this process were
used in a Western plant, costs could be at least
double current Western levels because of increased
metal and energy requirements. Moreover, each
weld will take longer to perform and more pipe-
layers will be required to handle the heavier pipe
Impact on Western Suppliers
A substantial drop in Soviet imports of 1,420-mm
pipe would most affect Japan and West Germa-
ny-the USSR's largest suppliers. Several of the
largest West German mills are currently producing
only for the Soviet market. It is doubtful, however,
that the Soviets would make sudden, sharp cuts in
pipe purchases. Instead increased Soviet output of
1,420-mm pipe will probably be phased in over a
period of several years, giving Western suppliers
some room to adjust. We believe the Soviets would
want to avoid consequences that could result from
sharp, unexpected cuts in orders placed in countries
with which the USSR is trying to improve ties. F_
Secret
2 December 1983
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Secret
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