ENERGY ALTERNATIVES TO THE NORTHWEST SIBERIAN PIPELINE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R000400840008-3
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: January 4, 2017
• Document Release Date: April 23, 2008
• Sequence Number: 8
• Publication Date: October 2, 1981
• Content Type: MEMO

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C ONF E TIAL
t
Department of Energy
Washington, D.C. 20585
O CT 2 1981
?
TO: Members of the SIG on East-West Economic Relations
FROM: Acting Assistant Secretary for International Affairs
SUBJECT: Energy Alternatives to the Northwest Siberian Pipeline
The attached paper was approved for distribution by Deputy
Secretary of Energy Ken Davis as a basis for discussion at
the SIG meeting next week.
The options outlined in the paper are directed either at
actually increasing energy supplies to Western Europe or at
strengthening the Europeans' perception that additional
energy supplies will be available.
You will see that some of the options would be difficult to
implement for domestic political or budgetary reasons. Some
represent energy policy objectives the Administration is
already working towards .0 On the other hand, at least one
option, government supported dredging of ports, has already
been rejected on budgetary and energy policy grounds; it is
included here only because it addresses the problem of
European perceptions.
I welcome your comments in advance of the SIG meeting.
1PPe/ter Bo e,~~~tCc
DOE review completed.
A_N
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ENERGY ALTERNATIVES TO THE NORTHWEST SIBERIAN PIPELINE
Introduction
This paper reviews possible energy alternatives to the use
of increased levels of Soviet natural gas in 6 Western European
countries: Germany, France, Italy, Belgium, the Netherlands
and Austria. The initial gas deliveries from the prospective
Northwest Siberian pipeline are estimated at 0.9-1.1 tcf/year
beginning in 1986-87. (Present Soviet gas deliveries to
Western Europe are about 0.8 tcf/year, the equivalent of
400,000 b/d oil.) Negotiations over the exact volumes to be
delivered are not completed. Over the past 6 months, the
overall prospective delivery schedules have been curtailed to
the currently estimated levels. (A CIA paper on the status of
negotiations is attached at Tab A.)
West Germany and France are likely to be the largest importers
under a' 1 tcf pipeline scenario. These countries are each
likely to import 0.25 tcf/year with Austria, Belgium, Italy
and the Netherlands sharing the remaining 0.5 tcf/year.
Under this scenario, German and French dependence on Soviet
gas could reach 25-30 percent of total gas consumption by
1990, while Italian and Belgian market dependence may exceed
20 percent. Dutch dependence is likely to be about 10 percent
while Soviet gas will continue to account for over 50 percent
? of the Austrian gas supply.
Some countries such as West Germany and Austria are more
committed to the Soviet 13roject than others. Although it is
desirable to develop a program which could displace the
entire prospective volume of the pipeline, it may not be
necessary to accomplish this goal in order to succeed in
halting the project. Options which appeal specifically
to the less committed countries may be sufficiently com-
pelling to detach them from the Soviet negotiations. The
other countries may feel over-exposed and, therefore, unable
to justify proceeding alone.
Differences in dollar/ruble exchange rates and the cost of
Soviet labor make it'difficult to place a dollar value on
the project from a purely commercial perspective. We can
reasonably estimate, however, that a 1 tcf large diameter
Siberian gas pipeline will cost at least $15-20 billion.
The Soviet perspective is that expensive ruble investments
are secondary to obtaining Western financing and technology
and earning hard currency. from gas exports.
The energy alternatives discussed in this paper can be
categorized as follows:
? means to increase available energy supplies on the world
market or to a specific country by indirect means avail-
able to the U.S.; and
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? steps that the U.S. could take directly to either increase
the level of or reduce the barriers to U.S. exports of
energy supplies to Europe or Japan.
?
No single alternative hydrocarbon option could replace the
total volume that would flow through the Northwest Siberian
pipeline. However, a combination of alternatives could
displace this Soviet gas during the relevant time frame.
I. MEASURES TO INCREASE ENERGY SUPPLIES ON WORLD MARKET:
A. Deregulation of U.S. Natural Gas Prices
Immediate deregulation of natural gas prices in the U.S.
will increase domestic natural gas production and reduce our
total petroleum consumption. These adjustments could lower
U.S. oil imports by 100 to 200 thousand barrels per day. Such
a move would increase the attractiveness of oil vis-a-vis
natural gas in Europe.
In addition, natural gas deregulation may reduce private
interest in imports of Liquefied Natural Gas (LNG) to the
U.S. due to increased domestic supplies thereby improving
Europe's access to these supplies. This decision would
respond to European urgings and would be particularly welcomed
by France.
B. U.S. Policy Statementg,on LNG Imports
A clear and unambiguous Administration statement on future
LNG imports to the U.S. would increase the attractiveness of
increasing LNG imports for several European governments,
particularly France, Belgium and Italy. It should be noted,
however, that European governments are generally cautious over
increasing dependence on OPEC LNG supplies for political and
technical reasons. Also, pipeline gas can generally be deliv-
ered at less cost than LNG, so the Soviets could undercut LNG
competitors.
The Administration could announce two policy statements:
a) High Level Reiteration of Our Competitive Fuels Price
Test for LNG Imports:
The Secretary of Energy could make a forceful public state-
ment of our present policy--to allow LNG to be imported
only if it is priced competitively with a 25 percent/75
percent mix of No. 2 and No. 6 residual oil and is*compat-
ible with Canadian and Mexican pipeline gas imports. This
test is sufficiently stringent to deny most long-haul (non-
Western Hemisphere) LNG. We have informed the Europeans
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of this policy and have pointed out that this would mean
that African and Asian LNG would be marketed in Europe and
Japan rather than the U.S. The French and others, however,
are still not convinced that they can rely on the U.S.
sticking to this policy. A clear, high level, public
statement would be very helpful in this regard.
b) Imposition of More Stringent Competitive Fuels Test for
LNG Imports:
The U.S. could insist that new LNG imports be priced
competitively with high sulfur residual fuel oil. Such a
test would likely exclude LNG from the Western Hemisphere
(e.g., Trinidad). We could justify such a stringent test
on the basis that complete deregulation of domestic natural
gas prices, by increasing production and reducing demand,
would mean that gas would have to compete at the margin
with residual fuel oil.
The following table contains an estimate of the amount of LNG
that the Europeans could assume would be made available to
them as a result of options A and B.
Replacing Soviet Gas from Yamal Pipeline
Volume
Possible Timeframe
(tcf/year)
?
Northwest Siberian Pipeline
.9
-1.1
1986-87
Alternatives:*
U.S. Gas Deregulation**
.2
-.4
1982
Algeria***
.55
1985-86
Nigeria
.3
1988-90
Cameroon
.2
1990
Trinidad
.2
1988-90
Qatar**'*
.2
1990
* These volumes do not include possible expanded deliveries
from Norway, Saudi Arabia or other non-oil/gas displace-
ment options.
Estimate of reduction in U.S. oil imports based upon
immediate natural gas deregulation.
*** U.S. imports of LNG from Algeria are under contract,
but deliveries from only one of three contracts are
functioning.
? **** The U.S. even now is not considered to be a likely narket
for gas from Qatar.
U Ens ~~'~i'. c ~Yt~
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European access to 0.55 tcf/year of Algerian LNG under contract
to U.S. firms poses certain regulatory and policy problems.
While Algeria has suspended deliveries indefinitely for the
former El Paso Project (0.36 tcf/year for resale to Columbia,
Consolidated and Southern), U.S. Government would face
lawsuits-and political proble if it tried to discontinue
through regulatory process (under Section 3 of the Natural Gas
Act of 1938) the Distrigas (0.04 tcf/year) and Trunkline (0.15
tcf/year) projects. The U.S. has invested approximately $3
billion in facilities to transport and regasify Algerian LNG.
Moreover, regulatory discontinuation of these projects would
cause serious diplomatic problems with Algeria.
The maintenance of our existing competitive fuels gas import
policy, however, may result in the ultimate failure of the
remaining Algerian LNG projects -- Trunkline and Distrigas.
Algerian demands for crude oil parity LNG prices which violate
our competitive fuels test will yield gas which is unmarketable
in the U.S. unless it is subsidized through price-averaging
with regulated domestic gas. Algerian demands to renegotiate
these contracts prices, which exceed our competitive fuels
test, may result in project failure without the U.S. having to
repudiate these contracts and incur lawsuits and political
problems.
The Algerian contracts account for about half of prospective
Northwest Siberian gas deliveries under a one pipeline -- 75
atmospheres scenario. All of this LNG may be diverted to
Western Europe before the,Siberian pipeline could be completed.
Europe also enjoys a $1 per million Btu transportation advant-
age over the U.S. in terms of the price it can pay for Algerian
LNG.
Nigeria
A West European consortium of 8 natural gas utilities has
concluded contracts for 0.3 tcf/year and has an option to
purchase the U.S. volumes (also 0.3 tcf/year) if U.S. com-
panies cannot or decide not to consummate the transaction.
It is highly unlikely that Nigerian gas could meet even a
lenient competitive fuels pricing test. Unlike Algerian
gas, which is available now, the Bonny project could not be
completed before the late 1980's, (i.e., about the time the
Northwest Siberian pipeline is due to be completed).
?
The combination of Nigerian and Algerian supplies contracted
for by U.S. companies.would replace virtually all of the
prospective Northwest Siberian pipeline deliveries under
the one strand -- 75 atmosphere scenario. However, European
access to this LNG is not without problems. Chronic tech-
nical problems at the Algerian facilities result in reduced
,. tr
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? load factors and gas availability. The Europeans have serious
. doubts about the ability of the Nigerians to implement their
project in a timely and cost-effective manner; some companies
think this project will never get off the ground. Finally, a
number of European gas com Mies and officials believe the
Soviet Union to be a more able supplier than Algeria or 11 ,,
Nigeria.`
Cameroon
Accelerated development of Cameroon's reserves leading to
production of about 0.2 tcf/year could be accomplished by
the late 1980's or early 1990's. The Government of Cameroon
is favorably disposed toward negotiation with foreign com-
panies for the development and export of gas. There has been
little consideration, so far, of the U.S. as a market for
Cameroon gas. Although European companies are aware of the
prospects, gas from Cameroon may not be needed in Western
Europe if the Northwest Siberian pipeline is completed. It
will almost certainly not be needed if both strands of the
pipeline are constructed.
Trinidad
go,
In 1978, the Government allocated over 4 tcf of natural gas
to an LNG project, presuming export to the U.S. The allocation
? was appropriate for the planned facility with a nominal capacity
of 0.2 tcf/year to which an additional 0.1 tcf/year could be
added if local gas reserves and market potential could support
increased capacity. The -plant could be completed by the late
1980's.
Although the U.S. is the logical export market for this gas
due to logistical considerations, it is questionable whether
we will need it. The French have informally expressed an
interest in purchasing Trinidadian gas and have suggested that
it might be an incentive for them to reconsider participation
in the Northwest Siberian pipeline. Although gas from Trinidad
would likely be more expensive than Soviet imports, further
discussions. with the French on this matter may be worth pursuing.
French purchases of Trinidadian gas could displace the total
amount of their prospective imports from the Northwest Siberian
pipeline.
Middle East Gas/LNG
The development of Qatar's huge offshore North Dome field (100-
200 tcf of recoverable reserves) can provide Europe and Japan
with LNG supplies by the late 1980's. The Government of Qatar
is currently evaluating competitive bids for the development of
? an 0.4 tcf/year LNG export project which would be shared
equally between European and Japanese markets.
~ne!rvn -ar-t KC
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C. Accelerated Development of Norwegian Natural Gas
Norway has the potential to become an increasingly important
gas supplier to Continental Europe in the 1990's, but the
prospects for accelerated development in the 1980's are
more tenuous.
Norway's recent decision to go ahead with development of
Statfjord and other gas fields will help offset premature
production declines from the Ekofisk gas field and will
increase current exports from 0.9 to 1.1 tcf by 1985-86.
However, the development of the giant Bloc 31/2 field (1-2
tcf/year) involves further delineation of adjacent unleased
Blocs, production of liquids before the gas is developed,
a lead time of 10 years, and probable development/trans-
mission costs of $5-7 per million Btu in current dollars.
On balance, Norway's Bloc 31/2 as well as other undeveloped
fields offer Western Europe the post-1995 potential to offset
the phasing out of 1.8 tcf/year of Dutch gas, and thereby
contribute to reducing dependence on Soviet gas. Translating
Norwegian resource potential into market reality, however,
requires: (1) accelerated development of structures such as
Bloc 31/2, and (2) Norwegian Government preference to expand
gas rather than oil output within the present 1.8 million b/d
hydrocarbon production ceiling.
Even if the Norwegian Government were willing to accelerate
production from Bloc 31/2, production from this field would
be insufficient by itself,to offset Soviet gas supplies in
light of the Dutch decision to reduce exports. However, an
acceleration of the production schedule would have important
psychological benefits.
D. U.S. Energy Security Tariff or Fee
If a tariff or fee of $5.00/barrel were imposed on oil imported
into the U.S., domestic consumption of imported oil would be
expected to decline by 220,000 b/d in 1982, with the decrease
growing to 440,000 b/d by 1985. Assuming that this reduction
in world oil demand does not induce a reduction in OPEC output,
an additional 106,000 b/d of oil could become available to
Western Europe in 1982 as a result of the tariff. The incre-
ment to European oil supplies could reach 212,000 b/d by 1985,
representing the energy equivalent of 40 percent of the capacity
of the proposed pipeline. This figure represents the upper
bound on the amount of energy that would become available to
the Europeans as a result of the tariff, since some OPEC supply
response would be likely. .
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E. Increased Saudi Deliveries
Saudi Arabia has the resource base to increase oil production
significantly by the mid-1980's. Although the Saudis have
been committed to limiting their maximum sustainable capacity
to 10.0-10.5 mmb/d, it is conceivable that Saudi Arabia could
be persuaded to marginally shift its position if a strong
anti-Communist political argument were made and possibly other
benefits given the Saudis.
It can be argued to the Saudis that increased Soviet/West
European energy and economic ties could serve to dissuade
many Western countries from resisting Soviet proxy or direct,
actions in the Near East. A clear signal of Saudi willingnes
to increase oil sales to the West in return for cancellation of
the pipeline could be helpful. Indeed, the Saudis need not
offer to displace the entire Btu equivalent of the pipeline.
A specific offer of an additional 150,000 b/d to selected
European countries (such as Italy, which has asked our help in
establishing a long-term supply relationship with the Saudis)
could be sufficiently compelling to dissuade some countries
from participating.
Many Europeans may not favor this approach because they are
seeking to reduce reliance on Persian Gulf oil. The Saudis
may also insist upon a shift in U.S. policy toward Israel as
a prerequisite for cooperation; also, the AWACS issue may drain
i our bargaining power.
II. MEASURES TO IMPROVE-THE PROSPECTS FOR INCREASED U.S.
ENERGY EXPORTS:
F. Nuclear Energy
With respect to the Northwest Siberian pipeline issue, there
are steps that the U.S. can propose to help revitalize the
development of nuclear power in Europe. To the extent that
nuclear energy can displace gas in the generation of elec-
tricity, these options could be of use in our campaign against
the Northwest Siberian pipeline. In general, however, these
options should be considered more for potential favorable
psycho-political impact on the prospects for nuclear power in
Europe rather than as a means for displacing large quantities
of Soviet gas in the late 1980's.
(1) A strong public statement on the U.S. commitment to
nuclear power. The Administration has already announced our
commitment to reestablish the U.S. as a reliable nuclear trade
partner. A similar statement by the President on our inten-
tions to revitalize the nuclear option in the United States
would support European government efforts in mobilizing public
opinion in favor of nuclear power.
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(2) We could agree to support reactivation of the Barnwell,
NFS and/or Morris reprocessing plants. We could also respond
positively to the interest of German utilities to buy shares of
the Barnwell Nuclear Fuel Plant. It would serve to remove one
of the major obstacles to the growth of nuclear power in West
Germany since German utilities are required to demonstrate a
solution to problems of the back end of the fuel cycle--either
through spent fuel storage (following the procedures of Section
131 of the Atomic Energy Act) or a reprocessing commitment--
before they will be permitted to initiate new nuclear power
plants. These steps may have only a marginal impact on
increasing energy supplies in Europe. However, a decision to
allow German participation in the Barnwell plant would have
political benefits and a U.S. statement on nuclear power would
have a direct effect on European domestic political attitudes.
G. Expanded U.S. Steam Coal Exports
The Europeans are concerned that infrastructure problems in the
U.S. will limit our ability to expand steam coal exports.
Furthermore, they still harbor doubts about security of supply.
The U.S. has already adopted a policy which we believe will
result in as rapid an expansion of coal exports as is economic-
ally feasible. However, we could take additional steps, even
some we have previously discarded as ineffective, to deal with
the Europeans' perceptions of the U.S. as a coal exporter.
Dredging e,
Return to the previous policy of Federal budgetary support
for harbor dredging. The Administration is currently seeking
legislation requiring local authorities, not the Federal
Government, to pay for the dredging and to seek reimbursement
through user fees. Dredging the harbors at Baltimore, Norfolk
and New Orleans to 50-55 feet, will greatly improve the compet-
itiveness of U.S. steam coal by reducing the daily cost per ton
of coal from $0.527 for 60,000 DWT vessels to $0.318 for 150,000
DWT vessels. Since advanced engineering and design (AE&D) for
dredging Baltimore harbor was completed in 1970, only financing
and perhaps environmental challenges remain as obstacles. Once
begun, dredging could be completed in 3 years. For Norfolk and
New Orleans, AE&D will require 3 years, followed by 3 or more
years of dredging. The dredging would be welcomed by the
Europeans who are, rightly or wrongly, extremely concerned
about this problem; however, a decision to return to Federal
support for dredging would be costly. The cost for three
harbors would be as follows: Baltimore, $302 million;-Norfolk,
$322 million; and New Orleans, $550 million.
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Slurry Pipelines
Coal slurry pipelines appear technologically and economically
feasible. They could contribute to the competitiveness of
U.S. coal by reducing the need and cost of some harbor improve-
ments. -The major impediments to the development of coal slurry
pipelines that the Government can affect directly are resolving
disputes over: (1) eminent domain and railroad right-of-ways,
and (2) water resources. The Administration is currently
reviewing the eminent domain issue. One drawback, however, is
that coal exports transported by slurry pipeline are 20 percent
water when loaded. However a 10 million ton capacity system
could yield costs 18 to 27 percent lower than dry bulk system
loading over the life of the project.
Supply Security
One of the most important concerns of European foreign coal
purchasers is security of supply. This concern stems in
part from their perception of a prior willingness by the USG
to resort to restrictions (e.g., oil and soybeans) as instru-
ments of economic or security policy. In order to help allay
this concern, we could impose a broader policy commitment,
approved by Congress, not to interrupt supplies under any cir-
cumstances unless there is no alternative. We have currently
issued an executive statement that we would not interrupt
exports except in case of a national emergency.
Removing Restrictions on Ilaskan Oil Exports
Removing all restrictions oh the export of Alaskan oil could
result in roughly 500-600 mb/d of exports to Asian markets.
Presently, Alaskan oil not consumed on the U.S. West Coast must
be shipped to the U.S. Gulf Coast. If exports were permitted,
this oil could be shipped to Japan instead. (Japan is not
particularly interested in this oil in the current soft market,
but would like long-term access.)
Lifting the Alaskan exports ban would not directly increase
the total amount of world oil production. However, permitting
exports would demonstrate U.S. willingness to increase the
flexibility of the world oil market, and readiness to rely
on it to distribute oil supplies. This issue, however, has
proven controversial on the Hill.
September 29, 1981
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