WEST EUROPEAN GAS MARKET: FRUSTRATIONS FOR THE SOVIETS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000700030001-3
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: July 14, 2010
• Sequence Number: 1
• Publication Date: January 6, 1984
• Content Type: MEMO

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Central In!ciii-cme Agency
6 January 1984
MEMORANDUM FOR: Charles V. Boykin
Deputy Assistant Secretary. for Intelligence
Department of Energy
Chiet, Strategic Resources Division
SUBJECT: West European Gas M r : Frustrations
for the Soviets 25X1
Attached is our assessment of the West European gas market
and recent Soviet marketing efforts. If you have any questions,
please call me
Attachment:
West European Gas Market: Frustrations for the Soviets
GI M 83-10286C, January 1984
Copy o
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SUBJECT: West European Gas Market:: Frustrations for the Soviets
Copy
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Charles Boykin, DOE
Dave Pumphrey, DOE
George Bradley, DOE
E. Allan Wendt, State
Greg Miller, State
Bill Martin, NSC
Benney Bonk, NSC
SA/DDCI
ExDir
DDI
DDI/PES
NIO/Eton
CPAS/ILS
OGI/PS
21 -
22 -
23 -
OGI/SRD/EIB,
DD/OGI, D/OGI
Ch/SRD
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
6 January 1984
West European Gas Market: Frustrations for the Soviets
Summary
Reduced natural gas demand and a surplus of available
supplies have sharply reduced West European willingness to buy
Soviet gas in this decade. To date, the Soviets have been able
to sell only about half of the amount of gas envisioned when
discussions began with West European purchasers in the late
1970s. As a result, Moscow has undertaken a concerted gas
marketing effort by cutting prices, tying sales of West European
equipment to gas purchases, and attempting to penetrate new
markets--an effort which has the potential to limit access of
other suppliers to the European market. With the exception of
Italy, however, prospects for major additional contracts for
Soviet gas in the next few years are poor. Nonetheless, Moscow
is still well- laced to capture any growth in European demand in 25X1
the 1990s.
This memorandum-was prepared by
Branch, Office of Issues
f Global Issues. i'ne zn ormation contained
herein is updated to 6 January 1984. Comments may be directed to
Chief
Strate
i
R
,
g
c
esources Division
GI M 83-10286C
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West European Gas Market: Frustrations for the Soviets
Gas Demand: Diminished Expectations
Lowered prospects for economic growth, together with rapid
escalation of European gas prices since the late 1970s, have
reduced sharply prospective West European gas demand. Government
and industry demand projections for 1990 have been trimmed by
nearly 20 percent since 1980. In addition, projections of
indigenous European gas production: are more optimistic.
According to the US Embassy, Rome plans to maintain existing
production levels--boosting 1990 Italian production estimates by
over 60 percent compared with earlier projections--and the
Netherlands, Western Europe's largest gas supplier, recently
authorized additional gas exports of 10-15 bcm per year. Lowered
demand estimates, combined with rising supply availability, have
reduced West European net gas import demand in 1990 by about 20
percent compared with projections made only last year. In light
of current supply contracts with the USSR, Algeria, and Libya, we
believe the West Europeans now face a potential supply surplus of
5-10 bcm in 1990, forcing purchasers to take only the allowable
minimum level from some contracts or shut in domestic
Pressures on the Soviets
Lowered projections of West European gas imports have
diminished the potential volume of gas the Soviets can sell. As
originally planned, the Siberia-to-Western Europe gas pipeline
was to have carried 40 billion cubic meters (bcm) of natural gas
annually--worth then about $7 billion. The pipeline, however,
was scaled back to 29 bcm of deliverable capacity in early 1981,
in part reflecting weaker gas demand and Soviet efforts t?o speed
completion of the project. At present, the Soviets have lined-up
firm contracts with the West Germans, French, Swiss, and
Austrians for only around 20 bcm. The Dutch and Belgians have
dropped out as potential purchasers and an Italian agreement,
which still has to be formally approved, will probably be for far
less gas than the Soviets originally expected (Table 1). 25X1
On the price front, Moscow faces lower gas prices and hence
lower potential hard currency earnings.' The recent decline in
oil prices to which gas prices are tied has prompted purchasers
of
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to request a review of the pricing provisions in their
contracts. Unless oil prices rebound, Moscow could be forced to
lower prices still further. French and West German purchasers
are presently seeking cuts in the base contract price of new
Soviet deliveries, Paris reportedly demanding a 10 percent
Soviet Overtures
Faced with reduced sales prospects in most major West
European gas markets, the Soviets have mounted an extensive
marketing campaign to promote gas sales to Italy and Finland and
to penetrate markets in Sweden, Greece, and Turkey.
o The Soviets have also offered to sell Finland and
Sweden 3 bcm of natural gas annually by extending the
current pipeline network in Eastern Finland to Helsinki
and then across the Baltic to Galve near Stockholm. To
entice the Finns and Swedes, the Soviets have marked
gas prices down to near parity with coal. Moscow is
also pressing the Finns to buy additional gas as a
means of closing the bilateral trade gap.
o In the south, Moscow has been pressing Greece to import
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Only Partial Success For Moscow
We believe lowered projections of gas demand, surplus
supplies, and high costs for gas infrastructure development will
largely thwart Soviet gas marketing efforts during the next few
years. Still, with the world's largest gas reserves and low
production costs, Moscow's hard currency needs and its desire to
limit other suppliers will almost certainly prompt the Soviets to
make offers to some West European countries which they would be
hard pressed to refuse. Some additional sales will be made if
Moscow cuts prices substantially but overall sales to Western
Europe through the 1980s will remain well below what the Soviets
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Italy.
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Italy-could def
er new purchases of Soviet gas until at
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least the early 1990s.
Even if Rome signs for Siberian gas
because of political and trade considerations, we believe the
volume will be far below the 8 bcm originally agreed upon--
probably in the range of 3-6 bcm--and a lower base price will
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Finland. Soviet sales efforts in Finland appear stymied by
price factors. A Finnish Trade Ministry report completed this
summer calls for a lower Soviet gas price to offset the large
capital investment required to extend the existing pipeline to
Helsinki--estimated at $140 million. Potential demand, moreover,
has been cut to only 1 bcm, down by one-third compared with
earlier projections issued this summer. Still, a-dramatic price
cut could gets the project moving, according to US Embassy
Sweden, Turkey, Greece. Although these countries are
considering gas imports, they presently have no significant
internal gas distribution networks. As a result, we believe high
infrastructure development costs will likely make Soviet gas an
uneconomic proposition unless Moscow moves to cut prices further
to help offset high development costs.
o Sweden has already encountered major obstacles in
developing the infrastructure to absorb 440 million
cubic,-meters annually of contracted Danish gas supplies
slated to arrive starting in 1985. According to press
reports, the Swedish state oil firm, Svenska Petroleum,
has even called for the project to be abandoned because
of huge potential losses.
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In Turkey, the need to spread high infrastructure costs
over thinly-populated residential and industrial bases
would appear to make Soviet gas financially
unattractive.
million BTU recently mentioned.
gas because of high infrastructure development
Moreover,
significant gas imports would only be cost effective if
gas penetrated the residential sector, which would
require that gas be sold at a 30-40 percent discount
compared with competing fuels. This would require a
Soviet contract price even lower than the $3 per
implementing any political pledge to purchase Soviet
Greece will drag its feet on
Gas Security Implications in the 1990s
Even if Moscow fails to win major additional sales in the
1980s, Moscow's marketing efforts will help set the stage for a
major new encroachment in the 1990s. Specifically, Soviet
willingness to cut prices will delay or prevent development of
additional new supplies. If alternative gas projects are not
undertaken in the next few years, supplies will not be available
in the early 1990s when forecasters expect West European demand
to grow. Without competing alternative supplies, the Soviets
would be well-placed to capture an even greater share of the West
Price Cutting. Moscow's recent pricing practices portend
stiff competition for other suppliers in the European market. In
attempts to negotiate gas deals with the Finns, Swedes, and
Greeks, the Soviets have shown a willingness to sharply cut gas
prices to near parity with coal and heavy fuel oil. With Soviet
energy sales accounting for over two-thirds of Moscow's hard
currency earnings and with gas expected to partially replace oil
in this trade, the Soviets will probably continue to undercut any
competition. In addition, the very surplus implicit in
contracted European gas supplies during the 1980s, which is
weakening prices and stymying present Soviet sales efforts, could
also prevent or delay development of several other gas export
projects such as the Norwegian Troll field. Should these
projects be delayed or fail to materialize the Soviets would be
in position to capture a greater share of the West European gas
m~rk
,
th
7 nnn_
e
n
e
Tied Sales. The prospect of granting lucrative Soviet
equipment contracts in return for gas purchases could put further
pressure on west European countries to purchase Siberi
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Barriers to Entry. If Soviet price cutting resulted in new
gas sales to Sweden, Greece, or Turkey, Moscow could also be in a
position to limit access of potential suppliers to the European
market. An extension of the Finnish gas pipeline from the Soviet
Union into Sweden would likely dampen any Swedish interest in
financing and building a gas pipeline from the Norwegian Troms
field to the continent. Such a pipeline through Sweden is one
alternative for bringing around 25 bcm of northern Norwegian gas
annually to the European market in the 1990s when it could be
used to limit dependence on Soviet supplies. Without Swedish
participation in either financing or purchasing some of the gas,
such a project would be more costly. A gas pipeline from Troms
through Norway, rather than Sweden, would cost an additional 10
j
percent
ust because of construction f ctors,
An extension of the Soviet pipeline network into Greece or
Turkey could effectively block access to the European market by
suppliers in the Middle East, where 45 percent of world non-
Communist gas reserves are located. Markets in Turkey and Greece
are key steppingstones for suppliers in the Middle East to enter
the larger West European market because Middle-East suppliers
will need to sell gas in transit to minimize the cost of
delivery. By attempting to expand sales of its own gas to
potential customers in Greece and Turkey, Moscow no doubt hopes
to minimize the potential threat from Middle East suppliers.
Following extensive press reporting of a potential Iran-Turkey
gas deal, Moscow signed a joint protocol in Istanbul setting up a
pipeline feasibility study on the export of gas from the USSR to
Turkey. Iran--with the world's second largest gas reserves--has
since abandoned all gas export projects in its present Twenty-
Year Plan and all gas production is slated for domestic
consumption. According to US Embassy reporting, aside from
financial and technical obstacles of a major Iranian export
pipeline, the Iranians are generally concerned about antagonizing
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Table I
Western Europe: Projected Soviet Gas Deliveries
(billion cubic meters)
1982a 1985
1990
2000
Existing Contracts 27.8 26.9
Austria 3.0 2.5
France 4.1 4.0
Italy 9.3 7.0
West Germany 10.6 12.0
Finland .8 1.4
26.9
2.5
4.0
7.0
12.0
1.4
26.9
2.5
4.0
7.0
12.0
1.4
New Contracts (Urengoy) 1.2
17.5-21.7
17
6-21
8
Austria 1.0
b
1.5
.
.
1.5
France
b
6.4-8.5
6.4-8.5
West Germany
6.0
8.4-10.5
8.4-10.5
Switzerland
.4
.5
West Berlin .2
.8
.8
Potential Contracts
c
10.0-13.0
12.5-15
5
Italy
3.0-6.0
.
3.0-6
0
Finland
1.0
.
1
5
Sweden
1.0
.
1
5
Greece
2.0
.
4
5
Turkey
2.0
.
2.0
The range takes into account that amounts of annual offtake
under the new contracts are subject to reduction by up to 20
percent under scheduled semiannual negotiations with the
Soviets.
We have assumed that any Italian-Soviet contract will be for
far less than the 8 bcm origianally agreed upon.
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Table 2
Natural Gas Export Prices, 1983a
(US $ per million BTU)
Exporter
Price
Algeria
5.00-5.25
Netherlands
3.70-3.80
Norway
3.80-3.90
4.50-4.70
USSR
4.00
Comment
Price of LNG to European
ports, c.i.f. including
regasifaction costs
Price at Dutch border
(Ekofisk)
(Statfjord) Estimated price
at West Germany, c.i.f.; gas
will not begin flowing until
1985 or 1986.
Base contract price for
minimum volumes. Purchases
above either the minimum or
80 percent of the contracted
amounts are discounted.
a Price per million BTUs can be converted to price per barrel
crude oil equivalent by multiplying by 5.62.
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