SOVIET ENERGY PROSPECTS INTO THE 1990'S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86B00301R000400480003-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: January 4, 2017
• Document Release Date: April 24, 2008
• Sequence Number: 3
• Publication Date: December 14, 1983
• Content Type: NIE

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Director of Secret
Intelligence 25X1
Soviet Energy Prospects
Into the 1990s
j
National Intelligence Estimate
f;'? r - +.'T
jt 1 I,
Secret
NIE 11-7-83
14 December 1983
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N I E 11-7-83
SOVIET ENERGY PROSPECTS
INTO THE 1990s
Information available as of 8 December 1983 was
used in the preparation of this Estimate.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State, the Treasury,
and Energy.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
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CONTENTS
Page
FOREWORD .............................................................................................................. 1
KEY JUDGMENTS .................................................................................................... 3
DISCUSSION .............................................................................................................. 9
Background ............................................................................................................. 9
Soviet Energy in Perspective ......................................................................... 9
Soviet Energy Policy ....................................................................................... 10
Recent Soviet Energy Performance .............................................................. 10
Key Kactors in Future Energy Development ............................................... 11
Production Possibilities ........................................................................................... 12
Oil .................................................................................................................... 12
Natural Gas ..................................................................................................... 13
Coal .................................................................................................................. 14
Electric Power ................................................................................................. 16
Energy Production in the 1990s .................................................................... 16
Prospects for Energy Consumption ....................................................................... 16
Overall Trends ................................................................................................ 16
Conservation and Substitution Problems ...................................................... 17
Sectoral Energy Use ........................................................................................ 18
The Oil Product Mix Problem ....................................................................... 19
Foreign Trade in Energy ....................................................................................... 20
Soviet Policies .................................................................................................. 20
Exports to Communist Countries .................................................................. 20
Hard Currency Exports .................................................................................. 21
Energy Investment ................................................................................................. 21
Energy Policies in the 1980s .................................................................................. 23
The Potential Impact of Western Actions ............................................................ 27
Implications for US Interests .................................................................................. 27
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FOREWORD
This Estimate is the US Intelligence Community's first integrated
assessment of Soviet energy policies and prospects. It brings together the
Community's best information and judgments on energy production
possibilities, consumption trends, export needs both to supply Eastern
Europe and to earn hard currency, investment costs, and policy
priorities.
During the past several years, members of the Intelligence Com-
munity-in particular CTA and DIA-have published differing fore-
casts of Soviet energy production, consumption, and exports. The
Estimate reflects considerable change over the past several years in
some Community members' view of Soviet oil production prospects. In
particular CIA, which in 1977 and 1978 predicted rapid declines in
Soviet oil production beginning around 1980, has substantially changed
its assessment. The current CIA view is that Soviet oil production will
level off in the mid-1980s and then begin a relatively slow decline.
There appear to be two principal reasons for the substantial change in
the CIA estimate:
(1) Information from intelligence sources that became available in
recent years indicates that Soviet proved oil reserves are
probably about twice as large as CIA previously thought.
(2) The Soviet leadership became very concerned about oil produc-
tion and, beginning in 1977, set in motion an intensive, high-
priority effort to develop West Siberian oil and gas as quickly as
possible, with the help of rapidly rising investment
expenditures.
In addition to new information on energy production possibilities
and Soviet energy policies, the Estimate reflects the findings of recent
studies of Soviet energy demand, including the possibilities for con-
sumption, substitution, and conservation.
Although differences remain among experts and between agencies,
there is a broad consensus on the general trends and problems of the So-
viet energy sector and the principal energy trade-offs facing the Soviet
leadership. There is also a broad consensus on the nature and impor-
tance of the USSR's dependence on the West for energy markets,
equipment, and technology.
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KEY JUDGMENTS
Soviet energy developments are likely to affect US and Western
interests in two principal ways. First, with the largest energy reserves in
the world, the USSR in the long term has the potential to become a ma-
jor source of energy, especially natural gas, for the West. This would
mean a large boost to Moscow's hard currency earnings and a basis for
expanded Soviet influence in Western Europe. Second, in the 1980s the
rising cost of energy development is diverting investment resources that
are badly needed elsewhere in the Soviet economy. This is making the
choices among consumption, investment, and defense substantially
more difficult. Soviet efforts to minimize these difficulties could result
in energy production levels too low to even maintain the present level of
total energy exports over the remainder of the decade while meeting
domestic energy requirements.
The USSR is in transition from reliance on cheap energy to the use
of expensive energy. Unlike the West, which has already completed
much of its adjustment, however, the USSR will feel the major impact
of this transition in the 1980s. Because of the inertia of Soviet planning
and the overwhelming emphasis given to meeting production targets,
the USSR has not yet made any significant progress in holding down the
demand for energy through conservation. Energy consumption has
grown faster than GNP, and is likely to grow at a rate close to that of
GNP in the 1980s unless Moscow is willing to push energy conservation
even at the expense of other economic objectives.
Consequently, Moscow must increase investment in energy pro-
duction very rapidly if it is to meet domestic energy requirements and
avoid a decline in hard currency earnings. In 1981-85, energy invest-
ments are increasing by about 60 percent over those of 1976-80, mainly
because of a near doubling in oil investment and a two-thirds increase in
investment in gas development and pipelines; in spite of rapidly rising
investment, the rate of growth of energy output is declining. Energy is
now taking over 20 percent of total investment, up sharply from about
15 percent in 1976-80. The resulting large claim on investment
resources at a time when the growth of total investment has slowed is
making it difficult for other sectors to get their new programs funded
and has become a major factor depressing the growth of the Soviet
economy. Investment in heavy industry is increasing slowly; efforts are
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being made to rebuild the transportation sector after decades of neglect;
agriculture is holding its own in investment allocations, and together
with energy is taking 40 percent of the total; investment in consumer-
oriented sectors-housing, light industry, and services-is probably
falling in absolute terms.
The investment burden will probably continue to mount during
the second half of the decade unless the growth of energy consumption,
especially of oil, can be slowed, thereby permitting domestic and export
needs to be met with a slower growth of energy production. A
continuing squeeze on investment in other economic sectors might
jeopardize objectives for raising living standards or possibly even
military production. Consequently, energy policy is likely to be a
contentious issue in preparing the next five-year plan; specifically,
political opposition to costly production-oriented energy policies is
likely to build.
A Soviet policy shift involving increased reliance on energy
conservation and interfuel substitution to assure adequate energy
supplies, while reducing the investment burden, would involve risks of
misjudging the volume of energy savings that the Soviet economic
system could generate. In such an event, energy supplies would become
insufficient to cover demand, resulting in worsening domestic energy
shortages and a sharp decline in energy exports until policies were
corrected.
We do not yet have any clear indications of Soviet policy
concerning energy investment, production, and consumption during
1986-90. Some critical policy decisions probably have not yet been
made. In this uncertain situation, judgments differ about which energy
policy mix is likely to be adopted, and on how much difficulty the
USSR is likely to experience in achieving an acceptable balance among
its main energy objectives. Some analysts, including those in DIA,
believe that Moscow will correctly assess both demand trends and the
technical requirements for energy production, and consequently will
produce as much oil as is necessary to meet domestic and export needs.
They believe that if progress in energy conservation and interfuel
substitution proves to be slow and Moscow considers it necessary to
maintain oil exports, the Soviets would keep oil production fairly
constant. They realize that the burden of energy investment may
continue to increase, but believe that the increase will not be large.
Moreover, Moscow may believe that the economic benefits from
incremental energy investments-especially the resulting hard currency
sales-are such, on balance, as to enhance the overall productivity of
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the economy. Other analysts, including those in CIA/DDI, believe that
rapidly rising investment costs and worsening operating conditions are
likely to lead to a gradual fall in oil production after 1985. They also be-
lieve that the Soviet leadership will, as in the past, overestimate the
possibilities for energy conservation and interfuel substitution. Conse-
quently, shortfalls in oil supply could develop that would disrupt the do-
mestic economy and squeeze exports. Because opportunities to reduce
oil deliveries to Eastern Europe and to increase gas sales are limited in
the 1980s, these analysts project a decline in hard currency earnings
from energy exports if oil and gas prices are unchanged.
The cost of producing Soviet oil, historically low by world stan-
dards, is rising rapidly and is likely to continue to increase. Productivity
of new wells in West Siberia is declining as exploitation shifts from the
highly productive giant and supergiant fields, which have peaked or
soon will peak, to smaller, less productive fields. Secondary and
enhanced recovery methods are increasingly being applied to mature
fields, especially in the older producing regions, in order to slow the de-
clines in production rates.
The Soviets plan only a small increase in oil output through 1985
and, because of an intensive investment effort in West Siberia, they will
probably reach the plan goal of 12.6 million barrels per day or come
close to doing so. Oil reserves are sufficient to sustain production at this
rate for the remainder of the decade. However, with the cost of oil ex-
traction likely to continue increasing rapidly, with gas-for-oil substitu-
tion, especially in industry and electric power, offsetting rising oil
demand in transportation and agriculture and possibly permitting oil
consumption to level off in the latter part of the decade, and with gas
exports rising rapidly, Moscow may accept a decline in oil production in
the latter part of the decade.
Natural gas is, in the long term, the USSR's cheapest energy source.
On completion of the current massive program to build five long-
distance pipelines from the remote West Siberian gasfields to supply the
consuming regions in the USSR and one to supply Eastern and Western
Europe, the Soviets will be able to further expand gas production at
moderate and fairly constant cost. By the late 1980s, gas production will
probably approach that of oil (in terms of caloric value), unless limited
by domestic and foreign demand.
Coal production is unlikely to increase appreciably until the USSR
can develop or acquire technologies that would make the transportation
of coal from areas east of the Urals or the long-distance transmission of
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electric power economically justified. Such technologies are unlikely to
be available until the 1990s. Although the Soviet nuclear power
program continues to lag far behind plan, about half of the likely
increase in electric power production in the 1980s will come from
nuclear plants.
Energy exports in the balance of the 1980s will be affected by a
complex mix of factors that neither we nor the Soviet Government can
predict with any confidence, including energy prices in the West.
Moscow's main concern with respect to energy exports will be to earn
the hard currency necessary to buy needed imports from the West
while continuing to supply at least the minimum needs of its client
states. Gas exports probably will rise by two-thirds while total oil exports
will probably decline.
Eastern Europe may not be able to rely on supplies of Soviet oil to
the extent it has in the past. The tight hard currency position of the Eu-
ropean countries prevents them from turning to the world market for
large added supplies of oil. There is a potential in Eastern Europe for
energy conservation and for some further substitution of Soviet gas for
oil in industry, but progress will be slow. A further cut in Soviet oil de-
liveries to the near-stagnant economies of Eastern Europe would
intensify the need for austerity measures and aggravate the danger of
popular unrest there. Because it holds the trump card of coercive
power, however, Moscow is likely to impose further cuts on the supply
of oil to Eastern Europe if oil supplies would otherwise be inadequate to
meet priority objectives of the regime.
Moscow will continue to stress energy exports for hard currency to
buy technology needed for industrial modernization and for special
applications in energy exploitation and defense production, and to
acquire the agricultural products necessary to offset domestic shortfalls.
Although oil exports will probably decline, the USSR will place a high
priority on maintaining these exports at a substantial level because of
their importance and flexibility as a hard currency earner. Moscow will
be in a position to offer the West European countries all the gas they are
willing to buy in the 1990s and can undercut the prices of any Western
supplier while still earning a large profit. If and when the Siberia-to-
Western Europe gas pipeline is used to capacity, Soviet gas exports to
the West will double their present level. If Moscow lands contracts to
supply even half of the West European gas-demand gap now foreseen
for the 1990s, an additional pipeline the size of the one now under con-
struction would be required, and dependence on Soviet gas could
approach 50 percent of gas consumption for major West European
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countries, far in excess of the 30-percent share that we and some West
European governments regard as a critical threshold for political risk.
Additional large Western purchases of Soviet gas would give the
Soviets large economic gains. Increased Soviet gas production for export
could substitute for exported oil at perhaps one-third of the investment
cost. Alternatively, if oil exports were held constant, it would add
greatly to Soviet hard currency earnings. Each new gas pipeline of the
size of the line to Western Europe now under construction potentially
permits additional gas sales worth nearly $5 billion annually at present
prices, or about one-fifth of total current Soviet hard currency earnings.
Such added hard currency earnings would enable Moscow to raise
substantially imports of Western goods and technology that the Soviet
economy badly needs.
The cost and speed of Soviet energy development will depend
partly on the level of imports of Western energy equipment and
technology. Although Soviet dependence on imports of Western pipe
and compressors for gas pipelines should decline, dependence on
imports of Western oil equipment will increase as production shifts to
deeper and more complex onshore and offshore deposits. I Most of the
needed equipment is available from non-US Western sources.
The high cost of Soviet energy development has possible implica-
tions not only for Soviet economic growth but also for military
programs. Although the military will probably retain its premier
position in the resource competition, it cannot be fully insulated from
the consequences of economic problems. Even if there is little direct
competition for resources between energy and military industries, the
growing cost of assuring adequate energy supplies could indirectly be a
factor slowing military expansion if it slows the development of the
heavy industrial base on which future military growth depends.
' Detailed information on the Soviet oil and gas equipment industries and dependence on imports of
2. Congress of the United States, Office of Technology Assessment, Technology and Soviet Energy
Availability, 1981.
3. SNIE 3-11/2-82, The Soviet Gas Pipeline In Perspective
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DISCUSSION
Background
Soviet Energy in Perspective
1. Soviet energy resources are major assets. The
USSR is the world's largest oil producer and has the
largest oil reserves outside the Persian Gulf. Soviet gas
reserves are the largest in the world, and this year or
next the USSR should surpass the United States as the
world's top gas producer. Coal resources are large,
although unfavorably located. Oil and gas exports
provide more than one-half of total Soviet hard cur-
rency earnings and supply the bulk of Eastern Eu-
rope's requirements for these sources of energy. Mos-
cow has found oil exports, and more recently gas
exports, to the West useful in pursuing its foreign
policy objectives, and its exports to Eastern Europe are
among the most important economic links solidifying
the Soviet Bloc.
2. Although the USSR is better endowed with ener-
gy than any other country (table 1), it is, like the rest of
the world, in a difficult transition from reliance on
Table 1
Countries With the Largest Energy Reserves, Yearend 1982 a
Total
(billion barrels
oil equivalent)
Crude Oil
(billion barrels)
Natural Gas
(trillion
cubic feet)
Coal
(billion metric
tons coal equivalent) b
2,985
687
1,107
50 to 70
1,201
165
(23.5) c
(9.0) d
(40.2)
(24.0)
United States
1,043
30
204
191
(22.2)
(4.5)
(6.8)
(27.8)
530
19
30
99
(11.3)
(2.8)
(1.0)
(14.4)
United Kingdom
249
14
25
45
(5.3)
(2.1)
(0.8)
(6.6)
189
2
18
36
(4.0)
(0.3)
(0.6)
(5.2)
187
165
121
(4.0)
(24.6)
(4.1)
175
6
34
(3.7)
(0.2)
(4.9)
159
5
31
(3.4)
(0.2)
(4.5)
144
55
483
(3.1)
(8.2)
(16.2)
128
NEGL
NEGL
25
(2.7)
(3.6)
a The portion of total resources exploitable under local economic
conditions and available technology.
b Yearend 1980. Coal equivalent defined as 7,000 kilocalories per
kilogram.
c Figures in parentheses show percentage of world total.
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cheap to relatively costly energy. Energy costs are
rising as production moves into more remote areas and
as production conditions become more difficult with
the depletion of the highest quality oil and coal
deposits.
Soviet Energy Policy
3. Soviet energy policy has evolved in the same
direction as that of the major Western nations but with
a lag and with differences which reflect the particular
Soviet energy endowment and economic system.
Through the 1960s and early 1970s, Moscow relied on
increases in production of crude oil and natural gas to
cover most of the growth of its energy requirements.
4. Between 1960 and 1973 Soviet crude oil produc-
tion almost tripled. Soviet oil production strategy was
to bring the largest and best fields to high production
as quickly as possible, thereby ensuring maximum
growth of output in relation to investment expendi-
tures. Soviet drilling technology relied heavily on the
turbodrill, which permitted the use of low-quality drill
pipe and was well suited to the principal oil-bearing
structures then being exploited. Early waterflooding
raised reservoir pressures and, consequently, well pro-
ductivity. This production strategy worked well in the
1960s as the Soviets exploited the rich deposits of the
Volga-Urals area, including the supergiant Romash-
kino field. As production at these fields began to level
off, even richer deposits were proved out in the West
Siberian Basin, including the supergiant Samotlor
field, so that continued substantial increases in oil
production could be obtained at relatively little cost.
5. While continuing to develop the best West Sibe-
rian oilfields rapidly, the Soviets began to consider
longer term energy strategies that took into account
other energy sources and technologies. These included:
expanded use of secondary and tertiary recovery
methods in older producing areas; accelerated devel-
opment of gas production, especially for export to the
West; development of Siberian coal deposits; expan-
sion of nuclear power; and progress in energy conser-
vation. But many programs were initiated without any
comprehensive assessment of technical requirements,
costs, and priorities.
6. The need to reassess energy policy became in-
creasingly apparent to the Soviet leadership in the
mid-1970s. New supergiant oilfields were not being
found, the growth of oil production was slowing and
falling behind plan, and a leveling off, if not a decline,
in production was in prospect within a very few years
if something was not done. In addition, coal produc-
tion and nuclear power plant construction were lag-
ging behind plan.
7. A top-level decision on energy policy was made
in late 1977 to give development of West Siberian oil
and gas an even greater priority. In the case of oil, this
decision led to a rapid increase in investment, includ-
ing drilling, pumping, and infrastructure in order to
maintain growth in output. The necessary skilled labor
was obtained by rotating drilling teams from the older
oil-producing regions, as well as by expanding the
permanent West Siberian labor force. Although oil
costs rose rapidly, oil production continued to increase,
but at a slower rate. In the case of gas, an expanded
program for building long-distance gas pipelines was
undertaken. Infrastructure was expanded slowly into
the major West Siberian gasfields.
Recent Soviet Energy Performance
8. In recent years the USSR has experienced a
slowdown in the growth of energy production, con-
sumption, and net exports (table 2).
- The growth of oil production has slowed to 1.7
percent a year in 1979-82 and to less than 1
percent in the past two years.
- Gas production increased at an average rate of
7.7 percent in 1979-82 and 7.3 percent in 1981-
82, and has accounted for about two-thirds of
the total increment to total energy production
since 1978.
- Coal production has stagnated.
- Nuclear power production has increased fairly
rapidly, although less than planned.
- The growth of total primary energy production
has declined from about 5 percent per year in
the early and mid-1970s to 2.9 percent a year
since 1978.
- The growth of energy consumption has declined
from 4.4 percent to 2.7 percent per year over the
corresponding period, with natural gas increas-
ingly used, especially in industry.
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Table 2
USSR: Trends in Energy Production, Consumption, and Trade
1
0.4
18.3
23.2
26.6
28.2
29.7
2.9
7.1
9.8
11.4
12.0
12.3
0.8
3.3
4.8
6.2
7.2
8.3
5.2
6.1
6.6
6.8
6.7
6.7
Hydro 0
.3
0.6
0.6
0.8
0.8
0.8
Nuclear NE
GL
NEGL
0.1
0.2
0.3
0.4
Other b 1
.2
1.2
1.3
1.2
1.2
1.2
Consumption c 9
.7
16.2
20.3
22.8
23.8
25.3
Oil 2
.3
5.3
7.3
8.3
8.8
9.1
Natural gas 0
.8
3.3
4.7
5.7
6.3
7.3
Coal 5
.1
5.8
6.3
6.6
6.5
6.6
0
.3
0.6
0.7
1.0
1.0
1.1
Other b 1
.2
1.2
1.3
1.2
1.2
1.2
Net exports 0
.7
2.1
2.9
3.8
4.4
4.4
0
.6
1.8
2.5
3.1
3.2
3.2
0
.3
0.8
0.9
1.3
1.2
1.4
1.0
1.6
1.8
2.0
1.8
NEGL
0.1
0.5
0.9
1.0
0
-0.1
-0.1
0.2
0.4
0.4
NEG
L
0.1
0.2
0.3
0.5
0.6
0.3
0.3
0.2
0.2
0.1
0.1
0.1
0.1
0.1
NEGL
0.2
0.2
0.1
0.1
0.1
NEGL
NEGL
NEGL
0.1
0.1
NEGL
NEGL
NEGL
NEGL
NEGL
NEGL
NEGL
NEGL
0.1
0.1
aIncluding gas condensate.
b Including peat, oil shale, fuelwood, and other renewable energy
sources.
c Apparent consumption, that is, production plus imports minus
exports.
d OECD countries plus non-Communist LDCs.
e CEMA countries plus Communist LDCs.
NEGL-may include amounts up to 50,000 b/d oil equivalent.
- Total oil exports were up slightly from 1978 to
1982. During 1979-81, exports to Eastern Eu-
rope and Cuba increased while those to the West
fell-although, thanks to higher prices, export
earnings grew. In contrast, 1982-83 exports to
Eastern Europe declined while those to the West
increased.
Key Factors in Future Energy Development
9. Looking ahead to the remainder of the 1980s and
beyond, the USSR faces a situation in which energy
production can be increased fast enough to meet
domestic and export needs only with rapidly rising
investment and an intensive management effort. The
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development of West Siberian oil and gas will be given
a high priority; it will require enormous investments in
production facilities, long-distance pipelines, and sup-
porting infrastructure under difficult, near-arctic con-
ditions. The Soviets in the 1981-85 Plan period are
building the equivalent of 35 large-diameter pipelines
of the length of the Alaskan oil pipeline, and are
planning to drill about 75 million meters for oil
development in West Siberia. They are building 14
nuclear power plants and expanding five others, and
are planning to greatly increase secondary processing
facilities at their oil refineries. The dimensions of these
energy development programs are enormous on a
world scale.
Production Possibilities
Oil
10. The USSR probably has sufficient oil reserves
(50-70 billion barrels), to achieve oil production of 12.5
million b/d through the 1980s (the current rate is
about 12.4 million b/d), but doing so would be
difficult and expensive. Soviet oil production in the
1980s will depend mainly on the development of the
West Siberian fields (figure 1). Most established oil-
producing areas outside West Siberia are well into the
declining phase of their development. With 60 percent
or more of recoverable original reserves having al-
ready been produced in most large fields in the
European USSR and in Central Asia, well productivi-
ties have fallen to low levels and the percentage of
water in well flow has become very high. Oil produc-
tion outside West Siberia has been falling by about
300,000 b/d annually since 1979, and continued de-
clines are inevitable. Secondary recovery efforts can
slow the decline in a few fields, but will not greatly
affect the overall regional patterns. Because of the
long leadtime required and high costs involved, explo-
ration and development of potential oil-producing
regions outside West Siberia (East Siberia, Sakhalin,
Barents Sea) will not have a major impact on national
production until the 1990s.
11. Production in West Siberia will continue to
increase, but at a declining rate and at increasing cost.
As shown in figure 2, the flow of oil per new well has
been declining rapidly and the Soviets expect a con-
tinuing decline through 1985. Samotlor, the supergiant
field which at peak in 1980 accounted for more than
25 percent of national production, is on the decline
and most other large West Siberian fields have peaked.
There is still considerable room for expansion of
production in some very large fields (Fedorovo and
Mamontovo, for example), but even these fields will
probably peak by the mid-1980s. Geological analysis
indicates that the Soviets may prove out large addi-
tional oil reserves in West Siberia, including gas
condensate, but that the odds on finding new supergi-
ant or very large giant fields are low. Consequently, an
increasing share of West Siberian production is likely
to come from small and medium-sized fields with well
productivities far below those of the giant and supergi-
ant fields in the earlier phases of their development,
although still above those in the older producing
regions of the USSR.
12. The Soviets are counting on continued substan-
tial increases in West Siberian oil output, at least in the
next few years. Development drilling is increasing
rapidly and a new long-distance oil pipeline which
will raise West Siberian pipeline capacity by about 1.8
million b/d is under construction. In the longer term,
continued growth of West Siberian production will
depend in large part on the quality of newly devel-
oped fields.
13. Development of West Siberian oil has involved
major technical and management difficulties. These
include the problems of producing oil under swampy,
near-arctic conditions, shortages of skilled labor, high
labor turnover, and the inherent difficulties of phasing
and coordinating all of the necessary facilities. Al-
though many facilities are already in place, the build-
ing of infrastructure will be a large, continuing
burden.
14. In addition to the massive West Siberian devel-
opment effort, the Soviets probably will have to
maintain a roughly constant rate of drilling to support
declining production outside West Siberia, and to
accelerate exploratory drilling, which has fallen sub-
stantially as a share of total drilling, as attention shifts
to more remote and geologically difficult producing
areas. They will also have to deal with a high and
increasing rate of depletion of existing capacity-
currently about 95 percent of the annual new capacity
merely offsets depletion.
15. Moscow will probably nearly double oil invest-
ment in 1981-85 compared with that of 1976-80.
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Figure 1
USSR: Oil Production
Soviet statements, as well as our own analysis, indicate
that oil investment will continue to increase rapidly in
1986-90. For example, Soviet specialists have calculat-
ed that development drilling would have to double
every five years to maintain oil output at present levels.
16. The Soviets apparently are making the massive
effort required to achieve the 12.6 million b/d pro-
duction rate planned for 1985, and probably will
fulfill the plan, or come close to doing so. Production
projections for 1990 are far more uncertain. Whether
or not production remains stable depends inter alia on
the quality of new oilfields, the willingness of Moscow
to incur increasing costs, how Soviet domestic oil
consumption evolves, and how badly Moscow needs to
maintain oil exports.
Natural Gas
17. With proved reserves of 34 trillion cubic me-
ters, 40 percent of the world's total, the USSR has
enough gas to sustain continued expansion of produc-
tion for several decades. Although most of these
reserves are of extraordinarily high quality-with
potential well flow rates among the highest in the
world-their location in the northern part of the West
Siberian Basin, a region which is remote and also
subject to permafrost and other arctic conditions,
creates major difficulties for production and transpor-
tation. In addition to developing the enormous gas
reserves in Tyumen, the Soviets are beginning to
exploit sour gas deposits in the southern USSR-
Astrakhan and Tenghiz-with the help of Western
technology. This development will offset some of the
decline in output of older fields, but will contribute
less than 2 percent of national output in 1990.
18. In recent years a major constraint on the growth
of gas production has been the construction of long-
distance gas pipelines and gas processing plants. Dur-
ing the current Five-Year Plan the Soviets are building
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Figure 2
West Siberia: Average New Well Flows
1) 0
1400
Favorable
Conditions
Unfavorable
Conditions
0 70 75 80 85 90
six major trunk lines originating in the West Siberian
gasfields, five of which are to be linked to the
domestic gas network and the sixth is for export of gas
to Western Europe (figure 3). Construction of these
pipelines is a massive undertaking: together the six
lines are 20,000 kilometers long; go through difficult
terrain; require enormous amounts of large-diameter
pipe, most of which must be imported from Western
Europe and Japan, as well as large numbers of domes-
tic and imported turbine-compressors, pipelayers, and
other equipment; and, the requirement for skilled
labor willing to work under arduous conditions is
difficult to meet. Although the plan for laying pipe is
on schedule, and annual gas production plans have
been overfulfilled in the last two years, the plan for
1985, which requires substantially larger annual incre-
ments for production than in 1981-82, is not likely to
be achieved, mainly because of lags in installing
pipeline compressors and gas processing equipment.
The chances are that gas production will be up to 5
percent below the planned 630 billion cubic meters
but will still meet demand.
19. In the late 1980s, long-distance gas pipeline
construction will continue to require a major effort.
However, the main constraint on Soviet gas production
will become the demand for gas, not the ability to
build long-distance pipelines. To permit large in-
creases in domestic gas consumption, the Soviets will
have to make a major effort to expand the smaller
lateral pipelines and distribution networks. Current
plans call for construction of 28,000 kilometers of
smaller lines by 1985; another large program will be
needed during 1986-90. The ability to build these
smaller pipelines and to substitute gas for oil and
possibly for coal domestically and in Eastern Europe,
and to market additional amounts of gas in Western
Europe, will determine how much gas the Soviets
produce.
Coal
20. As in the case of oil and gas, coal production is
declining in the western USSR and increasing in the
eastern USSR. Unlike oil and gas, however, much of
the eastern coal cannot be exploited because of coal
quality and critical transportation problems. Because
of severe technical and economic problems, even to
maintain coal output will require that the coal indus-
try receive a higher priority in investment allocations
than in the past. The coal industry's share in total
investment in fuels and electric power has fallen from
about 20 percent in the mid-1960s to 12 percent in the
1981-85 Plan, reflecting the increased requirements
and priority of oil and gas. Even if investments in the
coal industry increase substantially over the next
decade, much of the increase will be required just to
cope with the declining energy content of coal
production.
21. In the older coal regions, especially the Donets
and Kuznetsk Basins, which still account for about 50
percent of coal output, physical conditions for produc-
tion are rapidly worsening. Mine depth is increasing;
seam thickness is decreasing; and methane concentra-
tions are rising. Moreover, while labor productivity is
declining, the Soviet Government is having great
difficulty recruiting additional miners.
22. The USSR has several large coal deposits in
Siberia and Kazakhstan, most of which can be mined
by labor-saving open-cast methods, but the difficulties
of transporting this coal to the principal consuming
areas are immense. Production increases in the most
accessible eastern coal basin, Ekibastuz, are adding a
major strain to a rail system which is already in bad
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Figure 3
Major Soviet 1,420 mm Gas Pipelines, 1981-85
Complete
Under construction
Planned
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the inoo ppoo tion of Fitoni., Ltrie, -d Lithu.ni.
,.to Me Sovi.t thiidn. OMer bounMry repre..nt.tion
is not n.c....rfly wMOrittlive.
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shape. The coal from the Kansk-Achinsk Basin in East
Siberia cannot be transported for long distances in raw
form because it contains more than 30 percent water
and is subject to spontaneous combustion when ex-
posed to air.
23. The Soviets have been exploring alternative
technologies for using eastern coal domestically on a
large scale in several general approaches, none of
which could have a substantial impact during the
1980s:
Burning the coal in power plants near the mines
in Ekibastuz and Kansk Achinsk and transmit-
ting the electricity to the western USSR over
ultra-high-voltage power lines.
Upgrading the coal quality through processing in
facilities near the mines and transporting the
resulting coal and synthetic fuel to the western
USSR via railroads initially, and eventually in
pipelines for coal slurry and synfuels.
Working with Western firms, especially West
German and Italian, or otherwise incorporating
Western technology in the development of coal
slurry pipelines, synthetic fuels from coal, and
long-distance, ultra-high-voltage electricity trans-
mission systems.
Electric Power
24. During the 1980s, nearly two-thirds of the likely
increase in output of electricity will come from nucle-
ar and hydro stations, predominantly nuclear stations.
Construction and engineering problems held back the
nuclear program in the 1970s, delaying completion of
about half the planned projects, and construction of
nuclear plants continues to lag behind plan. Even with
these setbacks, nuclear generating capacity should
grow from 12,500 megawatts in 1980 to at least 48,000
megawatts by 1990. Still, the below-plan growth in
nuclear power (by perhaps 30,000 megawatts) will
prevent the Soviets from meeting objectives to sharply
reduce their reliance on fossil-fueled electricity gen-
eration.
25. At fossil-fueled power stations, problems with
fuel supply and slow plant construction will plague the
Soviets for the rest of the decade. These problems will
inevitably result in continued interruptions in the
supply of electricity and delays in bringing new
generating capacity on line. By the late 1980s, further
strains in electricity supply could result from pro-
longed operation of an increasing number of older
fossil-fueled plants overdue for retirement.
Energy Production in the 1990s
26. In the 1990s, gas will continue to be the main
source of additional energy:
- West Siberian gas will be by far the cheapest
energy source. Gas output will be limited mainly
by demand.
- The cost of oil development will continue to
increase as exploitation in West Siberia moves to
even smaller fields and offshore production be-
comes more important.
- Offshore development begun in the 1970s and
1980s will continue in the 1990s, notably in the
deeper waters of the Caspian Sea and offshore
Sakhalin. Thus far, however, there is no evidence
that either area will become a major source of oil
in the 1990s. Large imports of Western oil
equipment and technology are likely to be neces-
sary for rapid exploitation of offshore deposits.
- Oil may be found in unexplored areas of the
Barents Sea and Kara Sea and in East Siberia.
Major discoveries in these areas, although expen-
sive to exploit, could become important in the
1990s.
- Technology for long-distance coal transportation
and long-distance transmission of electricity
from Siberia may substantially improve, which
could permit a large increase in coal output by
the latter part of the decade.
- A sizable share of electricity will be produced in
nuclear plants, and the nuclear construction
program may become more efficient.
Under these conditions, oil production will probably
decline over the decade of the 1990s as oil develop-
ment costs rise and as gas and nuclear power are
increasingly substituted for oil.
Prospects for Energy Consumption
Overall Trends
27. The consumption of energy in the USSR will
continue to be driven primarily by the overall growth
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of the economy. The rate of growth of Soviet GNP has
been declining, from an average of 3.7 percent in
1971-75 to 1.6 percent in 1979-82. We project average
annual GNP growth rates of 2.5 percent in 1981-85
and about 2 percent in 1986-90. These projections
assume, on the one hand, that severe shortages of
critical inputs, including energy, do not develop, and,
on the other hand, that major improvements in mana-
gerial efficiency are not achieved. Soviet energy con-
sumption has risen as fast as or faster than Soviet GNP
for many years (figure 4). In the past decade Soviet
energy consumption increased by 4.1 percent per year
and GNP by 3.0 percent. Energy consumption per
unit of GNP increased by 9.1 percent in 1971-80,
despite some Soviet efforts to conserve energy. In
sharp contrast, after rising substantially during the
earlier period of declining real energy prices, energy
consumption per unit of GNP in the United States,
Western Europe, and Japan has fallen by 20 to 25
Figure 4
USSR: Energy/GNP Ratio
7n
percent since 1973 in response to the rise in real
energy prices during that period.
28. A major cause of the rapid rise in Soviet energy
consumption has been the extraordinarily rapid
growth of the stock of plant and equipment-8 per-
cent a year in 1971-75 and nearly 7 percent a year in
1976-80, or some two-thirds faster than in OECD
countries, whose aggregate GNP grew at about the
same rate as the USSR's.
Conservation and Substitution Problems
29. Institutional rigidities and production-oriented
policies also have greatly hindered Soviet energy
conservation. Unlike Western economies, the Soviet
economy has been unable to take advantage of the
many possibilities for conserving energy through im-
provements in management and small-scale expendi-
tures by individual factories or households. The Soviets
report that only a small part of energy use is accurate-
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ly measured and controlled at the point of use. The
kinds of quick energy economies which were obtained
in the West by improving insulation, lowering thermo-
stat settings, and making many other small and inex-
pensive adjustments, are not available or apparently
have been largely ignored in the USSR. The reason for
this is partly that the Soviets have not organized
themselves for this purpose and partly that energy
users have had little incentive individually to take any
action.
30. The Soviets are aware of the potential for
conserving energy by investing in more energy-effi-
cient equipment and structures, and apparently be-
lieve that energy can be conserved more cheaply than
it can be produced. However, the realization of this
potential saving has proved difficult since improving
energy efficiency is only one, and by no means the
most important, of the many goals Soviet machinery
producers and builders must meet. Design improve-
ments are being made, but slowly because of the
disinclination to take any chances on not meeting
production targets. Moreover, with the growth of
investment expenditures substantially reduced because
of general economic problems, the inclination to ac-
cept any delays in delivering equipment for the sake
of improved energy efficiency may become even
weaker.
31. Also detrimental to energy efficiency is the
deep-seated Soviet practice of continuing to use out-
moded capital equipment as long as it can be repaired.
The average annual retirement rate of Soviet capital
stock has been around 1.5 percent, less than half of
that normal in Western practice, and, in contrast to
the West, no major industry has scrapped its old
equipment and replaced it with much more energy-
efficient new equipment.
32. These fundamental constraints make it unlikely
that Moscow can make rapid progress in energy
conservation. In the long-term, however, steady and
eventually substantial conservation probably can be
achieved through improvements in the energy effi-
ciency of new equipment. Moreover, results could be
achieved more quickly if the Soviet Government gave
a high management priority to energy conservation,
and consequently were willing to sacrifice other eco-
nomic objectives which might compete with it. In the
January 1982 general price revision, the Soviet Gov-
ernment increased wholesale prices for crude oil and
oil products by 130 percent and average wholesale
prices for energy products by about two-thirds. These
were the first changes in wholesale energy prices since
1968. Higher energy prices constitute a belated recog-
nition of the large rise in domestic energy costs, and
perhaps also of the surge in world market prices
during the past decade. They cannot be expected,
however, to have much direct impact on Soviet mana-
gerial decisions because these are mainly governed by
other criteria, notably production plans.
33. There are fewer institutional and economic
barriers to substitution of one type of energy for
another. Converting industrial or power plant boilers
from oil to gas, or to dual use, for example, is
technically a fairly simple matter if the gas is made
available. Given the relatively low cost of gas develop-
ment, it makes good economic sense to substitute gas
for oil and in some areas for coal.
Sectoral Energy Use
34. The slow upward trend in the energy-GNP ratio
during the 1970s was partly the net result of a
relatively rapid increase in the output of energy-
intensive sectors. In addition, energy use per unit of
output increased in agriculture and construction,
mainly because of mechanization, more than offset-
ting a slow decline in energy consumption per unit of
output in industry and electric power. Energy effi-
ciency in transportation and in the trade and services
sectors showed little change. Sectoral trends in energy
use are shown in table 3.
35. In the 1980s, mechanization in agriculture and
construction probably will proceed at a slower pace
because of the general squeeze on investment funds,
and energy efficiency in industry should increase at
least as rapidly as in the past decade, given likely
government efforts to introduce more energy-efficient
equipment. The growth of transportation, trade, and
services activity will be substantially slower, in line
with the slower growth of GNP, and probably with
little change in energy efficiency. In transportation, a
further increase in the share of total freight carried on
trucks will tend to reduce energy efficiency because
trucks are far less energy-efficient than railroads. On
the other hand, a shift toward diesel engines in trucks
will tend to raise efficiency. These developments
could result in a leveling off of the energy-GNP ratio
over the decade without any major policy shift.
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Table 3
USSR: Estimated Energy Use
by Major Sector
Coal
5.8
6.5
Electricity a
0.6
1.0
Other b
1.2
1.2
3.7
2.2
2.6
0.4
0.7
Other b
0.5
0.5
Electric power d
3.2
4.8
Oil
0.7
1.7
Natural gas
0.8
1.2
Coal
1.5
1.8
Electricity a
NEGL
NEGL
a Primary electricity from hydro and nuclear sources distributed
according to shares for total electricity.
b Peat, oil shale, fuelwood, and other renewable energy sources.
c Including electricity and cogenerated heat supplied by captive
power plants.
d For fossil-fueled power stations, fuel used for generating heat is
distributed to the respective consuming sectors.
t Urban and rural residential and construction uses.
rNonenergy consumption includes that portion of output used to
produce lubricants, petrochemicals, and so forth.
w. vii cunsuutpuon prooaoty will grow more slow-
ly during the next few years, and may level off late in
the decade. Oil constitutes nearly 90 percent of the
fuels used in transportation and over half of those used
in agriculture. In neither of these sectors is substantial
substitution for oil feasible. Their combined oil con-
sumption probably will rise by around 1 million
barrels per day over the decade. As mentioned above,
however, there is large potential for substitution of gas
for oil in electric power stations and industrial boilers,
but implementation may be slow.
is being held back by the need to use gas to offset
shortfalls in coal production and the deterioration of
coal quality. Currently, oil is the backup fuel in most
0.2 0.1 boilers designed for coal, so oil consumption increases
2.0 3.0 when coal supply problems arise. By bringing gas to
Coal
Electricity a
Other b
2.7 these coal-fired plants, the Soviets are curtailing use of
NEGL the standby oil and increasing power plant reliability,
0.3 0.1 but this results in diversion of resources from the main
0.1 0.1 substitution objective, replacement of oil with gas.
NEGL 0.1 Since consumption of substantial amounts of oil to
1.4 offset coal shortfalls at power station boilers is likely to
0.8 continue, there may be little net reduction of oil use in
this sector during the 1980s.
0.1
0.3 38. In industry, there has already been great prog-
0.1 gress in boosting gas use. The oil share could decline
0.1 even more, to perhaps as little as 10 percent in 1990
3.8 compared with 19 percent in 1980, but only with a
0.5 0.8 sustained, high-priority effort. Such large-scale substi-
0.5 0.9 tution, however, requires rapid expansion of the local
1.5 1.6 gas networks so that most power plants and factories
can have access to gas. Moreover, the growing difficul-
0.1 0.1 ty of producing a mix of oil
0.5 0.4 g products consistent with
trends in demand may also limit the rate of gas-for-oil
0.9 1.5 z _... 1 ., ..
0.6 1.0
0.2 0.4 The Oil Product Mix Problem
Coal 0.1 0.1 39. The
pattern of Soviet energy consumption in
Other b NEGL NEGL the 1980s will result in increasing demand for light oil
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products (diesel fuel, gasoline, and jet fuel), especially
in transportation and agriculture, and possibly stable
or declining demand for residual fuel oil, for which
gas will be increasingly substituted. To meet these
demands, the Soviets will have to either change their
refinery mix or adjust their oil trade. But this will be
difficult. Major changes in the refinery mix would
require a large expansion of secondary processing
facilities, and Moscow may have to import some
Western equipment for the many catalytic cracking
units that may be needed. So far, however, Moscow
has not made the necessary investments; only two
catalytic cracking units are being built, apparently
with Soviet technology. There are also many con-
straints on adjustments through trade in crude oil,
residual fuel oil, and products with Eastern Europe
and Western countries. If adjustments in the refinery
mix and in foreign trade do not keep up with changes
in the pattern of demand, surpluses of residual fuel oil
and deficits of light products will develop.
Foreign Trade in Energy
Soviet Policies
40. In developing its energy resources for the 1980s,
Moscow will be trying not only to meet domestic
energy requirements but also to provide critical ener-
gy exports to Eastern Europe and maintain or expand
energy exports to the West for hard currency. The
total volume of Soviet energy exports grew steadily in
the 1970s, although at a declining rate, but leveled off
in 1981-82. Soviet energy exports are of fundamental
importance to Eastern Europe, representing some 27
percent of those countries' total primary energy con-
sumption. Exports to the West constitute more than
half of total Soviet hard currency earnings.
41. Energy exports in the 1980s will be affected by
a complex mix of economic, bureaucratic, technical,
and political considerations that neither we nor the
Soviets can predict with any confidence. Faced with
many uncertainties, Moscow characteristically tends to
aim toward stability-which in this case probably
means making provision at least to maintain and
perhaps to increase slowly net energy exports over the
1980s. But unexpected energy developments-for ex-
ample, large increases or decreases in world oil prices,
shortfalls in planned Soviet energy production, or
larger or smaller than planned increases in domestic
energy demand-could either raise or lower future
energy exports.
42. Among the economic considerations in Soviet
energy export policy is the profitability of these
exports in the longer term. Although available data on
Soviet energy costs are few and their meaning is often
unclear, there is sufficient evidence to indicate that
exports of gas to the West are highly profitable and
that exports of oil probably will continue to be more
profitable than most nonenergy exports, despite rapid-
ly increasing domestic costs. Gas exports, however, are
limited by Western demand and by Western political
considerations, while to raise or even to maintain oil
exports requires large and growing investments, which
must be bid away from high priority domestic
projects.
Exports to Communist Countries
43. About 60 percent of current Soviet energy
exports now go to Eastern Europe, Cuba, and other
Communist countries. These exports have involved
significant costs to the USSR-partly because under
the Council for Economic Mutual Assistance (CEMA)
pricing scheme, based on a five-year moving average
of world prices, Moscow charged its clients oil prices
far below world market levels, and partly because of
the opportunity foregone to sell the oil in the West for
hard currency. The slow phasing in of oil price
increases was designed to spare the East European
countries the necessity of rapid, disruptive economic
adjustments. In 1978, Moscow also tried to spur a
reduction in East European dependence on Soviet oil
by promoting long-term energy strategies keyed to
conservation, coal, nuclear power, and expansion of
the unified electric power grid linking the East Euro-
pean countries and the USSR. The new oil price jumps
in 1979-80, however, followed by Soviet hard currency
problems in 1981, led Moscow to take stronger meas-
ures. Already having warned the East Europeans not
to expect increases in planned oil deliveries during the
1981-85 Five-Year Plan period, in 1982 Moscow actu-
ally cut its oil exports to East Germany, Czechoslova-
kia, Hungary, and possibly Bulgaria by about 10
percent. Although the price of oil on the world market
declined in 1982-83, the CEMA pricing formula had
the effect of further increasing the price of Soviet oil
to Eastern Europe.
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44. The hard currency earning possibilities of Soviet
client states are insufficient to replace much Soviet oil
through imports from Western markets. The East
European economies are already facing near economic
stagnation, partly because of hard currency debt prob-
lems, the world recession, and the disruptions in
Poland. While there is clearly a potential in Eastern
Europe for some additional energy conservation and
for substitution of Soviet gas for oil in industry,
progress will be slow. Thus substantial additional
reductions in Soviet oil deliveries would call for
intensification of austerity measures in Eastern Europe
and aggravate the danger of popular unrest. Neverthe-
less, we believe that the Kremlin would not be inclined
to give Eastern Europe priority over its own domestic
oil consumers or its hard currency oil exports should
oil supplies become inadequate to meet all major
Soviet objectives. Moscow might then make additional
cuts in oil deliveries to Eastern Europe and trust to the
coercive power of the East European regimes, but-
tressed by Soviet power, to maintain social order.
Hard Currency Exports
45. Moscow probably expects energy exports to
continue as its principal source of hard currency
earnings. The prospects for most other hard currency
exports-for example, wood, machinery, and miner-
als-range from fair to poor. Even hard currency
earnings from arms deliveries will be hard to sustain as
major Soviet customers confront their own payments
problems. There is no evidence that Moscow is mount-
ing a major program to reduce Soviet dependence on
energy as a source of hard currency earnings. There
are many ambiguities in Soviet policy concerning hard
currency energy exports. Moscow cut oil export vol-
ume in 1979-80, but less than the rise in oil prices, so
total earnings increased. In some years, including
1981, export earnings have declined and imports have
been cut, especially in the case of machinery and
equipment. How much Moscow would be willing to
reduce hard currency imports, if maintaining them
meant serious domestic oil shortages, would depend on
many factors, including the food situation, the pros-
pects for oil price changes, and the state of East-West
relations. Clearly, however, some hard currency im-
ports are of great importance to the economy and
would be maintained even at the cost of significant
disruptions in domestic production.
46. The share of natural gas in total Soviet energy
exports for hard currency will increase in the 1980s
and probably in the 1990s as well. Completion of the
new Siberia-to-Western Europe gas pipeline will per-
mit an expansion of Soviet gas exports of about two-
thirds under existing contracts (that is, not including
Italy), and eventually by nearly 100 percent if the
pipeline is used at capacity. Moscow has ample gas
reserves to support a second, or even a third, pipeline
to Western Europe, should there be sufficient de-
mand, but these are not likely to be built until the
1990s if at all. Some decline in oil exports seems likely,
particularly in view of rapidly rising costs of oil
production. Even so, Moscow probably will consider
that it needs to maintain a substantial level of hard
currency oil exports because, unlike gas, oil can be sold
on a small scale and in many different markets, and is
politically less visible than the massive gas projects.
Moreover, at least through the 1980s, Moscow will still
depend on oil exports as an important source of hard
currency.
Energy Investment
47. Energy investment is surging because of both
rising investment costs of new production and the
need to make up for past neglect in some areas. In the
1960s and most of the 1970s, Moscow held down the
share of energy in total investment by meeting the
minimum needs of the top priority energy sectors at
the expense of others. This is no longer possible;
investment costs are increasing in all areas of energy,
in some cases very rapidly. Energy investments for
1981-85 are likely to be 60 percent higher than in
1976-80 and will probably constitute 19 percent of
total capital investment, compared with 14 percent in
1976-80. Investments in gas are planned to increase by
two-thirds in 1981-85 (table 4). Based on results for
1981 and 1982 and our analysis of drilling require-
ments and costs, oil investments will nearly double. A
rough allowance for investments in oil refining (which
Moscow classifies under chemicals) and energy-related
infrastructure combined would probably raise the
overall energy share to well over 20 percent.
48. Energy investment will continue to grow rapid-
ly during 1986-90 if present policies emphasizing
energy production continue. If oil production were
held near 12.5 million b/d, oil investment probably
would again about double; at a minimum, should the
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Table 4
USSR: Energy Investment a
Electric power
19.7
23
33
22
Energy investment as a share of total
new fixed investment (percent)
13.9
19,
21-23f
18-19f
a Excluding investment in the minor fuels (peat, oil shale, and
fuelwood), which amounted to about I billion rubles in 1976-80.
b High and low production estimates correspond approximately to
the policy scenarios described in section VI below. Projections are
subject to a considerable margin or error.
c Excluding investment in oil refining, which is included in petro-
chemical and chemical investment in Soviet statistics.
d Including estimated investment in pipelines.
e Assuming that total new fixed investment is 4 percent above plan.
f Assuming a 12-percent increase in total new fixed investment over
1981-85.
quality of newly developed fields prove sufficient to
greatly slow the decline in well flow rates, investment
would increase about 75 percent. Investment in coal
and electric power would probably increase more
rapidly. A substantial decline is likely in gas invest-
ment, however, in sharp contrast to the large increase
in 1981-85, as the current exceptionally large long-
distance pipeline program is completed. Under pro-
duction-oriented policies, the share of energy invest-
ment in total investment would continue to increase,
but probably less rapidly than in 1981-85. If Moscow
allowed the growth of energy production to slow,
however, and oil production to decline-for example,
by 1 million b/d-it could stabilize or even slightly
reduce the energy investment share during 1986-90.
The considerations that will determine Moscow energy
investment policies are discussed in the next section.
49. Soviet energy investment probably exceeds US
investment, which in turn is larger than the combined
total for the rest of the non-Communist world. Both
the USSR and the United States devote about 20
percent of total investment to energy, and the dollar
value of total Soviet investment is probably somewhat
above the US level. However, Soviet GNP is not much
Projected High Low
Production Production
over half the US level. Energy investment trends have
been upward in both countries, but their timing
differs. While US investment in oil and gas develop-
ment took large jumps immediately after both the
1973 and the 1979 price increases, the main surge in
Soviet oil and gas investment did not begin until the
late 1970s. Moreover, Soviet energy investments, and
those for oil development in particular, will continue
to increase rapidly throughout the 1980s, while those
in the United States apparently have already leveled
off.
50. The larger magnitude of Soviet energy invest-
ment compared with that of the United States does not
reflect differences in energy resource endowment; on
the whole, these differences clearly favor the USSR.
Well flows for both oil and gas on the average are
much higher in the USSR than in the United States,
where the larger fields have been in decline for a long
time, and where high prices justify the development of
very small fields with well flows far lower than
anything the Soviets are exploiting. Rather, the high
Soviet investment costs appear to reflect systemic and
policy differences. Because Moscow delayed for years
taking up the energy problem as a matter of high
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priority, investment requirements accumulated. More-
over, the inability of the Soviet management system to
make much progress in energy conservation put nearly
the entire burden of adjustment on energy supply.
Consequently, the USSR must increase energy produc-
tion much more rapidly than the United States, which
requires massive investment.
Energy Policies in the 1980s
51. In its energy policies for the 1980s, Moscow will
have to balance several objectives that will be difficult
to achieve simultaneously. With regard to energy
production, the Soviet leadership will be trying to hold
investment costs to a level which does not divert so
much scarce capital that it creates serious problems for
other economic sectors and for the growth of the
economy as a whole. With respect to energy consump-
tion, Moscow will try to avoid energy shortages disrup-
tive of production processes over long periods. With
respect to foreign trade, it is important to the leader-
ship to maintain a level of energy exports sufficient to
avoid severe political problems in Eastern Europe and
to ensure that at least the most essential imports from
the West can be paid for.
52. In the current Five-Year Plan (1981-85), Soviet
energy policies are primarily production oriented. The
large planned rise in energy investments indicates a
willingness to pay for the rapidly rising costs of
developing energy resources in order to cover domes-
tic and export needs. Planned investments should be
sufficient to raise oil production to near 12.5 million
b/d by 1985, reflecting a probably realistic view of oil
drilling requirements. Gas production in 1985 should
be around 10 million b/d oil equivalent, below plan
but still sufficient to meet demand. Coal production in
terms of energy content will be about constant and
nuclear power production will grow, but less than
planned. There is a great deal of talk, but little action,
to stimulate energy conservation. Although gas-for-oil
substitution is being pushed hard, it is not progressing
as rapidly as planned. Net energy exports will proba-
bly be maintained or slightly increased through 1985.
53. Energy prospects in the second half of the
decade are much more uncertain than those for 1985,
not only because of uncertainty regarding production,
conservation, and substitution is substantially wider,
but also because Soviet energy policies may change.
With the rapid growth of energy investment in the
current Five-Year Plan period, it is becoming increas-
ingly difficult to fund new programs in other areas.
Consequently, it is reasonable to expect that political
opposition to costly production-oriented energy poli-
cies will increase. Although energy investments are
only part of the picture, in the current Five-Year Plan
their share of the total is increasing by about 5
percentage points at a time when total investment is
growing very slowly-an increased claim comparable
to that given to agriculture about a decade earlier.
Investment in heavy industry is increasing slowly;
efforts are being made to rebuild the transportation
sector after decades of neglect; agriculture is holding
its own in investment allocations, and together with
energy is taking 40 percent of the total; investment in
consumer-oriented sectors-housing, light industry,
and services-is probably falling in absolute terms.
Continuation of production-oriented energy policies
would probably require a further increase in energy's
share of total investment during 1986-90, squeezing
investment in other economic sectors and jeopardizing
objectives for raising living standards or possibly even
military production.
54. Under these circumstances, the Soviet leader-
ship might consider alternative policies to achieve
substantial savings in energy investment during the
next Five-Year Plan. In order to save on investment,
Moscow must cut the demand for energy, especially
oil, so that it can meet its domestic and priority export
needs with less growth of energy production. Limiting
energy consumption in general, and oil consumption
in particular, would mean greater emphasis on energy
conservation and interfuel substitution. The shift to a
more conservation-oriented policy could be attractive
in view of Soviet expert claims that it is much cheaper
to conserve an extra unit of energy than to produce it.
The issue is certain to be a highly contentious one, and
we cannot predict the outcome of the debate.
55. To illustrate how a production-oriented or a
consumption-oriented policy might work out, notional
projections of energy balances for 1990 are set out in
table 5. To provide a basis for comparison, both of the
1990 balances are constructed on the assumption that
GNP will grow at an annual rate of 2 percent during
1986-90. In the production-oriented scenario, drilling
and other investment in the oil industry increases
rapidly enough to maintain oil production at 12.5
million b/d during 1986-90. This policy is more likely
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Table 5
USSR: Energy Balances Through 1985 and Possible 1990 Scenarios
Production Consumption
Emphasis a Emphasis a
Total energy 28.2 29.7
Nuclear/hydro 1.1 1.2
Nuclear/hydro 1.0 1.1
a These figures are illustrative results of alternative policies; they
do not represent a range of forecasts.
to be followed, the better the quality of the new oil
fields available for development. By the time the new
Five-Year Plan is completed, Moscow should have
better information on the technical possibilities and
problems of oil development. In the scenario, gas
production continues to rise in line with domestic and
export demand, while nuclear power and coal produc-
tion increase as much as is technically feasible. At the
same time, although no extraordinary measures are
taken to push conservation, the energy-GNP ratio
levels off. The result is a level and composition of
energy production that meets domestic requirements
and permits a small increase in net energy exports as
rising gas exports more than offset the slight decline in
oil sales.
56. In a scenario emphasizing limitation of energy
consumption, Moscow puts teeth into energy conserva-
tion policies by making energy savings a top priority
management objective and by severely rationing ener-
gy allocations to producers and consumers. Gas-for-oil
substitution is pushed hard, especially in industry and
electric power stations, in support of which the devel-
opment of local gas distribution networks and oil
cracking facilities would be given a high priority.
Substantially less investment is allocated to energy
production, especially oil. As a result, production of oil
declines to perhaps 11.5 million b/d, coal production
drops slightly, and the increase in nuclear power
production is slower. In this scenario, if Moscow were
able to hold the annual growth of energy consumption
to about half the rate of growth of GNP, domestic
energy needs could be met, but only with a fairly
substantial decline in oil exports.
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57. Continuation of production-oriented policies,
while minimizing problems of supplying energy to the
domestic economy and Eastern Europe, and permit-
ting hard currency energy exports to be maintained,
would have adverse affects on other areas of the Soviet
economy. There would be a further increase in the
share of energy in total investment-to perhaps 22
percent-except in the unlikely case in which produc-
tion conditions were highly favorable in all major
energy sectors. Probably about half of the likely
increase in total investment in 1986-90 would go to
energy. If heavy industry and agriculture continued to
receive priority in the allocation of the remaining
investments, investment in other consumer-oriented
sectors would probably fall in absolute terms. With a
decade of such declines, living standards would proba-
bly begin to deteriorate. If Moscow could not accept
the decline in living standards brought about by this
investment pattern, and instead decided to cut invest-
ment in heavy industry for several years, the competi-
tion between defense and civilian uses of investment
funds would become more severe, and the growth of
either military programs or total capital investment
would have to be slowed.
58. Energy policies emphasizing the limitation of
energy consumption could ease the burden of energy
investments-the energy share of total investment
would level off or decline-and consequently would
free up more investment funds for other sectors, but
would involve risks of serious difficulties in energy
supplies for domestic use and exports. Although we
cannot be confident about estimating the effects of
strong-even unprecedented-conservation policies
because they have never been tried in the USSR, our
knowledge of the way the Soviet planning and man-
agement system operates gives reason for doubt. There
is a substantial possibility that the Soviet political
leadership would underestimate the difficulty of
achieving conservation objectives. In setting an energy
production plan, the leadership cannot ignore geologi-
cal conditions and engineering analysis, which largely
determine production possibilities. But with respect to
energy conservation, expert judgment as to what is
technically feasible may have little bearing on what
can be achieved, given the economy's systemic prob-
lems. An energy plan in which meeting domestic and
export objectives required large-scale energy conserva-
tion thus might well turn out to be unbalanced. It
would then be difficult to avoid widespread energy
shortages and a large decline in energy exports. Al-
though there is little doubt that energy is used ineffi-
ciently in many parts of the Soviet economy, this
inefficiency does not easily translate into usable oppor-
tunities for conservation. Moscow has the power to
force cuts in energy use, but this may be at least in part
at the cost of slower growth of output and reduced
labor productivity. Accelerated energy conservation
also could be achieved through investment in new
equipment of improved design, and by accelerated
retirement of existing equipment. But such improve-
ments will be limited by the investment slowdown,
sluggish technological change, and unwillingness to
accept even temporary declines in output in industries.
59. In order to minimize the problems that are
likely to result from the two fairly extreme energy
policies, Moscow is likely to adopt a mix of policies
that have elements of both scenarios, or some compro-
mise policies. Policies also will be adjusted to try to
correct problems as they arise, and in response to
unexpected developments such as a large increase or
decline in international oil prices. Both in its initial
policy choices and in later adjustments, Moscow will
be trying to achieve a reasonable balance between its
objectives of minimizing the energy investment bur-
den, meeting domestic energy needs, assuring energy
exports sufficient to maintain reasonable economic
performance in Eastern Europe, and earning enough
hard currency to cover at least high priority imports.
60. Although the policy mix is likely to be an
admixture of those specified in the two scenarios, the
notional projections in table 5 should not be viewed as
bounding the range of possibilities because production,
consumption, and exports of the various forms of
energy are interrelated. Moreover, the uncertainties
regarding Soviet energy policy and the technical con-
ditions for energy production are not the only factors
preventing a firm projection of energy production,
consumption, and trade. Faster or slower growth of
GNP than the assumed 2 percent would raise or lower
energy demand, consequently forcing modifications of
policies concerning production, conservation, or trade.
Changes in real world energy prices would affect both
the profitability of energy investment and the volume
of energy exports required to maintain a given value
of imports.
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61. The indications of Soviet intentions for energy
policy in 1986-90 are sparse, mixed, and inconclusive.
The possibilities for and benefits of energy conserva-
tion are receiving growing attention, but it is not yet
clear how desires are to be translated into actions.
There is no reason to doubt that the Soviets intend to
push gas-for-oil substitution as hard as they can. As to
intentions for oil production, most Soviet public state-
ments have indicated in general terms that oil produc-
tion was expected to level off. Moreover, completion
of the new long-distance West Siberian oil pipeline
now under construction would provide the capacity to
transport enough West Siberian oil to keep national
output roughly constant. In the past year or so,
however, private statements by some Soviet officials,
although giving no forecasts, suggest that a decline in
production may occur. It is highly probable that the
issue of oil production for 1986-90 is still open. With
respect to foreign trade in energy, there are no
indications of future policy trends. We should obtain
early indications of Soviet policy directions as infor-
mation on the new Long-Term Energy Program,
which has already been drafted, is revealed. In addi-
tion, energy policy, and its role in investment policy,
will be debated at forthcoming Party Plenums. A list
of indicators of key Soviet energy trends and policy
decisions that should be monitored by the intelligence
Community is at inset.
Key Indicators of Soviet Energy Policies
Information on Soviet plans for the energy sector
during the 12th Five-Year Plan period (1986-90) is
unlikely to be released by Moscow until well into 1986
at the earliest. Even then official announcements will
probably be limited to planned production of the
various forms of energy, and perhaps a single figure
for total investment in the fuel and energy complex (as
was the case in 1981-85). Some data on investment in
individual energy sectors may be published in special-
ized journals throughout 1986, but only on a hit-or-
miss basis.
Some earlier indications of likely Soviet energy
policies should become available during 1984-85,
however, enabling intelligence analysts to reduce the
range of uncertainty about the likely Soviet energy
policy mix in 1986-90.
For example, indications that Moscow was con-
tinuing production-oriented energy policies would
include:
- Oil production continues to slowly increase or to
stabilize.
- Additional pumping capacity for long-distance
oil pipelines is being added.
- Work begins on a new long-distance oil pipe-
line.
- West Siberian development drilling is expand-
ing rapidly into new areas.
- The East European countries are receiving as-
surances that Soviet oil supplies will not be cut
further.
On the other hand, early indications of changes in
the direction of a more consumption-oriented energy
policy might include:
- Oil production begins to decline.
- Oil development drilling in West Siberia slows
down.
- Gas development moves into more northerly
West Siberian fields sooner than expected.
- A rash of energy conservation decrees is issued.
- Forceful articles are prepared on the need for
producing more energy efficient equipment.
- Many Soviet managers complain about cutbacks
in fuel allocations.
- The East Europeans are told to expect possibly
substantial cuts in Soviet oil deliveries.
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62. While there is agreement on the general energy
trends and policy choices, there is a range of judg-
ments on how much difficulty the USSR is likely to
experience in achieving an acceptable balance among
its main energy objectives. Some analysts, including
those in DIA, believe that Moscow has correctly
assessed both demand trends and the technical re-
quirements for energy production, and consequently
will produce as much oil as is necessary to meet
domestic and export needs. They believe that if
progress in energy conservation and interfuel substitu-
tion proves to be slow and Moscow considers it
necessary to maintain oil exports, the Soviets would
keep oil production fairly constant. They realize that
the burden of energy investment may continue to
increase, but believe that the increase will not be large.
Moreover, Moscow may believe that the economic
benefits from incremental energy investments-espe-
cially the resulting hard currency sales-are such, on
balance, as to enhance the overall productivity of the
economy. Other analysts, including those in CIA/DDI,
believe that rapidly rising investment costs are likely
to lead to a gradual fall in oil production after 1985.
They also believe that the Soviet leadership will, as in
the past, overestimate the possibilities for energy
conservation and interfuel substitution. Consequently,
shortfalls in oil supply could develop that would
disrupt the domestic economy and squeeze exports.
Because opportunities to reduce oil deliveries to East-
ern Europe and to increase gas sales are limited in the
1980s, these analysts project a decline in hard currency
earnings from energy exports if oil and gas prices are
unchanged.
The Potential Impact of Western Actions
63. Western actions can substantially affect Soviet
investment costs and/or hard currency earnings dur-
ing the 1980s and beyond. Specifically:
- A willingness to import large amounts of Soviet
gas-enough, for example, to fill an additional
Siberia-to-Western Europe pipeline of the size
of the one recently laid would, at present gas
prices, provide additional hard currency earn-
ings of nearly $5 billion per year.
- Development of the deeper offshore oil deposits
in the Arctic, the Caspian, and Sakhalin, depend
heavily on Western equipment and technology.
Although these deposits will not have a major
impact on Soviet oil production in the 1980s, some
of them may become important in the 1990s.
- More generally, as oil exploitation involves deep-
er deposits and more sophisticated forms of
secondary and enhanced recovery, various kinds
of Western technology will increasingly be
needed.
Although the USSR will probably become less
dependent on the West for large-diameter pipe
production and turbine-compressors, imports
from the West will involve lower costs and
greater efficiency. Moreover, the attractiveness
of the Soviet market to Western equipment
producers may give Moscow opportunities to use
the offer of additional equipment purchases as a
bargaining chip in any negotiations on new gas
projects.
Finally, being severely strapped for investment
resources, the USSR would seek and greatly
benefit from large Western loans to finance
imports for energy development.
Implications for US Interests
64. Soviet energy developments have important
implications for US and Western interests both
through their impact on Soviet economic performance
and resource allocation and through the potential
handles of influence that these developments may give
to both the West and the USSR.
65. To the extent that Soviet economic growth is
slowed either indirectly because of the rapidly rising
cost of energy development, or directly because of
energy shortages, Moscow's policy choices in allocating
resources among the competing objectives of defense,
consumption, and investment, will become more diffi-
cult. Although the military will probably retain its
premier position in the resource competition, it cannot
be fully insulated from the economic problems. Occa-
sionally, shortages of key industrial materials and
transportation bottlenecks due largely to insufficient
investment, have slowed output in some defense-
related plants. Military procurement and other invest-
ment at times has been restricted to accommodate
increased investment in high priority civilian areas,
such as agriculture and energy. Leaders of the Soviet
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military-industrial complex recognize that in the long-
er term, continued growth of the heavy industrial base
is essential to expansion and modernization of military
output. Thus, while there is little direct competition
for resources between the energy and the military
industries, the increasing investment burden of assur-
ing adequate energy supplies may indirectly be a
factor slowing military expansion.
66. Soviet dependence on the West for important
energy markets, especially gas, and for energy equip-
ment and technology, gives Western countries some
important potential policy handles. As mentioned
above, the expansion of Soviet gas production will
depend partly on the volume of exports to Western
Europe, especially in the 1990s. Many billions of
dollars in export earnings or, should gas be substituted
for oil in energy exports, major savings in investment
costs, would accrue to Moscow. The importance of
imports of Western oil and gas drilling and processing
equipment is likely to grow in the late 1980s and
especially in the 1990s as Moscow depends increasing-
ly on exploiting deeper, more complex deposits. Most
of the needed equipment is available from Western
sources outside the United States.
67. By the same token, Moscow's continued ability
to export substantial amounts of oil to the West, and
especially its strong position as a low-cost, potentially
very large supplier of gas to Western Europe, gives it
strong assets with which to bargain with Western
countries, and a potential basis for enhancing its
economic ties, and at least indirectly its political
influence in Western Europe.
68. We expect Soviet gas supplies to account for
roughly 20 percent of total gas consumption in West-
ern Europe and one-third in West Germany and
France by 1990. Despite plans to develop energy
supply alternatives, West European reliance on Soviet
gas could increase substantially in the 1990s. The
current comfortable supply-demand outlook through
1990 has reduced the perceived urgency of planning
additional gas supplies for the following decade. If
competitive alternatives are not found, or if the West
Europeans are unwilling to pay a premium for alter-
natives, the Soviet Union would be in a good position
to capture a greater share of the West European gas
market in the 1990s.
69. Western Europe will need to contract for addi-
tional gas supplies in the 1990s. If industry midrange
demand estimates prove accurate, indigenous conti-
nental gas production plus gas available under existing
import contracts will fall some 50 to 80 billion cubic
meters short of requirements by the year 2000. The
Soviet Union could supply an additional 10 to 15 bcm
from existing pipelines. If it should supply even one-
half of the West European demand gap, an additional
pipeline of the size of the one now under construction
would be needed, and dependence on Soviet gas could
approach 50 percent for major countries of continental
Western Europe-well in excess of the 30-percent
dependence that we and some West European govern-
ments regard as a critical threshold for political risk.
Development of major Norwegian fields, especially
the Troll field, could cover most additional West
European gas needs in the 1990s, but only if explora-
tion and technical analysis are not long delayed-
development of new areas of the North Sea will take
about 10 years-and if buyers are willing to commit
themselves to pay a relatively high price for the gas. If
new Norwegian gas can be developed for the late
1990s, and Dutch gas production can be maintained in
the meantime, there is a good chance that a new Soviet
pipeline will not be needed, although Soviet gas
deliveries through existing pipelines probably will
continue to increase. Other potential alternative
sources of additional gas (Algeria, Libya, Cameroon,
Nigeria, Qatar, and Canada) either would probably
cost at least as much as Norwegian gas or be considera-
bly less secure.
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