SOVIET ENERGY PROSPECTS INTO THE 1990'S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86B00301R000400480004-4
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 21, 2016
• Document Release Date: February 19, 2009
• Sequence Number: 4
• Publication Date: December 14, 1983
• Content Type: NIE

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Director of Central Intelligence Secret
National Intelligence Estimate
Soviet Energy Prospects
Into the 1990s
Key Judgments
Secret
NIE 11-7-83
/4 December 1983
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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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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 even to 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
being made to rebuild the transportation sector after decades of
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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 interf uel 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
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-
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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 stand-
ards, 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
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 frcm
nuclear plants.
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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 them at a substantial level because of their
importance and flexibility as a source of hard currency. 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
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
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investment cost. Alternatively, if oil exports were held constant, in-
creased gas sales would add greatly to Soviet hard currency earnings.
Each new gas pipeline of the size of the line to Western Europe now un-
der 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. 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.
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