SOVIET OIL EXPORTS: UNDERSTANDING THE DYNAMICS OF THE DOWNTURN

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• Document Creation Date: December 22, 2016
• Document Release Date: March 17, 2011
• Sequence Number: 3
• Publication Date: February 1, 1986
• Content Type: REPORT

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Directorate of
Intelligence
Soviet Oil Oil Exports:
Understanding the D namics
of the Downturn
An Intelligence Assessment
-Secret-
SOV 86-10008
February 1986
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Directorate of
Intelligence
Soviet Oil Exports:
Understanding the Dynamics
of the Downturn
An Intelligence Assessment
This paper was prepared by
of Soviet Analysis, with contributions from
SOYA, and
Office
Office of Global Issues. Comments and
queries are welcome and may be directed to the
Chief, Economic Performance Division, SOVA,
Secret
Secret
so V 86-10008
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Key Judgments
Information available
as of 3 January 1986
was used in this report.
Soviet Oil Exports:
Understanding the D namics
of the Downturn
Soviet oil production dropped by over 300,000 barrels per day in 1985.
Moscow opted to absorb all of the loss through reductions in oil exports to
the West while sustaining deliveries to domestic consumers and its
Communist partners and soft currency customers. As a result, the Soviets
probably lost as much as $3-4 billion in hard currency earnings in 1985.
The decision to let exports to the West bear the brunt of the oil production
decline was made easier because the USSR was in a fairly good position fi-
nancially to handle a decline in hard currency earnings without endanger-
ing critical import requirements.
Because of deep-rooted problems associated with the production of Soviet
oil, output will probably continue to fall. If, as we expect, domestic gains in
substitution and conservation during the balance of the decade will not be
sufficient to offset the production decline, Moscow will have to adjust its
exports or suffer shortfalls at home at a time when Gorbachev is anxious to
stimulate domestic growth. Moreover, the cost of cutting oil exports will be
greater in the future, because Eastern Europe is already suffering from oil
shortages, and a reduction in hard currency earnings from oil sales would
come at a time when Moscow's hard currency import requirements are
likely to grow.
The Communist world as a whole?particularly Eastern Europe?is
heavily dependent on Soviet oil, and these nations have good reason to be
concerned about the USSR's oil-export outlook. Substantial cutbacks in oil
deliveries to the East European countries would cause major economic
difficulties at a time when those countries are under pressure to expand de-
liveries of finished products to the USSR. Moscow would have to weigh
carefully the attendant risk of economic instability and increased political
tensions that could result from a reduction in oil deliveries to these nations.
Although the Soviets will try to reap whatever savings they can from the
domestic economy, Eastern Europe, and other client states, they will be
forced to further reduce oil exports to the West. Earnings from gas exports
are scheduled to increase substantially by 1990 but will fall far short of
compensating Moscow for the expected decline in oil-export revenues. If
Moscow continues its current strategy of sustaining oil deliveries to its
client states while reducing only exports to the West, hard currency losses
would become enormous before 1990. This, in turn, would present Moscow
with unpalatable choices, such as reducing imports of state-of-the-art
technology critical for the industrial modernization program or even
cutting some agricultural imports.
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so V 86-10008
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The Soviets have a few options available to ease the oil-export supply
situation, but not one offers substantial relief in the near term. Moscow
could, for example, try to step up its imports of OPEC oil by boosting arms
sales to the oil-producing nations. But these sales will probably be
constrained by the OPEC nations' limited ability to absorb and/or pay for
more Soviet arms. Although the Soviets are beginning to explore ways to
swap other goods in return for oil, so far no such deals have been arranged.
Moscow also could trim oil exports to non-Communist soft currency
customers, but these deliveries are already at relatively low levels.
If Moscow is unable to offset the anticipated decline in oil revenues, it will
have to cut back on planned imports or incur much higher levels of debt to
the West. Its strong credit rating would allow it to rapidly increase
borrowing to finance imports, but this would run against Moscow's
traditionally conservative borrowing posture. The Soviets could also boost
gold sales substantially and attempt to expand further their purchases from
soft currency trading partners.
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Contents
Page
Key Judgments
Ill
Preface
vii
The Domestic Oil Balance
1
What is the Oil-Production Outlook for the USSR?
1
Is the USSR Reducing Domestic Consumption?
1
Can Moscow Rely on Natural Gas To Ease the Oil Pinch?
1
Determining Export Allocations
2
How Are Oil-Export Decisions Made?
2
What Is the USSR's Overall Oil-Export Policy?
2
What Do We Know About Moscow's Priorities in Oil Allocations?
3
Oil Exports to Client States and Other Soft Currency Nations
4
How Dependent Are These Countries on Soviet Oil?
4
How Much Will Eastern Europe Be Paying for Moscow's Oil
in the Future?
5
Can Eastern Europe Afford Cuts in Soviet Oil Deliveries?
5
Can Moscow Trim Deliveries to Other Client States and Soft
Currency Nations?
5
Oil Exports to the West
6
What Is the Soviet Share of the Western Oil Market?
6
What Will Be the Impact on the Oil Market of the Downturn in
Soviet Exports?
6
How Will Soviet Hard Currency Earnings Be Affected?
7
The USSR-OPEC Oil Relationship
7
How Important to Soviet Interests Is the Reexport of Oil?
7
Can the USSR Increase This Source of Supply?
8
Outlook
8
What Are the Oil-Production Prospects Through 1990?
8
What Does This Imply for Exports?
8
How Will Soviet Imports Be Affected?
9
Appendixes
A. Worldwide Imports of and Dependence on Soviet Oil, 1983-84
11
B. The "Samotlor Disease" Is Spreading
13
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Preface
Taken together, the recent downturn in both Soviet oil production and hard
currency oil exports raises a number of basic questions regarding present
and probably future oil-export policies of the Soviets. Using a question-
and-answer format, this Intelligence Assessment seeks to provide a basic
understanding of the underlying issues. It makes no attempt to forecast
outcomes beyond 1990 or provide in-depth analyses of oil production and
other factors affecting the outlook for oil exports.
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Soviet Oil Exports:
Understanding the Dynamics
of the Downturn
The Domestic Oil Balance
What Is the Oil-Production Outlook for the USSR?
Domestic oil output fell in 1984?by 100,000 barrels
per day (b/d)?for the first time since World War II.
It fell again in 1985 by about 330,000 b/d?or by
about 3 percent?and we judge, on the basis of the
current state of the oil industry, production in 1986
could fall another 300,000 b/d (see appendix B).
In speeches given since last summer, Gorbachev has
implied that he is counting on short-term gains from
improved worker discipline and management to sus-
tain production until more and better oilfield equip-
ment is available. When Gorbachev visited the impor-
tant Tyumen' oilfields in West Siberia last
September, he pledged to improve both working con-
ditions and the quality and quantity of equipment.
Although this could well slow the production decline
in the near term, reversing the decline would be
extremely costly and difficult. Gorbachev's remarks
suggest he is not counting on the future discovery of
new giant oilfields as a solution, and increased output
from smaller, more remote, and less productive fields
will require considerably more investment than he
appears to have in mind for the oil industry. Although
the 1986 plan calls for a production boost of about
400,000 b/d and provides a 31-percent increase in oil-
industry investment for the year, we believe that the
surge in investment will be absorbed by sharply rising
costs associated with providing sufficient capacity just
to offset depletion.
Is the USSR Reducing Domestic Consumption?
The Soviets seem to be reducing oil use in two ways.
First, they are probably reducing oil consumption
through programs now under way to convert from oil
to gas in industrial and residential sectors. Second,
they could be saving oil by forcing conservation
through rationing; there is some evidence that Mos-
cow is using this method in a few sectors of the
economy.
1
The USSR has made oil-to-gas conversion programs
and energy conservation a national priority. There are
few firm indications, however, that oil consumption
has been reduced. The Soviet press?which is unlikely
to pass up an opportunity to tout progress in highly
publicized programs?has been relatively silent on the
issue of conservation. In addition, our analysis of the
electric power industry?the main target of the fuel-
switch programs?indicates that the oil "saved"
through conversion of some power plants to gas was
effectively used to offset major shortfalls in the supply
of coal to other power plants and to produce above-
plan amounts of electricity.
Prospects for conserving oil during the next several
years are not bright. Gorbachev's program for retool-
ing the industrial base with more energy-efficient
equipment promises substantial savings, but only in
the long run and after considerable expense. Over the
next several years, the industrial modernization pro-
gram, vigorously pursued, will itself consume large
quantities of fuel. Moscow may seek ways to adjust
the product mix of the economy that would reduce oil
consumption in industry. We believe that, on balance,
given Gorbachev's stated objectives, the mix of indus-
trial output is likely to become more rather than less
energy intensive.
Can Moscow Rely on Natural Gas To Ease the
Oil Pinch?
The energy outlook is not entirely bleak for the
Soviets because the increased availability of natural
gas will help ease some of the impact of declining oil
production. The USSR has abundant reserves of
natural gas and has had marked success increasing
output. By 1990 annual gas production could increase
by more than one-third. Such an increment in supply
would satisfy steady increases in domestic gas con-
sumption while leaving ample supplies for a potential
expansion of exports to Eastern and Western Europe
by roughly 50 percent.
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Moscow's plans for natural gas for the 1986-90 period
include:
? Energy conservation and a conversion program that
calls for increased substitution of gas for oil in
industry. The Soviets hope?probably overoptimisti-
cally?to reduce domestic oil consumption by about
1 million b/d by 1990. This would add to the
amount of oil available for export, but achieving this
goal will not be easy.
? A new gas-export pipeline to deliver an additional
20-22 billion cubic meters (bcm) of gas annually to
Eastern Europe. The pipeline would also provide
capacity for supplying an increment of about 6-8
bcm to the western USSR or to Western Europe.
The project could be completed by the late 1980s.
Moscow has been encouraging greater use of gas in
Eastern Europe to reduce the region's reliance on
oil; gas deliveries currently stand at roughly 40 bcm
a year.
? Greater gas sales to Western Europe. Total gas
exports are scheduled to increase from about 32
bcm in 1985 to roughly 55 bcm by 1990, as
deliveries increase through the pipeline from Siberia
to Western Europe. Although the full potential of
these plans is being limited by slack gas demand in
Western Europe, the sales that do occur will provide
substantial hard currency revenues. These addition-
al earnings, however, will fall far short of compen-
sating Moscow for the expected decline in oil export
revenues.
Soviet planners, moreover, may be too optimistic
about the ability of the domestic economy and the
economies of Eastern Europe to absorb this much
additional natural gas and the willingness of West
European countries to line up for new deals. Progress
in converting to greater use of gas in the USSR and
Eastern Europe has been slow?far below plan?and
prospects for substantial gains in the next few years
are limited. Some sectors of the economy, notably
agriculture and transport, are heavily dependent on
liquid fuels. With resources stretched thin, further
conversion of industrial facilities will be slow.
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Determining Export Allocations
How Are Oil-Export Decisions Made?
A prime consideration in allocation of oil for export is
an estimate of the hard currency needed to purchase
Western industrial technology and equipment and
agricultural commodities. The Soviet State Planning
Committee (Gosplan) annually examines the outlook
for oil availability, domestic requirements, need for
hard currency, and considerations affecting export to
Eastern Europe and the Third World in reaching
decisions on the allocation of oil for export.
Export allocations,
once made, provide the basis for the spate of oil-
export contract signings by the Soviet oil-exporting
agency at the beginning of each year. This agency has
some flexibility to alter plans according to market
conditions, but any changes must be approved by
Gosplan. During periods of market instability, inter-
action between Gosplan and the oil-exporting agency
increases. A leading Soviet economist, for example,
recently asserted that, because of declining oil prices
in recent years, Gosplan has had to decide on a
regular basis the quantities of oil to be diverted from
the domestic economy for export to the West.
Soviet planners determine annually the amount of oil
to be sent to Eastern Europe. Bilateral discussions set
the amounts to be delivered to the individual nations,
and Moscow usually meets these commitments. The
East Europeans can buy additional oil if they need to,
but have to pay hard currency for amounts beyond
those specified in the protocol.
What Is the USSR's Overall Oil-Export Policy?
Oil is the USSR's major hard currency earner, and
sales to the West in 1984 now account for almost half
of Soviet hard currency exports, compared with about
15 percent in 1970 (figure 1). Hard currency require-
ments figure prominently in the determination of
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Figure 1
Oil's Share of Total Soviet Hard
Currency Exports
Percent
1970
Total: $2.8 billion
Other b 71
Oil 15
Military a 8
Machinery and
equipment 6
1980
Total: $27.8 billion
Otherh 23
Machinery and
equipment 5
Military' 18
Oil 44
Gas 10
1984
Total: $31.7 billion
Other" 12
Machinery and
equipment 5
Military' 24
Oil 47
Gas 12
a Military exports are estimated from Soviet trade statistics and include
deliveries of major military hardware, spare parts, support materials, and
other follow-on supplies.
b Other exports include chemicals, wood and wood products, agricultural
products (mainly cotton), diamonds, minerals and raw materials, and small
quantities of other products.
386132 2-86
amounts sent to the West each year. About 90 percent
of Soviet oil sold in the West is exported to nations in
the Organization for Economic Cooperation and De-
velopment (OECD), mostly those in Western Europe.
The USSR will sell oil to any Western country willing
to pay the going price.
In exporting oil to Eastern Europe, the Soviets must
provide enough energy to avoid serious economic
disruption to the area's struggling economies. In
return, the USSR receives industrial machinery and
equipment?most of which is inferior to that available
in the West?consumer goods, and some agricultural
products. In attempting to reduce its reliance on the
West for quality goods, Moscow is now demanding
that the East Europeans increase the amount and
quality of goods exported to the USSR and has
insisted on greater East European participation in
Soviet energy development projects. This serves Mos-
cow's interest in increasing integration within the
Council for Mutual Economic Assistance (CEMA),
and it effectively raises the cost to Eastern Europe for
the same quantity of oil.
In trading with the Third World, the USSR sells oil
to selected countries to increase economic and politi-
cal ties. About two-thirds of this trade is settled
through soft currency exchanges, where the USSR
receives many goods not readily salable on Western
markets. The rest is sold for hard currency, with a
small portion of these sales on credit.
What Do We Know About
Moscow's Priorities in Oil Allocations?
During the past several years, Moscow has reduced
deliveries to each of the major claimants of oil at one
time or another to offset either temporary production
and transportation problems or liquidity shortfalls:
? In 1981-82, when the USSR was in the throes
of a hard currency pinch, Moscow cut deliveries to
several East European and other Communist coun-
tries by about 10 percent. The oil was diverted to
Western buyers to improve the USSR's liquidity
position.
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? During 1982-84 the Soviets appeared to be increas-
ing exports, at least in part by diverting more oil
from the domestic economy. Evidence suggests that
Moscow was forcing "conservation" in some in-
stances by not delivering planned allotments to
domestic installations. Some factories were being
sent less oil, while others were sent whatever fuel
was available, even if it was not the particular type
of fuel needed.
? In 1985 the USSR substantially reduced exports to
the West during the first quarter?when the harsh
winter drove up domestic consumption and ham-
pered production?and probably again in the fourth
quarter?evidently because of steadily declining
output and a seasonal buildup of domestic stocks.
During the year Moscow did not reduce deliveries to
Eastern Europe.
Because Moscow has changed its allocation priorities
from year to year, it is difficult to project them for the
coming years. It seems clear, however, that the costs
of adjustment will be greater in the future:
? Eastern Europe is already suffering from some oil
shortages, and Soviet hard currency oil earnings
appear to be on a permanent decline. As late as last
year, Moscow told its East European allies that oil
deliveries would not be cut during 1986-90 as long
as reciprocal delivery obligations were met. This
commitment may not bear much weight, however.
The Soviets made the same promise for the 1981-85
period and then cut deliveries in 1981-82.
? Moscow continues having difficulty conserving do-
mestic oil use. More strenuous efforts to force
conservation would take a toll on economic growth.
? Moscow will not be able indefinitely to offset the
loss of oil exports to the West by increased borrow-
ing.
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Oil Exports to Client States and
Other Soft Currency Nations
How Dependent Are These Countries on Soviet Oil?
The USSR's client states in the Communist world
are, as a whole, heavily dependent on Soviet oil, and
these countries have good reason to be concerned
about the USSR's recent struggle to meet export
commitments. All of Moscow's East European allies,
except for Romania, depend on the USSR for at least
three-fourths of their oil supplies. Romania depends
on the Soviet Union for over one-fifth of its supplies
and is seeking a large increase in Soviet oil deliveries
for 1986-90. Bucharest evidently prefers the security
of steady supplies from the USSR to the uncertainties
of Middle Eastern oil. It also would prefer to obtain
Soviet oil by bartering goods salable for hard currency
rather than paying cash. Soviet oil plays a key role in
the economy of Cuba, comprising all of the country's
oil imports and three-fourths of its oil consumption.
Most of Moscow's Third World clients are also
heavily reliant on Soviet oil (figure 4). Angola, in
contrast, buys little or no Soviet oil.
None of the non-Communist less developed countries'
(LDCs) are heavily dependent on Soviet oil. India
imports over 100,000 b/d from the USSR, but this
represents less than one-sixth of its oil consumption.
Nevertheless, for those financially strapped LDCs
that also experience periodic energy shortages such as
Madagascar, Soviet oil supplies offered on credit or at
concessionary prices can become very important?
both from a political and economic perspective?
despite their relatively minor share of total oil supply.
1 In addition to countries with centrally planned economies, this
group includes countries that consider themselves Marxist and that
rely primarily or entirely on Communist military support to
maintain their power.
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How Much Will Eastern Europe Be
Paying for Moscow's Oil in the Future?
In recent years, especially since the June 1984 CEMA
summit, Moscow has made clear that Soviet oil
would, in effect, become more costly to the East
Europeans. Taking advantage of plan coordination for
the 1986-90 period, Moscow has insisted that, in
return for roughly the same level of oil deliveries as in
1981-85, Eastern Europe must provide more and
better quality goods (that is, goods of Western quali-
ty), improve conservation efforts, and increase invest-
ment in Soviet energy development projects. For
example:
? East Germany has agreed to increase exports of
consumer goods to the USSR by 40 percent during
1986-90 compared to the previous five-year period,
all of which are to be of substantially higher quality
than in the past.
? Poland is to build a new cosmetics plant and
designate a significant portion of its production for
Soviet consumption, the first time Warsaw has
agreed to any such arrangement.
? East Germany is to build plants and provide equip-
ment for the Soviet oil and gas industry.
? Romania is to invest and participate in offshore oil
development in the Caspian Sea and increase deliv-
eries of meat and grain.
As a result, Eastern Europe will, in the short run at
least, potentially lose some ability to earn hard cur-
rency from sales of better quality goods to the West.
This will put further pressure on the economies in the
region already beset with difficulties in resolving their
indebtedness to the West. Losses of hard currency
earnings could lead to lower imports of Western
machinery and technology, which would aggravate
East European lack of progress toward industrial
modernization goals. From Moscow's viewpoint, how-
ever, these circumstances could facilitate closer inte-
gration of the economies of Eastern Europe and the
USSR, a goal Moscow stressed repeatedly during the
1984 CEMA summit.
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Can Eastern Europe Afford
Cuts in Soviet Oil Deliveries?
The East Europeans would have considerable difficul-
ty in coping with a substantial cut in oil deliveries
from Moscow. Most of the countries in the region?
plagued by sluggish export growth, large debt-service
obligations, and uncertain borrowing prospects?do
not have enough hard currency to purchase a substan-
tial portion of their oil requirements on the interna-
tional markets. Moreover, securing more oil through
barter arrangements has been made more difficult
because of a reluctance on the part of Third World
countries to increase such deals.
The cutback in Soviet oil deliveries to the East
Europeans in 1982 was easier to cope with because
the region was reexporting some Soviet oil for hard
currency. Cuts during 1986-90 would be much more
troublesome because they would have to be absorbed
by East European domestic economies. With balance-
of-payment constraints limiting East European pur-
chases of oil from hard currency sources, reduced oil
consumption would adversely affect economic produc-
tivity and growth in the region. Lower growth, in turn,
would make it more difficult to meet Soviet import
demands, increase the likelihood of political instabil-
ity in parts of Eastern Europe, and raise public
resentment toward the Soviet Union.
Can Moscow Trim Deliveries to Other
Client States and Soft Currency Nations?
There is some room for the USSR to trim deliveries to
other client states and soft currency customers to
divert exports to the hard currency market but doing
so would probably not provide Moscow with substan-
tial savings. Moreover, such cuts would have to be
balanced against potential political and economic
costs to Moscow. Outside Eastern Europe, the Soviets
export only about 300,000 b/d to Communist nations,
with approximately three-fourths of this amount go-
ing to Cuba. Although the Soviets currently allow
Cuba to sell some oil for hard currency as an incentive
to trim its domestic consumption, Moscow continues
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to pressure Havana to reduce oil imports. However,
a substantial reduction appears unlikely. Cuba
continues to face serious economic difficulties, and
lower Soviet oil deliveries in 1985 created domestic
shortages?including some for the military. Soviet
oil deliveries to North Korea last year ran only
about half the amount stipulated in the 1981-85
bilateral protocol. Other LDC client states that
depend on Soviet oil are also suffering from serious 12
economic difficulties, and Moscow may see little
net benefit in cutting these already small deliveries.
Figure 2
OECD: Soviet Share of Oil Imports
Percent
I .1
Crude oil
0 Oil products
En Total
10
Trimming oil deliveries to non-Communist soft cur-
rency countries?particularly Finland and India?
may also be difficult for the Soviets. Moscow in- 8
formed Finland to expect some "drastic cuts" in 1985;
deliveries for the year were probably about four-fifths
of the amount set by the bilateral protocol. Further
reductions in oil trade with Finland could begin to
restrict Soviet imports of Finnish high-quality goods.
Cutbacks in oil deliveries to India might be a more
likely option, but Moscow has shown some concern for
the political and strategic aspects of Soviet-Indian
relations as well as for the bilateral trade balance.
The USSR has little else to sell India besides oil and
arms. India's domestic oil production is expected to
peak soon, and the Soviet deliveries may become
increasingly important to that nation's economy.
Oil Exports to the West
What Is the Soviet Share of the Western Oil Market?
Soviet oil accounted for about 4 percent of OECD
oil imports in 1980 and 7 percent in 1984 (figure 2)?
a remarkable increase during a period of slack world
demand, explained largely by aggressive Soviet pric-
ing. The Soviets have increased their market share
largely at OPEC's expense; some of the increase
has come from Soviet reexports of OPEC oil. The
USSR's market share is considerably larger if only
oil products are considered. With a 10-percent share
of OECD oil-product imports in 1984, it ranks second
in importance behind the Netherlands and is the
leading supplier of several specialized products.
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4
2
1980
1984
308133 2-86
What Will Be the Impact on the Oil Market
of the Downturn in Soviet Exports?
The first-quarter 1985 decline in Soviet exports to
OECD nations?to some 600,000 b/d below first-
quarter 1984?contributed to the strengthening of
prices in the market. But, as the harsh winter in the
USSR subsided, oil exports began to increase rapidly.
Aggressive Soviet marketing during the summer drew
complaints from several OPEC nations that the
USSR was trying to undermine the market at a time
when OPEC was trying to increase internal discipline
on production quotas and pricing policies.
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Soviet exports again turned downward in the fourth
quarter of 1985 and were probably some 300,000 b/d
below the fourth-quarter 1984 level. This development
may have contributed to a firming of the overall
market but only in conjunction with several other
factors?a seasonal increase in demand during the
winter, low world oil stocks, and continued Iraqi
attacks on Iranian oil terminals. On balance, there is
enough excess oil available to absorb a major decline
in exports from the Soviet Union, even if substantial
shortfalls persist through the next several years
How Will Soviet Hard Currency
Earnings Be Affected?
The decline in the volume of oil sold to the West,
combined with lower world oil prices, probably led to
a reduction in hard currency earnings of about $3-4
billion for 1985 as a whole, or more than 10 percent of
the USSR's total hard currency earnings. Most indus-
try analysts expect oil market prices
to fluctuate in the range of $17 to $25 per barrel in
1986. A price of $25 per barrel, combined with an
export decline in the range of 100,000 to 200,000 b/d,
would lead to a fall in earnings of another $2-3 billion
this year. A price fall to $17 per barrel, combined
with a similar drop in volume, would cost the USSR
some $5 billion?a drop of more than 40 percent from
1985 oil-export earnings.
Moscow cannot compensate for this drop by expand-
ing other exports. Soviet earnings from natural gas
sales to Western Europe did not rise substantially in
1985, and gas prices on average fell somewhat. Other
exports?including sales of metals, machinery, and
weapons?face limited Western or LDC demand and,
in some cases, constrained domestic availability. Op-
portunities for boosting arms sales to OPEC nations?
traditionally paid for in oil that the USSR reexports
for hard currency?are limited by the ability of these
nations to absorb and pay for more arms.
Despite the loss in earnings last year, we believe that
the USSR was able financially to satisfy most of its
import requirements from the West in 1985. Doing so,
however, required a sharp step-up in Soviet borrow-
ing. Moscow was helped in 1985 by a better domestic
7
grain crop and thus substantially reduced grain im-
port requirements in the latter half of the year.
Nevertheless, reports toward the end of the year
indicated that some purchases were being postponed
because of hard currency shortages.
The USSR-OPEC Oil Relationship
How Important to Soviet Interests
Is the Reexport of Oil?
Soviet reexport of OPEC oil has facilitated the in-
crease of oil exports for hard currency. The USSR
reexports all of the oil it "imports," which in 1984
totaled an estimated 300,000 b/d (see table). Since
1981 Moscow's oil exports to the West have increased
by roughly 600,000 b/d, of which OPEC oil accounts
for about 200,000 b/d.
Several OPEC nations provide the USSR with oil in
payment for Soviet arms rather than market the oil
themselves. Although Moscow would probably prefer
to receive hard currency directly, the reexporting of
OPEC oil offers a means for expanding ties to LDCs
in need of a steady or reliable supplier of oil. Even
though the amounts supplied to these countries are
small, this oil frees up corresponding quantities of
Soviet oil for other uses. Moscow also uses reexported
oil to increase its total oil exports and to enhance its
image as one of the world's most important non-
OPEC oil exporters. Finally, to the extent that it can
obtain Libyan oil, the USSR can offer crude with low
sulfur content?an oil that is attractive to many West
European refineries.
Moscow recently has begun to use the OPEC oil as a
way of offsetting shortfalls on its contracted obliga-
tions to specific customers. During the fourth quarter
of 1985, for example, it reportedly offered the OPEC
oil?particularly high-quality Libyan crude?as com-
pensation to customers affected by shortfalls in the
export of Soviet crude. Some of the customers had
never received nor been offered reexported oil from
the USSR before.
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USSR:
Estimated Oil Reexports,
1984
Country of
Origin
Amount Probable Recipients
(thousand
bid)
Total 300
OPEC 285
Algeria 8
Iran 30
Yugoslavia, Bulgaria (1985 only)
India, others
Iraq
80 India, Yugoslavia, others
Libya 130 Finland, Yugoslavia, Western
Europe
Saudi Arabia 37
Caribbean nations, India
Other 15
Oman
1 South Yemen
Syria
14 Western Europe
Can the USSR Increase This Source of Supply?
In recent years the Soviets have been able to increase
oil deliveries from OPEC?particularly from Libya
and Iraq?almost entirely in exchange for arms ship-
ments. But there is little opportunity for additional oil
supplies through arms sales because most of these
countries are not asking for, and probably could not
pay for, substantial increases in deliveries of Soviet
arms. Kuwait has been a recent exception. It bought
several hundred million dollars worth of Soviet arms
for air defense, but it appears so far that the arms will
be paid for in cash, not oil.
There is, however, some opportunity for the Soviets to
provide economic assistance in exchange for OPEC
oil. In 1984, for example, the Soviets reportedly were
considering constructing an industrial plant in Nige-
ria in exchange for oil. Algeria also reportedly was
interested in using oil to pay for military deliveries
from the USSR. Although the deal with Lagos fell
through, Algeria did begin sending the USSR signifi-
cant amounts of oil in late 1984; the shipments
continued in 1985 as well. Libyan leader Muhammar
Qadhafi visited Moscow last October to discuss
among other issues a long-term economic develop-
ment program. The Soviets reportedly were interested
in being reimbursed in oil for some of this develop-
ment.
Secret
Outlook
What Are the Oil-Production
Prospects Through 1990?
By 1990 the USSR?if unable to boost investment as
planned and step up drilling, well completions, com-
missioning of new capacity, equipment supply, and
well repairs?could face a shortfall in annual oil
production of more than 1 million b/d compared with
the 1985 level, a decline of about 10 percent. The
aging of several giant oilfields in West Siberia, com-
bined with the inevitable decline of their crude oil
output and a rapidly escalating percentage of water
production, are factors Gorbachev will not be able to
overcome with improvements in oil industry manage-
ment and an increased supply of equipment (see
appendix B for details). Only the discovery and devel-
opment of new oilfields of comparable productive
capacity can offset the large declines in output from
aging giant fields at competitive costs. But the odds of
finding additional giant fields in West Siberia have
diminished rapidly over the past decade, according to
Soviet geologists. During his speech in Tyumen',
Gorbachev acknowledged that the USSR must turn to
deposits with lower yields and increasingly use forced
methods of extraction in West Siberia.
Offsetting losses from the aging fields will require the
development of an increasing number of small
fields?which are proving to be less productive and of
poorer quality. The methods required for such devel-
opment are very costly and require some technology
that the USSR has not yet mastered. Another option
is to continue active exploration in the Barents Sea,
which has a huge potential. In our judgment, however,
even if large oil deposits are found, this area will not
provide much relief before the mid-1990s
What Does This Imply for Exports?
The production outlook foreshadows a steady reduc-
tion in exports for the next several years, though the
Soviets may be able to ease the decline somewhat with
further gains in domestic oil conservation and energy
substitution. If Moscow sustains oil exports to its
CEMA partners and other soft currency clients at
current levels, it would have virtually no oil available
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to export for hard currency by 1990?even with some
savings in domestic oil use. Only by trimming exports
to its Communist clients would the USSR be able to
export more than minor quantities of oil to the West
for hard currency.
How Will Soviet Imports Be Affected?
In the next year or so, the Soviets will face more
difficult decisions as export earnings from oil continue
to decline. How the USSR will react to a sustained
drop in oil-export revenues remains unclear; in all
likelihood the Soviet leadership is temporizing on the
issues in hopes that the decline can be arrested.
Barring such a turnaround, Moscow will have to cut
back on planned imports. The degree of cutback will
depend, in turn, on decisions taken in the following
areas:
? A strong credit rating would allow for a rapid
expansion of borrowing to underwrite continued
inflows of Western plant and equipment?at least
for the next year or so. Moscow, however, will
probably be loath to let its debt get too high to avoid
the perception?if not the reality?of becoming
dependent on Western banks.
? Room exists for a sustained expansion in gold sales
without substantial downward pressure on prices.
? Soviet importers will probably seek to expand pur-
chases from soft currency trading partners both
inside and outside the Communist Bloc. Options are
limited, however, in the high-technology area.
? Greater flexibility on terms and raw material export
prices might result in new compensation deals with
West European and Japanese importers that could
increase nonoil exports.
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Appendix A
Worldwide Imports of
and Dependence on Soviet Oil,
1983-84 .
Thousand bid
1983
1984b
Imports of
Soviet Oil
Share of Oil
Imports
(Percent)
Share of Oil
Consumption
(Percent)c
Imports of
Soviet Oil
Share of Oil
Imports
(percent)
Share of Oil
Consumption
(Percent)
Total
3,667
3,727
Non-Communist
1,779
1,837
OECD d
1,569
7
5
1,626
7
6
Australia
0
0
0
1
NEGL
NEGL
Austria
30
17
15
26
14
15
Belgium
114
16
28
145
21
35
Denmark
22
10
12
24
II
12
Finland e
233
88
115
207
84
114
France
168
8
9
159
8
10
West Germany
211
10
11
239
II
12
Greece
53
16
23
51
17
22
Iceland
7
70
70
6
63
60
Ireland
2
2
2
3
3
4
Italy
195
11
10
242
13
16
Japan
17
NEGL
NEGL
17
NEGL
NEGL
Netherlands
270
18
47
271
18
43
Norway
10
11
7
18
18
13
Portugal
4
2
2
5
3
3
Spain
33
3
3
43
4
8
Sweden
84
15
18
50
12
17
Switzerland
46
18
19
36
15
16
Turkey
7
2
2
2
1
1
United Kingdom
62
8
4
69
6
4
United States
1
NEGL
NEGL
13
NEGL
NEGL
LDCs d
210
211
Brazil
15
3
2
20
4
3
India .
116
30
16
115
30
16
Morocco
17
17
17
17
17
17
Others
62
59
Footnotes appear at end of table
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Worldwide Imports of
and Dependence on Soviet Oil,
1983-84
Thousand bid
1983
1984 b
Imports of
Soviet Oil
Share of Oil
Imports
(Percent)
Share of Oil
Consumption
(Percent)c
Imports of
Soviet Oil
Share of Oil
Imports
(percent)
Share of Oil
Consumption
(Percent)
Communist and other client
states f
1,888
1,890
CIPS4Ae
1,720
NA
NA
1,710
78
83
Bulgaria
296
88
94
296
96
103
Czechoslovakia
342
94
101
342
96
105
East Germany
342
77
95
342
75
99
Hungary
159
75
80
156
75
83
Poland
300
86
91
300
85
92
Romania
4
1
22
9
7
Cuba
225
100
90
200
100
75
Vietnam
33
85-90
85-90
33
85-90
85-90
Mongolia
19
100
100
19
100
100
Other
168
180
Afghanistan
9
95
95
9
95
95
Cambodia
3
95-100
95-100
3
95-100
95-100
Ethiopia d
17
99
116
16
99
NA
Laos
1
20-25
20-25
1
20-25
20-25
Mozambique d
3
50
50
5
60
60
Nicaragua d
1
8
8
6
55
55
North Korea
15
30
30
12
25
25
Yugoslavia
112
54
39
114
55
40
Others
7
14
Includes deliveries of oil originating from OPEC or other oil-
producing countries (see p. 8). Columns may not equal totals due to
rounding.
b Preliminary.
c Share of consumption may be larger than the volume of imports
because of reexport.
d Hard currency countries except where indicated.
Secret
e Soft currency countries except where indicated.
f In addition to countries with centrally planned economies, this
category includes countries that are Marxist clients, that is,
countries that consider themselves Marxist and that rely primarily
or entirely on Communist military support to maintain their power.
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Appendix B
The "Samotlor Disease"
Is Spreading
The "Samotlor disease"?a vicious circle of flagging
output from giant oilfields and ever-increasing use of
manpower and equipment in an attempt to sustain
total oil output?is spreading throughout the West
Siberian oil region. Unless large oil finds are made,
the costs of oil exploitation in the USSR will rise
exponentially.
Developments associated with the aging of Samotlor,
the USSR's largest oilfield, are the principal cause for
last year's decline in nationwide oil output and for the
incipient decline in West Siberian oil output.' One-
third of Samotlor's wells stand idle. In the first
quarter of 1985, the number of flowing wells in the
field declined by nearly one-third, leading to a dou-
bling of the number of inactive wells there. The
number of inactive wells reflects the chronic shortage
of pumping equipment?a shortage that becomes
more acute as the proportion of water (water cut) in
the oil-and-water mixture produced from oil wells
rises sharply. At Samotlor, the water cut is now 55
percent, compared with about 40 percent in early
1983. The high water content in turn causes addition-
al complications (more corrosion of piping and equip-
ment, more need for storage facilities and separation
equipment to handle the water) that boost both the
labor and capital intensity of the oil-production effort.
Major Causes of the Decline in Oil Production
Two groups of factors, partly interrelated, are contrib-
uting to the spread of the "Samotlor disease." One
group?often referred to as "fixable" problems?
includes shortages of skilled manpower, poor quality
of equipment, and inadequate infrastructure. The
second group of factors embraces the aging of several
giant oilfields, with the consequent decline of their
crude oil output, rapidly escalating water production,
and a corresponding surge in demand for pumping
equipment, well workovers, and general oilfield main-
tenance.
'After reaching 12.3 million b/d in 1983, Soviet oil output slipped
to 12.2 million b/d in 1984 and fell to 11.9 million b/d in 1985.
The "fixable" problems have long plagued the oil
industry's production effort in West Siberia and most
recently were addressed by a Politburo decision in
August 1985 and by General Secretary Gorbachev in
his September speech in Tyumen'. The Politburo
decision calls for increasing construction and assem-
bly work in the West Siberian oil and gas complex by
60 percent in the 1986-90 plan, and for providing new
working capacity, a more reliable supply of electricity,
and improved transportation facilities. The Politburo
decision also calls on the factories to improve the
quantity and quality of equipment produced for the oil
and gas industries. Housing construction in the re-
gion?long a factor adversely affecting labor recruit-
ment, morale, and retention?is to increase. The
Gorbachev speech stressed these factors, together
with greater application of science and technology,
improved management, and heightened oversight by
local Communist Party units.
Implementation of these measures can do little to
improve output in the short run. In the long run, they
can ameliorate operating conditions in the West Sibe-
rian oilfields, but this offers only the prospect of
slowing the decline in output. A spate of articles in the
Soviet press has described the decline in West Siberi-
an oil production, the increased number of idle wells,
and the continuing problems with poor management.
From January through July of 1985, for example, oil
production by Glavtyumenneftegaz (which accounts
for about 90 percent of oil output in West Siberia) was
reportedly some 500,000 b/d below plan for the
period (212 days) because large numbers of wells
ceased flowing oil.' Although the productivity of well-
repair crews has increased, the number of wells being
idled each day outstrips the number being returned to
service. Efforts to return the wells to active service are
hampered by shortages of equipment. Moreover, the
' The share of West Siberian oil output attributable to the Glavtyu-
menneftegaz production association decreased from 97 percent in
1984 to about 90 percent in 1985 as the result of the transfer of
several oilfields from the operational control of Glavtyumennefte-
az to two Volga-Urals production associations.
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seriousness, extent, and persistence of the oil indus-
try's production problems enumerated by the Soviet
media strongly suggest that far more is involved than
problems with poor management, labor, and equip-
ment supply.
Indeed, far more is involved. The age distribution of
the developed oilfields in the USSR exacerbates the
effects stemming from the aging of giant oilfields. A
large proportion of West Siberia's developed reserves
were tapped in the 1969-79 period (figure 3). Conse-
quently, the peaking and decline of output from these
fields are occurring in a relatively short period. Sa-
motlor, placed on stream in 1969, accounts for 40
percent of the West Siberian oil reserves tapped from
1964 to date. As illustrated by the figure, oilfield
commissionings in the 1970s were smaller than
Samotlor by an order of magnitude?and those in the
1980s have been much smaller yet. Because the new
commissionings are not of comparable size to the
aging fields introduced in the 1960s and the 1970s,
the Soviet oil industry is now on a treadmill and faced
with the hopeless prospect of having "to run faster to
stay in place."
Only the discovery and development of new oilfields
of comparable productive capacity can offset the large
declines in output from aging giant fields at competi-
tive costs. In his Tyumen' speech, Gorbachev noted
that, when oil deposits pass their peak output, priority
attention must be given to finding and tapping new
deposits. But the odds against finding additional giant
fields in West Siberia have increased rapidly since
1975, according to Soviet geologists. Indeed, the
Soviet press states that these geologists no longer
predict the imminent discovery of a second Samotlor.
Offsetting the production losses from aging fields thus
requires the development of an increasing number of
small fields?which are proving less productive. For
example, the average flow from new wells has de-
creased by 50 percent since 1980, according to the
Soviet press. These circumstances are leading some
Soviet oil officials to emphasize development of "diffi-
cult-tO-extract" oil reserves. The methods required for
such development, however, are costly and technically
demanding.
Secret
Figure 3
West Siberia: Oil Reserves Tapped, 1964-85
(A + B + C1 Reserves in Fields Started Up)
Million tons
3,500
0 1964 65 66 67 68 69 70 71 72 3 74 75 6 77 78 79 80 81 82 83 84 85
308)34 2-86
The Soviet oil industry has taken steps to deal with
some of the "fixable" problems. Changes in manage-
rial personnel and a large increase in the number of
well-repair crews assigned to West Siberia have sped
up the servicing of wells and undoubtedly have pre-
vented a steeper decline in oil production. But the
negative impact of the aging process ultimately af-
fects all oilfields and will surely cause more wells to
cease flowing in the future. Soviet emphasis on short-
term production gains through more drilling and
larger water-injection programs accelerates the aging
process.
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The Status of Tyumen' Oilfields
Because of the advanced age (12 to 20 years) of the
dozen largest Tyumen' oilfields, only one of three
wells in this key region flows oil naturally. Even more
ominous for the Soviet oil production outlook, less
than one out of seven newly completed wells flows oil;
the rest need pumps. The number of old and new wells
inactive for lack of pumping equipment is nearly as
large as the number of Tyumen's remaining free-
flowing wells and is growing
The supergiant Samotlor oilfield provides a stark
example of the downward course of oil output and the
difficulties encountered in attempting to sustain pro-
duction in an aging field. Currently, after 15 years of
exploitation, only one of five wells at this giant field
flows oil naturally. Nearly 2,000 high-yield oil wells
are being converted to gas-lift operation to handle
ever-increasing volumes of water. The fluid produced
from Samotlor's gas-lift wells already averages 70
percent water and 30 percent oil. With the aging of
other major Tyumen' fields like Fedorovo, Mamon-
tovo, and Var'yegan, the number of wells awaiting
pumps can be expected to grow at a much brisker
rate, and the rate of attrition in the number of flowing
wells will accelerate.
Also associated with the aging of fields is a sharp
increase in problems associated with maintenance of
reservoir pressure and with advanced corrosion of
oilfield equipment and piping. Recently, for example,
the new Petroleum Industry Minister, Vasily Dinkov,
blamed below-plan performance on the inability of
Tyumen' oilworkers to maintain oilfield reservoir
pressures by waterflooding. Concurrently a speech by
the AI'met'yevsk party chief complained about the
serious pipeline and equipment corrosion problems
that were encountered by the Tatar and Bashkir
workers assigned to Tyumen' in January 1985. These
problems apparently prevented them from making
their production quotas. The speech noted that crude
oil pipelines develop numerous leaks after only one or
two years of service because of hydrogen sulfide
corrosion. In normal Soviet experience, such pipelines
last two or three times as long, according to the party
official. The corrosion of water-supply and crude oil
gathering pipelines poses severe operational problems
15
Secret
that affect waterflood-pressure maintenance pro-
grams and crude oil production operations, in turn
intensifying the demand for scarce labor, replacement
equipment, and spare parts.
Outlook
In contrast to the 1970s, when several giant, highly
productive oilfields were being tapped, the oil flow
from new wells in the mid-1980s is meager (for many,
less than 200 b/d)?that is, less than one-fifth the
average flow from new wells in 1975. Indeed, many of
the new wells in some fields reportedly do not flow.
This condition?in the absence of the discovery of a
"second Samotlor"?leads to a spiraling increase in
commitment of manpower and equipment for well
drilling and other oilfield activities in an attempt to
sustain the nation's oil output
Output from the supergiant Samotlor, the driving
force behind West Siberian oil-production growth for
a decade, will probably amount to only about 2.4
million b/d in 1985, down sharply from its 1980 peak
level of over 3.0 million b/d. Output from the second-
generation West Siberian fields?such as Fedorovo,
Mamontovo, Lyantor, Agan, and Severo-Var'yegan?
is beginning to decline, and the rate of decline is
increasing. By the end of the decade, the aging of all
major fields will pose a requirement for an added 2-3
million b/d of oil from other deposits if the Soviets
intend to compensate fully for the decline of output
from the major fields. Attempting to do so (which in
the end may be futile) by exploitation of the smaller,
poorer quality fields that have been coming on line
will entail steeply escalating costs in terms of man-
power, equipment, and logistic support.
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Figure 4
Client States' Dependence on Soviet 011,1984
Percent of dependence ...
MI 75 and above 50 to 75
25 to 50
4001%hb..
5 to 25
North
Atlantic
Ocean
Nicaragua
South
Pacific
Ocean
Boundary representation is
not necessarily authoritative.
707068 (545038) 2-86
Less than 5
M n Democr
-Feublici
Poland
os ovaHkuianga Romania
o lav,14 Bul:
calm 4'
ififr
SIM
4)?,Olip
1101140.. _
# par
Ito;
aria
South
Atlantic
Ocean
Angola
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Ethiopia
Moza
Soviet Union
Afghanistan
eople's Democratic
Republic of Yemen
(South Yemen)
ue
Mongolia
Vietnam
Camb
North
Korea,
?
North
Pacific
Ocean
Indian
Ocean
17
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