USSR: NATURAL GAS--FUEL FOR THE 1990S

• Document Type: CREST
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• Document Page Count: 33
• Document Creation Date: December 27, 2016
• Document Release Date: January 9, 2013
• Sequence Number: 1
• Publication Date: August 1, 1988
• Content Type: REPORT

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USSR: Natural Gas
Fuel for the 1990s
A Research Paper
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Intelligence
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USSR: Natural Gas
Fuel for the 1990s
A Research Paper
This paper was prepared by
the Office of Soviet Analysis. Comments and queries
are welcome and may be directed to the Chief,
Economic Performance Division, SOVA,
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Summary
Information available
as of! July 1988
was used in this report.
USSR: Natural Gas?
Fuel for the 1990s
Through most of the 1990s, gas will be the major fuel providing growth in
Soviet primary energy production. Gas is to bridge the USSR's planned
long-range transition from heavy reliance on oil to major emphasis on coal
and nuclear power. At a time when costs of oil production are soaring, con-
servation efforts are mired, and the coal industry offers few prospects in
the near term, gas offers marked advantages. It provides:
? Vast, proved reserves of high-quality fuel.
? High returns to investment in exploitation (albeit involving challenging
technical problems).
? An existing, large expanding network of gas pipelines.
? Lower investment requirements and easier exploitation than coal and oil,
especially for near-term benefits.
The Soviet gas industry has excellent potential for growth of supply into
the mid-1990s and for stable output for many years thereafter. The
availability of natural gas should enable the Soviet economy to escape a
shortage in aggregate energy availability through the 1990s. Future
production gains will come mainly from tapping huge gas reserves in West
Siberia. The Yamburg field is the major development project for 1986-90,
and additional gas will become available as deposits near Urengoy and on
the Yamal Peninsula are developed and tied into the pipeline network.
Realization of this substantial production potential depends in part,
however, on providing adequate investment and manpower resources to
develop the West Siberian gasfields and, more important, on the ability of
the domestic economy and export customers to absorb additional gas
deliveries. The Soviet economy's capacity to absorb the lion's share of
potential increases in gas production will depend on the implementation of
a series of costly adjustments to rechannel existing patterns of energy use.
These include:
? Completing a substantial expansion of the gas pipeline distribution
system.
? Building more storage facilities to eliminate disruptions in supply during
peak periods in winter.
? Increasing gas-for-oil substitution in the electric power industry by
building new plants and bringing gas to new areas not now supplied.
? Increasing the use of gas as a boiler fuel in the industrial, commercial,
and household service sectors of the economy.
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To accommodate increasing gas production, the Soviets plan some 58,000
kilometers of gas pipeline construction for 1986-90, compared with the
48,000 planned for 1981-85. Moscow continues to import large volumes of
materials and equipment for the pipeline program, particularly large-
diameter pipe and heavy-duty winterized pipelayers. In the future, Moscow
may need to step up imports of high-capacity gas pipeline turbines because
the domestically developed 16- and 25-megawatt turbines have proved to
be of low quality and poor reliability
The need to provide increased investment and manpower comes at a time
when these resources are in high demand by other priority activities.
Gorbachev's industrial modernization program, for example, calls for
increased access to many of these same resources. And within the energy
sector itself, rising claims on investment resources will be made by the oil,
coal, and nuclear power industries. Because oil will remain the USSR's
prime source of hard currency earnings for the forseeable future, the effort
to maintain oil production will continue despite soaring costs of production.
Past deficiencies in coal industry improvement will delay the time when
coal can supplant other fuels in many uses, while the investment require-
ments of the nuclear power industry have also increased since the
Chernobyl' accident.
Nonetheless, the technical problems that must be solved and the competi-
tion for investment resources are not likely in themselves to prevent the So-
viets from achieving their planned expansion of gas production and
carrying out the necessary pipeline construction. We estimate that gas
production will increase by 20 percent between 1987 and 1990 and could
grow by another 30 percent if demand warrants such an increase. By 1995,
West Siberian fields probably will provide three fourths of Soviet gas
production.
The outlook for gas demand, particularly after 1990, is uncertain. The
electric power industry might be able to substitute gas for fuel oil and add
gas-burning capacity to increase consumption by 50 percent. Further
increases are possible in the industrial, commercial, and household services
sectors if local pipelines are built. Much of Soviet industry has already
converted to gas, and further expansion of industrial use can be expected to
parallel future growth in industrial production, including the extent to
which the petrochemical industry expands.
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The prospect for export demand is much less favorable. The extent to
which Eastern Europe could absorb more gas as a replacement for oil
deliveries is problematic, because many of the region's countries primarily
need light oil products such as diesel fuel from the USSR. Nevertheless,
the Soviets are increasing the capacity for delivering gas to Eastern Europe
with the construction of the new "Progress" pipeline from Yamburg to
Uzhgorod. The pipeline should be in partial operation by 1989, but we
believe that East European demand for gas will not develop sufficiently to
achieve the originally planned rates of delivery until well into the 1990s.
Opportunities for boosting Soviet sales of gas for hard currency during the
next few years are uncertain. Increased gas sales to the West to offset
lower earnings from oil will be difficult to achieve because of sluggish
energy consumption growth in Western Europe and strong competition
from other oil and gas producers, which have driven down the price of gas.
Moscow's option of boosting gas exports would fade if West European oil
and gas markets remain soft well into the 1990s because of intense
interfuel price competition between oil, gas, and nuclear power (and if
development of Norway's giant Troll gasfield proceeds as planned).
However, if less nuclear power is generated in Western Europe than now
planned and total energy demand strengthens, gas exports could again
become an avenue for the Soviets to generate substantial increments in
hard currency revenues. Recent policy shifts away from nuclear power to
natural gas have been made in Italy and Sweden following the Chernobyl'
disaster.
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Contents
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Summary
111
The Growing Importance of Natural Gas
1
Impetus for Future Demand
1
Domestic Requirements
1
Export Demand
3
The Special Importance of Gas
4
Soviet Ability To Supply the Gas
5
Vast Reserve Base
5
Production Capability
5
Shifting Geographic Focus
8
The Role of Large-Bore Gas Wells
12
Pipelines?Essential Complement to Production
13
Potential Constraints
13
Investment Requirements
15
Storage Facilities
15
Regional and Local Gas Distribution Facilities
20
Outlook
20
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USSR: Natural Gas?
Fuel for the 1990s
The Growing Importance of Natural Gas
Soviet gas consumption doubled from 1975 to 1987,
buoyed mainly by large increases in use by the
chemical industry (up 173 percent), electric power
plants (up 213 percent), and compressor stations on
gas pipelines (up about 640 percent) (see table 1). The
rapid expansion in use of gas was facilitated by its
clean-burning characteristics and the relatively simple
technological requirements for its combustion.
Industrial consumption of gas rose from about 148
billion cubic meters (m3) in 1975 to 256 billion m3 in
1987 and accounted for 40 percent of domestic use.
The growth of gas consumption by the chemical
industry reflects a rapid expansion in output of gas-
based chemicals in recent years. About 80 percent of
the gas consumed by the chemical industry is for
feedstock?gaseous or liquid petroleum-derived hy-
drocarbons from which gasoline, fuel oil, and petro-
chemicals are produced; only about 20 percent is used
directly as fuel. Gas use by ferrous metallurgy has
risen by about 39 percent since the mid-1970s, both as
a partial substitute for metallurgical coke and as a
source of energy for various steelmaking operations.
And the massive expansion of the gas pipeline net-
work has caused increasing use of gas as a power
source for long-distance pipeline transport of gas. We
estimate that about 10 percent of "apparent" annual
gas consumption is now used as compressor fuel for
pipeline operations.'
Electric power plants remain the largest consumers of
gas. Their share of apparent consumption reached 33
percent in 1987. Despite the sharp increase in gas use
by power plants, however, the amount of fuel oil
consumed in the electric power industry has decreased
only slightly in recent years. Much of the increased
use of gas has offset shortfalls in coal output and
provided for above-plan electricity generation rather
than displacing oil.
' See footnote a in table 1.
1
In the household/municipal services sector, consump-
tion of natural gas, mainly for cooking, more than
doubled during 1976-87, although its share of appar-
ent consumption remained at about 12 percent. Soviet
press reports indicate that piped or bottled gas (in-
cluding liquefied petroleum gas) has become available
to about 70 percent of all dwellings nationwide.
Impetus for Future Demand
The USSR plans to rely heavily on natural gas to
facilitate a transition in its energy-supply structure
during the next 20 years and is capable of large
increases in production. We believe that demand for
gas by the domestic economy and by export customers
will be the key determinants of future production
levels.
Domestic Requirements. No forceful, coherent pro-
gram for energy conservation has yet materialized in
the USSR=and, with the demands on management
resources resulting from Gorbachev's economic re-
form program, no such program is likely to signifi-
cantly affect Soviet energy consumption in the next
five to 10 years. Further, as the economy grows,
energy will grow with it. The investment requirements
for energy production will also be rising, leading to
heightened competition among energy producers for
scarce investment resources. As a result, the outcome
will probably differ from the energy growth pattern
set forth in Moscow's Long-Term Energy Program
(see inset).
The coal and nuclear-energy industries will not be
able to provide for the sizable growth in primary
energy supply in the late 1990s that had been earlier
assumed by Soviet planners. The Chernobyl' accident
introduced a complex set of considerations that has
slowed nuclear power development, and improvements
in coal industry facilities are lagging, in part because
of inadequate investment. Oil production is becoming
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Table 1
USSR: Production, Trade, and
Consumption of Natural Gas
Billion cubic meters
1975
1980
1984
1985
1987
Production
289.3
435.2
587.4
643
727.4
Net exports
17.0
56.1
66.3
66
82.7
Apparent consumption a
272.3
379.1
521.1
577
644.7
Gas distributed for consumption b
.261.9
346.7
462.8
510
568.0
Electric power e
68.7
91.1
156.9
180
214.7
Industry:
148.4
190.6
223.1
239
256.3
Chemicals
21.0
36.4
48.2
52
57.4
Ferrous metallurgy
34.4
40.4
44.9
47
47.7
Nonferrous metallurgy
5.9
7.0
8.3
9
9.7
Machine building
23.4
29.1
34.2
37
39.8
Construction materials
23.2
26.6
31.1
32
34.1
Oil and gas
21.3
26.7
29.6
33
36.9
Other d
19.2
24.4
26.8
29
30.7
Household/municipal services e
35.5
52.1
64.3
70
74.4
Other r
9.3
12.9
18.5
21
22.7
a Differences between "apparent" consumption and gas distributed
for consumption are accounted for the most part by gas used as fuel
in compressor stations on long-distance pipelines.
6 Because data on gas storage are not available, this table has not
? been adjusted for additions to and withdrawals from storage.
ever more investment intensive; and, if-as we ex-
pect-oil production begins to decline in the 1990s,
increased efforts to free oil for export to hard curren-
cy markets are probable
The gas industry, in contrast, appears well positioned
to supply fuel both to meet increased domestic de-
mand and expanded exports. From the supply view-
point, gas production probably could be increased up
to 250 billion m' from 1990 to 1995' without strain-
ing the absorptive capacity of both the domestic
consumption and export delivery systems. Whether
the domestic and export markets could absorb the
increase is less certain but still possible. After allow-
ing for pipeline compressor fuel, the electric power
' Recent press reports indicate that eight to 11 large-diameter
pipelines may be constructed from Yamal Peninsula during the
13th Five-Year Plan (1991-95), and a seventh pipeline is being built
from Yamburg.
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e Ministry of Power and Electrification use only.
d Including light and food industries.
e Mainly cooking.
Includes construction, agriculture, transport, and losses.
industry could absorb about 85 billion m' of this
increase-roughly three-fourths used to displace oil
and the remainder as fuel in new gas-fired plants. A
shift away from use of heavy fuel oil by power plants
and boilers for central heating would need to be
accompanied by an upgrading of oil refineries, howev-
er, so that a larger share of the average barrel of
crude oil could be used to satisfy rising demand for
light oil products. Much of Soviet heavy industry has
already been converted to use of gas. Increasing the
industrial use of gas, therefore, would depend heavily
on the growth of industrial production and the con-
commitant growth in energy use, including the extent
to which the Soviet petrochemical industry expands.
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Moscow's Long-Term Energy Program
In March 1984, Soviet energy planners set guidelines
for energy supply and demand in the Long-Term
Energy Program. Although the ambitious timetable
set forth for implementing the program by the turn of
? the century is slipping in usual Soviet fashion, the
logic of the program and its implicit diagnosis of
future availability of the main fuels appear valid. But
a smooth transition depends on timely, coordinated
energy conservation and giant steps to increase pro-
duction of coal and nuclear power. If?as is proba-
ble?these do not materialize fully, the capability of
the gas industry to prevent emergence of an energy
gap would be crucial to the economy.
Soviet energy planners seek to provide a "stable, high
level" of oil production, at least through the early
1990s. For the longer term, they evidently foresee
declining oil production (despite the likelihood of
more discoveries) because the program notes a shift
from "oil" to "liquid fuels" (explicitly including
methanol and synthetic fuels).
According to the Soviet scenario, gas production is to
roughly double from 1985 to the 1995-2000 period
and then level off. Its share of primary energy supply
is expected to increase from 36 percent in 1987 to
about 40 percent in 1990 and will probably continue
to grow in the following decade. Meanwhile, nuclear
power production is slated to more than quadruple its
still relatively small share of primary energy supply,
and heavy investment is to be made in the coal
industry. After the turn of the century, when oil
production will almost certainly be declining and gas
is being produced at a high level, needed increments
to the primary energy supply are scheduled to come
mainly from nuclear power and open pit coal. During
the entire period under consideration, Moscow fore-
sees progress in reducing the energy intensity of the
economy?measured by the ratio of total energy
consumption to national income?through increased
conservation.
Export Demand. Although Soviet planners have some
ability to influence the domestic consumption of gas,
they have little flexibility to affect demand in West-
ern markets. Soviet gas exports have increased 50
percent since 1980, and further growth through 1990
is likely (see table 2).3 But decisions affecting addition-
al subsequent purchases of Soviet gas in Eastern and
Western Europe will depend on many complex and
unrelated factors, including economic conditions and
political considerations in the various consuming
countries as well as the availability and price of
alternative energy supplies. Because oil is readily
substitutable for gas in many uses, continued weak-
ness of the world oil market reduces the potential
demand for new Soviet gas. Finally, the West Europe-
an market is experiencing strong interfuel competition 25X1
between nuclear fuel, oil, gas, and coal suppliers, as
well as keen competition between the individual oil
and gas producers. 25X1
The extent to which Eastern Europe could absorb
more Soviet gas?and the rate at which it could
absorb the gas as a replacement for oil deliveries?is
problematic; what many of the region's countries
primarily need is light oil products such as diesel fuel
from the USSR. Nevertheless, the Soviets are increas-
ing the capacity for delivery of gas to Eastern Europe
with the construction of the new "Progress" pipeline
from Yamburg to Uzhgorod. This trunkline?being
built with East European participation?is intended
to deliver 22 billion m3 per year of additional gas.
Pipelaying was completed this year, and the pipeline
could be fully operational in 1991. We believe, howev-
er, that East European gas demand will not develop
sufficiently to require the planned amount of delivery
until well into the 1990s.4
The Soviets' most recent gas sales contract was concluded in
February 1986 with Turkey. Deliveries began in June 1987 and will
increase from 1.5 billion m' in 1988 to 6 billion m' in the mid-
1990s. Agreements in principle for Soviet gas were reached with
Greece, Sweden, and Spain in 1987
? The "Progress" pipeline could carry as much as 30-32 billion m' of
gas per year if equipped with a full complement of compressors,
which would provide at least 8-10 billion m' of spare capacity. If
gas demand in Western Europe increases, the Soviets could easily
use this capacity to boost exports via the Czechoslovak transit
pipeline system. The capacity of this system, which was about 53
billion m' per year in 1984, is to be increased to 68 billion m' by
1989 according to a Council for Mutual Economic Assistance
publication. About 60 billion m' of this capacity would be available
for transmission of Soviet gas to Western Europe.
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Table 2
USSR: Exports of Natural Gas ,
Billion cubic meters
1980
1981
1982
1983
1984
1985
1986
1987
1990 .
Total
56.5
60.8
62.3
65.7
68.8
68.7
79.2
84.3
112
Eastern Europe
31.5
32.2
33.8
40.3
36.8
38.3
41.2
43.7
54
Bulgaria
4.6
4.5
4.5
5.5
5.5
5.0
5.7
6.1
8
Czechoslovakia
8.3
8.5
9.0
11.1
9.3
11.0
10.6
10.6
11
East Germany
6.5
6.4
6.5
7.8
6.4
7.0
7.0
7.0
8
Hungary
3.8
3.8
3.7
4.5
3.9
4.0
4.7
4.8
6
Poland
5.3
5.3
5.6
6.0
6.0
5.7
7.1
7.5
11
Romania
1.5
1.5
1.5
2.1
2.0
2.0
2.5
3.3
4
Yugoslavia
1.5
2.2
3.0
3.3
3.7
3.6
4.0
4.4
6
Western Europe
25.0
28.6
28.5
25.4
32.0
30.4
38.0
40.6
58
Italy
7.0
8.1
8.6
7.5
7.7
6.0
8.0
8.6
14
France
4.0
4.7
4.2
4.0
6.0
6.8
9.3
8.8
12
West Germany
10.7
11.8
10.5
10.0
13.5
12.4
15.5
16.9
22
Austria
2.4
3.2
4.4
3.2
4.0
4.2
4.0
3.9
5
Finland
0.9
0.8
0.8
0.7
0.8
1.0
1.2
1.6
2
Turkey
0
0
0
0
0
0
0
0.8
3
Estimated hard currency revenue
(billion US $)
2.7
4.0
3.7
3.2
3.8
3.8
3.6
2.7
NA
. Estimated.
The Special Importance of Gas
In Moscow's Long-Term Energy Program, gas
emerges as the "swing fuel" in two senses. Through
most of the 1990s, it will be the major fuel providing
growth in Soviet primary energy production, bridging
the transition from heavy reliance on oil to major
emphasis on coal and nuclear power. Gas can provide
much of the badly needed flexibility in the adjustment
process-both with respect to the amount of energy
and the timing of availability-to cope with possible
shortfalls in oil output, in coal and nuclear power
development, and in energy conservation.
Gas has marked advantages over both oil and coal in
terms of investment requirements and ease of exploi-
tation (from extraction through combustion and the
delivery of energy to end users). Soviet investment
costs for maintaining current world record levels of oil
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output have been soaring as a consequence of the high
rates of depletion in a large number of existing giant
fields and the poorer quality of the new fields being
tapped. (The fields are located at great distance from
consuming centers and are difficult to exploit, and the
well flows are low.) The coal situation is characterized
not only by past neglect in terms of investment but
also by a host of problems related to the low quality of
much of Soviet coal. The bulk of the coal planned for
exploitation in the next quarter century has relatively
low energy content. It also presents difficult prob-
lems-many of them still unresolved-with regard to
combustion as well as transportation because the coal
is either transported directly by rail or after conver-
sion to electric power, to consuming centers thousands
of kilometers away
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..Anmuuntia,
In contrast, natural gas provides vast proved reserves
of high-quality fuel, high returns to investment in
exploitation (albeit involving challenging technical
problems), and a large, expanding gas pipeline system.
One large-bore gas well can produce as much energy
in one day as 30 new oil wells, a marked advantage in
terms of investment and manpower requirements. Gas
utilization does not present the combustion and ener-
gy transmission problems that plague much of Soviet
coal development. With total primary energy invest-
ment?including pipeline construction?already
about one-fifth of total new fixed investment in the
economy, and the agroindustrial complex continuing
to swallow up one-third of investment, Moscow might
well decide to amend its pattern of domestic fuel
consumption by obtaining even more energy from gas
and taking more vigorous steps to conserve energy to
throttle back increases in oil investment.
Soviet Ability To Supply Gas
Vast Reserve Base
The Soviet Union is endowed with the world's largest
natural gas reserves, last shown in Soviet publications
as 34 trillion m3 in 1981 (see table 3). Recent Western
sources cite estimates of up to 42 trillion m3.5 The high
ratio of reserves to production suggests that, even in
the unlikely event that no new reserves were added
between now and the year 2000, gas reserves would be
roughly equivalent to over 20 years' production at the
rate of 1 trillion in3 per year. Nearly 80 percent of
Soviet gas reserves are found in Tyumen' Oblast in
West Siberia (see figures 1 and 2 and inset). Other
sizable deposits are located in the Turkmen and
Uzbek Republics (over 3 trillion m3) and in Orenburg
Oblast and the Pre-Caspian Depression (at least 2
trillion m3).
Production in the Turkmen and Uzbek Republics and
in Orenburg Oblast accounted for most of the growth
in gas output during the 1970s but has been roughly
stable for the last five years. Development of two new
The Soviet Gas Minister was asked the size of current gas reserves
at the International Gas Union Congress in June 1988, and he
replied that this figure, like that for oil reserves, is now regarded as
a state secret. Prior to this Congress, the French Cedex publication
released a Soviet gas reserve estimate of 42 trillion m3.
Table 3
USSR: Natural Gas Reserves, Production,
and Reserves-to-Production Ratio
End-of-Year
Reserves a
(billion m3)
Production
(billion ni3)
Reserves-to-Produc-
tion Ratio b (in years)
1965
3,564
127.7
28
1970
15,750
197.9
80
1975
25,800
289.3
89
1980
30,000
435.2
69
1981
34,000
465.3
73
1985 c
34,000-42,000
643.0
up to 65
a Reserve data shown include A, B, and Cl categories. These Soviet
categories correspond generally to Western categories of proved,
probable, and possible reserves.
b The reserves-to-production ratio is the reserve base divided by
annual production. This ratio is used by planners at the national,
regional, and local levels as a basis for investment and development
decisions.
c One 1981 Soviet petroleum industry publication carried an esti-
mate of 34 trillion m'. Other We'tern observers, especially Cedex, a
Paris-based journal, believe reseAces to be as much as 42 trillion m.
We consider it likely that the Sovis have added to proved reserves
an amount roughly comparable to production in recent years. The
last published Soviet reserve estimate appeared in Razvedka i
Ekspluatatsiya Gazovykh i Morskikh Nefyanikh Mestorozhdenii
1981, No. 1, p. 2.
giant deposits?Sovetabad in tfis Turkmen Republic
and Shurtan in the Uzbek Republic (each with up to 1
trillion ire of reserves)?should enable production in
these regions to stabilize or gr9w slightly in the 1990s.
East Siberia, the Soviet Far East, and the offshore
Arctic may also possess huge reserves, but those
regions have been explored only slightly and have
produced very little gas. The older reserves in the
Ukraine and the North Caucasus have been heavily
exploited for more than two decades and are substan-
tially depleted.
Production Capability
Among the major fuels, only gas has posted substan-
tial rates of growth of output (6 to 10 percent) in the
USSR in recent years. Moscow's efforts to expand
natural gas production in the face of declining growth
5
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Figure 1
Major Soviet Gas Regions and Selected Gasfields
The United States Government has not recognized
the incorporation of Estonia. Latvia. and Lithuania
Into the Soviet Union. Other boundary representation
Is not necessarily authoritative.
tiited
ingdom
Norwegian Sea
Norway
BIS
F.R.G.
G.D.R. a
Balttc
'40.r
1:01and
e
Sweden
Ukrainian
S.S.R. Pripyat'
? nepr
,
\North'
Cauca
-\\N.
*MOSCOW
r- Urals,
n Basin
Barents
Sea
hara
aver
Arctic Ocean
Bovanenko\
Komi ?
)Camburg
1-,
,
Urenloya. ,
Medvezh'Yeillo, V )Zaprilyarnoye
- ' West"
/" Siberia
Caspt A
Iran
Soviet Union
\
FT Major producing area
Producing region
Prospective region
? Gasfield
800 Kilometers
BOO Miles
in oil and coal production have brought about a rise in
natural gas output from 435 billion m' in 1980 to 727
billion m' in 1987, making the USSR the world's
largest gas producer (see figure 3).6
The USSR publishes two data series on natural gas production,
both calculated at standard atmospheric pressure of 760 mm of
mercury. The first series, used in tables relating to energy produc-
tion and use in the USSR alone, evaluates the volume of gas
produced at a temperature of 20 degrees Celsius; the second, used
by the Soviets in international comparisons, evaluates the volume at
0 degrees C. Thus the volume of gas produced in 1985 is reported in
plan fulfillment reports and in the domestic section of the annual
statistical handbook as 643 billion m' (20 degrees C). But in the
section of the statistical handbook dealing with international
comparisons, it is reported as 599 billion m3(0 degrees C)
Confidential
China
Sea
of
Okhotsk
K rea
Bering
Sea
Sea
of
Japan
Japan
Kor a
714124 (800416) 8-88
Because of the country's vast natural gas reserves and
the Gas Ministry's established record of boosting
output, we believe that increases in gas output at an
average annual rate of 6 percent can readily be
achieved between now and the mid-1990s. Attaining
these production growth rates will involve the develop-
ment of one or two new giant gas deposits every five
years. The Soviets plan to let gas output level off in
the mid-to-late 1990s, probably within the range of
1,100-1,200 billion m' per year, and remain at that
level until about the year 2020. Such a plan appears
feasible: each large field should be able to produce
40-50 billion m' annually for 20 to 25 years from each
trillion m' of gas reserves. From time to time, smaller
fields will be developed to maintain output and to
cover demand in local areas to maximize utilization of
installed pipeline and distribution systems.
6
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Figure 2
Soviet West Siberia Gas Region
Gasfield CZ,
Supergiant URENGOY
Giant Gubkin
Other Taz
Major gas
pipeline
Kara Sea
Yuzhno-
Tam bey
KHARASAVEY
Peninsula
NB? VANENKO
Kruzernshter
Neyto%
Arkticheskiy
redne amaft
Nurmin0
4:r
Kazantse
Gydan
Peninsula
Ozernyy
Pelya tka
Zimniy.;4,
Semakov
Solenaya
Arkhangel'skaya
Oblast'
YAMBURG
yorku a
Nakhodka
urk ov
Taz
Komi
ASSR
lirbytnan
EDVEZH'YE
Tyumenskaya
Oblast'
Nadym
Yubtleynyy
Yamsovey
Berezovo?
Berezovo?
Komsomol
Beloyarskiy
Igri
Punga
Noyabr'sk
Svetly
Krasnoleninskiy
0 Yetypur
? Vyngapur
zhnevart.is
Tomskaya
Oblast'
150 Kilomete
0 150 Miles
7
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Tyumen' Oblast Gasfields: The Biggest and Best
Urengoy?the world's largest gasfield?and Yam-
burg together contain 10-12 trillion m3 of natural gas.
The seven major Tyumen' gasfields listed below
account for more than half of the country's reserves.
The two largest fields will provide most of the growth
in gas production in the next few years. At least 18
trillion m3 of the estimated explored gas reserves in
the Tyumen' Oblast are in shallow Cenomanian
(Upper Cretaceous) reservoirs at depths of 650 to
1,300 meters. Another 6 trillion m' are found in much
deeper Valangian (Lower Cretaceous) reservoirs at
depths of 2,200 to 3,700 meters. The Valangian gas
pools are less prolific producers, but they are rich in
natural gas liquids (NGL)?estimated to contain at
least 1 billion tons of ethane, propane, and butanes.
On average, large-bore Cenomanian gas wells can
each produce 1.5 million m' daily of gas that are 93
to 98 percent methane (the "natural gas" of com-
merce) for sustained periods. The Valangian wells
may produce about one-third as much gas per day,
and the methane content is lower (83 to 88 percent)
because of the high NGL fraction.
Field
Year of
Discovery
Reserves
(billion m')
Urengoy
Yamburg
1966
1969
6,000-8,000
4,000
Zapolyarnoye 1965
2,500
Bovanenko 1971
2,200
Medvezh'ye
1967 1,500
Kharasavey
1974 1,000
Vyngapur
1968 300
Shifting Geographic Focus. Like other major gas
producers, the USSR has relied on a small number of
very large fields to ensure the growth of gas produc-
tion. In the 1960s, Shebelinka in the Ukrainian
Republic, Gazli in the Uzbek Republic, and Vukhtyl
in the Komi Republic fueled most of the rapid growth
in gas supply. The Shatlyk, Achak, Naip, Gugurtli,
and Kirpichli fields in the eastern region of Turkmen
Republic provided the increases posted during the
Confidential
first half of the 1970s. During the last half of that
decade, Orenburg, located southwest of the Ural
Mountains, and Medvezh'ye?the first of the supergi-
ant West Siberian natural gas deposits to be devel-
oped?came on line. By 1980, Orenburg was produc-
ing 48 billion m3 per year, and Medvezh'ye
contributed another 70 billion in3.
Since the mid-1970s, West Siberia has replaced Cen-
tral Asia as the industry's main base for expansion.
Since its startup in 1978, the huge Urengoy field has
provided most of the increase in West Siberian out-
put. Medvezh'ye, Vyngapur, and Urengoy together
accounted for over 50 percent of Soviet gas production
in 1985, with a combined output of 345 billion m3.
The Yamburg field, the major development project on
the agenda for the 1986-90 Five-Year Plan, is sched-
uled to produce 195-200 billion m' in 1990
Moscow is stressing development in northern West
Siberia because of the numerous large gasfields wait-
ing to be tapped. After Yamburg, additional gas will
become available as the Zapolyarnoye, Yubileynyy,
and Gubkin deposits near Urengoy and the Bovan-
enko, Kharasavey, and Kruzernshtern fields on the
Yamal Peninsula are developed and tied into the
pipeline network. But development of these northern
fields will require increasing allocations of investment
and manpower to cope with several difficulties:
? The location of these fields some 3,500 km from the
centers of industry and consumption in the Europe-
an USSR has required development of an immense
gas pipeline system that, by 1990, will cost some
60-70 billion rubles.
? As production moves northward from Urengoy to
Yamburg and subsequently onto the Yamal Penin-
sula, permafrost will continue to present increasing-
ly difficult technical problems in field development
and in pipeline construction and operations. Highly
specialized insulation techniques are required to
prevent settling and misalignment of drilling and
processing equipment as well as breaks in pipelines.
8
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Figure 3
USSR: Natural Gas Industry Development, 1970-90
Billion cubic meters
1 Annual Production
1,000
800
600
400
200 I
0 1970 72 74 76 78
Estimated
80
82 84 86 88 90
1 Annual Increase in Production
60
ao
20
0 1970
72
74
76
78
80
82
I I
84
86
88
90
9
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tonnaennai
,
Deep drilling operations at Urengoy
-
Pipeline trenching excavato
Ell7ITTC1 ruzFriMi
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Moving a drilling rig to new wellsite
The new city for gas workers at Novyy Urengoy
10
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Gasfield Glasnost'
The glowing statistics of rapidly increasing gas pro-
duction in West Siberia tend to obscure living condi-
tions and operating practices that would be consid-
ered intolerable in the United States. A Soviet
television documentary highlighted the difficulties
and privations of workers and their families in Novyy
Urengoy, located just below the Arctic Circle. Hous-
ing varies from small prefabricated structures shaped
like large oil tanks lying on their sides to cramped
apartments in nine-story concrete buildings. Three
families were shown sharing an apartment, with
"three equal housewives" vying for use of the kitchen.
Social and cultural facilities were described as gross-
ly inadequate and thus a contributing cause to juve-
nile delinquency.
The documentary extended its criticism to local
gasfield operations, stressing the desire of the general
director of the production association responsible for
the area to fulfill gas development plans while disre-
garding the city's needs. The narrator noted that
much work at production sites remains incomplete
and wonders if the mistakes of the oil industry
(against which General Secretary Gorbachev railed in
his September 1985 Tyumen' speech) are being re-
peated: "the deposit has been brought up to design
capacity, yet it turns out that here at the operating
sites there is a need to mercilessly tear at the gas
horizons in order to conform to plan figures." The
video and commentary show flaming flare towers,
where 30 percent of the valuable ethane content of gas
from the deposit is being lost because of inadequate
planning for its use.
? Tapping northern Tyumen's immense gas reserves
will pose difficult logistic problems until roads,
communications, and utilities, as well as housing
and other social infrastructure, are provided (see
inset).
Less importance is attached by the Soviets to the deep
Astrakhan' and Karachaganak sour gas deposits in
the Pre-Caspian Basin (see inset). Each of these fields
11
Exploiting the Pre-Caspian Sour Gas Deposits
Development of the sour gas deposits of the Pre-
Caspian Basin requires specialized equipment, tech-
nology, and operating experience, as well as skill,
both in the drilling of wells and the processing of
output. Up to 50 percent of the gas from these
reservoirs is made up of toxic and corrosive contami-
nants such as hydrogen sulfide and carbon dioxide.
Because of their great depths?often 5,000 meters?
the Pre-Caspian reservoirs have bottom-hole pres-
sures and temperatures much higher than those
encountered in Tyumen'.
The conditions encountered in sour gas drilling and
processing call for use of highly specialized?and
expensive?equipment. On many wells, blow out pre-
venters capable of handling pressures of up to 15,000
pounds per square inch are needed. To cope with the
corrosive environment, stainless steels are called for
in drill pipe, casing and tubing, gathering systems,
and the processing plants that strip hydrogen sulfide
and carbon dioxide from the gas.
A high order of technical skill and performance is
needed not only in drilling but also in the vast
amount of "plumbing" work in assembling gathering
systems and processing equipment. The Soviets ap-
parently lack some of the skills and experience
needed for safe and efficient deep drilling under
conditions such as those encountered in the Pre-
Caspian Basin. They are also notably slack in the
exercise of quality control in critical assembly work.
As a result, drilling in the area proceeds at about
one-third the pace achieved by US drillers working on
comparable wells, blow outs have occurred, and leaks
of toxic gas have resulted in fatalities.
should be producing 5-6 billion m' of sour gas annual-
ly?plus 2-4 million tons of condensate by 1990. The
combined gas output for this region should reach 25
billion m' by 1995, and it could rise to 38 billion m' by
the year 2000 (see table 4).
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Table 4
USSR: Regional Production of
Natural Gas, 1975-2000
Billion cubic meters
1975
1980
1985
19908
1995a
2000a
Total
289
435
643
875
1,100-1,200
1,100-1,200
West Siberia
40
156
370
600
820-920
835-935
Urengoy
50
255
325
300-400
300-375
Yamburg
150
200
200-225
Medvezh'ye
32
70
72
68
65
60
Vyngapur
16
16
17
15
13
Middle Ob' oilfields a
4
16
22
35
35
32
Bovanenko
130
130
Kharasavey
70
95
Messoyakha
4
4
5
5
5
5
Volga-Urals
33
65
65
60
54
50
Komi Autonomous Republic
19
19
18
15
12
10
North Caucasus
23
14
10
10
6
5
Far East
2
2
2
5
8
10
Ukraine-Belorussia
69
53
46
45
40
30
Pre-Caspian Basin
4
4
5
10
25
38
Astrakhan'
3
9
20
Karachaganak
1
3
9
12
Oilfield gas
4
4
4
4
7
6
Central Asia
89
109
114
117
121
108
Turkmen Republic
51
70
77
86
90
80
Uzbek Republic
37
38
36
30
30
27
Other
1
1
1
1
1
1
Azerbaijan
10
13
13
13
14
14
. Estimated.
The Role of Large-Bore Gas Wells. Soviet gas pro-
duction has benefited from a major innovation?first
tried at the Medvezh'ye gasfield in the early 1970s?
which involves drilling extra-large-diameter gas wells.
These wells can produce up to 1.5 million m' of gas
daily?nearly three times as much as a normal well.
By reducing the total number of gas wells drilled, this
method permits a rapid buildup in output with mini-
mum inputs of scarce capital and labor.
Confidential
The use of large-bore wells, however, also involves
substantial risks. If local permeability is poor, cones of
low pressure may form around well bores, causing
water encroachment and leading to lower ultimate
recovery of gas. (An excessive or sharp loss of reser-
voir pressure usually draws in the formation and
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surrounding ground waters and can lead to a reduc-
tion in the flow of gas.) Advanced water encroach-
ment has already been detected along the eastern
slopes in the shallow reservoirs of Medvezh'ye and
Urengoy.' Continued overproduction of the develop-
ment wells at Urengoy in 1986 and 1987?probably
to meet production targets in the face of drilling
delays at Yamburg?has aggravated this problem,
prompting remarks in the Soviet press about repeating
mistakes of the same kind made at the Samotlor
oilfield in the 1970s.
Pipelines?Essential Complement to Production
To accommodate increasing gas production, the Sovi-
ets plan some 58,000 kilometers (km) of gas pipeline
construction for 1986-90, compared with the 48,000
km completed during 1981-85 (see figure 4).8 In part
because new gas production is planned to come
largely from the Yamburg field some 300 km north of
Urengoy, the amount of 1,420-mm-diameter pipeline
to be laid will be roughly 4,000 km greater than the
20,000 km constructed during 1981-85. A total of six
new transcontinental trunklines are to be built from
Yamburg via Urengoy to consuming centers in the
Western USSR and to export terminals. A seventh
pipeline from Yamburg to supply Omsk, Kemerovo,
and Novosibirsk in West Siberia had been mentioned
in the Soviet media, but little has been heard about
this project recently (see table 5).
Transporting gas from the new, remote Arctic on-
shore gasfields on the Yamal Peninsula will pose
challenges even greater than those being encountered
in building pipelines from Yamburg. These pipelines
must not only traverse a much longer route over
permafrost but also will require installation of long
underwater segments spanning th mouth if the Ob'
River.
' The drilling of deep large-bore gas wells to extract gas with a high
NGL content may not be feasible, because these fractions tend to
liquefy and collect at the bottom of larger diameter wells, causing a
reduction of the gas flow. For the NGL-rich reservoirs at Urengoy,
Yamburg, and other Tyumen' gas deposits, wells of standard
diameter are probably easier and faster to drill and can improve
condensate recovery.
13
Since 1980 the USSR has been laying large-diameter
gas pipelines from West Siberia to the European
USSR at an average rate of one per year. Moscow
continues to import large volumes of materials and
equipment for its gas pipeline program, particularly
large-diameter pipe and heavy-duty, winterized pipe-
layers. The Soviet development of 16- and 25-mega-
watt industrial gas turbines (GTN-16 and GTN-25)?
and, more important, the 16-megawatt aeroderivative
gas turbine (GPA-Ts-16)?doubled annual gas tur-
bine production in terms of rated capacity and eased
the shortage of high-capacity gas turbines. In terms of
quality, however, these turbines have fallen far short
of expectations, proving to be of low quality and poor
reliability.' Because Soviet-built 16- and 25-megawatt
gas turbines are scheduled to provide about one-half
of the aggregate power needed on the Yamburg
pipelines, Moscow may need to import more high-
capacity turbines or rely more heavily on the less
suitable 10-megawatt gas turbines and some
12.5-megawatt electric motors.
Potential Constraints
A number of economic adjustments will be required
on both the demand and supply sides to attain the
two-thirds increase in gas production we believe to be
achievable by 1995. The greater use of gas requires
not only large expansion of the gas distribution sys-
tem, with increasing emphasis on new local distribu-
tion networks, but also additions or changes of equip-
ment by gas consumers. All of this will entail
substantial investment, on both the production and
consumption ends.
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power industry that has already occurred has been 25X1
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either fuel. Using more gas in the industry will mean
constructing new plants, bringing gas to areas not now
supplied, and eliminating delays in extending lateral 25X1
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assembly practices
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Figure 4
Major Soviet Gas Pipelines
? Major gas pipeline corridor
? ? ? Pipeline under construction
*le Selected gasfield
Norwegian
Sea
etr?
Barents
Sea
Arctic Ocean
The United States Government has not recognized
rho incorporation of Estonia, Latvia. and Lithuania
into the Soviet Union. Other boundary representation
is not necessarily authoritative.
a
Kara
Sea
Norway
amburg
Zapolyarnoye
?Urengoy
Sweden
Baltic
Sea
Finland
Leningrad
Tomsk
Poland
Romania
41)Karachaganak
leksandrov
Gey
Chelyabinsk
?
'Omsk
Bulgaria
Astrakhan
Black Sea
Lake
Balkhash
Alma-Ate
9
Turkey
No
China
a
Cypros,
Mediterranean Sea
Iraq
Iran
500 Kilometers
500 Mlles
Afghanistan
India
Pakistan s?
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pipelines to areas where power plants are now being
built. Some of the planned power plants are to be sited
in northern West Siberia, where terrain and weather
conditions will raise construction costs. Increasing gas
consumption in the household/municipal services sec-
tor is not technically challenging but can be disruptive
and time consuming. The principal requirement will
be to set up local gas distribution networks in areas
not now served.
The requirement for increased equipment, manpower,
and skilled management for expanded production and
use of gas comes, however, at a time when these
resources are also in high demand by other priority
activities. Gorbachev's industrial modernization pro-
gram, for example, calls for increased access to many
of these same resources. Within the energy sector,
moreover, rising claims on investment resources will
be made by the oil, coal, and nuclear power industries.
For the foreseeable future, oil will remain the USSR's
prime source of hard currency earnings; accordingly,
the effort to maintain oil production will continue
despite soaring marginal costs of production. Past
deficiencies in coal industry investment will delay the
time when coal can supplant other fuels in many uses.
The requirements of the nuclear power industry have
also increased since the Chernobyl' accident
Investment Requirements
Gas industry investment, including the cost of gas
pipelines, will continue to increase, but at a much
slower rate than investment in the oil industry (see
table 6). As the center of gas production activity shifts
farther north and production from Pre-Caspian gas-
fields increases, the investment costs for attaining
greater output will increase more than proportionally.
In the mid-to-late 1990s, however, a planned leveling
off of gas production should drastically reduce the
requirement for further investment in transcontinen-
tal pipelines. Most gas-related investment will then be
limited to the drilling of new gas wells and field
gathering lines.
Although the current dramatic boost in investment
and manpower allocations needed to sustain oil-indus-
try output may lessen availability of resources for
some gas projects in the near term, it will probably
not endanger longer term goals.
15
We estimate that total investment in gasfield develop-
ment and pipeline construction during 1986-90 will be
roughly 59 billion rubles. According to the Soviet
press, planned investment for 1986-90 is to include
the construction of 56 gas-processing plants, 24,000
km of 1,420-mm pipelines, 34,000 km of other gas
transmission lines, more than 300 compressor stations,
and needed infrastructure (see table 7)
Harsh conditions and, initially, the almost total lack
of infrastructure at Yamburg?together with the
high-cost activities associated with development of
deep sour gas deposits in the Pre-Caspian Basin?lead
us to estimate a one-third rise in investment for gas
extraction and processing (including that necessary to
offset depletion). Soviet concern with escalating costs
was clearly evident when plans for a workers' city at
Yamburg were scrapped in late 1985 and the Gas
Ministry decided to reduce permanent staff at the
gasfield and fly in workers from other regions for two-
week shifts. In addition, the average cost per km of
the planned six transcontinental pipelines from Yam-
burg to the western USSR will be slightly higher than
that of those laid in 1981-85 because of the perma-
frost conditions in the first 200 to 300 km from
Yamburg (see inset). Construction of a seventh pipe-
line from Yamburg is now being considered to deliver
gas to the Novosibirsk region and Central Asia.
Storage Facilities
Because gas use fluctuates widely on a seasonal basis,
favorably sited gas storage facilities are an economi-
cal alternative to the construction of pipeline capacity
to accommodate gas demand during peak periods of
use. Where gas pipeline capacity constrains a gas
system's ability to meet peak demand, storage facili-
ties must be located close to the major gas-consuming
centers. In the Soviet Union, however, most of the
economical sites?abandoned oil and gas deposits and
salt formations?are far removed from these centers,
which are concentrated in the European USSR
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Following positive results from pilot gas storage pro-
jects in abandoned oilfields in the Volga-Urals region,
gas storage projects were launched in the 1960s near
Moscow and Leningrad. These projects, which sought
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Table 5
USSR: Major Gas Transmission
Pipelines From West Siberia
Pipeline
Length
(kilometers)
Route
Status
Pipelaying
Compressor Stations
Urengoy-Gryazovets
2,280
Urengoy-Nadym-Punga-
Ukhta-Gryazovets
Completed in 1981
Operational in 1983
Urengoy-Yelets (Urengoy-
Center I)
3,400
Urengoy-Krasnotur'insk-
Pomary-Yelets-Dikan'ka
Completed in 1984
Operational in 1986
Urengoy-Yelets (Urengoy-
Center II)
3,022
Same as above but termi-
nates at Yelets
Completed in 1985
Operational in 1985
Urengoy-Uzhgorod (Siber-
ia?Western Europe)
4,451
Urengoy-Pangody-
Krasnotur'insk-
Gornozavodsk-Mozhga-
Pomary-Pochinki-
Yelets-Kursk-Il'intsy-
Bogorodchany-Uzhgorod
Completed in 1983
Operational in 1985
Urengoy-Petrovsk
2,740
Urengoy-Nadym-Punga-
Krasnotur'insk-Nizhnyaya
Tura-Moskovo-Syzran'-
Petrovsk
Completed in 1981-82
Operational in 1983
Urengoy-Novopskov
3,346
Urengoy-Nadym-Punga-
Krasnotur'insk-Nizhnyaya
Tura-Moskovo-Syzran'-
Petrovsk-Balashov-Kala-
chevka-Novopskov
Completed in 1982
Operational in 1984
Yamburg-Yelets-Kremenchug
(Yamburg-Yelets I)
3,650 a
Follows route of Urengoy-
Yelets pipelines
Completed in 1985-86
Operational in 1987
Yamburg-Yelets (Yamburg-
Yelets II)
3,150 a
Follows route of Urengoy-
Yelets pipelines
Completed in 1988
Limited Operation
Yamburg-Uzhgorod (Progress)
4,605
Follows route of Urengoy-
Uzhgorod pipeline
Completed in 1988
Limited Operation
Yamburg-Gor'kiy-Mozdok (ex-
tension of Yamburg-Yelets I
line to North Caucasus)
3,100 a
Will probably follow route
of Urengoy-Yelets pipeline
as far as Pomary and then
through Gor'kiy and
Murom to Yelets, then
south to Mozdok and the
North Caucasus pipeline
grid
Completed to Mozdok
early 1988
Limited Operation
Yamburg-Tula-Kiev
(Yamburg-Tula II; also re-
ferred to as Yamburg-
Center II)
3,700 a
Will probably follow route
of Urengoy-Yelets pipeline
Started in late 1987
NA
Yamburg-Volga River area
(Yamburg-Povolzh'ye)
2,600 a
Will probably follow route
of Urengoy-Petrovsk pipe-
line
Under construction
NA
Yamburg-Omsk-Tomsk
NA
NA
Under construction
NA
a Estimated.
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Automatic welder for pipeline construction operations in Tyumen' Oblast
Pipelaying operations along major gas transmission route
ir4
11 '
mist%
II, .10
'
Urengoy gas plant
17
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%-etumenttat
Table 6
USSR: Investment in Production of
Major Forms of Energy
Billion 1984 rubles
1976-80
1981-85
1986900
Total
92.6
138.5
238
Gas b
29.0
46.0
59
Oil
29.3
50.3
120
Coal
11.4
13.5
18
Electric power
22.9
28.7
41 c
. CIA projections. The oil investment estimate reflects the accelera-
tion in the number of new fields planned and the substantial
increase in drilling meterage from that originally planned.
b Including estimates of investment in gas pipeline construction.
c Pre-Chernobyl' estimate.
to store gas in aquifers (shallow water-bearing forma-
tions) met with only partial success. By 1975, accord-
ing to a former gas minister, some 65 percent of the
gas being stored was in depleted petroleum reservoirs
far removed from the Moscow and Leningrad indus-
trial centers and thus poorly located for supplying gas
during periods of peak demand.
Recognizing the advantages of gas storage for supply-
ing peak demand, the Soviets planned a 170-percent
increase in storage volume during 1976-80, which
would allow about 500 million m3 per day to be
withdrawn. After 1976, however, the Soviet media
(including gas-industry journals) gave few specific
details on the subject of gas storage capacity and
withdrawal rates. Plans for 1986-90 stated only that
storage capacity was expected to double. But there is
clear evidence that gas available for withdrawal has
continued to be inadequate to meet peak seasonal
demand. In many winters, deliveries of gas to export
customers were reduced, and some domestic indus-
tries were ordered to use secondary fuels to ensure gas
supplies to priority consumers, including the urban/
household sector.'?
m During the severe winter of 1986-87, the Soviet press mentioned
the growing importance of gas storage for meeting demand during
peak periods, but did not provide information on the type, capacity,
or location of storage facilities. In late 1987, however, lzvestiya
reported that 53 billion m3 of gas were stored underground in
preparation for the coming winter
Confidential
Table 7
USSR: Estimated Investment for
Natural Gas Production Processing, and
Gas Transmission Pipelines, 1976-90
1976-80
1981-85
1986-90
Production (end of period, billion
rn3 per year)
435
643
875
Net additions to annual capacity
(billion m3)
146
208
232
Gross additions to annual capacity
(billion m3) a
180
270
300
Major gas trunkline construction
(kilometers)
32,200
48,000
58,000
1,420-mm-diameter pipelines
(kilometers)
10,600
20,000
24,000
Other pipelines (kilometers)
21,600
28,000
34,000
Compressor stations (number
completed)
174
231
300 '
Total compressor capacity, end
of period (megawatts)
18,000
43,000
68,000
Total investment in gas industry
complex (billion rubles)
29
46
59
Gas extraction and processing,
all phases (billion rubles)
11
16
21
Additions to gas transmission
pipeline system (billion rubles)
18
30
38
a Includes new capacity needed to offset depletion of old capacity.
The slow development of gas storage capacity con-
trasts sharply with the rapid expansion of gas produc-
tion. In typical Soviet fashion, the production and
transport of gas were stressed at the expense of
ancillary facilities. The gas industry was scoring
remarkable successes in field development, and the
pipeline construction industry was mastering the tech-
niques for laying large-diameter pipe. We believe that
these successes probably influenced Soviet officials to
scale back storage plans in the belief that expansion of
the pipeline network would provide sufficient excess
capacity to meet anticipated surges in demand. As a
result, current storage capacity will have to be ex-
panded substantially if gas is to penetrate further into
new domestic markets. This can be done most effi-
ciently by using abandoned oil and gas deposits in
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Estimating Capital Investment in Gas Transmission
Pipelines
The gaps in published Soviet data on gas pipeline
construction, both with respect to pipeline length and
costs, are substantial. Part of the problem involves
contradictory data; for example, one source may
state a length of pipeline commissioned during a
given time period while another cites a different
length. Investment costs for pipelines, moreover, are
not reported; instead, the Ministry of Construction of
Petroleum and Gas Industry Enterprises usually
publishes only the value of construction and installa-
tion work for its activities as a whole.
These published totals include not only those for gas
and oil pipelines, oil products, and related equipment,
but also housing and other infrastructure serving the
oil and gas industries. The outlays for infrastructure
probably constitute about 10 percent of the ministry's
total work. Of the construction and installation work
.by the ministry which amounted to 29.5 billion rubles
in 1981-85 and was projected at about 40 billion
rubles in 1986-90, some 18.6 billion rubles and 23
billion rubles, respectively, have been identified by
the ministry as being related to gas rather than to oil
or other programs. When these data are adjusted by
available ratios between outlays for construction and
installation work and total capital investment in
construction of major gas pipelines, the estimate for
investment during 1981-85 is 29 billion rubles and for
1986-90 is 36 billion rubles.
Another approach to estimating investment in gas
pipelines is to multiply costs per km (on the basis of
Soviet pipeline construction experience) by the length
of pipelines constructed. We use factors of 1.1 million
rubles per km for 1,420-mm pipelines and 0.25
million rubles per km for smaller pipelines built in
1981-85. To account for the added costs that are
being incurred between Yamburg and Urengoy, we
increase the average cost factor to 1.2 million rubles
per km for 1986-90. These calculations yield invest-
ment estimates of about 29 billion rubles for 1981-85
and 37 billion rubles for 1986-90
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Residualized investment data reported for the trans-
portation and communications sector result in an
estimate of about 34 billion rubles for oil and gas 25X1
pipeline investment in 1981-85. On the basis of the
relative length and size of the oil and gas pipelines
constructed, the implied investment from this residu-
al for additions to the gas pipeline system is roughly
30 billion rubles for 1981-85. 25X1
Finally, researchers at the Center for International
Research, US Bureau of the Census, have estimated
investment in gas pipelines of about 25 billion rubles
in 1981-85 and 33 billion rubles in 1986-90. Their
calculations are based on estimates of pipeline length
installed in 1981-85 and per-kilometer costs of gas
pipeline construction in 1986-90 somewhat lower
than those we used.
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We estimate that roughly 30 billion rubles of capital
investment was made in the gas pipeline system
during 1981-85. During 1988-90 roughly 38 billion 25X1
rubles of investment will be required to expand the
pipeline system to accommodate planned increases in
gas production, given the added length of major
pipelines and the potential for unforseen problems
with permafrost as gas production shifts northward
to Yamburg. 25X1
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the North Caucasus, Ukrainian, and Volga-Urals
regions of the European USSR.
Regional and Local Gas Distribution Facilities
During 1981-85, Soviet plans called for construction
of 48,000 km of gas pipelines, of which about 15
percent would be distribution lines directed to cities
for power plants, industry, households, and services.
Specific information on the construction of local-
distribution pipelines is sparse, but it appears that the
effort was successful as judged by the 47-percent rise
in gas distributed for consumption in the domestic
economy during 1981-85.
Extension of the network of lateral and local gas
distribution pipelines permitted rapid increases in gas
use in industry:
? Total industrial gas use rose by some 50 billion
cubic meters during 1981-85.
? By 1985, gas consumed by thermal electric power
plants, primarily in the Volga-Urals region and
West Siberia, had almost doubled from that used in
1980.
? The expansion of chemical production in West
Siberia, the Volga-Urals, and the Ukraine resulted
in a 43-percent growth in natural gas use by the
chemical industry.
? Gas accounted for a growing share?almost 30
percent in 1985?of total fuel requirements for
ferrous metallurgy.
No reliable information is available on the length or
extent of the gas pipeline network to households and
municipal services. However, this sector is the third
largest user of natural gas, accounting for about 13
percent of gas distributed for domestic consumption.
An increase of 18 billion m' in gas use by this sector in
1981-85 must have required a substantial expansion
of local gas distribution networks
Although many of the measures needed to implement
increased distribution and use of gas are not challeng-
ing in a technical sense, their implementation will
undoubtedly run afoul of the many perils of the Soviet
bureaucracy. With its heavily layered system of deci-
sionmaking and coordination, Moscow is unlikely to
smoothly achieve shifts in the pattern of fuel supply
and use. The woes of a program for large-scale use of
gas as a motor fuel provide a cameo portrait of the
Confidential
Soviet system in action (see inset). Despite its ineffi-
ciencies, Moscow has, during the 1980s, provided for
a remarkable expansion of gas production, transport,
and use and?not without difficulties?will almost
certainly continue to provide for the same through the
mid-1990s.
Outlook
For the remainder of this century, natural gas will
provide the major source of growth in the USSR's
energy supply. Plans for 1990 call for gas output to
reach 835-850 billion m'. On the basis of the gas
industry's current performance, we believe that out-
put of 875 billion m3 is more likely. For the longer
term, we believe that the comparatively high returns
to investment in gas industry will lead Soviet planners
to allocate sufficient resources to increase gas produc-
tion to 1,100-1,200 billion m3 in 1995 and to be able to
maintain output at that level into the next century,
despite investment and manpower requirements that
appear relatively inefficient compared with those em-
ployed in the West.
With gas providing most of the growth in future
energy supplies, the Soviet economy will face costly
adjustments in adapting patterns of energy use to the
changing proportions in availability of specific fuels.
If problems do arise, they are likely to stem from the
inability of the Soviet economy to absorb the increase
in gas production that the industry could supply by
the mid-1990s. Greater use of gas will require further
expansion of the transmission, lateral, and local gas
pipeline networks. Moscow must also build more
storage facilities to overcome the reluctance of enter-
prises to rely more heavily on gas because of fears that
their supply may be interrupted during peak demand
periods in the winter. As production activity increases
at Yamburg and on the Yamal Peninsula, both field
development and pipeline transportation will be more
difficult. Substantial investment will be required; the
amount will depend in part on whether the Soviets
obtain Western equipment and expertise to cope with
Arctic conditions. To ensure enough resources for the
gas sector, the Soviets probably will hold back invest-
ment from the coal industry
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Natural Gas for Transportation
Large-scale use of compressed natural gas and lique-
fied petroleum gas as motor fuel is being advocated
by prominent members of the Soviet regime, but the
planning, research and development, and industrial
establishments are dragging their feet. Pravda reports
that at a September 1987 CPSU Central Committee
conference, "Second Secretary" Yegor Ligachev em-
phasized the importance of improving the energy
balance by reducing the amount of oil used to
produce certain types of fuel. Vladimir Dolgikh,
party secretary in charge of energy, stressed the need
to accelerate the conversion of motor vehicles to use
natural gas. This conversion is seen by the leadership
as desirable not only for its effect on the pattern of
fuel use but also for its potential to reduce atmo-
spheric pollution, particularly in cities with large
numbers of motor vehicles.
According to the press report of the Central Commit-
tee conference, the program for using compressed gas
as transport fuel is beset with problems and delays.
Indeed, the process is described as "amateurish and
haphazard":
? Certain ministries, party organs, and enterprises
are failing to attach proper significance to resolving
the problem.
? Academic and scientific organizations are little
involved, and the research and design organizations
are extremely slow to produce specifications for gas
filling stations and for conversion of transport
vehicles to use of gas.
? The machine-building ministries are failing?with
respect to both quantity and quality?to produce
the needed equipment (such as compressors, gas
cylinders, and pressure regulators).
? Construction of gas filling stations is lagging, and
where they exist, the stations are operating at only
30 percent of capacity.
? Vehicles and equipment designed for use of gas fuel
are often supplied to regions where there are no gas
filling stations and no plans to build any.
Despite the many factors that complicate new produc-
tion and raise the cost of Soviet gas, meeting growing
energy demand by use of other fuels is even more
complicated and expensive. For example, oil refineries
need to be upgraded increasingly by installation of
catalytic cracking units so that heavy fuel oil released
from various uses by interfuel substitution or conser-
vation measures can be processed into needed light
products such as gasoline and diesel fuel." Expansion
of low-grade coal output calls for development and
widespread introduction of improved combustion
equipment and alternative technologies for the trans-
portation and use of energy derived from coal.
We estimate that total gas distributed for domestic
consumption (excluding fuel for compressors to trans-
port gas via pipelines) will reach about 685 billion m'
(11.1 million barrels per day of oil equivalent) in 1990
(see figure 5). They may be able to increase power
industry gas consumption from about 180 billion m3 in
1985 to as much as 265 billion m' in 1990 by
eliminating constraints on power-plant use of gas
during the winter, installing new gas-fired boilers at
industrial and commercial sites, and converting more
oil- and coal-fired power plants to gas. Beyond 1990,
increasing industrial use of gas will depend heavily on
growth in industrial production and the concomitant
growth in energy use
The outlook for boosting Soviet sales of gas for hard
currency during the next few years is bleak. Increased
gas sales to the West to offset lower earnings from oil
will be difficult to achieve because of sluggish energy
consumption growth in Western Europe and strong
competition from other energy sources, as well as
from oil and gas producers, which have driven down
the price of gas (see inset). Moscow's option of
boosting gas exports would fade if West European oil
and gas prices remain soft well into the 1990s because
of intense interfuel price competition between oil, gas,
and nuclear power (and if development of Norway's
giant Troll gasfield proceeds as planned). However, if
less nuclear power is generated in Western Europe
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Figure 5
USSR: Gas Distributed for Domestic Consumption'
Percent
1985:
510 Billion Cubic Meters
1990:
685 Billion Cubic Meters h
Other (construction,
agriculture, transport,
and loss) 4.1
Households and
service activities
13.7
Electric power
35.3
Industry
46.9
Other (construction,
agriculture,
transport, and loss)
3.4
Households and
service activities
-14.6
Electric power
38.7
Industry
43.4
'Excludes gas used as
compressor-station fuel.
b Estimated.
than is now planned and total energy demand
strengthens, gas exports could again become an ave-
nue for the Soviets to generate substantial incremen-
tal hard currency revenues. Nevertheless, the USSR
will probably remain able to export gas to Western
Europe at costs and selling prices below those of its
competitors
Although contractual deliveries of gas to West Euro-
pean countries could expand to as much as 58 billion
rn3 in 1990, France, West Germany, and Italy have
the option of curtailing these deliveries by up to 10 to
20 percent. This gives them the opportunity to reduce
the amount of gas taken at full price and to purchase
additional volumes in the "spot" market at lower
prices.
Confidential
318319 8.88
Soviet natural gas sales to the West should continue
to expand slowly in periods when gas is priced to
undersell fuel oil. Recently, the Soviets have succeed-
ed in signing up new buyers in Greece, Turkey, Spain,
and Sweden; however, only small volumes are in-
volved in each case. Combined sales to the above
markets will do little to enhance hard currency reve-
nues. The West European market for home heating
oil remains a big potential outlet for natural gas.
Natural gas is also expected to penetrate further into
the industrial heating and thermal-power markets.
Although the Soviets will probably continue to sell the
world's lowest cost gas until well into the next centu-
ry, there are competitors?Norway, the Netherlands,
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Soviet Gas Pricing and Marketing Policies
Although the Kremlin is reported to have halted oil
sales several times during 1986 in the face of falling
prices, it continued to push gas sales. Late that year,
Moscow was selling gas at a contractual price of $70
per thousand m3 or less, drastically lower than the
floor price of about $190 per thousand m3 expected
when the Siberia-to-Western Europe gas export pipe-
line began delivering gas in 1983
During the past few years, a "spot gas market" has
developed in Western Europe. During the summer
months of low seasonal demand for gas, for example,
the Soviets?and to a lesser degree the Dutch?have
pushed extra gas onto the market at prices heavily
discounted from prevailing contract prices. In Decem-
ber 1986, gas was sold on the spot market at prices
only half those in effect for contract sales. The
"rolled-in" average price of all gas purchased by the
various national distribution firms is probably low-
ered by about 10 percent annually as a result of this
strategy. In the summer, large West European buyers
store some of the gas for winter peak needs and
funnel some low-cost gas to domestic fertilizer manu-
facturers.
The issue of price is likely to remain a central issue
in West European gas consumers' choice of suppliers
even though the agreement with Norway to proceed
with development of its Troll deposit assures Norwe-
gian gas a larger role.a Gas prices in Western Europe
are, however, still well above Soviet costs for produc-
ing gas, and Moscow's strongly competitive gas pric-
ing will probably enable it to maintain market share
in the face of rapidly falling energy prices.
a There is, however, continuing ambivalence in West European gas
demand-and-supply relationships. An illustrative case is the late
1986 dispute in the French-Norwegian Troll negotiations. Norway
offered all Troll gas buyers the option of increasing gas deliver-
ies?without paying a premium?to meet surges in demand. But
the terms would have limited the ability of Gaz de France to
adjust contract volumes upward when it renews its contracts with
the USSR and Algeria and would have prohibited France from
increasing spot gas purchases. France held out until the Norwe-
gians dropped the requirement
23
and, to a lesser degree, Algeria?available to fill any
potential gas-supply gap in Western Europe over the
next 15 years
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a
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