WEST EUROPEAN NATURAL GAS REQUIREMENTS: LOOKING TO THE 1990S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00231R000200120002-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 19, 2016
• Document Release Date: February 14, 2007
• Sequence Number: 2
• Publication Date: May 1, 1982
• Content Type: REPORT

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Directorate of Secret
Intelligence
West European
natural Gas Requirements:
Looking to the 1990s
ntelligence Assessment
Secret
GI 82-10108
May 1982
Copy 462
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Directorate of
Intelligence
Looking to the 1990s
West European
Natural Gas Requirements:
Information available as of 13 May 1982
has been used in the preparation of this report.
This assessment was prepared b
11 Energy Division, Office of
Global Issues. Comments and queries are welcome
and may be addressed to the Chief, Energy Markets
Branch, OGI
Secret
GI 82-10108
May 1982
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West European
Natural Gas Requirements:
Looking to the 1990s
Key Judgments Rapid escalation of European gas prices, together with lowered prospects
for economic growth, has transformed the outlook for the West European
gas market. In the past two or three years, many industry analysts have
trimmed their estimates of Western Europe's gas needs in 1990 by more
than 20 percent. In turn, West European countries should have greater
flexibility than they had anticipated in choosing their gas suppliers. Still,
decisions on major new projects must be reached soon in order to obviate
the need for additional purchases of Soviet gas in the 1990s.
Lowered projections of West European gas imports have already affected
contract negotiations for gas supplies from the Soviet Union. As originally
planned, the Yamal gas pipeline was to have carried 670,000 barrels per
day oil equivalent (b/doe). The West Europeans have already reduced that
amount by at least 20 percent and may reduce it further.
Given the economic growth and natural gas pricing patterns that are now
materializing, West European gas consumption will increase slowly
through the 1990s. demand will total 25
only 4.5 million b/ Me by the end o the century. The Soviet Union will be
contending for as large a share of this market as it can get-along with the
Norwegians, Algerians, and other potential suppliers. The market shares of
these producers in the 1990s will depend on development decisions taken by
the importing countries in the next several years.
In choosing suppliers, the Europeans will have to weigh both economic and
security factors. Norway alone could probably supply an additional
670,000 to 830,000 b/doe to Western Europe by the mid-to-late 1990s. To
help make the Norwegian supplies competitive with Soviet gas, however,
the West Europeans will have to offer financing subsidies similar to those
given Moscow on the Yamal project. Even then, the Soviets may have a
pricing edge because Moscow probably will accept relatively low prices to
ensure hard currency earnings.
Secret
GI 82-10108
May 1982
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D
West European
Natural Gas Requirements:
Looking to the 1990s
Recent Trends
West European natural gas consumption rose sharply
during the 1970s, jumping from 2.5 million barrels
per day oil equivalent (b/doe) in 1973 to 3.7 million
b/doe in 1979.' 2 The growth in gas demand ended
abruptly in 1980, when total consumption declined for
the first time after two decades of uninterrupted
Figure 1
Netherlands: Natural Gas Export Pricesa
growth. Demand in the Netherlands and Belgium has
declined especially fast, and the drop has been more
than 10 percent in West Germany. Consumption in
the United Kingdom and Italy has dropped more
slowly. French gas use rose-mainly as a result of
increased industrial gas consumption. Provisional data
indicate that the weak market for gas continued into
1982, with use expected to approximate 3.4 million
b/doe.
The falloff in European gas consumption can be
traced to slow economic growth and sharply higher
gas prices. Industrial production in the European
Community is still 4 percent below the 1980 average.
On the price front, the nominal price of Dutch gas
exports, the basis for most European gas pricing, has
more than doubled since 1978 (figure 1). In 1980 the
Dutch were able to renegotiate prices with most
European clients-linking the price of gas to the price
of low-sulfur fuel oil. In October 1981 the Dutch
increased the price of gas to $4.45 per million
BTU'-nearly 60 percent higher than average 1980
prices (table 1). The cost of gas from the USSR and
elsewhere has followed a similar upward pattern.
Algerian gas prices, for example, rose from near
parity with US-controlled prices in 1978 to almost 2.5
times the US price in 1981.
West Germany
Italy
I I I I I I I I 1
1973 75 77 79 81
Jul
For one thing, economic growth during the balance of
the decade is apt to be slower than was forecast a few
years ago. The recent and continuous rise in natural
gas prices will also influence the level of demand in
the years ahead. Upward pressures on gas prices are
likely to persist throughout the next decade as the
Europeans increasingly shift to greater volumes of
more expensive imported gas. Several analyses of the
issue indicate that most European natural gas use is
Changing Outlook highly responsive to both the level of gas prices and
The decline in West European gas consumption is the cost of gas relative to available alternatives.C
expected to bottom out this year. Once economic
recovery begins, demand is expected to revive, albeit As a result of these factors, all forecasts of West
at a more moderate pace than previously anticipated. European gas requirements are being revised down-
ward (figure 2). The most recent West European
' Data are for 15 West European members of the IEA plus France. government forecasts point to 1990 West European
uropeans usually measure gas quantities in billion cubic meters. requirements of 4.9 million b/doe. These government
One billion cubic meters per year is approximately 16,700 t /doe
' One barrel of crude oil equivalent = 5.62 million BTU.
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Gas prices in Western Europe will increase sharply
during the decade. Cheap indigenous supplies are
dwindling, and new gas reserves-those in the North
Sea, for example-will be costly to develop:
? The British Gas Corporation (BGC) has begun
negotiations for new North Sea supplies. BGC
probably will have to pay more than twice the
average price now being received by suppliers. A UK
Government policy to weaken BGC s role by allow-
ing producers to negotiate directly with purchasers
is expected to result in further increases.
? Dutch prices will also increase; the base price of gas
will rise to near parity with low-sulphur fuel oil
prices by 1983 and will follow an indexation rate of
95 percent with afive-month lag. The Dutch reserve
the right to renegotiate export contracts if a cus-
tomer settles deals at higher prices with other gas
suppliers.
? Norwegian gas will also be expensive because of the
high cost of developing remote North Sea reserves
and the Norwegian policy ofpricing delivered gas
on parity with crude oil.
Despite the increasing linkage between oil and gas
prices, it is unlikely that European gas prices to final
consumers would fall with declining oil prices. The
shift to more expensive gas imports will tend to boost
average prices. Higher Dutch prices have been
matched by the Soviets and have been exceeded by
the Algerians. Following the French-Algerian gas
deal, Gas de France requested a 14 percent rate hike,
and further increases will be necessary. Some Span-
ish customers are paying gas prices equal to crude
prices on a heat-equivalent basis. Imports from non-
European sources-currently less than 15 percent of
total West European gas supplies-are expected to
increase to about 30 percent by 1990.
Gas prices also are being pushed upward by changing
use patterns. As residential gas consumption rises,
storage and distribution capacity must be expanded
to meet larger fluctuations in seasonal demand. New
storage facilities are under construction in West
Germany and France, and Distrigaz in Belgium is
planning to spend $175 million by 1986 to expand
storage capacity to meet winter demand. Ultimately,
the consumer will have to pay for the new facilities.
Moreover, many industrial consumers will have in-
terruptible contracts that raise the real cost of gas to
industry.
projections, however, will almost certainly prove too
high because prices will be substantially higher than
was assumed when the forecasts were made.
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Natural Gas Export Prices, 1982 a
Algeria
5.10
Price of LNG to France, f.o.b.
Netherlands
4.45
Price at Dutch border
Norway
4.25
Price at Emden, c.i.f.
USSR
4.65
Basis of new contract with West
Germany
a Price per million BTUs can be converted to price per barrel crude
oil equivalent by multiplying by 5.62.
est European natural gas consump-
tion will increase by no more than I million b/doe
between now and 1990. As domestic supplies are
depleted or shut in and countries turn increasingly to
imports, import dependence will grow from the less
than 15 percent currently to about 50 percent for all
of Europe by the turn of the century. Although
progressively less gas will be used in electrical genera-
tion, industry will come to rely on gas for about one-
fourth of fuel needs. Continentwide, the residential
sector would be even more heavily dependent on gas.
Demand Close Up
Gas demand in individual countries will grow, but
much less rapidly than government planners have
Figure 2
Western Europe: Changing Projections
of Gas Demand in 1990
Shell
Exxon
IEA
expected to decline substantially. French industrial
gas requirements will increase relatively slowly be-
cause of price competition from electricity and gov-
ernment efforts to promote industrial use of electric
power.
Natural gas requirements in Italy, the Netherlands,
and Austria will also fall well short of what had been
anticipated:
been talking about, because of hi her prices and
slower growth ros ects (table 3)
I West German gas require-
ments by 1990 will reach 940,000 b/doe, up about
125,000 b/doe over this year, primarily on the
strength of increased residential use. Higher prices
will constrain growth in West German industrial use;
gas is now considerably more expensive on a heat-
equivalent basis than coal or residual fuel oil (figure
3). In France, growth in the use of gas will be limited
by competition with electricity, which is in abundant
Italian gas needs will increase by only about
200,000 b/doe between now and 1990; most of this
gain will occur in the residential sector, where gas
still has a large price advantage over alternative
fuels.
? Dutch gas requirements will increase only slightly,
since both the residential and industrial sectors are
already gas intensive.
supply. Moreover, electricity prices in real terms are ? Austrian requirements will also increase by relative-
ly small absolute amounts, reflecting the small size
of the economy.
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Western Europe:
Sectoral Gas Demand
Residential Heating Costsa
Index: Jan 1978 electric heating costs= 100
Light heating oil
Electricity
Although gas use is generally expected to increase in
the residential and industrial sectors, its competitive-
ness in fuel markets can vary substantially among
countries.
Residential
Residential heating demand will be the fastest grow-
ing market for gas in Western Europe. Despite the
rapid increases in gas prices, gas is still the cheapest
means of home heating.
? Italian residential gas consumption should grow
rapidly during the 1980s because oil and electric
Light heating oil heating costs are considerably higher than gas
Electricity heating costs. Southern Italy's gas consumption is
150 i Gas expected to double if additional supplies are
Jan Jun Jan Jun Jan Jun Jan Jun Nov
1978 1979 1980 1981
brought on stream from the newly completed Alge-
rian gas pipeline. Rome expects Italian residential
gas consumption to increase 50 percent by 1990.
? In the United Kingdom, residential costs for gas
heat are only about one-half the cost for oil heat.
As a result, London expects residential gas con-
sumption to increase by more than 30 percent
during the 1980s. The prospect of higher gas prices,
however, suggests that increments in residential use
will probably be lower. The government has already
implemented a plan to raise residential gas prices to
near parity with oil.
? Growth in the French and West German markets
will be moderated by gains in electric heating. In
Electricity West Germany, gas heating costs have risen to near
parity with electricity. In France, gas will encounter
stiff competition from declining real electricity
prices during the decade. Cheap off-peak electricity,
Light heating oil along with the low capital costs of electric heating
Gas with coupled thermal storage, will make electricity
the preferred heating fuel in French homes.
a Cost per BTU of output from furnaces, assuming average heating
efficiencies of 1.0 for electricity, 0.6 for gas, and 0.5 for oil.
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? In Austria the decontrol of oil prices should push
Austrian residential gas consumption upward. Den-
mark is planning to introduce gas heating on a
massive scale as supplies become available from
offshore production. In the Netherlands, where 80
percent of heating needs are now met by gas, there
is little room for further growth.
Industrial
The prospects for gas use in the industrial sector are
mixed. The iron and steel industry probably will
reduce gas consumption by about 60 percent by 1990.
Natural gas consumption in the West European
chemicals industries, on the other hand, is expected
to increase. Several OPEC nations are planning siz-
able investments in petrochemicals during the decade.
If the plans are carried out, the cost advantage of
OPEC producers will slow the growth in the Europe-
an industry, and gas requirements will moderate.
Gas use in industrial boilers-the largest industrial
consumer of energy-should trend upward. A con-
tinuing reluctance to invest in coal-burning equipment
may inhibit a switch to moderately priced imported
coal in this sector, and gas and oil will remain strong
competitors for the future market.
Electricity Generation
Gas consumption by electric utilities will continue to
decline. Impressive gains in cheap nuclear- and coal-
fired output, coupled with sluggish growth in electric-
ity demand, should reduce the sector's gas needs by
125,000 b/doe by 1990. West German utility gas
consumption, the largest in Europe, is projected to
fall by about 100,000 b/doe by 1990. As a group,
European governments are pursuing policies to trim
gas use to less than 5 percent of fuel for electricity
generation by 1990.
Selected West European Countries:
Natural Gas Requirements
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Soviet Gas Contract
Negotiations: Status Report
Gas Austria and the Soviet Union have reached agreement
on a gas delivery contract that will run for 20 years.
The Austrians will take an additional 22,000 b/doe,
with an option for an additional 17,000 b/doe. The
price of the gas, however, has yet to be settled.
Residual fuel oil Austria had been originally negotiating for an addi-
Coal tional 83,000 b/doe. In 1981 the USSR provided
Austria with 30 percent of its total gas imports.
Belgium is negotiating with the Soviets for the deliv-
ery of gas supplies to begin in 1984. To ensure
flexibility of supply, Belgium has decided to limit
Soviet imports to a maximum of 33,000 b/doe, or
one-sixth of their projected 1990 gas consumption.
Brussels expects gas demand to grow by less than 1
percent a year, with 1990 consumption only margin-
ally higher than 1979 use, and may not authorize any
purchases of Soviet gas.
France recently concluded a contract with the Soviet
Union for 140,000 b/doe of natural gas per year. The
contract will run for 25 years, and the price will be
linked to crude oil and oil product prices. The
contract, however, permits French purchases of as
little as 105,000 b/doe each year without Soviet
authorization or penalty. The amount the French
purchase will depend almost entirely on the price of
gas supplies from other available sources.
West Germany, the first country to contract for
Soviet gas from the pipeline, agreed to import
pean utility gas use should be reduced to less than
In other European countries, gas demand is likely to
develop along similar lines, with the strongest growth
occurring in the residential sector and secondarily in
industrial plants. Plans call for a steady reduction in
gas use for electricity generation. Overall, West Euro-
4 percent of total fuel requirements by 1990.
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175,000 b/doe per year at a price linked to oil prices.
The Germans, however, do have an option under the
contract to reduce purchases by up to 20 percent if
the Soviets are noted at discussions in October.
Several energy companies holding shares in Ruhrgas
are pressuring the firm to exercise this option.
Italy and the Soviets reached "technical agreement"
on a gas contract in late January. SNAM, the Italian
gas distributor, and the Soviet gas exporter agreed on
a price and quantity of gas. The Italian Government,
however, has yet to grant final approval. The consid-
erable opposition which exists within the Italian
Government to the Siberian gas deal is based in part
on Socialist desires to conclude the contract with
Algeria first.
The Netherlands was negotiating with the Soviet
Union for 33,000 b/doe of natural gas annually. With
weak industrial demand for gas and the overall
decline in gas consumption, however, it is very likely
that the Dutch will not take any Soviet gas. The
Dutch feel slighted by the Soviets for the apparent
snubbing of Dutch industry when contracts were
awarded for the pipeline.
Spain recently requested that the Soviet Union open
talks on gas supplies. The Spanish Government,
however, has postponed the talks until at least July,
arguing that political and economic considerations
indicate the need for more detailed study. At present,
Impact on Pipeline Negotiations
These more realistic assessments of future gas re-
quirements are having some impact on the Soviet gas
deal. Most West European countries have scaled back
their proposed purchases, and some are seeking re-
duced volumes in present contract negotiations. As a
result, the West European countries have reduced
their planned Yamal pipeline purchases to 520,000
b/doe or less. Originally, the pipeline was to have
Spain plans to import 33,000 b/doe per year. The
price must compete favorably with the $4.50/million
BTU Spain now pays for liquefied natural gas from
Algeria and Libya. Madrid expects gas consumption
to increase sharply, primarily for use in the chemicals
industries and as a boiler fuel. For gas use to
increase, however, an extensive infrastructure must
be developed.
Greece is also interested in purchasing Soviet gas.
Preliminary talks have just been concluded in Mos-
cow for a possible supply of 33,000 b/doe a year for
seven years. However, an entire gas infrastructure
must be built if gas is to become an important energy
source in Greece. At present, Greece consumes no
natural gas.
Switzerland plans to import Soviet gas via West
Germany. The Swiss and the West German utility,
Ruhrgas, have agreed in principle on a delivery
contract. The Swiss would purchase 8,000 b/doe
annually, with an option to take another 3,000 b/doe.
Deliveries would begin in 1988. The Swiss purchases,
however, would require Ruhrgas to sign an additional
contract with the Soviet Union since the original West
German-Soviet contract prohibits Ruhrgas from
exporting Soviet gas.
provided an additional 670,000 b/doe. Including pur-
chases under previous deals, West Europeans could be
taking nearly 1 million b/doe of Soviet gas.
Even with this scaling back, continental Europe ` will
depend on the USSR for 25 to 30 percent of total
1990 gas requirements if the pipeline proceeds as now
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planned. For several countries, levels of dependence
will be higher; Italy and West Germany, for example,
will depend on the Soviets for 40 percent of their total
gas requirements by the end of the decade.
Requirements Beyond 1990
Beyond 1990, West European gas requirements will
robabl continue to rise in absolute terms and,
gas will increase its
share of total energy consumption. Demand projec-
tions for the 1990 to 2000 period, however, are not
especially reliable because of the obvious uncertain-
ties associated with such long-term projections.
North Sea Options. The Netherlands, currently Eu-
rope's largest gas supplier, would be the most reliable
and economical source of additional gas. Under cur-
rent government policies designed to conserve gas
resources, the volume of Dutch gas available for
export in the late 1990s will dwindle to less than
170,000 b/doe. This situation could change:
? Gas deliveries under existing contracts-due to
phase out in the early 1990s-can probably be
stretched through the mid-1990s by deferring gas
deliveries from earlier years when available supplies
exceed demand.
Western
Europe will need to contract for additional supplies
from the Soviet Union or elsewhere for the period
after 1990 (figure 4). With demand increasing and
domestic production expected to fall, especially in the
United Kingdom, the policy of the Netherlands not to
renew contracts for gas exports confronts the other
Europeans with a widening gas supply gap of 1.1 to
1.5 million b/doe in the year 2000. Although new
supplies must be lined up fairly soon, the next two to
three years offer a window of opportunity during
which projects could be launched that would obviate
the need for additional European purchases of Soviet
financing. If West Europeans continue to offer subsi-
dized financing to Moscow, for example, they are
likely to end up with a second Yamal pipeline, even
though alternative supplies could be obtained. In the
case of Yamal, the subsidy in effect shaved 3 to 5
percentage points from market interest rates Moscow
would otherwise have had to pay. This in turn cut 10
to 15 percent from the estimated cost of delivering gas
to Europe. If alternatives to Soviet gas are to be
developed, similar interest rate subsidies must be
offered for these alternative projects; or, at a mini-
mum, their competitive position will have to be pro-
tected by not providing subsidies to the USSR.
? Given the size of Dutch gas reserves and the
budgetary pressures confronting The Hague, we
believe new export contracts might be authorized.
Norwegian gas offers a secure but costly alternative
to Soviet gas. Norway could potentially supply an
additional. 670,000 to 830,000 b/doe:
? Norway has huge gas reserves-at this time about
18.0 billion barrels oil equivalent-and the govern-
ment believes there is considerable potential to add
to this total.
Norway's new conservative government has already
taken steps to accelerate resource development;
however, additional measures would be required to
reach full export potential.
gas in the 1990s. These new supplies might accou ?
for 850,000 to 1.3 million b/doe by the year 2000.
Maximizing non-Soviet supplies will depend on as-
sessments of the relative costs of alternative gas
supplies. This in turn will depend heavily on assump-
tions about the interest rates charged for project
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Figure 4
Natural Gas Supply and Demanda
Supply and Demand Forecast
Billion cubic meters
200
Other contracted
supplies
Soviet Urengoy
Indigenous production
and contracted supplies
Potential New Gas Supplies
Billion cubic meters
I I I
Demand
Netherlands
Other contracted 50
supplies
Soviet Urengoy
Maximum 40
-Minimum
Indigenous production
and contracted supplies
30 30
Soviet existing
1980 1990 2000 1980 1990 2000
aln some years in the 1980s, available gas supplies under existing contracts b Western Europe excluding the United Kingdom.
may excede demand. In those years, some countries will accept deliveries of
less than full contracted volume.
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Figure 4 (continued)
Supply and Demand Forecast Potential New Gas Supplies
Billion cubic meters Billion cubic meters
Demand
Other contracted
supplies
Soviet Urengoy
Maximum
Minimum
10 10
- Soviet existing
I Indigenous
1980 1990 2000 1980 1990 2000
Other contracted 30
supplies
{
Soviet Urengoy 20
Soviet existing
10
Indigenous
1980 1990 2000
u
Potential supply gap
Demand
LNG
Netherlands
Indigenous production
and contracted supplies
Demand
Netherlands
Norway
Algeria
Indigenous production
and contracted supplies
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? If a triangular gas deal can be arranged-using the
United Kingdom as a conduit for delivering gas to
the Continent-substantial savings of time and
money could be realized in delivering 170,000 to
250,000 b/doe of gas to Europe beginning in the
early 1990s.
? Given the high cost of developing Norway's gas-
fields and building major trunklines to the Conti-
nent, large additional supplies of Norwegian gas
would probably cost 15 to 20 percent more than
Soviet gas if no interest rate subsidies were offered
for the Norwegian project
? Although the original proposal for Nigeria's Bonny
LNG project has collapsed, a scaled-down version of
the project-to deliver 135,000 b/doe-might be
completed.
? The Cameroon's Kribi LNG project can supply
115,000 b/doe in the early 1990s if political and
institutional problems can be overcome.
? Qatar has huge gas reserves in its north gasfield and
might supply 135,000 b/doe late in the 1990s.[
Aside from these options, the West Europeans could
make greater use of coal to meet their 1990 to 2000
energy requirements. Reasonably priced steam coal is
available in virtually any quantity from the United
States, Australia, and other exporting countries. Mar-
ket studies show that the use of imported coal will
grow in the West European utility and industrial
sectors. In the residential sector, more direct use of
coal does not seem likely in the absence of some
technological improvements. Coal can provide a
greater portion of residential energy needs indirectly
through electricity from central generating plants and
possibly later through the Production of synthetic
or liquids from coal.
African/Middle East Options. Algerian gas can be
produced and delivered to Europe at well below the
cost of Norwegian gas. An additional 80,000 to
100,000 b/doe could probably be delivered through
existing Trans-Mediterranean pipelines and up to
250,000 b/doe through a new pipeline to Spain. Field
development costs are relatively low, and the feasibil-
ity of undersea pipeline connections to Western Eu-
rope has been proved. However, Algeria's militant
pricing policy and its unilateral suspension of gas
deliveries to France and the United States in 1980
label it as a potentially unreliable supplier.
Proposed gas pipelines from Africa or the Middle
East to Western Europe are probably not politically or
economically practical at this juncture. Any such
pipeline would probably cross several unstable coun-
tries and could cost from $30 to $60 billion. Supplies
from a Trans-African pipeline, carrying gas from
Nigeria and Cameroon to Europe, would be subject to
disruption in any of the countries crossed and would
probably face high transit fees. Given the lowering
projections of demand, it will be difficult to line u
European support for these systems.
LNG and Coal Options. All the LNG projects under
consideration to supply Western Europe would prob-
ably be expensive because of high delivery costs. Some
of the projects must overcome political uncertainties:
? Canada could supply 80,000 b/doe of gas to Europe
beginning in 1990 if technologies for exporting
LNG from arctic waters are proved.
Security of Supply Implications
The West Europeans are certainly aware of the
dangers of becoming overly dependent on the Soviet
Union for imported gas and probably would be willing
to pay a premium for security. The French and West
Germans have indicated this willingness in talks with
the Norwegians. If West European governments take
advantage of the options available, they can substan-
tially reduce their dependence on Soviet gas and, in
turn, reduce the amount of hard currency the USSR
will earn from gas exports. Possible patterns of gas
supply and demand during the next two decades
indicate that in the case of Italy enough alternative
gas can be found to reduce dependence on Soviet
supplies from about 40 percent in 1990 to only about
one-third in the year 2000. In the case of France,
dependence could be reduced to 25 to 30 percent; and
for continental Europe as a whole, dependence would
not exceed 25 percent. If, on the other hand, the West
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Europeans agree to a second Yamal pipeline to help
fill the supply gap from 1990 to 2000 with Soviet gas,
the level of dependence on the USSR would increase
greatly. For continental Europe as a whole, depend-
ence on Soviet gas would exceed 35 percent by the
mid-1990s, assuming that a second Yamal line
matches the first in capacity.
The factors that led the Soviets to conclude the first
Siberian gas deal-huge gas reserves and continued
needs for hard currency earnings and technology-
will probably eventually lead to a proposal for a
second pipeline. Judging by Soviet behavior in negoti-
ating the first Yamal pipeline, additional gas supplies
would be offered at a base price near the low end of
the market. By accepting a relatively low price initial-
ly, the Soviets would increase their market penetra-
tion and secure hard currency earnings. This move
would partially counteract an expected falloff in
earnings resulting from declining oil exports in the
1990s. If future gas prices were also linked to oil
prices, the Soviets could expect to increase earnings
substantially over the following years of long-term gas
contracts
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Approved For Release 2007/02/16: CIA-RDP83B00231 R000200120002-8