THE SOVIET GAS PIPELINE IN PERSPECTIVE

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• Content Type: SNIE

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Director of
Intelligence
The Soviet Gas Pipeline
in Perspective
SNIE 3-11/2-82
21 September 1982
COPY 010
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SNIE 3-11/2-82
THE SOVIET GAS PIPELINE
IN PERSPECTIVE
Information available as of 16 September 1982 was
used in the preparation of this Estimate.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State, the Treasury, and
Energy.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
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CONTENTS
SCOPE NOTE ............................................................................................................ 1
KEY JUDGMENTS .................................................................................................... 3
DISCUSSION .............................................................................................................. 9
II. THE ROLE OF EAST-WEST TRADE ..................................................... 9
A. East-West Economic Interaction ........................................................... 9
B. Profile of Soviet Trade ............................................................................ 9
C. Soviet Gains From Trade ....................................................................... 11
D. Consequences for Soviet Military Power .............................................. 11
E. The Hard Currency Squeeze ................................................................. 13
III. OIL AND GAS: FUTURE KEY TO IMPORTS ........................................ 16
A. The Soviet Energy Problem ................................................................... 16
B. Importance of the Export Pipeline ....................................................... 17
C. Alternative Energy Sources .................................................................... 20
D. Soviet Dependence on Western Oil Equipment .................................. 23
IV. OPPORTUNITIES FOR WESTERN GOVERNMENT POLICY........... 24
A. Possible Restrictions ................................................................................ 24
B. Impact on the Gas Export Pipeline ....................................................... 24
C. Impact on Oil Development .................................................................. 25
D. Impact on Future Gas Export Deals ..................................................... 25
E. Impact on the Soviet Economy and Military Capability ..................... 26
V. WEST EUROPEAN PERSPECTIVES ....................................................... 28
A. Attitudes on East-West Trade and Trade Sanctions ............................ 28
B. The Pipeline Deal in West European Eyes ........................................... 28
C. Possible Areas of Compromise ............................................................... 30
ANNEX: SOVIET DEPENDENCE ON US AND WESTERN OIL AND GAS
EQUIPMENT ......................................................................................................... A-1
II
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SCOPE NOTE
This Special National Intelligence Estimate reviews the degree to
which Western trade, technology, and energy relationships have assist-
ed-and can in the future assist-the USSR to increase its military
strength and impose unwanted burdens on the Western nations. The
Estimate also assesses the potential impact on the USSR of the following
courses of action:
- A strengthening of COCOM to assure that militarily sensitive
technology is withheld from the Soviets.
- Avoidance of gas imports by the Europeans beyond the imports
already agreed to as part of the Soviet export pipeline project.
- An embargo on some energy equipment and technology.
- An end to subsidized credits.
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KEY JUDGMENTS
1. The USSR has used imports from the West to enhance its
military capabilities:
- By obtaining goods and technology, legally and illegally, that
contribute directly to the production and technical sophistica-
tion of weapon systems.
- By expanding the base of industries of particular importance to
military production.
- And, more generally, by easing economic problems, thereby
reducing the burden of defense.
2. The rapid increase in Soviet imports from the West in the 1970s
was made possible by large windfall gains in export earnings due to the
surge in oil prices and the willingness of Western countries to provide
large credits, most of which were government guaranteed. The USSR is
encountering growing economic difficulties, which will make it more
difficult for Moscow to increase its imports from the West in the future.
The outlook for most Soviet exports, including oil, is not favorable, and
Western banks are unwilling to extend new long-term credits without
government guarantees.
3. Only the increase in gas exports through the Siberia-to-Western
Europe pipeline will prevent a marked decline in Soviet hard currency
imports in the 1980s. The USSR almost certainly will be able to meet
scheduled deliveries of gas through the pipeline without diverting Soviet
equipment from domestic uses. Enough equipment has already been
delivered, or soon will be, to enable the USSR to meet likely West
European demand for gas until the late 1980s. By then, Moscow will
probably be able to produce enough modern turbines and compressors
to bring the line to full capacity, or will have found new sources of
equipment for any it may have lost as a result of US actions. Meeting
gas delivery commitments and becoming self-sufficient in turbines and
compressors will impose costs on the Soviets in inefficiencies and shifts
in resources and effort.
4. While gas exports are the most promising future source of hard
currency, oil exports still account for some 50 percent of Soviet export
earnings, and it is important for Moscow to minimize their future
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decline. The USSR depends on the West for specialized oil exploration,
drilling, pumping, and processing equipment. As its deposits of high-
quality, accessible oil are depleted, the Soviets are turning to more
remote oil and gas fields and more costly exploitation techniques. But
they lag badly behind the West in the necessary technology. Without
any access to Western equipment, the adverse impact on Soviet oil
production could be as high as 10 percent of output by 1990.
5. Moscow's best hope of improving its strained hard currency
position in the longer run is to secure the cooperation of Western
Europe in building large new pipelines for the delivery of additional
natural gas in the late 1980s or in the 1990s. With enormous gas reserves
and a powerful incentive to earn more hard currency, Moscow is
prepared to sell as much gas as the West Europeans will accept. There is
potential uncovered gas demand in Western Europe to fill not only the
Siberia-to-Western Europe pipeline now being built, but also a second
and third strand during the 1990s. Development of these large gas
projects currently requires Western pipe, equipment, and credit and
markets as part of a package deal, although Soviet need for these
Western products will diminish as Moscow develops its domestic gas
equipment industry. Alternative sources of gas exist, notably in the
Norwegian sector of the North Sea and in North Africa, although they
are in general relatively costly and some are considered insecure.
6. It will be difficult to enlist Allied cooperation in restricting
trade with the USSR. Beyond economic incentives, there are political
considerations that fuel the West Europeans' reluctance to accept
restrictions on trade and credits to the USSR. These include:
- Their desire to restore the detente climate in Europe and to
avoid exacerbating East-West strains.
- Their desire to maintain access to Eastern Europe.
- Their belief that economic and other ties with the USSR will in-
fluence Soviet behavior.
These political considerations, combined with the economic incentive,
continue to limit West European cooperation with the United States in
restricting East-West trade.
7. The crux of the problem lies in developing with the West
European countries a common understanding of the strategic implica-
tions of East-West trade. Such an understanding has been notably
absent, but the chances of achieving it may be better now that the West
Europeans are becoming more aware of the issues and the depth of US
0
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concern. Allied leaders have asserted that they will not conduct
economic warfare against the Soviet Union. But adequate analysis and
discussion can lead to a common conclusion:
- That deficiencies in security policies among the Western Allies
have resulted in Soviet acquisition of militarily important
technology, financial subsidies, and, potentially, an important
role in Western Europe's energy supply.
- That taking steps to withhold these benefits is merely prudent
security policy which Allies owe to each other, and can be seen
as self-protection rather than economic warfare.
8. Accordingly, Western countries might be willing to cooperate
- Developing and implementing broader and tighter COCOM
restrictions.
- Agreeing to stricter limits on the terms and volume of govern-
ment-supported credits.
- Developing other energy sources as an alternative to additional
Soviet pipelines.
9. Making Western military-related technology, subsidized credit,
and locked-in gas markets available helps the Soviet military buildup.
Western governments would then be under increased pressure to raise
defense costs, a move that requires heavy taxes, sometimes leads to
deficit spending, and contributes to inflation and high interest rates.
The United States is now committing some 6 percent of its economic ef-
fort and the European Allies some 4 percent of theirs to defend against
a Soviet military threat that consumes 14 percent or more of their GNP.
At the same time Western leaders are asking their citizens to carry a
heavy defense burden they are pursuing policies that help the Soviets
maintain a threat that adds to this burden.
10. This Estimate includes analysis of the potential impact of
Western actions, including actions by Western Europe and Japan, on
Soviet economic and military programs:
- The reduced availability of hard currency and energy would
make more difficult the decisions Moscow must make among
key priorities in the 1980s-sustaining growth in military
programs, feeding the population, modernizing the civilian
economy, supporting its East European clients, and expanding
(or maintaining) its overseas involvements.
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- While the cumulative impact of Western actions would clearly
increase pressures on Soviet decisionmakers, we cannot judge
how they would choose to spread such losses throughout the
economy.
- Because economic growth will be slow through the 1980s,
annual additions to national output will be too small to simulta-
neously meet the incremental demands that planners are plac-
ing on the domestic economy. Even now, stagnation in the
production of key industrial materials is retarding growth in
machinery output-the source of military hardware, investment
goods, and consumer durables.
Shortfalls in Soviet hard currency earnings due to Western
actions probably would force further cuts in imports of machin-
ery and equipment. Moscow fears that reductions in food
imports would cause popular unrest and wants to avoid the
bottlenecks that would be caused by cutting imports of industri-
al materials, such as steel.
In the longer term, cuts in machinery imports would retard
progress in modernizing a number of industrial sectors-steel,
machine building, oil refining, robotics, microelectronics, trans-
portation, and construction equipment-at a time when Mos-
cow is counting on a strategy of limited investment growth and
relying instead on productivity growth.
Placing controls on energy-related equipment and technology
would aggravate civilian industrial bottlenecks and, therefore,
might cause civilian encroachment on defense production, such
as a reallocation of some military-oriented metallurgical and
machine-building facilities to produce the embargoed oil and
gas equipment.
The combination of enhanced COCOM controls and foreign
exchange shortfalls would raise the cost of Soviet military
modernization while at the same time weakening the industrial
base for military production.
11. The relative impact of Western economic measures on the
USSR can be estimated only as general orders of magnitude, as follows:
- Eschewing future gas projects-up to $10 billion a year in the
1990s.
- Denying all oil equipment and technology-about $10 billion a
year for several years but then declining.
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- Eliminating interest subsidies-less than $500 million a year.
In the long run, tighter COCOM restrictions on militarily sensitive
technology (including technology and equipment that indirectly con-
tributes to significant improvements in weapon systems) would perhaps
be the most valuable action for the West. Such action would retard
major improvements in Soviet weaponry, which the West would be
forced to counter. While the dollar value of such action is difficult to es-
timate, the savings in terms of Western spending for defense annually
would probably come to billions of dollars.
12. Moscow has the means to react to Western pressure by giving
defense needs an even greater priority than at present and by pursuing
a more truculent foreign policy. The Soviets meet their fundamental
military requirements from their own large industrial base. Military
programs, moreover, have great momentum and political support; they
would not easily be scaled back, although the rate of modernization
could be slowed. Even so, Moscow could not escape the reality that its
basic choices between military and economic programs would become
more difficult, at a time when a change in leadership might also make
those choices less predictable.
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DISCUSSION
1. THE SOVIET ECONOMY:
THE TIME OF TROUBLES
1. The USSR is encountering increasingly severe
and fundamental economic difficulties. Its rate of
economic growth has slowed to less than 2 percent and
the chances of any substantial improvement are slim.
The causes of this slowdown are basically homegrown.
Some of these-a drastic reduction in the growth of
population of working age and the increasing diffi-
culty of extracting and transporting energy and other
resources-were inevitable. Other causes of the slow-
down, however, appear to have their roots in the
Soviet bureaucratic, command-type system, which
seems to encounter great difficulty in coping with the
increasingly sophisticated problems of a modern econ-
omy, and in the negative reaction of Soviet workers to
what they consider a weakening of their standard of
living and inadequate rewards for hard work and
initiative within the system.
2. Although major systemic reforms could improve
Soviet economic performance, at least in the long
term, none are in the offing because Soviet leaders and
party functionaries are unwilling to take any chances
with an erosion of their political power and bureau-
cratic control. Events in Poland have reinforced this
fear. Reform attempts have basically taken the form of
bureaucratic reorganizations that put new clothes on
old problems. Any substantial political change after
Brezhnev is more likely to be in the direction of
tightening controls and labor discipline than toward
liberalization.
3. The slowdown in Soviet economic growth has
been characterized by a dramatic decline in the
productivity of investment and a much slower growth
of labor productivity. Moreover, with some important
sectors and industries, notably steel and grain, actually
experiencing an absolute decline in output, major
shortages have developed. Given an unwillingness to
undertake major economic reforms, the Soviet leader-
ship has used imports from the West to ease its
problems and will continue to do so.
4. Throughout its history the USSR has exploited
economic interaction with the West both legally and
illegally to expand its economic base, raise the techno-
logical level of its industry, relieve industrial bottle-
necks, increase domestic food supplies, improve its
military capability, and lessen the burden of defense.
This exploitation reached its zenith in the 1970s as
Soviet postwar productivity gains slowed and Moscow
increasingly turned to the West for equipment and
technology to spur its industry, and for grain to offset
shortfalls in its inefficient farm sector. For its part, the
West encouraged expansion of East-West trade by
loosening export controls and expanding the availabil-
ity of credit, often at subsidized interest rates. More-
over, the Soviets supplemented legal trade acquisitions
of Western goods with a well-organized and centrally
directed clandestine acquisitions program. The Soviet
intelligence services and their East European surro-
gates played a major role in acquiring US and other
Western military technology, embargoed equipment,
and manufacturing technology for Soviet military and
defense industrial needs.'
5. During the 1970s the value of Soviet hard cur-
rency imports from the West increased more than
ninefold in current prices (see figure 1) and more than
tripled in constant prices. Although still small in
relation to gross national product (less than 4 to 5
percent of GNP), Soviet hard currency imports-
especially machinery, ferrous metals, and foodstuffs-
have played a critical role in many high-priority
industrial, agricultural, and military programs, includ-
ing those for raising energy production and meat
' For a description of this activity and its contribution to Soviet
acquisition of Western technology, see NI IIM 82-10006, The
Technolo Acquisition Efforts of the Soviet Intelligence Services,
June 1981 1
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Figure 1
USSR: Hard Currency Imports, by Type
Machinery and
Equipment
Agricultural
Commodities
0 1971 72 73 74 75 76 77 78 79 80 81
Figure 2
USSR: Hard Currency Earnings, by Source
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consumption and improving missile performance.
Moscow's ability to sustain growing imports of West-
ern capital goods and foodstuffs was boosted sharply
by the runup in prices for oil and gold-two key
sources of foreign exchange (see figure 2)-and a
burgeoning market in the Third World for Soviet
arms, the USSR's highest quality manufactu'ed goods.
Spurred by overtures from Western businessmen hop-
ing to sell equipment and technology from underuti-
lized capital goods industries, Moscow successfully
negotiated a series of buyback deals with the West,
involving purchases of Western plant and equipment
financed at favorable rates and long-term maturities.
As payment for the equipment, Moscow was to sell
raw materials and semimanufactures at prices that
generally reflected rising rates of inflation.
6. Imports from the West have contributed in a
number of important ways to Soviet economic
capabilities:'
- In the 1970s, imported chemical equipment,
accounting for about one-third of all West-
ern machinery purchased by the Soviets,
was largely responsible for doubling the
output of ammonia, nitrogen fertilizer, and
plastics and for tripling synthetic fiber
production.
- The Soviets could never have accomplished
their ambitious 15-year program of modern-
ization and expansion in the motor vehicle
industry without Western help. The Fiat-
equipped VAZ plant, for example, produced
one-half of all Soviet passenger cars when it
came fully on stream in 1975; and the Kama
River truck plant, which is based almost
exclusively on Western equipment and tech-
nology, now supplies nearly 50 percent of
Soviet output of heavy trucks.
- Grain imports have averaged about 25 mil-
lion tons per year since 1975. Without West-
ern grain, Soviet meat consumption would
have increased less in the early 1970s, and
2 For a more extensive survey of these gains, see CIA Intelligence
Assessment SOV 82-10012, SoDependence on the
West (Appendix), January 19894
the fall in per capita consumption of meat in
the late 1970s would have been far worse.
- Large computer systems and minicomputers
of Western origin have been imported in
large numbers-1,300 systems since 1972-
because they (a) have capabilities that the
Soviets cannot match, (b) use complex soft-
ware that the Soviets have not developed,
and (c) often are backed up by expert
training and support that the Soviets cannot
duplicate.
- Because of Soviet deficiencies in drill bits,
pumps, and pipeline equipment, the USSR
bought about $5 billion worth of oil and gas
equipment alone in the 1970s, but these
purchases have now largely ceased. Sub-
mersible pumps purchased from the United
States, for example, may have added as
much as 2 million barrels a day of capacity
to Soviet oil production in recent years.
Similarly, the Soviet offshore exploration
effort would not be nearly as far along as it
is without access to Western equipment and
know-how. Meanwhile, West Germany and
Japan have provided most of the large-
diameter pipe needed for gas pipeline
construction.
D. Consequences for Soviet Military Power
7. Direct Benefits to Military Weavon Systems.
Acquisition of goods and technology from the West,
either by legal or illegal means, enhances Soviet
military programs in two principal ways: by making
available specific technologies that permit improve-
ments in weapon and military support systems and the
efficiency of military and civilian production technol-
ogy and by providing economic gains from trade that
relieve bottlenecks and improve the efficiency of the
economy and thereby reduce the burden of defense.
Soviet military power is based fundamentally on the
large size and diversity of the Soviet economy and the
breadth of the Soviet technical and scientific base, on
Soviet success in acquiring sophisticated technology in
the West, and on the longstanding preferred status of
the military sector.
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8. It has only been through an extraordinary alloca-
tion of resources to defense that the Soviets have
attained their present military power. Soviet weapons
are designed to minimize the requirements for tech-
nologies in which the USSR is deficient, but the Soviets
have turned to legal and illegal acquisitions of Western
technologies to make up for domestic shortcomings.
9. The Soviet armed forces are being modernized in
nearly every category of weapon system. Soviet mili-
tary hardware, which was at one time distinguished
for its rugged simplicity, has been qualitatively im-
proved until it is in some instances the technological
equal of-if not superior to-military hardware pro-
duced in the West. Without Western technology,
modernization and qualitative improvement of Soviet
military equipment would have proceeded at a slower
pace.
10. Through the acquisitions of Western technology
and hardware, the Soviets have been able to satisfy
certain R&D and production objectives:
- The reduction of engineering risk by following or
copying proven Western designs.
- The reduction of R&D time by several years
through the use of Western designs and technol-
ogy and equipment.
- The incorporation of countermeasures early in
the Soviet weapon development process.
In addition, the Soviets have been able to upgrade
critical industrial sectors such as computers, microelec-
tronics, and metallurgy, as well as to modernize
Warsaw Pact industrial manufacturing capabilities.
This has also helped to limit the rise in military
production costs.
11. The Soviets commonly acquire even directly
military-related hardware under COCOM license, os-
tensibly for commercial purposes. For example, ad-
vanced acoustic signal analyzers, legally purchased
from Denmark in the middle 1970s, if used on the
Soviets' own submarines, could significantly upgrade
their tactical passive sonar capability to detect and
classify Western submarines. In addition, two huge
floating drydocks purchased from the West for civilian
use have been diverted to strategic and tactical naval
shipbuilding and repair.
12. Legal purchases of Western machinery, equip-
ment, and manufacturing technologies have found a
wide range of applications in Soviet weapons produc-
tion. (See inset below.)
Soviet Military Uses of Legal Imports
- US-origin gear-cutting machines were used to
produce military trucks, wheeled armored vehi-
cles, and components for missile transporters.
- Western gear-cutting machines were used in the
development of the latest Soviet military heavy-
lift helicopter, the MI-26.
- High-technology automatic lathes, milling ma-
chines, and other machine tools from Sweden and
West Germany and two large rolling mills, one
Japanese and one West German, are probably
used in the construction of titanium hulls for the
A-class nuclear attack submarine, the world's
fastest and deepest diving submarine.
- US-origin grinding machines were used in manu-
facturing small, high-precision bearings suitable
for ballistic missile guidance operation.
- An electron beam drilling device of West Ger-
man origin was used to improve the quality of
Soviet turbine blades.
- Austrian-origin hot and cold rotary forges (some
26 in all) were used to produce artillery tubes and
small-arms barrels.
- US blind riveting and French aerospace welding
technology equipment was used to produce ad-
vanced Soviet interceptor aircraft.
- Western tungsten are welders were used to fabri-
cate armor plate for Soviet tanks.
- US technology acquired for the Cheboksary trac-
tor plant was used to make a new 12-cylinder
tank engine.
13. The Soviets have historically relied on clandes-
tine acquisitions of foreign technology to provide some
of the most critical inputs needed in the development
of their weapon systems. (See inset on next page.)
Although they pay high premiums for illegal imports,
the total value is small relative to total hard currency
imports of $30 billion.
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Soviet Military Uses of Illegal Imports
- Information on the US Redeye shoulder-fired
surface-to-air missile facilitated the development
of the Soviet SA-7. During the prototype con-
struction of the SA-7, bearings acquired from
Japan were used pending the subsequent develop-
ment of indigenous bearings of suitable quality.
- In the mid-1960s the Soviets copied the Texas
Instruments 7400 series monolithic integrated cir-
cuit (IC) to produce the series 155 (Logika 2) IC.
This IC was then used to develop the ES-1030
computer, whose design and architecture were
copied from the IBM-360/40. The ES-1030 has
been used in a number of military applications.
- Materials acquired on the US TACAN navigation
system were adapted for use in the MIG-25
Foxbat navigation system.
- Data acquired on the US C-5 transport have
apparently been used in the development of the
new AN-400 heavy transport under development
at the Antonov Design Bureau in Kiev.
14. Other Benefits to Military Programs. West-
ern technology and equipment also enable the Soviets
to improve industries that indirectly support weapon
developments. Even though the defense industrial
ministries perform the bulk of weapons development
and production, they rely on the nondefense industries
to supply specific products such as missile-handling
equipment, and to supply most of the basic tools of
weapons development and production-machine
tools, sensors, and computer software. Because most
defense industries also produce for the civilian econo-
my, imports of Western machinery for the civilian
sector also help to prevent greater encroachment of
civilian requirements on defense production facilities.
15. Traditionally the Soviets have lagged behind the
West in their ability to produce modern electronic
devices-more so perhaps than in any other area of
military technology. In particular, they have not been
able to produce the highly sophisticated precision
equipment they have needed in volume, and their
R&D methods are too ponderous and react too slowly
to stay current in a technology that moves with
expressway speed.
16. As a result, the Soviets undertook a major effort
in the early 1970s to obtain Western equipment for
the manufacture of integrated circuits. They have now
acquired several hundred million dollars' worth of
machinery that, if combined, would enable them to
equip 16 to 20 medium-size production lines capable
of producing advanced devices, including large-scale
integrated circuitry with sufficient capacity to meet
all current Soviet military requirements. This produc-
tion base is known to be used to support development
of military equipment such as strategic missiles, anti-
ballistic missile systems, sensors and weapons for anti-
submarine warfare, and computers for military appli-
cations. It is also a key technological capability for
continued advances in Soviet military electronics.
17. Western manufacturing technologies have
helped the USSR produce materials with critical mili-
tary applications, especially in metallurgy. A US firm
built a turnkey plant to produce rock-drill bits that
included extensive tungsten-based powder metallurgy
technology. The US equipment and expertise provided
have enhanced the Soviets' ability to make the tung-
sten powders needed to produce new and more lethal
tungsten-alloy penetrators for their kinetic-energy,
antitank projectiles. Sweden, Japan, and West Germa-
ny also have sold the Soviets powder metallurgy
pressing technology similar to that used by Western
manufacturers to make tungsten-alloy penetrators.
The French firm Creusot-Loire is helping to build a
massive steel plant in Novolipetsk, which will produce
about 7 million tons of specialty steel when operating
at full capacity in 1986. Much of the plant's output
will be electroslag and vacuum-arc remelt steels of the
kind used in submarine hulls, artillery tubes, and tank
armor.
E. The Hard Currency Squeeze
18. At a time when Soviet economic difficulties are
growing, the USSR's hard currency earnings are de-
clining. In the past few years, Moscow has used its
hard currency earnings primarily to buy the goods
necessary to cover major domestic shortages. As a
result of four bad grain crops in succession, food
imports have risen to about $12 billion, or about 40
percent of total hard currency imports, reflecting the
high priority the Soviet Government gives to at least
maintaining supplies of major foods in the consumer
market. There has also been a large expansion of steel
imports, especially large-diameter pipe and special
steels, because the Soviet steel industry lacks the
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diversity to support all the major Soviet economic and
military programs. These priority needs for hard
currency imports have squeezed Soviet imports of
Western machinery and equipment, which have fallen
by about 40 percent in constant prices since 1977, with
most of the decline having occurred in the past two
years.
19. During the past 18 months or so, the USSR has
experienced a severe foreign exchange squeeze as a
result of a soft oil market, low prices for other Soviet
export commodities, and unexpected expenditures on
imported grain and on aid to Poland. Although the
cyclical causes of this deterioration are only tempo-
rary, the longer term outlook for a rise in Soviet hard
currency earnings in the 1980s is poor. Unlike the
1970s, when enormous oil price increases financed the
bulk of the threefold increase in the volume of Soviet
hard currency imports, the outlook for oil prices for at
least several years in the 1980s is for a decline in real
terms, if not in nominal terms. At the same time, the
volume of Soviet oil exports is likely to be squeezed by
at least slow growth in domestic consumption coupled
with stagnant or declining production. Market condi-
tions for most other Soviet exports do not look very
promising either. In contrast to the 1970s, therefore,
likely market conditions in the 1980s point to a decline
in the purchasing power of Soviet hard currency
exports. (See inset below.)
Prospects for Major Hard Currency Exports
- The increase in gas exports now in train will
essentially constitute an offset to the likely de-
cline in oil exports.
- The dramatic decline of oil revenues of Middle
East producers such as Libya makes it unlikely
that some major Soviet arms clients will be able to
continue paying in hard currency.
- Exports of timber and wood products are
squeezed between rising domestic consumption
and the rising costs of exploiting timber in in-
creasingly remote areas.
- Exports of minerals (platinum-group metals, nick-
el, copper, aluminum, chromite, manganese, dia-
monds, lead, and zinc) present a mixed picture-
some trending up, others down.
- Exports of Soviet manufacturers are not finding
ready acceptance in Western markets, and Mos-
cow has not made the large investment required
in quality control and marketing to make rapid
progress.
20. Role of Western Credit. Western credits to the
USSR, often government guaranteed, have been an
important factor in the rise in Soviet imports. Since the
USSR began large purchases of Western technology in
the early 1970s, Moscow has used official and official-
ly backed credits to finance one-third of its imports of
plant, equipment, and large-diameter pipe from the
West. Annual Soviet drawings on government-backed
credits jumped from an average of $475 million in
1971-73 to nearly $2 billion by 1975, but have held at
$2.5 billion per year since 1978. The volume of new
commitments fell from a peak of nearly $4 billion in
1975 to less than $2 billion by 1980, reflecting falling
Soviet orders for Western machinery and equipment.
21. The combination of rising debt service pay-
ments and level drawings has steadily reduced the net
resource inflow to the USSR on official credits from a
maximum of $1.2 billion in 1976; by 1980-81 there
was a small net outflow from the USSR as debt service
exceeded drawings.
22. Subsidized interest rates and lengthy maturities
on most government-backed credits have helped Mos-
cow conserve some scarce hard currency. Interest rate
subsidies on new official loans reached a record level
in 1981-on the order of $300-400 million-as com-
mercial rates in most Western countries averaged 5
percentage points more than those charged on official
loans. Last October's increase in the OECD interest
rate guidelines and a possible reclassification of the
USSR into the "rich country" category will reduce the
subsidy, but only slowly.
23. In 1977-80, contracts for sales of large-diameter
pipe and chemical plants were the primary beneficia-
ries of government-backed financing (see table 1). Pipe
contracts backed by official financing totaled at least
$2.5 billion, and approximately $300-500 million in
contracts for other energy-related equipment also
received official guarantees or credits. Officially guar-
anteed credits covered $3 billion in contracts for
complete plants; two-thirds of these commitments
were for chemical plants, with the remainder going
mostly for steel mills ($170 million), aluminum plants
($150 million), and factories for machinery and con-
sumer goods ($690 million together). OECD data
report some $3 billion in official credit commitments
for machine tools and other plant and equipment in
1977-80. Small amounts of credits have financed
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Official Credit Commitments to the USSR in 1977-80, by Industrial Sector
(million US dollars)
West United
Germany France Italy b Kingdom Japan c
Total 8,99
2
208
2,673 2,68
3
775
728
1,450
Complete plants 2,99
3
718 1,18
4
423
300
Steel 16
8
44 12
4
Chemical 1,90
0
432 79
0
Hydro and thermal power 4
4
37
7
Wood, pulp, and paper 3
3
Aluminum, copper, and zinc 16
2
16
2
Other 68
6
205 10
1
60
Machinery and equipment 3,07
7
200
741 98
1
775
305
Ships 3
2
Telecommunications 8
7
Road vehicles
2
2
Oil and gas equipment 30
5
6
29
9
Pipe 2,49
6
1,214 13
2
a Value of contracts supported by official credits with an original maturity of more than five years.
b Presumably includes credits for pipe exports.
OECD reports for all countries except Japan. Data for Japan are based on announcements of credits backing specific contracts.
orders for telecommunications equipment, ships, and
earthmoving vehicles.
24. France and Italy probably provide more than
half of the interest rate subsidies. In 1981, as a result of
these subsidies, the Soviets saved an estimated $150
million in interest payments to France and $110
million in interest payments to Italy-or some 15 to 20
percent of the value of the machinery exports of these
countries to the USSR. If all official debt had been
contracted at commercial rates, the Soviets would have
had to pay $35 million more to the United Kingdom
and perhaps $20 million more to Japan. Any West
German subsidy was undoubtedly quite small because
only 1 to 3 percent of exports to the USSR have been
financed through West Germany's AKA rediscount
facility. When the Soviets demand interest rates below
market levels on Hermes-guaranteed credits, the Ger-
man exporter usually covers the financing cost by
charging higher prices. There is, however, an implicit
subsidy involved in providing government guarantees
for private credits-namely, the interest premium the
private lenders would require if there were no
guarantee.
25. More recently, however, Moscow has had to
recognize that it cannot count on a large increase in
Western credits to expand its hard currency imports.
Although the Soviet hard currency position is still
relatively strong (the debt service ratio is only about 17
percent), the prospective stagnation in export volume
means that any attempt to achieve a substantial
increase in imports would quickly push up hard
currency debt to an unacceptable level. Indeed, a
large inflow of Western capital would be required just
to maintain the current volume of imports, and this
would result in a doubling of debt by 1985 and a
quadrupling by 1990. The debt service ratio would
approach 30 percent by 1985-a level high enough to
cause concern in financial circles-and reach danger-
ous proportions (45 percent) by 1990.
26. Implications of Hard Currency Squeeze.
Even a moderate fall in hard currency imports could
greatly complicate Soviet economic problems and
make allocation decisions more painful. Large agricul-
tural imports are essential to the growth of meat
consumption even in normal crop years. Expansion of
gas consumption and exports requires massive pur-
chases of Western large-diameter pipe. Large imports
of metals and chemicals are an integral part of Soviet
economic plans. Orders of Western machinery and
equipment have already been sharply curtailed; fur-
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ther cuts would certainly impinge on priority pro-
grams in steel, transportation, agriculture, and heavy
machine building.
III. OIL AND GAS:
FUTURE KEY TO IMPORTS
27. If Moscow is to avoid a severe squeeze on its
hard currency import capacity, with painful repercus-
sions in the economy, it must find new ways of
increasing its exports to the West. This means develop-
ing new capacity as well as finding new markets. By
far the most promising potential for export expansion
is in the massive resources of West Siberian natural
gas. Proved reserves of Siberian gas are ample to cover
any likely increase in total energy consumption in the
USSR during the 1980s and 1990s as well as a large
expansion in gas exports to the West. Although trans-
port costs are high, production costs of Soviet gas are
low, and the USSR is willing to accept a low rate of
return on natural gas investment, making it likely that
Soviet gas can continue to be offered to Western
Europe at prices lower than those of most alternative
sources. Moreover, while gas exports are the only
promising future source of hard currency, oil exports
still account for some 50 percent of Soviet export
earnings, and it is important for Moscow to minimize
their future decline. An important factor affecting
future oil production and exports will be the degree of
access to Western oil equipment and technology.
28. The dispute over the pipeline has occupied
much of the policy discussion of East-West interaction
within the Western Alliance, partly because it involves
both political and strategic considerations-US "politi-
cal" export controls affect the pipeline, which the
United States also opposes for "strategic" reasons.
Some perspective on Soviet energy developments,
problems, and prospects is necessary for an under-
standing of the potential impact of Western actions.
A. The Soviet Energy Problem
29. Moscow is encountering rapidly rising costs in
the production and distribution of oil and coal:
- The USSR is running a race between declining
oil production in its older fields and increasing
development of new ones. Requirements for
drilling and fluid lift are rising rapidly, and
the Soviets are moving to develop offshore
deposits and introduce more sophisticated re-
covery techniques to prevent a decline in oil
output.
The coal industry is suffering from mine de-
pletion, increasing mine depths, reduced seam
thickness, and declining heat value per unit of
raw coal produced. Although the USSR pos-
sesses enormous coal reserves in Siberia, the
Soviets are ill prepared to exploit them-a
result of neglecting the coal industry since the
late 1960s, when Soviet policy put increasing
emphasis on development of oil. Thus, devel-
opment of coal deposits east of the Urals is now
constrained by lack of progress on coal enrich-
ment technology, unresolved technical prob-
lems relating to transmission of electricity pro-
duced at mine-mouth power stations, and lack
of sufficiently developed transportation capac-
ity in the east.
By 1990, gas will be the largest single source of
Soviet energy, with production at roughly 700
billion cubic meters-the equivalent of 11.6
million barrels a day (b/d) of oil. Reaching this
level, however, will be a costly undertaking
because it will require large amounts of West-
ern pipe and equipment. The Soviets are
building an unprecedented six major 56-inch
(1,420-millimeter) trunklines from Siberia-
each one a larger undertaking than the Alas-
kan oil pipeline-even though labor and
equipment are already stretched thin. The
massive outlays for pipeline construction, and
provision of needed infrastructure-such as
roads, all-weather ports, and electric power
facilities-will strain Soviet investment
resources.
30. In contrast to the West, the Soviet record on
energy consumption has been abysmal. Soviet energy
consumption has continued to grow more rapidly than
gross national product (see figure 3). If the relationship
between energy consumption and GNP in the USSR
had followed the trend in the "Big Seven" since 1973,
the USSR's annual consumption of energy would be
roughly 5 million b/d oil equivalent lower than it was
in 1980.
31. A major reason why conservation gains are
difficult in the USSR is that most of them require
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Figure 3
USSR and Big Seven: Energy/GNP Ratios
80 1973 74 75 76 77 78 79 80
aThe "Big Seven" include the United States, Canada,
West Germany, France, Italy, the United Kingdom,
and Japan.
massive investments to modernize and renovate indus-
trial and power-generating facilities-a program that
will itself consume significant quantities of fuel. Soviet
transportation is already reasonably energy efficient
and does not have the potential for large savings such
as those achieved relatively rapidly in many Western
countries. Residential and commercial energy use is
comparatively small. The largest energy savings, there-
fore, must come in the industrial sector. Producing
and introducing energy-efficient equipment, however,
will require most of the decade.
32. The pattern of energy production and use is
shown in table 2. About one-fourth of Soviet oil
production is exported, of which about 900,000 b/d is
sold to the West for hard currency. Gas exports are
also becoming substantial.
B. Importance of the Export Pipeline
33. The Soviet Union has been delivering gas to
Western Europe since the early 1970s. Between 1968
and 1975 Moscow concluded eight "gas for pipe"
agreements with Austria, France, Italy, and West
Germany. Under these agreements, the USSR pur-
chased with long-term government-backed credits
about 9 million tons of large-diameter pipe and other
gas-related equipment. To repay the loans, the USSR
agreed to long-term gas delivery contracts, some of
which extend to the year 2000.
34. In 1979, Moscow began negotiating with the
West Europeans for construction of an export gas
pipeline with a planned gross capacity of 35 billion
cubic meters annually (580,000 b/d oil equivalent).
Although two pipelines were originally discussed, pres-
ent contracts call for only one strand. Even so, this
Siberia-to-Western Europe natural gas pipeline is the
largest East-West trade project to date (see thumbnail
description in figure 4). The pipeline could deliver
nearly 30 billion cubic meters to West Germany,
France, Italy, Austria, and other countries. Gas pur-
USSR: Estimated Energy Balance, 1981
(million b/d oil equivalent)
Net Exports
Production
Apparent
Consumption
Total
For Hard
Currency Other
Total
28.3
23.8
4.5
1.5
3.0
Oil
12.2
9.0
3.2
0.9
2.3
Natural gas
7.7
6.7
1.0
0.5
0.5
Coal
6.6
6.4
0.2
0.1
0.1
Other b
1.8
1.7
0.1
NECL
0.1
a Including gas condensate.
b Including production of hydro and nuclear electricity, peat, oil shale, fuelwood, and electricity
exports.
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 Approved For Release 2007/04/10: CIA-R DP83M00914R002700060022-7'
Siberia-to-Western Europe Natural Gas Pipeline*
*Including provisional routes of transit lines through
Czechoslovakia and Hungary to West Germany, Austria, and Italy.
Length:
Capacity:
Pipe:
Operating Pressure:
Compressor Stations:
Total Cost:
Completion Date:
North
Sea
U.K.
eth I,''-.
Belg.
r,r East
UX. / Germany
*
west
'~ rw
Germany
Naidhaus?
r
Alboni
The Pipeline at a Glance
4,650 kilometers (Urengoy-Uzhgorod)
35 billion m3 per year (gross) ; 29 billion m' per
year (net)
2.6 million tons, 1,420-mm (56-inch) diameter
75 atmospheres
41 (40 with 3 25-MW gas turbine-compressors each;
1 with 5 10-MW gas turbine-compressors)
$22 billion ($7 billion in hard currency)
1984 (pipelaying)
1986-88 (compressor stations)
791z~hgq~ed~
y~Svalyaya
Ka ra
Sea
Mediterranean
Sea
Boundary representation is
not necessarily authoritative.
Figure 4
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Projected Soviet Gas Deliveries to Western Europe
(billion cubic meters)
1980
Austria:
2.4
3.0
3.5
4.0
4.0
Existing contracts
2.4
2.5
2.5
2.5
2.5
New contracts
0.5
1.0
1.5
1.5
France:
5.2
4.0
4.0
9.0
12.0
Existing contracts
5.2
4.0
4.0
4.0
4.0
New contracts
-
-
5.0
8.0
Italy: b
7.0
7.0
7.0
12.0
15.0
Existing contracts
7.0
7.0
7.0
7.0
7.0
New contracts
-
-
5.0
8.0
West Germany: C
10.9
15.0
18.0
22.5
22.5
Existing contracts
10.9
12.0
12.0
12.0
12.0
New contracts
3.0
6.0
10.5
10.5
Switzerland:
-
-
-
0.1
Existing contracts
New contracts
-
-
-
0.1
Total:
25.5
29.0
32.5
47.5
53.6
Existing contracts
25.5
25.5
25.5
25.5
25.5
New contracts
3.5
7.0
22.0
28.1
a Excluding Finland; amounts of annual offtake under the new contracts are subject to reduction by up
to 20 percent under scheduled semiannual negotiations with the Soviets.
b Italy has not yet signed the new purchase contract.
Excluding potential deliveries of 0.8 billion cubic meters to West Berlin.
chase agreements were signed in late 1981 for deliver-
ies over a 25-year period with West German and
French utilities and in June 1982 with Austria's Fern-
gas. Initial exports of 3-5 billion cubic meters per year
(50,000 to 80,000 b/d oil equivalent) are to start in
1984, and full deliveries are scheduled to begin in
1987-88.
35. The USSR will be able to use a combination of
the existing Soyuz export pipeline, domestic trunk-
lines, and East European transit lines to begin initial
gas deliveries on schedule. With the phasing-in of the
new gas export pipeline, total Soviet gas deliveries to
Western Europe-under older contracts as well as the
new export pipeline contracts-could reach about 33
billion cubic meters per year (550,000 b/d oil equiva-
lent) in 1985 and then in 1988 rise to as much as 54 bil-
lion cubic meters per year (nearly 900,000 b/d oil
equivalent) (see table 3).3 Annual gas deliveries to
The information available on the deliveries under the new
contracts is still extremely sketchy, so the timing depicted in table 3
should be considered a rough estimate of the delivery profile.
Eastern Europe would increase by several billion cubic
meters if 10 percent of the projected Soviet exports are
delivered to Czechoslovakia and Hungary as transit
fees.
36. Besides the gas sales, the pipeline project
involves:
- Soviet purchases of large-diameter pipe (about
$2 billion), mostly from West Germany and
Japan.
- Soviet purchases of turbine compressors and
related equipment ($5 billion), from the major
West European countries.
- Government-guaranteed credits (at least $7
billion) repayable in eight to 11 years with a
three-year grace period on repayment of prin-
cipal, and interest rates averaging 7 to 8
percent, well below market.
37. The gas export pipeline project is one of six 56-
inch gas pipelines that the Soviets hope to complete in
the current Five-Year Plan (1981-85). Two of the five
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domestic lines have already been laid. In addition to
the export pipeline, Moscow hopes to lay by 1985
three more lines from the Urengoy gasfield to the
European USSR, each 3,000 to 4,000 kilometers long.
The six new trunklines from West Siberia account for
roughly half of the total of 48,000 kilometers of gas
pipelines planned for construction in 1981-85.
38. If the Soviets believe they cannot count on
Western imports or pipe and compressors, they will
develop their own capability more rapidly. Certainly
by the 1990s they would be able to produce enough
16- or 25-megawatt turbines to move gas through long-
distance pipelines, such as the export line currently
being built. The Soviets would prefer to continue to
import some of this equipment from the West, howev-
er, because it can be paid for with gas exports and it
maintains the commercial ties between Western Eu-
rope and the USSR.
39. Because of the weak export prospects outlined
above, the pipeline is vital to Moscow's prospects for
earning sufficient hard currency beyond the mid-
1980s to avoid a major drop in its import capacity.
Annual revenues from the pipeline deal alone should
reach $51/2 billion (::n 1981 dollars) in the early 1990s
when all credits are repaid, and total gas earnings
(including existing contracts) could be roughly $101/2
billion.
40. The USSR also calculates that the increased
future dependence of the West Europeans on Soviet
gas deliveries will make them more vulnerable to
Soviet coercion and will become a permanent factor in
their decisionmaking on East-West issues. The Soviets,
moreover, have used the pipeline issue to create and
exploit divisions between Western Europe and the
United States. In the past, the Soviets have used West
European interest in expanding East-West commerce
to undercut US sanctions, and they believe successful
pipeline deals will reduce European willingness to
support future US economic actions against the USSR.
41. Follow-On Gas Projects. The factors that led
the Soviets to conclude the recent Siberia-to-Western
Europe gas deal-huge gas reserves and continued
need for hard currency earnings-almost certainly
will lead to a proposal for new export contracts that
will require additional export pipelines. If a second
strand of the new export pipeline were built, Soviet
revenues from gas sales would rise in the 1990s to
more than $15 billion per year (1981 prices). Soviet
behavior in negotiating the first contracts suggests that
additional gas supplies would be offered at a base
price near the low end of the market. By accepting a
relatively low price initially, the Soviets would be able
to increase their market penetration and still secure
hard currency earnings.
42. Indeed, potential demand in Western Europe
could support purchases of at least an additional 60
billion cubic meters (about 1 million b/d oil equiva-
lent) of Soviet gas by the year 2000-enough for two
additional pipelines of the magnitude of the one now
being built. This potential will be realized, of course,
only if alternative new sources of gas for Western
Europe are not developed.4
C. Alternative Energy Sources
43. The development of such alternative Western
energy sources-particularly the large gas resources of
the North Sea-will take too long to have much effect
on the West European demand for Soviet gas in the
1980s but could determine whether Western Europe
seeks additional Soviet gas in the 1990s. At best, an
additional 9-15 billion cubic meters of new supplies
could be delivered by 1990 through increased Dutch
and Norwegian production; estimated Norwegian gas
reserves are by themselves sufficient to permit a large
expansion of production in the 1990s. Several African
and Middle Eastern countries also have the potential
to increase gas exports during the 1990s.
44. Continental gas import requirements are ex-
pected to increase by about 70-80 billion cubic meters
in the 1990s as demand grows and domestic produc-
tion declines. Under favorable circumstances, North
Sea and Dutch gas could meet about 80 percent of
these requirements, or about 60 billion cubic meters.
North African gas could provide about 45-60 billion
cubic meters. Supplies from the Middle East and
North Africa would be substantially less secure from
disruption than would gas from West European
sources. Moreover, the likely investment costs of devel-
oping and transporting this gas would be extremely
high. (See table 4.)
4 See SNIE 3/11-82, Western Alternatives to Soviet Natural Gas:
Prospects and Implications, 28 May 198
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Proposed Non-Soviet Gas Projects for Western Europe
Volume
(billion cubic
Production and
Proposed Projects
Start
meters)
Transport Costa
Reliability
Norway
Secure
Secure
Secure
Italian pipeline
expansion
1990
6
Low
Unreliab
le
Italian pipeline II
1995
12-18
Low
Unreliab
le
Segamo pipeline I
1990
4
Medium
Unreliab
le
Segamo pipeline II
Bonny LNG
1995
16
Medium
Unreliab
le
Trains 1-3
1990
7.5
Medium
Secure
Trans-Sahara
pipeline
Kribi LNG
1990
250
Medium
Insecure
Trains 1-2
1990
75
Medium
Secure
Train 3
1995
35
Medium
Secure
II
Likelihood
of Project
Considerations Implementation
Preliminary negotiations for sale of Probable
gas now under way with both UK
and continental buyers.
Technical problems must be over- Probable
come to develop the field.
Oslo would like to see development Probable
in northern region to balance re-
gional development.
West Europeans view Algeria as an
unreliable supplier. Production
problems in the mid-1980s will re-
inforce this view, particularly if Al-
geria maintains a militant price
stance.
Requires additional compressors. Probable.
Requires new series of trans-Medi- Some possibility
terranean pipelines.
Will soon be technically feasible to Some possibility
construct; initial volumes will be
expanded if demand warrants. Some possibility
Project was canceled in early 1982, Probable
but we believe Nigerian revenue Some possibility
needs will force a smaller project to
go forward and be later expanded.
Nigerians dismiss this project be- Highly improbable
cause of potential transit and securi-
ty problems.
French firms are actively involved Probable
in the project.
Only if additional reserves are dis- Some possibility
covered.
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Table 4 (Continued)
Proposed Non-Soviet Gas Projects for Western Europe
Proposed Projects
Start
Volume
(billion cubic
meters)
Production and
Transport Cost a
Libya
LNG
1990
3-7
Medium
Italian pipeline
1995
14
Low-medium
Egypt
LNG I
1990
3
LNG II
1995
6
Ivory Coast
LNG
1995
7
Medium
Qatar
Has Laffan LNG I
1995
9
High
West European
1990
17
High
pipeline
IGAT-Turkey-
1995
7
Medium-high
LNG
IGAT-West Euro-
1995
17
Medium-high
pean pipeline
Reliability
Likelihood
of Project
Implementation
Fairly reliable Will probably be built only as a Some possibility
and secure replacement for Brega plant.
Fairly reliable Only if offshore reserves (recently Some possibility
and secure discovered by an Italian company)
of 140 billion cubic meters or more
are proved up and adjacent oilfields
are developed beforehand.
Secure Even if recent gas discoveries are Some possibility
proved up, the gas is likely to be
used domestically.
Secure Temporarily shelved because of Probable
failure to find buyers.
Insecure The regional political tensions, high Highly improbable
transit fees, and large costs make
this project difficult to implement.
Politically in- Possible export to Western Europe. Some possibility
secure and
unreliable
Politically in- Italian and West German firms Some possibility
secure and considering project.
unreliable
a Takes account of ;:ield development, operating, and transport costs amortized at 15 percent. Excludes wellhead value of gas. Low cost is
defined as costs under $3 per billion BTUs delivered to Western Europe; medium cost, $3 to $5; high cost, above $5.
II
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45. Multinational cooperation will be critical if
sizable new volumes of North Sea gas are to be
brought to the Continent by the early 1990s. Projects
to boost North Sea gas exports will require enormous
capital investments-$15-20 billion may be needed to
develop Norway's Troll gasfield alone-and will have
to compete with other North Sea oil and gas projects
for a share of the development funds to be spent
during the next decade. Interest rate subsidies similar
to those offered for the construction of the Soviet
pipeline could substantially speed development of
North Sea gas reserves; an interest rate subsidy of
about 2 percentage points could cut 15 percent from
total investment costs.
46. Cooperative agreements to transport gas to the
marketplace will be equally important. A gas swap
agreement, for example, would involve increased Nor-
wegian gas deliveries to the United Kingdom in
exchange for delivery of equal volumes of British gas
to the European Continent. This could save $1-2
billion in facilities investments and could shorten
leadtimes by two to three years. Similarly, Dutch
participation in a coordinated gas marketing strategy
could vastly simplify Norway's efforts to increase
future gas sales.
47. Although the commercial advantages of such
arrangements are sizable, numerous political obstacles
must still be overcome, including Norwegian reluc-
tance to become overly dependent on hydrocarbon
development. Other critical factors determining the
timing and size of new North Sea projects include:
- Tax policies. The current UK tax regime is a
serious deterrent to the development of small
fields. Norway's petroleum taxes are also high,
and development has been slowed further by
short drilling seasons and generally cautious
government policies.
- Market prospects. An unprecedented decline
in West European gas consumption during the
last two years has clouded the outlook for the
future size of the European gas market. Pres-
ent uncertainties could cause North Sea pro-
ducers to hesitate before launching new proj-
ects, especially in view of the possibility of
being undercut by cheaper Soviet gas.
- Revenue needs of producing countries. If
the budget crisis in the Netherlands worsens,
pressures to increase gas sales will increase.
Similarly, Norway may be inclined to speed
gas development because of lowered expecta-
tions of future oil revenues.
D. Soviet Dependence on Western Oil Equipment
48. The USSR faces increasing dependence on the
West in developing and processing its oil resources in
the 1980s. The Soviets already have drilled most of the
relatively shallow, easily located, accessible oil depos-
its. They specifically need Western seismic and well-
logging technology to bolster their ability to explore
for oil reserves in the 1980s (see annex). The Soviets
plan to nearly double the amount of drilling for oil
and gas in 1981-85 and to increase it further in the late
1980s, but their drilling productivity is poor by inter-
national standards. Thus, Western rigs, drill pipe, tool
joints, drill bits, blowout preventers, and drilling-fluid
technology could substantially aid Soviet drilling
efforts.
49. The Soviet oil industry faces rising fluid-lift
requirements in the 1980s, as the amount of water
produced along with oil increases. According to Soviet
plans, a large additional volume of fluid-well over 6
million barrels a day-must be lifted in 1985 simply to
maintain production of oil at the 1980 level of 12
million b/d. To handle the high volume of fluid, the
Soviets plan to double the number of wells producing
oil with the help of submersible pumps and gas-lift
equipment. Imported equipment could boost the pro-
ductivity of this effort because the capacity and
quality of Soviet-made submersible pumps and gas-lift
equipment are low.
50. The Soviets' least explored prospective areas for
new petroleum discoveries are offshore, and explora-
tion and development of the continental shelf will
contribute to their oil production in the 1990s. The
USSR already has received substantial assistance from
the West, and continued assistance could speed devel-
opment in the Caspian Sea and Arctic areas.
51. The United States is the preferred supplier of
most types of oil and gas equipment throughout the
world because it is by far the largest producer, with
the most experience, the best support network, and
often the best technology. In some products-for
example, large-capacity down-hole pumps-the United
States has a world monopoly. The position of most
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US suppliers in the changing world market has been
preserved by establishing overseas subsidiary firms
and licensees during the past decade. These offshore
operations deterred new competition from "wedging
in" to overcrowded markets. Up to now, the learning
curve for new competitors has been very steep and
entrance has been too costly in a highly cyclical
market. Booms in demand often trigger new invest-
ment in additional capacity, often only to be followed
by a drying up of the market when production begins
18 to 24 months later. Risk is high for any newcomer
because the period following the boom is marked by
fierce price competition until the excess capacity is
worked off. Nonetheless, in recent years the US share
of the market decreased, even before the US embargo
was imposed.
IV. OPPORTUNITIES FOR WESTERN
GOVERNMENT POLICY
52. Western governments, at considerable cost to
themselves, could increase Soviet economic difficulties
by:
- Restricting Soviet access to Western oil and gas
equipment and technology.
- Eliminating subsidies, including government
guarantees, on credits to the USSR.
- Using their influence to discourage Western
firms from entering into large-scale energy
projects with the USSR.
- Taking steps to shrink the potential Western
energy market for Soviet gas by developing
alternative energy sources.
53. The effectiveness of such steps depends on
many factors, including the scope of the action, the
degree of cooperation among the Western Allies, and
the duration of the :restriction. It is highly unlikely, for
example, that US Allies will participate in an export
embargo, except in response to specific political
events, with the result that such an embargo is likely to
be partial and/or short-lived. On the other hand, there
may be a better chance of gaining Allied cooperation
on credit policy and on development of alternative
energy sources, especially if common ground can be
found on a "strategic" policy concerning East-West
economic relations.
54. The following sections consider the impact of
possible Western measures on:
- The construction of the export pipeline and
the planned Soviet gas deliveries to Western
Europe.
- The development of Soviet oil production.
- The development of new gas export projects.
B. Impact on the Gas Export Pipeline 5
55. We believe that the USSR will succeed in
meeting its gas delivery commitments to Western
Europe through the 1980s and will do so without
significant diversion of domestic resources from other
sectors. Deliveries could begin in late 1984, as sched-
uled, by using existing pipelines, which have excess
capacity of at least 10 billion cubic meters annually.
56. The Soviets probably can begin deliveries
through the new pipeline in 1985 or 1986. With the 22
turbines built with the GE-made rotors already
shipped from Western Europe, or about to be shipped,
and by operating compressor stations without standby
units, Moscow could deliver through the new pipeline
about 70 percent of the planned annual throughput of
nearly 30 billion cubic meters. Turbines using an
additional 40 rotors-the number Alsthom-Atlantique
contracted before the US embargo to build for the
Soviet Union under GE license-could boost through-
put to more than 90 percent of capacity. For reliabil-
ity of pipeline operation and periodic maintenance,
however, the Soviets might use some of the available
turbines as standby units, thereby reducing throughput
somewhat.
57. It is highly unlikely that full capacity will be
needed until near the end of the decade, because West
European gas demand is lagging substantially. Before
the end of the 1980s the Soviets will be able to fully
equip the pipeline using either imported or domestic
equipment. By then they will probably be able to
produce 25-megawatt turbines, in spite of a history of
troubles. If necessary, the USSR could divert construc-
tion crews and compressor-station equipment from
new domestic pipelines to the export pipeline or even
'For a detailed survey of the export pipeline's status, see CIA
Intelligence Assessment SOV 82-10120/EUR 82-10078, outlook for
the Siberia-to-Western Europe Natural Gas Pipeline, August 1982
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Estimated Impact of Embargo by NATO Countries and
Japan on Selected Oil Equipment
Impact of Current
US Sanctions
Drill bits, drill pipe, tool joints, Small
other drilling equipment
Equipment for producing and proc- Substantial
essing high-pressure, high-sulfur gas
Oil refinery secondary processing Small
units
Nature and Degree of Estimated Impact of
Embargo Imposed by NATO Members
and Japan
Reduction in exploration success in existing
producing areas as well as unexplored re-
gions, with substantial impact in the 1990s.
Short run: Minimal
Long run: Substantial
Moderate delays in offshore drilling oper-
ations.
Short run: Moderate
Long run: Moderate
Small short-run impact on drilling
program.
Short run: Small
Long run: Small
Potentially moderate in short run, depend-
ing on Soviet import efforts.
Short run: Moderate
Long run: Moderate
Critical for production of high-sulfur Cen-
tral Asian gas and high-pressure gas in
West Siberia and elsewhere.
Short run: Substantial
Long run: Moderate
Potentially substantial if Soviets proceed
with plans to upgrade refineries, but they
have concluded no recent agreements for
this equipment.
dedicate a domestic pipeline for export use to ensure
capacity adequate to meet contractual delivery obliga-
tions. This diversion would be costly, but it is highly
unlikely to be required on a large scale. More likely,
Moscow would be able to meet Western Europe's
demand with little or no loss in domestic gas deliveries.
C. Impact on Oil Development
58. The impact of export restrictions on oil develop-
ment in the USSR would depend critically on the
development of domestic oil equipment manufactur-
ing capabilities. While some improvement is likely
over the decade, we do not believe that it will come in
time to offset the need for the kinds of Western
equipment shown in table 5:
- Continued denial of US oil and gas equipment
would retard Soviet oil production, particular-
ly in offshore drilling and in production of
high-pressure, high-sulfur gas.
- Denial of all oil equipment by all NATO
countries and Japan would have a substantially
larger impact, which could reach as much as
1.0 million b/d by the end of the decade-
almost 10 percent of total oil production.
D. Impact on Future Gas Export Deals
59. The most damaging measures to the Soviets in
the long run would be inflicted by Western agree-
ments that restrict further agreements either to buy
Soviet gas or to sell Moscow oil and gas equipment.
Under such conditions the USSR would lose its main
source of new hard currency earnings in the 1990s.
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E. Impact on the Soviet Economy and Military
Capability
60. Shortfalls in Soviet oil and gas production would
directly affect the USSR's ability to earn hard curren-
cy. To protect its hard currency earnings, Moscow
would be tempted to further cut energy exports to
Eastern Europe. And the importance to the Soviet
economy of substantial hard currency imports is such
that, in the event of a major production shortfall,
allocations of oil and gas to domestic Soviet uses would
be reduced.
61. Consequences for the Economy. Energy
shortfalls would affect the Soviet economy and might
lead to cuts in imports. The USSR would be reluctant
to cut food imports because this would risk popular
unrest and, in any event, would probably adversely
affect incentives and productivity.
62. Further reductions in imports of machinery and
equipment would hinder industrial modernization and
productivity. Cuts in allocations of oil and gas, or of
imported materials such as steel, would create produc-
tion bottlenecks, cause some plant capacity to be
unused, and disrupt supplies in many parts of the
economy. The bottlenecks would diminish and per-
haps eventually disappear as the Soviets took steps to
conserve the scarce products, to substitute other prod-
ucts, and to adjust the pattern of demand.
63. Given all the uncertainties surrounding the
scope and duration of Western measures, and the way
the Soviets would cope with and adjust to these
measures, quantitative measures of impact can at best
be viewed as illustrative orders of magnitude.
64. The effect of Western measures on potential
Soviet energy output (measured in dollars at world
market prices) would approximate the following mag-
nitudes (in billions of dollars per year):
Short Run
(2-3 Years)
Medium
Run (4-10
Years)
Long Run
(Over 10 years)
Pipeline Sanctions
US alone
Small
0-small
0
Oil Equipment
Restriction
US alone
2-6
2-6
Small
All Allies
7
12
Declining
No New Gas
Projects
0
0-5
5-10
(beyond current
pipeline)
65. In the hypothetical case of a full Western
embargo on all oil and gas equipment, including large-
diameter pipe, the cost to the Soviets would rise
substantially-reaching roughly $36 billion annually
by 1990. This case illustrates the particular importance
of Western linepipe to the Soviet gas program over the
next several years; in the 1990s this dependence will
decline as the Soviets master serial production of
multiwall large-diameter pipe.
66. The impact of these shortfalls on Soviet GNP
might be a multiple of the above losses, especially
during the period when bottlenecks could not be
avoided. The potential aggregate economic impact
could be characterized as follows:
- Insignificant, in the case of US unilateral
controls aimed only at the export pipeline.
- GNP by the end of the decade would be 2 to 3
percent less in the case of a sustained Allied
embargo of oil equipment, but the impact
would be much smaller in the more likely case
that US Allies provide limited, if any,
cooperation.
- In the hypothetical case that includes an em-
bargo on pipe, the Soviets would incur a loss in
GNP of 3 to 4 percent by 1990.
- After 1990 the effects of Western policies
could be enhanced considerably if follow-on
Soviet gas projects were squelched.
67. Soviet costs on the order of 3 percent of GNP by
1990 are significant. Such a loss of GNP would be
equivalent to all the investments made in housing
construction in 1980, or nearly 40 percent of all
industrial investments in 1980, or more than 25 per-
cent of military expenditures in 1980. These measures
indicate only the order of magnitude of forgone Soviet
GNP and do not equate to potential cuts in investment
or defense spending. While the cumulative effect of
such losses would clearly increase pressures on Soviet
decisionmakers, we cannot judge how they would
choose to spread such losses throughout the economy.
68. Additional Western actions such as restricting
subsidized government-guaranteed credits could raise
the cost to the Soviets of Western assistance by about
$400-500 million a year. Credit extensions themselves
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would probably fall sharply if government guarantees
were withheld, as most bankers are reluctant to extend
large long-term credits without government guaran-
tees.
69. In the long run, tighter COCOM restrictions on
militarily sensitive technology (including technology
and equipment that indirectly contributes to signifi-
cant improvements in weapon systems) would perhaps
be the most valuable action for the West. Such action
would retard major improvements in Soviet weaponry,
which the West would be forced to counter. While the
dollar value of such action is difficult to estimate, the
savings in terms of Western spending for defense
annually would probably come to billions of dollars.
70. Consequences for Military Programs. The
reduced availability of hard currency and energy
would also make more difficult the decisions Moscow
must make among key priorities in the 1980s-sustain-
ing growth in military programs, feeding the popula-
tion, modernizing the civilian economy, supporting its
East European clients, and expanding (or maintaining)
its overseas involvements. Because economic growth
will be slow through the 1980s, annual additions to
national output will be too small to simultaneously
meet the incremental demands that planners are
placing on the domestic economy. Even now, stagna-
tion in the production of key industrial materials is
retarding growth in machinery output-the source of
military hardware, investment goods, and consumer
durables.
71. If growing resource stringencies and hard cur-
rency shortages prompt Soviet leaders to cut back on
imports, it seems likely that, in true bureaucratic
tradition, initial efforts would be implemented in a
broad-brush fashion affecting a number of Soviet
ministries across the board. The very top-priority
programs no doubt would be spared, but many rela-
tively high-priority ones, including some military pro-
grams, could be hurt at least indirectly.
72. Even in the longer term, cuts in machinery
imports would retard progress in modernizing a num-
ber of industrial sectors-steel, machine building, oil
refining, robotics, microelectronics, transportation,
and construction equipment-at a time when Moscow
is counting on a strategy of limited investment growth
and relying instead on productivity growth.
73. Hard currency shortages by themselves proba-
bly would have little effect, however, on Soviet acqui-
sition of Western technology and equipment which
directly facilitate qualitative improvements in Soviet
weapon systems. These inputs are so important to
Moscow that the necessary hard currency will certain-
ly be allocated to them, and the value required
probably is at most a few hundred million dollars a
year. Such military-related acquisitions, legal and ille-
gal, can be prevented only through a broadening and
tightening of COCOM controls.
74. Reduced Soviet petroleum and gas output
would aggravate civilian industrial bottlenecks and,
therefore, might cause civilian encroachment on de-
fense production, such as a reallocation of some
military-oriented metallurgical and machine-building
facilities to produce the embargoed oil and gas equip-
ment. Technical requirements, however, could force
significant "upstream" changes in capital and opera-
tions. For example, major changes in capital equip-
ment would probably be required before assets in the
defense industries could contribute to the production
of energy-related equipment such as drilling rigs,
platforms, or pipe. High-temperature components
made by the aircraft industry could more readily
contribute to the production of compressor equipment
for the gas pipeline projects. Increased production of
turbines and transformers for electric power would
also require shifts of skills and machinery to the
civilian electrical equipment producers from the de-
fense industries.
75. The materials used by defense plants could be
redirected to alternative civilian production with
greater ease. For example, powder metallurgy used in
the production of munitions could be redirected to the
production of drill bits for petroleum extraction. In-
creased availability of steel for drilling rigs and tubular
goods could help the Soviets meet their oil drilling and
gas output targets. In addition, special steels for the
manufacture of turbine blades could increase the
reliability of gas turbines used to power electric
generators and pipeline compressors. Concrete, as-
phalt, and other construction materials would help to
overcome the serious lack of infrastructure (all-weath-
er roads, housing) in crucial areas of energy develop-
ment such as West Siberia. Transfers of fuels, particu-
larly petroleum products, from the military would also
ease civilian production bottlenecks.
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76. While there is the possibility of resource trans-
fers from defense facilities, the atmosphere of in-
creased East-West tensions-which would be likely to
prevail after imposition of an embargo-might
prompt Soviet leaders to raise even more the priority
of defense programs in the allocation of resources.
Should a weakenin: of the industrial base force some
cuts in military programs, this would not happen
quickly, and the effects on overall Soviet military
capabilities would be very gradual.
V. WEST EUROPEAN PERSPECTIVES
A. Attitudes Toward East-West Trade and Trade
Sanctions
77. In general the West Europeans believe that
increased trade with the East is a fruit of detente and
that it contributes to improved relations. They argue
that Soviet behavior will be more restrained if the
USSR has a.large slake in the international economic
system. Many West Europeans would therefore reject
economic sanctions, arguing that they also hurt the
West and do not affect Soviet behavior in any event.
The problem lies in developing with the West Europe-
an countries-or at least the major ones-a common
understanding of the strategic implications of East-
West trade and agreement on what kind of Soviet
behavior should trigger what kind of response.
78. Despite statements to the contrary, Allied gov-
ernments want to prevent the pipeline issue from
affecting major initiatives in NATO, such as INF
deployment. If the controversy is prolonged, however,
it is likely to adversely affect the political climate in
which final deployment decisions will be made. More-
over, it could reinforce the self-image of the West
Europeans as junior partners in a relationship with the
United States in which they have an equal stake. The
pipeline ban could. be seen in Western Europe as
another in a series of US moves that have eroded
European confidence in US leadership and intensified
anxiety about US-Soviet relations. Although START
and the INF talks have reduced European concerns
about the US willingness to resume a dialogue with
Moscow, the pipeline decision will contribute to uncer-
tainty about how the United States will manage the
East-West relationship. It will also nurture suspicion
about the seriousness with which Washington will
pursue arms control negotiations.
79. As a result of the era of detente, some West
European political leaders generally have acquired
more complacent attitudes toward the USSR. Further-
more, in their view, the superannuated Soviet leader-
ship already is undergoing an uncertain struggle for
succession and faces economic burdens that it can
manage only with considerable difficulty. These West
European political leaders, therefore, believe that it
would be in the interest of their countries to adopt a
less confrontational approach to Moscow in the hope
of precluding the emergence of more intransigent
leadership following Brezhnev's departure.
80. West European perceptions of the Soviet threat
depend heavily on Soviet actions close to home. A
direct intervention by the USSR in Poland or else-
where in Eastern Europe would greatly harden West
European attitudes, at least for a time. By contrast,
Soviet actions in Afghanistan, Africa, and Central
America, while unwelcome to West Europeans, are
perceived as less of a threat and would not have much
effect on Allied willingness to support US initiatives
outside the treaty area.
B. The Pipeline Deal in West European Eyes
81. The West Europeans are convinced that the
pipeline deal is a good one for them. In reaching this
conclusion they are looking at the deal as a package,
taking into account their projected energy needs and
considering such aspects as the cost and reliability of
Soviet gas, the cost of their export credit subsidies, and
the export sales that are likely to result.. They are
convinced that they will need large additional gas
supplies, especially in the 1990s. They have not fo-
cused extensively on what the additional gas revenue
might do for Soviet military power, but they tend to
argue that the Soviet military will get pretty much the
resources it wants whether or not the pipeline is built.
They are skeptical that it is in the West's interest to
cause cutbacks in Moscow's consumer-oriented and
civil investment expenditures, which they believe
would suffer most if earnings from the pipeline were
reduced or cut off.
82. The West Europeans' prime energy goal is to
reduce their dependence on OPEC. While that
dependence has fallen significantly since 1973 it is still
high enough that a sustained OPEC embargo would
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have a devastating impact. In searching for OPEC
substitutes, the West Europeans obviously would pre-
fer to find Western energy sources because of their
reliability. It is partly for this reason that they plan to
substantially expand their use of coal and nuclear
power. Nevertheless, gas-used mainly for home heat-
ing-will be the primary fuel displacing OPEC oil,
and there have been no alternative gas sources that
could match the Soviet offer. West European gas
producers have been neither willing nor able to ex-
pand production sufficiently in the 1980s, and poten-
tial non-European sources-such as Algeria, Nigeria,
Qatar, Indonesia, and Canada-appear too unreliable
or too expensive or both.
83. The West Europeans further believe that the
Soviet gas deal is relatively advantageous in terms of
security, flexibility, and price. (See inset below.)
84. The total number of jobs in Western Europe
directly dependent on pipeline contracts is only 20,000
to 30,000. Nevertheless, these job losses are important
because they are concentrated in key depressed
industries.
85. All in all, the United States would have had a
far better chance of aborting the pipeline project if it
had weighed in earlier and stressed the strategic
implications of East-West trade. The time to act
probably was before mid-1980-the period when the
West Europeans were evaluating the project. By the
time Washington raised strong objections, the West
European governments had already committed them-
selves to the deal and contract negotiations were well
under way. In addition, the US arguments initially
focused on the question of energy dependence on the
USSR-the very issue that the West Europeans said
Advantages of the Pipeline Deal: A West European View
- Security. The deal provides the West Europeans
with a 25-year gas supply from a partner that
they consider more reliable than OPEC. They
think that Moscow will deliver the gas on sched-
ule both to maintain its hard currency earnings
and to preserve its reputation as a reliable trade
partner. Furthermore, they maintain that they
have carefully considered the consequences of a
Soviet cutoff. At the projected peak delivery
levels of the pipeline currently being built, West-
ern Europe as a whole will get only about 3
percent of its total energy supplies from Soviet
gas, while West Germany-the largest purchas-
er-will get about 30 percent of its gas and 5 to 6
percent of its total energy supplies from the
USSR. Planned gas storage capacity in Western
Europe will equal about three months of Soviet
imports by 1990, and many industrial gas users
will have the capability of switching to other
fuels. As a result, the West Europeans believe that
they could cope with even a sustained Soviet gas
cutoff without facing a major economic
disruption.
- Flexibility. The Soviets also agreed to significant
flexibility in gas deliveries. West Germany on 1
October will have a one-time option to perma-
nently reduce the base amount of gas in its
contract (10.5 billion cubic meters per year) by up
to 20 percent. More important, each purchasing
country in each year of the contract will have the
right to reduce deliveries during that year up to
20 percent below the base amount.
- Price. The West Europeans were pleased by the
price formula even though they will be paying
more than the current market price for most gas.
The contract apparently stipulates a base price of
$4.65 per million BTUs, to be adjusted in propor-
tion to future changes in oil prices, as well as a
floor price of $5.40. The West Europeans will pay
whichever is higher: $5.40 or the adjusted base
price. The West Germans were particularly
pleased that the adjustment formula is based 80
percent on the prices of heavy and light heating
oil and only 20 percent on the price of crude.
They believe that the prices of these products will
rise less rapidly than crude prices in future years,
because greater use of coal, gas, and nuclear
power will hold down the demand for heating oil.
Most current gas prices are below those in the
Soviet contract but are rising rapidly: for exam-
ple, West Germany in 1982 is paying an average
of about $4.00 per million BTUs for imported gas,
up 30 percent from 1981. Even at the $5.40 floor
price, Soviet gas would be about 10 percent
cheaper, on an energy-equivalent basis, than oil at
$34 per barrel. Given that the Soviet gas deliver-
ies will not reach full volume before 1987, and
will continue through 2009, during which time oil
prices are likely to rise far above current levels-
if only because of world inflation-the West
Europeans are confident that the bulk of the
Soviet gas will be purchased at the adjusted base
price, which will always be well below the equiv-
alent crude oil price.
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 Approved For Release 2
they had already studied carefully and resolved to
their satisfaction.
C. Possible Areas of Compromise
86. While reiterating their intention to honor com-
mitments already made to the USSR, most of the
major suppliers see the necessity to tone down public
polemics over the pipeline issue, minimize the damage
to transatlantic relations, and seek some accommoda-
tion with the US position. Underlying this need is the
realization that European firms-without American
licenses-would be far less competitive in the world
energy market. The four West European countries
involved (France, West Germany, Italy, and the Unit-
ed Kingdom) have thus far failed to develop a com-
mon strategy with respect to US sanctions. Allied
acceptance of any US package designed to achieve
consensus on joint sanctions would be contingent on
two essential criteria: (1) that the burden be shared
evenly among the Western countries and (2) that the
sanctions not be applied retroactively. Possible areas of
compromise might include:
- The second strand of the pipeline. A second
Soviet pipeline is an obvious candidate to meet
Western Europe's projected gas shortfall in the
1990s, although there are no negotiations in
prospect at the moment. The West Europeans
would be concerned about substantially in-
creasing their dependence on Soviet gas. The
gas needs could be satisfied by some combina-
tion of other measures: conservation, substitu-
tion of other fuels, or other sources of gas.
Norway, for example, could expand gas pro-
duction enough to meet a large part of incre-
mental West European needs in the 1990s, if
development efforts are begun in the next few
years. Given these possibilities, the West Euro-
peans might be willing to renounce the Soviet
option.
- Tighter credit restrictions. As noted earlier
there is considerable support-particularly
from West Germany-for ending subsidized
interest rates on Soviet credits. The West
Europeans paid some lipservice to the idea at
Versailles and might now be pressed to act.
The French have been the strongest opponents
of higher interest rates, fearing-probably
with good reason-that they would lose some
Soviet sales as a result. Although supporting it
on interest rates, the West German position is
by no means wholly consonant with that of the
United States. On government export guaran-
tees, for example, Bonn argues strongly against
their abolition-and is adamant that it will do
nothing on this issue at least until subsidized
export credits are limited by other West
Europeans.
- Tighter COCOM restrictions. There is al-
ready some support in Western Europe for
tighter controls, and the United States can
present a compelling case that technology
transfers are contributing significantly to Sovi-
et military improvements. Purely out of self-
interest, the West Europeans should see that
these Soviet gains detract from their security
and/or compel them to increase defense
expenditures.
87. More important than compromise on these spe-
cific points, however, is the need to reach agreement
on a shared understanding of the long-run strategic
implications of East-West trade. Such an understand-
ing has been notably absent in the past, but the time
may now be ripe to achieve it. Although the sanctions
imbroglio has heightened the serious differences be-
tween Western Europe and the United States regard-
ing the linkage of economic and political policies, it
has raised the West European consciousness of the
issues and the depth of US concerns.
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SOVIET DEPENDENCE ON US AND WESTERN OIL AND GAS EQUIPMENT
Exploration Equipment
1. Having drilled most of their easily accessible
deposits, the Soviets now need Western seismic and
well-logging technology to accelerate discovery of
additional oil reserves for the remainder of the centu-
ry. Soviet exploration equipment, however, with its
dated technology and limited data-processing capabili-
ties is poorly suited to the exploration of complicated
geologic areas such as the potential petroleum-bearing
regions in East Siberia, as well as to finding oil and gas
in smaller, subtle geologic formations in the West
Siberian basin. Soviet equipment is also inadequate for
efficient offshore exploration, drilling, and production,
lacking particularly the sophisticated positioning, sta-
bilizing, and seabed production capabilities of West-
ern equipment.
2. Western geophysical equipment would help the
Soviets explore deeper, hard-to-find subtle traps. Mod-
ern Western seismograph software and hardware-
digital recorders, cable, geophones, computers, field
processors-would enable them to increase their proc-
essing capability and better locate potential hydrocar-
bon traps. Western well-logging equipment for drill-
ing-fluid analysis and final borehole evaluation would
improve both drilling efficiency and oil discovery
rates.
Magnetometers and Gravity Meters
3. This equipment involves highly sophisticated
sensing technology and data-processing capability. Re-
mote areas, such as East Siberia, will be difficult to
explore without this equipment. The USSR's technol-
ogy in this area is perhaps 10 years behind that of the
West. Skania of Sweden is the only known producer of
this equipment outside the potential embargo group,
and it is a small producer.
Seismic Equipment
4. Improved seismic equipment is necessary if the
Soviets are to find smaller and deeper oil and gas
deposits. The lack of this equipment will limit Soviet
production five to seven years from now, as well as
further in the future. If the Soviets try to develop their
own seismic capability, the oil industry will need
improved computer technology and additional R&D
resources. Seismic equipment is available elsewhere,
but the data-processing capability is closely held by
Western firms.
Well-Logging Equipment
5. Improved well-logging equipment could greatly
aid the Soviets in identifying and assessing new oil and
gas deposits. As is the case with seismic equipment,
well-logging tools could be produced within one to two
years in countries outside the Western embargo group,
but the all-important software, which is more tightly
controlled, would not be available.
Drilling Equipment
6. Development of geologically complex and deep
oil and gas reserves is consuming an increasing share of
scarce resources throughout the USSR. In general,
however, Soviet drilling equipment, characterized by
poor metallurgy and manufacturing technology, is at a
disadvantage relative to new Western equipment in
working such deposits. Reservoirs of more than 3,000
meters are considered too deep for present Soviet
turbodrills. A sustained embargo could substantially
slow oil production in the early 1990s. Western blow-
out preventers and remote hydraulic controls are
indispensable for controlling high pressure, corrosive
gas when exploring and exploiting deep reserves.
Western drill pipe, collars, and tool joints would be
lighter and stronger and provide improved efficiency
in deep drilling operations. These items would effec-
tively extend the depth capability of existing rigs by at
least 25 to 33 percent. Improved Western tungsten-
carbide insert bits with sealed journal bearings would
provide the Soviets with state-of-the-art cutting and
bearing technology. The latter features determine
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average bit life and the meters drilled per bit run. The
longer the bit holds up, the fewer bits used per well.
Changing the bit takes up to 66 percent of all deep
drilling time. The Soviets change bits twice daily at
3,000-meter depths; US midcontinent drillers change
bits about once a week.
Drill Pipe and Tool Joints
7. The Soviet Oil Ministry's plan for a 75-percent
increase in drilling in 1981-85 will probably not be
met, in part because of the insufficient quality and
quantity of domestic drill pipe. The Soviets currently
import substantial quantities of drill pipe. Countries
outside NATO and Japan could fulfill only part of the
need in the short run, but could expand production
within one to two years. Increased Soviet production
would require larger allocations of crude steel to the
pipe mills. In such a situation the machine-building
and metalworking sector would probably be the pri-
mary loser (it consumes some 40 percent of steel
output).
8. The Soviets badly need Western technical help in
improving operations at a turnkey bit plant purchased
from Dresser (US). If substantial improvements in the
plant's operations are not forthcoming, imports of
Western bits, which give 10 to 20 times longer bit life
than normal Soviet bits, will have to be stepped up to
meet drilling requirements.
Other Specialized Drilling Equipment
9. The United States produces a wide assortment of
drilling tools that perform a variety of tasks such as
retrieving broken drill pipe. Specialized tools contrib-
ute greatly to drilling efficiency when unexpected
drilling problems a:rise. Greater use of such tools could
lead to some increase in Soviet drilling efficiency.
Much of this equipment requires special steel and
precise machining and would be easier and probably
less costly for the Soviets to import than to manufac-
ture. Countries such as Austria and Finland could
produce this equipment within one to two years, but it
is questionable whether such firms would invest the
effort based solely on the Soviet market.
Blowout Preventers (BOPs) and Controls
10. Most Soviet wells can be drilled using low-
pressure Soviet or Romanian BOPs. The dangers inher-
ent in drilling for high-pressure or high-sulfur gas,
however, require the use of high-pressure BOPs with
automatic controls. Although countries such as Swe-
den, Finland, or Mexico could produce this equipment
in one to two years, an embargo would substantially
hamper gas condensate development in West Siberia
(high pressures) and Central Asia (high sulfur content)
until then.
Production Equipment
11. The Soviets need production equipment for
both old, developed fields and new undeveloped deep
deposits. In both cases, the availability of the longer
lived, more reliable Western items would be strongly
to their advantage. Oil production is most affected by
water encroachment at the Volga-Urals, Mangyshlak,
and West Siberian fields. Large quantities of high-
volume fluid-lift equipment is critical to maintaining
oil output levels and improving oil recovery rates.
New, undeveloped high-pressure, corrosive, and deep
oil and gas deposits will require equipment made from
special corrosion-resistant alloyed steel-wellheads,
trees, casing, tubing valves, and the like. High subsur-
face pressures and temperatures cause many Soviet
items to fail, and development of deep reserves at new
fields-Tenghiz and Astrakhan-may be deferred or
delayed if special Western equipment is not available.
Wellhead Assemblies, Downhole Completion Units,
Casing, and Tubing
12. The situation with this type of equipment is
almost identical to that with the blowout preventers.
Soviet and East European equipment is adequate for
most wells, but high-pressure gas production and high-
sulfur gas production require speciality steels and
different machining. Countries outside NATO and
Japan could begin production of all of these items
within one year. Soviet production of this equipment
would require reallocation of scarce specialty steels.
Offshore/Arctic Equipment
13. A major effort to improve offshore oil and gas
exploration and production capability has been
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launched by the USSR. The Soviets purchased three
drillships, two semisubmersible drilling platforms, and
a full complement of US technology and equipment
during the 1976-80 plan period. Offshore activities
have been concentrated in the Soviet Gas Ministry,
which will manage both oil and gas exploration and
production. Exploration for oil will be the focus of
offshore activity inasmuch as onshore Arctic gas re-
serves are abundant. However, the most promising
offshore areas could be more gas-prone-for example,
the Caspian, Azov, Kara, Baltic, Barents, and Okhotsk
Seas. The icy waters of the Kara and Barents Seas have
the most potential, but they present the most serious
technical problems for exploitation. Ice flows could
prevent year-round operations in all but parts of the
western Barents. Also, pipelines to shore would still
have to traverse Arctic permafrost areas.
Offshore Positioning Equipment, Tensioners, Risers,
and Motion-Compensating Systems
14. Although most offshore drilling equipment is
currently produced in countries outside NATO and
Japan, essential positioning equipment is not. The lack
of such equipment would cause moderate delays in the
Soviet offshore drilling program, especially Arctic
exploration. A country such as Finland would proba-
bly require two or more years to develop this technol-
ogy. The Soviets would require several years more.
Pipeline Construction
15. Current and future Soviet plans for new pipe-
line construction are strongly biased toward natural
gas, whose production has, thus far, been heavily
dependent on Western large-diameter linepipe, pipe-
layers, turbine-compressors, ball valves, and controls.
Western pipe-coating and wrapping materials are also
needed. Soviet linepipe is unsuited for high-pressure
natural gas transmission service in the Arctic. Domes-
tic turbine-compressors, pipelayers, and valves are
generally too small, or too limited in capacity to do the
job efficiently. The Soviets, however, are currently
attempting to improve the quality and capacity of
these items. Similar efforts to upgrade technology in
the past proved unsuccessful, but the Soviets' political
prestige is now on the line as far as the export pipeline
is concerned. Some improvements can be expected,
but the Soviets will still need all the help they can get
in building major gas trunklines.
Large-Diameter Pipe and Valves
16. Depending on the amount of Western large-
diameter linepipe already in Soviet inventories, an
embargo on pipe and valves could severely impede
Soviet progess toward the USSR's goal of completing
six 56-inch gas pipelines in 1981-85. The completion of
one or two pipelines by 1985 might be prevented,
reducing potential gas deliveries in that year as much
as 45 billion cubic meters. The Soviets are developing
their own large-diameter pipe, a multilayered pipe
manufactured in short sections. Use of this pipe would
entail a massive increase in the amount of welding
required for joining pipe. In any event, production of
this pipe almost certainly will be insufficient to cope
with ambitious Soviet pipeline construction plans
through the mid-1980s. Steel requirements for Soviet
self-sufficiency in large-diameter pipe would be enor-
mous. Although other countries, such as Sweden, could
produce the pipe and valves, the existing large pipe-
mill capacity in West Germany, Japan, and Italy
might deter potential suppliers from undertaking large
investment to supply the Soviets, who openly are
trying to develop their own production capability.
Pipelayers
17. The United States, Japan, and Italy are current-
ly the only producers of pipelayers large enough to
handle the large-diameter gas pipe. Soviet production
of such pipelayers is just beginning, and their quality is
uncertain. The lack of Western pipelayers would slow
the Soviet effort, although the impact is difficult to
measure. A major uncertainty is the degree to which
the service life of equipment is reduced under Soviet
operating and maintenance conditions.
Compressors and Turbines
18. Western compressors with 25-megawatt gas tur-
bines-a size the Soviets cannot yet serially produce-
have been ordered for the Siberia-to-Western Europe
pipeline. If expanded US sanctions were followed by
the NATO countries and Japan, the Soviets could lose
some 20 billion cubic meters of gas annually for one to
two years. The Soviets have two principal options in
the face of a full NATO and Japanese embargo-using
smaller turbines built in the USSR or in countries
outside NATO and Japan and perfecting their own 25-
megawatt turbines.
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Gas-Processing Equipment
19. Imported gas-processing equipment is necessary
for developing the high-sulfur gasfields of Central Asia
and Astrakhan. High-quality steels-an area in which
the Soviets are deficient-are the main prerequisite
for this producing equipment. Firms in countries such
as Sweden could enter the market within one to two
years.
Oil-Refining Equipment
20. The Soviets intend to expand their secondary
refining capability substantially in the 1980s. Installa-
tion of additional secondary refining capacity will
make refinery operations more efficient, and allow the
Soviets to refine crude oils with higher sulfur content.
Plans to substitute gas for oil would involve displacing
heavy fuel oil from present uses and would be ham-
pered by a Soviet inability to further refine heavy fuel
oil. The heavy fuel oil currently comprises a large
share of refinery output, and we anticipate that the
export market for this product will continue to be
unattractive to the Soviets.
21. While the Soviets are installing secondary refin-
ing equipment, they would probably like to obtain
more Western units but may be constrained by hard
currency shortages.
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1. This document was disseminated by the Directorate of Intelligence. This copy is for the
information and use of the recipient and of persons under his or her jurisdiction on a need-to-
know basis. Additional essential dissemination may be authorized by the following officials
within their respective departments:
a. Director, Bureau of Intelligence and Research, for the Department of State
b. Director, Defense Intelligence Agency, for the Office of the Secretary of Defense
and the organization of the Joint Chiefs of Staff
c. Assistant Chief of Staff for Intelligence, for the Department of the Army
d. Director of Naval Intelligence, for the Department of the Navy
e. Assistant Chief of Staff, Intelligence, for the Department of the Air Force
f. Director of Intelligence, for Headquarters, Marine Corps
g. Deputy Assistant Secretary for International Intelligence Analysis, for the Depart-
ment of Energy
h. Assistant Director, FBI, for the Federal Bureau of Investigation
i. Director of NSA, for the National Security Agency
j. Special Assistant to the Secretary for National Security, for the Department of the
Treasury
The Deputy Director for Intelligence for any other Department or Aaencv
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