SOVIET ENERGY PROSPECTS INTO THE 1990S (Key Judgments) (NIE 11-7-83)

Created: 12/14/1983

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National fuiclligcmr Kstlmatr

Soviet Energy Prospects Into

Key Judgments

Declassified and Approved (or Dy me Central Intelligence Aoencvo I

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SOVIET ENERGY PROSPECTS INTO

this estimate is issued by the director of central intelligence.

the national foreign intelligence board concurs.

The following intelligence organizations participated in iht preparation of the Estimatei

The CentralAgency, rt* OetemeAgency, th* Nofiond Security Aooncy, ond th* iniefljgence orc^zcnSorn ol me Oeportnwntt ol Stou. Ih* Treasury, end Fr*.B,

Abo Participating:

Tr- Aunlonrl Staff for UteJ^eoce.f rhe Army

Theof Hcred kie-igence. Deportment of fhe Novy

Ihe Auiitont Chief of Stcrff, irrleScience, Oeporlmeni ol the Air Iorto

key judgments

Soviet energy developments are likely to affect US andin two principal ways. First, wi^ tlie larger energy nativesworld^ilii- USSR in tlie long term has the potential lo become ajor source of energy, especially natural gas, for the West. Thisa Large boost to Moscow's hard currency earningsasisSoviet influence in Western Europe. Second, incost of energy development is diverting investment resourcesbadly needed elsewhere in the Soviet economy. This is makingamong consumption, investment, and defensedifficult. Soviet efforts to minimize these difficulties couldenergy production levels too low even to maintain the present levelenergy exports over the remainder of the decade whileenergy

The USSR is in transition from reliance on cheap energy to the use of expensive energy. Unlike the West, which has already completed much of its adjustment, however, the USSR will feel the major impact of this transition in. Because of tho inertia of Soviet planning and the overwhelming emphasis given to meeting production targets, the USSR has not yet made any significant progress in holding down the demand for energy through conservation. Energy consumption has grown faster than GNP, and is likely to growate close to that of GNP innless Moscow is willing to push energy conservation even at the expense of other economic objectives.

Consequently. Moscow must Increase investment in energyvery rapidly if it Is to meet domestic energy requirements andecline In hard currency earnings.. energyare increasing by aboutercent over those, mainly becauseear doubling in oil investmentwo-thirds Increase In investment In gas development and pipelines; in spite of rapidly rising investment, tlie rate of growth of energy output is declining. Energy is now taking overercent of total investment, up sharply from aboutercent. The resulting large claim on investment resourcesime when the growth of total investment has slowed is making it difficult for other sectors to get their new programs funded and hasajor factor depressing the growth of the Soviet economy. Investment in heavy industry is increasing: slowly, efforts are being made lo rebuild the transportation sector after decades of

neglect; agriculture is holding its own in investment allocations and. togctlicr with energy, is takingercent of the total; investment in consumer-orientedusing, light industry, andproltably falling in absolute terms.

The investment burden will probably continue to mount during the second half of tbe decade unless the growth of energy consumption, especially of oil, can be slowed, thereby permitting domestic and export needs to be metlower growth of energyontinuing squeeze on investment in other economic sectors might jeopardize objectives for raising living standards or possibly even military production. Consequently, energy policy is likely toontentious issue in preparing the neat five-year plan; specifically, political opposition to costly production-oriented energy policies is likely to build.

A Soviet policy shift involving increased reliance on energy conservation and interfuel substitution lo assure adequate energy supplies, while reducing the investment burden, would involve risks of misjudging the volume of energy savings that the Soviet economic system could generate. In such an event, energy supplies would become insufficient to cover demand, resulting in worsening domestic energy shortagesharp decline in energy exports until policies were corrected.

We do not yet have any clear indications of Soviet policy concerning energy investment, production, and consumptionome critical policy decisions probably have not yet been made. In this uncertain situation, judgment differ about which energy policy mix is likely to be adopted, and on how much difficulty the USSH is likely to experience in achieving an acceptable balance among its main energy objectives. Some analysts, including those in DIA, believe that Moscow will correctly assess both demand trends and the technical requirements for energy production, and consequently will produce as much oil as Is necessary to meet domestic and export needs. They believe that. If progress in energy conservation and interfuel substitution proves to be slow and Moscow considers it .necessary to maintain oil exports, the Soviets would keep oil production fairly constant. They realize that the burden of energy investment may continue to increase, but believe that the increase will not be large. Moreover. Moscow may believe that the economic benefits from incremental energythe resulting hard currencysuch, on balance, as to enhance the overall productivity of the economy. Other analysts, including those in CIA/DDI. believe that rapidly rising investment costs and worsening operating conditions are likely to leadradual fall in oil productionhey also be-

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licve that the Soviet leadership will, as in the past, overestimate the possibilities for energy conservation and interfuel substitution.shortfalls in oil supply could develop that would disrupt theeconomy and squeeze exports. Because opportunities to reduce oil deliveries to Eastern Europe and to increase gas sales are limited in, these analystsecline in hard currency earnings from energy exports if oil and gas prices arc unchanged.

The cost of producing Soviet oil. historically low by worldis rising rapidly and is likely to continue to increase. Productivity of new wells in West Siberia is declining as exploitation shifts from the highly productive giant and superglant fields, which have peaked or soon will peak, lo smaller, less productive fields. Secondary and enhanced recovery methods are increasingly being appUed to mature fields, especially in tbe older producing regions, in order to slow tliein production rates.

Tlie Soviets planmall increase in oil output5 and, because of an intensive investment effort in West Siberia, they will probably reach the plan goal6 million barrels per day or come close to doing so. Oil reserves are sufficient to sustain production at this rate for ihe remainder of the decade. However, with the cost of oillikely lo continue increasing rapidly, with gas-for-oilespecially in industry and electric power, offsetting rising oil demand in transportation and agriculture and possibly permitting oil consumption to level off in the latter part of the decade, and with gas exports rising rapidly. Moscow mayecline in oil production in the latter part of the decade.

Natural gas Is, in the long term, the USSR's cheapest energy source. On completion of the current massive program to build fivepipelines from the remote West Siberian gasfields to supply tbe consuming regions in the USSR and one to supply Eastern and Western Europe, ihe Soviets will be able to further expand gas production at moderate and fairly constant cost By the, gas production will probably approach that of oil (in terms of caloricnless limited by domestic and foreign demand.

Coal production is unlikely to increase appreciably until the USSR can develop or acquire technologies that would make ihe transportation of coal from areas east of the Urals or the long-distance transmission of electric power economically iustified. Such technologies are unlikely to be available until. Although the Soviet nuclear power program continues lo lag far behind plan, about half of the likely increase in electric power production inill come frcm nuclear plants.

Energy exports in the balance offfectedomplex mix of factors that neither we nor the Soviet Government can predict with any confidence, includinr. energy prices in the West. Moscow's main concern with respect to energy exports will be to earn the hard currency necessary to buy needed imports from the West while continuing to supply at least the minimum needs of its client states. Gas exports probably will rise by two-thirds while total oil exports will probably decline.

Eastern Europe may not be able to rely on supplies of Soviet oil to the extent il has in the past. The tight hard currency position of thecountries prevents them from turning to the world market for large added supplies of oil. Thereotential in Eastern Europe for energy conservation and for some further substitution of Soviet gas for oil in industry, but progress will beurther cut in Soviet oilto the near-stagnant economies of Eastern Europe would intensify the need for austerity measures and aggravate the danger of popular unrest there. Because it holds the trump card of coercive power, however. Moscow is likely to impose further cuts on the supply of oil to Eastern Europe if oil supplies would otherwise be inadequate to meet priority objectives of the regime.

Moscow will continue to stress energy exports for hard currency to buy technology needed for industrial moderniTalion and for special applications in energy exploitation and defense production, and to acquire the agricultural products necessary to offset domestic shortfalls. Although oil exports will probably decline, the USSR willigh priority on maintaining themubstantial level because of their importance and flexibilityource of hard currency. Moscow will beosition to offer the West European countries all the gas they are willing to buy innd can undercut the prices of any Western supplier while stillarge profit. If and when the Sibexia-to-Western Europe gas pipeline is used to capacity, Soviet gas exports to the West will double their present level. If Moscow lands contracts to supply even half of tlie West European gas-demand gap now foreseen for, an additional pipeline the size of the one now underwould be required, and dependence on Soviet gas could approach SO percent of gas consumption for major West European countries, far in excess ofpercent share that wc and some West European governments regardritical threshold for political risk.

Additional large Western purchases of Soviet gas would give the Soviets large economic gains. Increased Soviet gas production for export could substitute for exported oil at perhaps one-third of the

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investment cost Alternalivcly. if oil exports were held constant.gas sales would add greatly to Soviet hard currency earnings. Each new gas pipeline of the size of the line to Western Europe nowconstruction potentially permits additional gas sales worth nearlyillion annually at present prices, or about one-fifth of total current Soviet hard currency earnings. Such added hard currency earnings would enable Moscow to raise substantially imports of Western goods and technology that the Soviet economy badly needs.

The cost and speed of Soviet energy development will dependon the level of imports of Western energy equipment and technology. Although Soviet dependence on imports of Western pipe and compressors for gas pipelines should decline, dependence on imports of Western oil equipment will increase as production shifts to deeper and more complex onshore and offshore deposits. Most of the needed equipment is available from non-US Western sources

The high cost of Soviel energy development lias possibleiom not only for Soviet economic growth but also for military programs. Although the military will, probably retain its premier position in the resource competition, it cannot be fully insulated from the consequences of economic problems. Even if there is little direct competition for resources between energy and military industries, the growing cost of assuring adequate energy supplies could indirectlyactor slowing military expansion if it slows the development of the heavy industrial base on which future milllary growth depends.

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