PROSPECTS FOR SOVIET OIL IN THE 1980S (GI 83-10130CX)

Created: 6/1/1983

OCR scan of the original document, errors are possible

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Prospects for Soviet Oil in_

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Prospects (or Soviet Oil in'i

KeySoviet Union has thus far averted the downturn in oil produclion that

had earlier predicted by virtue of an enormous. bnite-forec devclop-

effort thai hasetroleum reserve ease larger in size than we

previously believed. Production of oil and gas condensate now standi4 million barrels per daynd continues to inch forward, albeitate of lessercent annually Tbe cost of doing this has beenSovietvfostry has calculated thai the cost ofaml of oil nearly tripled0 andwe believe the Soviets will allocate enough investment resources to the oil industry to permit Ihcm to come close to if not meet their produclion target6

Beyond the end of Ihe current five-year planowever, the situation will probably become increasingly difficult:

Outside of West Siberia only (wo major onshore producing regions.Kazakhstan, arc not in decline, and both will remain relativelythroughout this decade. Promising offihore areas will contrib-

ute little before.

By the, production at moat of Ihe supergiant and larger giant fields on which the Soviets have relied for Ihe bulk of their oil over the past two decades will be declining rapidly0 the Soviets will need lof new oil just to offset lost output fromf their largest oil fields.

- Though the remaining hydrocarbon resources of the Soviet Union are potentially among the largest in Ihe world, the Soviets have already tapped or will soon have tapped mini of Iheir highest quality, favorably located oil reserves. Since the, well flow rates have steadily declined, and water cuts have rapidly increased even in oil-rich West Siberia, sure signs that Ibe bcsl reserves are being depleted and that ibe Soviets must work increasingly hard just to keep production from falling. To make mailers worse, new deposits tend lo be deeper, harder to drill, and more remotely located

' The IKiciic Iculli.eove Agency (DIA)with the production fnrecttt. DlA dot* not him with ihefo'mii>or. of Ihe Soviei oil induMry In the Utter mOt nor -ith ihr pio-cc'.ed oiln level0

on maintaining high rates of production growih bas resulted in Soviei failure lo initiate the kind of exploration program that would be essential to proving up substantial new reserves, especially outside West Siberia. Consequently, potentially oil-rich portions of the Arctic. East Siberia, and even parts of West Siberia will contribute little significant new oil output until.

largely self-sufficient and highly sophisticated in terms of technical theory, the Soviet oil industry suffers from the same kinds ofpoor performance, and bureaucratic mismanagement that tend to plague other civilian sectors of the Soviet economy.

Though none of these sets of problems individually would preclude the Soviets from maintaining some growth in oil output over the rest of thistogether they have dramatically raised the average and marginal costs ofarrel of crude. The Sovicu plan to increase the oilshare of industrial investment fromercent in the previous five-year plan toercent in lhc current plan, and5 will be allocating to the oil sector aboul one-third of all incremental industrial investment funds. Our own estimates of investment requirements and analysis of past spending trends indicate that Moscow would have to increase investment in the oil industryillion rubles1 toillion rubles0 just to keep production at its present level. In an era of slow growih and tarnished performance in other key sectors of their economy, like agriculture, the Soviets, in our view, will be unwilling lo sustain this pace of investment.

Wc do not believe the Soviets will get much relief from reductions in demand for oil.0 internal requirements should riser. up0 in spite of substantial gains in the substitution of gas for oil. The Soviets also export moref oil; two-thirds of this amount supplies Eastern Europe and otherslates with roughly three-fourths of their oil needs; over one-third is sold on the world oil market, comprising the Soviets' principal source of hard currency. Even with careful domestic fuel management, completion of the Soviet pipeline for export of gas to Western Europe, and continued pressure on the other CEMA countries to reduce their liftings of Soviet crude, totaldemand for Soviet oil should continue to hover betweenndhrough Ihc rest of.

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recise estimate is not possible because of lack ol data, we do not believe thai Moscow could, without extreme difficulty, wring much moreut of projected total demand for its oil during this decade. Only gradual cuts in supply to Eastern Europe are possible until late in the decade when the Soviets will have gas availableubstitute for oil. The Soviets cannot afford substantial cuts in hard currency etporti, which provide the foreign cachingc to buy grain and technology, until natural gas begins to take some of the pressure off oil as an export earner toward the end of the decade. Finally, the structure ofdomestic oil consumption does not lend itself to substantialcuts In use, nor is there an effective price system to help reduce demand. Opportunities to substitute additional coal and gas for oil appear to be limited by sitong competition for investment resources andin the transportation network and refinery industry. To cover the potential supply shortfall, we believe the Soviets would have to turnrogram of conservation by fiat, coupled with additional unilateral cuts in exports to soft currency customers. Moscow's flexibility would be very limited

Ttie supply-demand outlook and the escalating investment costs present the Soviets with an increasingly serious oil challenge, albeit one that probably will prove manageable The Soviets have several investment options available.

They could continue to increase the total amount of economic resources going to tbe oil industry during theh Five-Year Plan but slowly reduce the rate of growth in this investment. This strategy would most likely result in pioductioa plateauing atSy the middle of this decade and subsequently declining slowly to betweenndhoughrogram would still beand drilling effort would have to double between now andcourse *OuM be consistent with Moscow's past willingness to make the effort needed to avoid an energy crisis.

Wiih an enormous increase in investment, the Soviets could possibly hold production betweenndOil reserves are probably adequate, but we believe the costs of exploiting ihcm could prove io be prohibitive: total investment and drilling would have to triple,

(he number of wells on artificial lift would hare to roughly double. This option would he very expensive and. without windfall discoveries, wouldrag on oilier sectors of the economy.

At the other end of the spectrum, the Soviets, if dogged by production problems and worsc-than-expected geologic conditions in Ibeir oilfields and forced to shift investment rubles to other hard-pressed industries, could choose to sharply limit the growth of resources going to the oilafter the end of this five-year plan. Such an approach, according to our calculations, could result in production peaking5 and subsequently falling as lowrhis option would, in our view, create an unmanageable and potentially catastrophic gap between oil supplies and demand.

Though the situation might change, we believe the Soviets are nowthe direction of the fiist option. Recent speeches by Andropovby senior spokesmen of the oil and gas

industries, and the stiTl-sketchy details of the Soviets'year energy plan, convince us that Moscow is feeling the energy investment pinch. These sources suggest that Soviet planners may gradually shift the energy investment balance from oil lo the currently more cost-effective gas later in the decade. If this is theit certainly woulderychoice under thewould probably see little, if any. further growth in Soviet oil outputndeed, given the enormous and increasing effort the Soviets have been making since theo keep production from leveling off, we would expect to see some decline by the end of this decade.

f

ajor shift in the oil market or change in energy technology. Moscow, in our view, wouldtrong incentive to keepecline as small as possible. Other things being equal, production below0 wouldap that would pose great difficulties for the Soviet and East European economies. Conversely, however, sustained oil production much abovever the rest of this decade might notrerequisite to faster economic growih.

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in ibe final analysis, the oil policies the Soviets choose and the ultimate success of those policies will depend on manygeneral state of the Soviet economy and key sectors like agriculture; the Soviet perception of the military balance; the state of the world oil market; the success of the development and export program for Siberian natural gas; Soviet success in substituting gai for oil in the domestic economy; and the stability and confidence of the new leadership. One thing, however, is clean the Soviets face costly energy problems that will absorb much of their attention andthrough Ihe rest of this decade.

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Contents

rage

Key Judgments

Soviet Oil Challenge

Reserve Base

Quantity

Siberian Reserves

Siberian Reserves

dial Reserves

Quality

Reserve Base for

Possibilities

Production

i

Problems

To Meet the Challenge

Versus Weaknesses

for Success

Approach

Siberia

Siberia

Ul Surprises

for: Implications and Alternatives

Side Remedies and the Price of Grovtb

Dilemma of Risin* Cosis

the Inputs

Demand Side

Any Shortfall

Oil Marker Factor

Ahead

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ll

The Soviet Union, abundantly endowed wiih energy resources, is no* (lie world's leading oil producerubstantial net exporter of oil. As Soviei oil produclion has increased over tbe past threeo hai Moscow's reliance on this resource. Oil has fueled national economic growth, and the expansion of key seciors of Ihe economy is lied to iu availability. The Sovieu" ample domestic supplies of oil have cllowed Mcocow to provide the Council for Mutual Economic Assistance (CEM A) countries and other client stales with inw cost oil and to export crude oil and petroleum products to the West for badly nrxded hard currency. Petroleum hai alio become an essential element in the USSR's strategic positionymbol of national pride. Thus, an accurate assessment of Soviet oil production prospects is central to an understandingumber of larger economic, political, and military issues in.

The number and the range of estimates made by governments, private industry, and academicians reflect the importance and difficulty of predicting Soviet oil production. Much of this interest was stimulated by the ClA estimaten contrast to optimistic forecasts ofrowth madeumber of other individuals and organizations,7 esiimaie asserted that Soviet oil production would soon peak and then decline rapidly. We now know lhat estimate underestimated both the size of the Soviets' petroleum reserve base and their capability and willingness io make the investment needed jo keep oil output growing. Indeed, though the evidence is not conclusive, we believe that the unclassified release of7 CIA estimate may haveole in spurring Moscow to take these measures. Although Soviet oil production has yet to decline, many of the trends first highlighted inellumber of newcontributedlowdown tr. the rate of growth of Soviet oil production.

With the era of rapid oil production growth ncaiing an end. now is anlime to reexamine the short- and long-term oil supply outlook for the USSR. This report assesses whether the Soviet Union can produce enough oil over this decade to satisfy its needs and those of iu clieni states, and what the Soviets could doerious supply problem. The principal focus of the analysis is on the physical resources of the USSR and the capabilities of the Soviet petroleum industry to exploit them. In

describing lhc dilemmas facing ihe Soviets, this report summarizes the findingsumber of building-block studies referenced in theincluding some that arc available only in typescript form. The reader should consult those reportsore detailed discussion of our analytic approach and supporting data. Moreover, this report addresses only superficially tbe broad economic, poliiical. and military impactotential supply shortfall and Soviet efforts to averthortfall. These issues will be treated in Policy Implications of the Soviet Economic Slowdown, scheduled for publication later this year.

Prospects for Sorief Oil in,

Soviet Oil Challenge

Tbe Soviei rxtrakon industry is oce of the oldest in tbe world. Bcfincicf wiihwdb in Baku in Ibefigure ll tbe USSR hat rises- lo full place In world oil production. ssith in average oulptilullion barrcU per day) in IM2It ranks secondortsewl of, snd ii ooc of lhc few mayor industrialiicd naiioru selfia oil (figurehe era of rapid ero-il: thatIervird tic Soviet petrolemri ioduiuy liece World War II. bowever, has aow endedlthough annual incrcmenu are ttillibe raie ofsftoil production has been low

We do not believe that the current slowdown will bephenomenon, and numerous staiemcnilofficialsovtion lo know saggcsiIt of the tarne mind. According, toand the Stjvicti' own suietnents. the icotislowdown lie in tbe drHcnoiaiion of theof the known oil reserve bate,rapidly raising the coils of producing and lla baric) ofhese difficulties areby the technical and bureaucraticof ibe Soviei oil induiiry. whose technologymuch aa two decades behindWealmattcri

that the Soviet Ministry of (lie Petroleum Industryineffective field development ptae-ticei. poor planning, ind plain bureaucraticoften unablete effectively the lechnci-ogy it does have sval.iKe

' Thi SUvint initadt ftlliquid hjdrwsilm" pro

taooiiina with talk oil aad naitirsletaoe oil

ii piadkiclisn |latiii<i. Cat mndrnailt prodrxtioa Is al fiowiag

and vill pmhablvmai of the TulareIkeofSwiet noon

trrat <nl pililiaietataitle prodocuaa aaltu lUtrd

' Tke ten* trtaiei at ajenad as Sa>vn tetmei n'ri te it*

<li>'it iiheaad eherveal owvosithi leseivwn ieth. lousiiy. fin'*tv.li

irnvfeniu" and *tuch dnrjailnran and

ml xlatl (it union

A slowdown or decline in production, however, would be no problem for (he Soviets if o' ciporU were not so vita! to their political and eeonomie goals, fcjeept tirades- Ibe most petsinusitc so pfrly-demand acraarios. ibe USSR is capable of meeting its own needs ihreigb Ihe end of ibe decade. But with about one-fourth of their oilto dependent titles in Eastern Europe or sold for vital bird currency, tbe Soviels can ill afford to lose much of their caport opacity during thiiubaiaaiial ;liac in Soviet oil available for ex part- beforen demand for Weal Siberian gas allow* lubaUniialincrease economic aad political stresses in Eastern Europe and other client states that depend on Sc-oci energy and could deprive Moscow of at much asrrccni of iu hard currency earnings fiomports. In our view lhc immediate concern for Ihe USSR, then, it noi to avoid import dependency bui io minimize theof ton of earnings and other btMfm from oil exports

avoid the

OiTTiCuli political and economic choicer, that an oil supply crunch could eMail some lime In, ihe new Soviet leadership is struggling to formulaic new long-term policies for Ihe oil Induiiry and the rest of lhc energy lector. These policy decisions will be essentially investmentpotion of in-acasingly scarce inves-jTcat fundsllocate to the energy sector and bow lohcac funds among ihe compeiing eneiiy interests. Wc believe lhai lhc onus on Ihe policymakers to make ihe correctii grc.ii, because their choices could affect the futuie pattern of economic development and. hence, ihe health of the economy for decades.

Alibocgh the debate over long-term strategy is still

ilrvfavnlMai rlaia

ariety

sources, and cuircnt five-ycai plan il VI') goalsthai taccattonrnikfr* have already come io URN

wiih Ihc notion lhal the cia of chup >nd plentiful growih in oil supplies it over. They ate now wcIihr waysopeewtint increments lo national oil production cannot be obtained wilheut imposing iticit tcchiucat aid economic demitdi or tie eeooomy We believe that acceptance of this new fact of eeooomte life if reflected in Soviet osl-prodix-lion goals forOs.) goal ii no* tei6. an increase of0 output and an average annual increase of lessercent. Thii goal, already reduced from an upper limit9hen the plan was first announced, could be scaled bach even rurtherhe ihird year ofth FYP. Aa oflicml goal0 will not be availablead it will be determined by the performance of tbc Oil sector over the neat three yean. In an energy forecast submitted to the UN Foonomic Commission for huropehe Soviets proyocted0 production would fall38. We believe, however, that ibe rising costs of oil production will force Ihe Soviets tooal at or below the low end of this range

educed level ofo meet iheirhe Soviets must alter Ibe energy economy of the country through oil conservation and lhc substitution of other fuels for oil. They are attempting to do jusi that. The conservation program, however, hampered by ibe nature of Ihe Soviet economic system and (he structure of energy demand, bas had little effect to date, and appears to offer limited help through tbc rest of. Tbe Ind substitution program, particularly tbe sobsiiimnc of natural gas for oil,ore promising altereaiive. The current FYP calls for investment in lhc natural gas industiy to me by ISO perceni, and the Soviets are apparently willing to spend the rubles needed to increase (he production of gas from (heir nearly unlimited resource base, to build (he necessary pipelines, and to convert capital equipmeni lo gas At the same time, the cost industry, whose reserves arc also more thin ample. i> suffering from an array of technical problems thai ibe Sovicu have yet lo remedy The real challenge fot ihe oil industry In the shot rud( then, it to maintainat the current high levels until natural gas can begin tootenti-'ly terioui oil gap anting near ihe end of the decade

tht Reverie Bbv

The fad thai the Soviei Union has risen io frit place ist morlJ petroleum productionestament so the

of lis reserve bake, which by most es lima In is among the largeai io tbeumber ol major potential hydrocarbon-bearing regions of tbe country are in lemnie areas and remain virtually unctptored, and exploration of offihore areas other thin Ihe Caspian is jusi beginning '

The reserve base ia lucalcdayor and numerous minor oil and gai provinces scattered throughout tbe country (figure IJ. Per bens the most noteworthyof tbe distribution of Soviet oil is the relationship between the location and site of (he oil-bearing basins and Ihr location of Soviet economic activity. With the exception of (he Volga-Urals region, the economic and population heartland in the weal contains mostly minor oti-bearing basins. The large sedimentarythat will provide the USSR with moat of its oil for the res! of this century arc in the lightly populated northern and esutero sections of tbe cctsalry, where environmental conditions are severe, economic infra-iiruciurc lacking, and developmenl costs high Thus, as the Soviet economy and its demand for oil have grown since World War II. the Soviets have been forced to move their search for oil into remote regions farther from the centers of petroleum demand.

Tbe Soviets have concentrated their deve Icemen! effortsingle regionimerovide needed growih In oil supplies. As Baku, tbc earliest ceoicr of major extractive activity, declined afiei World War II, the Sovicu moved north and east into their "Secondhe Volga-Urals Basin. The Volga-Urals provided large annual increments of growth for lwo decades and ts still ihe second-largest producing irea. accounting foeerceni of national oil output. Produclion from ihe basin is now declining rapidly as major fields and reserves become depicted ,

When it became apparent ihn tbe Volga-Urals woo'id no ionic- be able lo provide large annual incrementi in oil ouipul. the oil industry began to shift iu search

Soviet Union: Oil Production and Reserves

BIMl ME

Figure 2

Soviei Union: National Oil Production, Consumption, nnd Exports

Mi"too me

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fot new oil to ihe remote and environmentally hostile Wet! Sibcriin Basin io tbe early iSfrOi This prolific buin peovided most of tbe growth in, and will be. accordinj to Serin* own analysis, tbe leading producing region into. It now accounts forercent of national oil output, and the Soviets expect this share to rise to more thanercent5 and even higher by the end of the decade. Although West Siberia contains ihe richest knowi hydtocarbon deposits ia the country andis c'pected to inciense for several more yean, the rate of growth hat slowed. Some segments of the Soviet oil industry are now arguing openly thai Ihe time is ripe to shift tbe focus of eiplotation activity into virgin regions of the country such as East Siberia and offshore bums in (be Kara and Barents Seas The Soviets acknowledge thai production from ibeae areas, however, will notactor nntil the nesi decade.

Rr-teirr Quantity

The sire and potential o' its peirolcuro-reserve base puts the USSR in an enviable rwiiwn compared to other industrial)ted nations, but potential cal reserves hold IKlle significance for ihc immediate oil supply problem. Because of ibe lag between theeposit ii discovered and lhc lime developmentto Soviet iiaterr-ents and our own analysis, not less than four to five years and some-tines seven years or more for fields in remoteprodaction independ almost entirely on hydrocarbon-bearing structures thai have alicady been discovered and whose reserves can be rapidly eiplotled by delineation and development diilling.

Estimating the actual liu of the Soviei reservei formidable analytical task Sincehas ireated the site of its oil reserves astecret, publishing only occasional,incontinent data. Our las* official data

ed that at the cad} Moscow probably esiimat-ed its proved reserves to be aboutillion barrels, and regarded tbcm as adequate in Quantity if not quality. Another problem it the USSR's reserve das-sifkation system, which is not only different from ihat used in the West but has changed over lime.an estimate of tbe sue of the reserve base through lhcby the Sonets or Ihe Unitedbe Italic: it mull allow for depletion of known reserves, for increments tofrom exploration and development drilling, and for improvements in Soviet recovery technology.any eslimate of mineral reserves is basedumber of highly subjective judgments and should be treated with caution (see insetndnd insetnd table II

ffnr SIMes Rntmi. Became West Siberia is so central io Soviet production in, wcan intensive basin analysis of the region, focusing on Use middle Ob* sector where the Soviets are increasingly cortcenlisting their oil produclion

Reieryet: Otfiniiions and Terminology

I

Estimates of Soviet Oil Reserves

Soviet system of reserve claisificailon it much different from lhai uied In the Weil. The Sovieire based primarily on the degree a/ exploration and delineation drilling lhai has been carried out, and cannot be directly equated to ihe Wesiern categories of proved, probable, and possible reierves.'which are based more on prevailing economlr and technological factors-

In our analysis, the term "provedroughly to the Weiirrn definition, reserves that geological and engineering data demonstrate with reasonable certainly to be recoverable under exliling eeoatonve and operating conditions. The nearest direct comparison lo Western "proved re-serves"in the Soviet system Is the concept of "explored"or "commercial"reserves, whichiheategories plusercent of ihe C, category. Our geologic analysis, however, indicates that ihis percentage is too high forand we would include onlyercent of Soviei C, reserves as proved.

Our "potentialreserves"category, which Includes both probable aid possible reserves by Wesiern definition, roughly correspondshend In this asiesiment represents our estimate of ihe recoverable portion of the remaining C, reserves and of ihe Ch li, and O, categories

ased on this geologic analysis, we believe ihai the size of the reserve base in West Siberia will not by itselfonstraint on produclion growih from thai region during this decade. We estimate, for eiample, that the middle Ob' region alone may have originally contained as muchillion barrels of oil in place. Our engineering analyses of Soviettechnique* at major Soviet fields in the region indicaic that the Soviets probably will achieve an

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average rr^ayvery efficiency of abouloercent for ihe middle Ob' depositshole. Assuming the Soviets find and exploit these resouices efficiently, they could expect to ultimately recover perhaps some HS billion barrels of oil

According io Soviet data, more than IS billion barrels in the middle Ob' region have already been extracted, leaving by ourotentialillon barrels of ultimately recoverable oil in that lesion alone. Not all of this oil would be available to tne Soviets in this decade or even in this century- Producing it wouldassive exploration and drilling program :nd more scaics investment resources than theany otherbe able to muster. From geologic (. .analysesC

owever, wc can confirm that Ibe cunenlly producing deposits alone contain ai least IS billionprobably muchas piovcd leserves by strict Western definitions Of the remaining SS billion barrels, an estimated 25

-

Reterre Calculation Methodology

ariety of techniques to eslimate Soviet proved and potential reserves, depending on the data available and the site and importance of eachraiei and recovery poientials) of each oil-bearing tone.Finally, we extended the productivity data from known to potential oil-bearing structures to esii-mate oil tn place and proved and potential reserves

Approach

the middle Ob'region, whichercent of West Siberian oilnearlyerceni of ihe nationaleant of geologists,ndspeelalisti lo perform en intensive baitnTechniques the US oil industry would useoil in place and potential oil recoverylo data available

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Proved and Potential Reserves

In simple terms, oar approach to estimating oil In place and both proved and potential reserve! of ihe middle Ob'region was as follow*:

Identified and measured the areas of potential hydrocarbon-bearing structures by correlating Q

J turtaee geology with Soviei maps of the

Ne"dac ^malytis of drilling and produclion activities, we determined whether ihe Soviets knew their structure! were oil ht*nefm-

We ihen useireporting to identify the relative productivity fikat it. well

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level of Confidence

Basin astestments of hydrocarbon-bearing potential lend to be optimistic when based principally on geologic data To compensate, we tried to bein assigning productivities and recovery raits and tn Interring ihe actual pretence of oil. Our resutu fall approximately within Ihe middle of thehe estimates done in recent years by other govern-meat agencies, private firms, foreign countries, and the Soviet! themtelres

We are moil confident of our Judgment! of Soviet proved reserves in the middle Ob'. We are leu certain about ihe accuracy of the estimate of potCDliilIn both eases, however, because of our conservative approcch. we believe that the ime amounts of oil in place and potential reserves are more likely lo berather thanwe have estimated <

OtherApproach Proved Reiervei

A lack of dataimilatly detailed analy-tit of reiervei in the rett of the Soviet Union. For Komi. Kaiakhitan. and other areas in West Siberia where data are relatively plentiful, we calculated proved reierveiodified volumetric geologic approach similar to the oae uied in ihe middle Otoe each of ihe remaining producingwe calculated proved reserves as the product ol current annual produclion ond an estimate of the

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FiCurn 3

Sorici Union: Resent Classifies lion SrsMm

Reserves

afoi/i. wr oreonfideni afthe curacyprovedrntrve estimates, primarily becauseOf tht RJP estimate, benefited fiomreserve data provided^accuracy af the pottn:iai retort estimatesbe expected to exceed the accuracy of thein the volumeincgrologve eauaiton. Weto estimate many of these inputs, andour potential reserve! eslin-att mayreality by ptut-or-mtnuioercent.inputs -we kept conservative, we believeis mtoce likely to be on the lo- sidt

Tht SaaLn

Sofie'i own reserveor

Ike year. Their data both prene-year Snapshot af what the Soviels believed iheir reserve base to be and lend io confirmite According lo this data, at the endJ Sovfettuiercent ofcnaitd somea BO billion bareelt Since ihai lime, someillion barrels have been produced leaving someOillion baerehhatever reserves the Soviets have bren ablr io prove up subsequently through eiplo-alion and dnelapment dullingcstemlsilt icenano in which the Soviets found new oil lo replace only iO perceni of oil produced, the Sowed would Still be eo/ryng OS "explored" Or proved some JI loillion bareeli of oil. <rery muck in line sumoteaf roughly iO to '0 billion barrels

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billion lie in fields now being developed or in deposit, well explored by the drill bit. These ttmeC nalyses indicate that much of this oil could ix protectable as the decade prc-grcsses If ihe Soviets made tbeindeed, the Soviets probably consider moai of iheseillion barrels as proved. Conscqucntly, we believe thatib decade the Sovieti will have available forase of proved reserves ofillion barrels from the middle Ob' region alone. Most of the lemaining JO or more billion barrcli of potential icservci lie in largely undrilkd but Ecophysitally explored iliuciurcs and would not, in our judgment, be available for prodec-lion untilr later

North of the rruddie Ob' study area, the So ieu have Dot yet been iblc lo conduct an citcnstvc ripiutaiksr. and development effort. Our low provedillion barrels, reflects this lack of effort rather lhan pessimism over Ihe long-lcrm potential of this area. South of ibe middlen Tomsk Oblatt. Ibe Soviets have been active linceith much less success lhan in ihe middleomsk probably containsillion barrets of remaining proved Oilostly io deeper Mcsetioic deposits. Tbe Sovieu havetubsunlial reserves of much deeper PilcottwC oil ia Tomsk and Novosibirsk Oblasu Although Ihis area conuiniillion barrel* of potentially produccoble oil. we do oot think ibe Sovieu will be abledo much wiih Ihese reserves in this decade

In addition to the crude oil reserves, Weil Siberian condensate reserves are sabsiaaiial, an opinion held by both Soviet and VV est ere oil eiperu Based on published data from Soviet Gas Ministry, we estimate lhc current proved gas condensale reserves assoeiaied with oil to be on the order ofillion tons, with little growth expected over the resl of Ihe decade Recently published Soviet data Indicate the presenceillion ions of ccesdensaie reserves att-xUted wiih gasfietds. primarily lhcet giant fields in northern West Siberia We cipeci large additions to this legion's proved condensate reserve loul of0 million torn or, vcty roughly, lull billion barrelseaploratory and delmej'toii diil:Lng increa.

'OwtSai*aviva*aaa as It

at m* TW awnra lnw avalpin in widelyo ytaield lo filM

Son-Weil Siberia* Rtttfti. In contrasi, ihe reserve siiaaiion west of ihe Urals aad inregions rs prccarsout al best. We bscrw from Soviei data thai reserves tn the criiical Volga-Urals Basim art falling rapidly, and wc estimate ihai the proved reserve base there has probably dropped belowillion barrels. Reserve additions in Komi andonly areas ouuide Wesi Siberia scheduled for any significant produclionhave notlived up lo Soviet especial ioni. ai least in part because of large shortfalls ia eipkiaioiy drilling. Reserves in the other producing regions art too small to have much of an effect oa theotal ia this decade

ir.diiilry

i Given the uncertaintiesestimating Soviei oil reserves, it is foolhardyto arriverecise estimati. Taktnpromise of West Siberia, IheKomi and KarakhsUn, and tbe deterioratingin other producingestimatereserves ai the beginning3 to be inofosllioa barrelshusin the lower half of the range of estimates madeanalysis of the Sovietand is comparable to what analysis ofthe Sovieu esiimate

iheir own oil reserves io be

Reserve Qua lily

Numbers do not tell the wbole story in an aaalvsis of ibe Soviet reserveeserve base must be accessible anduality that permsu esptexutve* wnhoul undue technical and economic cosu. Tbe Soviet oil industry faces growing problemi on both counts In the middle Ob', out geologic analysis indicate* that the Soviets will find decreasing reservedeeper reservoirs with lowerpermeabtlity. and flowthey begin work in depceuu fatihcr from the earlier centers ofMoreover, bated OO out analysis and the Soviets'

*i ike tariwiaft C* rack baitceswiifl b> open a

pore srwee inii Oil tuPrrimabvWivrasa't at lieibfluids move ibmgb lbs fori spate

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o-ii eipeeiaiiom. ihe remoteness oi these newt-Mli fiom the oil consuming center! In the liuiopean USSR anduing middle Ob1 infra ilriKtuie. will acceleraie the already high com of development' Many of the same infrastructure and cost problems will occur in Komi and Kazakhstan, where the Semen are working very haid tothe sue of ihe pto*ed reserve base

'S.

lo other areas weai of the Utah, ihc reservealthough favorably located near ciisung oil prodac-

refining, and trans porta Ironbong ciseevered in

the ciitical Volga-Urals, for euxnle. are smalki, more scaitered. and deeper, with lower quality oil

IVaw for

Although problems of duality anC accessibility con-itime lo grow and -ill intensity Ihe challenge of development, we do not ihink ihat reserves bywill senouily constrain Soviet oil produclion in ihisdeenile. Conlinuaiton of produecion0 at the prrsenl rale of more4,mple. would result in the subtraction of more thanillion barrels of oil from our estimated proved reserve bine0 billion barrels nition-idc. Wuh the proving oolS billion more barrels ofreserves in ihe middlehe expansion of gas condensate reserves in Weal Siberia, and minor addi-iions west of Ibe Urals, ibe Soviet proved reserve base -ould still be aitLior barrelsthe end of ihe decode

Wc also believe ihc Soviets are reasoaabh content -sib iheir reserve uiaation forlthough ihey plan to increase caploraiof) Grilling meterage bybouterceni naisooilly and byeit Siberia duting this FYP. the national in-cicase in absolute terms will be small, lessillion meters. We would eipeci touch larger increase planned if the Soviets believed reserves were in danger of dropping below the amount needed io achieve future output targets. Furthermore, although ihc Soviei planning system is far from perfect and there have been instances of gross miscttculalioo.o noi believe that cevesopment drilling and crude oil ouipul would be planned al levels that Ihe Soviets believed io be completely beyond the bounds of feasibility unless Ihey were attempting to mislead the tea: of the world Finally, we Inc-

'hai ptoduclior. fiom West Siberiathit

sbbstintiM amount! of new reserves are continuing to be proved up

There are. however, indication! of Soviei concern over Ihe long-ranee reserve outlook, as indicated bydiscussions in Ihe press of ihe declining reserves-to-productionenerally accepted principle in the oil industry holds that production must be backed up by an adequate ratio of piovcd reserves to production if steep declines in future output arc to be avoided. Our analysis of Soviet reserves and production data indicates that this key indicator of future production possibilities is fallingesult of the overemphasis oa production drilling ia, the poorer quality of new reserves, and decreasing finding rates of new oil. If the Soviets do not succeed in reversing this downward trend, they will probably run into reserve constraints onin

*

Soviet Union: Monthly Oi

Mir

lie

IiT '

roduetio"

presencearge proved and potential reserve base isuarantee of future production increases. The Soviets must also be willing to devote anshaie of limited investment resources to the oil induiiry and be capable of applying Ihe level of managerial and technical expertise needed to develop and produce this reserve base. The nature andof their present and future reserves will severely test both of tbese requirements, To tbe west of the Urals, equipment needs, technology demands, and costs will multiply as the Soviets move to exploit tbe lower quality deposits. In West Siberia, theseas well as infrasiructtiral and logisticroads, housing, electric power, timely delivery ofrequire huge upfront costs before oil starts lo flow. .

Production Possibilities Current Production

Future oil production for the Soviei Union or any oihcr country is impossible to predict withouta number of reference points that become increasingly tenuous tbe further one moves from tbe present. Over the remaining Ihree years oflh FYP, Soviet oil production will be determined largely by the sire and quality of known deposits, as well as by invesiment and field development choices that have, for ihe mosi part, already been made and are known io us. In lhc last half of Ihi, decade, however.

Ian Iff*

Sovict produclion levels will increasingly depend on unknown and haid-lo-predict variables like future exploration success and Investment decisions that might be influenced by external political andfactor! i

se Soviet oil industry reported an aw-rage daily produclion rale ofillion barrels- For tbe roilnoolhs, daily output, while aul! inching upward, has varied by lessercent, fluctuating4 iriillioa barrels, as reported rfionihly in the Soviet press (figurerom all indications the sharp drop in September2 and subsequent equally sharp recovery in October do not portend any major changes In lhc pace of Soviet oil production, bul reflect lhc caynsequencesire and lengthy power outage thai disrupted aciivitie* inhigh petceniace of Weal Siberian deposit!

Though slill growing. Soviei oil produclion has noi reached plan goals ror some lime The Soviets failed

cither the original or revised targets foiof the last FYP, and have not equaled ororiginal annual targetlans havedownward lo the point where6s no higher thanoal, already lowered from an. represents planned growth ofI perceni per year

These small increases have beco possible only because the Sovicu have been able to keep West Siberian0 io anercent average annual increaseest Siberia's share or national ouipul is nowerceni, and should continue to grow throughout this decade. Other than West Siberia, only two major regions of Ihc USSR are currently able to boostKomi region, in the northern European USSR, andon the eastern shore of the Caspianneither are adding production increments large enough lo offset significant declines elsewhere. These three growth areas, together with the declining Volga-Urals region, produce more thanercent of Soviet

will largely determine Soviet productionin

Aside from West Siberian crude oil production, (he only major bright spot for tbc Soviets has been the growib of gas condensate production. We know fromoviet data tbai condensate output is growingurrent annual rate of aboutercent compared to ibe less-than-1growth of oil and condensate combined. Condensate slilllessercent of Soviet oil output, but the Soviets expect ihat most, if not all, of any growih in oil production will probably come from condensate. Their optimism is based on the immense reserves of natural gas and condensate in the northern gaificlds of West Siberia. The Soviets hope to recover as muchillion tonsfrom the Urcngoy field alone

Oil production in all other major Soviei producing regions ii now stagnating or declining. Volga-Urals production has declined by moreits peas:he drop was largely the resultecline ai the supergiant Romashkino oilfield, the leading producer in tbe region and the second largest field in the country. Altogether, oil production in ihese declining areas slipped by more5

Production Pro6 In simple terms we believe that tbc current oil-production slowdown can be attributed primarilyumber of poor strategy choices mode by Soviet planners in. The high growth ia production since World Waras largely the result of the discovery and explorationeries of luge giant and supergiamahe

' OiltKldi "ih mmiiit* roirvti |iuiii dun SOD million blind ireTo ml >iluptriiiQt.mini COnltiB fWoteiibU incivci at atHO* tMiich

Soviei oil industry ii now con fing these problems in thelic foim of declining capaciiy front old wells Ifld lower iniiial flnwi from new wells.

<

7

Average Well Flo**

Figure S

Decreeing Returns Ic- OriUInf

)

a result ihe Soviets now muit increase production drilling annually jusi to keep output steady. Figurerawn from Soviet open source data, illustrates the dilemma: oil produclion incieasea aa drilling increases butecreasing rale. The seventy of the problem was summed up by the Soviet Oil Minister, who stated that for6eriod the oil industry had to drill wells able toons of oil just tooo net increase in oil production, with theonsercent) going to offset the depleted capacity from old wells Ineriodf new capacity will go io offset depleted capicily

Capability To MM Uw

How sttccessful tbc Soviets will be in coping with these challenges during the real of this decade will depend in large mcaiutc on the technical ca.vibililies ol iheu oil industry These capabilities are miaed.'

The USSR's first-placr position in world oil pioduc-tion appears to us to be primanly the result of an abundant resource bale and sheet persistence tathcr

than of any technical and managerial vjnuosiiy on (be part of its oil industry, which for many years has suffered from equipment shortages, technologyand lagging productivity and efficiency. Indeed, though accorded high-priority status in the civilian sector, we find the oil industry io be troubled by many of the same problems that afflict other Soviet industries.

Facedeteriorating reserve base crdconstraints in. key segments of the oil industry will clearly need lo improve thenand etTVtcncy tf the Soviets arc toroduction decline Moscow has been utesnptinj to accoenplish this with aa across-Ibe-board program of foreign equipment purchases and domestic technology enhancements. In our judgment, ihn progfata has met with some success and will iruk in continued bul unevenhat decade (bat will helpraiiK production downturn In fight of the inefficiencies ind inftcatbitiiy of lhc Soviet economic system, we do not. howevei. eipect the Sovietto mutt in the kimli of fundamental changes in

wbilitits o* iheiloi

mudi<fiiiQOi mefi(ihi .n-

libit)

Apparent Suetst-tbs and Weaknesses af lit*HI taattritry

petroleum iiidustry thai *tmM allow produclion to continue grtjwing tbtouih the rest of this decadeisproportionate 4iycrcase in coil andnst

Sirmgikt Vtitui Wtak*ttttt. Although we would noi rale the Soviet oil industry as being without at lean some significant limitations on every fionl. the Sovieu are deaily more capable in some areas lhan othersummariies our best currentbuttressed by data from induttiv earverit nan own lysb. and dala

2

-of the capabilities of eight critical Soviet oil indutii)

On lhc positive sade, ihe Soviet ol pipeline system appears adequate lo support planned production itlca ibrough ihe cod of that FYP ifow planned for West Siberia are completed on schedule. We raiehe overall Qoalily of planning and management in the Soviet cnl industry ts well as Soviet capabilities in ihe aieas of petroleum lechrvaOev rspkoitior ofltlxXf opera irons, and refining at either marginal ot weak relative lo those of Western cnl industries. None of these, however, are likely by themselves lo impose ctitical constraints on current Soviet oil production inf the Soviets move shead wiih planned improvements. Failure by ihe Soviets io continue upgrading ibeir capabilities in these areas,ulJ be an important signal of their inability or unwillingness io keep increasing oil produclion.wc do noi believe thai lhc Soviei strengths in these ateaswill be in thislo compensate for weaknesses In Ibe oihers.

On the negative side, twof weakness stand out. and. in our view, promise lo constrain Soviet efforts throughout Ibis decade. One key weakness ts Sovset drilling eapabtliiy. Over Use pastears or so Soviet dnilrrteported large annual galas in meterage drilled, thus helping to keep production growing, bul they have cotms'.tr'.ly fallen far snort of planned goals

and productivity targets. Soviet technical " indicate that the main prob-

ediocre quality of Soviet drilling equipment and poor execution in the field. Soviet capabilities in production methods are even weaker. Overall, we would rate Soviet oilfield technology and recovery practicet aa aboutoear* behind those of the United Slates, and the Soviets remain highly dependent on Western designs and equipment for advanced artificial lift systems and enhanced oil recovery. Moreover, Soviet production practices bave tended to emphasize achieving high-volume production rates rapidly at tbe expense of more balanced field development and larger ultimate recovery. Improvements in both drilling andmethods have been slow, and the Soviets have generally opted for corrections that Increased the level rather lhan tbc quality of ibc effort

Pioipeaifor Success- The Soviets are now moving aheadroad range of programs to upgrade ihc capabilities of their oil industry, streamline theand management system, and increaseWe knov-c

J that Moscow is expanding its alreadyprograms for acquiring Western equipment and technology and for enhancing domestic capabilities to manufacture large volumes of higher quality oilfield equipmeni such as drill bits and pipe. We expect many of these programs to meet with some success.

The real issue, however, is whether thesecao be made quickly enough to offset the disturbing trends confronting the industry.or example, we estimate tbe average flow rale or newll have fallen byoercent. We also expect ihat the average national watercui, currently aboutercent, will have risen by at trailrercentage points. The pressure will be on the Soviets to deliver accelerating talcs of increase in drilling meterage and fluid Ufl capacity just lo offset tbc production declines occurring nationwide and al key fields. Based on the Soviets* past record, wc believe it will be extremely difficult and very cosily interms for ihcm lo do ihis In Our view the improvcmenls now beinc made by the Soviets are likely to occur too lale and* in lew critical segments of Ihe oil indu'iry. sivd ihut will not obvi-tc lhcor

an identification of the bruie-foree developmenlon which Moscow has relied us keep prodift? lion growing, however slowly, since the.

Consequently. In eslimaiing Soviet productionfor ihe rest of this decade, our analysts reflects an assessment thai tbe negative trends now facing the oil industry can at best be Stabilized or moderated some whit and, indeed, are more likely to continue at the same pace as in recent years. Thus, theoscow is most likely to achieve will come from increases in thefaciors ofrather lhan from any major increase* in efficiency, DalarJ

onvince us that ibis is how tbe Soviets also see the task, particularly in the critical drilling

F^rimating Approach

Although the problems facing the Soviets arc national in scope, we have divided our analysts of Soviet production possibilities along regionalWeil Siberia on one side and tbe other producing areas takenbole on ibe Other. West Siberia is now tbc dominant Soviet producing area, and it is also the only major producing region with strong prospects for growth during this decade. We consequently chose to examine ii in great detail, using not only relatively simple reserves analysis and decline curve analogiesiber producing regions butstatistical and planning models. InformationC

J -not generally available for oibera more detailed approach and allows us to incorporate data on investment (drilling and wells) and field conditions (decline rales and wellSee inset

In contrast, oil output from ihe rest of ihewhere all but two of tbe principal regions are infalling, and fuiure production can be estimated by fitting standard decline curves iodaia since5 peak. Wc also estimated gas condensate productionrowing Share of condensate yield comes from gasfields raiher thannd is not directly related to drilling or olher investment measures fo' the oil industry. We

Productionethodological View

ariety of methods to estimate future Soviei oil production levels because of the inherent

uncertainty of production estimating and because no single methodology is applicable In all instances. For example, some ngelhods are more suitable for fields or -tglons that exhibit increastnt production, while others work better on declining fields or regions

In regions of theWest Siberia--where production Is currently growing, we used four srparate approaches thai yield convergent results:

We Inferred production byailo series based on our highest and (own estimates of proved reserves.

most precise method of estimating oil production Is detailed field and reservoir engineering analysis, which looks at geologic and operating characteristics of Individual fields and tkeir'pesi produclionin depth, and then models the field to profeci future production possibilities under alternativescenarios. Ideally we would like lo apply Ihis method to all curreni and emerging Soviei oilfields, and then simply sum ihe individualto estimate notional oil production Unforiunoiely. sufficient data on mosifields are notand, even if they were, the cost of carrying om the analysis would be prohibitive.

Because of the impossibility af applying thefitld-by-field engineering approach to the ensire USSR, we used several other estimating methods In regions of the USSRIhe majority nf fields have reached maturity and production is well documented and already falling, we have applied simple decline curve analysis The validity of the decline curve approach relies on she fact that, once produclion at an oilfield has peaked, subsequent production generally follows an ooKrvablc and predictable rate of decline lhat can be described mathematicallyegression lirend) line and used lo predU. future performance al the field In producing regions whirrnoi all fields have peaked, we canomposite decline curve for the areahole. This Is standard entineerinr practice and typically yields good remits.

On the basil of our reserve estimates and the Soviets' experience in more mature oil-producing rtgions. weeries af possible peak years and associated production ratet. and then declined production as rales based on historUai lends for other areas.

Wt made Individual esttmates of capacity-decline rates, the number of new wells, and well flows, and substituted these valuesormula -similar to ihr one used by the Soviels for planningwhere produclion capacity is ihe sum of llart-of-yeoe capacity plus net change In productionover the year.

Weeries of statistical estimating equations thai relate annual changes in production to essentially ihe same variables described aboveultiple regression model.

Datacomeari-

own geologic

neering analyses and fieldJ and open Soviet statistics.

None of these methods yield entirely satisfactory results. We prefer the latter two approaches, however, because of iheir ability to account statistically for the moee critical variables that will off eel output

AnOil Produclionethodologicalihe detailedobtained bv the four meihodoloeies it available

-Top

our condensate estimates by Riling growth curves, analyting Soviei expectations, and performinc engineering calculations of (he amount of condensate possible in Soviei gai reservoirs {see inset pagendnd inset pagend

In addition, we performed reservoir engineeringofey Soviet oilfields-including all the supergiants and many of the large giants in the USSR. In vinually all major oil-producingew (ij.ii or supcrgiant fields produce most of the oil. with the balance of production coming from many small fields. The Soviet Union is no exception:Romashkino, and I'cdorovo, the three top ranking fields, accounted for aboutercenthough we lack the data to model enough key fields toationwide estimate based only on reservoir analysis, this specific technique hasey source of supplementary field dataseful check on the regional production estimates (see inset pagend.

Forecasts

West Siberia. West Siberia is the region the Soviets are counting on to hold their oil industry together for at least tbe rest of this decade. This is the region where they plan to expend the bulk of new oil industry investment. Based on our calculations, we expect Weil Siberian production to continue growing through at6 and possibly until the end of the decade, though the laiier wouldery expensive proposition.

At the current pace ofassuming planned investment levels are carriedbelieve ihat West Siberian production5 will approach or reach the target.5 produclion growth in West Siberia could slow appreciably, with output probably peaking in the.nder what we view io be ihe most likely circumstances. West Siberian production would rBnge roughly. Our forecast assumes ihat the Sc-iets approach5 drilling plans in Siberia and continue to increase drilling in lhc last half or the decade at the same rale as during Ihe first half, and thai field conditions arc no worse than Soviet sinlements or our geological studies suggest ll.cm lobe. In ibc exiicme cases, if the Sovieli could triple drilling meieragc in west Siberia

frii Siberia* Regions Dnlining Regions

Other than West Siberia, Komi, and Kaiakhstan. all major Soviet oil-producing regions are in decline. Produclion from ihese decliningVolga-Urals, Belorussla. Ukraine. Aierbaijan. Narlh Caucasus, andotal6 lo IPSO,urther declinelanned foreriod. These declines will continue through the, although iheir rates may slow. Substantialdrilling, pump installation, and weltare necessary even io hold ihe declines to planned levels. During this FYP. for example, some JO percent Of Oil Ministry developmens drilling is planned for the declining regions. If Ihese efforts ere reduced, the produclion decline will be steeper.

Volga-Ural,

The Volga-Urals region, which includes eightoil-production associations, accounts for Si toercent of production from these declining regions. Production began tn the Volgo-Urals during. bui growth in oil output did not start lo accelerate until thehen ihe superpan; Romashkino field and several other major deposits were developed. The decline of ihese major fields, coupled with delays in developing smaller, lower Quality deposits, caused regional production io peake expect Volgo-Urals produclion to dropelow peak5 and to fall on

Stable Regions

Several producingSakhalin, and thebeen able to Stabilise production or post slight increases. These regions accounted forercent1 produclion. less than

t.de/ivm effsbote Sakhalin {ais>us,edmlr eho+geis aniinpasrdfor theseregwsns In the IWi f.

Growth Regioni

Of the three ma/Or growthRatakh-stan. oiul Weil Siberia out* West Siberu pru-des moreercent a/ national production ftrrer-theless. given the soaring marginal tost cdoil Komi andmem careful evaluation

Komi

Komi, despite repealed disappointments, remains one of the Soviets' hopes for' Although the 'egsorn appeari to have substantial retourtes-have identifiedil and gas fields and ai leanotentialhat been slowed by the extrtmr oreiic environment and the heavy and paraf-ftnlc oils that are chaiacteristlc of she regionthe Soviets are committed to developing the oil and gas iondensoie reserves of she region the number of active drill ngt in Komi is far out of proportionts contribution lo national oilWe believe that Komi has on outside thance of meetingS plan goalut ihat declining condensate production, lagging injection programs, poor infrastructure and supply, and com pelition from West Siberi*growth proa peat in the

Kazakhstan

Katakhilans produclion tomes primarily from three areas: ihe Mangyshlak Peninsula, dominated by the giant Uten field; ihe Busachl Peninsula, with several deposits of very heavy oil. and ihe Emba region, ihe

iof early Kotakh production Kaiakh oilface some of she most difficultn the USSK the highly paraffinlc Uten oil has long bedeviled Soviet oilmen, and the hejvy iiuiachi oil must be produced by expensive EORore recent discovery, the Tenghlt oilfield, has extremely high sulfur and CO, eonleni In addition, labor turnoreresult of some of ihe harshest weather conditions In ihe Soviei Union Our analysis indicates that ihe Soviets will be unable to achieve more lhan lUghl Increases ini. wilh liaklr nmdurlion or tlight declines later in

Offihore

The Soviets also have substantial offshore oil and gat potential. Aside from Sakhalin, most of ihe more promising offshore-ihr Barents ond Kara Seas, foronly now being explored, and substantial oil production will not be reatiied untile eslimate ihat produclion could begin from of/shore Sakhalinut rile io0 and lo00 bid by the

hot even0 number may be overly optlmiitle. In ihe less promising areas like the Batik, some oil has been discovered and is being produced, but the Soviet! eipeci Utile growth Exploration In Ihe Black Sea hat turned up primarily gas There Is no Indication thai new oil production from deeper Caspian Sea areat tan do more lhan Compensate for falling production from older,deposits Thus we belirve that offshorecan do Utile mort than hold today's ratehrough ihe, rising perhapssuccess in deeper areas of the Caspian.

SS

MIKF.BE

Gas Condeinau

condensat' alio (ailed natural-gat liquids.ydrocarbon occurring either In natural-gas or nil-associated-gas reiervolrs of great depth and high pressure Condensate is normally In ike vapor phase, but condenses as reservoir peesiure is reduced during extraction. Processed eornponenis af condensate such as propane, butane, and peniane are Importani energy resources used as petrochemical feedstocks, motor gasoline, 'bottlednd raw materials for other industrial uses. Since thehe Sorltls have added condensate oulpul lo lhai of crude when reporting figures for total oil produclion,

Ktitrtei

Data are sparse on Soviet condensate reserves, but both Soviet and Western oil experts believe the reserves are substantial. We estimate ihem to rangeillion Ions; they ere widely distributed in the USSR, with numerous deposits In WestKomi ASSR. western Kazakhstan. Central Alia, aid the Ukraine. Soviei sources Indicate, konxver. that at leastercent of total condensate reserves are In Weil Siberia, primarily In ihe immense North Tyumen gasfleldt Based on available

J rtcentlf published Soviet reports, wt estimate current proved oil-associated gas coaden-saie reserves in West Siberia to range from IS6illion tons, with Indlcailons ofo BIB million terns of condensate resents associated wiih gaxfields.-

Current Production Trends

Significant produclion of condensate was not achieved until ihe, when the Soviets first

began to add condensate totals to their crudeoutput.S production had risen iotons, wiihillion corning fromVukiyt in Komi ASSR andIn ihe southern Urals. Since lhat timeregional condensate produclion figures haveprovided by ihe Soviels We estimate, basedopen-source data and recently acquired'bat currentoutput now ranges fromo 2Jwith some0 II million Ions provided byaf Ike Gas Industry andons produced by she Ministry of iheIndustry.

Growth has been iteady. but the Soviets havenumerous problems in expanding theiroutput. Condensate development has long taken aback seat In imtsimenl allocations, wiih ihe oil and' gas ministries preferring instead to concentrate on easier anJ more rewarding oil and naturalarge percentage of both otl-assoclated condensate and condensate available from gas production has bten lost because of Inadequate processing capacity and inefficient field recovery leck-niaues. Until very recently Ihe Soviets have lagged badly In developing their gas-proctsiingfacilliies and increasing Iheir condensate recovery totals.

The USSR is now attempting io upgrade theof III condrnsaie Industry and has set ambitious production goals for. We expeci to see substantial produclion Increases from West Siberia,

Central Alto,Jiai-iua- mnd possibly

Komi ASStX. Ihe Sovseis haftecoverillion lorn from Urengoy field alonei, Ondransport iiajor condensate pipeline that will link uprgut and. accordint So Some reports, ettend westward lo the Volga-Urals. Two other ma-for gas condensate fields. Astrakhan on the Volga /titer and Karachaganak tn northwestern Kazakh Han, are sloted to provide togetherillion tons of condensate production

Piodueuen Passibilitirs foror severalrising Importance of con-desate. Hi leverage on future oil production, lhc fact that mosi condensate Is derived from natural gas. and Ihe comratiing growth trends between condensate and trade oilhave choien lo estimate gas condensate produclion separately and odd these estimates lo crude produclion to derive an overall oil estimate. Our analysis of Soviet plans, statements, and pipeline and proerisint capacity, and our engineeringon the condensate content of future Soviet natural gas production Indicate that condensateshould continue io grow al the rateillionear. Annual output should approach li W> JO million ions1 and someaillion tonshe Soviets' obilisy to prevent rapid declines in condensate production at older oilfields and gaifieldt is ihe critical unknown in the gas condensoie equation, and will determine whether production reaches the low or high end of our

Union: C

i Condcnuic Ptoduciion

Key Fields: An Engineering Analysis

anyew key fields usually account /or mosi of the oil produclion. This Is especially true In Ihe USSK. whose production has historicallyfrom the early contributions of Baku, fromand Arlan tn, and Samoilor in. Consequently we have examined In greoi detail ihe future produclion possibilities off ihe USSR's largest fields, comprising ihe four largest fields in the country and eight large deposits In the critical West Siberian Basin,

Our Approach

The Soviets have for some time publishedand often conflicting produciion dataoilfields. To overcome this problem, wea number of predictive geologic,

These methodologies utilise available Soviet open-source scientific data.t^

and allow us to estimate with some precision the reserves, current production, and future yields of Soviet oilfields under alternative developmenl scenarios. We are quite confident of ihe accuracy of the short-ierm production estimates and of the general trends our approach reveals. These detailed field analyses are useful as analogs for other Soviei fields, and also provide us with an excellent understanding of ihe strengths andf Soviet Oilfield development practices.

Findings

Our engineering analyses reveal that:

arge fields in our sample contributed aboutercent of total Soviei oil productionroduction from these fields Is now declining at an average annual rateercent per year; their contribution to notional oil produclion could fall toerceni5 and as low asercent

I

ihe end of this decade, even under the best of circumstances, the Soviets will need to produce atillionf oil from other

amount greater than total Soviei oil exports to Eastern Europe and at least two-thirds of Mexico's current oiltofor the anticipated decline etf these fields.

The lupergiant Samoilor, the driving force behind West Siberian producslon growthecade, peakedur analysis Indicates that Ihts critical field2 and will decline by at much aso IS percent or more annually, through most of the resthis decade

The second-generation West Siberianas Fedorovo, Mamoniovo. Lyantor, Agan. andthe Soviets expect toproduclion increments In the wake of the Samoilor decline.peatheeven of the eight West Siberian fields we analysed will be In decline.

According to our analyitt the Soviets seriously mismanaged the fields In our sample, resulting In irreversible reservoir damage tn many easel. The track record of the petreltum industry al dtfficult-to-develop fields such as Uien in Katakhsian has been particularly poor

Conclusions and Implications

Our engineering analyses reinforce much of what the Soviets themselves have been saying about thefacing the oil industry in the rest of ihe decode as well as tome other problems we have highlighted In thi, paper:

Soviets have stated repeatedly that they mustarge number of smaller fields later In this decode, one of ihe primary reasons for ihe rising coils of Oil production Our engineering ono-Ifiet confirm that ihe contribution of larter fields will fall rapidh In this drcade*^

3 theparticularly in the middle Ob'. are moving to

develop many of ihe small fields. We find no evidence of the discovery and development of any new supergianl or large giant fields.

Soviet oilmen are Indeed facing ihe problem of decreasing reserve quality, requiring moreand cosily recovery techniques. Inthey are trying to slow the decline of ihe damaged Usen field, and at nearby Kalamkas. ihe source af most of the new prod.tction Inare attempting with limited success to Instllule thermal recovery methodsarge scale. Our geologic analysis of ihe newer West Siberian fields Indicates lhat well flow rates will continue lo decrease as Ihe Soviets move farther away from the older established producing areas

Our survey of key fields helps confirm ihe fact that the Soviets can do Utile to hall ihe rapid decline of older producing regions. Romaihkino and Arlan. which account forercent af peoduetlon from the large Volga Urals producing region, will continue In strep decline unless the Soviets attempt costly and risky enhanced recovery techniques.

Soviet technical literature has emphotlied ihe need for belter and more cost-efTecllvc field development practices. Our analysis Indicates lhat the Soviets have plenty of room for improvement In ihis regard; and If the Ministry of the Petroleum Industry changes some af lis more controversial procedures, newer fields could sustain longer production peaks and significantly improve she Soviet oil outlook later tn this decade.

Ihe llth FYP calls for large Increases in drilling and In tnsiallalton of pumps and gas lift tn Wen Siberian field1 Our engineering analysis confirms thai this effort will be pivotal If the Soviets areeep West Siberian produclion growing

BLANK PAGE

between nov. and IWO. produclion could approach 9 eul< [2

onversely, if the Sovieu cube, chow or Sovie( fjn|on: OilForecasts were not able to at lean double drill in* between nowen Siberian production could peak is Ihend fall as low0

n

talent of Soviei success in Wesi Siberia will depend in large measure on their ability to continue developing smaller fields lo replace the supeigiani Samotlor. The rapid growth in oil production from Weal Siberia inas made possible by this single key field. At its peakO SamotlOfmoreillionover ewie-balf of Wesiotal pioduciion. Today, production from the original Samotlor reporting unit is declining:2 (tie field produced. and> production could be. according to ournalysis Thus faroviets have been able to draw more than enough production from newer fields in West Siberia like fedorovo lo make up for loatci fiom Samotloi. bul this Is an increasingly costly

of Soviet drilling activity indicates lhai (he Sovielt have high hopes for fields aed geologic SKuc-luiea In ihe new Noyabr'sk production association in the northern part of the middle Ob* region Oar geologic analysis indicates thai ihis area does have the frtenlial for giant fields. The discovery and rapidof anoihrr Samollor, oredorovo. though possible, docs not seem likely in (his decade

if Siberia. On ihe whole, ihe Soviets hold no hopes of increasingrrachactioo outside Weil Siberia duringbey ate. bovrevei.on increased production 'rom Komi andonly major nonegions showing any appreciable giowth in percentagehelp slow the rate of decline ofesi Siberiaa production Soviet plans call for produttior.f oil oulsade West Siberian average annual decline of moreercenthis conttoili with (tic S-cfCcni annual declines0? and suggests lhat the Soviets hope to tlo- tbe raie oJ decline -though the talk easy noi be caiy We espect hssed oa

the decline rale analysis (tee iniet page IR) lhat. at best, the Soviets may be able to reach iheir plan of1 and slow the decline adequately to keep production al0 We eipect non-West Siberian produclion to fall to* and to0

Sanoiil Ourounted rnange of possibilities for Soviet oil production between now and ihe end of this decade. Our forecasts for the yea it) duster doscly enough io suggest thai, assuming the Soviets follow through with iheir current development plans, ihey should come very close to. il noi meet, then announced pioduciion target nationwide ofhonlall greater than icveril bundled. though possible, would be unlikely

Scgci

he range of possibilities optAS up considerably, wiih tbc forecast* varying accordinghit estimating rnctbodotogies aod assumptions about investment aad geologic conditions ate used:

Analysis based on the likely magnitude of theurrent bate of proved reserves provides what is catenliallybounding set ofnd suggests that produclion can, at best, grow slowly, to no more thant worst, ihese reserves wouldasis for produc*ionevel no lessilly that year.

Use of decline curve analysts for Wealwith Soviet experience io the Volga-Urals region serving as theilmllai results and suggests thai national production will begin to decline by the middle of this decade and stand somcwbeie betweennd

Neither of these estimates explicit Ir incorporates key variables indexing level of effort or changing field conditions When ihese considerations are introduced into tbe calculations, the forecasts sun remain well within tbc same range:

Substituting realistic high and low estimates of investment and geologic indicators drilling,decline rates at old fields, and newlanning formula similar to one Sovietuse suggests that. at best. Soviet production will remain liable al its current level through the end of this decade or. at worst, begin lo decline shortly and fallointnd

Statistical modeling, using cimitai values for these key variables, indicates that production is unlikcf; io Increase beyondr to fall below J1 to

There is, of course, no single Coiieci answer. Bul, when we adjust our methodologies to Incorporate what now appear to be the most likely values for the principal inveslmenl and geologic variables, wethai by ihe middle of this decade Soviet oil output will have probablytaieau and icsld Subsequently begin io fall io betweenndomewhat highei and lower

t ion paths arc possible, bul depend onthai,ut current indications, appear ovariyessimuiK. in terms of Soviet capabilities and ihe gooiot ic conditions the Soviet oil industry will increasingly be facing

We believe that Moscow wiB choose an investment path calculated lo keep output betweenndt the end of the decade. Based on our estimates of the likely range of unco .is trained demand for Sovietis, domestic needs plus exportSoviets would be hard pressed to cope with tbc shortfall that would occur wereto drop belowview of their oil reserves and the capabilities of ih ndustry, it appears almost certain that . would take steps to avoidhortfall.

Whatever happens,the form of more money, manpower, drilling, andbe the gey. And, the coals will be substantial, asist tablebe Sovwu will need to double iheir overall level of investment simply to keep production from falling below ibe range5onversely, they will probably need to triple overall investment to ensure output remains at or near current levels.

Potential Surpriiet, Our projections of futureoil produclion possibtlitiea arc based on current Soviet plans and our assessment of likely future Soviet capabilities, on the geology of areas now beingor explored, and on Ihe Soviets' record of dealing wiih oil production and exploration problems in tbe pasi. Though our production possibility estimates allow for what appears to us to be the most likely eombtnalions of circumstances, we cannot rule out the possibilitynrprising development that mightter each of the supply accoaricn. panjenlarty those eompeU'ng whatbelieve to be the rnost likelyavorable combination of developments could mate it mucl easier for the Soviets lo keep output at abouturing this decade. Ancombination, however, could wort to pullbelow0 ,

Table

ttmenl Option.

IM)

rrll.fmlWo-m

Hiili

) won

oo

i

W

positive side. Ihe Soviets could identifyher Samotlor-class supcrgianl field. Our assessment of ihe middle Ob" region of Weil Siberia indicaic. ihe possibility of several very large undrilled structure* with supciginnt potenlial. Ifield werelocated and developedrash basis, ii could reverse by (he end of ihe decade many of ihe negative trends in oil produclion that have been occurring over Ihe past few years. Even if notlass with Samotlor or eveningle Urge field would be much easier aod cheaper to developumber of small fields, and could give Soviet oil production an uncipeetcdbe. Much has been made ia tbe Western press of Soviet failure to fled large fields, aad there have been no irdicatiooi lhat any of Ihe new fields reported in the Soviei press are of this tire. All things considered, we discount ihe lsuv4*iWdiscovery but cannot rule it out.

An unexpected stimulus could raise production by the end of the decade if the Soviets reverse past policiesopen up lhc country, as China has teccnily done, lo carnorat'on and development by Westernthrough traditional joint-risk ventures. Thecould provide technology, equipmeni. and cveo tallied labor in tetutnhare of any future tnl produced. Ideologic considerations aside, jointwould appear to be economically attiactive to lhc Sovieu, particularly in offshore areas requiring tUte-of-tlie-art technology. Even assuming the will-ineness of Western firms to participste and Ihe availability of equipmeni. tbe Soviets would have to make this decision very soon, or the inevitable Umc lags betwen negotiations and production wouldany significant oulpul in this decade. For the Soviets to pursueourse for onshore oil development, au untie pain ihe taunting of tbe leadership wonld have to occur

On ibe negative side ibe recent leadership changes in Ibe Soviet Union could result in energy policy shifts that would cause our projections lo be too high. Breahnevowerful advocate of Weal Siberian oil and gas development, and little is known about new General Secretary Andropov's loyalty to this policy. Albeit unlikely in view of Soviet oil needs, (he possibility exists that, under Andropov's stewaidship, ihe leadership might attempt io cut back the oil induttiy'a share of investmem substantially and to

allocate more fundi to other fuels, to vigotout conser-vat ionubstitution programs, and to other capi-Ul-abort sectors of tbe economy. We believe liven tbe inertia of the energy sector, tbc likelihood of Miff bureaucratic resistance, and the tons leadtimeain cranging establitbed energythe effects ofajor policy diangc would not be felt untilP. beginningt the very earliest.

Outlook for:

I on plications and All eras lives

Tbc USSR hat mini ted tbua far to avoid thedownturn in production that this Agency had previously predicted. This wat madethe face of Increasingly difficult logistic, environmental, and technologica large reserve base and by the willingness on the part of the Soviet Government to commit itselfrute forceprotract. If our analysis of Soviet oil piodueiion possibilities and capabilities isweit is not too different from the Soviets' ownfo* yielding rapidly diiiuniihine return! The rate at which Ibc Soviets must poor resources into their oiloaring disproportionately, creating adrag on other sectors of tbe economy. In short, tne iruigina! ecst of keeping oil production reiittvelyof preventing it fiome nor moat, and the limits of growth are now visible.

We do not believe that Moscowbe ableon ibis course much lonier, probably notthe end of this FYP. and will most likelyto accept some decline in produclionto moderate tbe increase in the flow ofthe oil industry Tbe still sketchy detailsyear energy plan togetber withof recent itaiemenis by ten**most notably

GOSPLAN.C rie oilof

Ibc Academy of Sciences, and Andropov himself, lead us to believe that tbe leadership is xcparing lo do-vntihly when ibe llth FYP it announced L. L) has been particularly frank about the high

costs of oil produclion and tbe need to increaseinvestment in the gas and coal industries.

umber of scenarios arcon the international climate, tbe health of other key sexton of ihe economy, and the politicalidcoce of tbe new leadership-ai oar juJtmeni Moscow willradual approach to tbeWe believe tbe Soviets will attempt lo avoid any sharp drop in oil production, and will opt to back off as slowly as possible from the increasing rate of growth in oil iavestrnent that has charscteriied Ibetr recent efforts flow luge tbe resulting drop in oil production and how serious its couicqucaccs would depend not only on ibe liming of tbe decision but. more importantly, on how fast production coststo mount and ccsxeslic energy cconrnption and hard currency needs continued to grow.as oil production prospects dim. Moscow will need to seek an acceptable tradeoff among threejeetives-

Satisfying domestic energy needskecpieg the economy growing.

Gaining badly needed bard currency to buy grain and Western technology.

Keeping Eastern Europe solvent and politically liable

Supply Side Remedies and the Price of Cro-tb Specifically, wc do not believethe unlikely discovery and rapid development of several accessible Samoilor-classSoviets will be able io support continued growth in oil ootpat throughout thb decade. Indeed, simply maintaining ihe level of current output may already be becoming proliibilively eipensive. Accordingly, supply-side lem-edies can. at best,ecline but not reverse it during this decade.

ThtTbe principal cause of riiltifbe deteriorating quality of (he reservetbc form of declining well flows, rising water cuts, ind the lest favorable location of new reserves These factors increase drilling and fluid lift require-menu and drive up production costs. Drilling, for

example, accounts foro SO perceni of oilootu according io Soviet sources. As operations move lo the north and east away from the centers of economic activity, drilling costs per meter of well riseubles in tbe middle Ob' region of West Siberia,ubles at tbe Arctic Circle, andubles on tbe Yamal Peninsula, reflect ing the relative remoteness of these locations, the need for stronger aod more expensive climate-capableand the associated higher repair andcosls."

Though oil operations in West Siberia havevery expensive, the payoff has beentbe past because of tbe very high well flowsin supcrgianl fields like Samotlor aodToday, however.that well flows in mosl parts or Westfallen sharply, and waicrcuts havetheir early levels. Accordingly anpercentage of the well stock is freethe requirements for expensive and repairartificial lift equipmeni such as pumpslift. To make matters worse, increasedraises the amount of fluid separationrequired and. hence, associated cosls.achieving production increases in anby intensifying drilling is far more taled that at thefield, Samotlor. ihe added cost of producingion of oil by pumpinghat by drilling1 rubles.

Soviet sources have reported that ihese changing operating eondiiions have caused oil production costsriple over ihe post decade;15 the average cost ofon of oil wasubles;1 the average cost had risenubles. Other Soviet industry experts have esf imaied thai deteriorating operating conditions doubled lhc oust of producing an incremental Ion of oil from Ihe Ninth FYP toh FYP. and ihey expect these cosls to accelerate even faster duringthh FYP.

The high cost of oilfield development and pioduciion is an increasingly contentious issue in tbe Soviet Union. Oil experts frequently use cost-basedfor or against development of more remote regions, deeper drilling of existing deposits, use of enhanced recovery methods, and exploration ofareas. At tbe same lime efforts to contain and reduce oil.related costs are much in evidence, Tbe Soviets hope, for example thai tbe higher quality drill bits coming from their US-cquipped plant atwill increase tbe meters drilled per bit, thereby reducing both time and cost. They areew field, Suiormin in West Siberia, using several cost- and timfrreducing metbodi ells are being drilledv-ell pads to ease tbe cost of drill site infrastructure, site preparation, and rig selup and tear down- Infrastructure costs will possibly be reduced furtherovel roadbuliding technique using compacted material dredged from the lakes io foim roadbeds. The field is also utilizing modular skid-mounted gatheringof larger,installedgather oil from the wells for treating and shipment

ihe Upttis. All things taken together, Ihe rapidly mourning costs of producing oil arc forcing Moscow to allocate an increasing share of thepic lo the oil industry. From ihe perspective of the state budgethole, oil industry investment representederceni of Soviei industrial investmenturing the current FYP endinghc Sovieu plan io increase tbe share of industrialgoing io the oil industry toercent, compared to onlyerceni in ihe previous plan, wiih oil receivingercent of all invesiment monies for the economyhole and about one-third of all incremenul Industrial invesiment. Though wc cannot identify the precise breakpoini. we do not believe ibai ihe Soviets can continue to increase the allocation going to the oil industry in view of the dismal performance of their agricultural and industrialMoscow, for exomple.illion rubles in its oil industryn increase ofercentased on our estimates of investment needs and pasi spendingould have to triple iis curreni

This irSrclcrma IO rutfe com from Sowrt wiicci arr lor iltuirrtiivrbe imuMlcitd onlycUlivc bkuvics ol cltoi

investment0 In order lo lioM oil produclion at cuncnl levels through lhc next FYP. With (low economic growih and many competing cbinti on investmentommitment of ibis site must appear extremely cosily lo Soviet planners.

Consequently, we believe Moscow's options for avoid-ia; or mirJciriccshort/ill iaaiUbduy are limiied. Actual invcstmcnl requireir.enis aic diiTicul: lo qoantify, but our prelum nsry calculations suggest tbai keeping production growing, even slowly,5 couid be prohibitively expensivr in icrms of resources required'

rilling requirements would nearly triple, with sharp increases foi more rigs, biis, and drill pipe.

Even allowing for produciiviiy improvements, ihe number of production workers ind drillers would have lo increase by SO peiccnl.

As water cans continued to rise, ihe Soviets would need to llfl andinimum off water by the cod of ihis decade.

At0 more wells would need io be put on some form of artificial lift.

At Use same lime tbe associated coats of exploration and infrssiructural deiroads, electrification, andhave to ntc accordingly

Taken individually, achievement of no singleis beyond ihe Soviets' means Bul when all of these resource requirements are added together, the additional cost io lhc economy becoiitcs staggering.

Al ihe lower endfof the production spectrum, there is Utile relief for ihe Soviels. Our own economic analysis of Ihe Soviei cconomv coupled wiih data

indicate that maintaining ihe level of resources going to the oil industry israin oat lhc Soviet economy Based on our esdmates, however, tbe Soviets would have to hold investment al levels implied byih FYP5 just to keep oil produclion from railing00

On balance we believe ibe Soviets will opliddle course and begin lo moderale the incicate in Ihe ITow of new investo oil.< tlv when and to

whai degree ihis occurs will dependariety of factors lhat cannot be accurately predicted:

Thee of the Soviet economy in general and the performance of key sectors, like agriculture.

The Soviet perception of the mililary balance and Ibe assoeiaied requirement toflow of resources to defense

Global economic conditions and tbe state of the world oil market.

sales of gas io Western Europcand Soviet success in increasing natural gas production and substituting gas for oil both domestically and for export.

We expect this invcstmcnl path to keep average production close toverh FY P, with total oulpul beginning to decline in the latter half ofnd most likely standing somewhere betweenndatastrophe of some sort, we judge this to be an attainable goal, providing that the Soviels canio make some increases, albeit smaller than in the past, in oil industry invesiment. The effort requited, however, would still be greater tban the one tbe Soviels are now iruking--witb most of the risks on the downthe outcome would be far from certain.

The Demand Side

In the final analysb, the adequacy of Soviet Oil supplies during ihis decade will depend in large measure on the level and structure of demand for Soviet oil and (he ability of the Soviets to manipulate ihaiince thebe Soviets have been able to produce as much oil as they needed internally, with an ample share left over for export. By definition then, domestic oil consULiption. and hence requirements, always equaled total oil pless net exports and stock changes. In such an environment the Soviei economy has becomedependent on oil. which noworoercent of energy use and ranks as tne USSR's mosi important energy source.

" Use Agency at vull as several oasiide Klolin are nowmajor ilsrfei ol < Soviu eocery demand. Some el lhat

appear taier

p-fveererr

round numbers, (be Sovicu consumeillion bands of oil daily, wiih Ibe bulk scant: io transportation, indosiry. elecuieity. and asrrieullure. Tbe Soviets export,f tbat shipped to Eastern Europe.nd other soft currency buyers aod tbe balance told on tbe worldinly to France, the Netherlands, Italy, and Westhardn the whole, Soviet oilf the oil requirement* of the non-Soviet CEMA countries. The hard currency sales component Is also extremely Important,earned tbe Soviets aboutillion dollars innow tbe largest single source of Soviet foreign exchange and yieldsreater return than any other export item.

Because of the difficulties inherent in decoupling supply from demand in the Soviet context, future oil requirements are tricky to estimate. Based on analysis of open-source material and daroC

including planning documents, we oelieve mat tolafaemand for Soviet oil, unless further constrained by production or outside events, will continue to grow throughout the rest of decade. Though precise estimates arc difficult to make and must be treated with extreme care, we calculate that total domestic demand for energy win rise from aboutil equivalentoc) to aboutocnd to slightly more thanocllowing for projected growth in supplies of other energy sources and foe anticipated substitution among them, iniertial requirements for oil would grow slightly, to0" Soft currency deliveries of Soviet oil. oo the other band, arc unlikely to grow beyond tbe currentwill probably shrink. Since the, the Soviets have put pressure on Eastern Europe and Cuba la reduce their liftings, and have also imposed several unilateral reductions on deliveries to CEMA countries. Hard eunencyfor Sovietmore properly, projected Soviei requirements to corn hard currency from oil-will dependumber of variables lhal arc nesily

impossible to anticipate such as the State of Western markets for Soviei nonencrgy capons, the world oil market, and the quantity of gas sold to Western Europe.'1 Bul, assuming that the current gas pipeline project is completed and European customers take all ihe gas to which they are entitled and that all oiber factors remain about the same (or changeashion to balance one another0 Moscow would need to export only one-half the oil It docs nowaintain1 level of iota! hard currencyCombining aU these estimates, unconstrained total demand for Soviet oil would probably remain WOTewbcicndver the rest of this decade

When our estimates of total unconstrained demand are compared with the likely range of Soviet oil production, it is clear that lhc Soviets should be easily able lo satisfy their oil requirement*n Ibe lanes half ol the decade, however, Moscow couldotential oil supply shortfall of several hundred thousand to several. depending on what inveslmenl path it cbcoses for tbe oil industry duringh FYP. In ihe most likely supply case, wcexpect 'bat the Soviets would need to compen-salehortfall of.istressing prospectovietthis is noi. in our judgment.-ao unmanageable gap

J

AorifylL Analysis of the demand side of the equation highlight* the real crux of lhc Soviets' oil dilemma. Under no likely set ofeven the most dismal ones, would the Soviets fail to produce enough oil to satisfy their domestic needs during this decade. Rather, their problemai tbc margin, where they might be forced to choose between earning bard currency, andstability in Eastern Eutope without aggravating an alicady tense domestic energy situation. During the first half of this decade the Soviet oil problem will be largely one of hatd currency. The pressure will not beoff oilevenue earner until the late

L-

C

when sales of Siberian gas to Western Europe sbould be well on line. Uacil then, ihc Soviei* will likely irj

any oil aupply shortfall overand soft currency ulc* *

On the domestic side Moscow would need to look:onservation and substitulion to do ibc job. but its track record on both oT these has been poor to date. Our projections of internal consumption alreadysome additional conservation as well as intcrfucl lubstitulioa, particularly ass for oil. On tbe whole we believe the Soviet options for additional decreases in

over this decade arc veryto. in very roughf oilrercentuse

The factors that will limit Soviei success in achieving significant oil savings via conservation or substitution of oilier fuels for oil arc reasonably clear:

structure of Soviet oil consumption does not lend itself lo substantial discretionary cuts or to rapid adjustments io changes in supply levels(he United States, for example, the Soviet Union burns little gasoline in personaland relatednstead, the bulk of oil use is concentrated in public transportation, electrical generation, agriculture, and heavy industry, where consumption rates are dciet mined by tbc sire and condition of the physical plant and capilal Hoc*.

some improvements sinces.substantial increases in energy prices, the role of petroleum product prices in enterprise decisions does not encourage efficient use and will not help to ration oilupply shoitfall. The Soviets ire well aware of this problem, as their economic, literature indicaies, but ihey have been unable to correct it.

- Inicrfucl substitution is sharply constrained byin the distribution network fot gas and coal, and by tbe limited ability of lhcndustry io alici its ptoduct mix. Moicovci. major oil users like agriculture und heavy traiitpoil areequipped to use fuels Other than oil. Finally,of lyiih coal and nuclear power production tt lagging behind plan

Oa* can be easily substituted for fuel oil in power generation, and tbc Soviet* have ambitious plans for doing this over the rest of ihe decade. Tbe heavy fuel oil {matuf} that would be saved, however, is already oversupplicd on world markets, and wouldelatively poor money earner. Moreover,substantial additions and changes to theirrefining units, the Soviet* could not further process much more of It for oiber uses.

In tbe long ron, of course, with appropriatein tbe national capital stock and refinery product mix, a* well as with further adjustments in rationing arrangements, the Soviets couldmoderate their. In the shorterthe better part of thisoil savings would have to be achieved by administrative fiat.ountry where oil and electricity are still frequently not metered and "misappropriation" oftenerceni of iheir annuel fuel allotments, slowing the rate of growth of consumption appreciably will be difficult.

In any rase, Uie process of demand adjustment is slow. Economists agree, for example, that the impact or tbe oil supply disruptions ofs still wotkjng its way through Western economies Adjustment tosupplies in Ihe USSR probably is unlikely io proceed much faster

On lhc soft currency side, the Soviets will have lo decide if Ihey want lo risk 'bepolitical andreducing oil deliveries io Eastern Europe. Though Romania receives (ink oil from ihc Soviets, the remaining Warsaw Pact clients depend on Moscow forercenteir oil imports Eastern Europe's desperate external financial problems would preclude, in ihe near term, making up fot Soviet cutbacks by going lo the world mirkct. Thus,by the USSRquecre et en as littleotalrom us East European clients would diminish the area's economic propectt. Cuts RicJtci Iluiiould ml. driving some Easi Eu'us'can economics into abioluie decline

:r" ui iiT

German Democratic Republic, and Hungary was one of the principal factor! (hai drove average economic growih in these countrvesercent

With tcvcril vcan to ad put. lhchave several opcaoRi that would give ibe bait Europeans tome alternatives to Soviet oil. They could supply riaore gat to Fait em Europe, or they could arrange barter dealt with other oil producer*If tuch tubtillutet tie available and if (be East Europeans teacb their goals for conservailon and nuclear power production, ihey mighl be able to withstand cuts as largeithout differing icverc decline* in econcn-.ic growth

All thitiais considered, we believe Moscow could copeap between domestic production and total demand of as largeuring the. Tbe task would noi be easy and wouldurther strain on the Soviet economy and those of its client stales, particularly in Eaalern lUirope In our judgment, however,ubstantially latger supply shortfall with demand-side remedies could well prove more economically and politically difficult thaa allocating enough new investment to Ibe Oil industry to produce Ihe additional oil needed to narrow the gap.

Tht Oil Matin Faeior. One variable lhat could either help or hurt ihe Soviets in theii effoili to dealupply shortfall will be lhc state of lhc world oil market Outingoscow benefited from rising real prices for oil.owever, when tbe world oil market began to soften, the Soviets have been forced to sell increasing amounts of Oil Simpiy to prevent hard cuticncy earnings from falling Though industry forecasts do not lead us to espect any increase in the ica! price of oil over the neat few years, it is probable that oil and gas prices will begin ruing again later in Ibe decade. This would be strongly to ihe Soviets' advantage, particularly if the gai pipeline to Western Europe ts operating at full capacity Under no circumstances would we sec lhc Soviets entering the world oil marketuyei during tan decade cveept possibly to tupporl financially strapped

" fur riamcU. Motto- nu(ti tcod arms ID Libia Hi Sriia.-hi) aa <inntrnt mlnin> oir iom< ol IIWIDC .

clientoviet loduciioni in oil deliveries could, however, force IheA countries to increase their liftings from Fie* World sources.

Looking Ahead

Moscow laces an increasingly serious challenge over the rest of ihis decade in copingotential drop in oil produclion while al lhc same time Hying to regain aa acceptable level of economic growth. Based on ocr foregoing analysis, tbe oil problemerious one, particularly because of its raenifkalions foe investcseat allocation! and hard currency earnings and the unpleasant trade -off decisions it presents for the leadership Though we do not believe that Soviet oil prospects for the rest of (has decade arc in and of themselves sufficiently poor lo hall economic growth, ihey could, when combined with economic problems in other lectors, cause considerable damage.

ore positive note the USSK shouldcasonabie opportunity to avoid an oil-fueled crisis providing it can moderate production declines, on the one hand, ixd gently reduce the rate ofemand oa the other Continued success of tbe West Siberian gas dcvelopnveat program, combined with more skillful management in ihe other sectors of tbe economy, will be critical io lhc process

We believe ihe Sovieu are now in the process ofoncerted ailack on theii oil problems for (he rest ol Ihit decade. Within ihe not year pi Iwo. wc should begin loumber of indicators that point to Ihe seriousness wiih which they perceive iheir dilemma and lo the approach Ihey will iry to use to solve it. These ihould include

* Lr -tpeeled changes in investment and catgoals forh FYP Our best jvadgmect ai that tame as that the Sovseii willo reduce searstvrtiat the rate of growih of newhe oil industry grid to accept some decline ineduction in ihe picduClicn target0 of moreiom^ goal would indicate that Motcow believes itself to be in iciiooi trouble

iiasi botefl oil mac.Iiik. inhibit "illloi the nureoKi atiwiv*>

Gradually mescaline efforts to cultivate Western source* of supply for drilling and artificial lift equipment, for oilfield technology, and to improve domestic manufacturing capability.

A drive to increase secondaryso as tohortage of lighter products (gasoline, kerosene, and dieiel fuel) in the eventrude oil production decline.

Expansion of oil pipeline capacity in Westernto accommodate increased production goals for thatconversely.o add capacity currently planned.

Continuing pressure on Eastern Europe and other soft currency importers of Soviet oil to reduce liftings, combinedearch for alternative sources ofthrough barter and arms tradethese countries.

More stringent goals for domestic energycombined with tougher penalties for waste and theft of oil.

Adoptionolitical and economic posture that would encourage Free World, particularly LDC. oii producers to limit supplies, thus raising pikes to the Wot.

A heightening of the debate between thoseiricreased exploration and those favoring high near-term production goats, with the advantage probably continuing lo go with the latter group.

Top SecieT

MKPAEt

Appendix

Capabilities of Ihe Soviet Oil Industry

Responsibility for making and im piemen ting Soviet oil policy extends through an official hierarchy and parallel informal network from the highest party and government official) in Moacow to the individual work erewi in the fieldl ihc apex of this hierarchy is tbc Politburo of tb) Communist Party of tbe Soviei Unionhich has final rccprmbil-it> and ultimate authority forbasic oil policy. Because the breadth of its responsibilitythe entire spectrum of Soviet foreign and domestic policy, the Politburo considers oil pcJicy only sporadically and often in tbe contest of larger issues. Among Politburo mem ben. only Altyev. Tikhonov, and Dolgikh appear toirong aod continuing interest and responsibility in this policy area.although the Politburo retains approvalover policy, it must rely on others far much of the input into these decisions. Moil of the high-level policy initiatives and plan formulation takes place just below the Politburo In:

- The Secretariat of ihe Central Committee of the CPSU. wtich monitors plan fulfillment and policy icpitmentation for tbc Party

The Presidium of the USSR Council of Ministers, which exercises operational control over theof the Petroleum Industry (MPI) rod other energy ministries as part of its larger task of overseeing the entire economy. The Statefot Reservesubordinate to the Council of Miniiiers. also exercises substantial control over the oil industry thiough Us power lo certify reserves and apptove drilling plans nnd production practices al individual oilfields.

hich makes both long- aod short-range plans for the oil sector as pan of its national planning effort.'

Rr*ponsibiiit) for detailed planning and managerneoi and tbc implements (too of oil policy is shared by somer irsore separate government ministriesost of research and advisoryour ministriesresponsible for locating new petroleumthe Petroleum Industry, the Gas Industry, and the Conslruction of Petroleum and Gas Industryihe bulk of this work, with Ihe additional ministries providing often critical support facilities, equipment, or funds

At might be expccied with so many separateinvolved, the Soviet oil sector, from lop to bottom, is not effscienily managed. We believe thai tbc gerontocracy in tbe Politburo has been too rigid and crxnservattvc to provide creative leadership on energy policy mi names Shifts in oil policy have been small and incremental, reflecting tbe Soviet style of planning. On occasion, however, the leadership has shown itselfe capable of making much sharper changes when confrontedriiis.eadership awareness of Ihe mounting problems associated with meeting oil produclion targets and ihc very real potentialownturn in oil production ledecision to reallocate vast sums of investmeni capital into Ihr rapid development of tbe Westoil and gas fields. Similarly, the leadershipand apparently without priot warning reduced oa! eiporu to Eastern Europel and again ,

uring tbe Brethncv :it policy was decided by consensus, often difficult to obtain becausemembers are linked by background and personal connections to diflcient and competing energywhich opciule nccotding to Iheir percci.ed

self-interest. Wirh ihe death of Brezhnev, consensus indchange may be evea mote caiTicultchieve, il lean for sonic lime. In anybe Andropov regime will be constrained by bureaucratic inertia in ibe energy sector, by lhc same corsrwrnic and foreign policy considerations thai ledhe curienl policies, and by tbe highly itutilulioaabxcd natuie of ihe Soviei decisionmaking process, which tends lo generate similar decisions regardless of who makes them *

We have seen numerous examples recently of the kinds of iDCrcr-ter.il! changes liheiy lo become mote common at Soviei leaders search foi greaterin lhc oil industry. As panarget programing effort lo speed up socotiotu to top-priority social and economiche Council of Ministers and Gosplan set up special interdepartmental commissions to monitor development of the West Siberian oil and nas complex f

2 ihe Deputyof ibe Council ofhc Deputyof Gosplan. and other high-ranking officials were engagederies of meetings to plat energytargets and possibly lo consider policy shifts in energy planning. In December. General Secretary Andropov proposed, and the Supreme Soviet Presidi* urnlan ioermanent commission on energy to supervise the work of the minaslries andcall managers to task for wasteful use of resource. There arc even indication 3ih.il the Council of Ministers is toying with ibe idea of reorganizing thend gai cssnmries into three ministries along icgioaal lines. Though we judge

The working-level planning and management burcau-cracy stiffers from all ibe problems endemicbe Soviet system,umbersome and rigid planning process thai discourages initiatives byand centrally planned price and per forma nee criteria thai do not reflect cosls or allocate resources' effectively. The system also emphasizes output and plan fulfillment rather than efficiency, which tends to reduce productivity and raise investment needs, asas favoring sbort-ierm gams at the eapense of long-run benefits, lint, in our view, perhaps ihe most fit -reach.ng problem is the absence ofdocnutnnt central organizationauthority that cannot besettle disputes. The lack of anatiocrarsdc master plan and an all-powerful organization to direct itost of telaied difficulties. Manageincnl iiraiegies are diverse, power and authority diffused, and ministries battle each other over jurisdiction and funds. Wiih no mechanism for coordination or lateral cotnmunicatioa. onea failure echoes down the sotvply chain, forcing adjustments and inefficiencies.

At the receiving end of all these deficiencies is theorced lo deal wiih ma it, problems not of lit own making. Tbe MP) and its subordinate organiza-lions. charged with meeting or exceeding oftenoutpui goals, oficn have to use rryunietproduc-tive short term production praeiieei ai the expense of long-lerm production, and arc also hampered bv the lack of oocawrarion fmmmiisistriesg^

critically needed equipment or suppotl infr attract uie. for example, it one of iheart reasons fordelays at new deposit! in Writlb* MPI is dependent on ihe Minasuy of the Run Fleet for supplies, on ihe Minrsiiy ofet ion of

n resgsn ra^

im mi

op-Sam

of these to be cosmetic changes, they do underscore ihe increasing importance of Weal Siberio in ihe tyes or Ibe Soviet, leadership. Only if the boilom falls out from under Wesi Siberian produclion would we anticipate major attempts at reform

Tt-tbnoiogy

The Soviet oil industry bas transformed itself from near total devastation during Wortd Warargely self-supporting industry capable of leading tbe world in oilhas done so in spile of equipment and technology thai generally suffet In comparison to those available in the West. The USSR's technologic problem, in our view, bas lain not so much in know how or design bui in an inefficient and cumbersome economic system that has hindered both the production or high-quality oil equipment in the Quantities needed and the elTicic.it use oftechniques and equipment Consequently, tbe performance of hey segments of the oil industry, fiom ct plot at ion to drilbng to refining, continues to be characterized by inefficiencies and tagging

The Soviets have in the past compensated forshortcomings wiih imports, but they have done so only selectively to cover spot shortages or for particularly difficult applications. Duiinghe USSR bought aboutillion worth of Western oil equipment, which we believe wasmall portion of their total equipmeni requirements These imports often had an impact far out of proportion to their cost, however, because they were used on the Sovieti' largest and most critical peojects

ton fir

that Moscow intends to continue totechnology and equipment and hashit of items it believes will be rscccssary loproduction goal' fot the current FYP. Thelooking to France, lapan. Welt Germany,count ne* and,iminishingUnitednow bet ice issupp'ietIbe items they wardn variety of leceni Soviet discuss*'"

and our own detailed analysis ofe believe ihese purchases will duster into sia broad categoricc

RapWatioo equipmeni.

Drilling equipment and technology.

Fluid-lift and oil-treatquipment.

Computers and automated control technology and equipmeni.

Spec ia hied offshore drilling aod produclion oqiipmeni.

oil recovery technology and couipment.

Wc aba cipect the Soviet* to continue toother than outright purchases forlecheaoSogy They regularly collecton Western-developed technology andopen and covert mean* During thefor example, lhc Soviets tried throughincluding the other Warsaw Pact countries,or copy denied equipment. They also useprojects similar to their Sakhalinwith Japan lo obtain Westernthese projects have theof not roquiring large upfront paymcntihatdoscow, foroint development scheme forSea wiih several Scandinavian countriesFor these joint projects to affect nationalhowever, tbe Soviets woahj bate topan reluctance to grant foreign firm* accciioilfield

C

At the *ame time, the Soviets are attempting to alleviate equipment problems with an across ibe board effort to enhance domrstkacto ringOne critical problem beingoor metallurgy, which result! in ihort-lived drill bits, pipe, and pumps, and In resultant inefficiencies and delays in Ibe field. Report* in the Sovietlaim, for caamplc. that Soviet industry basew technique for hardening drill pipe If true, thu process would help alleviate sosne of the stress problemt thai ihe Soviets have bad wiih (he drill pipe and make it

3

Top-Strict.

suitable foi rotary drilling Theni altoew offihoic oil rcseairti institute to develop equipm'nl and technology foe thentil shelf. In addmo- C

to

improve onSoviet defente sector is becoming Involved in icsearch. development, and maaufactuic oloU eipsocatton and pauductioc *

By almost any measure the Soviet oil industry bai raised its level of technology and equipment Over the past few years, and vre espect to tee steadyover (he rest of thit decade The aomestic industry will continue to provide the bulk of Soviet oil equipment requirements, certainly for the current FIT. Wc believe lhat the Soviets vnlt indeed try to go forward with many ol Ihey planned eoui pence ibut lhat the conlribulion of ihit Western technology will be held al the margin over the nest few years. In ibe short term, product km frees diffi-cult-to-devclop fields and necessary increases in dull ing and fluid lifl will depend somewhat on Western eouipment In lhc longer run. lhc availability of foreign technology will be critical lo finding and developing deeper, less accessible onshore reserves 1st ihend offtborc reserves in

The effect of these foreign purchases and technology improvement! on oil output will tsttimately depend oa tbe ability of Ihe oil iodustfy lodiweminaie and apply them (is irack record, however, like lhat ol oilier Soviet civilian industries, has been quite poor. Soviet oil research institutes and key industrial ministries have acquired state -of- ihe an knowledge and have closely studied and tried lo copy Wesiern technique* and equipment. Bul ihey have tubsequrnily open enced difficulty in transferring thit knowledgeide-scale ate in ihe Oilfields, largely because of whal wc believe lobe systemiconal incentive-and-reward systemeluctance on (he pari of managers io take necessary risks Numcioui reliable sources have reported sunup and cvaMy

i- imiv drvUIn, It* cMircdidl urine roliin.oUOMltas

onlectio* of ihr drill of-ot liubihn 10

raOBaliSe-vit drills;

il.sirral iau al'i Hot awnlsta mm rotate tanImVm waawajno-

uii-ae po'us ihe Orlil tin luitaeliillmi -oiti mil -

ihalloo.vmitt hoiiiilii. ind lufH-pressure (aauirnn

con11ol pioblcnu in purchased oilfield equipment i'jn'.i. for exsmpte. and delays in installing and" problems ia operating new equipment in the field arc common Though wc see Soviei recognition of this pioblem and some pietiminary attempts al solutions, wc do noi expeci the kind of fundamental changes In tbe economic system thai vrould allow Soviet oilmen to iosplcnseai new and improved technologiesimely basis oreal: thai would dramatically raise productivity and efficiency.

Exploration

Eapiwralion is (he keyuture cl anddac-iion.on effort in the Soviei Union docs not usually pay off In commeicialfor four io seven years Inhe Soviets often sacrificed uploratioo for the sake nf current prod action, especially in ostrich West Siberia They aic attempting to improve the situation in lhc current FYP by calling forJO-percenl increase in eiploro-lion drilling nationwide andubstantial cipaniico cf other ctpioration efforts as well, but appear to have potted only modest gains thus far. The Soviet press neveiilielesi reports that uploratioo drilling for oil and gai itncrease by anothererceni during Ihe neal FYP

Soviet geologists areide array of techniques id their explorationimagery to locate promillng areas, regional and Iocs Ii red seismiceochemical mapping, and well

vindicate, however, that ci stoat ion progress ts impeded by technological limitations in> .ii-Ji Magnetomelcn and gravity meters used io perform regional surveys require highly sophiilicaied sensing technology and data processing capability Sovieihat area lags essnssderablylhat availsble in ihe Wesi. Rcrnote areat. tuch at East Sibeiia aod lhc offshore Arctic, will be difficult to oplotc wttboul improved equipmeni. Inadequate seismic equipmeni forces the Soviets io continue io icly an technaowes which can identify largetruct met bui lack ihe icacdarivon toidentify smallei more tubllc irapi These techniques also yield

roD-rtcvrr

eters, hampering deeperMoreover, (be Soviets have genet ally lacked Ibc computers acd sopuiiiicaicd software to process ihe seismic data into usable high-tesolu(loo form.

ever, we believe (hai (hey arc now beginning to make significant progress toward overcoming theselimitations

o patrol at and Kxplonttory Drilling

Given the apparent adequacy of the en of the reserve base the performance of the Soviet drilling industry will be pivotal in determining output levels over the rest of (bisevelopmentto produce oil un inject water- -ill determine (he amount of new production capacity, and cspBora-Iton drilling locating new field) and establishing the limits of pieviousdetermine the level of ihe proved iciervci (hat arc needed to sustain Soviet oil ptoduciion through tbc end of this decade and into '

Soviet drillers have received heavyim and sn-jeh of tbc blasnc for the declining rate of growth in Soviet oil production Doth the Sonets atid moti Western analysts agree ihat the industry's leading problem bas been tbe poor quality and inadequate quantity of drillingpipe, tool loints. bits. mud. and blowout"ith poor ciocu-Itoa in the field Because of the emphasis on meeting high ralvme drilling goals, given Ihe fact that the industry bat been unable lo produce sufficientof high-quality drill pipe ihat tan stand up to the stresses of rotary drilling. Soviet drillers have come lo iely principally oo turbodiilling Though luibodrilbngignificant technologic achievement of the Soviet oil industry, it remains less efficient lhan rotary drilling for lhc deeper deposits and high mess Condi -tiocse Sovicu arc increasingly encountering Equipment problems are exacerbated by poorlyand motivated crews, aad logistic, plaaning. aad opciitiolal difficulties. Despite theseIhe Sovietr.iitiinctcascd in-puis of men and equipment hat managed lo raise

drilling meterage steadily over the past two decades,7 million mctcis duringlan loillion meters duringlan] Foe, however, the Soviets acknowledge tbat Increases of ihis magnitude,will not be enough. Soviei Oil Ministry plans call for drilling to growillion meters In this FYP, and the Soviets anticipate that requirements will rise even more steeply, possibly doubling, inb FYP. According to tbe Soviets, these increases reflect the lower quality and greater depths of new deposits and the need to drill more wells to compensate for the incr-ssing declines in capacity of the current well

For ihe Soviets to meet drilling and oil ouipul goals in Ihis decade, we believe (he drilling industry musl both allocate tls limited resources effectively and also

Fop Store!

io upgrade tlx level of drilling technology. SpeofiesBy. ibe industry -iU need lo

drilling efToru properly between deckop-mcnt drilling and ciplorasjon drilling.

ropei balance in drilling between Weal Siberia and tbe other region).

planned productivity gains in drilling, or. in the absence of these gains, provide sufficientInputs ol labor and capital in the lorm of drilling brigades and equipment.

The Soviets aie attempting, so far with miied lesults,ccomplish all three tasis.

-n: Versus t'.xplorarioa

Soviet planners have long rccognired iheof over emphi tiring development drillingexpense of exploration drilling The slow pacedrilling in West Siberia is oftenio the technical press and planning literature asof special concern for long-term

Ministry of Geology has managed only sluggiih growth in riphxation driHinf for oil and gas during the fust two years of the currentated on their panSovietsillion mat an of exploratory drilling in Wesi Siberia inY P. and could reachillion meters inoriginal goal to triple eiptora-tion drilling in West Siberia during the current plan seems well out of reach, though wc do not sec this poieniial shortfallignificant constraint on oil output until afterajor stroke of luck in discoveriesuantum increase in ex plotrilling efficiency in West Siberia, however, the Sovietsnrobably pay for past neglect In

west siberia venwi other reginwi

Although its share of exploration dulling remain! small (someest Siberia's share of development drilling has risen rapidly, fromer cent0 toercenturther increase ioercent5 is ptanocdufot expansion of lite number of drilling brigades and (lie use of expeditionary biigades flown in fiom othei oil-producing regions. Indeed, ihe expeditionary crews alone are slated to contribute about ooe-lhiidrilling meterage in Went Siberia, andas already yielded big dividends lor ihr

Soviets Largely because of belter geologic conditjtuis in West Siberia, the expedilionaiy crews arc able to drill iw*ot as fast there as in their borne regions aad complete welts with much higher flow rales Tbc Soviets, however, mutt balance these gains against tbc polemul loisea in the otheirom which they hope to pi educe

Productivity

The succesi of the Soviet drifting program Ihis decade will hinge ptimarily on elfotls lo Improve drilling productivity, dcFned by the Soviets as the number ofrigade can drillear. The increased drilling meterage, which Soviet oil planners believe necessary to teach oil supply goals, assumes ambitious productiviiy gains.5 FYP, for example, calls for individual Oil Ministry drilling brigades to drillercent more5 thaof Ihese gains are not realized, the pUnned inputs ofand equipment will probably be irrsuffment. and erode oil output will suffer, espeoailv in the

There ia conaidctable room for improvement, asdrilling productivity remains low by world nand-ardsor exarnple. US rigsimes more productive than Sovietariety of factors dcleimine productivity- equipment andlock type and depth, and the hostility of the workingall Ihese. with theof equipment and technology, are getting worse for the Soviets by their own admission Despite ihe worsening conditions. Ovl Ministry drilkis didto icgiiter some increases in productiviiy duringYP period. The reason foe ihese gains, however, was not so much improved drilling practices as tbe increasing share of iheeffort going lo West Siberia. West Saberian diilling productivity, neve (Useless, though stall more than three time* the Oil Ministry average, declined49 as drillers began working smaller deposits This decline was reversednd we eipect thai drilling productivity will conttr.ue io increase, assuming ibe Soviets ate successful in making the improvements they now plan in diillii" equipment, procedures, and support inftasliuciur- f

Ton"Tw, iii

ii.

It >J

11 7* It Jit It 10 11

Weilled tbe factors offecting drillingfor lite major categories of brigades. The effect of (hcac productivity tains on drilling rates1 M;hese projections assume that Soviet drilling technology will continue lo improve daring ihe rest of tha decade, that Ihe Soviets trill be Siaccessful in al lean tome of tbeir efforts to correct hmiu lions via ihe acquisition of Wesiern techrsofogy and ihe eiparoioa of ihe domestic equipmentbul thai worsening geologic condition! willthese gains somewhat.

More speciftcally. based on our analysis of posi trends and most likely future eondiiions. we believe ibe Soviets can achieve an increase in drilling pcodiKfivity in West Siberia ofoerceni between now0 through ihr use of higher quality driU bits, larger production pads. and. most significantly,in lhc support tnfrasiiwciuic lhat could reduce rig downtime byoercent. Outside nf West Siberia, pioipccis for produciiviiy increases arc poorer.0 ihe Soviels have been managing to raise productivity slightly by concentiating on infill

drilling and work on easier-todlilt, shallow depositsS, however, roost of ihe readi-gaini from ihit approach will probably be exhausted, and the Soviet! plan lo turneeper drilling which, If anything, will lend to depress produciiviiy

If our analysis of future productivity gains is correct, botb drilling and oil prod action goals could be in jeopardy unless ihe Soviets increase tbe number nf brigades faster Ihxn planned (table b) To5 goali for drilling and production, for example, we estimate ibai the oil industry will needrilling brigades, tome ISO more than ibe number implied by Soviet productivity largetiIhe Sovieu now appear io be adding brigades falter than originally planned. If the Soviets at tempi lo maintain oil production al approximately thelevel over the rest of (bis decade, development drilling, based on our projections of likely well (lows, would have to grow from aboutillion meters5 lo someillion meters0 Exploration drilling by ihe Oil Ministry would have to nearly double5o reach these projected drilling levels, the Soviets would need to addore drilling brigades tbtn exiited Inambitious (ntk, given ibe rUing drillingof ihe Geology and Gas Ministries.

Production Methods

In addition lo increasing drilling, the Soviets also face challenges in extracting more oil from theirewer Soviei oil wdls flow freely loday lhan id the nasi, primarily because of the rising ansouais of water produced along with ihe cel. Soviei production eagi-neees use water injectionrimary production

;infforl to tnaiataaiBoH prewsv, res Although the initiation of water iajeetioo earlyield't development enables tbe Soviets to boost well flows, limit the requirement for pumping equipment, and increase initial oil recovery, ii also creates the need later on lo hfl targe volumes of fluid

r5j> Seem

Table 5

Drilling Productivity

perft' rrv

OO

TDttadci in

0

in'^i

Ibe reservoir. Thus, the Soviets" aging Hock olapidly increasing numbei of artificial lift systems such ai sucker-rod (walking beam) pumps, submersible pumps, and gas lift. The Soviets arc also investigating the ute of several methods of enhanced oil recovery (EOR) to raise recovery rues and to produce oil that artificial lift methods cannot eilract. Tbe Soviets consider EOR to be an attractive alterbecause of its potential to recover additional oil in atrai where large investments in oil industryhave already been made.

Fluid lift

The Soviet practice of initial water injectionressure maintenance technique hai paid benefits but not withoutigh cost. Dy maintaining high reservoir pressures, water injection helps welli to remain off pump for longer per tods, and tends to raise in,ml recovery rates by flushing oil from the reservoir more quickly. It also increases drilling requirements, however, as one injection well il generally drilled for eveiy three to five producing wells, and creates ever larger amounts ofmixture of oil. gas. andmust later be bfted from the productionand sectostly separation processurthermore, as Ihe watershare of water in the water and oil mixture recoveredOerceni. the wells require some form of artificial li" tn maietarn oil output1 foe example.

in Tyumene Soviets plan to inject moreillion torn of water andottiWeillion tons of fluid in urder to ea tractillion tons of cat

Table 6

Oil Production Coals and Oil Ministry Drilling Requirements

r:in

(aa.ttto.Wfl

ertlha, (mllMoame'r'il

ditElm fffnt/tM mum)

liunri'i

TO

EolmaiaJ.

We calculate the average water cui to beercent oe mote nationwide and close loercent in West)

ased on Sonet plans sod out analysis of past trends, we expect the water cut to continue to increase ihrough, reachingoercenind exceedingercent0 The water

oat in West Siberia would still lag behind the

average, but by only several percentage points

The result of the riling water cut is that increasingf fluid must be extracted aad separated for each barrel of oil produced.hows the fluid lifted0 and our estimates of fluid-lift icqutrtinenis5he ictiouinesi

Tup Sctrcf

lhc increatini! fluid-lift rcquitcincni can betraiedomparison of estimated fluid growth versus planned oil growth during the current FYP-Wc estimate thai fluid produclion mull increase by aboutOctceul01 just for the Sovieu lo achieve iheir planned oil production increase ofercent for the sarrvc period Fluid Itfl (cetuircmentf0 wiB depend upon Soviet production goats, water oil. and tbe So-iet't lechnical capability. In the event lhat the water cut reaches lhcoerceni we believe to be possiblehe Soviels would need io lifi roughlyillion barrels of fluid per day juat to maintain Ihe curreni Soviet oil produclion rale. This would0 percent increase in fluid oulpul over ihe amount now being lifr.ee* f

Because of ihe increasing fluid-itft recuireme. ihe Sovieu have had torowing share of iheir wells on tome type of anifiejai liftl The SovietsJ-pereeni eapansion ia ibe number of wells on artificial lift05ccording lo Soviet plans, onlyoerceni ol Ihe wells will flow by themselves. The cosl of ihis program hat been and will continue lo be high The Soviets have not been successful in producing lop quality submersible pumps or gas-liftIwo more sophisticated and bigh-capaciiy methods of artificialhave had to import both or make do wiih lower capacity and Letsroduced equ.pm.eni We capect lhatn contia-ac so do so We also eipcci (Bit fluid Ufi require men it will probably esceed capaciiy laier ia thu decade andonttraini on Soviet oil production

Enhanced Oil RecoverySoviels have expressed high hopes forEORthai have yei toDuring theeveral highincluding Ihe Chairman and Deputyof Gosplan and lhc Minister of thevcMed Iheir supporrfor the EORboatled of its potential IO boost Oilercent

ihat the enhanced recovery proV-tam has been beSieged wuh management problems, scandal,assimilalion problems, and an appiicnl lack of adequate fundingesult, onlyd of current Soviet a" rHmiuct-or. can be niinbutcd in enhanced recovery

The Soviels have eaperimentcd wiih EOR piograim in many fields emphasizing chemical and thermalapplications In Ihe declining Volga-Urals Basin, ihey have capenmented with polytncr finding atnd CO, inifctron at Romashkino- la the Kazakhstan. Arcrbaiiae. and Komi legkeit. ihey have usedmclhodt such as steam or hot water injection and in tiiu combustion lo aid in Ihe recovery of heavy, viscous oils,"

Tbe Sovieu difficultves with EOR have in partby tbe limited production capabilities ofThe Soviels have cot been able to buildcan generators needed for thermal recovery norsufficient amoucu of surfaciaau orchemical and polymer flood progiams Wef liai ihe

Soviets have turned lo ihe West forand supplies, bul have oftenassimilating the sophisticaied Westernfor eiample. that

Westetn-built steam genera tort are jusi now is place aad working it tbe Uzcn oilfield after several years ofota Union and startup problems1 Soviet officials, possibly spurred by ibe prceriems ihey were facing, staled lhat any new neam in/fction projects would need io be turnkey, with ihe Wesiern supplier piovlding both equipment and initialassistance

In addition to lhc normal problems of duplicating laboratory run lis ia any odftcld. management and financial pi cole mi also have plagued the Soviet EOR program Mosi noubly. tbe Deputy Mintticr of the Petroleum Induiiry in charge of enhanced recovery projects was fired1 for falsifying data and "groti wane of enhanced recoveryince the scandals sunounding the EOR program became public, the Sovieu have postponed several FORciting both maaagemcnt difficulties and high costs

C J

Enhanced rocovciy programs, noimally inky ventures

nan wiih. require Urge upfront, expenditure! of scarce hard currency for an often minimal atnouni of additional oil recovery several years in the future. Largely for this reason, wc do not believe that EOR willignificant rote in tbc near future, although the Soviets will still actively experiment with its use.0 the Soviets stated their hopes to eventuallyf oil. More recently, however, theyargetn normal Industry use. EORare not intended to produce large volumes of

but rather to produce oil that cat not be recovered at all by conventional methods. We believe tbe Soviets have no chance of reaching even the lower goals, and that they will only obtain5 and lesset, enhanced recovery will probably remain an attractive idea because of its application at older fields that the Soviets are reluctant to abandon

in the Bailie as partoint effort with theEast (iermaos. To begin exploration of (heregion, they have bought (hreedrillships from Finland. Two have beenboth have begun to drill in (he Barentsthat the Soviets are negotiat-

ing wuh tne (Norwegians, Swedes, and possiblyfor sem (submersible offshore drillingThe Soviets arc also developing ancapability in the northern part ofThe Soviet press has announcedemisubmcrslble drilling platform atin Vyborg for use on tbe Baltic coast. Alongplatforms,os-

cow hasariety or other types of aopnisti-cated offshore equipment. They hate bought ora desire to buy underwater survey systems including low-light television, ship and rig station-keeping equipment, subsca wellheads, and underwater pipe laying equipment.

Offshore

The Soviet Union is looking to Its offshore areas touture boost in oil production. Sovietareas have enormous oil and gas potential, but production from offshore deposits has had very little impact on national oil output lo dale. Technical requirements for offshore work are high, and Soviet capabilities in this sector lag much farther behind lite state of the art lhan in any other part of the oil industry. Consequently, offshore ptoduciion is now only, most of it from older and near-shore deposits in tbe Caspian Sea.

The Soviets are attempting to upgrade their offshore capabilities thtough direct purchases from the West, reproduction of Western designs, and strengthening domestic manufacturing capability. In ihe south the Soviets are importing some jack-up and scntisubmer-sible platforms and parts to explore new and deeper Caspian Sea areas. Two construction yardi in theequippedrenchturned out eight offshore platforms.the Soviets have begun to develop an offshore capability in their untapped northern waters The Soviets noworeign-buili offshore platform

Because of the high technology requirements andexpense of developing offshore areas, theeven concluded joint venture agreementscountries. In addition to participating withGermans and Poles in the jointly ownedro-Baltic, the Soviets have joined withoint venture to explore and produce oilfrom ihe area amund the Sakhalin Island.Sovietswith Ibe Norweeians^bc cither theequipmeni or the creationoint venture inSea. Joint ventures in the offshore areasattractive lo the Soviets, who gainadvanced technology while the foreignbears the brunt of Ibe investmentreturnhare of future oil production

Wc expect improvements in Soviet offshoreto have tittle effect on national oil output in. The use of the teriiisubmersible platforms in Ihe Caspian may result in new production from deeper waters, bul there is no indication thai it will do anything more than compensate for declines from older offshore deposits in lhc area. Wc expectoil ptoduciion from offshore Sakhalin in this

decide, and probably no mote0y ihe. Recent indications Q

3f" that the Sakhalin program may be tea led back substantially Drilling in ihe BjIik hai met with limited luceeaa, and only gas has been discovered in Ibe Slack Sea and ibc Sea ol Azov. Prospects are bright for, bower, if the Soviets are able to continue to acquire Western technology The Soviets arc only beginning to explore their most promising offshoreArcticoil from this hostile region trill be eraorrnonsly expensive and will require equipment and lechitology mote sophisticated than that currentlyn in the West. These difficulties, combined wilh long leadtimes, should delay significant offshoreuntil

Pipelines

The USSR relies on pipeiir.es. the most cm! tfTeorre method, for transporting more thanercent of its crude oil production Most of the Soviet oil pipeline network is relatively new, having expandedOO kilometers (km)6 to more0 kmearlyercent of theillimeterpipelinewai (aid01

The Soviet oil pipeline industry is also largely(here la no single piece of requiredthe Soviets cannot supply fromTbe Soviets do import,electivebulldozers, surge control valves, aadmaterials lo speed construction and tooperational capacity and service life ofThe average quality of domesticallySoviet pipelines, however, is well belowslandardiesult of dcficicncr intechniques and pipe manufacturingwelding and insulating procedures arethose of the West, and quality work isfor ihc sake of speed Shoddy constwhen combined with the poor qualityproduced pipe, facilitate pipe tbe Soviets arc

already replacing sections of some relatively newven he less.erceni of Ihe pvpehne network is leas lhanears old. and we believe a

major replacement program large enough to affect the movement of crude oil will not be needed until

The conn ruction target for erode oil pipeline* inm. is small compared lo earlierkm foreriod0 km. Tc some extent this may reflect an anticipated leveling off of oil production. Because of competition from the gas pipeline programoviet history of overly ambitious pipelinetargets, we believe that oil pipeline construction ineriod may amount tom.ercent) short of tbe current plan goal (figure II)

Whether ot not this pipeline construction shortfall will affect oil production inill depend largely on lhc Soviets' ability loajor Irunkline. coniiiuction of which may have already

begun, from the new fields in ihe Kbolmogor area of West Siberia into the Votga-Urab region" We eslimale that (he present Wcsi Siberian (runk pipeline neiworic hasf usable throughputmore lhan ihe current rate of production for the region. The Soviets will ntly need to addf

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trinsportationin new pi pet iocs,to existing lysiemi. orcombinaiion of theaccommodate planned productionn Ihe post the Sovietsever failed to have the required trunk pipeline capacity available in West Siberia lo transport increased crude oil output. In ihis five year plan, however, the Soviets are extending their gas pipeline neiwork at anrale; and it is by no means certain ihat they possess adequate labor and material resource* io complete lhc new oil pipeline on schedule

Rcfiasng

Tbe refining iisdastry, tbe Iange in lhc Soviet oil lopfrfy chain, must not only be able lo rxooeu (be required quantity of crude, bulproducemil of cod products thai satisfies ibe particular demands of the Soviet economy (tableuf analysis Indicates that the Soviet refinery system is of adequate sire to process eriough crude oil lo provide for current consumption of. Wc estimate curreni capacity for crude oiltbe initial process In which crude oil Is separated into gases, gasoline, kerosene, diesel fuel, and heavybegin the, -iih anue to be completed bynd subsequent smallerlo capacity scheduled throughout tbe decade.11

2 bovrevcr. that tbe Soviets are facing difficulties with their refinery oil and are suffering from shortages of several of tbe lighter prod*eis Inadequate secondary processing and crack* ing capacity, processes that convert tbe output from ihe crude oil distillation process into light producti. is the source of the Soviet problem. In the pasl the Soviets have been able to increase their production of gasoline and other light products by simply producing more crude and constructing more distillation units to handle the increased crude production. Stagnant or declining oil output is foreclosing this option. The Sovieu have repeatedly emphasized the need totheir heavier oil products inio tighter ones but have not installed adequate amounts of catalytic cracking and hydrocraciing capacity lo accomplish this laik. We estimate that Soviet secondarycapacity it now only JO loercent ofercente United Stales- aad thai Ibe share of heavy products coming

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from Soviet refineries is increaticg rather than de-eieating. This lack of secondary capacity has resulted in poor quality tefined prcducu. increased production of heavy fuel oil al tbe espense of more desired pioducu such as high octane gasoline, low-sulfur diesel fuel, lubricating oil. and less flexibility in adjusting the pioduct mix to meet seasonal changes in demand

Tbe shortage of secondary prrxessing capacity is not an actual constraint on future Soviet oil produclion as luch ll does, bo-ever,erious fc-dblock io Soviet plans to bridge any poteatisl oil gap through substitution of natural gas and coal in the domestic economy. AJtbougb substituiion possibilities for light prcducu arc very limited, natural gas aad coal can replace rocne of tbe huge qutouues of heavyurned in power piaau and industrial betters. The tiicceas of such substituiioo hinges, however, on the tnodern,ration of the Soviet refinery industry Unless Ihe refinery industry increases iu abiliiy to convert fuel oil into lighter prcducu, lhc Sovieu -ill have to continue lo burn fuel oil inlanu. boilers, and Other applications for which natural suitable, keeping ciude oil demand high

Original document.

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