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Over*!gw ofcrla-to-Burope Natural Gas Pipeline
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ile Siberia-to-Europe natural gaa pipeline is an enormous undertaking that promises substantial economic and political gains for the Soviet Union. The trunkline, costing atillion, la the first of two gas lines through which the Soviets plan toillion cubic feet per day to Western Europe by theolume worthillion annually In much needed hard currency. After credits are paid offoviet earnings from the deal will reach at leastillion. Increased dependence on Soviet gas will almost certainly influence European decision-making, despite likely efforts toushion against supply cutoffs. The Soviets conceivably could exacerbate European differences with the US over future economic aanctlons against the USSR or even over more sensitive Issues such as NATO force modernization.
Financing and equipment negotiations for the first pipeline are nearly completed, and construction should begin later this year.
o West Germany end France have already agreed to purchase roughly half the gas to be exported through the new pipeline system. Italy, the other large prospective gas importer under the deal, will algn very aoon. Much smaller gas purchase agreements with Austria, the Netherlands and Belgium probably will follow In the next few months.
D Less-than-fulI gas deliveries are supposed to begin In4loor priceubic feet.
o Moscow has lined upillion In government-backed, subsidized credits for non-pipe equipment for the first export pipeline, more than twice the amount needed to cover likely equipment needs.
o
O The Soviets have signed contracts for approximatelyillion In turbines, compressors and other non-pipe equipment for the pipeline. Anotherillion inpipe-layingstill be ordered. Delivery of most equipment is probably scheduled for3 or
expanded US embargo, however, has forced Moscow to canvass Western firms to determineufficient number of turbines not using US technology could be obtained should US sanctions prevent delivery of the GE-deslgn turbines already ordered.
o Moscow has not ordered any pipe specifically for the
export pipeline but will instead use pipe from multi-year contracts already signed with West European and Japanese firms to provide pipe for Soviet gas lines In general.
The value of the pipe use on the export line will
billion.
Should US sanctions substantially reduce the availability of critical Western turbines to the USSR, Moscow would encounter considerable difficulty in building the export pipeline. The Soviets could still complete the pipeline if Western Europe were willing to purchase the gas. Moscow could reconfigure orders placed with Western turbine suppliers and divert additional domestic resources to the export pipeline project.
Even If all Western turbines for the export line were denied by US sanctions, Moscow could make adjustments in Its internal pipeline building, but the domestic cost would be substantial. The USSR's projected tight energy position through most ofould make Moscow extremely reluctant to risk makingacrifice. If the gamble failed, the Soviets almost certainly would have to sharply curtail oil exports. Moscow especially wants to avoid the disruption and potential hardship of having to divert equipment from domestic line construction at short notice after two or three years work on the export line. Nonetheless, the USSR's great need for substantially Increased hard currency earnings from gas could prompt It to risk the costs of restricting the growth of domestic gas supplies, particularly if Moscow believed that It had no other way ofitable share of the West European gas market In the.
Scope of the Project
The export pipeline represents an enormous undertaking In
terms of size, commercial complexity, and coat. Bout a
The export pipeline will run0 miles) within the USSR, following the southwesterly route planned for almost all Soviet domestic gas lines to be built by thesee map). The route selectedompromise between the ahorter "Northern Lights" right of way, more of which lies in difficult aub-Aretle terrain, and the longer but easier path through Chelyabinsk. Beyond the exit point at Uzhgorod, some of the gas will transit Czechoslovakia to West Germany and central and north European customers, and some will cross through Hungary to supply Austria and southern customers.
Capacity
The pipeline at full capacity can probablyilliono Western Europe. (The input at the gas field will probablyillion cf/d, with the turbines powering the 41
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compressor stations consuming at leastercent of
throughput). Because the Soviets want to ship some of the gag to domestic consumers andortion to Eastern Europeransitesser amount will actually reach the West. Moscow therefore plans toarallel export line, beginning4 in order tootalillion cf/d
to Western Europe by the. as Customers
At least six countries will purchase gas delivered through the export pipeline, and additional countries may sign up. West Germany is the largest prospective buyer. It signed an agreement
In1 toillion cf/d, with an option for an additionalillionf East Germany allows gas to flow to West Berlin. France and Italy are the next largest.buyers,illionach. Austria, the Netherlands, and Belgium have not made firm commitments, but will probably eachillion cf/d. Spain has not actively participated fn negotiations with Moscow thus far but has become increasingly interested In purchasing Soviet gas following France's agreement to buy last month. Madrid wants to tie Into the West European gas grid, and sees imports of Siberianillionas the best way of doing so.
Pipeline Completion Date
Moscow has contracted to begin gas deliveries to Western Europe in fourth If start-up did occur on time, robably no moreillionould be delivered that year. Completion of the export plpellne--bringlng on line of all compressor stations and ancillaryprobably be delayed until 6 or Moscow could also extend an existing domestic line to the Czech border in the next two years to ensure at least small gas deliveries on schedule. (See "Work Done to Date" below.) Once the export line Itself is laid, deliveries to Western Europe will increase gradually until full compressor capacity Is achieved, perhaps by m
Construction Coats
The first export pipeline will cost atillion. Western pipe and equipment paid for in hard currency will probably8 billion. Roughlyillion In equipment
will be required,3 billion in pipe. Soviet Interna) eoits ofillion are estimated on the basis of analogous Western projects, such as the Alaskan-Canadian gas
the Pipeline Means to the USSR and Western Europe
Construction of the first export line by thesecond line by the decade's end would conferon both the USSR and Western Europe. The Sovietsgain more from the project's completion than thehowever, both economically and politically.
Moscow wants the pipeline principally for the hard currency it will generate beginning in the, but the potential olitical leverage inherent in the project must also be attractive.
Hard Currency Gains. Hard currency earnings from the export pipeline will partially offset the expected decline in Soviet oil exports to the West (see table 1 ). Natural gas promises to be by far Moscow's most Important source of Incremental hard currency revenues, since earnings from non-fuel exportsincluding arms andprobably stagnate or rise only slowly during. Although the USSR will have to make substantial outlays for equipment and pipe before gas export pipeline la ready for full operation, most of these expenditures will be covered by Western credits on favorable terms. hen we expect that the first pipeline could come on atrearn--net receipts will total nearlyillion. Receipts from the
Table 1
USSR: Estimated Net Receipts fran Gasales
are based on the USSR'sual-line system in two stages, with the lines to begin operation6espectively.
volume of oil sales for hard currency Is projectedales volume then declines to xeroil prices are assumed to fall nearlyercentefore leveling off for the rest of the decade.
gas exports from existing lines riseillion cubicay1illion cubicay3 and remain at this level The real price of gas (currently undervalued In relation to oil) is assumed to increaseercent during the decade.
1)
pipeline1
sales
Downpayments Repayments and interest on credits
0
0
receipts
Gas3
3.4
3.5
3.7
3.9
4.0
4.0
4.0
4.0
5.0
5.0
hard currency earnings from oi1 and gas 9
arrangement will rise toillion by the end of the decade if the Soviets go through with construction of the second line. Earnings from the deal will not completely offset the expected drop in oil export receipts, even If oil sales for hard currency remain high5 before disappearingonetheless, the export pipeline willharp decline in total Soviet hard currency earnings during thehat would have reduce imports of Western good and technology critical to the Soviet economy.
Political Gains. West Europeans reliance on Soviet gas would rise considerably if the deal goes through. The share of Soviet gas in the total combined energy use of the six countries currently in the deal would increase fromercent0ercent" Total Soviet gas deliver1es--on existing contracts as well as exports over the new line--would cover one-fourth of the gas requirements of the six countries0 If only one export line were built;win-line project total deliveries would cover one-third of gas consumption. Por some countries dependence would be quite high. West German reliance on Soviet gas could exceedercent, the level seen aa critieal by Bonn. F NC)
The Increase in gas supplies to Western Europe will be offset by reduced deliveries of oil.
Moscow almost certainly sees this dependence as giving it increased influence over West European political behavior. The Soviets would be reluctant toas cut-off, since
Moscow will need the hard currency from gas sales and would not want the West Europeans to begin switching to other suppliers. The USSR could, however, use its gas exports more subtly In Influencing West European decision-makIng on selected East-West issues. Technical breakdowns in pipeline operation--which will occur periodically In any event due to weather conditions and poor Soviet maintenance--could be used, for example, to heighten West European awareness of the potential economic costs arising from policy decisions harmful to Soviet interests.
At the very least, the gas line deal will enhance the USSR's ability to influence the West Europeans on Issues which they see as peripheral to their own security Interests. Moscow will be able to dampen enthusiasm for economic sanctions sponsored by the United States in retaliation for Soviet actions elaewhere. The USSR already has threatened Western Europe with the loss of energy and other projects If it joined in either the Afghanistan or Pollah-related sanctions. ubstantially expanded Soviet-European gas relationship would give Moscow even more clout on questions of this sort by the.
Conceivably, the Soviets might alao try to use Increased European gas dependence to influence decisions on more sensitive issues such as the NATO force modernization program. If so, Moscow would probably attempt to affect the views of the groups that would suffer most economicallyutoff of Soviet gas. The USSR could make it more difficult for the West Europeans and the US to agree on certain key issues. But West European sensitivity to Soviet pressure on military Issues
related to national security wouldajor barrier to Soviet exploitation of European energy dependence In this area. West Buropean Benefits Despite increased East-West tensions over Poland, the West Europeans see greater use of Soviet gaslear cut economic gain, and an acceptable political risk.
Bccwcaale Oalae. Economically, the West Europeans argue that the Siberian gas pipeline project offers several advantages: o At f, Soviet gas is priced
competitively with alternative gas sources, o Theillion In pipe and equipment
orders for just the first pipeline will go primarily to Western Europe, possibly providing up0 jobsime of high unemployment. (This amount, however, is
idh1i
less than one percent of theillion West Europeans urrently Most of the hard currency earned by the Soviets through the pipeline deal In later years will be spent in Western Eu rope.|
The Political Calculus. The political risks of the project, the West Europeans have long maintained, will be outweighed by the political gains. Increased use of Soviet gas will reduce Keat European dependence on oil and gas from less developed countries, whom the Europeans consider less reliable suppliers than Moscow. The Europeans also contend that prompting Soviet reliance on the West European market for hard currency sales and for imports of critical goods and technology will raise the costs
of aggressive Soviet behavior In Europe. ontinued Soviet Imports of Western equipment aid Soviet energy production, the Europeans also argue, Moscow may be less Inclined to meddle In the Persian Gulf region.
Although West Europeans recognize that their potential vulnerability to an Interruption in Soviet energy supplies will be greateresult of the pipeline deal, they argue that the risksajor gas cutoff are small. First, they count on Moscow's growing need for hard currency. Second, they believe that the Impact of any interruptions that do occur would be cushioned substantially by several back-up supply systems:
o Dutch gas fields have some surge production capacity that could be tapped in an emergency,
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o Norwegian gas from the North may be available in much IHII greater quantities by thar.
o West Germany and France are planning to Increase considerably their gas storage capacity.
o Many West European !ndustries--the most likely targets of gas cutbacks during reduced Sovietswitch rapidly to alternative fuels. At least IS percent of French industry does thli each winter when gas supplies are tight, and this percentage is much higher in West Germany.
Nonetheless, West European ability to counteroviet gas denial la not assured. The Europeans did not respondnified manner toil erlals and could follow divergent policies in the future. Countries with some surge
capacity, such aa the Netherlands and the UK, may be unwilling or unable to divert substantial supplies to other countriesrolonged period. Norway, moreover, may not expand its gas deliveries in Europe substantially if the price of Soviet gas remains considerably below the prices at which new Norwegian gas would be profitable far Oslo. Moreover, because Soviet gas probably will be delivered through Czechoslovakia and Hungary, Moscow could create divisions in Western Europe by denying gas to some countries Instead of to all. Current Status of the Project
Financial and contractual arrangements for the export pipeline are nearly completed. Wast Germany and France have signed gas purchase contracts, and Italy,pause" for reflection, is likely to sign soon. Credits sufficient to cover the pipeline's imported equipment needs have been extended,ost of the contracts for pipe and equipment delivery have been '"
initialed. BLbxbbI
Pipe and Equipment Orders
Moscow has initialed contracts for3 billion in pipeline equipment, excluding pipe (see Although Japan is intensely interested in obtaining large equipment contracts, West European firms hold most of the supply agreements. Non-pipe contracts have been signed specifically for the export pipeline, while existing contracts with European and Japanese firms (listed in tableill supply pipe for both domestic and export lines. The value of the pipe required for the export pipeline,
Credi ts
Western Europe and Japan have extendedillion In credits for purchase of equipment for the export pipeline, excluding pipe (see The lines of credit coverercent of the value of the equipment contracts, and all the credits are government-guaranteed. West Germany, Italy, and Prance togehter have each extended almost two-thirds of the total credits offered. The offerings will be reduced as final equipment supply contracts are worked out. Credits for pipe will be negotiated annually at market rates of interest.
Work on the Pipeline to Date
No part of the export pipeline has been built so far, but Moscow has assigned its construction very high priority. The Soviets plan to build six gas trunklines from Siberia, including the export line. These lines will average moren length. The lines will carry virtually the9 billionncrement In Soviet gas production. One domestic line (Urengoy-Petrovsk)
ha* Just been laid, and the Soviets are trying to finish another domestic line (Urengoy-Novopskov) by instead ofs initially planned. 2 the Soviets will also constructing the Urcngoy-Uzhgorod export line. Thus far the right of way for the export line has been cleared, and some Infrastructure and pipe-laying equipment has been placed along the route. To permit Initial exports to Western Europe by4 orowever, the Soviets may build the pipelineost likely, the pipeline crews now finishing the Urengoy-Petrovsk line will build the last leg of the export line first by continuing from Petrovsk to Uzhgorod, completing awith Czechoslovakia within two years. The US Embargo and Soviet Options
Should US sanctions substantially reduce the availability of Western turbines to the USSR, Moscow would encounter much greater but not insurmountable difficulty in building the export pipeline. An expanded embargo preventing Western sales to Moscow of equipment embodying US technology would increase considerably the cost to the USSR of continuing with the project. The Soviets could still complete the pipeline, however, If Western Europe were willing to purchase the gas- Moscow could reconfigure orders placed with Western turbine suppliers and divert additional domestic resources to the export pipeline project.
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The USSR probably has not decided how to counteract the US embargo already imposed. Moscow is currently exploring technical
Relying on Domestic Production
Even If expanded US sanctions severely reduced the number of foreign-made turbines available to the USSR, gas deliveries to Western Europe could probably begin byrj at up to one-third of planned capacity. Moscow has several options. It could:
o Transfer surplus turbines end compressors to the export
pipeline from existing lines. 0 Reallocate to the export pipeline material, labor, and
domestically produced turbines intended for building
compressor stations on domestic lines, o Increase, with some difficulty, the rate of conversion of
retired aircraft turbine engines to pipeline service, o Extend an existing trunk!Ine In the European USSR to the
Cxech border for West European linkuphile
continuing to build the export pipeline as was dlseussed
Nonetheless, the domestic cost would be substantial. Completion dates for reaching full capacity on one, and possibly
BEnmr Heron* NwrwrftAtff MBsUM MOM
two, of the five planned domestic trunk-lines would have to be postponed as turbines, labor, and compressor station materials and equipment were transferred to the exportf, as we believe, the Soviets do not produce nearly as much turbine capacity for their domestic gas lines as they apparently are planning, an all-out effort on the export line might delay for one or more years gas deliveries of upillionor the equivalentf oil).
The USSR's projected tight energy position through most ofould make Moscow extremely reluctant to risk makingacriflce. The Soviets almost certainly would have to sharply eurtall oil exports to the West or be forced to reduce oil deliveries to Eastern Europe more rapidlyhan Moscow now deems politically feasible. The Soviets especially want toituation In which they get two to three years into construction of the export line and then have to divert equipment from domestic line construction at ahort notice with all the disruption and potential hardship that might causa. Nonetheless, the Importance of substantially increased hard currency earnings from gas could prompt the Soviets to restrict the growth of domestic gas supplies, particularly if Moscow believed that It had no other way ofizable share of the West European gas market in the- I
Original document.
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