The Sibcria-to-Europe Natural Gas Pipeline: An
ile Siberia-to-Kestern Europe natural gas
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pipeline is an enormous "end costly undertaking, but one that promises substantial economic and political gains for the Soviet Union. Costingillion in combined internal and hard currency outlays, the export trunkline Is the first of the two gas lines through which the Soviets hope to deliver aboutillion cubic meters per year to Western Europeolume worth nearlyillion annually in much-needed hard currency.fter credits are paid off, Soviet earnings from the deal should reach at leastillion annually.
Increased dependence on Soviet gas will almostWest European decision-making, despite ushion against supply cutoffs. Thecould exacerbate West European differences withover future economic sanctions against the USSR or evensensitive issues such as NATO forceidmi1
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and equipment negotiations for the first pipeline are nearly completed, and the Soviet press claims that pipe-laying hes begun.
o West Germany and France have already agreed to purchase roughly one-half the gas to be exported through the planned pipeline system. Italy, the other large prospective gas importer under the deal, will sign very soon.- Much smaller gas purchase agreements with Austria,
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the Netherlands, and Belgium probably will follow in the next few months.
Gas deliveries are supposed to begin inloor'priceubic feet. Moscow has lined upillion in government-backed, subsidized credits for equipment (not including pipe) for the first export pipeline, more than twice the amount needed.
The Soviets have signed contracts for approximatelyillion in turbines, compressors, and other non-pipe equipment for the pipeline. The contracts, signed last fall, are believed to call for delivery of most equipment by3 or Anotherillion in equipment--primarily pipe-layingstill be ordered.
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Moscow to canvass Western firms to determine whether a
sufficient number of turbines not using US technology
could be obtained should expanded US sanctions prevent
delivery of the GE-desIgn turbines already ordered.
0 Moscow has not ordered any pipe specifically for the
export pipeline but will instead use pipe from mu1ti-year
contracts already signed with West European and Japanese
firms to provide pipe "for Soviet gas lines in general.
The value of the pipe used on the export line will
approximate
Should US sanctions substantially reduce the availability of
critical Western turbines lo the USSR, Moscow would encounter considerable difficulty in building the export pipeline. The Soviets could, however, 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 impact on the domestic economy would be substantial. The ussr's projected tight energy position through most ofake Moscow extremely reluctant to risk makingacrifice. If the gamble failed, the Soviets almost certainly would have lo curtail oil exports more sharply than is now foreseen. Nonetheless, the USSR's great need 'or substantially increased hard currency earnings from gas could
prompt it to risk the consequences of restricting* the growth of domestic gas supplies, particularly if Moscow believed that now is the time toizable share of the West European gas
market for the. H Scope of the Project
The export pipeline represents an enormous undertaking in terms of size, commercial complexity, and cos*..
Route
nch) export pipeline will run0 miles) within the USSR. Starting at the huge Urengoy gas field, it will entral route generally southwestward to the Uzhgorod export terminal on the border with Czechoslovakia (see map). The route selectedompromise between the shorter "Northern Lights" right of way, more of which lies in difficult sub-Arctic terrain and the longer but easier path through Chelyabinsk. Beyond the exit point at Uzhgorod, some of the gas will transit Eastern Europe, possibly through Czechoslovakia, to West Germany and central and north European customers; some will cross through io
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The pipeline at full capacity could probably deliver 28
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billion cubic meters per year t0 Western Europe. (Maximum input at the gas field will probably beillion cubic meters per year, with the turbines powering theompressor stations consuming at leastoercent of the throughput). But the Soviets may .want to deliver additional gas to domestic consumers
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endortion of the throughput to Eastern Europe for transit fees. Moscow therefore has beenarallel export line to be started4 or. The two large pipelines would be
by the, as well as to supply gas for transit fees and accommodate some additional Soviet or East European
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to six West European countries will purchase gas delivered through the export pipeline, and others may sign up. West Germany is the largest buyer. It signed an agreement in1 to5 billion cubic meters per year, with an option for anillion cubic meters per year if East Germany allows gas to flow to West Berlin. France and Italy are the next largest buyers, atillion cubic meters per year each. Austria, the Netherlands, and Belgium have not made firm commitments, but will probably eachillion cubic meters per year. Spain has not actively participated in 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 ofillion cubic meters per yearthe best way of doing so around the endJ
Pipeline Completion Date
Moscow has contracted to begin gas deliveries to Western Europe in fourth If the start-up occurs on lime,
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probably no moreillion cubic meters could be delivered that year. Once the pipe for the export line is laid, deliveries to Western Europe will increase gradually until full compressor capecity is achieved. ompletion of the first exporton line all planned compressor stations and ancillaryprobably occur In6 or Moscow could also extend an existing domestic line bym from Us present terminus to the Czech border in the next two years and thus ensure at least small gas deliveries schedule.
Construction Costs
The first export pipeline will cost at illion. Western pipe and equipment paid for in hard currency will probably8 billion. Roughlyillion In equipment will be required, 3 billion In pipe. Soviet internal costs ofillion are estimated on the basis of analogous Western projects, such as the Alaskan-Canadian gas
What the Pipeline Means to the USSR and Western Europe
Construction of the first export line by thend the second line by decade's end offers significantwell as someboth the USSR and Western Europe. On balance, the Soviets would probably gain more from the project's completion than the West Europeans, both economically andally.
Soviet Benefits
Moscow wants the pipeline principally for the hard currency
it will generate beginning in the, but the potential
political leverage inheren-t in the project must also be
Hard Currencycurrency earnings .from the export
pipeline will partially offset the expected decline in Soviet oil exports to the West (see. Natural gas promises to beby far Moscow's most important source of incremental hard currency revenues, since ea'rnYrigs from non-fuel exports
*
including arms andprobably stagnate or rise only slowly during. Although the USSR will have to make substantial outlays for equipment and pipe before the gas export pipeline is ready for full operation, most of these expenditures will be covered by Western credits on favorable terms. Inwhen we expect that the first pipeline could come onreceipts will total nearlyillion. Receipts from the
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arrengement will rise to almostillion 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 oileceipts, even if oil sales for hard currency remain high5 before disappearingonetheless, the export pipeline willharp decline in total Soviet hard currency earnings during thehat otherwise would reduce imports_of Western good and technology critical to the Soviet economy.
Political Gains. West European reliance on Soviet gas would rise considerably if Moscow's export pipeline plans are implemented. 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 deliveries--on existing contracts as well as exports through the newcover one-fourth of the gas requirements of the six countries0 if only one export line were built. West German reliance on Soviet gas would then exceed
Under twin-line
project total deliveries would be somewhat higher, covering nearly one-third of the six countries' gas consumption. |
* Reduced deliveries of oil will be nearly offset by the increase in gas supplies. Soviet oil sales to these six countries were Additional gas supplies ofillion cubic meters per year0 would be equivalentf oil.
Moscow almost certainly sees this dependence as giving it some increased influence over West European political behavior.
The Soviets, however, would be reluctant toassince Moscow will need the hard currency from gas sales and would not want the West Europeans to begin switching to other suppliers. Moreover, g ahead to future credit needs, the Soviets are interested in maintaining their reputation for reliability in commercial and financial matters.
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 thus might be able to dampen enthusiasm for economic sanctions sponsored by the United States in retaliation for Soviet actions elsewhere. The USSR already has threatened Western Europe with the loss of energy and other projects if it joined in either the Afghanistan or Polish-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 also try to use increased European gas dependence to influence decisions on more sensitive issues such as the NATO force modernization program. If so,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 European Benefits
Despite increased East-West tensions over Poland, the West
Europeans see greater use. of Soviet gaslear cut economic
gain and an acceptable potTtical risk.
s . Cconoml otllj i Ihe West Europeans argua thai the Siberian gas pipeline project offers several advantagesi
0 Atubic feet, Soviet gas Is priced competitively wjth 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. (Such employment, however, is only one-half percent of theillion West Europeans currently unemployed.)
o Most of the hard currency earned by the Soviets through the pipeline deal In later years will be spent in Western Europe.
The Political Calculus. The political risks of the project, the West Europeans have long mainjained, will be outweighed by the political gains. Increased use of gas from the Soviet Unlon--whlch in the past has scrupulously honored its gas supply reduce West European dependence on oil and gas from less developed countries, which the West Europeans consider less reliable suppliers. The West 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. If continued Soviet, imports of Western equipment aid Soviet energy
production, the 'Vest 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 lhal the risksajor gas culoff are small. First, they count on Moscow's growing need for hard currency. Second, they believe lhat the impact of any interruptions that do occur would be cushioned substanlially by several back-up supply systems:
o Dutch gas fields with ample surge production capacity lbl
uffer that could be tapped in any major
emergency.
0 Norwegian gas from the North Sea may be available in much greater quantilies by ther.
o West Germany and France are planning to increase
considerably their gas storage capacity. Italy has many depleted gas fields that could be converted to storage.
o Many Nest European 1ndustries--the most likely targets of gas cutbecks during reduced Soviet deliveries--can switch rapidly to alternative fuels. At leastercent of French industry does this esch winter when gas supplies are tight, and this percentage is much higher in West Germany.
o France has reached an agreement with Algeria for resuming LNG imports, end Italy msy soon start to import Algerian gas via the newranean pipeline.onetheless, West European ability to counter successfully a
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Soviet gas denial is not assured- The West Europeans did not respondnified manner toil crisis end might again follow divergent policies. Countries with surge capacity,
may be unwilling or unable to divert substantial supplies to other countriesrolonged period. Norway may continue to limit gas development for reasons of conservation or because the price of Soviet gas remains considerably below that at whTch further development would be profitable. Moreover, because Soviet gas probably will be delivered by at least two routes through Czechoslovakia and Hungary, Moscow could attempt to create divisiveness by denying gas to some West European countries instead of to all Current Status of the Project
Financial and contractual arrangements for the export pipeline are nearly completed- West Germany and France have signed gas purchase contracts; Italy,pause" for reflection, is likely to sign soon- Credits sufficient to cover ihe pipeline's imported equipment needs have been extended, and most of the contracts for pipe and equipment delivery havel ed.
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 orders, Vest European firms won most of the supply contracts for the first export pipeline in return for buying Soviet gas- Non-pipe contracts he.ve been signed specifically for the export pipeline,
while separate, existing credit arrangements with West European and Japanese firms (listed- in tableill finance the pipe for both domestic andes. The value of the pipe required for the export pipeline sfiould be3 billion.
The largest portion of equipment orders is for turbine-compressors, related equipment, and engineering services for the pipeline'sompressor stations.!
" Forty compressor stations will each use three ofMV GE turbines; the station at the gas field will use five lower-capacity turbines.
Work on the Pipeline to Date
Construction of the export pipeline is just getting
underway. Moscow has ass-igned this project very high priority in
h Five-Yearncluding the export line, the Soviets
plan to build six gas trunklines from Siberia.
These tines, which will average morem.n
length, are to carry virtually theillion cubic
meters increment in planned aggregate Soviet gas production
. One domestic line (Urengoy-Petrovsk) has just
been laid, and the Soviets are trying to finish another (Urengoy-
Novopskov) by Thus far, clearing of the right of way
for the export line has commenced, and some infrastructure,
linepipe, and pipe-laying equipment have been positioned along
the route. To permit initial exports of gas to Western Europe
under the new contracts by4 or the Soviets
may firstipeline segment ofm connecting a
domestic pipeline from Urengoy to Novopskov (or that from Urengoy
to Petrovsk) with the export terminal at Uzhgorod. Gas from the
domestic system could then be diverted.for export until the new
export pipeline from Urengoy is
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The US Embargo and Soviet Options
Should US sanctions substantially reduce the availability of Western turbines to the USSR, Moscow would encounter much greaterbut notsurmouncul ty 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
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project. The Soviets could still comolete the pipeline, however If Western Europe were willing to purchase the gas and If the critical large-diameter linepipe and ball valves (as well as an adequate park of pipelayer""s) were available. Moscow could reconfigure orders placed wilh Western turbine suppliers and divert additional domestic resources to the export pipeline project.
The Possible Options
The USSR probably is actively working to counteract the US embargo by exploring technical and financial alternatives with West European firms. Without imposition of further US restrictions, the Soviets have several options for obtaining Western equipment:
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up to one-third of planned capacity. Moscow has several
opt ions- It could:
o "Loop" or "twin" the export pipeline byecond strand of pipe, flfl's configuration would permit delivery of as much gasullyatmosphere pipeline but would require onlyoercent as much compressor
power.
o Transfer surplus turbines and compressors to the export
pipeline from existing lines, o Reallocate lo ihe 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 trunkline in the European USSR to the
Czech border for West European linkuphile
above.
continuing to build the export pipeline, as discussed
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Nonetheless, the domestic cost would be substantial. Completion dates for reaching full capacity on one, and possibly two, of the five planned domestic trunklines would have to be postponed as turbines, labor, and compressor station materials and equipment were transferred to the export pipeline. We believe that Soviet production of suitable gasrWMW units per year from series currently In productionmall numberMW units (if serial production of these indeed can be starlmost certainly
fell short of needed new capacity for the planned expansion of the domestic gas pipeline system. An all-out effort on the export line, therefore, might delay for one or more years domestic gas deliveries of up toillion cubic meters per year (or the equivalentf oil).
The USSR's projected tight energy position through most ofould make Moscow extremely reluctant to risk makingacrifice. Thelmost certainly would have to curtail oil exports more sharply than Is now foreseen or be
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forced lo reduce oil deliveries to Eastern Europe more rapidly han Moscow now deems politically feasible. Nonetheless, the importance of substantially increesed hard currency earnings from gas could prompt the Soviets to restrict the growth of domestic gas supplies, particularly if Moscow believed that now Is the time toizable share of the West European gas market for the.
Original document.
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