Economics of
Siberia-to-Europe
HtiEASE AS9
BLANK PAGE
F.eonomic. of Ihc Siberia Ho-Europe Cat
in natural gas pipeline is of great importance lo Ihe
So-riei economy, even though ii wouldarginal project al best if eralualcd in terms of Western profitability accounting The likelyneWesi European gas demand inill probably force the pipeline's gas to fell at nearly Ihe same price as residual fuel oil.ubic feel (cfj. At that price, lhe Soviets would notrofit unless theyairly low me of return on their capital. Algerian gat. In contrast, could easily be profitable at0 price. II Ihe Soviets expectedhigher rate of returnhose rates comldered reasonable by Westernthe Siberian project probably would earnprofit only if ihe gas were priced al parity with crude oil,f. *
Theseowever, .do not reflect important constdcralions that make ihc pipeline profitable ai well as imporiani to the Sovct economy:
Moscow cannot find alternative uses for most of the gas io be shipped io Western Europe until the Soviet domestic gas disiribaiion network iaooatly and time-coniumming nradcrukiag!
The Western goods Moscow can buy with ihe gasnnual earnings of aboutillion arcreat deal mare lo the Sov.eilhan are the domestic goods thai could be produced with ihe Soriet resource, used lo build and operate ibc pipelineoodsbetter technology than do Soviet goods and nil important gaps in tuppliei.
Alternative sources or hard currency capons on the scale of those lhe pipeline will generate aro either unavailable or wouldood deal more in Soviet labor and capiul goods.
With the likelihood that Soviet oil exports to the Wesi will nearly disappear over ihe neat few years, and with few prospectsarge ea-panston of alternative exports, exsnsiructioo of the pipeline is necessary toecline incapacity to impel from the Wen
3R
of ihr Siberia-to-Kur Op* Cas f'ipclinc
Introduction
paper evaluates th* rcononuc Costs and benefiti
to thc So-nM Union of the propgicd Si tene-io-Europe
ft pipeline Theiabilityirst lodged in
Wcitcrn lerm. with <He tppbtaiMM in some instances of cottt thai iior similar projects undci taken inen After talrulaiincrange of* iat prices that amid rnable the proftet to break even, the pipeline's potential pratitabil-iyestimated using thc strictly Weatern criuiion ofibc
and our uuinfnuia likely telling priCe fen Soviet gsi M> Wetiern Europe. The protect*!
viabilitythen cammedorici national perspective, whichcom men lion of broader criteria.
A summary of out estimates and assumptions retard-insosts of Ihc Siberian project and probable (as prices is presented in table I. Sobi.ce.ucnt sections will provide more detail. Thit paper updates our earlier aiscitrncnt. USSH-Wrtlt'ii Europe: Implications of MiCoi Pipeline.1
Tible [
Atll
So'iet Pipeline Cot lint
iBdeperiil'i Mi in(or tiiti!
dfi beiia January Ifad ivem
iiomaiwret only. Rnwan wmiiim nnminit lermi
evaluation
Currency Costs
Wc derived the estimate ofillion in Soviet purchases of Weatern pipe, equipment, and services by adjusting our1 estimate of hardeosttwin-line syslcm with theimple halving ofI4 billion estimated for the two-line piOicet was not practical, since several costs could be almost constant whether one or two linesbuilt. As in tbe twjn-linc cost estimate, two modifications of prices arc made:
Because the Soviets arc seeling concessionaryat interest ratetCurrent market rates and EC guidelines. Western suppliers of equipment and services will adjust their final tales prices upwards to provide the same yield as could be earned in thc West. Our estimatesercent price markup to relied Ihit action.
A lO-perccnt annua' rue ol price inflation his been included lo reflect increased Diiccs ai the time of equipment delivery.
iei Ai
I
Pit-
Ic com of tl 5ol
lhano
S.SOO-lm range astomed inihc result of
bitter" itioul Ihc pipeline's probable route.
Pip* deliverre* are illumed lo occur in threehipmeuti.
Co-
Campiumturbine equipment, ocruirvc of reined engineering services, repretenu lhevariation. Our estimate of S3 billion, whichidpoint amongcolli, assumesompreaior ilalioni. Tne total eoti -ill dependn ho- Soviet purchaici .rc dialeden industrial eomprettor units and thc leu espeo-arre. lighthi airetafl designi. Although theprobably -ant complete deli-ery by MXtttime tome itippagc.
laMr ft I
ervice oaap*
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Cantt
Although our citinuieilbon for tint caiccory ia not much firmer lhan io March becauie of tpotiy information,re probably tbe kail likely to differ lubaianliallyne- and iwo-nae system Although inch itcira at pipeline ballwill be needed in reduced quantity, purehaiea of other itemi inch ai pipelayera. earih movers, tome commu-nica lions equipment, and engineering acrulcra and ancillary ectuipment for the eomprettor tuiionicould reaomble thoaearger project, (mporu of Arctic-designequipment for the Urenioy Beld maybe Included In the deal."
DahtSrtrtC.
Wo are eaauming that Moscow will use theed ni needed to cove* molt of the hard currency cent* in four equal drawings (ice table II Although final financial agreementsnot been made, wehree-year grace
A waun prwaiLaaatay aa kwadbd1 Unaaa* w
which nm. inierraian cichl-year re-payment period. We0 pereeni interest rale to accountrobable combination of rates lhal will be sgrred upon, matin, 'romercent to near market leveli
So-lrr Conatruction Coils
Foully of SIS billion in lhe Siberian project0 pncttl ii represented by Soviet internal costshe pipeline and compressor ilalioni. We are aaiumlni for lack of better information that thit invettmcnt will be made in equal portionsour-year construction period. To estimalc Ihc inns. waestern analogue based on the propoaod Alatkaa Natural Gaa Trantponatloo Syi-
(ANOTSVipeline reject! will carry a
roughly ii nilar amount of fat over similar lerriin. Con il ruction coil tin mates0 prices)obtained for ihe portion of ANCTS erading at the US-t a- border inlength ilightly
7
l that Ul lit Siberian pipeline built IO thl
Czechoslovak boidcii mi ul iicim tu be piovtdcd by hard currency import, in the Sovietprimarily pipe, eomptmois. pi (slaving equipment.
and some engineeringnetted out. and a
per-kilometertderived. Thai cost wat (hen applied to Ihc Siberian line's length. Thecost of an Alaskan gal ptoceuiag plant
added lo the eonitruction figure. Although Ihcin planl'i capacity i> .li(hili leu lhan that required for thc Siberian protect, itougCOS I
Coat Qnmai
As in cvaluaiiag Western pipeline projects, our aaat)-
sis includes pmibU lostcosts cielusivc of nominal inflalioa.cqi.cnt Sonet
failures in ihe pan h> uimnteic gn bnei oa schedule, evenusing morelhan planned, an overrun is not ineoneeiaable Ovenuni ofnd SO percent arc considered
Capital Costs
Wc have considered three nominal ratet of return on Soviet investment in evaluating the pipeline project. Some Western amlitti believeI-pcrccn( return represents capital's productivity in the Soviet economy. Rales ofndercent have alto beea Included toange of after-laa rales of return eipcctcd for ANGTS. Oceanic we arcan annual inflation rait ofereeni over theifetime,returnamouat to. andercent
Cast-Wesi Caenonrtsaaa
A StraightapplMalian of Wcalera coat) lo
Soviet construction practices, of course,notprecisely the actual casta lo Mosco- of tMitclag the pipeline. Dcsletei the immediate diff^uliv of inprices ofand service, providedommand economr into dollar equivalents, thealmutlancoui development of Siberian gas fot domestic use will affect the cost of building the Siberian oat pipeline. We believe, however, that such differences from Wcttern costs may cancel themselves out sufTfCtenily to make the Western costseful first cut al estimating Soviet Investment in the Siberian eiport proeyample* are infra-structurev
Ifit ii urrv The etprirl pipeline's Curstf luCImn
prubiblybenefit from tonicines already lair! ilong its ro-K. Mine
over, since allmajor domesilc irunklinttalso
run from the IJiengoyof ihem along Ihc
same route as thc eiportmay not have to create as much additional mfrastructure and provide as many temporary support facilities for constructing each line at will (he builders of ANGTS. On thc other hand, lhe eiport pipeline will increase the strain on labor and equipment already stretched thin by Ihc Soviets'omestic pipe-laying effort.
iaoov. Generally inferior Soviet equipment and tub-standard construction pncticei usually requireto use more men than thc Well in building both pipelines and compressor stations. The real cost of that labor, however, may nm be higher than for ANGTS. Although the Soviets, like the Welt, pay premium, thoughwages for Siberian work, the total Soviet expenditure on labor in thc form of housing and related services and amenities It much
Operation and Malntroanc*
Much of thit eott for both ANGTS and thewill result from the use of natural gas into run compressor station! and relatedAlthough in this use both Soviet andarewhen theWesterngas lossesarc usually higher due to pipelinestation failures and substandardand maintenance procedures. Wehave raised slightly the operatingofline above that for
Gat consumption and lenses during transport arc coiled lo our analysts at Ibc assumed selling price for gas. Weal Germanubic feet. The gas could also be coiled al Its wellhead price, however. We have opted to reflect the hard currency revenue forceoncesult of online gas consumption, although we rccognire lhat thecost of gas at ihe wellhead it much lower. There is no universally accepted approach to this problem. If
gas were Costed Ji ill wellhead price, our isnmate of operation and maintenance eoitte reduced
considerably. Other Coats
Aatn pipeline construction, thc Soviets use far more labor in operating andiberianine lhan will ANGTS. We ag.in are assuming. however, that the real costs of Siberian labor will not exceed that for ANGTS. due lo lower real espendi-lures on wages, housing, and related services. Tiiet. which constitute roughlyercent of tbe projected cost of transporting gas via ANGTS, are not imposed on Soviet pipeline) and thus arc not included in our cai (males
tn
USSR; Pipeline ProtectPrice
CaalO>>riM
It
e>
price
Tratoit
We arc unsure how the Soviets will pay (or the expansion of Czechoslovakian Irunklinc capacity to West Germany and for lubsoqucnt Cicchostovat; operatingayment in gas from the Siberian pipeline seem) unlikely under the tingle-tine eiport project, since Ihc Scicti probably want to sell thentire capacity to Western Europe. Moscow may instead payin gat from another
line or in goodl oramount equivalent to
ercent of the pipeline's throuihpul. Thishate reportedly being considered prevwmily byas paymentwin-line deal. If coiled at the assumed selling price for gasubic feet, the tramit 'ce 'guild approximate B0 eeattubic feet
Project* Profitability
Thc Siberian pipeline would probablyarginal project al beat under our coating and pricewith positive nctbaeka at the wellhead achieved inew of the cases thai we have considered. We arcelling price for gat. West Germany)O prices ofubicprice roughly at parity with reaidual fuel oil rather lhan with crude. Possible breakeven prices for ibc project arc those thai under Ihc various rates of return would equate theyear streams of revenues and costs (tee table JIeturn on couityofercent with coat overruns ofrercent would thus
pctrnii positive netbacks. Several other cases would result In only small tosses. Half the possible breakeven prices,result innegative netbaeki
Algerian gat, the largest alternative natural gas source for Western Europe during, is probablyby pipeline or LNGcheaply fexclusive of West European costt) than Siberian gat (iceO0ubic feet, cither Algerian project wouldrofit. Moscow, on Ihe other hand, has beenrice. West Germany) near parity with the price or crude oil.0ubic feet. Only at that price, by Our estimates, would the Siberian proved atrnen- ecrtalalyositive nclback.
The Sorlet Prcipcctirc
The eiport pipeline project would be attractive to Moscow evert if it appeared marginal in terms of Western profiiabilityncreased gas ex-pom will be vital to Soviet hard currency earnings by
' 1Uteanor ashcr So-lci euwU. suchi. aad ess-car. iadk.ua, ikai ih. Savin awe' -aey. at dcKrltad lathe leas.* oncern
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Arnorliiatfoa auavlif tartc runuild.nd I'-paXonlraliaT return on' Portion oiixau Alirria nays.
of Wa) Eurapua iairrnil dnmlMtiaaa Portioncolli lialy pay*.
efeniioDitmiimh or iMbx&tr.
Ihend Western investment in thee-oulel helpighl supply of Soviet cipiiil for Siberian cnugy developmem. Ittake manyoreover.xpand ihc Soviet (ai distribution network sufficiently to use domestically all ihc cat lhat Ihc pipeline can cany.
Plraaraeia
Thc pipeline it the Sovieti* largol protpoctlve source of stable hard currency earning, and some alternative exports, even If feasible, would be far more costly;
- Combined tarrom capons of aold. nickel, and
platinumcould approximate thoac
hum lax sreigUnncci rl caiilutf. worldi Vpkii,met ah markets. >tiHBaMj
lain)11 twstt in-apt) so carjjuiaa pricea
reducing revenues (ankr (or each
im hi ia capons. Theionean tat mar-bet. on the other hand, ish to
absorb Ihe tint lc line's deliveries at aroughly
equivalent lo lhat of residual fuel oil
oviet eipo-rtt of other in" materiala and
of mtufacturodweapons would
encounter more rapidly rtauti easts than vould |as
taponi and wouldmaller actrevervue Rrturna on investment in anany Soviet
extractive industries are fading faster than for gas. la minufactutea. aa improvement ia Ihe qualityport -or kn tod goodi neeeatary lo achieve anIn hard currency revenues equal in thai from the pipeline project would probablyore investment than ihc pipeline itself.
Conversely, the coals to Moscow of notipeline deal arc high. Although hard currency tain-usgtnc-liac prejeet probably would be about oO pereeni of lhatin-have deal, they would nill bc aubaianiial (teeeeeerver. sinee the pipeline's hard currency eetU alone could be repaid wlihin twohree yean after ilart-up (tee tableoat of Iheevenue atrcam would reprcacnl discretionary income for Imports. With oil etporti to lha Weal probably disappearing by Iheackipeline deal wouldubstantial drop In Soviet import capacity. By the, total gas bard currency earning! with Ihe pipeline in operation wonM equal one-half of
revenues from oil: without thc pipeline theyequal only one fourth (leebe rcv-tnoca
force one. moreover, would meat likely have purchased machinery and other manufactured goods, whose marginal f1 tit1that or similar in produced doenca tic-ally
V
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AClNfl I
Wml ['urOpr-ai. Dependence
onas
The Soviets have recently decided noi to construct (urn i pipelines Simultaneously, ai iticy hid planned inut instead IO build only one linecomirtcikwecond line reserved for fulutc negOtiati. -i, lhe iu Wen European eountnei participating in Ihe project thatnot be at reliant on Sonet rii deliveries toward theCk as earlier ci peeled, particularlyecond line were not built The share of Soviet gas In those countries' total combined energy use0 would be'.ii (sec tabicTotal Soviet gas delivercontractsorts-from the Siberiancoveried of thesis countries' projected combined gas needs0win-Uae project,ne-line project total deliveries would cover one-fourth of gas consumption. Individual countries" dependenceingle-line deal, however, would itill be fairly high In Ihe important case of Weil
Germany,cacccdercent. Ihe level currently teen si
critical by Bonn
urope: Dcpcndcner onSmlct Cu Supplies *
Li
.
Giiminc*
ru
1
Bwnfw.uurm tlii
Tirwtni lin.
lid' iui.nd.
Bcr
dependency untelala-IlMo uihhm^ IBr. ul Sovkita UkL ma.
eoualrteJ la aaatc tispmaN a.iae lffl ruble fm ao Oil "mui tWreor.iluat, mtlHi.ttaK alSxaraBtu aadrriltic- eut-pu-day touuna .a. tbe snip em*o bindisTlhr nmilndir
Original document.
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