USSR-WESTERN EUROPE: IMPLICATIONS OF THE SIBERIA-TO-EUROPE GAS PIPELINE (PA 81-

Created: 3/1/1981

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USSR-Western Europe: Implications of the Siberia-to-Europe Gas Pipeline

CIA HISTORICAL REVIEW PROGRAM RELEASE AS9

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USSR-Western Europf Implications of the Siberia-to-Europe Gas Pipeline

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Europe: Implications of (tic Siboris-fo-EuropcCas Pipeline

1 he proposed project-which would be completed in aboutWtol to ilic Sovtcu und important to the West Europeans. Wc expect Soviet oil exports to the West to decline sharply by the. Increased gas export* ore Moscow's only major alternative source of hard currency. Without the earnings expected from the pipeline deal. Moscow would have to reduce imports of Western machinery und other goods greatly. Moreover the project furthers Soviet goals of drawing Western Europeloser poliiical-cconoinlc rdailonthip.

The Question of Political

The pipeline wouldajor new element in Soviet-West European relations. It would provide the Sovicis one additional pressure point they could use os partroader diplomatic offensive to persuade the West Europeans lo accept their viewpoint on East-West issues. Such pressures might be dijeetcd. for example, ai undermining European willingness to act in concert with the US on economic sanctions against the Soviets or on security

Circumstances that wculd aff=ci any thoughts the Soviets might have to threaten to cut off gas shipments for political endshe Soviet need for hard currency earnings:he physical setup of the pipeline, which will preclude cutting off any one West European country without cutunc them all off. But political leverage stemming from the jras pipelineprobablyapplied more subtly. The emphasis would be on the benefitse gained from cooperation and from awidinn conten-nous

Nevertheless, even cutoffs ire not without some precedent. The Soviets cm off oil supplies to Yugoslaviao Israelnd to China in the early and. In all three cases. Moscow faced much less serious consequences than wouM be at state with the European pipeline.

Wen European Perspeai'e

ajor increase in East-West tensions. West Europeansee increased use of Soviet gas as an acceptable political risk. Western Kuropc views the USSRore reliable supplier than many alternative sources They argue, for example, that Moscow is less likely than Algiers to use gas leverageeans of blackmail. They also point out that thdr overall dependence on Moscow for energy supplies would increase little, because of declining Soviet oil deliveries.

Moreover. the iii West European countries involved see major economichey need tos import* lo offset Ihe likely decline in oil lupplics. Related equipment sales by Weil European firms would create thousands of jobs and biUiom of dollars in business. The Soviet* would alsoarge part of their earnings from gas sales in Western Europe.

Weil European officials arc never thclcst wary of signaling their approval to the Soviets while the Polish situation remains volatile. West Germany and France recently agreedointstudy of the whole project, which ihcy could use to delay It if necessary.

Impact of <h* "Neimal Cat Wtapon "

Tho likelihood is strong that the Soviets will attempt subtle exploitation of the developing natural gas relationship. The cffceti of such pressure would depend on: (I) West European and NATO cohesion and will:rogress over the neat few years by Western Europe in instailing "insur-nnct" in the form of strategic reserves and fuel substitution capability. West European countries arc taking steps to protect themselves from Soviet supply interruptions. Rut additional measures arc necessary to provide (he cushion needed to avoid tcrioui repercussions in the eventomplete Soviet cutoff.

One policy device ycl to be full* exploredechanism for sharing shortages in the eventupol* disruption resulting from either technical or political factors.

uts

Pose

Key

Dimensions and Siaiui of ihe* "|

Benefit*

Easi

2

Technicalelivery "

Potential "Soviet Pulilical Levcrago

Specific Areas

The Natural Gas

I Internal Supply

Diversifying.

_Suttuof the ftojcci

Equipment and Hard Currency

Energy

Western jju. rope: Energy Slake in Pipeline

Western Europe: hidu_)trial_Siake_in Pipeline21

Soviet Pipeline Delivery 'Problems "

Western Europe: Implication* oflhc Sibcrla-lo-Europe Gas Pipeline

and Status of tli( Project

1 he proposedla-Western Europe naturali celiac is tbc largestiradc project ever neeottd Tbc gasexport projectcntaili connruciasu oftiunUioc fromm burg guficid in Wni Siberia to Westistance of approhe pipeline will be atmoM totally dedicated tocxport.lt willapacityillion Cubicy (cf/dx depend Ingoa whetherinilc or double line. The gai will be dbtribalcd arnoag at least six Weil EuropeanGermany. Fraacc. Italy.beriaimU.d Austria. The agreement wouk)ycar period, with ihe pipeline'i hsrd currency coin re cooped in too years. The last European countries aciois which the pipeline navels repeatedly will icecive (ought)ercent of the caponed got asa uaniii fee. (See appendiiA-i

Sonet iadcciuon retarding the r- roauaad capacity baaame in peubJcprefectstunt Wc believe thai Moscow will decide to buildo}icraiincailmum pressure than would be used in thenek-line option, sinceingle line at higher pecisuics would present ffcalcr difficulties Tbc route In ihe USSR end Easterncould follow several direct ioa* (see ma pioc route is selected, hard currency rcouinatcali lea ihe Sonet pennn ol ib* Imic couMclWaa. (See appendix Bj lumen ehaigei daringconsuactica wuiiId (ppioalmate SI billion (or that piniculx op-tion. Bunging the pipeline to full capacity in any eveat will take at least four years (torn contract lignina

Although no credit agiccmcnts have becninitiilcd. ike Soviets appear to have lined up pcrhapsSI6 billion in Western financing, largely official and officii Sly backed credits. The sii principal West European participants haveJ billion, with another SI billion probably extended by Japan. Gas pricing li an

outstanding issue. The Soviets have backed off (or nowemand for gas prices at parity with crude oil. which at the present average OPEC price of SJJ per barrel wo old be aboutubic feethe French believe thai Moscow will eventually sctue for less than parity wiih oil. but this seems unlikely given trends in rcccai gas price agreements within Western Europe.

Bvnefiti lathe USSR

The cat pipeline project wouldinancial boaaeia far thepecifically, the inc. ease in gat cipoiii willajor boost to hard currency earningsime when oil capons ate

Once theperating at full capacity, the USSR would be caponing for hard currency thecquiv.illionthe same volume of oil caponed to hard currency countriesSO. If prices achieve parity with crude oilard currency earning* from gas0 oil pr-ccs wouldulliea. about cutching combinedroncaporua/edaad gas0 By ItVO.gat capon saitingi would be in the4 billion range

Moscow it counting on the gas project to provide an offsci lo declining hard currency earnings from oil. The rear leveling off of oil production projected inoviet pun. ecu pled with rising dominie cori'irnption and Soviet commitments lo maintainvile apart levels to Eastern Europe,natkoviet oiletports to the Wen (See Igpaav diiC]Soviet Gccrnraeen probably expectseduction We bcticc Moscow will face an ccaanorc difTici.iloil production will begin to decline within liteean and continue

declining thioucb the ich of the decade. Undo theseven with tight domestic oil rationing. Mow could not avoid an elimination of hardoil c nd probably would base lo impori substantial amount* of cul lor hard currency

ThcoBlkHik (orminji frombin oil and gat is dim. Saraeofuac aaorc traditional ciport* of rawa addeed rant. GoM and arm) are more promising, but 1bey arc erratic and incveM will mat be large enough lo offset the dccfiflcith thepipeline, therefore, ike Soviet Union coulddo no better than maintain the current purchasing power of iti eiporta over imports of Wcitern food, machinery, and materiali other than oil. Without the pipeline, we doubt that MOKOwcouldramatic decline In such import*.

As for (a* production, the project will not initially enhance Soviet output for domestic use bocauic of the capon pipeline'* absorpt ion of (tilled labor and other resourcesomestic pipeline projects. Over the king run. the technology traaifer associated with the project should totter the development of critical gas ioduitry infraitructuie The deal would enable the USSR to purchase Wcitera Arctic-design couipmcoi for gas citnsetioa and iat wellhead assemblies, drill pipe* large-diameter line pipe, and itate-cf the-artto Siberian gas development but not man-produced by the Soviets. Without the pipeline deal and iu hard currencyon the other hand, the Soviet* would be hard pressed to finance Import* of Western pipe andessential to domestic ga* project*.

Eatl ' ihe

The Pailuld benefit substantially from thehey wCadd receive from the newhe precise amountdepend on Ifr pro posedthroughput, of which Eaucm Earner will receive approaimalcly JO percent. Current Soviet gal deliveriesillionnnually account forercent of Eastern Cur ipc's primary energy consumption and overercent of all energy Import*

-from Use USSR. Soviet gat espU'lthe region nearli-tripledSGTyct git deliveries togicr the nest five yciafa arc CUjrotted to grcM bi onlyercent asome cuuntrk* laticipstiag ao furtherhe additional gat deliveries, however,could booit share of Soviet git to dose toercent of Soviet energy deliveries to Eastern Europe andercent of Eastern Europe's ratal primary energy consumptionS.

If ga* from the pipeline i* paidransit fee only to those countric* thai the pipelinehe additional tat would go entirely cither to Poland and tail Ocr-manyso Crcchmlovxfca. depending on the route selected. Creefcjilova kii appears to be the favored route at present, especially given the turmoil in Potaad. If only oneountries received the entirethe additional gas would substantially improve the recipients' energy balance* in the

Wear Kuruprtn Perspective

The pipeline project would benefit Westernd reducing its

dependence on OPEC oil. West European induitrici would also benefit ubUaotuTly from the equipment sales that wouU be associated with the protect. Finally. West European governmest* realise that most of the fcrcign enchingc Moscow earns from ihe tale of gas will be ipent in Western Europe.

The slit West European countries depend on Imported energy, primarily oil. for more than half of theirWhile oil remains the dominant energy source, natural gat is beccmine Increasingly important, accounting for almostercent of total energy uie last year complied -ithecadeThe USSR already supplies Western Europe withellnn cf'C bated en prior agicements with Wot Germany. France, Italy, and Austria Thenegotiation* arc for additional Soviet supplies of at9 billiono these four con"trie* plus Belgium and the Netherlands

These plan* woukl moie than double the propuiiion of Sovkl bo* idill ruiopcuB fji cuOMiBiption front aboui lOpcrceni lo aboutercent. Tbc most iaaporta.nl inC rente* would be in WatIrota

ociCcnDand fklfiamtftnaO lo Jl percent I

France, which received no direct ihipnienu of Soviet

ould relvon the Sonet* fori* moch **

ofroadergas would rise toercent of totalprimaiy energySec

TheEuropean*hai the pipeline deal would Incicaic their vulnerability lo Sovici economic leverage but they have lone icen theore reliable lounx of energy supply than thehis attitude originated in theiii*hen Western Europe -a* affected by cutoff* of Middle Eattcrn oil and It-reedhe Soviet ail then bcgrnrUrig lo enter the world market. The West tu'Opraoi have remained Heady euitomers for Soviet oil. which Continued to be delivered during the Middle East war7 and the Arab oil embargoven though the Soviet* verbally supported Ihe Atab action.

Another incentive encouraging Ihe Wen European move Is the proline! or large-scale equipment sales. Indeed. Wen lluropcan supplier* of pipeline,andect to benefit tobtlintii lly from Ihe project. Altogetber. pipe and couipanenl sates of up4 briltoa may be involved. The chief West European be ncfiiiarici would be the firms that have already provided several billion dolUri in gasto Ihe Sovici* during. Many of these films have developed aubnantial production capacity dedicated to Soviet need*.

Technical Kllk*elivery

Dependence on Soviet natural gat nippllet can be riskyellolitical, standpoint. Given the dif ficu't terrain, long distaneca. and heavy dcmaeels cn cqi'ipment. chances arc bigb that supply problems wit) develop from time to time on purely lechaicalhe past record of Sovki ga*substantiate* this. Temporal> (eduction* in gas deliveries for purely technical oraserns have

bnojiK frequent in receni years: ihoorw capon pijv

hoc would atocctwbicct- ici i

r-:'i.i" dssrsturtbtwinter nsomas. prianarj caBSC* of cutbacks arc difficulties in meeting peak "inter gas ncedi and unreliable operation of pipeline* during the winter teasun

With or without the preject, the Soviet ga* induilry will hate little surer production capaeliy. In la. i. became of advefte wintereonditioni. output often decline* when supplies arc moll needed. Ihe problem it ihat ga> atoracc opacity, lest thanercent of con sumption, hn roi filled the seasonal *upply gap. Winter supply problems will rrcrtnu. with peal demand probably Increasinghare of annual consumption. SobstiiBiiOfl af gas tor oil ia domestic ccnauaapuoa will gainCa. enlarging ihe onm-bcr of potential winter eoesurners. All bough some fuel switching will he possible, flcatbtlity will remain

Drcakdownt in piiwlinc operations due ia pipe and valve failures hove also cuutcd capon reduction* and arc likely lo do so in the fuiurc. Although nol confined to ihe winter tcaion. pipeline failures are more likely during that period and often compound the diffscuttkt of meeting peal rat demand Operational rctiiteta) of ihe export paprHKbecoeee particularly worrisome if il parallel* ihe Northern Lights trunk lyttena. one of the world* meat ireubk-prone pipe routea Althoagh good reliability ha* been achieved for gatlinca in the North American Arctic, the Soviets probably will not fare as well. Pipe rupture* and compretior nation breakdowns nre probable, even if Weitetnsed. (Sec

Potential Soviet Political Leverage

Moscow see* dcfinte po&tkal advantage! in the prospective natural gas arrangement, ihort ofdirect leveragea*upply interruption i* unlikely because of the substantia Ioust to Ibe USSR itself. In addition, cutting off gas supplies to attempt political blackmail would under mine any Improvement in ihe Soviet Westpollileal climate that the pipeline project ii ia

Li*

afrw*

designed lo.fiMn.uppli interruption tsutild be anlunt ut'iipon for thepply "line Moscowbe unable to1 "inunet amil nhip-

in.-ii ioojld pill throughb.itil II

percent ol ibe tout viould Continueon lo Dcsgiuni and the Netherlands.est German

Shortomplete (utolt. theI gatwith Western Luropc would yield ivromajor ortrtoetunities tor increased political influence for the JS.iv.rt Union. The fitil lici in ihe iaspctus that the gat deal would impart to broader Soviet cToriilodrau-Wotcrn Europe into cloicr pohtltal and ceonomic relations with then aim aft hit Soviet effort is lo increase the legitimacy of Sovitt foreign policy goals in the eyes of West Europeans and to persuade litem to sec US led or coordinated NATO 'anti-Soviet" initiatives as unnecessary or disturbingavorable ttalBsijuo the Soviets in no-n goal, with mixed success, through iadividual bilateral and multilateral arrangements ing through tbc Security and Craapcratioa in Europe

The second ad'antagc lu Ihenion lies tn opportunities tbit the evolving nilurll gas iclatioruhip would provide to lictp achieveoliticalThe pipeline deal might give the Sovietsopportunity to gain pollticulf they used their micntiat leverage indirectly and as only one elementroader diplomatic offtntlve.could arise during the construction phase of the gal deal Until at least the] because of European eigcritcis to keep production andlevels as high as possible. Afstr the pipeline is completed, the leverage would lie as Westease with Soviet nuaasolatic* of gas supplies.

To capita lite on these potcntiil opportunities, the Sovl eti would have to create Ihe apprehension (in the construction phase) that cQulpmcnt ordets might be canceled and |Uter) that Ihe supply of gas might be reduced without appearing to threatening as to proest European backlash andio unify the West

-liuropcao countries' fCiittancc. Thus, llseyould allude to lite gtiTf ilualiod onlyreminding the West European! cj the benefits ofstrcsslnc the need to avoid "ttnii-Sovict" actions thai could worsen the Wotpolitical climuic and playing on diffcnncei between the Wcu Europeans and ihe United States tttsd among West European countries. They eoald uvotd direct threats by reducing gas supplies with the explanation that there were "technicalhich would be "solved" if tbc political sit union

Specific Areasscrape

Tvro issues that tbc USSR might try to influence by using its potential naturalleverage at partroader diplomatic effort ate Western economicand NATO military moderntMtion. In the fust case, the Soviets probably would believe that theof difficulties arising with Soviet gas deliveries would be an important consideration in WestsupportS-led economic boycott of the Soviet Union or in limiting transfers of high technology to the Soviets. The Soviets, for example, used energy diplomacy as one clement in their campaign againtt West European support for US-led sanction! btcausc of tbc invasion ofASS commentary in0 hinted that Western Europe am] Japan would risk ionuel supplies front the Soviet Union If tltcy joined in these tanctions. It isunclenr how West European behavior was affected by such Matcmtntt. bui it it clear that European support for the sanctioni was weakened becauseeneral concern about tbc economic and political costs of reduced trode with the USSR

The got connection could be used to influence decisions by European NATO members on Implementation of the NATO Long-Term Defense Plan andf long-range theaterusd'Fi For example, the increase in Wctt German dependence on Soviet gasoercent, when taken In the conical of German efforts to maintain the present level of Sovicl-Wcit German economic interdependence, could provide one more argument for those groups that .iii tiying to hold down growth in German real defease

J

Similarly, thedoubling'Vcnth dependence on Soviet gas might iu<iti the Soviet effortlowuhtendcloserip.'ii between France and its jllicv Finally,if llclgium had been tecciving* from th* Suviclt9 the USSR would have had an additional diplomatic punt with which to press for Uclfiian oppositionTNF deployment.

The critical politieul factor in an* Sctcs effortapitalirc on ihe potent.it knriji fVtrwing from the

natural gat tuppl) relationship mould bt *aowthe USSRWeesOM. The Sonet Union hat long tried to influence the

West European public on ektmeaic Wen European issues, moil leecnily in campaif na to prevent deploy-meni of the "neutron bomb" and of IRTNF. iTta> eapcrience mi lead the Sovietselieve thai they Can aliengroups would be mott sensitive to the economic lotto poied bj difficulties with the natural pa* arranccrrienis and how- iiflacnlijl these groups arc. The Weil European publichole, semifixed by the Middle Foil oil eutoffi of the pan. -might be vcii concernedrospcelivc ton of Soviet

bet. The Ouieji are already aealilH iiddtt-oniilin the huce Grunjnrrn field, which cuuld serve aspurtialatTsctm reducedkl deliveries

Even Ihli additional CpuCil) rubI'i hi tajffancM iorictigr.lvmall porno* uf Wen

Lurupcani demand in the absence of Sonet ga> supplies. Other West Europeantomri tic gas nruduciion nuyopi to drill additional- if welli in create curie capacity thai could then be uud in the eventhortfall. Only smallmounts, how-ever. could be forthcoming from such un effort

North Sea oat tcicrvcs pretcni the puti'niisl fo* acushion against reductions in Soviet deliveries, but thev will probablv mil beJO jit pcicyic its iwIiii.-iiiiiy for domestic purposes, andui litely thai other Weil Europeancount in-,be iitowed latve

i-io (iiuuif orwivli as i

measure

l*addiil aa> Inwtll probaxrt bum flc-xni 10

continentaleadiimci are iwch thai

Furiher large deliveries from more mtrttnrly njifielili are nut likely be0

Wespon

Soviet ability to use its potential naturalr successfully1 would depend both on the European nulili cal will to resist and on two teeha>eal com ider at ionsthe rdativel) iIom urn factor of national andhijkjic gai reserves and the rmdicrm avail-ability of alternative supplies of gas and other energy sources in the world market. Rceogniiing that the project entail* risks, the West European! arc taking some steps to protcci themselves from Sovirt supply interruptions. Plant to capand storage capacity arc being formuUtcd. for en ample Stronger govcrninentowever, will be reoiiired to provide the cushion needrd to avoid serious repercuitionsomplete Sovwi cutoff Ultimately, some wri offor ihxthoriagci In the eventupply disruption will have lo be dented

ImtttmalWest European countries are esploeing ways to limit their vulnerability to interrupt Ions in Soviet gal supplies should (lie pipeline protect be completed. Dutch gas reserves arc the best

The Europeans areplanum.-increaseng (jfiactt'*in Wtal 1ilmsi.ii> ulritty, te rsiueitoty planningtriple sis gai stur.iirc cuiwlHtlisft Tomlnutnur;iti'.'. .

less thun I'lench officials

are ,ilto >eekinn to npandiural gn storage to roughlyercent o' cipeetcd gas consumption. France alio has ihe capability of storing LNG at ixo import locstiunt fur use in peak shanng and In meetingcsis'silumcsof gasdarina; seasonal or other declines us Ocaiand (in abobc rciajecicd intoOOmesiie rasficlOS and used tse offset ling future shortages

Tbc clisting capacity of West I'uioiwan gas consumers to switch lo alternative luclsas supply short fall is unknown. Conversion from clooil is relatively simple, however, icoumng onlyil storageipeline to the furnace,ilferenl nor ik In Belgium, all industrial gai users are required to main, lain dual energy trttcms and tu twitch to alternative

MKireVkulllUdtil VP OCluwVtlll led

ercent uf Pf emit amil on

iiucrrupiiltlc"conii<iei> Wenmaw

ij'nt.iil ul lluill ClpaCil) HullnXiiuxir it greatertl liit-

tion occur* in itw industrial sec. In'm ilniiiial

iCii> generaiim'

uppiifi.uit>pc.in> appear mure uacaint about the tmpliCiiiiuns of

n Sj-Kt gat thanir and the

United State*that divcruficiiioflit importa* in denting the Soaxu aar to use gat wffty Cot loHciidatciistuned *ic ji

o-mtwn was.to reaebi-l. i, Ia Mivik

l" I'f 1tll< tlieili|>

i ro. of Ciii'iiIm th*i/ re re ccnily. German Economics Minmeiee> ttn:ro.tgi.nit Sovm Ieni.ite .k>riii)<rig ii- ai

ll ii not yet clear whit degree of diversification Ihe Wen Europeans -ill he able lahe iv'SCiO im-inii-on eon Id mean thai oceanat. primal il)Cs. could be much naore important ironci pipciiAt

1 - Algeria, fori - hat Ihe (aptraal

the USSRuvatuer toore over the neat five toean ifusedft and the triw.-Mcducrranean pipeline to full ill eaming and prunahe Wett llutupeans.(ace new vocci lamonnection waits gal imetxis front

LOCl tern fioJn ic.llike ihe Iranian revolution CouM lead I0 tvtnemion of project*

that dieundei conudcialKH

Such devclopmenli coukl influence It" proportion of Soviet and nun-Sovitl gat in total Wot European import) and thus alien prospective Soviet leverage Forhortfall in proiecicd Niirih or Wen African got eould kad to eontpeiiii'i bidding for ihar gat among several Wen European countries. If ihe

losing West LuMiin couniry were not- tnthe rUelhertJnd. or Non> jv toeeds for gat. it auabi turn to

aupHl In addition, if current USMimsoreUS "ok in tin LNG markx. there could be coot pelon between Ihe Untied Stales and iu European uIIki far African gas. To the Client that ihiicompetition weakened West European protpten for obtaining non-Soviett could atrenglhcn Well European inccniisct lo coon-crate with ihe Soviet Union

Outlook

The Sovktapitalizeharujing world gas market will depend both on West European und broader allied eaergy planning and on ibe nvailability of alternative! ta Soviet ga> in (he world mnikcl. The Suviets nrobiblv believe that the Weil Cvopeant are capable of etlabktltiai gai reservesai aid oi! surge peoduciraa eapocsly. They reabee ihnl Western Eurore. likeounting on increased world nroduei-yn ofinOi

lhc Sovtettatc alio aware that during pan oiltheLurtsncant have often failed tocither uniona themselves or with Japan and the United Siatei Ike Sovictt may judge. iKereforc. that the Wetietn eounirict lack the cohesion and strategicoaddrcii energy tecurHy nvwescottec. lively and thai ikey are nalihct> to pa* ihe eeononMc and political coin nocunry loeounier ihe vulncrabil-ny arising from then dependence on imparled gas The Sovkii alsothai ihccc are political and economic unec'iaintici asuxiaicd with incre.ticd gai production in LDCl and that the USSReputation for retiabiMv in energy supply that could appear inereaireassuring to the West Europeans for theie rcuons the lihcMnod is strong both ibai the Sonets full* iccogniff the potential for subtle eaptouaiion of the ekvciocHng natarat ga* reJaiionihip and ihii they willaitempt to wit it

Appendix A

Details ond Status of Ihe Project"

gai capori projeci entail* constructionrunk line from Ihe Yarns*re. gasftcld in Well Siberia lo Winistance ofhe pipeline will bealmoti totallyloeapon. Ii willapacity ofillion

cubic feci pelf/dl, depcfiilltif; on nlictlicr it ii a

tingle or double line The cat will be distributed amour, ai lean six West European countGermany. France. Italy, the Netherlands. Belgium, and Austria. The East European ecu ntiiei across which the pipelinereportedly will receive roughlyercent of ihe exported gasrirxii fee

limine and Cons

The Soviets have net yet announced theit will parallel the Northern Light*(sec map) about half of which would be iatone,ore southerly path, thusihe area erf psrmafrcttf to be traversed.in coniuuctint tiunklines alonesouthernmoti route, however, mayMoscow to teleeihird but unknownThe pipeline's route across Eastern EuropeGermany it alio unknown, allhoueh aCcechotlovakia via Uchcorod teems theCtwolinct are to be

laid. Ihcy may lotto- two aeparaie routes and be built

oneime rather than ttmiiluncooily

Soviet indeeiiion rc|tidin* tiunkline route andprevent* an accurate cttimatc of theachangc com and the credits needed to cover impcxu of pipe, compressors, and other components. Given these uncertainties, wc estimate thit the bard currency costs will tinge up toillion. The upper range of our estimate assumes an annual IS-percent inflation rate for the pipe and equipment costs and the construction0 mm) linesapacity o( approiimstely iX billion cf/d. If theopti line, cupadty wouldillionnd the costs would be closer

billion. Inlcicsibururingn wiO be appro*imatch' S' billion if ihehosen .

Bringing ihe pipeline to full caiuitiy probabl: will talc at lean four years (row contract signing. If begetia-lions arc conspletedummer or fall, ga* deliveries would not begin. Even ihii anurtuet no unusual delay* If all Wesicia cqvipaxnt is oelWered on Kmc and acceunpaaicd by aubtlantial leek ai rat advice. Ihe Soviet pinct lying effort probably will still fall behind schedulen of hang persistenta serious inorUcc of (killed labor and severely inadequate infrastructure. The espurt (we

njeci apfsarcnily ii included in therunk line ennnruction plans and will be commune lor skilled labor needed fur the domestic lines.'

Status of Negotiations

Although diaeusscdong lime, the currenthas gained considerable momentum within the past year. Attcarlici Soviet plan. North Star, was designedoint US USSR projeci to pipe eas from the giant Uiengoy field in Wen Siberiailometer pipeline lo Murmantk. where the eat wouldean liquefied for shipment by tanker to

the can coast of Ihr United Statu, When US Govern-

t approval and biimlonk financinghe US consortium turnedr Europeourte of equipment andandustomer for pari of the gas.gai petcea andegardme USgat (LNGl inaul polacy. however. IM toshelving

According tn the Soviet Ga, Minis try. the pipeline* ccMnpIctionajor objective ofh Five-YearBiJ Sovici negotiators have hadprekmi-nary talks wilh nil interested European parties on all aspects of the project Ditcuaiion of the current deal

pKkcil up steamlaM

mil bet-ien Wot Uc/man Chancellor Scttainti and

en. Urohno Although profile"be."

i. Soviet ofTVeiisU bcHicsi thatrsonasntc problem, .land in Ihe was of thekxi of Western guvcrnnsemf uitlingncM to grantc led in and businro (iinxu for equipment cedcrt have encouraged this sic-

r-lraaacing

AH hooch no credit nrrccmcnn haw been .nnliled. ihe Soviets appeal wellhe nayining ui> ncriufnillion in Western financing foe ihe deal, ihe bulk ol which would be nof official and offKiilly bachedf ihe total, iheprincipal Wtu European participant, bawl indicated ihey may pro-videillion in credits. Another SI bill-on mil probablyendcd by1 By our count. Western ciedit offering! tiered (heestlnnted hard cuireneycoiiof ihewiiha built-in inflation factor ofear. While wceannot captain the discrepancy, the Soviet! maybe tiling to proieet themselves against con twcrroni. In any event. Moicow would be under no obligation to draw ill the credit 1

icnn* in eiedn Hike -ill be Wen Germany Deutsche Bad* onsort mraanks prepared toredit ofu lie hey *iue lor the coniorttuteturn iK-roii Maaaaj marketout IS percent) -ink anpeai ng laict demand thatram tenS.i deala.hope loc gap by manipulating entw. ihe price of thet they boy or the comthe rouipmcaitei ng service they if II totV Coviets. Since neither gai pricing noreeits rave been resolved, eredrt negotiationslints- further hard baraaintng. Once an accordiihhowever. Iheotnti eoun

triesptobatJyauit

Gai Pricing

Anolher major outstanding issue is gas pricingwith major West European customers last fall ended with Ihe Soviet! backingemand foi delivered gai prices at parity with oil. which at tin

IVi.ibk rtpetlue CreditTenn.

;

.1

_'

AtihD.ah Muno. pweliiienau runrrorrei sad to ton <ad

aan

tter

.

wge OPEC price of SJS per0 be about So per inousand ef Even

toubstantial lump in tbc nme of gasarninglessa thousand tf. -Such generally prevailed . to more thaaSa per thousand cf. or from about Slo per barrel of oil oQurvalcnt to. TV Trench bttioc that the USSR eventually -ill settleas pr.ee that isercent of parity wilh crudecal. but this see mi unlikely given trends in recentt agieementsfor eaample. his recentlya deal thai essentially resultsrude price parity by the mid-ISSOJ

Impart on Smlrt Hard Currency Earnings Cat caponsourec of Soviet hard curiency earn, in gi have grown markedly in iceent years In iVSO.the USSRilliono Weitcrn Europt

vuluvtl ill ,iIkki< S3 billion, up from SIOO milhun in Ivolume0 cote JO percent9 but foreign exchangemore than doubled because of higher prices. Gat export earningsIIncrease to perliap.billion, even ihouch cxpori volume vvillwhanged. Sovici gas cxpd'U "nder current agreements arc near ihck peakillioncbcdulcd lo be icachcdS. '

ihe Soviet* project ihai the pnapoied ga* export pipe-line will be operating at full eapachystuni-ine they arc correct, which we doubt, ihe USSR would be esporting for hardillionilthe tame volume of Oil exported lo hard currency countriesBOIkcJ, If gasprices achieve pariiy with crude OilS. hard currency earning, from0 oil tKicci wouldbillion.al-.jl

malCliiiiE combinediom exports ofoil and gitori earning* wouldillion range

Got Indudry Impact

The Suvieii arc countlm; on rapid irtcrcaiei in naluml ga* output to helpmeet growing domesticenergy nccoi at well asciisling capon commitments. If Ihe prO.veei goo through. Soviet planner* arc counting on gul of aboutilliony theiling toilliony Ihe watt ofGt(secll of the growth inoulpul will have loeome fiom development of the Urengoy and Yamburc fiddt in Weil Siberia. The Soviets will be able lo incre.te ihe level of natural gat production likely in tlvey about the amount Ihey would ahip throuch the pipeline. Initially, the project will not enhance the Soviet abilify io increase pcod-etioii for domeiiic uic bceaute the enormoui resource requirement! of the export pipeline, ejpecialty tkltled manpower, will drain resources from other oil and gai projects. Installing the pipelineortherly permafrost route would re-quire more skilled labor and other ipcciati'edsn wouldore southerly muie. Over the longer run. the technology trantfer aisociated -iih theincluding lite centiruction of compressor repair plants and Ihe envelopment of aiiiealincrease produeiioo feu domeitic use.

USSR: Oil and Gas Hard Currency Kaporit

lunwrf IVFO US I

ivio

ISSi-

is it

o.:

0 _

. Aiiumo no-Oil"naenrdeail. url-ode" il*

ii

USSR: Production of Natural Gas

J.I

M

1

a

rtsr.foi USSIHor-H'* West Sibaii avl 'drluiu WntSiUrlintatleniriaicd by ircfiim ia>(M> emreni uici ut iio-i* far "hi ic|ionendl ot IMS plio

e. 'orrtu.tiitu.dcahura indwo-erall

Hitl'-oualiiy Western equipment for extraction and transport of Weil Siberian gas wouldajor benefit to Ihe Soviet gas industry. Specifically, the deal would enable the USSR lo purchase Western Aiciic-design equipment for gas extractionoeeti.nc. includiiuj wellhead assemblies and drill pipe, which tbc USSR has difficulty in manufacturing. The Sovieti probably will remain unableetcrline pipe during mttCli.

hianiifaciufcof Infriio"lccit hai made

Iiumiinadequate fur liifli (irtsiuii [mi (run*

miiaaan nr fur aten- or hie:nviron-meniMhsi ihe Wen Siberian Arctic, la*cciiurca pciiiMe vilh Weuna pipegniiniven Jnvcvt mem ina for cumpreiiofi. Soviet pipeliae eoniprcuor (cthnofOBC ii probably0 yean behind italc-of ili.mi technology in the Weal. The USSR ha* no

mcgawatiiccaod-ccncraiioo aireiafi derivative compicuoraor lo any Itn. both wWa could he en neI lo tuccoiful opei aliote pipeline

The iai iruluitryi it from the project even after (heompletion. For example. Weatern pipelaycrt. oanhrrtovcri. and related eqaipmem would continue io be uied for laying domeiiic iruakJInca. The

coniUuetiort equipment could alio be aicd at other

civilian induitriciee in military eonsucciion project i. If arepair plaai weic part of ihe package, aihe Sovieti. the USSR coulduantum jump in Ibeir lagging comprcuor IcclinolOEy by reveite engineering the purchated completion.ihii, the capon pipeline would improve Ihe dome ii ic pipeline net work if the Sovieti dropper1 <rji oflute'i throughput aa ihe European USSR.

IN ai ariai ai illhemie (ollavjdlore lOatherly

iii- linkedtvilr-lilmliiiM line-

Even without ihe pipeline deal, the Sovieti would limemparl conildrraMe amount* of gaicquipnirni iocarry out the remaining poniM of the inprof ram. The USSR, for caamplcrwuaVLuill need pipe, eompeciton. and anociaicd cquipncnt for cipaaiion ol ill domciliedulribulioo tyiiem Ai loo, ai the USSR cootiooea io irfl oil in iheoe pur chalet. By the. however, fotciin exchange coauireiou would brail Soviet acccti to such cqu ipmcei unlets the pipeline project Itway. The Sovieti will be unable lo prodacc tubaianlial amount! of large-diimcler line pipe, (he eoallicat ii related Import, until thet beat. Piperii hive beenillion lont pee vearan annual coil0 mill ion to II billion

Appendix li

Equipment and Hard Currency Costs

tig> reuie and capacilt his peimillcdonly roughestimatesof hard currency costs. The project's batik foreign eacnangc capcndsiurcs will be to* Umflamia pipe,nd ancillary equipment andengineering services for the pipeline and (he Vamburiiaiflcld(secur estimates have modified reportedprices for tbote lions in two vayv(l) Because'n* Soviets arc set Vine cottccstioeiary financing atates below current market rates and EC guidelines. Wcsietn suppliers of equipment and services willtlictr final sales prices upwird to proridc the same yield as could be earned in lite Wen. Ottr estlnuteaerccni puce ntd aci to reflect tins lion,pcrccni annual rale of price inflaiion has also been included to reflect increased prices at the time of equipment delivery.

Pipe

The amount of la ice diameter (VtVlneh)pipe needed is (he pioject's largcat variable and will depend ot/thc pipeline's length, its operating pressure, andrA/ther oneo* (wo lines are icrpiircd. Rspe purec,ucntly could rangeillion tons as indicnlcd inwo.line lystetn atower throughput pressure oltmospheres would require only aboutercent more pipetntospherc tine, sinceie* pipe walls arcThe pipeline'a length probably will fallo ' trending onorthern or longer, southern route it Chosen. Given ihe resulting range of tonnage, and Inflation overthree-yearperiod, hard currency capcrnlilorciofbillion in pipe import) would be required

Oomprtnott

Compressor costs probably will nee vary wideli with tSd pipe tine's length or capacity. Roughly the same amount of com pressor power would be neededingle oi dual line were built and -he!Iter the pipelineorthern or southern route. Only the

liac<

Ifcg-IM

lion <JS i

TeOI_

j

ID

10

- iiHiniif.ir-'it'iiimauOitrri atesivrc

be o' gas turbine compressor units would differ substantially, depinding on whether Industrial orft designs were used (iceombination of com pressor types probably would be rccruircd. Lighter weight nxraft models would predominateern, pcrmnfioii route while Industrial models probably would ptovide the majority of throughput capacityouthern line. Most combinations, bow-ever, would fall-OO-MWA compressor equ.pmea price reflecting inflationr'ivcty period would producemall difference in costs,edianillion

Additional Costs

This category is more difficult to estimate because little information It available. The Soviets haveneed (at several hundredimitar number of earth movers, an extensive CORsputeriiEd pipeline telecommunications andayticn.J development eauipmcnt for the Yamburgh at driC pipe and well completion equipment built to Arctic spec.fleationt. The project probably also would require several hundred wellhead

11

Bottom

. Total citimuicd hait) currency cons fee the piojcci of4 billion ate lower than aortic (ii^uieijituvidcd both in the. pi cm and privately by induiuy. They alia are leu linn ihe approximately SI6 billion in total Wencrn cicdiit tentatively offered io far. Sonic of the higher enimatci probably include Soviet domeiiic. rum-batd-currency capccdiiiffcs that would add an equivalent of icverildollarie total ton. The initial credit offerirfga. moreover, may be reduced at specific contracts arc worked out ir> eliminateoffers of equipment andoviet attempt to ai range more concetiionary financing than needed for the project isottiWcof the gap between credit offerings andhard curiencr coats. Another ponible cost *ion could result if the project Involved construction at staggered Intervals oforthernouthern line. The total hard currency requlremtnii, however, would probably still fall -itdin the upper end of ihe SI0-I4 billion range

ball valves, and perhaps transport vehicles designed for operation In iwempy terrain. Virtually no irtformalion on cotii of Western engineering set vices, which perhaps could include lome on-site construciion work, areighly tentative estimate of ii billion for tbc above items could be In Ihe ballpark.

ia

Appendix U

Western Europe; Energy Slnkc in Pipeline Projccl

oil remain* the dominani enetey source In (he six European oounirict involved in ihe project, naturalxworninr increaiingly importuni (teeatural gas is consulted principally In the industrial and rcstdcmlal-ccmmercial sectors ofsix European nations, but is abo used to generate cleetrtcliy. During. the Increase in gas consumption -as man raptd in lite rcsidcniial acctor where it replaced coal and oil in space beating. Oas has also increased iu share of energy use In the Industrial sector at the expense ol" coal and oil. The share of natural gai'in total energy uie0 it projected to remain the tut me or increase for all countries except

Total naiuial gas suppJici. to the iii Weil European countries amounted to1 billione Netherlands supplied about half of (hit total, including caponsilliono other West European countries. Domestic production in Wat Germany. France. Iialy.nnd Austria accounted rot aboutillion ef/d. The remaining luppliet sverc imported from the Soviet Union, Norway.and Libya, with over half of the Imports coming from the USSR, via pipeline. West Germany. Italy, France, and Anuria received all the Soviet deliveries.

Increased deliveries of SovietIn theould help offset an expected decline in Dutch gat shipments. Several Dutch gas contracts ate scheduled to expire beginningn put becautc of The Hague's conservationist policies. In any eveni.from the Soviet Union couldillion cf/d. enough to make the USSR the largest single supplierealisation of all pending contracts would boost total gai supplies to these Weal European countries by someercent0 despitedecline* in Dutch and other domettupplies.

Western Europe: Distribution of Total Primary Energy Consumption -

Nats-nil... _

w><i

West Giroiaoy.rance. Ausuis, Brtflua. aad it* Nether-lomti. BfeaiiH ofr. eu-niioiudii mayM.

' ItUniVusiiien. mum bwlcii.

While tcelting more gas front (he USSR, severalnation! are alio negotiating with the Algerians for itcppcd^up deliveries. The Italians arc completing the final phase of construction of tn underwaterthai willillionf natural gas from Algeria beginning 'atehe Algerians olio have contracts with France and Belgium toombined totalillionf LNG annually beginningnother Algerian contractillionf LNG annually to West Germany and the Netherlands1 apparently has been canceled. Some of the contracted volume probably will be forthcoming In the form of pipeline ciports through Italy or Spain (See)

Norway and Nigeria arc also being looked to for increasedonsortium of films in West Germany. France. Belgium, and the Netherlands ii negotiating for increased imports from Norway that could add as muchilliono combined

r. TaficP.,

Netbcrtandi: Natural CaaBelgium: Natural CSuf

Mm

1.1

NfCl

1.1

i/ssi*

-i. i

It

mi

0.1

04 wwiw

Q.t

i 04

ra.i

jm

iMliill

bi united.

I

o hn

Atiiitla: Natural Cat Supplies

r-itrfoction

I

ionia at Utpanri ml-

_

mirpUin

Eiiimutd.

ltcte countries and Italy haveith Nigeria toillionf LNG annuallyi appaicntl* delayingxnYttructioa of the In ur fiction Utility, and import) will probably be delayed until Ulc in Ihe decade

Diutiledeali. Ihe emphasis in Weal Europeanlanning baa been toward jrcita relianceliae (a. from the Soriet Union- The Wen lu rope amlong leen the Sovktaa morelourccof cneriy tupply than Ihe LDCs. Thii attituden the Sucicrttli when Waaiern Europe wai affected by cutoflief Middic Fatttrn cal tod turned to the Soviet oil tbco beginoini to inter the world market. The Writ EarctKant1 i.i tteady eultomcra Tor Soviet oil. which continued to be delivered during the Middle Eati war

tJipcndlX

l^utopc: Industrial Stuhc in Pipeline Piojccl

pipeline projectspecially Importantestern pipe ma nu factoen European and Japanese companies have devoted substantial opacity to meetingrowing demand.UShave never producedInch-diameter line pipe thai hat become ike predominant Soviet tat pipe pure hate. The USSR (pent un cttiitiatcd S2 billion9 Tot appro aimillion toot of largediameter pine. West Germany and Japanons, with France and Italy, providing most ol the remainder

The West German filmeager lothe prime contractor Tor the pipeline project, is parliculitly dependent on Soviet ortlctt. whichSO percent of its large-diameter pipe output. Manncsmann apparently Is alio the only firm capable ofinch pipe for operating pressurestmospheres, for which the Soviets arc the only conceivable buyers. The Japanese welded pipe indut-try. whichure than one-fifth of its output to the US -'.lso produce such pipe under license from Minnetmann If Moscow opttual linetmosr-hcictr. Wett Germany, Italy.

franrr. and la pan might all provide some pipe in ordertrlivei ihe ion' (luichisc by the cunliacted date compressor delivery has stilledo-efforts to line up xvettil European firms to hanilc the ordcro been hampered by Soviet concern ot-ci US sanction) policy, since most leading contenders produce at least part of their units under US contpinv licenses

Kollt Royee of the United Kingdom reportedly is the only major European compressor munufaciutcieniirely on it)technology. It iteading contender for the pipeline project order andhe only Wen European compuny formjeii contract could mean avoiding severeubK The Rollsircraft-type compressor sib un ntodcl competes with US designs. Occautc ruean cclioiion of aircraft engine ordcri hasi, with mbsiantial idle capacity. Rolls i>nc hard to win Moscow') favor, including arceieanet

of Soviet demands thatcompressor repaire part of the deal Devoid uf major aitclafl

dees. Kolls Koycc contei-ably could attempt iv ntire order fo' alrtrift-type Comprelsoisii iia task of at least two yea is Rolls,ight have tot the job to several West Iropcan firms, tpecadi.ig the pipclHic prujeci'* in-* somewhat wider

n fi'ms alioood chance of

winning itir compressor siniionlie other majo'mchatr o' ihr pipelineUS companiesin subject to government bans on suCti

sates toach of the tia countries in the pipeline project, caccpt for Austria, hat at least one firm or consortium ctipible of producingr aircraft lyiien'bine eontpreitor units thatcouktnd other European countries arcupplier)citii would ptefer US compretwihey are the tainted consumers of several hundred in rljiebut Soviet concern aboiiiro'iomie isncuc-n) that uould imcrrui.i

BLANK PAGE

Appendix I'

Sovici Pipeline Delivery Problems

Soviet Union willard time preventing laccaiional supply interruptions, given Ihe (uklef lech-Dilloviet pipeline brcaki tetult front both

dim.IKcvfanFcal problemsyinf lartc-

dia meter Unci uion thoviandi of kilometers of namobstacles, paniculaily ice-coveted mauauinond per matron, erexleilarge potential for botli coniiiuciion erron and operational unites ret-in it ft construct ici hai been particularly troubk-lornc foe the Sovieti.fro/rn

ii-I ii" toicvtri I'i.11 MB tine n'.oi "i

lorface layer annually meln and free tea. Heat gen-crated by gav iraosrniitcd through pipes laidound cin aggravate the problem ofovieti have attempted lo nuniinirc thcsircii tan th" placet on pipeline! but, like ihe Weil, have not been entirely succeisful. Another potcnilal problem ii moil lure collecting In pipe valvei and then frcctiof. map ping the valves All iai pipeline; comingfrom Siberia naust If avettc bandrcds of rivera and ravines. - ipclirie strew.inds can damage pipes laid above (fount!

The Soviets aggravate mattcri by paying little aiten-lion in performance standard! flan fulfillment and wage bonutci lot mpclsyingrc baieil on ihe amount of pipe laid, rathei than the yuality of -oil duneetail, high-Quality Westernre-eruent ly damaged through earclcii Itandhng and thenpaaed for mom hi before installation, reducing in resist anee locorroiion oflcn caused by improper ic-inovat fiorn gas orimpuritiei such at waic and ml in Lines have been improperly welded and burled in pel ma frost, subjecting the pipe to more uresi than ii necessary from the ground's thawing and frecdag Thetpoetedly Ion la gi aections of trunklmr along the Not Hera Light! route because ofally in itatlalMM procedurca Altl pipeline construction in permafioit protiably has improvedHie past dri-ode, Moicow't refusal to allow Western

con true tors nniit. In the Arctic cun it ruction rone would givenipunci* nu-aisurancc ogaiau subitandard pcifotmancc.

Major pipeline rupturei could occur at any time of the year. Repair work oniito.iiruaklinc during winter would require ai least several weekj. Allracnrgh tbc Sovietsimed that on occasion ihcyrepaired pipeline! withinwee* or two. theythat the norm ii much longer. The 'rcecnin winici doci aid the movement of repair vehicles and delivery of new tape and equipment, bnt those material! still arc often ilow lo arrive on lite If theinstall two lines under ihe capon line projeci. the chance* for mainiainini aieduced gas flow would be greatly enhanced.

A scriout nonwmiri pipe rupture could take several months to repair if it occurred in thawed permafrost or swampy tundiu. The lack of luifacc toads, likely to persist even along the capon pipeline, prevents rapid use of repair equipment in lhat environment. Heavy pipelaying'or example, can link into the deep mud, causing aetiuut delayt.reakdown,mightouble impact on Sovici gas capons, not only reducing delrveriea at that lime but perhaps hampering above-nornsal spring or snnamci shipments, which the Soviets have made in the pan to make undivcrtaan of gai lo domestic needs

tation failure! cuuld also reduce cxporti Crews opcraiing gai tiunklintt air judced primaril) by the amount ol gai ihcy tranipoil annually, rathe: than foi overall per fen manic thai would includeepair and maintenancehe Soviets airesult have let comprestoi units run without substantial maintenance until major failulei have occurred. According io Wcttrrn observers. CUmpieuor unions

23

tin tome o! (he Sovirii' major (tit eipott iramlilijvc been tubjcclcdxiclurn

Theipeline would puuoi Mine atcifta of reducing (he likelihood of complete ihutdowrtsduc lo cumprc&see failure! Djekup coniprcitan ji each ita lion on the Line could minimiie flow durum ionsew unit* brokeiuie ofnliee coanprcuor station noolde flow substantially bu! not bah II if (he pipe remained intact, allowing inypusi (he itatioo.Tbc amount of downtime doconipeci aor Italian failure would depend on ihe problcni and ihe dciifaof ihe unin Aircraft-type unin that ihe Sovieii haic requested could be back on line within JOerious caploainn In an Induitrial-type compressor station could restuire many months toThceiport pipeline probably will hire >tationi of both types.

Original document.

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