PROSPECTS FOR CONTINUED SOVIET EXPORTS OF PETROLEUM (ER IR 70-24)

Created: 9/1/1970

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DIRECTORATE OF INTELLIGENCE

Intelligence Report

Prospects For Continued Soviet Exports Of Petrol*

ennrnteiitTal

ER0

CIA HISTORICAL REVIEW PROGRAM RELEASE IN9

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afiecring-aie national Slates, within thejrieanliig off the Ug-Code, as amended.

itso Ori prohibited by

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence September0

INTELLIGENCE REPORT

spects For Continued Soviet Exports Of Petroleum

Introduction

Since thehe USSR hasnet exporter of fuels. In recent years, Soviet exports of oil to the Free World have been the largest single source of hard currency foreign exchange. However, the Minister of the Petroleum Extraction Industry in the. Shashin, stated9 that total Soviet exports of oil will not increase significantly in the future because of rising domestic demand. He also announced that the USSR wi.lligh level of exports toEurope but doubted that exports to the West would continue to increase indefinitely, various Western specialists have made even more extreme They speculate that future Sovietof petroleum will be unable to keep pace with rising requirements at home and in Eastern Europe, causing the USSR toet importer of oil duringnd to procure large quantities of oil from the Middle East to meet its total require-ments.

This report reviews the development of the Soviot petroleum industry in recent years and estimates its ability to satisfy the various demands that will be placed upon it over the next decade.

Note: Tats report was prepared solely by CIA. It was produced by the Office of Economic Research.

Recent Position of the Petroleum Industry Reserves

The USSR has abundant potential resources of petroleum, both onshore and offshore, that could make it the world's leading producer of petroleum by the end ofh century. f these reserves are located in permafrost regions where their exploitation will be difficult and costly.

The capability of the Soviet Union to meet future demands for petroleum from its own resources is measured by the level of "proved" reserves, which means the oil estimated to be economically recoverable with existing production technology. Although detailed information is published on natural gas reserves, no official data on oil reserves have been disclosed since World War II, as the State Secrets Actuch publication. Soviet technical journals, however, have published certain link relatives that can be applied to prewar data to provide an estimate

of Soviet oil reserves.

partolicy emphasizingin strategic resources, Sovietregarded maintenanceatio ofto production of aboutrs highly

i desirable. The Soviet definition of "proved"is broader in scope than that used in the United States. Soviet geologists have indicated that perhaps only two-thirds to three-fourths of their estimated "proved" reserves can be considered as confirmed by drilling, and hence roughlyto the US definition of proved reserves. Consequently, Soviet claims of oil and gas reserves apply to probable and/or possible resources rather than to "proved" reserves, upon which firm plans for future production can be made.

of data in various Sovietled several US experts to conclude that11 the USSR had approximately 3tons of 'proved" oil reserves. Thisthat the ratio of such reserves inoviet journal

For US and Soviet definitions of reserves. Appendix A.

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CO^lMNTIAr.

reported that these reserves hadhile production of crude oil hod more than doubled. No significant change in this pattern was foreseen in the near future. Therefore, asoviet "proved" reserves of oil were estimated atillion tons, or aboutimes the annual rate ofons at the end. Assuming that two-thirds to throe-fourths of these "proved" reserves can bo equated to proved reserves according to the US definition, Soviet reservesillion tons, or aboutoimes the annual rate of production. This situation approximated that of the United states where proved reservesillion tonseserves to production ratio of

Exploration and_Drilling

5. Host Soviet geophysical instruments used in mapping subsurface structures are less accurate than comparable US equipment. For example, the Soviet Union isoears behind tho United States in computerized seismograph technology which permits exploration of deep complex geologic formations. Thc first computerized seismic field unit was de-ployod in tho northern regions of the USSRhereas the application of this technology hadimpressive bonefits to petroleumin the United States Limitedof modern geophysical techniques has contributed to the lag in Soviet rates of petroleum discovery compared to the growth in production during the past cJecado.

6. Drilling hasignificant obstacle to oil and gas development in the USSR. Much of the drilling equipment and technology employed isand obsolete. Most of the turbodrills and rigs now in use were designed for shallow drilling in hard formations, such as those in the Urals-Volga region where wells generally are lesseters deep. The extra weight and high rotational speeds of turbodrills facilitated the rapid drilling of shallow wells, but in regions with geological structures requiring deeper drilling, turbodrilling is loss satisfactory. In soft formations and at depthsatars the conventionalis very inefficient. Although deeper drilling is becoming increasingly necessary both in the older

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producing fluids and in the new areas being developed, the turbodrill continues to be used forf all drilling operations in the USSR. Soviethave suggested modifications to make the turbodrill more effective, but most of itspersist. To improve deep drilling capability, Soviet experts have advocated thof turbodrilling and rotary drillingturbodrilling to depthseters and rotary drilling beyond. Tho lack of high-quality drill pipe, however,widespread use of rotary drilling. Soviet deep-drilling capability also is limited by the lack of high-powered mud pumps, blowout preventers, and high-quality bits. Soviet data revealoonths are needed toell to depthseters. In the United States, such wells are usually drilled inonth. Sovietto drill faster, deeper, and more efficiently will limit tho amount of oil and gas reserves that can be explored and exploited without disproportionate increases in investment.

7. Total drilling for exploration and development of oil and gas in the USSR roseillion meters9eak7 million meters7 and than declined to1 million Of tho total meters drilled duringyear,as for oil exploration and Drilling activity0 docs not appear to be increasing as it should to meot the needs for new reserves and greater production; the plan calls for total drilling to reach only aboutillion meters, and Soviei: sources have indicated that this goal will be difficult to reach.

Production

6. During the past two decades the USSR hascrude oil production at an average annual rate of,4 million tons9illion tons9 (see Soviet output is second only to that of the United States, the world's largest producer. Rates of increase have declined, however, fromo less thanlthough the annualincrease has risen from aboutillion tons por year in the earlier period to moreons annually.

COTJEraeNTIAL

cqulfhswTTal

rTl'IAL

9. The major portion of the increase in output during the pastears has come from the Urals-Volq* oilfields, which9 accounted forf national output- Soviet production of crude oil is planned to reachillion tons, and data on output during the first half of the year indicate that the goal can be attained. According to Soviet sources, however, output in the Urals-Volga fields shouldaximum ofillion tonsnd future growth in production will have to come primarily from deposits in Western Siberi and Central Asia. In recent years, the USSR haswith the use of nuclear explosives to stimulate production in some of the oilfields of the Urals-Volga where well yields had fallen sharply. Preliminary results indicated that production at one oilfield had been increased as muchy such nuclear stimulation. US experts, however, do not consider this method, in its present state ofa reliable or economical means of increasing recovery from oil or gas deposits.

10. Production in the West Siberian region is, and will continue to be, plagued with problems and high costs because of the permafrost, extremes of climate, difficult terrain, shortages of equipment and labor, and poor transport and supply facilities. The lack of production equipment suitable for use in Siberian conditionsajor bottleneck. Chronic shortages of suitable drilling rigs, all-terrain vehicles, earthmoving equipment, and building materials are reported, 'tost of the oil toolindustry is located far from Siberian activity and has been slow to meet the needs of this region. Automation equipment is needed in the oil and gasfields to reduce the requirement for labor in the difficult operating conditions of Siberia, but little equipment of this type is available at present. There is inadequate planning for the construction of roads, railroads, pipelines, or electric power facilities before the fields are developed. In many instances equipment must be brought in by helicopter which adds significantly to the cost of development. ir freight alone accounted forillion rubles ouleported total ofillion rubles spent forin West Siberia.

CONr^SEiTflAL

Refining

k oil refiningechnologically

backward branch of the Soviet petroleum industry" t lags far behind the United States in terms of the quality of individual products, product mix, depth of refming, and complexity of refining processes. This situation resulted from the failure to allocate necessary investment to refining durina thenderiod of rapid growth in production of poorer quality crude oils that were more difficult to process. Some of thever, can be attributed to the market, which differs considerably from that in the United States,

mq?oC- S Pa?sen9Gr automobile transport in the USSR is insignificant.

deman?oil products is increasing, especially for higher octaneand dieselfuels with low sulfur content. many of the secondary processing facilities, such as catalytic cracking, hydrocracking, and

whichecessary to improve quality and to increase flexibility of the product mix, are not being installed as rapidly as needed, or when completed are not operated at design capacity. Tne expansion of existing refineries has not been completed on schedule. oviet journals

as

Sin?le new EefinerYstarted d 8 and tworefineries planned5 had not yot reached the blueprint stage. *ailure to put new refineries in operation on schedule has required the more intensive use of existing facilities, including such practices as use of thermal cracking units for primaryon.

Asotal crude oil charqe pacity (primary distillation capacity) in the USSR

illion7 million barrels perecond only to the United States. Primary caoacity has increased at an average rate of aboutearut is not adequate to process ail o. the indigenous crude oil produced. Soviet Planners apparently decided against building excess refining capacity when the USSR began to export large quantities of crude oil during the. Refining capacity is continuing to expand, however, at aboutillion tons per year. Plans

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call for construction of primary distillation units

w>sv wo wkAWH v f U 1 Oil

with larger capacities up illion tons por year ratherillionillionnd almost certainly the past level of annualto capacity can be maintained. Therefore, total primary capacity is expected to botons by the end

output of petroleum productsillion tons8 to, an average annual increase of aboutthis period tho yield of Droducts hasto satisfy tho quantitative demands ofand also to permit exports averagingmillion tons per year.

Domestic Consumption

he apparent domesticof petroleum products in the USSR roseaverage annual rateillion tons8 to8 (see During the sameproduction of crude oil increased atrateer year. Although theoil products in general has been adequate tosteadily growing domestic demand, somein refinery operations has resulted at times

ange of product output that does not satisfy seasonal needs or that does not meet quality Consequently, sporadic local shortages of certain oil products occur. local shortages also result from inadequate transport facilities during peak periods of consumption. Tor example, at harvest time when railroads are overburdened, supplies of diesel fuel tend to be tight.

Distribution

16. Transportation of oil in the USSR continues toajor problem because of the concentration of crude oil productionew regior far fron the centers of refining and consumption. In theil pipeline transport developed slowly because greater priority vas given to building the natural gas pipeline system. 5 railroads carried more oil than any other mode of transport,ost of almost three times that of movement by pipeline. owever, movement of oil by pipeline hai accounted for the hare of

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:::

3 I

total tons carried, ipelines andaccounted forf all. oilthe

17. The total length of the oil pipeline network in the USSR at the end9 was0 Atf the system consisted offor transport of crude oil and the remainder for product movement. The total tons of oil carried by

e increased froraillion tonshen the system consisted0 kilometers to moreillion tons,otalystem0 kilometers. Most of the available data on future plans indicate that emphasis will bo placed on construction of long-distance crude oil lines rather than product lines. At the same time, larger diameter lines will have to be used to move oil over greater distances. Domestic supplies of large-diameter pipe, however, are not adequate to meet the needs of both the oil and gas industries, and imports of suchViH,be re1uired from Western and Eastern Europe to fulfill construction goals. If adequate supplies of pipe cannot be obtained, the Soviet oil industry may have to return to greater reliance on rail and maritime transport, thereby making pipe available for movement of natural gas that cannot be shipped by other means.

Foreign Trade

18. The USSR haset exoorter of oil in increasing amounts Net exports rose from slightly lessillion tonso about

tonsn average annual increase

of. owever, total exports leveled orr and net exports were about the same as8 Exports of oil haveising share of indigenous production of crude oil, increasing0 Total oil exports rose from aboutillion tons0 to approximately

tons8 (see 0f the oil exportedUSSR has been shipped to Free Worldexports totalod aboutillion tons ingreatest part of this oil has been sold tocountries to finance imports ofand equipment needed for Soviet In recent years exports of oilthe largest single source of foreign exchange

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oviet ExportsOil

Million Metric Tons

Year

to

World Countries &

to

Oil

b/

Oil

59

v

4

7

7

3

.5

8

c/

a,Cuba isincluded in thi Free Uorld prior0 and thereafter in the Communist countries

b* Because of rounding, components may not add to the totals shown* o. Preliminary,

d. Not includingillion tone procured from the Free World and reexported on Soviet account.

rorfiTTr>pirniir

earnings for the Soviet Union. nnual hard currency earnings from oil exports to Free World countries roseillionaximumillion During the past five, soviet oil sales to the industrialized countries of the Free Worldotal of5 billion in hard currency (see

Prospects for Oil

Probable Soviet ProductionS0

The USSR probably can fulfill the announced goal for productionillion tons of crude oil5 without significantly increasing its present level of drilling.* The average annual rate ofroduction of crude oilould beompared% during the previous five years. The requisite yearly increase ofillion tons, which is slightly less than the average yearly increase attained, seems feasible.

Soviet production of crude oil0 is much more difficult to forecast. The plan callsillionillion tons in that year. Various methods of estimationossible production rangeillionillion tons The anticipated decline in production in some of the older regions (coupled with more difficult climatic and geological conditions in new producing areas),exploration and development costs, and the lack of equipment embodying modern technologyespecially

for drillingsuggest that within this rangeprobably will be in the vicinityillion tons. This estimate equates to an average annualof%, and theofillion tons of additional crude oil each year. The importance of the petroleum industryomestic source of energy and as an earner of foreign exchange probably will lead Soviet planners to take the steps necessary to guarantee production ofthis level even if production costs increase sharply.

See Appendix 0, Case 1.

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1

1

Prillingey to Production

of crude oil andunction of Uie number of As the number of wells increases eachdrilling requirement rises. During the earlythe National Petroleum Council (NPC)*oil and gas exploration, drilling,transportation operations and concludedis the best indicator of ultimate To evaluate future outputthe basis of total drilling, production ofoil and natural gas must be considered. in the NPC evaluation estimatedillion meters would have to be drilledtoillion tons of oilcubic maters of gas bynd maintain"proved" reserves to production1 for oil

1 for gas. Subsequent information published in Soviet petroleum journals revealedotalillion meters -were to be drilled for oil and gas. Drilling plans, however, have not been fulfilled during this period; by the endess thanillion meters will have been drilled. The production goals0 have been loweredillion tons for oilillion cubic meters for natural gas, but in consequence of the failure to fulfill drilling plans, achievement of evon these revised goals will result in significant reduction of the reserves to production ratios.

the NPC study, it was estimatedillion meters would have too achieve production goalsmetric tons of oilillion cubicnatural gas and toeserves1 for oil1 for gas. from Soviet sources indicated thatmeters would have to be drilled

to meet the above production goals. Since that time, however, the goals for production0 have been lowered considerably,illionillion

* NPC reports. Impact of Oil Exports from the Soviet Bloc, Vols. nd JI) and Supplement to 2 report UNCLASSIFIED.

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tons of oilillionillion cubic milters of natural gas. Achieving even the low ends ot the planned ranges, while maintaining the reserves to production ratios indicated above, would require annual drilling over the next ten years toimes tho amounts attained in recent years. In fact, however, total drilling has been declining, from7 million meters7 toillion Failure to invest in more exploratory and developmental drilling, if continued, will seriously impede tho growth of production.

23. . Shashin, Minister of the PetroleumIndustry, stated early9 that, based on past and present drilling efforts, the amount of drilling by0 would have toore thanf oil and gas production goals are to be reached, andore rigsore drilling crews would be required. This effort would almost double the number of rigs and crews and also double the average cost per meter drilled. At about the same tine he indicated that fulfillment of future goals for production of oil and gas must be accomplished without any such steep rise in capital Investment for drilling as has occurred in recent years. He emphasized that technical progress is essential for achieving the goals. Presumably such technical progress would include greater reliance on rotary drilling and development ofdrilling rigs suitable for use in the Siberian climate and terrain. Instead, however, there appears to be continued relianco on tho turbodrill, andnew drilling rigs have been devoloped for use in Western Siberia, they are extremely heavy. Their transport between drilling sites requires threo times as many tractors as did the older rigs, and frequently involves considerable loss of time. Downtime (time whon the bit is not drilling on the bottom) now amountsf total drilling time in the USSR, compared withn the United States.

24. The drilling performance suggested by Shashin is not impossible in the light of past experience, but it appears improbable. The annual drilling depths achievedreater than those attained, and annual drillingaa approximately double that. Thosehowever, were attained chiefly in the Urals-volga region where conditions were more favorable than in tho areas that will be exploited in.

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in0 would require ani"ion meters per year. This average is higher than anv annual increase achieved in the past and pJobSly

lf ifc could be' thel?roducti^ of oil and gase reached bV permitting the "proved"

tios abouflO:!

can becrude oil production inbetween the level

no improvement in drilling rates

thtUal Productionhe almost "crease in drilling mentioned bythiseasonable estimate mav beofillion

26. Given the greater average depths ofthe use of more drilling rigs in

and the-difficult drilling conditions to be encountered in the next

Stcfwiilannual drUling

rates will grow very much. Some improvement is doi-sible, especially if tho USSR is willing to mat e* sufficient investment in new technology andsome of it from Free World sources The ori-

USSRysaSlea^nd ^

earner of foreign exchange makes it

inners will fail to

=trGnuousrovide the resourcesto solve problems already recognized by their

See Appendix B, Caneee Appendixase 3.

wilinbcCiahrca^erGThaVG beSn indic^ions that Sis win be the case. In recent years the USSR has turned

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to Freo World countries for equipment and technology to overcome soma of its deficiencies. 7 the USSRobile offshore drilling platform, valuedillion, from the Netherlands for use in petroleum exploration in the Caspian Sea. Lateigh-level Soviet officialsS firm to consider undertaking offshore work in the USSR. . Gvishiani, Deputy Chairman of the State Committee for Science and Technology of the Council of Ministers of tho USSR (and Kosygin'stated that the USSR has several projects underinvolving offshore exploration for oil and gas and construction of underwater gasipeline to Japan. He indicated that the USSR had almost no specialized equipment for such work and that it would be easier to bring in outside contractors for the initial phase of the offshore program than to wait for development of Soviet technology.

Regional Trends in Production

Available information on trends in regional development of oil production was evaluatedheck on the validity of the above estimates which wero based on national drilling rates and minimum desirable reserves to production ratios. Theof the two methods of estimation were found to be at least compatible.

Many of the productive deposits of the Urals-Volga region, which now accounts forf the current national output of crudo oil, have been overproduced to meet annual goals and their producing life has been severely curtailedesult. Faulty technical procedure in waterflooding oilfields at

the initial stage of developmentfor purposes of pressure maintenancehas resulted in unexpected water encroachment in the producing oil zones,in oil recovery, and lossignificant part of the reserves in place. ritical loss in oil reservesesult of such practices occurred in the Romashkino field, the largest in the USSR. This field, which now accounts for about one-fourth of total national production, originally was esti-nated to have recoverable reservesillion tons. With increased water encroachment in recent years, it is now estimated that no moretons will be recovered.

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production forecast for i9romfields originally wasut Soviet sources now indicate that thetons to be produced0 will be aboutlevel of output. Once oilfields reachoutput, rates of decline often are similarof the buildup period, resulting in acurve for annual production throughout the

life of the field. If this proves true in the Urals-Volga fields, output from the region may be in the neighborhoodillion tons5tons Given the extensive damage to the fields that has occurred, much larger production seems unlikely. The estimateillion tons from the Urals-Volga0 approximately coincides with the findingsS petroleum geologist who has made an independent study of the most important Soviet oilfields.

errors in thc development ofnew large oil deposits in the Mangyshlakwestern Kazakh apparently have reduced thethere as well, instead of collectinggas and reinjecting it to stabilizeSoviet technicians have flared itumber of wells to stop flowing. stopped flowing when cold sea water injectedpressure reduced the reservoirthereby causing the highly paraffinic oil

to solidify underground. When these wells stopped producing, the goals for production were lowered. The original goals called for Mangyshlak fields to produceillion toillion tons5 andillionillion tons Recently,oviet oil industry official indicated that output from these fields is not expected to exceedillion tons5 orillion tons Production from Turkmen, the other significant oil producing region in Central Asia, is developing at about the same rate as production from Mangyshlak and totalfrom Central Asia probably will not be more thanillion tons5 and someillion tons in

oviet policymakersdevelopment of oil and gas reserves inwould have top priority during the next Annual production of oil from this regiontoillionillionillionillion tons

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These goals are considerably above those announced in the earlyhich called for an output0 of aboutillion tons from all of Siberia

and the Par East.

32. West Siberian deposits are located in an uninhabited area, coverad with permafrost and taiga and lacking in public utilities, transportation, and communication facilities. Their development will be much more expensive than development of those in the Urals-Volga region and logically could take longer. It tookears to reach an annual productionillion tons from thc Tatar ASSR, the republic which is the largest producer of oil in the Urals-Volga region. The Tatar ASSR, it should bo noted, was an area ideally suited for use of the turbodrill and which possessed established population centers and developed communication and transportation facilities. illionillion tons of oil from the West Siberian fieldsnlyoears after the beginning of their development, will bo difficultalthough possible if the most favorable prospects arc developed first. Annual production has been growing much more rapidly in Western Siberia than it did during the comparable period of development in Tatar. The chance for continued rapid growth is improved somewhat by the high average well-yield achieved thus far in Western Siberia. . Shashin has indicated that this average yield hasimes that from the fields of the Tatar ASSR. Thus productionillion tons per year could be achievedmaller number of wells than wasin the older fields.

33. Attainment of thc goal for productionillionillion tons of oil in Western Siberia0 appears more unlikely thanof the goal Once the most obvious prospects have been drilled, growth in production from the region can be expected to slow down. More efficient oilfield development than has occurred in the past, combinedonsiderable amount of good luck, will bo necessary if production from West Siberian reserves is toillionillion tons

-

Tableomestic Demand for Oil

34. Thus tho throe principal oil-producing regions of the USSRthe Urals-Volga, Central Asia, and Western Siberiaay beillionillion tons of crude oil5 andillion tons Production from other regions in those years may totaltonsillion tons, respectively. On the basis of such regional information as is available it can be estimated that production of crude oil in the USSRhole could totalilliontons5illionillion tons egional distribution of Soviet crude oil production in selected years, see

35. To forecast future levels of Soviet demand for oil the relationship of growth in total domestic demand* to growth in industrial production wasfor thend projected50 using two different assumptions (seend The first projects industrial growth at an average annual rate ofndemandillionillion tons of oil5illionillion tons The second projects industrial growth ater yearnder year This latter projection, which assumesng returns to capital,emandillion tons of oil* These figures imply that total demand for oil in the USSR will increase at an average annual rate ofondo. Caution must be exorcised in extrapolating the results of any regression exercise, although the level of demand for oil probably will fall within these ranges. The uncertainty of the projection5 is, of

* Includingoonaumption, losses, storage, and bunkers, all measured in crude oil equivalents -

'* Ranges assume three standard errors of estimate from the computed regression line and rounding to two significant figures.

**' For further discussion of possible rates of industrial growth, see CIA/ER, Investment and Growth in the USSR, Ma rahECRET.

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Table 5

Estimated Production of Crude Oil in the USSR, by Region

Million Metric Tons

Producing Reqion 5

Siberia

Asia

Caucasus

'

East

1

a. Because of rounding, components may not add to the totals shown.

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GQNFrDENTIAL.

Soviot Domestic Demand for Oil and Growth in Industrial

Production

Domestic Demand for Oil (Million Metric Tons

Year

Crude Oil Equivalents)

of Industrial Product

39

a/

a/

75

a/

a/ /

a.fi rate of industrial growth. o. S rate of industrial growth during.

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XaN4^tTmTTAL

course, much greater, as .is indicated by the ranges shown for both quantities and rates of increase.

36. Average annual rates of growth in total domestic demand for oil in tho USSR have declined%nd%. During these same periods, however, the average quantitativeemand for oil have risen from aboutillion tons per year to approximatelyillion tons. These past patterns of declining percentage rates ofand growing quantitative increases in demand suggest that the most likely rates of growth in total demand for oil, considering possible improvements in technology and increases in efficiency of consumption, may be% toer yearnd somennually. Thus total domestic demand for oil mayillion tons5illion tons This estimate of demand in5 is -compatible with the forecast ofillion tons of crude oil charge capacity at refineries in that year. It also appears reasonable when compared with estimated use of oil by agricultural tractors and combines5 taken in conjunctionoviet projection of agriculture's share in total petroleum consumption in that yearand is consistent with an estimate of increased requirements of the growing motor vehicle park during the first half of the.

Growing Demand in Eastern Europe

37. in addition to being facedrowing domestic demand for oil, the USSR is expected to supply increasing quantities to the Communistot Eastern Europe. The total oil supply of these countries rose from aboutillion tons*0 to more thanillion tonsn average annual rate of growth of morevailable information on plans, combined with' esti-

o: consumptioneads to Uie conclusion that Eastern Europe's demand for oilrobably will riselightly slower rate, perhaps at aboutnnually. If this is the case, it will total someiUion

4 Including crude oil and petroleum productsin crude oil equivalents.

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million tons5illionillion tons This would be compatible with plans for refining capacity of at leastillion tons

38. Eastern Europe will be able to meetelatively small part of this demand from its own production which totaled aboutillion tons9 and is not expected to rise muchons per year The largest part of Eastern Europe's requirement for oil will continuo to be met by imports from the USSR, uch imports rose fromillion tons to almostillion tons, orf total East European supply. If Romania, which iset exporter of petroleum, is excluded, Soviet oilforf Eastern Europe's oil supply0 and9 (see Plans indicate that Eastern Europe expects imports of Soviet oil to continue to rise, reachingillionons5 and perhaps as much asillion toillion tons These expectations appear to coincide with intentions of the USSR to continue to supply most of the oil required by Eastern Europe. In recent years, much of the Soviet crude oil exported to Eastern Europe has been delivered via thepipeline system which extends from oilfields in the Urals-Volga region to Czechoslovakia, Hungary, Poland, and East Germany. This system, which was completed in thend now has the capacity to deliver more thanillion tons per year, is being paralleled. When the second line ia finished in tho, the entire system should be capable of transporting someillion tons per year. of the present level of Soviet deliveries by rail and maritimeons of crude oil equivalent per yearappears adequate to satisfy thc additional East European requirement for Soviet oil

39. Most of the East European countries have signed contracts with Middle East nationsIran, Iraq, and Syriato obtain oil in exchange for technical equipment and manufactured goods. The quantity of oil to be imported from the Free World will be rather small for the next several years, reaching aboutillion tonsf which Romania will import about one-third. from thc Free World may reachillion tons and account for as much as one-fourth of the total

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Kast European supply of oil. Construction of an oil pipeline through Yugoslavia to Hungary, Czecho?ln2-i-

bast has been proposed for several years. PrelimiiuL, discussions indicate that the capacity of this line might be aboutillion tons per year, but no acreeountries invo^vIS

Prospects for Oil Exports

Ej/iJirS aVajiable for ewrl to other areasrtain* roma combinations of the ranges of

and of den,andthe USSR Ind a? r" Europe imply that the amount could be as little

available for export* oth^Tco^ ist countries'^ to the Free World, if the USSR wishes to maintain positionupplier of these Utter areas af ihr present levels, modest quantities o' oilnerhfn*illion tonsmay have

World producersinto agreements with Middle East andcountries Iraq, Svri*

oi^rinl^provid*ti^

in tne

one extreme Soviet production would fallons short of covering domestic demand At SU

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CQI-JiiMNTlTVL

anticipated, thc quantity of oil available for export will be sharply reduced. To supply the quantities of oil desired by Eastern Europe and to maintain exports to other Conauunist countries and to the Free World at or near present levels, the USSR may have to procure aboutillion tons from non-Communist sources.ummary of possible future patterns of Soviet oil trade, seend Figure 2.

During the past two years Soviot oil experts have noted the rising demand for oil in thc USSR and have indicated that although the USSR willto sell oil to capitalist countries to earn much-needed foreign exchange, such exports may have reached thoir peak. These experts have expressed awaronoos that the United States, tho world'sproducer of petroleum, depends on imports for moref its oil supplies. Soviot planners may be considering the possibilityimilar solution to some of their long-range problems.

Several possible courses of action are open to the USSR. The strong Soviet need for hardforeign exchange could motivate planners to increase exports to the Free World and to let the East European countriesuch larger share of their oil directly from the Free World. However, it is unlikely that Eastern Europe could afford to buy tha major part of its oil supply from Free World producers. Moreover, from the Soviet point of view, this course of action would have the disadvantage of reducing East European dependence on the USSR and, if carried far enough, could result in undorutiliza-tion of the Friendship crude oil pipeline system. After expanding the capacity of this system to aboutillion tons per year by the, the USSR probably intends to utilize it.

The USSR could also actroker for sales of Middle East oil obtained primarily from national companies. Such sales could incroase Soviet earnings of foreign exchange and help to keep Soviet oil available for export, both to Eastern Europe and to the Froo World. Oil might be obtained from the Persian Gulfipeline through Iran that could, for thc most part, be built parallel to the route

as pipeline due to become operational in tho fall ol The oil could then bo transported

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1 PII

. Ill

m

Europe, or it could be used in the European part of the USSR and Soviet crude oils from Central Asia or Western Siberia could be shipped via thepipeline to Eastern Europe. The Middle East oil possibly could be obtainedarter basis for Soviet manufactured goods and military equipment without expenditure of hard currency.

Limited Possibility of Substituting Natural

45. Widespread reports of huge reserves of natural gas in the USSR, and the recently concludedwhereby the USSR is to sell natural gas to Western Europe, have occasioned speculation thatuse of gas can relieve the pressure of growinq Soviet and East European demand for oil and that foreign exchange earnings from exports of gas canignificant supplement to earnings from oil exports. It is true that the USSR has large deposits of natural gas and that the share of natural gas in Soviet and East European fuel consumption is growinq. Exports of gas during the next decade will be an important means of financing imports of badly needed large-diameter line pipe and equipment, and ofsome foreign exchange. However, more than half of all the "proved" Soviet gas reserves are located in permafrost regions where development would be difficult and costly. In many respects, the problemsust be overcome to expand the output of the gas industry are more difficult than thosethe oil industry. The chronic shortfalls below planned gas production that have occurred during the past ten years probably will continue during the next decade.

Natural Gas Reserves and Production Problems

46. Inhe Minister of the Gas Industry claimed that "commercial" reserves of natural gas had reachedrillion cubic meters and that they would increase torillion cubic meters This statement was in keeping with recent Soviet practice of discussing national and regional gas reserves in terms ofhat is, reserveather than in terms of reserves that havc been 'proved" by drilling, as reserve

29 -

See Appendix A

Inclusion of tho C, category, which is estimated on the basis of geological data but not extensively tested by drilling, inflates the reserve estimates significantly. "Proved" reserves aro estimated to have been trillion cubic meters asquivalent toyear supply at8 production rateillion cubic meters. iscrepancy between the inflated "official" estimates of "commercial" reserves that havc been publicly announced and the reserves actually proved by drilling and available forhasource of ombarrassment to Soviet officials. Negotiations concerning the possible sale of Soviet gas to Japan were suspended in0 when Kosygin disclosed that reserves of gas in. Sakhalin were actually onlyillion cubic meters and notillion as claimed in earlier talks and as reported in Soviot statistics. Thus the reserves would not be adequate toillion cubic meters per year to Japan forears as had been discussed in tho negotiations.

the older producing regionsKrasnodar and Stavropol Krays,and the Gazli field in Central Asiaprovidef present ga3 output,are being depleted and explorationbeen poor. Total production ol natural gas

in these regions6 has exceeded total additions to reserves. In the future, the bulk of new gas resources and new production will originate in West Siberia and Central Asia. Most of the reserves discovered in West Siberia have not yet been drilled extensively, perhaps only one well per structure thus far. On the basis of onlyoilometers apart on ths southern half of the structurehe gas discovery at Urengoy was claimed to be the largest in the Soviet Union,rillion cubic meters of commercial reserves. Tlie reserves in this deposit accounted for more than half of total commercial reserves in Western Siberia as

many of the natural gasfields,has been emphasized to maximizein the process gas has been wasted andhave been reduced unnecessarily. 0 billion cubic meters of associated

-

gas and condensate, worthillion rubles, were flared to facilitate more rapid production of oil and gas walls. The waste of this gas has reduced the producing life of many fields because of the loss of reservoir pressure.

49. As production of gas moves eastward to the remote, permafrost regions of West Siberia, theproblems become more severe. It isfor seismic equipment to detect the presence of oil and gas structures in permafrost areas, and in Wost Siberia permafrost io encountered at depths upeters. Therefore, only by drilling can an accurate delineation of the petroleum-bearingbe obtained. Such drilling operations areespecially if insulation is not supplied around the well bores to prevent the permafrost from thawing. Warm flows of gas at elevated temperatures can thaw permafrost upeters around the well and cause the casing to collapse, with subsequent loss of the borehole. Several producing gas wells in the large Tazov field developed ruptures in the permafrost surrounding tho well, allowed the gas to escape, andortion of the gas deposit.

Probable Production of Natural Gas

The problems of developing natural gasIn permafrost regions without adequate modern equipment and technology, coupled with shortages of large-diameter pipe and matching valves andwill make fulfillment of production goals50 impossible. Instead of the planned outputillionillion cubic metersroduction probably willillionillion. utput is unlikely toillion cubic meters, compared to the present goalillionillion cubic meters.

During the pastoears output of natural gas rose rapidly in the USSR, but few annual production goals were attained. The shortfalls in output resulted from lack of production and transport equipment, shortages of large-diameter pipe,supplies of consumer equipment to receive the

gas, and the lack of storage facilities to meet peak-load demands. The cumulative effect of these failures is evident in the fact that production0 is now axpected toillion cubic meters instead ofillionillion foreseen in the planhich was set early in.

52. The new goal for productionillionillion cubic meters of natural gas5 probably could be met, although with greaterthan that for production of oil, if drilling were the sole prerequisite for plan fulfillment. However, construction of the pipeline system is the most critical factor in future production of natural gas, as pipelines are the only economical means of transportation. Very large quantities of large-diameternches and over) and matching compressors must be procured before the pipeline networks planned5 can operate at capacity. Domestic facilities to provide such pipe andequipment are not available, so sizable imports will be required. It is estimated that shortages of line pipe and of producing and consuming equipment will continue to contribute to shortfalls in output. Achieving the level of production planned5 would require annual increases of approximatelyillion toillion cubic meters., production rose less thanillion cubic meters annually, and only aboutillion per year. It seems improbable thatcapacity can be expanded rapidly enough to permit annual increases in gas output to exceedillion toillion cubic meters. Such increases would resultotal productionillionillion cubic meterselow the plan goal.

53. Tho goal for productionillionillion cubic meters of natural gaa0 appears unattainable, and probably will be lowered as other gas goals have boen during the past docade. Current Soviet plans are predicated upon theand installation of line pipeiameternches). The use of such pipe would permit shipment ofillion cubic meters per yearingle pipeline and would roducc the requirement for pipe, as aboutiameternches) would have to be laid to transport the sane volume of gas. The USSR, however, does not have tho capability

-

to fabricate the larger pipe or to manufacture the necessary matching valves and compressors. Soviot planners acknowledge that development of this pipoong-torm project as is solution of thcproblems of transporting and laying it.

54. lans call for the completion of three natural gas pipelinesiameter ofnchestwo from West Siberia and one from Central Asiato the Moscowotal lengthilometers. Three additional gas pipelinesiameter ofnches aro to be built from West Siberia and Central Asia to serve the Urals and Moscow areas, respectively. Tho total requirement for pipe for these six lines would beoillion tons. Also, other oil and gas pipelines of smaller diameter to be constructed will require anillionillion tons of pipo The USSR currentlyapability to produceillion tons per yearinchinch diameter pipe, and is developing capacity toinch pipo. Soviot pipe-manufacturing facilities are not likely to bo expanded enough to provide all of the pipe needed nor will imports of pipe and ancillary equipment be adequate to meet pipeline construction schedules. 0he Soviot Unionotal ofillion tons of large-diameter pipe, valued at0 million. To fulfill0 goals for pipeline construction would necessitate importing moreillion tons per year of large-diameter pipe and thc expansion of domestic pipe-manufacturing facilities by at. It appears that the installationinch diameter pipe in the amounts anticipated by Soviet planners is tooask to achieve Therefore, pipeline capacity probably will not expand rapidly enough to permit the average annual increase in output of natural gas to be more than aboutillion cubic meters. If this proves to be the case, production of natural gas0 will beillion cubic meters. Estimate of regional output of natural gas0 are presented in Table 9.

Tabla 9

Estimated Output of Natural Gas in the USSH, by Region

Meters

Reqion

Caucasus

Asia

Siberia

East

7

Demand for

Industry has been the major consuming sector, accounting for moref total gas use in recent years, and undoubtedly it will continue to occupy this dominant position, especially as the needs of the chomical and metallurgical industries expand. Plans call for the share of natural gas in the Soviet fuel balance toompared witht the present time, if, however, the production goal is underfulfilled by as muchillion cubic metershe output of other more expensive and less efficient fuels may havo to be increased sharply to provide the energy required. Information obtainedecent US coal delegation visit to the USSR indicated that investment in the coal industry is to be increased substantially. This, coupled with tho

-

highcr-than-averagc increase in coal production attained9urther rise in output planneday reflect the beginningreater requirement for coal by consumers that originally expected to use oil or gas.* Planned increases in distribution of gas to the communal-household sector probably would be reduced first as solid fuels could be readily substituted, coal might also be usedof oil and gas in central heating and electric powerplants where flexibility in fuel use is possible if provided for in the design of the plant. No quantitative estimate of how much oil or gas could behis manner is possible, but providing the necessary flexibility in facilities increases the capital cost of power stations up.

Prospects for Trade in Natural Gas

56. During the past two years the USSRcontracts agreeing to supply Austria,and Italyotalillionper year of gas5 andillion toannually These sales willUSSR , withchinch diameter pipe andfor use in construction of its gassystems. Negotiations for sales of SovietPrance and Japan have been suspended inbut may be resumed. If contracts arethese countries, annual Soviet deliveriesrGaCh 2'5 billioneach by

The USSR has very extensive reserves of coal and is the world's leading coal producer. Most of the deposits, however, contain low-quality coals and are located in the eastern region far from present centers of consumption. Production, which has been growing at an average rate of almoster year during the

Qh8duUd tolUon tons in 0 (see Table Plans provide for continued

he output of coalillion tons in

ndillion in A likely goal

for0 appears to be someillion tons, which

could be reached with an average annual rate of

growth of slightly more

- 35 -

5? he USSR will be nd Tran. Afghanistan

began to provide gas to the USSR8ipeline built by Soviet technicians with Soviet pip-

In??rtsan gas win reach illion cubic metersncrease graduallyillion bynd remain at that level This gas will be used foJ th! most part in the eastern part of Central Asia, but some

inP?hP3 Ue toin the fallateillion cubic

:ear" ThaSe irof,orts arebil-

in the Caucasus area as local deposits of qas are becoming depleted and local demands are rising ew years, however, some of it could be diverted northward through the Ukrainian system. The Afghan and Iranian gas is being obtained at relatively iSS prices and can free more expensive Soviet qas for export to Eastern and Western Europe.

pipelines already built from the USSRand Poland win supply these coSntri^

UIion c^

plannod* construction from thn USSR to Bulgaria, East Germany, and Hungary are

tto EasternUlion CuMc mR^rs <see

he USSR willet importergas from the Free World, but overKlK will

a/,ec exporter ofillion cubic meters asof deliveries to Eastern Europe. nion shouldotal net exporter offtoillion cubic meters of natural gastrade with the Free WorJd is expected to

roughly m

cre,is evidence chat: even with gas tailing to achieve planned levels and with do-meotic supplies regaining smaller than desired, -oviet planners place constdecabie importance on

chases of equipment and technology. recent months

- 16 -

Table 10

Estimated Supply of Natural Gas in the USSR

Cubic Meters

70

Estimated actual

197

Afghanistan From Iran

2

10

10

Eastern Europe To the Free World

1

9

/

supply b/

a' Assuming exports ofillion cubic meters each to France and Japan,

Hounded to two significant figures.

acedrders million so far) with US companies for tractors, bulldozers, and pipe-laying equipment for the constructionasfrom Nowy Port in the far north to the Soviet-Czechoslovak border via Moscow. Lateortunov, Minister of the Gas Industry, suggestedepresentativeS firm that the Soviet

compete in the sale of liquefied natural gas (LNG to the United States at some future date. Ho visualized the possibilityS consortium being formed to buy Soviet LNG in exchange for the delivery to the USSR of predetermined "turnkey" plants via the consortium.

Conclusions

61. The USSR has very large resources ofbut many are located far from the majorareas, in permafrost regions of Siberia and the Far North where exploitation will be difficult. Exploration and development of these reserves and transport of the petroleum to consumers will require not only sizable allocations of investment but also modern technology and equipment, much of which is not available in the Soviet Union. Some of tlicequipment and technical data are primarily of US origin and subject to trade controls, although numerous exceptions have been made to permit export.

Soviet fields are beingrapidly than expected, in part becausepractices have made large quantitiesimpossible to rocover. Such practicesand almost certainly will impairof oil.

USSR is the world's second largestof oil. Its output is expected to reachtonsnd5 goaltons appears to be attainable. Productionlevel5 would bo adequate to providedomestic neods, to satisfy East EuropeanSoviet oil, and still leave substantialfor export to other Communist countries andFree World. At the same time, smalloilperhaps someillion tonsmightfrom Free World sources for shipmentcountries on Soviet account.

64. ecause of the rapid decline infrom tho major producing fields of the Urals-Volga region and the probable underfulfillment of production goals in West Siberia, production isto fall below plan and to reachtons. This level of output probably would be more than adequate to cover domestic demands, but

-

exports from domestic resources would be sharply reduced. If the USSR continues to provide most of the oil required by Eastern Europe and maintains othei exports near present levels, it may have to procure aboutillion tons from Free World sources. The most likely sources are the Middle East and North Africa, areas from which the USSR and Eastern Europe are already beginning to procure small amounts of oil.

Eastern Europe also is expected to increase its annual imports of oil from the Free World, to someillion tons5 and perhapsillion tons Thus combined Soviet and East European procurement of oil from the Middle East and North Africa0 may totalillion tons. Although thisignificant amount of oil, the major market for Middle East and African oil will continue to be Western Europe which now takes over half of the oil produced in those areas. Communist purchases will lay claimelatively small share of Middle Bast and North African production, probably no more thanr

Substitution of natural gas cannot be expected to relieve the pressures on thc Soviet oil industry created by growingnd East European demand and by the desire to earn foreign exchange byto the Free World. Despite the publicity given to large Soviet reserves of gas and to recent Soviet sales of gas to Western Europe, the problems

of expanding the gas industry are even more serious than those of the oil industry, and it is unlikely that gas production goals can be mot during the next

The USSR is becoming increasingly interested in participating in thc development of petroleum in Lhc Middle East through assistance to the national oil. companies. This policy will be aided by Soviet willingness to become virtually the sole supplier of sophisticated arms to the Middle East. Another means of payment for oil would be the increased supply, on long-term credits, of industrial coods needed for economic development of the Middle Eastern countries.

In the long run, if the USSR is able tothe necessary modem technology especially exploration, drilling, and transport equipmentthe need for Free World oil may be only temporary. It

- 39

?aUidequirementinf the large oil deposits that the USSRpossesses are developed. However,would almost certainly regard anyto procure Middle East oil, or to serve asin its sale, as valuable economic andassets worth

-

S and Soviet Detintfinns of Reserves

Proved reserves (American Petroleumconcept) include only the crude oil. natural gas liquids, and natural gasfrom known deposits under existinq economic and operating conditions. Proved reserves are both drilled and undrilled, but to be included, tho undrilled reserves must be so close and so related to the drilled reserves that there is every reasonablethat they can be recovered by drilling

USSR

ncludes reserves of crude oil and natural gas fully outlined by wells with proved production capability.

Category B includes reserves of oil and qas presumed to exist in undrilled partstructure adjacent to drilled parts of the same structure containing at least two wells.

Categoryincludes reserves of oil and gas presumed to exist in undrilled partstructure in which ono well has been drilled and where geophysical and geologicalindicates favorable conditions for the presence of petroleum.

Category C includes reserves of oil and gas presumed to oxist in completely undrilled structures where geophysical information, supported by geological data from similar drilled structures nearby, indicates favorable prospects for the presence of petroleum.

- 41 -

BLANK PAGE

APPENDIX B

Annual Drilling Rates and Ratios of

Case 1

Continuation of Present Level ofThrough

Oil (Billion Hatrie Tons)

Estimatedanuary

Additions to

Total reserves

Estimated

Net reserves available in

Planned production in

Ratio of reserves to production 1

Gas {Trillion

Cubic Meters)

2.5

2.7

5.2

1

(t) continued total drillingeters per year as planned for vithof illion meters drilled during f total drilling vill be for oilas; f total drilling for naturalcontinue to be exploratory drilling, as it, and the remainder vill be drilling; continuation of discovery 55 tons of oil per meter drilled for oilcubic meters of gas par meter of for gaa achieved during .

achievement of planned productionmillion tons of crude oilillion of natural gas in

-

Case 2

ncrease in Annual Drilling0

Oil (Billion Metric Tons)

Natural Gas (Trillion

Cubic Meters)

"proved" reserves

as9

to/

reserves available

cumulative production during/

reserves available in0

production0

of reserves to production

:1

Assumes: rilling, would result in during; Oilor for natural gas

ing, as it was, be developmental drilling;

ex-

increase in total annual as proposed by Shaskin, which a totalillion meters drilledf total drilling will be for natural gas; f total drilling will continue to be exploratory drill-and the remainder will continuation of rates of SS tons of oil per meter drilled for oil andubic meters of gas per meter of ploratory drilling for gas.

pro-bil-

b.chievement$ of planned ductionillion tons of crude oilion cubic meters of natural)0 of SSO million tons of oilillion cubic meters of gas, the lower limits of the goals for that year.

-

Case 3

Continuation of Present Level ofThrough"

Metric Tons)

Crude Oil Natural Gas

(Trillion Cubic Meters)

"proved" reserves as9

Additions to/

Total reserves available

Estimated cumulative production/

Net reserves available0

Estimated production in0

Ratio of reserves to production

2.5

1

fi) continued total drilling ofmeters per year,otal 1S1 million meters drilled during; total drilling will be for oilorf total drilling for natural gas to be exploratory drilling, as it was and the remainder will be continuation of discovery ratesil per meter drilledubic metersper meter of exploratory drilling for gas.

roductionillion tons oilillion aubic meters of naturalS; roduction in 0illionmillion tons of oilillion cubicgas.

- 45 -

-CwrfidentlaT

Original document.

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