USSR: MARKED SLOWDOWN IN GROWTH OF THE FUELS INDUSTRIES

Created: 7/1/1969

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DIRECTORATE OF INTELLIGENCE

Intelligence Memorandum

USSR: Marked Slowdown in Growth of tbe Fuels Industries

cia historical review program release in8

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CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence9

INTELLIGENCE MEMORANDUM

USSR: Marked Slowdown in Growth of the Fuels Industries

Growth in production of fuels in the USSR has been declining for several years and withoutincreases in investment is unlikely toin the near future. . plans were not fulfilled for production of natural gas, coal, and petroleum equipment or for construction of oil and gas pipelines. Only8 production goal for crude oil was attained, butercentwas the smallest annual growth in the postwar period. During the first quarterroduc-tion of all fuels lagged behind that of the first quarterartly because of severe winter weather.

The generally poor performance of recent years has lededuction of plan goals in the fuels industries, but even the reduced goals will be difficult to achieve. Future increases inof oil and gas will come mainly from deposits located at greater depths, and frequently in areas more remote from centers of consumption than those exploited thus far. Exploitation of these deposits will require the use of more advanced technology and equipment and the construction of long-distance pipeline systems. Increased investment in oilfacilities, especially in secondary refining equipment, will also be necessary if the growing demand for higher quality petroleum products is to be met. The coal industry will need stepped-up investments if it is to make better progress in its program to modernize, re-equip, and mechanize mine operations. onsequence of recent shortfalls

Hote: This memorandum wae produced eotely by CIA. It wae prepared by the Office of Economic Research.

in supplies of fuels for winter needs, the Council of Ministers in9 allocated additional capital investment for thc development of the coal andindustriee.

Neither improvement in the Soviet fuel supply situation nor any significant increase in oilto the Free World appears likely in tho next few years. Demand for fuel, both in the USSR and in Eastern Europe, continues to rise more rapidly than Soviet fuel production. This is especially true of demand for oi1 and gas. The present program for paralleling the Friendship crude oil pipeline system from the USSR to Eastern Europe indicates that the USSR intends to continue to supply the lion's share of the oil consumed by East European Communistother than Romania. These countries, for the foreseeable future, probably will take most of the additional Soviet oil available for export, thereby precluding any significant increase in Soviet exports of oil to tho Free World.

Declining Performance in Recent Years

1* The record of plan fulfillment in the Soviet fuels industries8 was the worst in recent years. Only the goal for production of crudeillion tonswas attained, and thiswas far from outstanding in view of pastrecords. Output of oil8 increased by onlyercent, the lowest annual percentage increase achieved in the postwar period (see the table).

2* Annual goals for production of natural gas have not been met during the past decade, largely because of inadequate investment in producing and consuming equipment and in pipeline facilities. The output of natural gas {including small amounts of manufactured gas derived from coal and oil shale)as reportedillion cubic meters,illion cubic meters below plan. Thelute increase in gasubic metersdeclined for the thirdyear, andercent increase in output was the smallest percentage increasehen this branch of the petroleum industry was still insignificant.

3. Construction of oil and gas pipelines faltered badly8 because of shortages of equipment such as valves, compressors, and pumps and because ofsupply problems in remote areas, especially in western Siberia. Onlyilometers of gas linesilometers of oil lines were builthe lowest total in any yearhis recordreditablehe first two years of the present five-year plan period.

4* Output of petroleum products is not reported in Soviet statistics, but technical journals indicate that demand for higher quality fuels is increasing rapidly. fforts have been made tolarger quantities of high-octane gasolines and low-sulfur diesel fuels, but the secondary refining units required to provide such products are not being installed as rapidly as needed. Moreover, newrefining facilities are not being operated at design capacity, primarily because of lack of experience in operating such equipmentommercial scale.

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Production of oil industry equipment,refining equipment, has fluctuated within wide limits during the pastow of0 tons5igh ofons Irregular delivery of equipment probably has contributed to the failure to complete refinery construction on schedule. utput of oil equipment amounted toons less than7 andf the plan, which apparently calledons.

Exports of oil from the USSR78 increased byercent, respectively, considerably less than the average annual rate of aboutercent attained. or the first timehen the USSRa net exporter of oilthere was little or no increase in Soviet exports of oil to the Free World. Exports of oil to the Free World have been thesingle source of foreign exchange for the USSR during the past several years. Hard currencyfrom such exports amounted

Production of coal8 wasillion tons,illion tons less thanhis decline in output was the first1 and only the second in the postwar period (see the table).

Commissioning of additional mining capacity lagged badlymounting to onlyillion tons, compared withillion tons7 and an average of aboutillion tons per year. Huge deposits of low-cost, low-quality coal in the eastern regions have not been developed as expected, because of the lack of nearby consumers. Ingreater attention is being given to theof coking coal, as there is no .adequate substitute for coke in the production of iron and steel.

exports of-coal and coke duringremained fairly constant at about 26 Of this total,illion tons peratillion, wereto the industrialized countries of: the

Impediments to Growth

9. The increasingly poor performance of the fuels industries in recent years results from the failure to solve several chronic problems related to the allocation of investment and the management ofprograms. Growing demand for fuel coupled with depletion of resources in older producing regions is forcing development and exploitation of reserves in new areas. The distances between centers ofand new producing regions, severe climatic conditions, and changing patterns of demand areobsolescent some of the production techniques and equipment now employed. Modernization andwill require substantial capital investment, but instead the recent past has seen declining rates of increase in investment accompanied by ever smaller rates of growth in output per unit of investment.

the petroleum industry* investmentin recent years have been inadequate tofollowing badly needed items: newand technology for exploration and deepremote areas of western Siberia and central Asiaj

large-diameter pipe and ancillary equipment to build long-distance pipeline systems for oil and gas;

equipment for construction of associated gas-processing facilities to recover valuable liquid hydrocarbons and to recycle dry gas to producingfor reservoir pressure maintenance;ew refinery capacity and secondary processing units to improve product quality and to vary the product mix. Furthermore, increases in production per unit of additional investment have been growing smaller, at least in part because more output has come from remote, high-cost areas.

Soviet claims of prolific?crude oil and natural gasP success inexploration of proved reserves in recentnot kept pace with increases inexperts have reported that while productionoil has more than doubledhave risen by only aboutercent. Asproved reserves are adequate for onlyyears at the present rate of production-the level ofears regarded as desirable.

To provide for increased reserves of oil and gas and for future growth in production, Soviet petroleum

expertsechnical reequipmententerprises, similar to that accomplished in thes.

increases in production of oilwill com mainly from reserves locatedeters in the older producing areasCaucasus and Urals-Volga regions and inareas of western Siberia, westernoffshore in the Caspian Sea. Exploitation ofwill require improved exploration andtechnology and equipment. The USSR,modern seismograph equipment and techniques

for mapping deep-lying structures and drillingsuitable for their development. The turbodrill, used in aboutercent of Soviet drilling work, is an excellent device in shallow, hard-rocksuch as those encountered in the Urals-Volga, the prosont major producing region. It loses efficiency, however,eters andetersesult of accelerated bit wear and declining penetration rates. Because of the adverse climate, difficult terrain, inadequate services, high labor turnover, and long distances for pipeline transport of oil and gas to consuming centers, unit production costs in the new fields, especially in westorn Siberia, are about five times greater than in the Urals-Volga area.

thc USSR leads the world in thelarge-diameter pipelines, shortfalls havepipeline construction because of shortagespipe, valves, compressors, pumps, andequipment. The difficult terrain andof climate mentioned above have alsoto delays in construction. Prioritygiven to construction of gas pipelines,gasow-cost, clean, and efficientenergy that can be transported economically only

by pipeline. esult of the lower priority given to building oil pipelines, aboutercent of all oil moved in the USSR is transported by railost about throe times that of movement by pipeline.

the USSR invests in facilitiesgas in the field, gas condensatebe developed properly, and the lose ofwill continue to constitute aof valuable raw material for the oil andindustries. Such processing equipment is expensive

but is needed to recover the liquid products and to permit recycling some of the dry gas to the producing formations to maintain reservoir pressures.

Hew refining technology and processes have not been introduced on an adequate scale or utilized properly. Refineries have not been completed on time, and the proper mix of products to meet seasonal and regional demands has not been provided. Rapid improvement is not in prospect. Soviet sources report thatingle new oil refinery was startednd that two important refineries planned5 have not as yet reached the blueprint stage.

The program for modernizing and re-equipping coal mines, which starteds lagging far behind schedule. Most of the capital investment in the coal industry has been allocated to theof high-cost underground mining areas, such as

the Donets Basin. In the extension of mining to greater depths, unforeseen and difficult geologicalwere encountered that led to markedly higher unit costs. Consequently, increased investment has resulted in little or no increase in output of hard coal. , investment in the coal industryhole increased ot an average annual rateercent while coal production rose an average ofercent per year.

Plans and Prospects

and gas will constitute anof the Soviet fuel balance at the expense In the future, coal will be consumedthose sectors of tho economy where it cannotor where it is cheaper than oil orin coal output will dependargeexpanding production of coke for use inindustries and on the use of coalin thermal powerplants. During the next five

to six years, Soviet demand for oil and gas probably will riseore rapid rate than increases in production. esult, the petroleum supplywill get tighter, and no significant increase in Soviet exports of oil to the Free World is

of crude oil9 andwill be less than called for in theplan. utput of crude oil is

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scheduled toillion tons, only aboutillion tons more; than If attained, this would be the smallest absolute increase9 and the lowest annual percentage increasen the postwar period. Even this low rate of growth may be difficult to achieve, however, as the increase in crude oil output during the first quarter9 was only about one-third ae great as that in the first quarterainlyesult of severe winter weather. Because of this shortfall, the Council of Ministers in9 adopted adesigned to control the use of fuels and power and to insure adequate supplies of fuel for the winter. Additional capital investment also was allocated for the development of theand coal industries. The goal forof crude oiletillion tons by the five-year plan, is now being cited by various Soviet sourcesillion tons. The goal for production of oil5 wasillion tons, the low end of therangeillion tons set As seen in the table, achievement of this target will require an absolute increase of onlyillion tons per year or an averago annual rate of growth ofercent, well below the increases achieved.

. Shashin, Minister ofExtraction Industry in the USSR,Soviet exports of oil will not increasein the future, because of risingfor oil. Ho said that the USSR willhigh level of exports to Eastern Europe, butexports to the West will continue to Preliminary estimates indicate that

0 the USSR nay export aboutillion tons of oil, onlyercent above the level

Soviet Union evidently is committedlarger amounts of oil to moet theneeds of Eastern Europe. Therefore, theparalleling the Friendship crude oil pipelinefrom the USSR to Poland, East Germany,Hungary. esult, Soviet exports to theprobably will gradually decline, along withof hard currency from such exports. Eastern

Europe on the other hand is developing refiningsomewhat in excess of its immediate requirements

and may be able, at leant temporarily, to increase its earnings of foreign exchange by exportingproducts derived from imported Soviet crude oil. To enable the USSR to provide the oil and gas that they neod, the East European countries have agreed to invest in the development of Sovietand other industrial resources.

The USSR plans to supply large amounts of natural gas to Eastern Europe, possibly as much asillion cubic meters per year Before any such quantities can be exported, however, additional pipelines now under construction or planned must be completed. At present, onlyillion cubic meters of Soviet natural gas are exported to Poland and Czechoslovakia. Some of the gas exported to Eastern Europe will be replaced in the Soviet economy by low-cost gas imported from Afghanistan end Iran. Imports from Afghanistanlatend deliveries of Iranian gas are to begin By thes,ubic motors per yoar are to be imported from those sources to supplement supplies from deposits in contiguous parts of the USSR.

9 plan calls forcubic moters of natural gas, almostillion cubic meters more than This goal appears to be extremely ambitious, especially in view of the fact that output of gas during the first quarter

9 increasedercent, well belowercent rate of growth during the first quarter Tho five-year plan goal0 originally called for productionillion cubic meters, but was subsequently loweredillion cubic meters. Unofficial reports in the Soviet pressthat tho target0 may actuallycubicuch more realistic figure. The original production goal5cubic moters was reducedillion cubic meters innd further reduced in Marchillion cubic meters.

of oil and gas pipelineshas not been adequate to0 goals. At the end8 the lengthgas pipeline system waseach0 goalilometers of gas pipeline would have, the same amount of pipe

that was laid. The oil pipelineextended for0 kilometerso fulfill the goal0 kilometers of oilby the endilometers would have to be constructed during the next two yearsa little moreimes the amount added6 8. It is extremely doubtful that either the oil or the gas pipeline construction plans can be met.

Soviet difficulties in providing modernequipmentimely basis have prevailed since thes and probably will continue in the future. The desire for higher quality products will leadequirement for more specialized and expensive secondary refining units, some of which may be purchased from the Industrial West.

The output of coal9 is planned toillion tons, about the same as7 However, this goal may not be achieved. During the first quarteroalercent, comparedercent increase during the first quarter Goals for production of coal05 have been revised downward in recent months. is toillion tons instead ofillion tons planned previously, and output

5 is toillion tons rathertons. These new goals appear to be much more realistic.

-ONFIDENT!

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