DEVELOPMENTS IN COMMUNIST PETROLEUM TRADE WITH THE FREE WORLD: 1968 AND PROSPEC

Created: 4/1/1969

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DIRECTORATE OF INTELLIGENCE

Intelligence Memorandum

Developments in Communist Petroleum Trade with the Free8 and Prospects

ISTORICAL REVIEW PROGRAM RELEASE IN8

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CEHTRAL INTELLIGEHCE AGENCY Directorate of Intelligence April9

INTELLIGEKCE MEMORANDUM

Developments in Communist Petroleum Trade with the Free8 and Prospects

Summary

8 the OSSR failed to increase itsexports to the Free World for the first timend little expansion is likely at least through thes. Soviet exports consisted ofillion tons of crude oil andillion tons of petroleum products. Eastern Europeanillion tons of petroleum products to the Free World, one million tons more than in

the Communist countries*million tons of petroleum valued at Aboutercent of thesewent to developed countries and earnedmillion in hard currencies. Soviet exportsless developed countries declined for theyear.

Exports of oil from the USSR to markets east of Suez continued to show some effect of the higher transport costs resulting from closure of the Canal. The quantity of oil sold to Japan, the principal market affected, which had declinedonsell anons in

decline would have been greater ifhad not participated in swap arrangements with

1 All references to exports of petroleum fromcountries refer to exports from the USSR and the Communist countries of Eastern EuropeBulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Rumania.

/tote: This memorandum was produced solely by CIA. It was prepared by the Office of Economio Research.

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Western oil companies. Under this procedure, Free World companies provide oil to the USSR at Persian Gulf terminals for Soviet markets east of Suez. In exchange, the USSR delivers oil at Black Sea ports to these companies for their markets in Western Europe. This arrangement, which saves transport costs, probably will be continued and expanded even after the Canal is reopened.

Tho Eastern European countries, except Rumania, continued to depend on the USSR forf their oil supply. Their exportsproductsillion tons, mainly to Westernn effect, are derived from Soviet crude oil. Dependence on Soviet oil will notsignificantly through thes in spite of the efforts of several of the countries to obtain new sources of oil in the Middle East. Rumanian exports of petroleum products illion tonsavo boon derived from Rumanian crude oil. Little or no increase in domestic crude oilis expected, however, and in order to expand its exports, Rumania hopes to increase its supply of crude'oil by means of agreements concluded with Iran, Saudi Arabia, and Venezuela to exchange industrial goods for oi1.

The growth of Soviot oil production has slowed and may diminish further during the next few years. Costs of production are increasing in the established oilfields, and development of new fields has been slow and will be expensive, with commitments to Eastern Europe and domestic demand rising rapidly, the USSR probably Will be unable to increase oilto the Free World in the next few years. 9 these are likely to decline byillionercent) to aboutillion tons, andartial recovery can be expected The USSR may obtain small quantities of oil from national oil companies in the Middle East and Africa through barter of industrial goods and use such oil toits position in Free World markets. Even though exports from the Eastern European countries,Rumania, should rise, total Communist oil exports to the Free World90 probably will not significantly exceed8 level. The share of Free World demand (excluding the United States) that Communist countries will satisfy, consequently, will decline to leosercent, comparedercent in recent years.

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Origin and Composition of Oil Exports

The USSR andCommunist countries of Eastern Europe exported aboutillion tona* of petroleum to the Free Worldalued at0 million, an increase of lessillion tons,ercent, Exports from the USSR amounted toillion tonsore thanillion tons of crude oil and aboutillion tons of petroleum productsnd were slightly less than Bard-currency markets accounted for5 million of Soviet exports0 million of Eastern European exports.

The8 was the first one in which the USSR failed to increase its oil exports to the Free World sinceet exporter Soviet crude oil production8 roseillion tons,ercenta rate of growth considerably below the average ofercent- whereas domestic demand increasedercent andto Eastern Europe increased aboutercent.

The Communist countries of Eastern Europeillion tons of oil to the Free World These exports, all in the form of petroleum products and valued0 million, were responsible for the increaseillion tons in total Communist deliveries. Rumania was tho largest Eastern European supplier,illion tons of products derived from domestic crude oil. The other Eastern European Communistxported petroleum products derived mainly from Soviet crude oil. Exports of petroleum from Communist countries to the Free World5 are shown in tho following chart.

All tonnages are metric tone.

*' Theillion tons from Eastern Europe consisted ofillion tons each fromHungary, andons from East Germany,ons from Bulgaria.

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4. At leastercent of the petroleum exported from the Communist countries to the Free Worldas shipped in tankersmore than half in Communist-flag ships. Aboutillion tons of the exports originated from Black Sea ports, an increaseillion tons Baltic Sea ports accounted for almostillion tons, about the same as last year. The remainder was shipped from ports in the Soviet Far East or by rail and barge, as shown in tho following tabulation

Million Tons

Export Movement

Crude Oil

USSB

Petroleum Products

Products fron Eastern

Of Total

Saa ports

Sea ports

Eastern ports

and barge

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Destination of Exports

USSR and,esser degree,minor adjustments in their pattern of8 in order to maintain markets incountries. The increased coatresulting from the closure of thobroughtotal decline of abouttons in exports to Japan, India,. The drop in exports to Japan wastons, and the share of Japan's oilfrom Communist countries fell to about 2from moreercent Shipments

to Western Europe roseillion tons, and Communist countries provided about the same share of total oil supply in Western Europeercent)8 as hows the Free World destinations of oil exports from Communist countries.

decline in exports to the lessthat has occurred each yearo continue in the next few years. Adocrease is anticipated in exports tolargest markets in this categoryEgypt,production soon will make that countryand Greece, which recently concludedcontract with Western oil companiesof its oil requirements tabulation shows Communist oil exportsand less developed countries:

Million Tons

Area

countries

Europe

.6

developed

3

Oil Imports from the Free World

7. In an effort to expand trade andmall degree their sources of oil supply, Eastern European Communist countriesarter arrangements with countries in the Middle East and with Venezuela. Rumania, expecting to export more refined products but faced with little or no growth in output of crude oil,barter agreements toillion tons of crude oil from Saudi Arabiaillion tons from Iran Rumania also signed an agreement in principle with the government-owned Venezuelan Petroleum Company to supplyillion tons of petroleumn exchange5 million of machinery and equipment. Moreover, Rumania made spot purchasesons of crude oil for cash8 from US concessionaires in Libya.

tho delivery ofonsoil via the Cape of Good Hopediscontinued exports to Rumania pondingas to how the Rumanian credits couldused. It is possible, however, that this related to Saudi Arabia's anti-Israeliexportsons of crude8 were moved through thepipeline from the Gulf of Aqaba tofor further movement to Rumania.

ungary andbarter agreements with Iran for theoil, but no details havo been published. are land-locked, and prohibitivemay militate against implementation. reasons, these countries apparentlyto use the Israeli pipeline tocosts. Moreover, the line presentlyfully utilized for Israeli and Rumanianisrude oila port on the Adriatic Sea to serveand has proposed that Hungaryextend the line north to serve Although both Hungary andagreed to this project,roblem, and the proposal hasin abeyance. Construction of the Yugoslavof the line is continuing, andbe resumed.

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10* Bulgaria, East Germany, and Poland, all readily accessible by sea, have not sought Free World oil as aggressively as the other Eastern European countries. Bulgaria didarter arrangement with Iran7 toillion tons of crude oil, but the Suez closure prevented implementation. Bulgaria also concluded agreements with Algeria and Syria and received small quantities of oil from both sources in East Germany has importedons of crude oil annually from the UAR for several years but has neither concluded nor sought barter arrangements with other Middle East countries, Poland has not imported crude oil from the Free World and apparently has no immediate plans to do so.

USSR itself entered into aagreement with Algeria8 thatdelivery of manufactured goods to Algeriafor Algerian crude oil. The USSR maydeliver the oil to Ghana, Morocco, andwhile conserving its own oil for salescountries.

East-West Oil Exchanges

oil exchanges inaugurated by thecertain Western oil companies inhe higher transport costs arisingSuez Canal closure were expanded arrangement. Western oil companies providethe USSR at Persian Gulf sources for deliverymarkets east of Suez. In exchange, theoil to the Western oil companies atports for delivery to their markets infollowing exchanges reportedly were negotiated

Source in Persian Gulf

(Thousand Tons)

Julo Feb/Jun 69

Fran;aise Des Potroles

Egypt also may be involved in an oil involving the USSR and Japan. Oil from the UAR's Morgan field in the Gulf of Suez, where production is increasing rapidly, cannot now.be moved economically to the refinery at Alexandria while the Canal remains closed. There is evidenceons of this Morgan crude oil will be moved to Japan9 against the Japanese-Soviet account. Inorresponding quantity of -Soviet crude oil will be delivered to Alexandria.

The mutually beneficial oil exchanges that the USSR has negotiated since the closure of the Suez Canal may continue after the Canal is reopened and even if the proposed Suez-to-Mediterraneanthrough Egypt is constructed. In addition to preserving Soviet markets that might otherwise be lost because of the higher transport costs, the oil exchanges permit the USSR to use its tanker fleet more effectively, and the importing countriesfrom lower landed costs. Thehowever, are smallat its peakhe USSR exported six million tons of oil east of Suezand they representmall part of the total oil imports in the area east of Suez.

Soviet Investment in Free World Oil Activities

USSR, which hitherto had limitedmarketing activities abroad to Greatthem to Belgium Previousin Free World oil activities hadessentially to sales of crude oilproducts at marine terminals and toof technical assistance and equipmentindustries in the less developed countries.

Only in Great Britain had the USSR invested in the ownership of local distribution facilities.

establishmentointNafta (li)at the outsetmbitious in scope. Thendoviet agencies andercent by privatewas authorized to engage in allto petroleum and began construction ofand distribution facility in thearea Moreover, the firminterested in buying orefineryarea, the first evidence of Soviet interest in

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this kind of activity, but as yet nothing has come of thii.

8 the Soviet oil exportingSoyuznefteksport, was seeking to establish

a joint marketing enterprise in France similar to Nafta France has importedillion tons of crude oil and petroleum products nnually from the USSR for the past three.

Prospects for oil Trade90

oil exports to the Free Worldto increase much, if at all, through The rate of growth of Soviet crudemay decline further because ofin existing fields and the slow progresscost of developing new fields. At theSoviet domestic demand is likely to grow at

7ercent annually, and Soviet exports to Eastern Europe will be greater than originally plannedesult of the decision to continue supplying the predominant part of the region's oil requiromonts until at

of crude oil in the USSRpparently will be less than was utput of crude oilillion tons, only aboutillionthan8 and the smallest The goal0 recently hasasillion tons. estimates9 indicateillion tons of petroleum59of crude oil andillion tons of productsbe available for export Sovietto other Communist countries, primarilywill increase from aboutillion tonsto aboutillion tons Thusoil available for export to the Free World inapproximateillion tons,illionthan otal Soviet oilfor export probably will be about 6moro than Host of this additionalwill go to other Communist countries,exports to the Froo World0 mayS percent above the levelutthan orecast of Soviet exports of

oil by market groupss shown in the following tabulation:

Million Tons

Free World

Other-countries

Total

Crude Petroleum Oil Products

16

23

3

Oil 23

42

65

Crude Petroleum

Products Total

41

48

89

Estimates of Soviet exports to individual Communist countriesnd projected exportsre shown in Table 2.

20. The decrease in Soviet exports of oil to the Free World90 will be partly offset by an increase in exports of petroleum products from Eastern Europe, but total Communist exports of oil to the Free World probably will fall slightly9 and return0 to about the level If total Communist oil exports to the Free World remain unchanged while Free World demand increases at the expected annual rateercent. Communist oilhare of Free World demand (excluding the United States) will decline to lessercentompared withercent.

21. The Eastern European Communist countries, except Rumania, will continue to obtain theshare of their oil needs from the USSR, at least through thes. The Friendship crude oil pipeline system, which links Poland, East Germany, Czechoslovakia, and Hungary with the oilfields of the Urals-Volga region of the USSR, currently is being expanded. The northern and southern sections of the Friendship pipeline to Eastern Europe willombined annual capacity ofoillion tons in45 when all pumping stations are in If, as is likely, the line is operated near

optimum capacity, it will supply enough Soviet crude oil to cover aboutercent of total demand in the four Eastern European countries served by the line. This would leave only aboutercent of theirto be supplied from Free World sources.

In effect, therefore, most of Eastern Europe's exports of oil products to the Free World (except those of Rumania) will continue to be derived from Soviet crude oil. Unable to increase its own oil exports to the Free World, it is unlikely that the USSR will permit the Eastern European countries to expand their exports very much, as this would amountonsiderable diversion of hard currency that the USSR also needs.

Rumania is an exception because theincrease in Rumanian exports of petroleumwill be derived, at least indirectly, from crude oil imported from the Free World. Rumania will have sufficient refining capacity in excess of domestic crude oil production to processillion tons of imported oil by0o 7tons by Exports of products from Rumania will account for an estimated two-thirds of the total increase in exports of potroleum products from Eastern Europe

In order to maximize earnings of hard currency, the USSR probably will direct its Free World exports of indigenous oil almost exclusively to industrialized countries. Oil supplied to the less developedmay be on the basis of barter deals such as

the one with Algeria, described above.

the long term, if sufficient investmentto the petroleum industry, the USSR'sof petroleum can be developed. In thethe USSR may attempt to maintain its positionWorld markets by obtaining small quantitiesfrom national oil companies in the Middle Eastthrough barter deals, as repayment foror by acting as broker for oil notof established oil companies in countriesSyria, Egypt, Iran, and Iraq. There is nothe USSR will, in the next year or two, stepprocurement of oil from the Middle Easttohreat to Free World interests.

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Tablo 1

Conaunist Exports of Pctroleun co the Free World8

Thousand Metric Tons

Petroloum Products

Destination h/

total

Western Europe

Austria Belgium Derunarx Finland France Iceland Ireland Italy

aueoen Switzerland United Kingdom West Germany

Middle East

Netherlands Norway

the

2

sso

European

the USSB the USSR Communist Countries

J

c

Porcont of Total Recipient's Total Petroleum Demand

7 OJ

0

af a

Is) g ;ia

: a ;

a I=

a

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