THE SOVIET PETROLEUM POSITION AND INTEREST IN MIDDLE EAST OIL

Created: 6/1/1968

OCR scan of the original document, errors are possible

Intelligence Memorandum

The Soviet Petroleum Position and Interest in Middle East Oil

ERUNE8

COPY NO.

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence8

INTELLIGENCE MEMORANDUM

The Soviet Petroleum Position and Interest in Middle East Oil

Summary

Soviet activities in the Middle East have not led to any control over petroleum supplies, and there are no indications that such controlear-term prospect. In general, Soviet objectives in the Middle East include the reduction of Western influence and, through Communist trade and aid promotion, the growth of Soviet influence. The USSR does not now need to establish control over Middle East oil to satisfy its own current orrequirements. The USSR is the second largast producer of crude oil in the world, and its output has been growing at an average rate ofons* per year This level ofenabled it to satisfy domestic consumption as well as to export substantial quantities to the Free World and,esser but important extent, to other Communist countries.

Soviet proved reserves of crude oil wereatillion tons at the endore than adequate for attainment of the planned productionillion tons per year In addition to its large proved reserves, the USSR

All tonnagee are given in metric tone.

Hote; Thie memorandum wag produaed solely by CIA. It wae prepared by the Office of Economic Beaearch and coordinated with the Office of Current Intelligence and the Office of national Estimatet.

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into formationoint Soviet-Belgian oilNaftahich has leased land in the Antwerp harbor area and plans construction of an oil import and distribution facility. This is the first time that the USSR is known to havo invested in such an oil facility abroad, and in doing so it hasits willingness to adapt to foreign government restrictions and to Western commercial procedures.

Access to Middle East oil wouldaluable economic and political asset which the USSR no doubt finds attractive. There is no evidence,that the USSR is exerting pressure to gain such access. Thus far, it has limited its oil activities in the area to assisting certain Middle Bast countries with petroleum exploration and development. It hasutuallyeconomic agreement with Iran to exchange military and industrial equipment for natural gas.

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Soviet Petroleum Supply and Demand

Soviet Union is the secondof crude oil in the world, beingby the United States. illion tons, aboutercent of total

rld output. US production wasillionrercent of world output. ho average annual increase in Soviet production has been aboutillion tons. It is estimated that the average annual increment5 will be aboutillion tons.

in the USSR is based onreserves estimated atillionthe endercent ofproved reserves of crude oil. f the world's proved reserves of crude oilin tho Middle East andercentUnited States. The Soviet reserves aresup-port achievement of announced goalsillion tons0 The discovery and development ofof crude oil in the USSR has notpace with tho increase in production, and

the ratio of reserves to production which was8 had fallen to The USSR has, however, huge potential reserves, and the development of West Siberian deposits may lead to considerable improvement in the reserve toratio

USSR also ranks second in the worldrefining capacity. At the beginningitotal primaryillion tons, not enough toof the crude oil produced domestically. Accord-

* Tng to the original seven-year plan for the, primary distillation capacity was toillionillion tonshich would have been adequate to processillion tons of crude oil produced in that year. During the seven-year period, however, refinorylagged, particularly construction of the secondary refining facilities necessary forof product quality and for greater flexibility

in the product mix. Exports of crude oil increased significantly, and refinery construction goals were lowered so that excess primary refining capacity would not be built. During the present five-year

lan, emphasis is being placed on Dnstruction of secondary refining units, anddistillation capacity probably will increase toillion tons per year.

4. The supply of petroleum products in the USSR has in general been adequate to satisfy the steadily growing domestic demand. There has beon an excess supply of gasoline, although in recent years steps have been taken to improve quality. The supply of diesel fuel, the basic fuel of the Soviet economy, has been tight, partiallyesult of the fact thatoercent of the diesel fuel produced is exported to earn foreign exchange. Consumption of diesel fuel has risen rapidly with the widespread use of diesel equipment in agriculture and transport. Apparent consumption rose from aboutillion tons8onshile production rose fromillion tons toillion tons, an increaseercent In both cases. Sporadic local shortages have occurred, usuallyesult of transport difficulties during periods of peak demand, such as at the time of the grain harvest. Consumption of petroleum products increased in the USSR at an average annual rate ofercent. It is estimated that the average annual increase will boercent during the presont five-year plan, andercent. Estimates of the total supply and. demand for petroleum products in the USSR arepaired for various years in the following

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yield from refining Imports

3

3

2

1

1

1

gas liquids

synthetics

consumption Exports

9

15

21

25

27

32

5. In addition to its huge resources of oil, the USSR has between one-third and one-half of the world's potential resources of natural gas, which for many uses can be substituted for oil. The proved natural gas reserves of the USSR at the beginning6 were estimatedrillion cubic motors , aboutercent of the proved resorves in the world. Production7illionquivalent toillion tons of oil. as production is scheduled toillionnd5illion cu. m. Attainment of these goals appears doubtful. Soviet goals for production of natural gas have frequently been underfulfilled, and achievement of tho targets05 would require average annual increments innearly twice the increase ofillion cu. m. recorded Nevertheless, production of natural gas can be expected to increaseand0 it may be equivalent toillionillion tons of oil. of gas in the USSR has nearly equalled Small quantities have been exported, primarily to Poland and Czechoslovakia, and agreements signed67 provide for the first imports of gas from Afghanistan and Iran.

6. Deliveries from Afghanistan beganillion cu. m. during the last half7 and are to increase graduallyillion cu. m.illionillion annually. Deliveries from Tran will commence ^Uthe rateillion cu. m.illtoillionnd will remain at that level until The USSR probably willet importer of gas. However, by satisfying part of the domestic need by importing low-coat gas from Afghanistan and Iran, the USSR may be able to maXe available some domestic gas for profitable export to markets In the Free World. Proposals forillion cu. m. to Japanillionillion cu. m. to markets in Western Europe5 have been under discussion. If these proposals are implemented, Soviet trade in natural gas will be approximately in balance The USSR probably will then exportillion cu. m. annually to the Communist countries of Eastern Europe* and will import aboutillion cu. m. annually from Afghanistan and Iran,

7. In recent months, Austria has agreed to import Soviet natural gasroposedof theinch gas line from the USSR to Czechoslovakia. illion cu. m. per year are to be supplied to Austria,n exchangeinchinch pipe for use in tho USSR. Soviet negotiations with Italy have been under way for more thanonths. The Italians are reluctant to extend credits for pipe and equipment at the low rate of interestby the USSR. Italy also is unwilling to accept the Soviet request that part of the gas be paid forih hard currency. Italy may bo attempting to gainin which to negotiate for gas from theat more favorable prices.

The USSR as an Exporter of Oil

* Theountries of Eastern Europe include Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Rumania.

8. The USSR haset exporter of oil. Exports have risenillion tons in that year to an estimatedillion tonsn avorage annual increase of about 21 xports of petroleum were equivalent

toercent of total Soviet production of crude oil. hift in the composition of exports has occurred over the years. rude oilonlyercent of total petroleum exports. Tho share of crude oil has been moref the total, however,0 and reachedercent Estimated Soviet exports of crude oil and petroleum products for selected years aro compared below.

Million Tons

oil 8 4 SO.3 0

103

0 5 6 7 0 5

73

Petroleum products

Total

0 3 7

4 6 7

9. The USSR has been the major source offor other Communist countries except Rumania and Communist China. Rumania has been self-sufficient in petroleum, and Communist China has boon essentially self-sufficient in recent years. Exports to other Communist countries havo increased fromillion tons5 toons However, the share of other Communist countries in total Soviot exports of petroleum declined during this periodoercent. Approximatelyercent of the petroleum exported by tho USSR to otherountries goes to Eastern Europe. Oil fromSSR satisfies approximatelyercent of Eastern Europe's demand, excluding that of Rumania. han the USSRillion tons of crude oil, it exportedillion tons of petroleum. Of this amountillion tons were shipped to other Communist countries, includingillion to Eastern Europe. The level of exports to other Communist countries67 is indicated below:

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Area

Europe

China

Vietnam

Korea

8

3

1

7

10. The USSR has emphasized exports of oil to the Free World, especially to the industrialized Free World countries, to earn foreign exchange for tho purchase of equipment and technology. oviet exports to the Free World were valued at0 million, of whichas in hard currency. , Soviet sales of oil to Western Europe accounted for more than three-fourths of its oil exports to the Free World and aboutercent of all petroleumfrom the USSR. Imports by Italy, West Germany, and Finland represented more than half of all the oil sold by the USSR to the Free World Soviet exports to Western Europe cur-.rontlyittle lessercenthis area's rising demand. The largest importer of Soviet oil outside of Western Europe is Japan which 7illion tons offromSSR, thereby satisfying nearly 4of its demand for oil. The estimated division of Soviet petroleum exports botween Communist and Free World countrios is shown in tho following tabulation.

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Other Communist Countries

Free World Total

tons Percent

2

tons Percent

1

0

70

53

52

11. Soviet sales of petroleum to the less developed countries accounted for onlyercent of total Soviet exports to the Free WoeIdompared withercent tons of petroleum sold to the less developedby the USSR7 represented only about

6 percent of their collective demand for oil. In some countries, however, such as Somalia, Ghana, Ceylon, and Yemen, the small quantities of Soviet oilignificant portion of their supply* The less developed countries are not Interactive markets for Soviet oilumber of reasons* Their demand is uneven; the smallinvolve uneconomical shipments; they lack hard currency; and the goods that they offer in exchange for oil are not essential to the Soviet economy.

Future Patterns of Soviet Oil Exports

12. Tho ability of the USSR to increase exports of oil to the Free World will be limited by the Soviot level of production; by the growing demand within the USSR; by Soviet commitments to supply larger quantities of oil to other Communistespecially those of Eastern Europe; and by the lack of Soviet marketing and distribution facilities in the industrialized Free World countries. Tho Soviot plan for production of crude oil0 isillion tons. In that year the USSR may exportillion tons of crude oil and petroleum productsaboutillion to other Communist countries andillion to the Free World. It is anticipated thatoviet exports to Communist countries outside Eastern Europe will beillionillion tons above the level. Plans andalready exist whereby the Communist countries of Eastern Europe will import betweenillion andillion tons of crude oil frcn the USSR It is estimated that in that year these countries will also produce aboutillion tons

crudo oil,illionillion tons of petroleum products from the USSR, and procureillionillion tons of crude oil from Free World sources. Rumania, which until tho prcsont has always met its own needs for crude oil and haset exporter of petroleumprobably will import about half of this Free World oil.

13. The plans and estimates of imports by the Eastern European Communist countries are compatible with plans for expansion of pipeline and refining facilities. The capacity of the Friendship crude oil pipeline system, which links Eastern Europe to the oilfields of the Urals-Volga region in the kUSSR, is being expanded. This system is nownear capacity,illion to 9tons through the northern branch to Poland and East Germanyillion tons through the southern branch to Czechoslovakia andecond line, parallel to the first, is to be laid throughout the entire system which eventually will have an annual capacity of aboutillion tons. This capacity probably will not be fully attained until the. The laying of the second line has been completed within Czechoslovakia, and work is in progress ln tho USSR. The combined capacity of the southern branch probably will be aboutillion toillion tons per year when all pumping stations are installed. On the basis of plans for expansion of refining capacity in Czechoslovakia and Hungary, it does not appear that the new portion of the southern line will be fully utilized or needed until owover, tho capacities of refineries servod by the southern line are to be expanded byillion tons and the capacities of refineries in Poland and East Germany served by the northern branchillionillion tons. and Poland have agreed to providefor Soviet industry in return for increased deliveries of Soviet oil

14. Tho USSR may exportillion tons of potroleumS million tons tomunist countries andillion tons to the rree World. Of theillion tons exported to other Communist countries, nearlyillion tons probably will be delivered to Eastern Europe. In addition, the Communist countries of Eastern Europe may produce aboutillion tonsand importillion toillion tons from the Free world. Estimated East Europeanof crude oil for selected yearsro shown in the following tabulation:

Imports

tha

World

to 59 toto 7to 98 toto 20

15. In an apparent effort to diversify sources of supply, the East European Communist countries have made or are seeking to make arrangements to import crude oil,arter basis, from various Middle East countriesIran, Saudi Arabia, and Kuwait. Thus far, however, no East European country has taken delivery of any Middle East oil, probably because of tho prohibitive transport costs caused by thc closing of the Suez Canal. The quantity of non-Soviet oil that Eastern Europe can obtain may also be limited, in part, by thc willingness of Free World countries to accept Eastern European goods in exchange. Rumania has concluded agreements whereby it willillion tons of crude oil from Iranillion tons of crude oil from Saudi Arabia. Czechoslovakia is negotiating

Iran to obtainillion toillion tons or crude oiln exchange forcapital goods valued0 million, and it is possible that for political reasons Czechoslovakia may also seek to obtain oil from other Free World sources. If existing agreements are honored, however, the USSR will continue to supplyoercent of tho oil required by Czechoslovakialthough obtaining an alternative source of supply might give theeeling of Independence, they will, in any case still remain heavily dependent

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on the ussr. any oil that czechoslovakia obtained from iran would bo expensive because of tho high cost of transporting it to this land-locked country.equirement for hard currency might restrict czechoslovakia's ability to import oil it needed.

ussr now suppliosercentoil required by free world countriesthe united states. the soviet commitmentthe major part of the buhmsljig oil required by eastern europe and theposition of free world oil companiesunlikely that the ussr will increase itsthe free world market, at least through in fact, if as is expected thepetroleum in the free world, excludingstates, increasesate of about sper year and the availability of sovietexport to the free world increases at about

6 porcent per yearhe soviet union will not even be able to maintain its present share in the free world market.

ussr rocently hasewcooperating with western oil operators andin oil activities abroad. theof tbe sues canal has increased thothe ussr of transporting soviet oil toof suez and the cost to western oilsupplying middlo east oil to markets west the ussr has agreed to provide oil toshell oil, and compagnle francaiseat the black sea for markets in europefor oil in the persian gulf tomarkets east of suez. although thc quan-

3 fttities involved ln these accommodations are smallillion tons are involved thus far) and are limited by tho small size of soviet markots east of suez, the arrangement is economically beneficial to all parties. having established its willingness to cooperate, the ussr may continue the arrangements even after the canal reopens.

the ussr participatedoint soviet-belgian oiln which the ussrajority

interest. This company has leased land in the rVntwerp harbor area and plans construction of an oil import and distribution facility. InNafta (D) attempted tomall refinery from an established independent Belgian ?il company. The USSR has not previously invosted tn such oil facilities abroad. The USSR also has announced plans to expand the retail sales of Nafta (GB) in the United Kingdom. This company is the successoroviet company that has sold locally procured potroleum products through its retail outlets since before World War II. The immediate effect will be to enhance the Soviet imageeasonable, cooperative oil supplier capable of adapting to Western commercial practices and of competingoreign country with established Free World oil companies.

Soviet Activities in the. Middle East

the Middle East, overt Sovietin oil has been limited essentially toactivities in Egypt, in thewaters of the Caspian Sea, and (Soviet technicians also have engagedactivities in Algeria.) Hone ofappears designed to achieve control

of Middle East oil. The USSR has assisted in oil exploration in Egypt, but Egypt relieson Western oil companies for expansion of its oil industry. Actingontractor for Iran, the USSR has explored the Iranian offshore areas of the Caspian Sea. Although the findingsare promising, neither the USSR nor Iran now is willing to risk capital in exploiting the aroa. The Soviet aid to Syria's oil industryevel of production that exceeds Syria's needs, and the USSR may have to assist in the disposal of seme of the surplus.

Soviet-Iranian agreementsexchange of Soviot capital and militaryIranian natural gas are economicallyto both parties and mayactorin the aroa. The Iranian gas thatbo burned as waste (flared) can be used

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to supplement, at low cost, declining supplies in the contiguous areas of the USSR. The successful fulfillment of the contract to supply gas to the USSR depends on the uninterrupted production and marketing of oil as the gas occurs in association with oil controlledombination of Frco World oil companies, the Consortium.

USSR also has offered to assistexpanding its* oil industry. Recentthat Iraq has invited bids fromfor help in developing its richNorth Rumaila. This suggests that Iraq mayWestern assistance.

Importance of Middle East Oil

Annual oil revenuos for the Middle East oil-producing states currently are approachingillion. These revenues comprise aboutercent of total export income and, on the avorage, represent about two-thirds of total government income. Revenues to these oil producing states will grow as Free World demand for oil increases. Moreover, individual states continue to press for increased oil sales andreater share in the revenues from oil sales. It is unlikely that this dependence on oil income will decrease significantly in tha foreseeable future.

About one-third of the oil produced in the Free World now comes from tho Middle East. This region supplies about one-half of the Freo World oil produced outside of the United States. These shares may decrease slightly in thes, .as production of oil is expected to increase somewhat more rapidly in North Africa than in tho Middle East. The United Statesegligible amount of oil from the Middle East and has access to oil at home and elsewhere in the Westernadequate to meat its estimated requirements through Western Europe and Japan, however, will continue to bo heavily dependent on Middle East oil for the foreseeable future. estern Europe received slightly more than one-half of its oil imports from the Middle East.

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By thes, when Wostern Europe's demand will have increased by aboutercent, it is expected that the Middle East will supply slightly less than one-half of the oil imported into Western Europe. Imports of oil from North Africa will have tmayeased substantially. Japan now depends on the Middle East for more thanercent of its oiland it is expected that this same degree of dependence will exist in thes, by which time Japan's demand for oil will have more than doubled. Thc distances involved would make itfor Japan to reduce its dependence on Middle Eastern oil by shifting to oil from tho Western Hemisphere or North Africa. The demand forin Western Europe and Japan and the sources of supply6 are compared with forecasts5 in the following tabulation.

Middle East North Africa Communist countries Latin America United States Far East

Middle Eastosition on Exploitation of Oil by Foreigners

Middle East governments now tendgranting exclusive concessions toexploit their oil resources. Most Middlethrough national oil companies,ownership and also control theareas, both onshore and offshore, wherecompanies do not now hold concessions. regain control of any areas relinquished by The Middle East governments nowdevelop oil resources under their controlcontracts with foreigners, throughor partnerships with foreigners, and todegree through their own resources. provisions of the former two arrangements,East governments provide no risk capital,foreigners recover investment only if oil Neither the USSR nor other Communistprovided risk capital for the development ofabroad. Unless therehange in

this traditional policy, it is unlikely thatcountries would be party to any partnership or service contract with the national oil companies in the Middle East. No Communist country would be eligibleartnership in Iran unless an Iranian organization was permitted to conduct similarin the Communist country.

Control of Middle East Oil Production vs. Control of Middle East Oil Movements

of the production of Middledoes not necessarily imply control of itsdisposition. Crude oil is of value tothat it can be transported, refinedproducts for use by the consumers, US agencies alone own or controlpercent of the world tanker fleet, andoil companies alsoarge sharecharter fleet; the USSR owns less than 5and the Middle East governments a US and UK oil companies own, in whole or

in part, about two-thirds of the refining capacity in Western Europe and Japan, the principal markets for Middle East oil. These same oil comoanies also

control most of the oil storage and retailfacilities. These oil companies could be expected to oppose the transfer of control of Middle

st oilostile nation which would be ableew potential vulnerability into the normal flow of Middle East oil to Free World consumers. Thereimit, however, to the extent that these oil companies could deny theirfacilities in consuming countries to Middle East oil. It is unlikely that any European country or Japan would permit US or UK oil companies to refuse to store, refine, and distribute Middle East oil if refusalational oil shortage, particularly if Middle East oil continued to bo available at reasonable prices.

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