OUTLOOK FOR DEVELOPMENT OF THE NATURAL GAS INDUSTRY IN THE
CENTRAL INTELLIGENCE AGENCY Office of Research and Reports
OUTLOOK. FOR DEVELOPMENT OF THE NATURAL GAS INDUSTRY IN THE
contain*theense olted Slates within theU>-thc espionage laws.SC,, theor^ietfSTation ofny maimer lo BQjfllauthorlzed person is proftMsted by law
CENTRAL INTELLIGENCE AGENCY Office of Research and Reports
Since the beginning of the Seven Yeur, Soviethave placed great emphasis on the contribution to economic growth expected from changes in the structure of production of energy in the USSR. Increased allocation of productive factors to the oil and natural gas industries is expected to result in rates of growth in output for these industries that substantially exceed rates of growth in gross national product (GNP),
The purposes of this report are to assess the prospects forof plans for development of the Soviet gas industry and to estimate the over-all saving that will result from the substitution of gaB for solid fuel in the USSR.
II. Seven Yearor the Gas
Construction of Pipelines
III, Prospects for the Performance of the Gas Industry,
Appendix A. Soviet Gas Reserve
Appendix C. Gaps in
Appendix D, Source
General Level of Development of the Natural Cas
Estimated Production of Primary Energy, by Source,
3. USSR: Change in the Targets5 for the Extraction
of Natural Gas, by
k. USSR; Control Figures of the Seven Year Plan forDrilling for Natural Gas, by
Exploratory Drilling for Natural Gas and Additions
to Proved Reserves of Nonassociated Natural Gas,
Effectiveness of Exploratory Drilling for Natural
Gas, by9 and
Preparation of Structures for Exploratory Drilling
for Natural Gas end Initial Exploratory Drilling of
Structures, by9 and
Planned and Actual Additions to Proved Reserves of
Nonassociated Natural Gas, by90
Pipelines for Transmission of Oil and Natural Cue
Available and Commissioned for Use, Estimate
and Plans2 and
Planned Construction of Pipelines for Crude Oil and
Construction Of ItO-Inch Diameter Pipelines for
Transmission of Oil and Natural Gas During the Pericd
Estimated Structure Of Consumption of Natural Gas,
I5. USSR: Siumrjiry Calculation of Estimated Savings inExpenses Resulting from the Substitution offor-
15. USSR: Tndex of Ail-Union Average Extraction Costs for
Coal and Natural5
- vii -
Capital Savings Resulting from the Sub-
stitution of Natural Gas for .
Planned Percentage Reduction in Energy
Requirements Resulting from the Substitution of
Natural Gas for Other
Planned and Estimated Heduction in Energy
Requirements Resulting from the Substitution of
Natural Gas for Other Fuels,
Figure 1. USSR; Production of Natural
Figure 2. USSR: Proved Reserves ofGas, by Selectedas9 and6 (Map)
FigureSSR; Estimated Oil and GasAvuiluble for25 (Chart)
Figure li. Western USSR: Natural Gas Transmissionl (Map) (UNCLASSIFIED) Inside bock cover
Figureentral Asiatic USSR: Naturall (Map)Inside back cover
amacK. fob development of the natural gas industry in the ussr*
Summary and Conclusions
Production and consumption of naturaln the USSR will increase at an estimated average annual rate of aboutercent fromillion cubic meters (cu m)8 toillionn roduction of gas in the USSR probably will amount to moref production in the US compared with less thanercenthe share of gas in the total production of primary energy will increaseercent8 toercent- rilling for gas will be approximately six times as great as during theear period to provide for approximately three times ae much in proved* by the end5 as by the endhe length of pipelines available for transmission of gas probably will increase from0 kilometers (km) by the end8 to more0 km by the end In spite of this increase inof transmission lines in the USSR, the total length of thenet will amount to only one-tenth of that forecast for the US Consumption of gas by industry in tho USSR is expected to account for aboutercent of the total consumption. Users in the category Donestic and Communal Servico arc to accountercent of the total consumption5 compared withercent In contrast, usersomparable category. Residential and Coeoerciai Services, havefromoercent of the total in the US. It is anticipated that the increased investment required to accomplish the plannedof the industry will be well justified by the substantial savings to the economy resulting from the substitution of gas for moreforms of energy. It is estimated that the substitution of gas for other fuelsill resultaving ofillionn amount roughly equivalent to almostercent of the total investment in the gas industry planned for the period.
Ihe estimates and conclusions in this report represent the bestof this Office as of
Unless otherwise indicated, the tenn gas Is used to mean natural gas throughout this report.
Reserve classifications are explained in Appendix A.
T Ruble values in this report are given in new rubles established by the Soviet currency reform ominal rate of exchange based on the gold content of the respective currencies0 ruble tc This rate, however, should riot be interpreted as an estlr-ute of the equivalent dollar value of similar US goods or services.
In spite ofold increase, output will fall aboutercent short of the original goal of the Seven Year Planillion cu m. Underfulflllroent of plans for productioneaves little doubt that the target for cumulative extractionillion cuill not be met. The major factors contributing to luider-fulfillment of production goals probably will be the following:
Shortages of transmission equipment,
Shortages of consuming equipment and inadequate development
of city distribution Systems, and
in additions to proved reserves in some regions.
Shortages of line pipe, although relatively unimportant at present, could be of greater consequence. Production goals have not been met in many Instances, because the designated consumers have not made the necessary preparations to receive gas. Equipment for residentialof gas has been in short supply. In the RSFSR, for example. Itprobable that less than one-half of the requirements for gas stoves, water heaters, space heaters, and the like will be met. The failure to develop and manufacture satisfactory cocipreesors hasin undcrutilization.of existing pipelines and in undcrfulfillment of production plans in each ofnitial years of the Seven Year.
Partly as the result of the estimated ur.eerfulfiilment of the plan for production, savings accruing from the substitution of gas for solid fuels probably will amount to aboutercent of ttenillion rubles. The estimated total savingillion rubles, however,ubstantial release of productive services for allocation to ether Sectors of the economy.
I. Introducti or.
In order toaximum contribution to Soviet economic growth, the industries producing primary energy should be organized to minimize their requirements for labor, capital, and materials while simultaneously meeting the demands for energy* imposed by the over-all level of economic activity. The plan for extraction, processing, and transport of coal, oil, and gas should be chosen so that for the time period underthe total cost of their contribution to the demand for energy willinimum.
Ultimate reserves of all three basic sources of mineral energy are possessed in relative abundance by the USSR. According to the latest official Soviet evaluation completedhe total geologicalof coal in the USSR amountillionr aboutercent of the world total compared with similar reserves in the US or lessillion tons, Geologic appraisal of the USSRthat its total potential crude oil resources may exceed those of the US. In the US the total potential crude oil reserves have bocn estimated to be in the range ofi]}ion to 3'. billion tons. 5 Soviet estimate ofillion tons of potential petroleum resources in the USSR appears to be geologically reasonable. The Soviet estimate of the total recoverable reserves of gas is based on calculations for US reserves published6 by the Bureau of Mines, which estimates the total recoverable reserves in the US0 billion cu m. The total area in the US that is geologically favorable for the occurrence of gas amounts toillion square kilometers (sq km). Theterritory within the boundaries of the USSR totals aboutillion sq km. Geologie evaluations indicate that the prospective petroliferous regions of the USSR are no less promising than those of the US. Soviet geologists argue, the total recoverable reserves of gas of the USSR should amount to somewhat more than twice those Of the US, or more0 bililon cu m. 2/
* irst approximation the fuels industries may be regarded ay engaged in output of heatomogeneous commodity measurable inunits Such as calories, tons of standard fuel, British thermal unite, and the like. In spite of some areas of limited substitutability, the approximation IS particularlyroblems involving energy coal and gas.
Tonnages are given in netric Ions throughout this For serially numbered sourceee Appendix D.
In spite of this apparently enormous resource potential iuid thecost advantages of gas, the Soviet gas industryow-
priority appendage of the oil industry In general,for gas took place only incidentally to the search for oil, and it was not until World Mar II that drilling expressly for gas was authorized. The keeping of separate quantitative records of drilling for oil and gas vas not began Similarly, production of gas took place largely in connection with tho extraction of oil.*
During theoutput of gas vos concentrated in the oilfields of Azerbaydzhan SSBthe site of almostercent of the total extraction of gas. Nonassee 1ated gas was obtained primarily in Dagestan SSR,illion cuwere produced ineriod. By the end of the decade, associated gas accounted for approximatelyercent of tha total production of gas in the USSR. The low level of development of tho Soviet gas Industryo is shown in*
In tho postwar period, in spite of the low priority given to theproved reserves continued to grow, and5 the ratioreserves of nonassociated gashad mounted to
o 1. At the same time, the share of gas In the fuel productionadvancedercent0ercent0ercent in The situation was aggravated by the economically untenable policy of encouraging production of manufactured gas. For example, under the Fifth Five Year, fully one-hulf of the investment of hko million rubles in the gas industry wasto obtaining capacity for production of relatively expensive manufactured Thus output of low-cost gas was expanded much more slowly than the rate required for minimizing the cost of meeting theof the national economy for fuel.
On the one hand, the resulting fuel balance structure as shown in" has been acknowledgedistake hj that retarded economic growth in the past, and, on the other, it Is viewedreserve" that can contriDutc toward more rapid economic growth under the Seven Year Plan and in the more distant future.
Khrushchev himself has spelled out the problem in general and has outlined the economics to be achieved by the restructuring of the ruel balance;
Previously, geologic methods were not sufficiently accurateuccessful well would yield oil or nonassociated gas. Gat obtainedeposits where oil also is extracted is called associated gae. Honassociated gas is extracted independently of oil.
ollows on p. . 7.
At one tine we adopted decisions forbidding the use of gas and oil fuel at powerplants and atenterprises using boilers.
We looked to coal to ensure the growing fuel needs of industry. Yet gas and oil fuel, as Is known, are sevoral times cheaper than coal. If we were to continue meeting the fuel needs of power, transport, and industry with costly coal while the leading capitalist states developed their own power system and industry on the basis of gas and oil, it would be difficult for us to overtake then.
Therefore, in workingong-range plan for the development of the national economy, we arefor the extensive use of natural gas and oil fuel for powerplants, industry, and transport, at the same time fully meeting cccnunal and everyday needs of the public and the needs of the chemical industry for gasaw material in theof synthetic materials. 5/
In his report toh Party Congress inhrushchev claimed that "tho total saving from the substitution of natural gas and oil fuel for coal will come to more5 billion rubles in the seven/ The anticipated saving in operating expenses connected with extraction and transportation of gas alone was expected toillion rubles. 7/ In addition, expansion of the gas Industryexpected toillion rubles loss in capital investment than would have been required to attain the same addition to capacity in the coal industry. 8/
Savings of this magnitude are based on the assumption that production of gas will rise at an average annual rate of more thanercent per year fromillion8 toillion The growth in exploratory activity, in construction of transmissionand in consumption of gas, which will be required to makeold growth in production of gas possible, Is discussed in the following sections of this report. Performance of the Soviet gas industrys tuken as the busla for assessing prospects for dovolopmento during the remainder of tho Seven Year
Text continued on p. 8.
II. Seven Yearor the Gas Industry
According to the original Seven Year Plan, production of gas vas expected to increase at an average annual rate of aboutercent from aboutillion8 toillion extraction of associated and nonassociatcd gas vas expected to amountillion. If this goal vere achieved, production of gas in the USSR would rise fromercent of the level in the US8 to approximatelyercent of productionfor the US
In view of tho persistent nature of the difficulties withtransmission, distribution, storage, and consumption encountered by the gas industry in theears of the Seven Year Plan, thegoalillionet5 now appears to be the maximum achievable. It is estimated as more probable, however, thatnnual increments to production will average5 billion cu m, an average annual rate of aboutercent, and that5 the total production of gas will amount toillion cu m, or more thanercent of production in the US.
The data in tho chart.how the relation between planned and actual production of gas in the USSRnd the plans2
Regional extraction targets set5 have been modified in accordance with the varying success experienced in obtaining additions to reserves. FaSter-than-anticipated development of reserves in the Shebclinka field of the Ukrainian SSR and the Gazli field of Uzbek SSR has permitted an increase in the goals5 set for theseorresponding reduction in planned extraction, largely in the Urals-Volga region of the RSFSli, has been announced. The change In the targets5 for regional extraction of gas in the USSR is shown in*
Reserves of gas were expected to increaseillions99 billion cu m' as The
** ollows on p.* Only reserves of nonassociated gas are discussed in this report. Reserves of associated gas can be estimated onlyarge margin of error.
basing their estimates on the substantial overfulfillment of the plan for additions to reservesoviet planners now estimate that reserves of gas will reach jfootnote continued on p. 9]
USSR: Change in the Targets5 for the Extraction Of Natural Gas, by Republic
Billion Cubic Meters
for all republics except Kirgiz SSR are fromn the plan for Kirgiz SSR has been reported.
map.hows planned regional changes in proved reserve patterns.
It hasarget of Soviet plannersarbitrarily adopted from recent experience in tho UShat the ratio of proved reserves to extraction should not bo permitted to descend belowo 1. If the plan is fulfilled the ratio will decline from8 to5 -
The program for transformation of possible reserves into proved reserves was expected to require largo increases in expenditures on geologic fieldwork and deep exploratory drilling. Achievement of the goal for additions to reserves5 would require an increase in the amount of exploratory drilling for gas froaillion meters9 toillion meters Investment by the gas industry
illion Performance Of the Soviet iiidus-try in exploratory drilling and in additions to reserveso-6i, however, raises some doubt concerning fulfillment of even the original, more moderate plan.
in predxilling exploratory activities such as geologic surveying, structural-prospecting drilling, and geologic fieldvork is to amountillion rubles. Expenditures on deep exploratory drilling for gas are to amountotal8 billion rubles- The amount of exploratory drilling for gas is tootal ofmillio meters, or about six times the amount of theear period. Th planned distribution of exploratory drilling for gas is shown in Table *
USSR: Control Figures of the Seven Year Plan for Exploratory Drilling for Natural Gas, by Republic a/
. Control figures refer to annual goals set forth as guidelines at the outsetedium-range or iong-rur.ge plan. Modifications are frequently required when the actual annual planrawn up. b. Part of the total drilling for gas is to be accomplishedthe Main Administration of the Soviet Gas Industry (glavgaz) ir. unspecifiedOf the USSR.
esult of the greatly expanded volume of exploration,less favorable structures will be drilled. Therefore, Soviet authorities anticipated that the effectiveness of exploratory drilling will declinedded to reserves per ineter drilled during
USSR: PROVED RESERVES OF NONASSOCIATED NATURAL GAS, BY SELECTED GEOGRAPHIC AREA AS9 AND PLAN6
f Luc cubic MinnsRSFSR irii Uit'tMartti Ciucnui
1 ii hfitir www uilt forCl'lMK plan tor thir loui rt*armlS pillion we* mHtrv
o be added to reserves per meter drilled
Consistent lags lo the volume of exploratory drilling as yet have not resulted in chronic underfulfillmcnt of annual plans for additions to proved reserves, as shown in Tableevelopments to date, however,that the plan for additions to proved reserves may not be met. Continuation of substandard performance in exploratory efforts may contribute to underfulfillment of the Seven Year Plan for increments to proved reserves. , onlyercent of the planneddrilling for gas was actually accomplished. It appearstherefore, that the much higher goals for the later years will be met.
USSR: Exploratory Drilling for Natural Gas and Additions to Proved Reserves of Nonassociated Natural Gas
Drilling a/ (Thousand Meters)
Additions to Reserves (Billion Cubic Meters)
otherwise indicuted, datu ore frotn.
otherwise indicated, data are from.
from data In.
Shortfalls in the volume of exploratory drilling would haveore detrimental effect had they not been offset by greater-than-anlicipateu additions to reserves per meT.er drilled. he
region, and in other regions of the RSFSR, as shown In Table 8. Minor underfulflllmants of goalsesultf the experience of shortfalls in planned additions toin these regions.
USSR: Planned and Actual Additions to Proved Reserves of Nonassociated Natural Gas, by Region90
Billion Cubic Meters
accounted for largely
Transmission 1. Coupressors
In order to insure operation of transalsslon lines at planned throughput voluasc, constructionompressor stationsotal capacity ofillion horsepower (hp) was to. Demand for gas turbine-powered compressors was to Increase from U0 per year8 to about IOC per year later in the
Productionotal ofoo turbine compressors for gas transmission was planned forear
In recent years the inability to develop and produce agas turbine compressor for operation on trunk transmission lines probably has been the most significant single problem encountered by the Soviet gas industry. By the end0 the decision had been reached to convert* more thantations to electric Becauseof compressor stations has lagged substantially relative to construction of pipelines and because only compressors arc needed topotential tronsaission capacities, Soviet authorities estimate that the conversion will result in on increase in annual transmission capacity of aboutillion cu m. }hj
Although development of all types of compressors for use on gas transmission lines has proceeded slowly in the USSR during the entire postwar period, much of the difficulty in transmission encountered by the industryay be ascribed to deficiencies in the program for production and operationp gas turbine-driven centrifugal compressorho GT-7CO-*. In the first place, it remained in the design and development stages longer than hod been planned. Operational use of* showed that itow coefficient of efficiency.capacity,omplicated mechanism that required excessive Thus this compressor could not satisfactorily meet requirements for trunk lino
Electric drive has been successfully substituted forubstantial number of stations, and, as noted above, theof more thantations to electric drive was planned. However, piano for and actual accoapl1sfcnent of acquisition of electric power equipment willisrupting factor. By the second quarterl, schedules for construction of electric power lines and for procurement of electrical equipment were not being net. Furthermore, theof electric drive will not be feasible in all regions, as an existing system providing inexpensive electric power is Certainwhere no such supply of electric power exists, will need gas To meet this need, several new compressors ore being prepared.
* 'ihe word convert is used to indicate (l) the actual removal of gas turbines and the substitution of electric motors at existing stationshange in plans whereby stations originally slated to receive ear- turbines were to be equipped with electric motors.
Theerely an improved version of the, was toesting program In spite of cloimo that thes tho world's foremost compressor of its typo, that assembly line production had begun, and that installation on trunk transmission
lines had been successfully accomplished, testing probably had not been completed by the fourth quarter
Manufacturehp gas turbine-driven compressors,'s, for use primarily on kO-inch gas lines has beenests of the, however, are to continueo/ Soviet experience gives reason for doubt concerning possibilities of meeting the schedule for installation of's on tho dual Gazll-Urals linethe major gas transmission construction project under the Seven Year Plan. As possible substitution ofb for's on the Gazll-Urals lino has been considered, hi/ Soviet planners may be apprehensive concerning the outcome of the tests.
rocurement of satisfactory gasacosnary condition for successful implementation of the Seven Year Plan of the Soviet gas industry. A3 ofequirements for such compressors continued to significantly exceed the quantitiesdelivered. hsj Thus the available evidence suggests that domestic capability for manufacture of gas turbine-driven compressors mayto lag. If suitable coopressors cannot be Imported, undarutlllza-tion of pipeline throughput capacity is quite likely to persist.
2. Construction of Pipelines
During the period of the Seven Year0 km of gas trunk transmission lines were to be constructed and put into service. The total length of gas transmission lines in operation was expected to Increase0 km at the end8 to0 km by the end* In the US,m of gus transmission lines were In existence by the endonstmction0 additional km has been forecast foreriod, bringing the total tom. Thus5 the total length oflines available in the US will be on the orderimes the length of such lines in the USSR. Soviet writers claimed, however, that0 (aire than Uo percentm) of all gaolines in the USSR werenches) or more In diameter, whtlo lines of comparable diameter in the US constitutedercent of the total.
* The revised plan callsm by the end
As oil and gaa pipeline laying operations arx* oouontiully quite similar and as Glavgos has been charged with construction of both oil and gas lines, prospects for fulfillment of the program forof gas transmission lines can be meaningfully considered only in conjunction with the program for oil lines. Changes in availability
for use of Soviet oil and gas pipelines* are summarized in the chart." and in Table ndhow the status of the Soviet gas transmission net as of the endl.
dditions to availability of Soviet gas lines proceededace easily consistent with achievement of the original goal of the Seven Year Plan0 km. Tt In fact,of gas linesxceeded the amount that would have had to occur to achieve the simple arithmetic average required to meet the original Seven Year Plan. Thus it appears probable thatdditions to the total amount of line pipe in service were more than adequate for transmission of the increments to gasactually achieved. Even the delay in construction of the Krasno-darsklyerpukhov line, caused by lack of capability for the domestic production of kO-inch pipe, probably did not seriouslyto underfulfillment of plans for gas extraction. Relying solely on imports of kO-inch pipe, Soviet planners apparently chose tok0-ka line from Shebelinka to Ostrogozhsk by the end0 even though it may have meant diverting kO-inch line pipe fromm Krasnodarskiyerpukhov line. Thisprobably was based on tho fact that theinch pipe would duplicate the service provided by theinchinch Stavropol'-toscow lines, which0 operated at onlyoercent of capacity because of insufficient compression equipment.
- Ii. ai.y -ivci: f thenp--; r,
ccarpared with the length of line placed into service may show adisparity. eriod of years, however, either figure is likely toood approximation of the other. Soviet sources presentand apparently comparable data on availability for use of both oil and gas pipeline. Such fragments as are available on actual laying of line in place are roughly consistent with the datu on additions to
** Following ollows onnside back cover.
tr An authoritative Soviet source indicates that the plan forand commissioning of transmission linesay have been increased0 km to0 km.ummation of the length of individual gas transmission pipelines apparently planned for construction during the periodeven Year Planesult in excess0
he use of imported pipe enabled the Soviet gas industry to make substantial progress on the construction of its gas transmission net. However, the brunt of any failures in pipe supply or pipeline constructionrobably would be borne by the gas
USSR: Pipelines for Transmission of Oil and Natural Oas Available and Commissioned for Use a/ Estimatend Plans25
Unless otherwise indicated, data are from source b. Computed fret the plan for additiona to availability
d. Average annual addition to availability requiredo meet the target
USSR: ESTIMATED OIL AND GAS TRANSMISSION PIPELINES AVAILABLE FORND PLANS25
industry. Any such failure could significantly affect the ability of theto meet the goal for extraction of gaB',. Although the original Seven Year Plan for construction of oil lines substantiallythat for construction of gas lines, annual plans and actualIn the first three years of the Seven Year Plan indicate thatvna given to construction of gas Unas. The plans1tepedress in the Imbalance, however, and if plans forof oil lines as shown in Tablerc fulfilled, movement in this direction will continue In the future. 0 the gas industry receivedercent of the aaount of pipe procuredndl the allocation to the gas industry hod fallen toercent of the level Requirements of the gas Industryinch pipe were expected to be fulfilled by onlyercent
USSR: Planned Construc-ion of Pipelines for Crude Oil and Oil
Although indigenous production of line pipe in general has not been sufficient to meet the demands of Soviet industry, until late1 the most prominent deficiencye total lack of capacity zoinch line pipe. Requironentfl of the Soviet Oil and gas industry for 'lO-incb pipe are shown In* Aspproximatelyercent of the program had been completed, an
- Tableollows on
USSR: ConstructionTnch Diameter Pipelines for Transmission of Oil and Natural Gas During the
Krasnodarskiy Kray and Shebelinka system
Gas pipeline total Kuybyshev-Mozyr' oil pipeline
Sac and oil pipeline total a. As
achievement made possible largely by itnports of line pipe free. Wast Germany. As only token quantitiesnestically produced kO-inch pipe became available by the fourth quarter1 and as futureof domestically produced pipe is extremely uncertain, completion of thechedule undoubtedly -ill require further imports of bO-inch piP6- Existing contracts call for the delivery ofonsm)ir.ch line pipe to the USSR from -Jest Germany,
i- i v f, L
Italy, and Sweden before the end In spite of the sizablefor import of line pipe, construction of the Carl1-Urals line was being delayed inecause of insufficient stocks of pipe, 6l/ and construction planned1 was reducedmm. Construction of tho Uo-inch oil line from Kuybyshev to Hozyr' probably will receive priorityinch gas linos. Any future shortage of bo-inch line pipe probably will resultelay in construction of transmission lines.
3- Underground Storage
Operation of natural gas pipelines at near capacity isfor efficiency, and in order to achieve such operation, some allowance for variable seasonal demands must be made. Undergroundor gas is the noat effective method to neet the variable seasonal demands and still maintain uniform operation of the pipelines the year round. Experience of the US industry indicates that underground storage is best accomplished in exhausted oil and gas structures. As the USSR has few such structures in major consumingotal capacity ofillionf underground storage was plannedith theillionvailable in the US by the endjJ Because of the predominant industrial load In the USSR,seasonal demand for gas probably is loss pronounced there than it is in the US, and the relatively small amount of underground Btorage planned may be nearly adequate for the gas industry.
As the USSR Imports no gue and exports lessercentproduction, consumption has differed little from production. expansion in exports of gas is expected The distri-
bution of consumption of gas by consumer categorynd that expected5 ore shown la Table It was anticipated thatenterprises would continue to account for aboutercent of the total consumption of gas; that the electric power industry wouldajor concumer, accounting for aboutercent of the total consumptionnd that ferrous and nonferrous metallurgywould account for approximatelyercent of the5 compared with las* thanercent
The pattern of consumption of gas in the USSR differs strikingly free that in the US. In the US, Residential, and Commercial consumption has varied fromoercent of the total, while the most nearly comparable Soviet category Domestic and Costaunal Services according to plan was expected to decline slightly fromercentfl to about
VO <V H V0
9 percent In spite of the slight diminution in the relative importance of the residential consumer, it was planned that the number of cities and towns serviced with gas will rise6 to 5C0nd the number of individuals housed in quarters supplied with gas was to increase from aboutillion8 toillion
The estimated shortfall in production of gas will be reflectedorresponding shortfall in consumption, but there Is no indication that the underfill fillment of the production plan will appreciably affect the sectoral distribution of consumption planned The pattern of consumption, as indicated by the data presented In* suggests general consistency with achievement of the pattern planned5
In recent years the chronic lack of preparation on the part of consumers haserious obstacle to even more rapid growth inof gas in the USSR. nlynterprises began using gas rathers was originally planned, lsrgoly because necessary preparations by consumers had not been 9 the plan for capital investment in urban gasification was fulfilled by onlyercent in the RSFSRhe most Important gas-consumingn the same year, rural, areas in the RSFSR fulfilled the plan forgas to apurtments by only undreds of industrial enterprises were to receive gas, but conversion of plants,electric power stations, proceeded at an "extraordinarily" slow These difficulties arose partly as the result of faultyon the part of the RSFSR Stute Planning Commission, which had not allocated sufficient quantities of pipe and gas-consuming apparatus.In the third quarter1 the lack of preparation on the part ofcontinued to impede development of the gus
The outlook is for continued difficulty oi this type. In the
equipment rray be able to satisfy less than one-half of the requirements placed on it under the Seven Year , factories of the RSFSRCO gas ranges annually, although requirements amountednity. lk/ In Azerbaydihan SSR, achievement of thecr the manufacture of gas refrigerators, dryers, water heaters,
likevei; it :r. the-
rainistratlon for Machine Construction. JJ>/
In addition to the lack of equipment, consumers may beprice charged for gas, and the possibility of lowering prices
has beenbearing the conversion cbarges, the state has
already given en Le rprlr.es some financial incentive to convert furnaces and boilers to
In addition to financial incentives, other measures have been suggested for stimulating consumption of gas. in Uzbek SSRain Administration of Gasification vas rcccameaded. The Main Administration would be responsibleide range of activities including project planning, construction, and the manufacture of gas equipment, as well as for all other aspects in the operation of the gas industry. The organisation was expected to exercise strict andcontrol over the progress in the development of the gas industry in Uzbek/
In view of the major shortfalls in achievement of capacity to consume gas, financial and/or organizational measures probably will not bo adequate to eliminate similar shortfalls. Furthermore, there have been no Indications of significant increases in priority given to supplying equipment for consumption of gas or for construction of distribution systems. Even if the Soviet gas industry proved capable ofillionf gast appears that consumers would be unable to make use of it.
E. Anticipated Economics
The total savings anticipated by Soviet planners from theof the gas Industry during the Seven Year Plan periodto amount toillionaved in operating expensesillion rubles savedexpenditures)imes the totalthe gas industry planned. According tohe saving on the delivered cost of fuel in major: i: ic.
Urals region5 the saving on operating expenaeo was to6 billion rubles. 'Ihe reduced capital Investment made possible by the use of gas in tho Uralsas to amount toh billion/
* Probably including investment ir. the cheeiical industry only. ** Ul Soviet practice the combination of economies in both operating expenses and capital expenditures is an [footnote continued on
The use of gashemical raw material also was to result in an annual saving3 billion rubleshile capital economicsere to amount5 billion to gas vas to permit production of an additional quantityillion tons of cement5 without any greater Investment than would have been required with the old technological When gas is used In place of solid fuels, certain other plants suchnd particular types of electric power stations also require less investmentiven
Other benefits that Soviet planners hoped to realize from the increased share of gas in the total consumption of energy aro reduced requirements for labor and fuel and improved conditions in omployment and quality of product. The claim was tnade that5 productivity of labor in gas extraction would amount to aboutinea that in coal extraction. Productivity of labor in gas transport was to amount to aboutimes that in coal transport. Increases In thermal efficiency and reductions In losses were expected to reduce fuel requirements per unit of GRP. esult of these factors it was expectedewer workers would be required by the fuels industriesk/ Furthermore, the quality of output of the cement, brick, andndustries waa expected tc rise with the introduction of gas.
In spite of the estimated undcrfulfilLment of plans forof gas and for decreases In delivered costs of gas, adjustments for these expected shortfalls, for estimated shortfalls in reduction of coal costs, and for peculiarities of Soviet computational andprocedures suggest thatavings accruing fromof gas for solid fuels probably will amount torubles comparedillion rubles originally announced. It is estimated that savings of fuel In physical terms will amount2 million tons of standard fuel, falling short of tho plan in proportion to the shortfall In production of gas,"
unusual case. Ordinarily at hlr7icr planning levelswell as at the level of tho individual projecta saving of operating expenses has been compared with the increment in Investment required to achiovo it. The result indicates how many years ure required to recoup the additional investment. The shorter the recoupsient period, the more effective is the incremental Investment. Ihe gas Industryeculiar case in that the increment to Investment (compared with the alternative of investing in further capacity for producing coal) required to achieve the diminution In operating coata was thought to be negative by Soviet planners. The resulting negative recoupment period suggests that investment in this direction la long overdue.
* For the methodologies used in making tho estimatesillion rubles2 million tons of standard fuel, see Appendix M.
Inclusion in the accounts of the gas industry of expenditures for exploration, which huve been omitted in official cost-of-production calculations, may diminish the widely acclaimed cost advantage. The use of amortisation norms that do not accurately reflect lengths of service of capital equipment and capital structures contributes to an understatement of the relative cost advantage of gas ever coal. In the gas Industry, as elsewhere in the economy, no charge la mode for the productive services of capital. To the extent that the gas industry
is capable of producing the standardaving in capital, the lackapital charge results in an understatement of the cost advantage that gas exhibits.*
Incomplete regional coverage of consumption of gas probably resultsendency toward understatement of the savings actually achieved. Computation on the basis of average rather than incremental costs also contributes to an understatement of the advantage to be gained from the use of gas.
Under fulfillment of tho plan for production of gas andunderfulfillment of the plans for cost reduction in the coal and gas industries will cause deviations of actual from planned economies, hortfall in production will mean that less high-cost solid fuel can be replaced by gas than was planned, and this would contribute toward less saving than is planned. Underfulfillment of the plan for reduction of delivered costs of coal will be of greater consequence than the underfulfillment of the plan for reduction of the delivered cost of gas, and the differential in the delivered coats of coal and gas would contribute toward greater-than-planned savings.
Adjustments for computational and accounting peculiarities where possible and for the consequences of plan underfulfillment indicate thatavings in operating expenses nay be on the orderillion rubles rather thanillion rubles originally cited. Capital savings probably will amount toillion rubles rather thanillion rubles initially claimed by Soviet authorities.
IH. Prospects for the Performance of the Gas
, production of gas in the USSR probably will grow at an average annual rate of aboutercent fromillion1illion During this period, almost kO percent of the increase in the total consumption of primary energy in the USSR will be accounted for by the increased consumption of gas. esult, the share of gas in the total consumption of primary energy will increase from aboutercent1 to aboutercent
* Revisions in accounting procedures affecting the calculated costs of coal and gas have been discussed in the issue of Finunsy SSSR for Prices based on the new cost schedules are to
In spite of the outstanding rate of growth that will be achieved by the gas industry, output probably will average aboutercent below
tho plan for the period. Aa operations In the gas industry are highly Interdependent, failure at any stage has an alaost Immediate effect on final output. In any given year, lags In the installation of consuming equipment in onehortage of compression equipoent or line pipe In another, and insufficient reserves inhird couldto underfulfillment of the annual plan for the gas industry. Thus persistenceat various times and placesf any oneombination of the above-mentionod difficulties vould be sufficient to cause underfillfilloent of annual plans.
During theears of the Seven Year Plan the goals for the manufacture of equipment necessary for the consumption of gas and plane for construction of city distribution systems have been consistently under fulfilled by substantial margins. It ucems quite likely that these some difficulties will continue to contribute to underfulfillncnt of production plans.
Construction of gas transmission lines has proceeded at planned rates only because the USSR has baen able to import substantialof large-diameter line pipe almost exclusively from non-Bloc countries. Line pipe couldottleneck for the gas industry In thenly if Soviet planners do not avail themselves of relatively plentiful supplies from non-Bloc countries. It isthat production of domestic pipe will be adequate to meetinch pipe for both the gas and the oil industries. Consequently, it is anticipated that heavy demand probably willto be code on Free World suppliers of pipe. Any delays Inof Vo-inch pipehich could result from overoptlmistic expectations of increases in the domestic capacity to manufacture itrobably would cause delays in construction of the gaslines and would cause underfulfillment of the plan for
During the entire postwar period and particularlyhe inability to develop and masa-produce nutisfactory priFe movers for use at compressor stationo on transmission lines probably has been the most serious single obstacle to even faster growth of the gas industry in the USSR. Deficits in installation of compressors that developedrobably will not be made up.esult, pipelines will continue to be used at less thanthroughput capacities, and extraction of gas will be retarded.
Annual plana for exploratory drilling for gas were fulfilled by only s5 percent. Furthermore, annual plans were set even lower than the original control figures of the Seven Year Plan. Thus it seems extremely doubtful that the volume of exploratory drilling for gas set in the original plan will be achieved. In
certain regions, shortfallc in drilling volumes combined with continued relatively small additions to reserves per meter drilled have resulted in gross shortfalls in additions to reserves. In Komi ASSR and the Urals-Volga region of the RSFSR, as well as in Azerbaydzhan SSR, lags in additions to proved reserves could result in failure to meet original extraction targets On the other hand, other regions, in spite of lags in exploratory drilling, have exceeded plans for additions to In Utbek SSR, for example, reserves sufficient to sustain levels of extraction planned5 are already available.
As indicated abovo, certain bottlenecks have developed that havethe growth of production of gas in the USSR. esult theof gas for other fuels has not proceeded an rapidly as vasanticipated, and it probably will not. Moreover, it is estimated that the potential saving in rubles resulting from the substitution of gas for other fuels was substantially overstated in original Soviet calculations. Even after allowing for the overstatomenl, however, the saving in rubles will be substantial. she substitution of gas for other fuels willignificant contribution to increasingin the Soviet economy.
SOVIET GAS RESERVE CATEGORIES
The followingummary description of the Soviet classification proved reserves, which is the sum ofg,eserves. Aj_include those that can be extracted from wells that were drilled in fields where there is great confidence that the geology of the beds is relatively well understood. The condition of the beds and their pressures and structures have been studied on the basis of producing wells. A2 reserves are calculated for fields that have been contoured with wells. The character of the producing horizons, the condition of the beds, and the structure of the fields have been studied on the basis of exploratory wells. The quality of the gas has been studied on the basis of laboratory tests. eserves arc calculated for an area where the presence of wells with favorable characteristics has been shown and at least two wells of commercial capacity exist. The structure of the field is established, and the extent of the productive horizons has been approximately determined. Analysis of the extracted material has beer. made. The suneserves usually is called proved
As stated In the body of this report, the substitution of gas for coal In the USSRill result in an estimated saving of capital and labor valued atillion rublesillion rubles in operating expensesillion rubles on capital The procedures used for deriving this estimate are presented below.
1. Estimation of Planned Savings of Operation Expenses
A summary calculation of estimated savings in operating expenses is presented in Table lj," alculation of resource savings that would be appropriate if no modification of Soviet delivered cost and consumption data were made is presented inf This calculationeduction in3 billion rubles5 and7 billion rubles during the- This latter figure is compatible withillion rubles cited in8- Kortunov, Chief of (llavgaz. These calculated savings, however, required adjustment to compensateumber of computational and accounting deficiencies and -or deviations from planned consumption and delivered cost.
u. Modifications for Inappropriate Amortization Worms
In general, Soviet amortization norms do not reflect full depreciation of the capital Stock. The rates are frequently based on overoptlmistic est 1nations of productive life and,result in incomplete amortization of capital items that are to be rttired. Errors of thid type havr been :imde in estimating the service Uvea of equipment and structures used in the coal and gas industries. It is estimated that the reported cost of extraction in the coal industry would have been about l8 percent higher, and in the petroleumercent higher, if adequate depreciation were The adjustment refers only to extraction, but in the ease of coal aboutercent of delivered cost is due to costs of extraction. The delivered cost of coal, therefore, would have been about li percent higher if adequate depreciation were charged in the coal extracting industry and if depreciation charges associated with the- transport of coal are uysurncd to have been completely adequate.""
Tableollows on p.
Text continued on p.
USSR: Summary Calculation of Eat lea ted Savings in Operating Expenses Resulting from the Substitution of Natural Gas for Coal
Planned savings a/ Modifications for:
Inappropriate amortization norms a/ b/ and
Estimated shortfalls in plana for reduction of delivered costs a/ c/
Complete regional coverage d/ and
Index-fulfillment of consumption plana andof incremental consumption 5 6
Amortization charges on investment In exploration Estimated 1
on consumption In regions id.-were expected to accountandercent of the total gas consumption5 and See Table lfc,elow.
Previous results multiplied byndercent, respectively.
Inappropriate depreciation norms actually may result in an overstatement of the delivered cost of gas. It has been argued that the service life of gas transmission lines probably is closer too bo years than to theoears now used for accounting91/ If it is conservatively estimated that the probable life of gas transmission lines is twice the period now allowed forthe transportation costs of gas can be adjusted to allowore realistic depreciation schedule. This adjustment is made by the following formula:
whereverage cost after the reform
whereverage cost before the reform
whereost other than amortization charges
actor by which the amortization charges changeesult of more appropriate amortization normsequivalentmount of amortization charges
Applying this factor to theercent of the total delivered costs represented by transportation costs and allowingercentinpercent share in delivered coots represented bycosts results in an estimate of delivered costs that is aboutercent of the present level (effect on deliveredo.'fZ)
The data shown in Table 1'- for delivered costs were adjusted by using the factors derived above't-percent increase for coalpercent decrease for gas) to allow for more realistic depreciation schedules. 'Ihe results of this adjustment are presented inf Table lb, which show the reduction of costs in
" Weights for the average factors are from-
illion rubles and the reduction overeriod3 billion rubles.
b. Modifications for Estimated Shortfalls in Piano for Reduction of Delivered Costs
The delivered cost data adjusted for more realistic depreciation schedules required further adjustment to compensate for shortfalls in the plans for reduction of delivered costs.
The delivered costs of coal and gas shown innd I* of Table v* probably are based on projected cost trends. At the time that Soviet officials made these projectionsand savings calculationsit was expected that5 the extraction costs for coal would be reduced toercent below the level Actually the All-Union average extraction costs for coal both9 and0 exceeded the levels shown in" It has been estimated that5 the average coat of coal may be reduced to aboutercent of the levelr to aboutercent above the plan. Adjusted for an expected rise in calorific value, extraction costs of energy from coal will be aboutercent above the plan. Rail freight costs are expected to decline at very close to planned rates during the Seven Year Plan. As the allocation of productive services to the gas industry probably will not be reduced below planned amounts, and as the production goal probably wille achieved, the anticipatedin average delivered costs of gas also will not be achieved. It is estimated that tho delivered costs of both coal and gas will exceed the plan by aboutercent- The absolute difference between them, however, will lncreooc significantly. Thus deviations from planned trends in delivered costs of coal and gas will contribute to larger-than-plannod savings of productive services.
As shown inndf Table Ik, the adjustneri for failure to achieve plunned reduction in delivered costs brought the estimated reduction In operating expenses upU billion rubles53 billion rubles for the Seven Year Plan period.
c. Kodlflcations for Cor.pletc Regional Coverage
Calculations on estimated savings have been on the basis of Economichroughnd have amounted toart of the total.*" The results of the computations thus far
Tableollows on The economic regions referred to in this report arc those defined and numbered onSSR: Polltical-Adoir.lstra-.lvc Divisions and Economic Regions. See footnote a, Tableabove.
exploration. Capital expenditures normally charged to the coal and gan industries are counted rirst as capital expenditures and then as amortization charges included in the cost of production. Investment in predrilling activities and exploratory drilling probably should be treated in the sane way.
,e billion rubles inactivities probably will not bo included In investment in the gan Industry. In addition,9 billion rubles of investment indrilling will not be amortized by the gas industry. The official system of accounting for oil and gas extraction requiresoff the cost of unsuccessful exploratory wells as losses that do not add to capital assets. Exploratory wells that later becomewells are entered on thet the same rateomparable developmental well, even though the cost in general for an exploratory well exceeds thatomparable developmental well by approximately About one-half of all exploratory wells now become producing If It Is assumed that this rate continues to be true In the future, about one-half of3 billion rubles ofwill be amortized butate sufficient to cover only two-thirds of the actual outlays. 9 billion rubles in addition will be charged to the state budgetotal ofillion rubles during the.
It Is estimated that charges for amortization ofin predrilling activities und in drilling of unsuccessful exploratory wells would amount to1 billion rubles5 and5 billion rubles. Consequently,ubles shown for reduction in costs5 and6 billion rubles shown for reduction in costs during the Seven Year Plan period ware reducedli billion rubles51 billion rubles for the entire period. These reductions in cost constitute savings in operating expenses estimated at aboutbillion rubles51 billion rubles for the.
2. Katlmation of Capital Savings
Capital savings arc slgnlficantly overstated because of the failure to charge exploration expenditures to the gas industry. Predrilling rieldwork, which is regarded as being of such long-range character that it is financed directly from allocations in the stateevertheless requires substantial resource allocation for optimal operation of the industry. Some Soviet writers have suggested that all expenditures connected with the search for gas should be charged to the industry. rocedure, it is argued, wouldetter basis for minimising the allocation of resources required for satisfaction of the demand for energy.
The total expenditure for exploration for gas during the Seven Year Plan period la to amount5 billionillion rubles on3 billion rubles on deep exploratory drilling,5 billion rubles on exploration support activities. The expenditure2 billion rubles on fieldwork together with exploration support activities probably vas not included inin the gas industry. Ho great error will be Involved if the2 billion rubles are deducted from the total expectedfor sums that are to be expended by the coal Industry for such purposes are very small in comparison with those to be expended by the gas industry. The calculations are summarized in"
3- Estimation of Savings Due to Increases In Thermal Efficiency and to Reductions in Fuel Losses
Hot only will capital and current costs required per unit of thermal output be reduced, but also requirements for primary energy per unit of GUP will diminish as the consequence of the substitution of gas for other fuels. Several factors contribute to produce this result. Transportation and storage losses are lower for gas than for coal. In many processes, thermal efficiency is considerably higher when gas Is consumed. In other processes the need for energy-consuming transformation of coal into gas, electric power, or coke is99/ Increases in thermal efficiency and expected savings of fuel are shown in* and If the production plan Is fulfilled by onlyercent, as is now estimated, savings accruing from the reduction in losses and from Increases in thermal efficiency probably also will be only aboutercent as large as those originally planned.
* tableollows on* Tableollows on Tableollows on p. ho.
CAPS IN INTELLIGENCE
The most significant gaps in intelligence relating to the Soviet gaB industry concern capabilities for transmission and consumption of gas. Information necessary to provide more reliable estimates of plans for construction and actual commissioning Of large-diameterlines, compressor stations, and city distribution systems is needed. Data indicating why, when, and where and to what extent consumers have not been prepared to use gas when Glavgaz wasosition to deliver it mayeasonably reliable quantitative estimate of theof this factor to underfulfillment of production plans.
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