WESTERN EUROPE: MOVING TOWARD GAS SECURITY?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001200190001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: August 18, 2010
• Sequence Number: 1
• Publication Date: June 14, 1984
• Content Type: MEMO

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/f
Central Intelligence Agency
MEMORANDUM FOR: William Martin
Special Assistant to the President
for National Security Affairs
National Security Council
Chief, Strategic Resources Division
SUBJECT: Western Europe: Moving Toward Gas Security?
Attached is our assessment of the impact of the outcome of
the Sleipner gas negotiations on West European gas security. if
you have any questions, please call me
Attachment:
Western Europe: Moving Toward Gas Security?
GI M 84-10105, June 1984
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SUBJECT: Western Europe: Moving Toward Gas Security?
OGI/SRD/EMB
Distribution:
1 - William Martin/NSC
1 - Roger Robinson/NSC
1 - Ambassador Richard Fairbanks/State
1 - The Honorable Allen Wallis/State
1 - The Honorable Richard T. McCormack/State
1 - E. Allan Wendt/State
1 - Charles V. Boykin/DOE
1 - The Honorable Lionel H. Olmer/Commerce
1 - The Honorable Fred C. Ikle/Defense
1 - Doug Mulholland/Treasury
1 - SA/DDCI
1 - ExDir
1 - DDI
1 - DDI/PES
1 - NIO/ECON
1 - CPAS/ILS
1- DD/OGI, D/OGI
X - OGI/EXS/PG
1 - OGI/PG
1 - Ch/SRD
1 - EMB
1 - MB
1 - EMB Chrono
(14 June 1984) 25X1
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
14 June 1984
Western Europe: Moving Toward Gas Security?
Summary
The United Kingdom is engulfed in a political debate over
the necessity of importing large, new quantities of natural gas
from Norway's Sleipner field. Some British officials oppose
these imports because of balance of payments implications and
favor a smaller volume of Dutch gas imports. In addition,
several oil companies believe domestic production can be stepped
up to meet demand. The outcome of London's gas negotiations with
Norway and the Netherlands could have major implications for the
security of gas supplies in Western Europe during the next
decade. Failure to proceed quickly with the development of the
Sleipner field could delay or postpone development of Norway's
Troll field--a future source of gas needed to prevent further
inroads by the Soviet Union into the West European gas market in
the 1990s. In our judgment, going ahead with the Dutch option
would enhance West European security by integrating the pipeline
network between the continent and the United Kingdom. Over the
longer term, however, such a link could provide Moscow with an
opportunity to penetrate the UK market.
This memorandum was prepared by
Energy Markets Branch, Office of Global
Issues. The information contained herein is updated to 7 June
1984. Comments may be directed to Chief,
Strategic Resources Div ision
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Western Europe: Moving Toward Gas Securty?
Market Setting
The prospects of increasing gas demand and declining
indigenous production in Western Europe indicate that both
continental Europe and the United Kingdom--currently two distinct
markets due to the absence of any interconnecting pipeline--will
become increasingly reliant on natural gas imports over the
balance of the century. Current forecasts project that natural
gas demand on the Continent will increase from 167 bcm in 1983 to
approximately 200 bcm in the mid 1990s, with only about 85
percent of projected requirements covered by indigenous
production and existing supply contracts. Prospective suppliers
now include the Netherlands, Norway, the USSR, and Algeria and
competition for incremental market share likely will be stiff.
Marketing efforts by Norway and the Netherlands--secure OECD
suppliers--are under way both on the Continent and in the United
Kingdom. Although the United Kingdom is a major European gas
producer and now meets about three-fourths of its requirements
from indigenous production, the British Gas Corporation (BGC)
also imports about one-fourth of its gas from Norway. Declining
production from Britain's southern basin gasfields and
termination of Norwegian deliveries from the Frigg field in the
early 1990s point to a potential gas supply gap in the United
Kingdom of around 31 bcm in 1995, according to the BGC. Unlike
most other European buyers, BGC is moving now to fill these
projected needs.
Meeting British Needs
After 18 months of negotiations, the Norwegian state oil
company (Statoil) and the BGC reached an understanding in
February for the purchase of about 12-14 bcm of natural gas from
Norway's Sleipner field. Sleipner gas supplies are expected to
be developed by the early 1990s and would roughly offset the loss
in supplies from the Norwegian Frigg gasfield. The gas deal is
subject to both British and Norwegian parliamentary approval.
Some British officials, however, have voiced reservations
about the agreement. In particular, Nigel Lawson, Chancellor of
the British Exchequer and former Energy Secretary, has played a
key role in opposing the deal because of the potential financial
implications. According to some British economists, the $28
billion gas deal would cause a net outflow of payments of around
$2.1 billion a year. In addition, the cost to the Treasury from
lost tax revenues could amount to more than $4.2 billion over the 25X1
lifetime of the field if these volumes were produced
domestically. For these reasons, Chancellor Lawson has advocated
increased reliance on domestic gas production and imports from
GI M 84-10105
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the Netherlands as an alternative to the purchase of Sleipner
gas. In February, the UK Department of Energy instructed the BGC
to explore the possibility of purchasing natural gas from
Gasunie, the Dutch state gas utility.
Although the Dutch have not previously sold gas to the
United Kingdom, the Netherlands now has additional gas available
for export and Gasunie has offered to supply the British with
about 5 bcm per year possibly beginning as early as 1990--less
than half the volume that would be available from Sleipner.
Although the initial offer was at a price about 20 percent higher
than the Sleipner price, Gasunie recently made a more competitive
offer and indicated its willingness to negotiate. With only
lukewarm interest expressed recently by Continental buyers in
additional Dutch gas volumes, the Hague would like to penetrate a
new gas market in the United Kingdom. We believe any Dutch sales
to London would reduce future availability of Dutch gas to
Continental buyers. At the same time, the outcome of London's
gas negotiations with Norway and the Netherlands could have major
implications for the security of gas supplies in Western Europe
during the next decade.
The Politics of Negotiation
The Sleipner gas deal is a major and complex political issue
in the United Kingdom, and its outcome is far from certain.
Nigel Lawson, who has close connections with Prime Minister
Thatcher, opposes the deal
On the other hand, Sir
Dennis Rooke, chairman of the BGC, strongly supports the deal.
Although Rooke has a good reputation in the gas industry, his
relations with the current Government are poor, according to
The Sleipner Option
A British decision to proceed with the Sleipner agreement
would provide a secure and certain source for meeting around one-
fourth of British gas demand in the 1990s. Even with Sleipner
gas imports of 12-14 bcm annually, however, the UK would still
require increased domestic production, according to the BGC.
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Indeed, BGC is currently engaged in its largest ever exploration
program--spending $140 million annually on domestic gas
exploration--and plans to negotiate for 25 new British gas fields
by 1995. With a statutory requirement to ensure supplies for 16
million customers, the BGC views the Sleipner deal as a prudent
course. Moreover, the agreed upon price is favorable to BGC and
the corporation probably wants to finalize the agreement soon
given the current buyers' market for natural gas in Western
Europe.
Viewing the Dutch Option
Some UK officials have proposed 25X1
increasing domestic production and importing Dutch gas to meet
future demand needs. the lower 25X1
volume of Dutch gas imports would have a less adverse effect on
the balance of payments, and increased domestic production could
benefit the British offshore industry. Some companies have
recently unveiled significant new gas development plans in the
British sector and have stated that there is no need for
Norwegian imports:
o Conoco intends to develop four new North Sea gasfields
with recoverable reserves of 70 bcm at a cost of over
$1 billion and claims that southern basin gas reserves
are sufficient to meet British requirements to the year
2000.
o British Petroleum (BP) recently stated that enough
British gas reserves are recoverable at a price
comparable to the Sleipner price to meet domestic needs
until after the year 2000 and has announced it will
develop four gasfields in the southern sector of the
North Sea capable of producing about 4 bcm annually.
Without Sleipner, however, the British gas industry will
have to find and develop more than the equivalent of about three-
quarters of its current output to satisfy demand requirements
when Frigg gas supplies terminate. To meet such an ambitious
target, British offshore gas would have to be developed much
faster over the next 10 years than it was during the boom years 25X1
of the 1970s. Given the uncertainties surrounding demand,
indigenous supply, and balance of payments implications,
London may eventually approve 25X1
the Sleipner contract with lower volumes and possibly take some
Dutch gas as well. Under this scenario, London may also change
its current policy of forbidding export of UK North Sea gas,
according to embassy reporting. Dutch supplies could be used to
meet British needs in the 1980s, while Norwegian supplies would
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come on line in the 1990s in combination with maximum domestic
production.
Outlook and Implications
In our judgment, the security of gas supplies in Western
Europe over the next decade will be influenced by the outcome of
the Sleipner contract. A decision by London to approve the
Sleipner purchase would improve prospects for marketing the
Norwegian Troll field. Oslo has stated that progress on Troll
would be delayed pending resolution of Sleipner sales. Troll is
the only large, secure OECD gas supply available and capable of
meeting Continental requirements in the 1990s. Because of the
10-year leadtime for Troll development, we believe a decision to
proceed with the project in the next year or so is essential to
prevent significant additional Soviet gas sales to the West
Europeans in the 1990s.
Alternatively, a decision by London to rely on increased
indigenous production and some smaller volume of Dutch gas
imports could be more problematic, if--as we believe--domestic
output falls short of expectations. The United Kingdom would
then be forced to seek additional imports, either from Norway, or
potentially the Soviet Union. The Soviet option would become
available to London if Dutch gas were imported, creating the
necessary conduit to bring in Soviet gas in the future. A
pipeline link to the Continent from the UK to import Dutch gas,
however, could enhance European gas security through integrating
the distribution network.
We believe London will eventually approve the purchase of
Sleipner gas. British Department of Energy officials, however,
may instruct BGC to reduce the volumes agreed to in the original
deal because they believe domestic production can be increased
significantly.
Beyond Sleipner
The willingness of West European gas suppliers to adjust to
the realities of a weak energy market could have a positive
impact on West European gas security. Norway and the
Netherlands--which account for 70 percent of proved European gas
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reserves--have shown considerable price flexibility recently in
making available additional gas supplies. The Norwegian price
offer to the United Kingdom on Sleipner gas was well below its
1980 deal to sell Statfjord gas to the continent, and lower than
the Norwegians seemed determined to get six months ago. Such
price flexibility is probably a prerequisite to the development
of Troll's huge reserves. Although the Dutch initially misread
the market, the Hague showed a pragmatic stance by submitting a
more competitive offer to the United Kingdom and indicating a
willingness to negotiate further. On the Continent, the Dutch
have offered to provide additional gas supplies to Italy at the
present price. Two months ago, the Dutch were demanding a higher
price as a premium for being a secure gas supplier
Given the price flexibility of suppliers, the prospect of
enhancing gas security now rests primarily with consumers. In
gas contract renegotiations scheduled to occur this year with the
Dutch, consumers probably will have the opportunity to take
additional volumes of Dutch gas beyond contract expiration
dates. Indeed, the Hague has indicated a willingness to offer
buyers a 10-year extension of current contracts, which run into
the 1990s Additional Dutch gas 25X1
supplies have the potential to partially meet future demand
growth and minimize Soviet sales until Troll can be developed in
the mid-to late 1990s. 25X1
Price flexibility on the part of Norway and the Netherlands,
however, may not be enough to attract consumers. Although the
Dutch offered additional gas supplies at competitive prices, Rome
recently opted for Soviet gas and lucrative counter-trade
agreements. As a result of signing for Siberian gas, Rome hopes
to make sales of $600-800 million to Moscow by 1990, beginning
with the signing of a $150 million contract for the construction
of an experimental coal slurry pipeline in the Soviet Union,
according to embassy reporting. Thus even if the Sleipner
agreement is approved and the outlook for Troll development
brightens, the prospect of receiving lucrative Soviet contracts
in return for gas purchases could lure some West European
consumers to purchase additional Siberian gas in the 1990s.
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