OUTLOOK FOR THE SIBERIA-TO-WESTERN EUROPE NATURAL GAS PIPELINE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83T00853R000100100005-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 21, 2016
• Document Release Date: October 6, 2008
• Sequence Number: 5
• Publication Date: August 1, 1982
• Content Type: REPORT

Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Directorate of Secret
Intelligence
Natural Gas Pipeline
Outlook for the
Siberia-to-Western Europe
State Dept. review completed
Secret
SOV 82-10120
EUR 82-10078
August 1982
COPY 3 9C) I
1
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Directorate of Secret
Intelligence
Outlook for the
Siberia-to-Western Europe
Natural Gas Pipeline
This assessment was prepared by the Office of
European Analysis and the Office of Soviet Analysis.
Comments and queries are welcome and may be
addressed to the Chief, Resources Branch, Soviet
Economy Division, SOYA
Secret
SOV 82-10120
EUR 82-10078
August 1982
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
Outlook for the
Siberia-to-Western Europe
Natural Gas Pipeline
Key Judgments We believe that the USSR will succeed in meeting its gas delivery
commitments to Western Europe through the 1980s. Moscow has a wide
range of options to accomplish this end:
? Deliveries could begin in late 1984, as scheduled, by using existing
pipelines, which have excess capacity of at least 6 billion cubic meters
(m') annually.
? Using some combination of Soviet and West European equipment,
deliveries through the new export pipeline could probably begin in late
1985 and reach nearly full volume in 1987-about one year later than if
the sanctions had not been imposed.
? At substantial cost to the domestic economy, the USSR could divert
construction crews and compressor-station equipment from new domestic
pipelines to the export pipeline or even dedicate a domestic pipeline for
export use to ensure capacity adequate to meet contractual delivery
LOA-1
The task confronting the Soviets is made easier by the nonlinear relation 25X1
between compressor power requirements and gas throughput in pipeline
operations.
Completion of the pipeline has become a top-priority objective for the
Soviet leadership. On the economic side, they look forward to some
$5 billion a year in new hard currency earnings from gas in the early 1990s
(after repayment of pipeline borrowing) to partially offset declining oil
export revenues. In their view, moreover, the United States' imposition of
Information available as of 6 August 1982
was used in the preparation of this report.
Secret
SOV 82-10120
EUR 82-10078
August 1982
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
sanctions has made completion of the pipeline a matter of national prestige
and has provided an opportunity to foment dissension in the Western
alliance.
The West Europeans see Soviet gas as a relatively low-priced substitute for
uncertain Middle Eastern oil and also view the Soviet pipeline equipment
orders as easing their substantial unemployment problems. In addition,
they hold that increased East-West economic interdependence will lead to
more responsible Soviet behavior. They are deeply angry about the US
decision, especially the extraterritorial and retroactive features of the
measures, which they regard as a serious infringement of their sovereignty.
As a result, the West Europeans are seeking ways to defeat or circumvent
the extended US sanctions. Paris has ordered French firms to honor their
Soviet contracts, and London-acting under legislative authority-has
required British firms to, do the same. Bonn clearly approves of the French
action and has made known its position that the West German Government
cannot stop the West German firm involved from delivering embargoed
material to the USSR. Rome has said that pipeline contracts will be
honored but has not yet ordered Italian firms to do so.
Taking all this into account, we think the likely Soviet choices for
completing the export pipeline-in descending order of probability-are:
? Production of the 40 GE-designed rotors by the French firm Alsthom-
Atlantique under its existing contract with the Soviets-the move
already announced by Paris.
? Western assistance in manufacturing.rotors for Soviet-designed 25-
megawatt turbines.
? Soviet redesign of pipeline compressor stations, substituting a combina-
tion of smaller turbines or other drivers of either foreign or Soviet design.
Only the last outcome--primary reliance on their own resources-would
cause the USSR much difficulty. The costs to them will be much higher if
they have to build their own gas turbines and compressors for the export
pipeline. Specifically, diverting from the domestic pipeline program Soviet
equipment sufficient to equip the export line could reduce gas delivery to
the domestic economy by as much as 30 billion m' annually for a year or
two. Other Soviet equipment options would have considerably smaller
impact on domestic gas supply.
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
The Export Pipeline's Place in Soviet Pipeline Plans 3
Importance of the Project for the USSR and Western Europe 3
Soviet Options 5
The West European Companies and Their Views 8
Nuovo Pignone 9
United Kingdom 11
Short-Term Outlook 11
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Siberia-to-Western Europe Natural Gas Pipeline*
The Pipeline at a Glance
Length: 4,650 kilometers (Urengoy-Uzhgorod)
year (net)
Operating Pressure: 75 atmospheres
Tarvisi
Italy
Figure 1
.- Nizhnyaya Tura
erm'
Soviet
Caspian
Sea
Aral
Sea
Yugoslavia
not
necessarily authoritative. ~~
j!
hgored-
Svalyava
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
Outlook for the
Siberia-to-Western Europe
Natural Gas Pipeline F_
The Siberia-to-Western Europe natural gas pipeline is
the largest East-West trade project to date (see
thumbnail description in figure 1). Under negotiation
since 1979, the pipeline has a planned gross capacity
of 35 billion cubic meters annually and could deliver
nearly 30 billion m' to West Germany, France, Italy,
Austria, and other countries for 25 years. Gas pur-
chase agreements were signed in late 1981 with West
German and French utilities and in June 1982 with
Austria's Ferngas. Initial exports of 3 to 5 billion m3
per year are to start in 1984, and full deliveries are
scheduled to begin in 1987.
The USSR will be able to use a combination of the
existing Soyuz export pipeline, domestic trunklines,
and East European transit lines to begin initial deliv-
eries in late 1984 or to supplement the initial through-
put of the export pipeline. With the phasing-in of the
new gas export pipeline, total Soviet gas deliveries to
Western Europe-under older contracts as well as the
new export pipeline contracts-could reach about 42
billion m' in 1985 and then rise to as much as 54
billion m' in 1987 (see table 1).' Annual gas deliveries
to Eastern Europe would increase by several billion m'
if 10 percent of the projected Soviet exports are
delivered to Czechoslovakia and Hungary as transit
Western Europe remains the primary market for
additional Soviet natural gas exports. Although gas
demand has softened in recent years, it is expected to
bottom out this year and revive as economic recovery
begins. Total West European gas demand is expected
to grow from about 215 billion m' in 1980 to 245
billion m' in 1990, and perhaps to 270 to 300 billion
m' by the year 2000. The Soviets are anxious to
increase gas exports to Western Europe. With the
completion of the export pipeline, deliveries would
' The information available on the deliveries under the new
contracts is still extremely sketchy, so the timing depicted in table 1
should be considered a rough estimate of the delivery profile. F_
Existing
contracts
10.9
12.0
12.0
12.0
24.3
30.8
42.1
54.1
a Excluding Finland; amounts of annual offtake under the new
contracts are subject to reduction by up to 20 percent under
scheduled semiannual negotiations with the Soviets.
b Italy has not yet signed the new purchase contract.
Excluding potential deliveries of 0.8 billion m' to West Berlin.
25X1
25X1
25X1
25X1
25X1
more than double by 1990, compared with the present
level. At that time, West European countries could be
relying on Soviet gas for nearly one-fourth of their gas
requirements. Unless Western alternatives to Soviet
gas are developed, the USSR could capture an even
larger share of the West European gas market in the
1990s.
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Major Western Suppliers for Compressor-Station Equipment
General contractors for Mannesmann-Creusot-Loire Nuovo Pignone
compressor stations (22 stations-$940 million) (19 stations-$560 million)
Gas turbines-Frame V 25-MW
AEG-Kanis a (42 turbines)
Nuovo Pignone a (57 turbines)
John Brown a (21 turbines)
Gasline compressors
Creusot-Loire (42 compressors)
Nuovo Pignone a (57 compressors)
Dresser-France (21 compressors)
Frame V turbine rotor sets
General Electric (63 rotor sets)
General Electric (57 rotor sets)
Computer system for central control of
export pipeline
Thomson/CSF
Thomson/CSF
Soviet order (Nov. 1981) for 40 Frame V rotor
sets (end use uncertain)
Alsthom-Atlantique a
Alsthom-Atlantique a
While most of the new large-diameter lines being
built in the Soviet Union will depend on domestically
produced compressor-station equipment of less than
optimum reliability and efficiency, the export line was
planned to have a first-rate array of Western equip-
ment. The added reliability of the system would
benefit the Western purchasers of Soviet gas, and the
supply of equipment financed by Western credits
.would reduce investment burden on the Soviet
economy.
Deliveries of gas to Western Europe under the new
supply contracts can begin in late 1984 using excess
capacity in existing pipelines transiting Czechoslova-
kia. As the volume of deliveries increases, however,
Secret 2
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
new transit pipeline capacity will be necessary. Some
reports indicate one new transit pipeline will probably
pass through Czechoslovakia to Waidhaus, West Ger-
many, possibly with a branch through Baumgarten,
Austria, to Italy. Other reports, however, suggest that
Hungary will build the branch to Italy. Whichever
decision is taken as to the route, a transit pipeline to
cover the distance of roughly 800 km from the Soviet
border to Waidhaus, West Germany, or Tarvisio,
Italy, could be completed well before the added
capacity is needed.
If the Soviets want to provide transit capacity for
future expansion of their gas export pipeline system,
they could press Czechoslovakia to build a 1,420-mm
(56-inch) line to Waidhaus and ask Hungary to build
a 1,420-mm line to Tarvisio. Compressor-station
power could be supplied by GE-design Frame V 25-
MW gas turbines or by any of a wide selection of
smaller equipment, including 12-MW or 16-MW
electric motors. A number of Japanese and West
European manufacturers of turbines, electric motors,
and compressors appropriate for gas transmission
service have been actively seeking contracts from
Czechoslovakia and Hungary.
The Export Pipeline's Place in Soviet Pipeline Plans
The gas export pipeline project dominates Soviet
energy export plans for the 1980s and will have a
strong influence on the gas industry's pace of develop-
ment. But the Siberia-to-Western Europe pipeline is
only one of six 1,420-mm gas pipelines that the
Soviets hope to complete in the current Five-Year
Plan (1981-85).2 Two of the five domestic lines have
already been laid. In addition to the export pipeline,
Moscow hopes to lay by 1985 three more lines from
the Urengoy gasfield to the European USSR, each
3,000 to 4,000 km long. The six new 1,420-mm
trunklines from West Siberia account for roughly
' The new pipelines being constructed represent a major extension
of the Soviet gas transmission system, which has grown rapidly,
from only 5,000 km in 1955 to 132,000 km in 1980. A large share
of the network transits territory where physical and environmental
conditions are harsh and the infrastructural base is sparse. The
major gas pipeline corridors of the USSR link the gas-rich regions
of West Siberia, Central Asia, the Ukraine, and the southern Urals
one-half of the total of 48,000 km of gas pipelines
planned for construction in 1981-85.
25X1
25X1
By the end of 1980, about 17,000 km of the Soviet gas
transmission pipeline system consisted of imported
1,420-mm pipe. The Soviet Union has not succeeded
in mass producing 1,420-mm pipe of high quality and
strength for gasline service at 75 atmospheres. Much
of the pipeline system operates at lower pressures and,
consequently, the throughput is below the maximum
attainable. In addition, because of shortages of appro-
priate equipment, Soviet pipelines often operate for
extended periods with only a part of the designed
compressor capacity installed. Running below capac-
ity entails added costs per unit of gas delivered. Such
costs might not be acceptable in Western market
economies, but the Soviets are inured to the added
burden of second-best solutions. Moscow plans to
increase pipeline deliveries of gas by almost half from
1980 to 1985 despite prospective equipment shortages.
25X1
Importance of the Project for the USSR and Western
Europe 25X1
The USSR
Moscow wants the gas export project for three basic
reasons. Most important, the pipeline will earn badly
needed hard currency and aid development of the
Soviet gas industry. These objectives are increasingly
important to the troubled Soviet and East European
economies. At the same time, the USSR
sees the project as a major step toward expanding its
commercial and political ties with Western Europe at
US expense.
Hard Currency Earnings. The pipeline is vital to
Moscow's prospects for earning sufficient hard cur-
rency beyond the mid-1980s to avoid a major drop in
its import capacity. Oil export revenues will probably
fall substantially by 1985, and gas exports-under the
export pipeline deal and preexisting contracts-will
pick up much of the slack. Revenues from the pipeline
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
deal alone should reach $5 billion (in 1981 dollars)
annually in the early 1990s when all credits are
repaid, and total gas earnings (including existing
contracts) could be roughly $10 billion. The pipeline
thus will support Moscow's purchases of Western
goods and technology, which will be increasingly
important to improving industrial productivity and to
reducing agricultural shortfalls. The earnings from
export deliveries of gas will also help the Soviets to
maintain economic support to Eastern Europe, sup-
port that is now threatened by the hard currency
crunch and domestic requirements.
Aid to Gas Production. Moscow almost certainly
hopes that the pipeline project will establish reliable
non-US sources of equipment for developing Siberian
gas production, the key to Soviet energy plans through
1990. Gas output will provide almost all the growth in
Soviet primary energy production and will be an
increasingly important source of Soviet energy sup-
plies to Eastern Europe. Because Western pipeline
equipment will be critical to meeting plans for rapid
gas production growth, the Soviets are now seeking to
establish secure, non-US sources of supply-particu-
larly for turbines, the technology most vulnerable to
US sanctions. Moscow may see the turbine orders for
the export pipeline as leading to further contracts,
with the West Europeans possibly participating in the
manufacture of a turbine of Soviet design. The Sovi-
ets, at the least, expect the current deal to sustain
West European business interest in future gas-for-
equipment agreements.
An assured non-US source of supply for pipelayers
capable of handling 1,420-mm pipe is a critical
consideration bearing on completion of the large
pipelines planned. Because of the embargo on US
equipment, the Soviets are obtaining large numbers of
pipelayers from a Japanese manufacturer, Komatsu.
The Komatsu deliveries, together with the pipelayers
and associated equipment already in the USSR, ap-
pear to ensure that there will be no large imbalance in
availability between pipelayers and large-diameter
pipe in the next year or so.
Political Objectives. The Soviets almost certainly
view the pipeline project as a means of increasing
divisions between Western Europe and the United
States, and the embargo has enhanced Moscow's
ability to pursue that goal. The USSR probably
believes that the West Europeans' increased depen-
dence on Soviet gas deliveries by the late 1980s will
become a permanent factor in their decisionmaking
on East-West issues. In the past, the Soviets have used
West European interest in expanding East-West com-
merce to undercut US sanctions, and they believe a
successful pipeline deal will reduce future European
willingness to support a US disruption of East-West
trade.
West European Interests
The West Europeans have several reasons for wanting
the gas export pipeline, including diversification of
energy sources, pipeline-related export contracts, the
relatively low price of Soviet gas, and the hope that
economic ties will contribute to detente.
Diversification of Energy Sources. The West Europe-
ans' prime reason for wanting the pipeline is to reduce
their dependence on OPEC oil. Although that depen-
dence has fallen substantially since 1973, Western
Europe still imports more than half of its total energy
requirements, and the bulk of those imports come
from OPEC. Soviet gas, by contrast, would cover only
about 3 percent of total energy needs once the pipeline
is completed. Moreover, the West Europeans regard
the USSR as a more reliable supplier than some
OPEC countries. Given the absence of sufficient
alternative gas supplies during the 1980s, they feel
strongly that the pipeline will enhance their energy
security rather than detract from it. They also believe
that they could cope reasonably well with even a total
cutoff of Soviet gas deliveries, through a combination
of conservation, fuel-switching, temporary increases
in domestic gas production, and drawdown of gas
stocks.
Although projections of West European demand for
gas have been cut sharply over the last few years, we
estimate that consumption in 1990 will nonetheless be
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
some 30 billion m' higher than in 1980-equivalent to
the maximum delivery capacity of the new export
pipeline. Moreover, domestic production-mostly in
the Netherlands-is expected to begin a steep decline
within a few years. Should gas consumption fall well
below expectations later in the decade, the West
Europeans could respond by temporarily reducing
domestic production. Any surplus probably would
disappear within a few years, as Western Europe now
appears to be facing a gas shortfall in the 1990s.
Employment. The West Europeans prize the jobs
provided by pipeline-related export contracts. While
the actual number of jobs involved is rather low-
perhaps several tens of thousands total for the four
countries involved-they tend to be concentrated in
depressed industries and depressed regions. Moreover,
unemployment is at or near post-1930s records in most
of these countries, making any jobs-related issue a
sensitive matter.
Prices. Soviet gas also looks attractive to the West
Europeans because it is relatively cheap in comparison
either with OPEC oil or with gas from other potential
suppliers such as Norway or Algeria.
Detente. Finally, the West Europeans regard trade
with the Soviet Union as a stabilizing element in East-
West relations and consequently as a factor enhancing
their national security. They have been unwilling to
give up detente in Europe because of Soviet expan-
sionism in other parts of the world, and they do not
appear to give the United States much credit for
shouldering the burden of protecting their interests in
other areas, especially the Middle East.
Moscow has a wide range of options available to meet
its gas delivery commitments to Western Europe
under the contracts recently negotiated or still under
negotiation. The most important options relate to
sources and types of equipment, use of other pipelines,
and adjustment of gas delivery schedules.
Alternative Sources of Equipment
25X1
25X1
25X1
25X1
25X1
Moscow can try to convince Western suppliers to
deliver the equipment now on order, equip the pipeline
with Soviet turbine-compressors, or work out a combi-
nation of these approaches. Some of the technical
options are listed in table 3. In most cases these
options individually would provide adequate compres-
sor power for a substantial flow of gas through the
export pipeline in 1984. Equipping all compressor
stations with the planned array of equipment (both on
line and standby) would extend final completion of the
export pipeline to around 1987-88.
25X1
throughput is not linearly related to compressor power
(see figure 2), the export pipeline could deliver about
25 billion m' per year, about 85 percent of designed
capacity. Annual deliveries at this rate would exceed
the total volume of gas that the West Europeans have
contracted for or are likely to buy in the late 1980s.LI
25X1
Moscow's attempts to improve the availability, capac-
ity, and reliability of the Soviet gas turbines manufac-
tured for gas pipeline service have been meeting with
some success, according to recent reports. Soviet-25X1
made gas turbines, which account for the bulk of
compressor power installed on Soviet gas pipelines,
have up to this time been produced mainly in 6-MW
and 10-MW sizes-considerably smaller than the 25-
MW unit desirable for the most efficient performance
on 1,420-mm pipelines. 25X1
The Soviets may be close to a breakthrough in 25X1
development of larger turbines, however. After a
decade of development, prototypes of the Soviet
GTN-16 (16-MW) and GTN-25 (25-MW) units have
been built and tested. According to Soviet reports,
serial production of these units is beginning. If even 10
25X1
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Soviet Technical Options To Counter the US Embargo
Soviet Technical Options To Obtain
Compressors for the Export Pipeline
Use of 20 GE-manufactured rotor sets
already in Europe and the 40 Alsthom-
Atlantique rotors (ordered in Novem-
ber 1981) in 25-MW Frame V turbines
Accelerated introduction of the
Soviet 16-MW and 25-MW turbines
Use of smaller (e.g., 10-MW) Soviet-
built turbines
Soviet-designed rotors manufactured in
Western Europe
Use of Soviet 25-MW turbines with
a Initial export delivery volumes of at least 7 billion m'/yr, excluding d Output of GTK- 10 turbines would suffice for export line and
all other options listed. some-but not all-planned domestic pipelines.
b Full capacity of pipeline (using gas from the pipeline as fuel for e A mix of Western variable speed turbines such as those made by
turbines and delivering about 30 billion m'/yr to Czech border), Sulzer or Stal-Laval.
excluding all other options listed.
e Additional turbines supplying a total of 1,500-MW would be
required to reach 100 percent of planned throughput capacity and
provide for installation of all standby units by 1988.
to 15 turbines in each of these series could be
produced annually, Moscow's capacity to equip the
export pipeline at minimum cost to the domestic
economy would be considerably enhanced. But Soviet
turbines have a service life between major overhauls
that is only a small fraction of that offered by
Western equipment. The Soviet units, moreover, have
been chronically in short supply, causing long delays
in bringing domestic pipelines up to full throughput.
For the new larger turbines-as yet untried under
Soviet pipeline operating conditions-the question of
reliability and service life is undoubtedly worrisome to
Soviet gas industry officials and reinforces their basic
preference for Western equipment on the export
pipeline.
Alternative Types of Equipment
While 25-MW gas turbines are the best power source,
the Soviets could turn to smaller gas turbines, other
power sources such as electric motors, or some combi-
nation of equipment. Although Moscow probably
would not mix different types of compressor drive
equipment in any one compressor station for reasons
related to pipeline control and maintenance, it is
considering an option to equip some stations with
Western equipment and others with Soviet equipment.
This is technically feasible and offers a way of,
accelerating completion of the pipeline. For example,
Moscow might combine options such as the first and
second options listed in table 3. The Soviet Gas
Ministry has a strong preference for powering gasline
compressors with gas turbines fueled from the pipe-
line, in part because this mode of operation achieves
independence from reliance on outside energy sources
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Probability
of Realization
Cost to
Soviets
Initial
Substantial
Volume a
Full Throughput
Capacity b
Probable
Reliability of
Pipeline Operation
Very High
Low
_
Very High
High
_
High
Moderate
Moderate
Low
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
Figure 2
Relation Between Compressor Power and Gas
Throughput on Large Pipelines (in Percent)
40
20
0
0 20 40 60 80 100
Power Input
and does not reduce local energy supply in the regions
transited. We believe that the use of electric motors
would be avoided by the Soviets because of the need
for new powerlines in Siberia, the drain it would
impose on already heavily taxed power grids in the
western USSR, and the possible difficulties associated
with variable speed control on 12-MW or 16-MW
motors.
Use of Other Pipelines
Moscow may elect to supply some of the gas called for
under the new contracts with West European pur-
chasers through excess capacity in the existing gas
transmission system to Western Europe, and it could
also utilize pipelines in the rapidly expanding domes-
tic trunkline system carrying gas from the huge
Urengoy field to the western USSR. By the end of
1982, the Soviets will have laid three new 1,420-mm
pipelines from Urengoy into the western USSR, ac-
counting for 7,000 km of the 14,000 km of domestic
gas trunklines planned for 1981-85. Through inter-
connections with the existing gas transmission pipe-
line network, or by extending one of the new pipelines
(for example, some 1,300 km from Novopskov to
Uzhgorod), sufficient gas could be diverted from the
domestic system to meet the new export delivery
commitments. This course of action, however, would
result in a somewhat higher shortfall in domestic gas
deliveries than would diversion of Soviet equipment to
the export pipeline.
Adjustment of Gas Delivery Schedules 25X1
West European gas requirements through 1987 are
likely to fall well below the full volume specified in
the contracts. Moscow therefore may be able to adjust
the phasing-in of gas deliveries to some or all of the
West European customers.
Such adjustments would
in turn permit stretching out equipment delivery and
installation schedules. 25X1
Implications for the Soviet Economy 25X1
Since the USSR apparently can meet its commit-
ments for delivering gas to Western Europe despite
the expanded US sanctions, we believe that there will
be little or no effect on the Soviet hard currency
position in the 1980s. The qualifications to this judg-
ment are: 25X1
? Some of the options imply higher hard currency
costs of obtaining Western equipment. West Ger-
man and British turbine manufacturers, for exam-
ple, professed reluctance to rely on Alsthom-Atlan-
tique for rotors because they would be too expensive.
But the added cost would be trivial in comparison
with anticipated revenues from Soviet gas exports,
and Moscow would probably pick up the tab for
some increase in project costs. 25X1
? If project delays were to lead the USSR to ask for a
stretched-out buildup of deliveries through the ex-
port pipeline, the loss of hard currency earnings
could amount to roughly $1.5 billion annually for a
year or two.
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
? Should the.USSR push some gas intended for
domestic use through existing pipelines before the
new export pipeline is ready, it might have to use oil
internally where it had hoped to use gas. The oil
might have to be held back from export to hard
currency countries, resulting in an earnings loss of
almost $200 million for the oil equivalent of each
billion m' of gas displaced.
The principal impact of the sanctions on the Soviet
Union would be added strain on an extremely taut
domestic economy. The diversion of Soviet-made
compressor equipment from the domestic gas trans-
mission system would increase the real cost of the
export pipeline project to the Soviet economy and
would decrease the reliability of the export pipeline.
In the extreme case-denial of all Western compres-
sor equipment coupled with a crash Soviet effort on
the export pipeline-the USSR could lose roughly 30
billion m' of gas production in 1985 because of
reduced compressor power on the domestic transmis-
sion lines. The forgone production would represent
about 5 percent of planned output of gas in 1985 and
somewhat less than 2 percent of planned energy
production.
Moscow clearly would prefer to avoid the disruption
in domestic energy plans that would result from
diversion of equipment to the export pipeline. Some of
the increase in supply of Urengoy gas to the domestic
economy is needed to offset declining gas availability
from the older Ukraine and Caucasus gasfields. The
planners cannot be sure that domestic production
capacity can be geared up quickly enough to supply
compressors for both the export pipeline and the
equivalent of even four of the five domestic lines
planned for 1981-85. If necessary, however, the Sovi-
ets would accept the costs entailed in order to ensure
the expected hard currency revenues from the new gas
sales beginning in 1984. Facing a tight supply of
energy in the mid-1980s, Moscow might be forced to
reduce delivery of fuels to Eastern Europe more
rapidly than it now deems politically feasible. It would
also have to make internal adjustments in planned gas
consumption that could:
? Curb efforts to substitute gas for oil and coal.
? Reduce industrial efficiency, especially in metals
and petrochemicals.
? Intensify competition between sectors of the econo-
my for scarce resources.
The West European Companies and Their Views
The four West European companies at the center of
the storm-those supplying compressor-station equip-
ment for the pipeline-have all been put in a difficult
position by the extended US sanctions. To varying
degrees, they need the sales and jobs offered by the
Soviet contracts, but they also have important
dependencies on the United States. In the absence of
government intervention, most of the firms probably
would obey the sanctions.
Alsthom-Atlantique. Alsthom's role is particularly
important because it is the only West European
company licensed to produce the GE rotors. It is also
subject to rather direct government control because
its maiority shareholder is a state-owned firm.
can produce the rotors without any assistance from
General Electric. When it purchased the technology
in 1980, GE provided all the necessary engineering
drawings and specifications. Alsthom could in fact
produce rotors at an increased rate, but this would
require a fairly costly plant expansion.
If Paris had not ordered it to honor the Soviet
contract, Alsthom-because of reluctance to damage
its 20-year relationship with GE-probably would
25X1
25X1
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
have complied with the sanctions. However, company
officials clearly think the sanctions are unenforceable.
They argue that the licensing agreement with GE
only restricts Alsthom from selling the technology-
not the products-to third parties, and they claim that
the US prohibition cannot be applied retroactively in
any case.
The Soviet contract is not essential for Alsthom. The
company is relatively sound financially, posting a $36
million profit last year. Moreover, the $60 million
contract equals less than 3 percent of the firm's 1981
sales.
AEG-Kanis. As of early August, company officials
had not yet decided whether to supply pipeline tur-
The US sanctions put AEG in a difficult position. It
needs the Soviet contract but is reluctant to jeopar-
dize its US interests.
The $250 million turbine contract is important to
AEG-Kanis-which has 2,900 employees and about
$130 million in annual sales-because its parent
company, AEG-Telefunken, is virtually bankrupt. In-
deed, the parent company cannot survive in its present
form, with or without the pipeline order. Although it
is West Germany's eighth-largest employer (with
96,000 workers), AEG has been on a downhill path
25X1
25X1
25X1
25X1
since the late 1960s. During 1979-81 the parent firm
lost close to $800 million, and a deficit of $225 million
is projected for this year. Loss of the turbine contract
apparently would add about $40 million to this figure.
AEG's directors are currently trying to avert bank-
ruptcy with a complicated restructuring plan that
includes major sacrifices by the banks, the closing of
some facilities and the selling of others, and a large
injection of foreign equity capital. Perhaps in part
because of the sanctions issue, Bonn is deviating from
its free-market principles by providing loan guaran-
tees to assist the rescue effort. 25X1
25X1
Nuovo Pignone. Nuovo Pignone-the general con-
tractor for 19 of the 41 compressor stations and 57 of
the 125 turbines-is still unsure how to proceed. The
firm wants to maintain good relations with GE but 25X1
knows that refusal to meet delivery schedules could
result in substantial penalties.
Despite healthy profits in recent years ($24 million 25X1
during 1978-81), the firm probably cannot afford the
loss of a contract that represents up to one and a half
years' sales. Without the contract the firm would be
stuck with a large pipeline-related inventory, estimat-
government bail-out under a worst-case situation is
possible but, given Italy's massive budget problems, is
far from assured. 25X1
25X1
25X1
Secret 25X1
25X1
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
John Brown. In response to London's order, the
British firm has announced that it will begin shipping
this month the six turbines with GE rotors that it has
onhand. The extended sanctions have put the compa-
ny in a desperate position, and we believe it ultimately
would have shipped the turbines anyway. Failure to
honor the Soviet contract apparently. would cause a
loss of about $250 million. This would force John
Brown Engineering-the turbine manufacturing sub-
sidiary-into bankruptcy, putting 1,700 people out of
work. It also would seriously threaten the survival of
the parent firm, John Brown Ltd., whose net worth is
Rome will sit on the fence as long as possible but if
forced to decide probably will follow the French and
British example.
France. Among the West European leaders, President
Mitterrand has been the most outspoken in declaring
that France will not engage in economic warfare
against the Soviets;, he believes that acquiescing in the
new US sanctions would be a move in that direction.
Paris is convinced that the US claims of extraterri-
toriality and retroactivity are weak. The French also
insist that contracts already concluded must be car-
only slightly greater than $250 million.
On the other hand, violating the US sanctions may
also lead to bankruptcy. John Brown Engineering
relies exclusively on GE components for its turbines,
and US blacklisting could force the company to
cancel non-Soviet orders for turbines stretching out
over the next two years.
Company officials had been playing for time by
seeking a further extension in delivery dates. They
believed that the firm had until the end of August to
begin shipment or face damage claims. The officials
probably still hope for US authorization to ship the
six turbines with GE rotors, in which case they believe
Moscow would let the company renege on providing
the remaining 15 turbines. The order from London to
honor the Soviet contract is the second-best outcome,
in company eyes, because it may open the door for
damage claims against the British Government. F_
The four West European governments reacted to the
sanctions extension with varying degrees of surprise
and anger. They question the extraterritorial and
retroactive nature of the sanctions, which are viewed
as infringing on West European sovereignty. Other
common themes are that the sanctions are inappropri-
ate and will not affect Soviet behavior, that contracts
must be honored, and that the pipeline will be built.
Paris and London have ordered firms in their coun-
tries to fulfill their Soviet contracts, and Bonn has at
least tacitly encouraged AEG-Kanis to do the same.
Secret
ried out.
Paris has ordered Alsthom to proceed with the 40
rotors already under contract.
25X1
25X1
French officials
arsine to see the pipeline completed. If they 25X1
had not ordered Alsthom to go ahead, they would
have pursued some other option, such as joint efforts
with the Soviets to develop separate technology or
revival of the alternate European projects that had
been advanced earlier but rejected by the Soviets in
favor of GE.
West Germany. Government officials have stated that
Bonn cannot allow the US sanctions to force West
German firms to break contracts.
that the government has no authority to force AEG to
move in either direction, but that it would welcome
completion of the contract.
West German leaders were shocked and dismayed by
the sanctions extension, which they regard as a com-
pletely unacceptable intrusion on West European
sovereignty. They are adamant that the pipeline will
25X1
25X1
25X1
25X1
25X1
25X1
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
be completed and have expressed approval of France's
decision to produce the rotors as scheduled. Because
of the traditional West German respect for the sancti-
ty of contracts, they are particularly upset at the
retroactive aspect of the sanctions, and of course they
are concerned about the added problems that may be
caused for the effort to rescue AEG.
25X1
regulations in Britain, and on 2 August London
announced that it would order firms in Britain- 25X1
including three subsidiaries of US firms-to fulfill 25X1
their contracts in direct contravention of the sanc-
tions. 25X1
Bonn officials are worried about the impact on US-
West European relations and thus have downplayed
the sanctions issue in public. For example, Economics
Minister Lambsdorff recently characterized it as
nothin more than a family dispute.
Publicly, the West European govern-
Italy. After some hesitation, Rome finally joined its
European partners in condemning the US action. We
believe that partisan differences within the Spadolini
coalition on the wisdom of buying more Soviet gas
and subsidizing pipeline contracts account for the
initial hesitation and the persistent fuzziness of Italian
positions. After the Foreign Ministry publicly stated
on 24 July that signed pipeline contracts would be
honored, Italian diplomats rushed to assure US offi-
cials that Rome had not yet instructed Nuovo Pignone
to disobey US sanctions. Given domestic political
constraints, Italian officials probably will try to main-
tain an ambiguous position as long as possible. If
Rome is forced to take a clear-cut stand, we believe
the government will follow in the French and British
footsteps.
United Kingdom. London strongly opposes what it
sees as questionable extraterritorial and retroactive
application of US law. Prime Minister Thatcher has
described the US decision as "wrong and ultimately
harmful to US interests." The government has said
that it will not accept the extension of US jurisdiction
and will use whatever countermeasures are available,
including trade restrictions on US firms. Existing
legislation allows it to block applicability of US trade
ments have expressed determination to proceed with
the project, and decisions to go ahead may be made at
any time. 25X1
The Soviets have continued their hardline approach
involving threats of contract cancellation and imposi-
tion of severe penalties against the financially shaky
firms. The Soviet media have also become increasing-
ly vocal in recent weeks. Soviet officials are claiming
that they can equip the export pipeline themselves by
accelerating development and production of their own
25-MW turbine. Such an effort has been endorsed by
the Communist Party and the Council of Ministers. A
joint resolution was adopted on 12 July stating that
gas will be supplied for domestic users in quantities
determined by the Five-Year Plan and for export in
accordance with signed contracts beginning in 1984.
Overcoming the US embargo continues to be seen in
Moscow as a matter of national pride, and workers
are being saturated with patriotic slogans.
We do not believe the Soviets will abandon their West
European equipment connections so quickly, however,
given the current friction between the West Europe-
ans and the United States, their strong preference for
the reliability offered by Western equipment, and the
costs to the Soviet economy of going it alone. The
Soviets probably are confident that a joint Soviet-
25X1
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
 Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
West European solution can still be worked out; their
deadlines have been'set in the past and extended or
ignored;
The Soviets may be planning for the remote contin-
gency that the expanded US embargo will be success-
ful, but they almost certainly do not believe that the
GTN-25 is by itself a viable, short-term alternative.
Despite the risk to domestic gas supply that would be
entailed by shifting smaller turbines from domestic
pipelines to equip the export line, the importance of
substantially increased hard currency earnings could
prompt Moscow to take such a step. The availability
of some Frame V turbines built with the GE rotors
and/or West Euro-
pean manufacturing help with the GTN-25 would
ease the internal burden of any turbine switching.
The West Europeans are beginning to act. Paris and
London have ordered companies in their countries to
honor their pipeline contracts, while Bonn has at least
hinted to AEG-Kanis that it should do the same. West
German banks also have formally signed the $1.1-
billion credit agreement for the pipeline. In addition
to continued attempts to get the United States to
soften or withdraw its sanctions, the West Europeans
appear increasingly ready to take the final= step in
direct defiance of the sanctions and/or to take other
actions' against the United States. Incoming EC Am-
zbassador to the United States, Sir Roy Denman, has
already compiled, a list of possible retaliatory ac-
tions-including legal challenges, withdrawal of sup-
port for US initiatives to liberalize trade in banking
and insurance and to ease the international flow of
investment and dividends, and the imposition of duties
on US agricultural exports to the Community. The
French Government has drawn up its own list as well,
largely involving nontariff restrictions on US exports
Despite the current acrimony, a point of no return has
not yet been reached. The British, West Germans,
and Italians have not yet shipped anything to the
are still working to find a compromise. Moreover,
there still seems to be lingering hope that West
European outcries over the issue will force the US to
lift the embargo.
Final disposition of the rotors will determine the
winner and loser in this political tug of war.
The Soviets undoubtedly feel that if the West Europe-
an contractors can be persuaded to deliver the rotors,
additional petroleum equipment embodying US tech-
nology will pour forth from Free World producers
outside the United States. Many US patents already
have expired, or soon will, and the economic advan-
tage to be gained from copying US equipment and
taking over US markets will not be ignored in West-
ern Europe and Japan. In fact; this form of competi-
tion is already encouraged-and in many cases subsi-
dized-by governments through. provision of
investment capital and concessionary financing for
export sales.
Foreign governments and firms will be reluctant to
disturb historic trade relationships with the United
States. But if corporate survival and national interests
conflict sharply enough with US policy, the legality of
the US sanctions will probably be challenged directly
by legislative or administrative measures or by actions
in unfriendly foreign courts. Should business and
economic conditions become worse, for the West Euro-
pean pipeline contractors, the flood gates holding back
equipment affected by the US embargo would be
opened much sooner.
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
 Secret
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0
Secret
Approved For Release 2008/10/06: CIA-RDP83T00853R000100100005-0