SOVIET OIL PRODUCTION THROUGH 1990: HARD CHOICES AHEAD

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• Document Page Count: 40
• Document Creation Date: December 22, 2016
• Document Release Date: March 17, 2011
• Sequence Number: 1
• Publication Date: November 1, 1986
• Content Type: REPORT

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Directorate of Secret
Intelligence
Soviet Oil Production
Through 1990:
Hard Choices Ahead
P1~7FJCT NUMBER ~~OU~ - O~SD ~~-
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Secret
SOV 86-10051
November 1986
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Intelligence 25X1
Directorate of
Through 1990:
Hard Choices Ahead
Soviet Oil Production
This paper was prepared by
Office of Soviet Analysis.
Division, SOVA
Comments and queries are welcome and may be
directed to the Chief, Economic Performance
Reverse Blank SeCiet
SOV 86-1005/
November 1986
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Summary
Ir~/ormation available
as of 1 S October 1986
was used in this report.
Through 1990:
Hard Choices Ahead
Soviet Oil Production
field in that region is unlikely to commence before 1990.
We believe the USSR will not be able to sustain for long the pickup in oil
production achieved in 1986. This increase-from an average of 11.9
million barrels per day (b/d) in 1985 to 12.2 million b/d during January-
August 1986-resulted from the conjunction of favorable but limited
developments: the return of a large number of idle wells to active status
and a sharp increase in drilling activity. Our best judgment is that oil
production is likely to begin declining sometime in 1987 and by 1990-
even if Moscow doubles investment in 1986-90 from the 1981-85 level-
will reach a rate of about 11-1 /4 million b/d:
? The natural aging and depletion of existing oilfields, exacerbated by
continuing overproduction, severely limits the potential for growth of oil
production in the West Siberian region during 1986-90.
? Although there is potential for the discovery of giant oilfields in the
Barents Sea, none have yet been found. Significant production from any
slows.
With better-than-expected results in drilling and well completions in West
Siberia and marked improvement in oilfield equipment quality and supply,
oil production could remain about 12 million b/d through 1990. On the
other hand, it could fall to about 10-1 /2 million b/d by 1990 if the Soviets
encounter greater difficulties and lower productivities in West Siberian
field development than anticipated, if they are unwilling to continue
boosting investment to provide large increases in drilling and well comple-
tions, and if development of the petroleum potential of the Caspian region
million b/d.
Investment requirements for the Soviet oil industry are soaring, primarily
because of the aging of key West Siberian oilfields and the need to develop
a much larger number of smaller, less productive, and more remote fields.
The Soviets appear committed to maintaining oil output at a high level-
the 1990 target is 12.7 million b/d. Plan data (expressed in percentages)
suggest that Moscow believes investment of roughly 80-85 billion rubles
will meet the oil industry's requirements in 1986-90. We estimate,
however, that investment will have to be about 100 billion rubles-double
the level of 1981-85-to keep oil production from falling below 11-1/4
Moscow will be unable to compensate for lower-than-expected oil produc-
tion with cuts in domestic consumption. Despite substantial efforts to
reduce domestic use, we expect the regime will be able to count on only a
slight decline in oil consumption during this period. The leadership will
Secret
SOV 86-1005/
November 1986
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then be confronted with three options, each of which would have some
adverse effect on Gorbachev's economic agenda. The inevitable competi-
tion between the industrial modernization program and the oil industry for
access to scarce supplies of high-quality steel products, equipment, and
instrumentation will force hard choices:
? Stimulating oil production through increased purchases of Western
oilfield equipment would-barring a turnaround in Moscow's hard
currency position-result in cutting imports of machinery and equipment
for Gorbachev's modernization program, as well as imports of agricultur-
al products and consumer goods.
? Devoting even more domestic investment to the oil production effort and
to the manufacture of oilfield equipment would reduce investment
resources for plant construction and equipment in other industries.
? Living with less oil production would substantially reduce hard currency
earnings, with direct and indirect adverse consequences for Gorbachev's
programs (less Western machinery for the modernization program and
fewer high-quality goods for consumption, possibly affecting worker
incentive).
The degree to which Moscow will be willing to buy more oilfield equipment
from the West is not clear. While Western technology and equipment
could reduce (or even prevent) some bottlenecks, we expect that purchases
of equipment and technology from the West during 1986-90 will be made
on a highly selective basis and at a slower pace than was in prospect before
the fall in oil prices. Since late 1985, Moscow has cut back and deferred or-
ders of some equipment and has vigorously pursued efforts to seek lower
prices, better financing, and expanded countertrade agreements.
The themes of several of Gorbachev's speeches suggest that he is counting
on the revitalization of the Soviet manufacturing industry to improve the
general supply and quality of domestic oilfield equipment. From a
technological standpoint, Western technology and equipment are not
critical for most current Soviet oilfield operations. Much of the oil
industry's effort will be concentrated in West Siberia, where tasks of
building infrastructure and accelerating the development of new oilfields-
while formidable-do not call for sophisticated technology.
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In all likelihood, however, Soviet equipment producers will be unable to
keep up with the rapidly growing demand for oilfield equipment, increasing
the pressure on Moscow to turn to foreign suppliers. Some relief may be
available from Eastern Europe, notably from Romania, but purchases from
the West remain an option. Soviet buyers are currently engaging a wide
range of Western suppliers in discussions for the purchase of oilfield
equipment. Although such discussions are not novel, the unusually wide
range of suppliers being contacted and the stress on financing terms
suggest that the Kremlin is orchestrating its commercial inquiries to
extract price and financing concessions
Moscow's willingness to follow up these conversations with actual contracts
remains problematical. Proposals to purchase Western oilfield equipment
will be competing with requirements of the high-priority industrial mod-
ernization program, as well as with equipment needs critical to the coal and
natural gas development programs. But the continued heavy need for oil as
both a prime energy product and a major source of hard currency will
increase pressure on Moscow to spend whatever is necessary to keep oil
output above 11 million b/d. Given Soviet hard currency problems,
signings of substantial contracts would be a clear signal of the importance
attached to maximizing oil production in the short and medium term.
(Fortuitously, the current worldwide depression in the oilfield equipment
industry will probably reduce the cost and leadtimes for whatever equip-
ment is purchased.)
Regardless of the approach taken to cover for domestic production
shortfalls, the Soviets will continue to obtain from the West some
specialized equipment and technology that they cannot manufacture
themselves or acquire from Eastern Europe. Emphasis will be on equip-
ment for offshore operations and on specialized corrosion-resistant equip-
ment and processing plants essential to exploitation of the deep, high-sulfur
oil and gas fields of the Pre-Caspian Depression.
In all likelihood the leadership will be increasingly frustrated by a growing
gap between planned and actual oil production. The industry almost
certainly will require more investment than is currently planned. The
production outlook is made more complex and volatile by the questionable
reliability of Soviet reserve estimates and the uncertain outlook for West
Siberian new-well flows, which have fallen rapidly in recent years. If
production begins to fall more rapidly, moving Moscow in the direction of
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the worst case scenario, the USSR would stand to lose nearly all revenues
from oil exports to hard currency countries and would be forced to make
major cuts in oil exports to Eastern Europe. Hard currency is essential to
purchase grain, foodstuffs, and other desired imports from the West, and a
continuing supply of oil to Eastern Europe is important for maintaining
economic and political stability there. We believe that Moscow would
devote even more investment to its oil sector in an attempt to forestall such
developments. In this circumstance, investment in other parts of the energy
sector-as well as in transportation, the modernization program, agro-
industry, and perhaps even the military-would be subject to cuts.
After 1990, Soviet oil production could be in an even more precarious
position. National oil output could fall sharply, and the Soviets would need
to bring on line substantial capacity from a new oil region, perhaps the
Barents Sea. If Moscow elects to expedite development of any offshore
field in the Barents, its only realistic option would be to rely on Western
technology and equipment. An effort to establish a domestic capability to
manufacture offshore arctic equipment would create further bottlenecks in
equipment supply and consume already scarce investment resources.
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Soviet Oil: Increasing Costs
1
The Outlook for Soviet Oil Production During 1986-90
2
West Siberia: Centerpiece of the Soviet Oil Industry
4
Plans for Tyumen' Oblast
8
Most Likely Outcome
8
High Case
9
If the Bottom Drops Out
9
Production From Tomsk Oblast
11
Oil Production in Other Regions
12
Implications for the Economy
14
Can Oil Consumption Be Reduced?
14
Responding to the Shortage
16
Will Moscow Increase Imports of Western Equipment
and Technology?
16
Can Moscow Afford To Throw More Rubles at Oil?
16
Will Moscow Opt for Lower Oil Production?
18
B. Prospects for Gas Condensate Production
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the usual forecast with confidence bounds.
Forecasting Soviet oil production is a far less exact exercise than forecast-
ing production in the West. Lack of information on important variables-
the entire gamut from proved reserves through field development-plays a
part. The uncertainty is compounded by lack of evidence as to the strength
of Moscow's commitment to attaining planned oil-production targets in the
face of inefficiencies and soaring costs that would make Western oilmen
and their bankers blanch. Because of these uncertainties, we do not present
Instead, we present our approximation of the most likely outcome, together
with two scenarios on the basis of alternative assumptions relating to the
physical aspects of oil production and to the policy choices affecting the
outcome. Our "high case" combines positive developments in the field with
an assumed willingness of the leadership to commit to oil production
substantially more investment and manpower than currently planned
even at the cost of some impairment of other programs. Our "worst case"
output projection entails amore-rapid-than-expected deterioration of
conditions in the field and a leadership decision to accept the consequences
of refusing to pay the steeply escalating costs required to sustain oil output.
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Soviet Oil Production
Through 1990:
Hard Choices Ahead
The Soviet oil industry is one of the oldest in the
world. Beginning with hand-dug wells in Baku in the
early 1800s, the Soviet industry has risen to first place
in world oil output (averaging 11.9 million barrels per
day in 1985) while ranking second in oil exports
(about 3.4 million b/d).' Its rise to preeminence was
fueled by rapid output growth during the 1960s and
1970s.
Before World War II, about 70 percent of Soviet oil
production was concentrated around Baku. This phase
of Soviet oil development came to an end in the mid-
1950s when the industry made both a quantitative
and a geographic leap from the modest production
levels of Baku to the large, productive oilfields of the
Volga-Urals region (see foldout map). Output from
the Volga-Urals region, however, peaked in 1975, and
by 1980 average annual output fell roughly 200,000
b/d. Fortunately for Moscow, the development of
prolific giant and supergiant oilfields in West Siberia
allowed national output to show large increases
through 1980.
During the late 1970s and early 1980s, however, West
Siberian production became increasingly complicated
and expensive. Average flows from new wells fell from
over 1,000 b/d in 1975 to 480 b/d in 1980 while
investment rose by 75 percent. The rate of growth of
Soviet oil production slowed to less than 1 percent per
year by 1981-83. In 1984 and 1985, despite intensive
efforts to stabilize oil output, national production fell
roughly 100,000 and 300,000 b/d, respectively.
Costs will continue to rise during 1986-90 as the
Soviet oil industry deals with three fundamental
trends: a growing water cut (proportion of water in the
fluid produced from oil wells); escalating drilling
requirements; and the need to develop a much larger
number of smaller oilfields that are less productive,
more complicated, and more remote. With increasing
numbers of new wells being drilled and old wells
"watering out" rapidly because of both aging and
waterflooding, the industry's requirements for artifi-
cial lift of fluid-and, concomitantly, for well-repair
services-will escalate rapidly (figure 1).Z Also, to
keep production in the range of 11-12 million b/d
during 1986-90, we estimate that Soviet oilmen will
have to perform roughly 190-200 million meters of
development drilling~ompared with 125 million me-
ters during 1981-85. Because of declining new-well
flows, drilling requirements are growing rapidly. In
1990 alone the Soviets will be required to drill about
50 million meters-roughly equal to the total drilling
performed in 1976-80.
As a result of these factors, investment in the oil
industry has risen rapidly in recent five-year plan
periods, from about 18 billion rubles during 1971-75
to 29 billion rubles during 1976-80 and to 50 billion
rubles during 1981-85. Analysis of past investment
trends as a function of drilling, estimated fluid-lift
requirements, and major planned inputs already an-
nounced for the oil industry leads us to estimate that
oil industry investment during 1986-90 will have to
double-to about 100 billion rubles-if Moscow is to
keep oil production near 11-1/4 million b/d (appendix
A)?' ~
' The substantial impact of each 1-percentage point change in water
cut on total fluid-lift requirements may be illustrated by the Soviet
oil industry's experience in 1980. If the average water cut had been
57 percent, as originally planned, the 12.1 million b/d of oil output
would have implied a total fluid production of 28.2 million b/d.
With the 58-percent water cut in the revised plan, however, the
implied production of total fluid for the year amounted to 28.8
million b/d. A 1-percent change in water cut thus implied the
lifting of an additional 660,000 b/d of fluid. 0
' Oil industry investment of 100 billion rubles would represent 10
percent of total Soviet investment during 1986-90; the 50-billion-
ruble increment over the first half of the decade would account for
30 percent of the planned increment in investment for the economy
as a whole. ~
' Oil production reported by the USSR includes natural gas liquids.
Of the total oil exports, roughly 260,000 b/d were acquired by the
USSR (primarily in exchange for arms) from Middle Eastern
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Figure 1
USSR: Oil Well Fluid Production, 1970-90
Although General Secretary Gorbachev would doubt-
less prefer to see the oil sector claim a smaller
segment of the investment "pie," existing plans for oil
production and investment indicate that Moscow-at
least for now-will provide the resources necessary to
attempt to keep oil production at a high level. Oil
industry investment is planned to increase 31 percent
in 1986, to almost 15 billion rubles. This steep
increase follows an 11-percent hike in 1985. During
1986-90, Moscow plans to increase overall energy
investment 35 percent over the 1981-85 investment
level. Because of the pressing investment needs of the
oil sector and the sharp increase in 1986 investment,
we believe that the 35-percent increase in energy
investment is not proportionally divided among the
energy sectors on the basis of past shares but includes
a larger share for oil. In a recent party congress
speech, it was reported that planned oil industry
investment was increased 10 percent above the pre-
liminary guidelines. We estimate that Moscow is
planning to invest roughly 80-85 billion rubles in the
oil sector during 1986-90. This level of investment
appears far short of what we estimate is needed to
keep production near 12 million b/d, much less to
meet the plan of 12.7 million b/d.
Despite the substantial growth in oil production evi-
dent so far this year, the Soviet press continues to
criticize the industry for little improvement in produc-
tivity of oilfield operations. (Soviet economic statistics
show that productivity in the oil industry during
January-July 1986 was down about 2 percent from
last year's level.) Without improvements in labor
productivity, Moscow will have to increase the num-
ber of personnel working in the oil industry. But
attracting additional manpower to work in the oil-
fields, particularly in West Siberia, will not be easy.
Soviet press reports indicate that one West Siberian
oilfield construction association annually loses 40
percent of its work force. Gorbachev indicated in his
September 1985 speech in West Siberia that the lack
of adequate social infrastructure in this region is a
major cause of high labor turnover. To attract and
retain more workers, Moscow will have to follow
through on plans to boost investment for housing and
the social infrastructure.
The Outlook for Soviet Oil Production
During 1986-90
Moscow has targeted production to rise to 12.7
million b/d in 1990, a goal almost unchanged from
those set in the two previous five-year plans. Although
oil production has picked up to 12.2 million b/d in the
first eight months of 1986 (see inset), we believe that
the USSR will not be able to sustain this growth. We
project that nationwide oil production will begin
declining again in 1987 and will reach 11-1/4 million
b/d by 1990. Under our "best case" scenario, Moscow
would be able to just maintain current production
levels of about 12 million b/d through 1990. This
would depend upon the Soviets developing a large
number of small and remote West Siberian oilfields,
reducing the number of idle wells in West Siberia by
improving the quality and supply of oilfield equip-
ment, and developing sour oil and gas condensate
fields in the Pre-Caspian Depression. Our "worse
case" scenario projects a fall in oil production to
10-1/2 million b/d by 1990 (see table 1).
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Table 1
Alternative Estimates of Soviet
Oil Production in 1990 a
Why Has Output Risen in 1986? We estimate that
Soviet oil production will average about 12.2-12.3
million b/d in 1986. This year's rise has resulted
from an increase in Tyumen' output-realized large-
ly by returning idle wells to production, by sharply
stepping up the pace of drilling and well completions,
and by improving gas-lift operations at the region's
two largest oilfields, Samotlor and Fedorovo. In
1986, the increase in drilling in Tyumen' will proba-
bly exceed S million meters, a sharp increaselrom
the 1983-85 annual increments, which we estimate
were in the range of 1-2 million meters. To paylor
the increase in drilling and well-repair activities,
Moscow is increasing investment in the oil sector by
31 percent in 1986. Comparison of overall investment
and drilling activity in Tyumen'for 1984 and for
1986 suggests that the investment cost per meter of
drilling in Tyumen' has remained level or has risen
slightly. Further increases in drilling will require at
least proportionate increases in investment.
Outlook for 1987. The tasksfacing the Soviet oil
industry next year will be moreformidable. The press
reports that most of the idle wells returned to
production in 1986 required only minor repairs and
that it will be more ditgicult to bring back on line the
remaining idle wells. As the percentage of wells
awaiting repair or pumps is reduced to a normal
level, the burden of providing oil to offset depletion
will fall increasingly on development drilling and the
commissioning of new wells. The preparation of new
drilling sites will entail substantial construction work
to provide new well pads, powerlines, and other
production-related infrastructure.
Moscow may be able to sustain some growth in
production in 1987 with a continued heavy commit-
ment of investment. However, as the increase in the
number of wells coming on line slows and the repair
requirements for maintaining an ever-increasing num-
ber of wells escalate, production will eventually level
oJf and begin to decline before the end of the year.
Most Likely
Case
High Case
Worst Case
USSR total
11.25
12.1
10.5
West Siberia
7.35
7.97
6.83
Tyumen'
7.05
7.65
6.55
Tomsk
0.30
0.32
0.28
Other regions n
3.90
4.10
3.70
a The estimates for Tyumen' output are derived in table 2; for
Tomsk, from the current production level and extrapolation of past
trends; and for other regions, from decline-curve analysis.
b Includes gas condensate production from the North Tyumen'
gasfields.
To increase oil output, we believe the Soviets would
need to discover and develop a supergiant or several
giant oilfields. Any substantial impact on production,
even if such a field or fields were to be discovered
tomorrow, would be highly unlikely in the 1986-90
period because of the leadtime necessary for develop-
ment. There is some potential for discoveries of giant
oilfields in the Barents Sea, but significant production
from any field in that region is unlikely to commence
before 1990 (see inset).
To provide the foundation for these estimates, we first
examine the outlook for West Siberia. Despite the
growing production difficulties there, the leadership is
reportedly planning to increase dependence on West
Siberian production from the current level of 60
percent of nationwide oil production to 70 percent by
1990.
~We then review the situation
in the other oil regions, where prospects are dominat-
ed by factors affecting the rate of decline of produc-
tion in the Volga-Urals region.
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The acceleration of Soviet exploration in the Barents
Sea during the last two to three years suggests that
Moscow is engaged in a determined ejjort to assess
the sea's oil potential. The dre;f't guidelines of the
12th Five-Year Plan (1986-90J call ,for the develop-
ment of the oil resources of the L/SSR's continental
shell: Although not stated explicitly, we take this to
mean that the Soviets will begin to develop the oil
resources of the Barents Sea during this period. Even
so, in view of the long leadtimes involved (10 to 1 S
years.for major Offshore development), Barents Sea
oil will not have much of an impact on the Soviet
energy picture until the 1990s.
Dur analysis of Soviet technical literature
suggests that massive amounts of po-
tentially recoverable oil (25-30 billion barrels) exist
in the Soviet portion of the Barents Sea. While the
indicators point to large potential resources, however,
we do not have information on the size of the
individual reservoirs that may exist. During the last
West Siberia: Centerpiece of the Soviet Oil Industry
West Siberia has been the source of increased oil
production for about a decade, with annual produc-
tion in 1971-80 growing at an average annual rate of
25 percent; in some years the increment exceeded
600,000 b/d (see figure 2). The ease of achieving this
rapid growth led many officials to believe that West
Siberian output would ultimately reach 10 million
b/d. A false sense of security engendered by past
successes-which is partly responsible for many of the
region's current problems-has yet to be fully
dissipated.
During the period of rapid production growth, explor-
atory drilling came to be regarded as a high-cost
operating expense that could be eliminated because of
a large "identified," albeit untapped, reserve base.
Exploration drilling in the USSR stagnated and, by
1980, was equal to only 30 percent of the volume of
several years a significant number of seismic and
regional aeromagnetic surveys, as well as shipborne
gravimetric, bottom-sounding, and sampling studies,
have been conducted. A number of wells have been
drilled and several gas strikes and one oil strike have
in the Barents Sea.
The Barents Sea poses formidable challenges to any
oil development ei~`ort. Storms, high seas, fog, snow,
and-in some areas pack ice hamper exploration
and will increase the d~culty of maintaining drilling
and pumping equipment. Most of the exploration
activity has been concentrated in the southern portion
oJ'the sea in fairly shallow water (100 to 250 meters),
and the Soviets would almost certainly develop this
area.f~rst. Even under the best of conditions, this
would entail an effort far offshore in arctic waters on
a scale never before attempted by the Soviets. Never-
theless, we see nothing that would make the develop-
ment of southern Barents Sea oil technologically
impossible. Producers in the North Sea have been
operating for years in conditions no worse than those
development drilling in West Siberia (figure 3). Un-
fortunately for the Soviets, their exploration efforts
failed to discover new giant, highly productive depos-
its, and developed oil reserves were being depleted
faster than they could be replaced by the smaller
fields that were being proved.
With West Siberian oil production largely dependent
on output from a small number of aging oilfields, oil
policy relating to West Siberia was at a critical
juncture during the late 1970s. Maximizing produc-
tion over the long term would have required Moscow
to (1) slow the growth in production from existing
fields in order to improve prospects for ultimate
recovery and (2) sharply increase the exploration
effort while simultaneously developing infrastructure
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Figure 2
USSR: Oil Production in
West Siberia, 1965-85
0 1965
Figure 3
West Siberia: Development Versus
Exploration Drilling, 1970-85
85 0 1970
for bringing more of the smaller fields on line. The
Soviets, however, took the opposite approach. Output
from existing fields was maximized with little effort
to step up exploration or bring more of the smaller
fields on line. We believe that they chose this course
of action for several reasons:
? Accelerating oil production at the established fields
was relatively easy and inexpensive with a quick
payback.
? Maintaining growth in oil production at a time
when faster-than-expected production declines were
occurring in regions outside West Siberia was im-
portant for national prestige.
? High-priced oil was an attractive export earner at a
time when the Brezhnev regime was counting on
Western equipment and technology to improve the
industrial base and Western foodstuffs to back
Brezhnev's commitment to better the consumer diet.
? Reserve estimates provided by the geologists ap-
peared more than adequate to permit further growth
of production in West Siberia.
? Using oil allowed Moscow to meet easily the rapidly
growing energy demand and to pursue faster indus-
trial growth with only modest additional conversion
and infrastructure costs.
Despite large increases in the volume of drilling and
in the number of oil wells brought on line, growth in
production slowed considerably during the early
1980s (see inset and figure 4). In 1983, West Siberia's
oilmen failed for the first time to reach the planned
production goal. In 1984, regional production rose less
than 150,000 b/d. Despite this poor performance, the
1985 plan called for substantial growth-to about 8
million b/d. However, West Siberia's 1985 output fell
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Figure 4
Key Trends Affecting Tyumen' Oil Production
Water Cut Rising Rapidly Average New-Well
Flows Down Sharply
Percent of fluid
from producing wells
~~ Estimated.
b From Soviet statistics on availability of "explored" reserves.
Average Size of Newly Share of Oil Output
Discovered Oilfields From Artificial-Lift
Substantially Smaller Than Wells Up Sharply
in Earlier Periodsb
100
100
,~
'~"::
Artificial
~' lift
r
50
50
~v~,
x~
:,
Free
flowing
1961-65 66-70 71-75 76-80 0
Has West Siberia Seen Its Heyday?
West Siberia is by any standard a mature oil-
producing region. Because output lrom most of the
best oilfields has peaked, overall production capacity
remains virtually level even though the Soviets are
adding wells from less productivelields at increasing
rates (so jar in 1986, about 40 percent above last
year's pace). At a comparable age, the Volga-Urals
region experienced peak output, which has been fol-
lowed by an irreversible decline. Although such an
outcome in the near term is not aloregone conclusion
for West Siberia, the era of "easy oil" has certainly
come to an end. There are more wells to drill; more
pumps to install and maintain; more water to pump,
separate, and reinject; and morelields to develop in
the attempt to sustain West Siberian oil production.
Developments associated with the aging oj'Samotlor,
the USSR's largest oilfield, were the principal cause
for last year s decline in West Siberian oil output.
Moreover, the 'Samotlor disease'=a vicious circle
olflagging output lrom giant oilfields and ever-
increasing use oj' manpower and equipment in an
attempt to sustain total oil output-is spreading
throughout the West Siberian oil region. At various
times in 1985, as many as one-third of Samotlor's
wells were idle. The high number of inactive wells
was caused by unreliable pumping equipment and
shortages of well-repair brigades. The high water
content, in turn, causes additional complications
(more corrosion of piping and equipment, and more
need,for storagelacilities and separation equipment
to handle the water) that boost both the labor and
capital intensity of the oil-production effort. r
Percent of
producing wells
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short of the 1984 production level by 240,000 b/d.
Until 1984, West Siberia's annual increments more
than offset all the regional declines elsewhere in the
USSR. The 1985 decline in West Siberian output was
chiefly responsible for national output dropping
300,000 b/d (see figure 5).
Growing Kremlin concern about problems with oil-
production operations in Tyumen' Oblast-which
accounts for about 96 percent of West Siberian
output~ame to a head in 1985.^ Despite the replace-
ment of the oil minister, the head of Tyumen' oil
operations, and numerous other local oil industry and
party officials, Gorbachev observed little or no im-
provement in the performance of Tyumen' oil opera-
tions from February through late August 1985. In
early September 1985, he traveled to Tyumen' on a
personal factfinding mission. Gorbachev-indicating
that no quick solutions to the region's oil problems
were at hand~riticized Tyumen' party and industry
officials for failing to develop enough new oil deposits
and for inadequately preparing for the transition from
the era of "golden gushers" to the era of forced
Figure 5
USSR: Year-to-Year Change in
Oil Production, 1966-85
-4001966 70
extraction by artificial lift.
Gorbachev also noted that West Siberia's explored
reserves had declined steadily over the past decade
and that the region's current ratio of reserves to
production (reserves expressed as a multiple of 1984
oil output) was down to the nationwide average for the
oil industry. He also indicated that past decisions had
substantially reduced the potential for raising output
at Tyumen' as planned.
There are no easy options available to boost oil
production. Active and persevering high-level inter-
vention will be necessary to ensure that the oilfield
equipment industries are able to increase the supply of
equipment. Tightened labor discipline and better
management could lead to more efficient oilfield
operations. Nonetheless, because of the confluence of
several negative factors affecting Tyumen' output, the
Soviets will have to work efficiently and hard just to
minimize production declines during 1986-90:
West Siberia
USSR total
? Production is overly dependent on output from a
dozen giant, now aging oilfields that were developed
during the late 1960s and early-to-middle 1970s.
Soviet geologists no longer expect the discovery of a
"second Samotlor."
? New capacity will have to come from expanding
development northward and exploiting 60 to 75
remote fields (compared with 13 new field commis-
sionings during 1981-85) that are smaller, more
complicated structurally, and far less productive
than the oilfields developed up to 1980.
? Average flow from new wells has steadily
declined-from 1,250 b/d in 1975 to 490 b/d in
1980 and to about 220 b/d in 1985-and is still
headed downward.
? Tyumen' Oblast lies west of the Ural Mountains and comprises
most of West Siberia, including the Middle Ob' region where the
oilfields are concentrated-among them the supergiant Samotlor
oilfield (one of the world's largest).r
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? Technically inappropriate water injection practices
and excessive infill drilling have caused the share of
water produced with oil to rise to 50 percent,
increasing the demand for reliable pumping equip-
ments By early 1986, about 80 percent of the
producing wells were operating with artificial-lift
equipment. Maintaining consistent production oper-
ations will be much more difficult than in the past
because six out of seven new wells in Tyumen'
require pumps from the onset of production. Not
only shortages of equipment but also a long history
of unreliability of Soviet pumps make it almost
certain that maintenance requirements will be se-
vere, and servicing problems will be aggravated by
the harsh climate and remoteness of the West
Siberian region.
? The infrastructure (water injection facilities, oil
treatment facilities, gathering pipelines, storage
tanks, roads, and electric powerlines) in Tyumen' is
reportedly four to five years behind the level needed
to support efficiently the current production effort.
Moreover, much of the oil-producing infrastructure
is being weakened by corrosion.
Plans.for Tyumen' Oblast. Press reports indicate that
the Soviets have endorsed a plan to produce about 8.4
million b/d of oil in Tyumen' in 1990-well over 1
million b/d above the level of 7.1-7.2 million b/d we
estimate for 1985. The Soviet press has also reported
plans to double the number of existing wells and to
double the amount of development drilling over that
achieved during 1981-85. These reported plans imply
that Gorbachev is not altering the thrust of oil
production policy for Tyumen' during 1986-90 and is
continuing to emphasize production growth despite
the high and rising cost. The planned 1.3 million-b/d
increment over 1985 output is about as large as the
increment posted during 1981-84. Given the existing
state of affairs in Tyumen', the current plans are more
ambitious and less likely to be realized than any in the
past.
wells and, thereby, reducing the well spacing. This practice in-
creases oil production in the short term but reduces reservoir
pressure and shortens the average life of the wells in an oilfield.
Most Likely Outcome. Our best judgment is that
output from Tyumen' will increase in 1986 and then
fall slowly to roughly 7 million b/d by 1990, despite
an enormous effort to raise production and some
success in improving management and the quality of
materials and equipment:
? We judge that Tyumen' oilmen will probably
meet-but not exceed-the well-drilling plan. Ex-
ceeding the development drilling targets during
1986-90 will be more difficult than in the past, not
only because of the huge increase in drilling called
for but also because the drilling effort will be spread
over a larger number of fields in remote areas
lacking infrastructure. The producing horizons in
the new fields are deeper, a factor that will slow the
drilling effort.b
? We believe that the Soviets will have difficulty
maintaining 85 percent of their wells in active
status-especially during a period when the total
well inventory will probably double. The Soviet
press reports that the number of well-repair bri-
gades will also increase by roughly 50 percent
during 1986-90, but press reports and analysis of
the activities of these brigades show little, if any,
improvement in their productivity.
? The need to proceed with existing but lagging
infrastructure development programs and to cope
with intensifying corrosion problems that are dam-
aging older production-support facilities will drain
material and labor resources away from the effort to
bring new fields on line. We judge it unlikely that
Tyumen' oilmen will be able to bring on line 75 new
fields planned for introduction during 1986-90.
During 1981-85, the Soviets introduced only 13 of
b Many of the producing horizons in fields currently being brought
on line are below 3,000 meters. The efficiency-measured in meters
drilled per rig per month-of Soviet turbodrills drops about 30
percent at depths greater than 3,000 meters because of the
progressive loss in pressure of the fluid that operates the turbine.
The average well depth in Tyumen' has been increasing-from
about 2,200 meters in 1975 to about 2,600 meters in 1985-and we
estimate that the average depth will be about 2,800 meters in 1990.
25X1
25X1
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26 fields scheduled. The Soviet press called for an
accelerated effort in 1985, but later reported that
fields were still being brought on line too slowly due
to infrastructure constraints. During January-June
1985, Tyumen' oilmen met only 5 percent of the
plan for production from new fields.
? We believe that the Soviet oilfield equipment indus-
tries will be hard pressed just to supply the neces-
sary increases in equipment. Soviet press reports
indicate that key plants in the Baku region are
already operating near capacity. It is unlikely that
the oilfield equipment industries can effect a
marked improvement in quality while engaged in an
all-out effort to increase the volume of equipment
produced.
Table 2 illustrates the assumptions and implications
of this projection as well as those of the following
cases.
High Case. In our judgment, the best possible out-
come for Moscow from aforced-draft effort would be
to stabilize Tyumen' production at approximately 7.6
million b/d. Soviet oilfield-equipment industries
would also have to improve markedly both the quality
and quantity of equipment supplied (see inset). To
stabilize output at this high level, the following would
have to occur:
? The plan for development drilling would have to be
exceeded and roughly 38,500 new production wells
brought on line (nearly all will require pumping
equipment more than double the number of wells
brought on line during 1981-85.
? The Soviets would have to establish acapability-
by increasing the reliability of their pumping equip-
ment and improving their ability to service and
repair wells-to keep almost 90 percent of their well
inventory active. (In contrast, according to the
Soviet press, during mid-1985 Tyumen' oilmen were
able to keep only about 80 percent of the production
wells active.)
? Tyumen' oilmen would have to equip and bring on
line at least 75 new oilfields during 1986-90-
roughly six times as many new oilfields as were
The incremental investment requirements for this
result could amount to 15 billion rubles. With invest-
ment tight in the energy sector as well as in the
economy as a whole, a decision to provide such an
amount and sacrifice other important plan targets
would most likely stem from a pressing need to earn
hard currency.
/'the Bottom Drops Out. There is a chance that the
pace of drilling will stabilize rather than increase due
to factors such as shortages of drilling and well-
completion equipment, lack of production infrastruc-
ture (particularly well pads) in new fields, and dimin-
ishing opportunities to conduct infill drilling at the
established fields. In this circumstance, oil production
could fall sharply by 1990.
The huge increase in drilling during 1981-85, together
with the slow pace at which new fields were brought
on line, points to substantial infill drilling during the
period. Nearly all of the major fields are at least 10
years old and have probably been drilled extensively.
While we do not know the actual extent to which infill
drilling is becoming impractical at the older fields,
Tyumen' oilmen could, in the near term, face a
situation in which the bulk of planned development
drilling would have to be concentrated in smaller new
fields.'
Tyumen' oilmen claim that central planners do not
understand the seriousness of the situation. Invest-
ment allocations for new field development are report-
edly inadequate because funds are being allocated on
the basis of costs encountered in earlier field develop-
ment and are not taking into account the rapidly
escalating costs associated with development of the
more remote and smaller fields.8 Inadequate field
' Press reports indicate that the increased pace of drilling evident so
far in 1986 is rapidly reducing the number of prepared well pads
available for drilling, particularly at new fields.
a Even with large investment allocations, new field development will
proceed slowly at first. Before field production can begin to grow,
field infrastructure-well pads, storage tanks, oil separation facili-
ties, electric transmission lines, and gathering pipelines-must be in
place. Creating this infrastructure is atime-consuming process
made more difficult not only because of the crisscrossed lines of
responsibility in the bureaucracy but also by the severe northern
climate and swam terrain that is often impassable except in
winter. ~~
introduced during 1981-85.
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Table 2
Estimates of Oil Production in Tyumen' Oblast
Calculation of Capacity Added
(Based on 14-Percent Depletion Rate) a
Average new-well flow (barrels per dayJ 204 190 175 160 150
Capacity added (million b/dJ 1.306 1.273 1.225 1.168 1.14
Percent remaining in 1990 0.547 0.636 0.740 0.860 1.000
Capacity remaining in 1990 0.714 0.810 0.906 1.004 0.570
(million b/dJ
Net capacity added, 1986-90 4.004
The Estimates
Depleted by 1990 (million b/dJ -4.6
Net capacity added, 1986-90 (million b/dJ 4.0
1990 total capacity (million b/dJ 8.1
Share utilized 0.87
1990 oil production (million b/dJ 7.05
Assumptions Drilling plan is met.
? Share of well inventory in active status remains at mid-1986 level
of roughly 87 percent.
? New field development accelerates but falls short of plan.
? Equipment supply increases but quality remains a problem.
? Moscow provides investment in the range of 95-100 billion rubles.
a We believe that our production estimates fairly represent the
range of possibilities as to how many wells the Soviets could add
during 1986-90 and what share of the well inventory they can
maintain in active status. The estimates, however, are particularly
sensitive to two key variables that were projected on the basis of
past trends: the depletion rate and new-well flows. An increase in
the depletion rate of 1 percent decreases the 1990 production
estimate by roughly 300,000 b/d. Also, an increment of 10 b/d in
1990 new-well flows would raise the production estimate about
100,000 b/d.
infrastructure would constrain development drilling, of the East European economies in order to protect
and the full impact of declining well flows would be priority programs elsewhere in the economy. Such a
reflected in the region's oil output. Under these decision would be contrary to the leadership's reaction
circumstances, Tyumen' output could fall to about 6.5 to past crises in oil production, when heroic measures
million b/d by 1990. were adopted to provide manpower and equipment.
But in 1986-90, the costs of extraordinary measures
The "worst case" scenario-with its assumption of will be escalating from already high levels. In a
limited investment funding-presumes that Moscow
would be willing to suffer the implicit negative conse-
quences for its hard currency revenues and for support
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Table 2 (continued)
? Drilling plan is exceeded.
? Share of well inventory in active status increases to 90 percent.
? New field development accelerates and exceeds or meets plan.
? Equipment supply and quality improve markedly.
? Day-to-day operations improve through better management; as a
result, drilling productivities increase, the quality of well repairs
improves, and new field development is smoother and on
schedule.
? Moscow provides about 125 billion rubles (about 50 percent more
than planned), probably impairing programs elsewhere in the
energy sector or in the economy.
situation where other major programs in the economy
(such as modernization of industry and agriculture)
might encounter substantial obstacles and require a
greater infusion of investment, Moscow's analysis of
the trade-offs might lead to acceptance of the lower
level of oil production.
Production From Tomsk Oblast. The remaining 4
percent of West Siberia's oil production comes from
Tomsk Oblast. Production from Tomsk began in 1966
? Drilling is constrained; plan is underfulfilled.
? Share of well inventory in active status falls to 83 percent because
of low reliability of equipment.
? New field development is slow.
? In 1988-89, Moscow decides against continuing large annual
investment increases, and total investment for 1986-90 is held
down to 80 billion rubles or somewhat less. Moscow accepts low
oil production, along with its negative consequences for hard
currency revenue and support of East European economies, in
order to protect priority programs elsewhere in the economy.
at fields just south of Nizhnevartovsk and has grown
slowly. During the late 1970s, production from more
remote fields near Novyy Vasyugan came on line. In
1985, output was 260,000 b/d-60,000 b/d more
than in 1980. The Soviet press reports a 1990 produc-
tion plan for Tomsk of 310,000 to 320,000 b/d. We
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The Quality of Soviet Oilfield Equipment:
Speaking for Itself'
In the past, Soviet oilfield equipment served most
needs only because the oilmen's sheer persistence
compensated for many shortcomings in quality. Re-
cently, however, the volume of equipment being made
available to the oil industry has become increasingly
inadequate in relation to needs. Moreover, oil pro-
duction at Tyumen' has entered an era in which
sustaining production is becoming critically depen-
dent on the availability of better quality equipment.
More efficient drilling and production of.fluid from
oil wells are needed to offset the impact on produc-
tion of deeper drilling, lower natural well.flows, and
higher water cuts. As the record demonstrates, much
remains to be done by Soviet manufacturing indus-
tries if they are to provide the requisite equipment:
? During a 1984 survey of the quality of oilfield
equipment produced in Baku, the following was
reported: Every second piece of equipment used for
well-repair work was delivered from the factory
with "serious defects."Every.ftlth well-completion
unit was found defective.
? A leading Soviet economic journal reported that the
electric cable for submersible pumps is designed
poorly and `often" does not work "the first time"
the pump and cable are lowered into the well. By
November 1985, defective cable was responsible for
idling more than 400 wells, and 3,000 kilometers of
defective cable had accumulated in the Tyumen'
oil producing region.
? In response to a question about the quality of well
casing from the Sumgait pipe plant, a driller an-
swered, "We just do not need it"and then elaborat-
ed that the casing, which must withstand 200
atmospheres of pressure, sometimes fails at 17
atmospheres.
? fUter an "authoritative commission" recommended
a special inhibitor to fight pipeline corrosion, the
pipes corroded as before-"because the inhibitor
does not inhibit. "
? Responding to a question on what had changed in
the 18 months since a meeting in Baku that focused
on the low quality of oilfield equipment, the chief
mechanic for Tyumen' oil operations answered,
"The amount of substandard output of certain
types of equipment produced by Baku plants has
even increased."
? Construction of one compressor station (of a
planned 12J for the Samotlor gas-lift project was
`completed" in 1984. However, in November 1985
it was still "impossible to effectively use the station
because of the low quality of the equipment."
believe that production from Tomsk is likely to contin-
ue to grow-but at a slower pace-to roughly 300,000
b/d in 1990. In the second half of this decade, the
Soviets are planning to develop oilfields in the Pudino
area. Development of the new fields will probably be
constrained by the extremely swampy terrain of the
Pudino region and the 3,500- to 4,000-meter depth of
the producing strata.
Oil Production in Other Regions
Established trends make the oil-production outlook
less uncertain for other areas. Although oil and gas
condensate output outside West Siberia (including gas
condensate from the north Tyumen' gasfields) has
been falling for adecade-from 6.9 million b/d in
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1975 to 4.6 million b/d in 1985-the rate of decline
has slowed in recent years. Production from new
capacity at oilfields in Kazakhstan and the Caspian
Sea is helping to offset declining output from the
Volga-Urals region, the USSR's second largest, where
production has fallen from about 4.5 million b/d in
1975 to roughly 2.8 million b/d in 1985 (figure 6).
Figure 6
USSR: Oil Production
Outside West Siberia, 1965-85
Soviet media suggest that the average annual declines
in production for the Volga-Urals region have slowed
slightly in recent years. Nonetheless, there is virtually
no chance that the Soviets can completely stem the
fall in output. Production from the two major fields in
this region-Romashkino and Arlan-peaked in the
early 1970s. We estimate that the Soviets have al-
ready produced about 80 percent of the recoverable
reserves (calculated on the basis of a 35-percent
recovery factor) for these two fields. Soviet efforts to
employ enhanced oil recovery techniques during
1986-90 will probably meet with only limited success,
largely because of severe shortages of the needed
chemicals. A new group of oil deposits has been
discovered near Orenburg, but the depth of the
producing horizons (4,400 to 4,800 meters) will proba-
bly slow development. The Soviets plan to produce
only 50,000 b/d from these fields in 1990.
Our best judgment is that the collective oil and gas
condensate output from regions outside West Siberia
(including gas condensate production from the north
Tyumen' gasfields) will experience an average annual
decline of roughly 140,000 b/d during 1986-90. The
rate of decline in production from the Volga-Urals
region probably will decrease slightly-to about
170,000 b/d annually (less than the average annual
decline of 200,000 b/d during 1981-85). The com-
bined oil output from other regions will probably
change little as new oil capacity from the Caspian Sea
and Kazakhstan comes on line and offsets declining
production from the North Caucasus, Central Asian,
and Komi ASSR regions.9 We estimate that conden-
sate output will grow only slowly-by about 30,000
Analysis of the complex geology of Eastern Siberia suggests that
the Soviets have so far discovered only limited oil reserves there
(roughly 100 million to 1 billion barrels of proved reserves). Because
of the distance to industrialized centers, the complexity of the
reservoirs, the quality of the oil found so far, and the severe climate
and terrain, it is doubtful that the Soviets will mount any major
effort to develop East Siberian oil in the period under consideration
North 1
Caucasus
Azerbaijan-
Georgia
Ukraine and
Northwest
Turkmen- 1
Central Asia
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b/d annually~iuring 1986-90 despite the potential
for substantial increases in condensate production and
numerous press statements emphasizing its impor-
tance to the national economy (see appendix B).
Our assumptions for this most likely scenario are that:
? Declines in output from the Volga-Urals region slow
only marginally.
? Implementation of enhanced oil recovery (EOR)
techniques at key fields in this region is slow and on
a small scale.
? The existing pace of heavy-oil development in
Kazakhstan does not increase. Also, the pace of
Caspian Sea development slows as output from the
April 28 oilfield reaches peak production and devel-
opment of oilfields in deeper waters and deep gas
condensate fields is constrained by shortcomings of
domestic equipment.
We believe that, under the best of circumstances, the
Soviets could limit the average annual decline in the
level of production outside West Siberia to about
100,000 b/d; alternatively, it could be as much as
180,000 b/d:
? For the high case, we assume the Soviets sharply
increase purchases from the West of advanced
drilling, production, and processing equipment to
accelerate development of the oil and gas conden-
sate potential of the Pre-Caspian Depression. Also,
the Soviets purchase and effectively utilize Western
FOR technology for use in the Volga-Urals and
Komi ASSR regions.
? For the low case, we assume that production de-
clines from areas where output is falling continue
(Volga-Urals, Komi ASSR, North Caucasus, and
Central Asia), and new capacity is introduced slowly
(Caspian Sea and Kazakhstan). This could occur as
a result of the continued transfer of equipment and
labor resources from these regions to West Siberia
(a practice that Moscow has followed to boost
production in West Siberia).
Implications for the Economy
In all likelihood the leadership will be increasingly
frustrated by a growing gap between planned and
actual oil production. The success of efforts to im-
prove the flow of needed equipment and to provide
better management of the existing stock of wells will,
of course, affect the size and timing of the gap. But it
will soon become clear that the additional resources
Gorbachev has allocated to the industry are not
enough and that even additional domestic resources
may not solve the problem. How the leadership reacts
to this dilemma will be shaped by the following
considerations:
? Success in oil conservation and gas-for-oil
substitution.
? The ability to cope with a reduction in hard curren-
cy imports resulting from cutbacks in oil exports.
? The world market price for oil.
? The ability and will to reduce oil exports to soft
currency customers, principally Eastern Europe.
? The need to maintain or increase investment alloca-
tions to support key sectors of the modernization
program.
? Moscow's perception of its ability to quickly discov-
er and develop the oil potential of the Barents Sea.
Can Oil Consumption Be Reduced?
An alternative to the production-oriented policy
would be a successful oil conservation and substitution
program. Success in this area would allow lower
production without a proportional reduction of export
availability. The high production targets and the
enormous increase in investment incorporated in the
recently approved annual and five-year plans suggest,
however, that Moscow is not confident that substan-
tial oil savings will be realized. We believe that total
oil consumption will probably decline only slightly
during 1986-90.
In the last five years, the Soviets have apparently been
able to slow and essentially stabilize domestic oil
consumption (table 3). As oil and coal output stagnat-
ed, the Soviets rapidly boosted gas production and,
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Table 3
USSR: Apparent Oil
Consumption a
Production n
+ Imports ~
-Exports
=Apparent
Consump-
tion
1970
7.06
0.09
1.92
5.23
1975
9.82
0.15
2.61
7.36
1980
12.03
0.08
3.28
8.83
1981
12.18
0.09
3.22
9.05
1982
12.25
0.15
3.39
9.01
1983
12.33
0.24
3.67
8.90
a The absence of extensive data prevents a close determination of
Soviet oil consumption. We can, however, calculate apparent
domestic oil consumption by adding exports and subtracting
imports from production. The major weakness of this approach is
that the change in oil stocks (oil in storage) is not known or
included; moreover, the trade data may contain errors. Nonetheless,
we believe that apparent domestic consumption can be used as a
general guideline for establishing trends-especially when compar-
ing one set of years to another.
bincluding gas condensate.
Middle Eastern oil is acquired in exchange for arms and reexport-
ed by the USSR.
thus, provided the needed energy. Infrastructure to
transport and utilize larger supplies of natural gas was
put in place. Despite these achievements, during
1981-85 Moscow did not decrease the volume of fuel
oil consumed by thermal power plants-which was to
have been the main thrust of the effort to conserve oil.
Our analysis indicates that the volume of fuel oil
consumed by power plants remained at nearly the
same level in 1985 as in 1981-about 2.5 million b/d,
accounting for about 28 percent of total apparent oil
consumption.
Despite successes in substituting natural gas for fuel
oil at many power plants, fuel oil consumption by
coal-fired power plants increased during 1981-85
because of the lack of an adequate supply of coal (both
in terms of quality and quantity) and because of
demands on thermal power plant capacity resulting
from delays in commissionings of nuclear power
plants. These developments offset the oil savings being
realized from the oil-to-gas conversion program.10 A
Soviet technical journal recently reported that 11
percent of the fuel used by power plants designed to
burn coal as the primary fuel is fuel oil~ompared
with about 1 percent for coal-fired plants in the
United States.
The USSR's relatively heavy reliance on residual fuel
oil for power generation in part reflects the design of
its refineries, which use mainly distillation processes
that yield a large amount of residual fuel oil suitable
only for industrial furnaces. In the past decade at
least, the USSR has increased only slightly the share
of light products refined from crude oil. For the next
several years, large supplies of residual fuel oil will be
available, and there will be little incentive to acceler-
ate the conversion of oil-fired power plants.
Of the major oil products (gasoline, kerosene/jet fuel,
diesel fuel, fuel oils, and lubricants), we judge that the
only one for which there exists an opportunity-either
through improvements in efficiency or interfuel sub-
stitution-for less consumption is heavy fuel oil: "
? The demand for oil products, particularly gasoline
and diesel fuel, in transportation and agriculture
will probably grow.
? The requirements for nonenergy oil products-such
as lubricants and plastics-will probably remain
constant or increase.
? Despite the conversion of some plants to gas, the use
of fuel oil in the electric power industry, which
accounts for about 70 percent of fuel oil consump-
tion, will probably decline by only about 10 percent
by 1990 because of continuing problems with low-
quality coal and coal shortages.
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Responding to the Shortage
Because the Soviets are likely to fall far short of
meeting their oil production targets, the inability to
reduce consumption will confront the leadership with
essentially three options, all of which will require hard
choices:
? Buy a large volume of Western equipment in an
effort to boost oil production at the expense of
imports for other sectors.
? Devote even more investment resources to the oil
industry.
? Live with less oil production and accept reductions
in hard currency revenues from oil exports
Will Moscow Increase Imports of Western Equip-
ment and Technology? The degree to which Moscow
will be willing to buy more oilfield equipment from
the West is not clear. While Western technology and
equipment could reduce (or even prevent) some bottle-
necks, we expect that purchases of equipment and
technology from the West during 1986-90 will be
made on a highly selective basis and at a slower pace
than was in prospect before the fall in oil prices. Since
late 1985, Moscow has cut back and deferred orders
of some equipment and has vigorously pursued efforts
to seek lower prices, better financing, and expanded
countertrade agreements.
The themes of several of Gorbachev's speeches sug-
gest that he is counting on the revitalization of the
Soviet manufacturing industry to improve the general
supply and quality of domestic oilfield equipment.
From a technological standpoint, Western technology
and equipment are not critical for most current Soviet
oilfield operations. Much of the oil industry's effort
will be concentrated in West Siberia, where the tasks
of building infrastructure and accelerating the devel-
opment of new oilfields-while formidable-do not
call for sophisticated technology.
In all likelihood, however, Soviet equipment producers
will be unable to keep up with the rapidly growing
demand for oilfield equipment, increasing the pres-
sure on Moscow to turn to foreign suppliers. Some
relief may be available from Eastern Europe, notably
from Romania, but purchases from the West remain
an option. Soviet buyers are currently engaging a wide
range of Western suppliers in discussions for the
purchase of oilfield equipment. Although such discus-
sions are not novel, the unusually wide range of
suppliers being contacted and the stress on financing
terms suggest that the Kremlin is orchestrating its
commercial inquiries to extract price and financing
concessions.
Moscow's willingness to follow up these conversations
with actual contracts remains problematic. Proposals
to purchase Western oilfield equipment will be com-
peting with requirements of the high-priority industri-
al modernization program as well as with equipment
needs critical to the coal and natural gas development
programs. But the continued heavy need for oil as
both a prime energy product and a major source of
hard currency will increase pressure on Moscow to
spend whatever is necessary to keep oil output above
11 million b/d. Given Soviet hard currency problems,
signings of substantial contracts would be a clear
signal of the importance attached to maximizing oil
production in the short and medium term. (Fortu-
itously, the current worldwide depression in the oil-
field equipment industry will probably reduce the cost
and leadtimes for whatever equipment is purchased.)
Regardless of the approach taken to cover for domes-
tic production shortfalls, the Soviets will continue to
obtain from the West some specialized equipment and
technology that they cannot manufacture themselves
or acquire from Eastern Europe. Emphasis will be on
equipment for offshore operations and on specialized
corrosion-resistant equipment and processing plants
essential to exploitation of the deep, high-sulfur oil
and gas fields of the Pre-Caspian Depression.
Can Moscow ~`ord To Throw More Rubles at Oil?
Investment funds are already spread thin and the
investment requirements for even moderate success in
sustaining oil output are high. Our most likely
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The Oil Industry's Appetite for Steel: Still Growing
The demand for oilfield equipment will rise rapidly
during 1986-90. To keep production around 11-1/4
million b/d, we estimate that the pace ojdrilling and
well completions would have to increase by roughly
75 percent over the pace achieved during 1981-85.
Some 7-8 million tons ojhigh-quality seamless steel
would be needed just to satisfy the increase in
demand for well casing and production tubing. A
substantial amount of drill pipe would also be need-
ed. Although drill pipe is a reusable item, the Soviet
press reports that a large share of the existing stock
ojdrill pipe is old and fatigued. Large tonnages of
steel would be needed for the increases in construc-
tion of gathering pipelines and storage tanks. The
demand for wellheads and all types of valves would
also grow rapidly. Overall, we estimate that at least
an additional 1 S million tons of steel would be
needed to satstifY the increase in oil-industry demand
for all types of steel products. Because much oil
equipment requires high-quality steel, meeting the
needs of the oil industry could result in shortfalls in
delivering steel products to other sectors.
scenario assumes that the Soviets will invest about
100 billion rubles in oil production and exploration
during 1986-90." The impact of investment of this
magnitude is even more striking when translated into
real terms; for example, into demand for steel (see
inset). Failing to invest this much would almost
certainly cause production to fall below 11-1 /4 mil-
lion b/d in 1990. Conversely, by investing roughly 125
billion rubles, Moscow, with luck, could probably
succeed in keeping production hovering at about 12
million b/d.
Moscow plans for total investment to increase by
about 4 percent annually during 1986-90. Gorbachev
has indicated that, at the same time, investment in
civilian machinery will nearly double, and roughly
one-third of all investment will continue to go to the
agro-industrial complex. If investment in oil doubles
to the 100-billion-ruble range, planned increases in
other areas, including other energy industries, will
have to be trimmed. It is difficult to imagine where
Gorbachev could find additional investment resources
that would not have at least some adverse effect on
investment allocations for his plan to modernize and
revitalize the economy. For instance:
? Significant increases in investment in ferrous metal-
lurgy will be necessary to provide the higher quality
steel for the machinery required by Gorbachev's
ambitious modernization program.
? Without increases in investment for the consumer,
Gorbachev risks worker discontent that could
counter efforts to raise productivity.
? The pressure for more investment in transportation
will be especially acute as demand increases for
roads and other infrastructure to support develop-
ment in the more costly and inhospitable arctic and
eastern regions-areas critical to Soviet plans to
buttress energy production.
? Shortchanging the other energy sectors, most likely
coal but perhaps even gas, could jeopardize the
USSR's long-term energy program (see inset). We
expect that Moscow would try to avoid the conse-
quences of such a reduction by bringing about
productivity gains to compensate for any cuts in
investment.
? The loss of the electric power generating capacity of
the Chernobyl' plant and of the 11 others of the
same type while the Soviets make safety-related
modifications will boost the need for fossil-fueled
(fuel oil, gas, coal) generation of electricity. This
activity has significantly increased the short-term
risk associated with cutting back investment for any
fuel. We estimate that each month about 130,000
b/d of oil equivalent would be needed to replace the
loss in output of electric power by the Chernobyl'
plant alone. As each of the other reactors is shut
down for modifications, monthly power plant de-
mand for fossil fuel could increase by an additional
30,000 b/d of oil equivalent.
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Will Moscow Opt for Lower Oil Production? Moscow
could decide that its production goals are too costly,
given alternative demands for limited investment
funds. A policy of lower oil production, however,
would imply acceptance of a reduction in oil exports
for hard currency and cuts in oil exports to Eastern
Europe. Key indicators of such an abrupt shift in
Soviet oil policy would be:
? Statements from high-ranking government or party
officials questioning the wisdom of a production-
oriented policy, followed by a plateau in investment
allocations for oilfield development and an increase
in investment for exploration, particularly in the
Barents Sea.
? More incidents of rationing of oil products and press
reports rationalizing that high oil production levels
are no longer necessary because of the "successful"
implementation of an oil substitution and conserva-
tion program.
? A crash effort-probably involving large imports
from the West-to bring on line additional second-
ary refining units to increase the share of light
products, such as gasoline and diesel fuel, per barrel
of oil processed. This would facilitate the production
of the necessary volume of light products, should
less crude oil be available for primary refining.
The likelihood of such a policy shift, however, appears
remote. Moscow imports a large volume of grain and
other foodstuffs; these account for about one-third of
its hard currency import bill. Sustained improvements
in the agricultural sector leading to a reduction of
those imports would be almost mandatory before
Moscow could safely throttle back oil production and
exports, especially in view of falling oil prices. Such
improvements are unlikely. Without such offsets,
Gorbachev is unlikely to sanction lower oil production
targets.
Moreover, given the announced growth goals, the mix
of Soviet industrial output over the next five years is
likely to become more, rather than less, energy inten-
sive. Much of the Soviet capital stock is aged and
guzzles fuel. The production of large quantities of new
Because sustained growth in oil production is not
likely, the Soviets must also continue to emphasize
gas development and accelerate development of other
energy resources. Soviet planners have been counting
on coal and nuclear power to provide nearly all new
energy output once natural gas production levels ojf
in the mid-1990s.
energy production after 1995.
Before the Chernobyl' disaster, Moscow planned to
double the electricity generating capacity from nucle-
ar power plants during 1986-90. We estimate that
investment in planned nuclear power facilities for
those years may well be in the 20-billion-ruble range.
Investment in the coal industry would also have to
grow substantially for the Soviets to establish a basis
for meeting their long-term goals for coal; this would
require large-capacity lignite-fired boilers, ultra-
high-voltage transmission systems, coal-slurry pipe-
lines, and syrtfuel plants. Thus, within the energy
sector, the competition for investment resources will
be intense. We judge that coal will most likely be the
sector shortchanged, because the payback from much
of the coal-related investment is uncertain and most
of the benefrts would not be realized until the mid-
1990s. But not meeting the short-term needs of the
coal industry will make it very d~cult for the
industry to provide its expected share of increased
Gas production will continue to increase rapidly,
although some slackening in the pace of development
is possible. In addition to the tight investment situa-
tion, factors favoring such a slowdown include the
hard currency shortage (construction of a gas trans-
mission pipeline uses a large volume of Western
linepipe and other items), unanticipated difficulties in
developing the Yamburg gasfzeld, and weak demand
for gas exports.
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energy-efficient machinery-a goal of the industrial
modernization program-is not only difficult, expen-
sive, and time consuming but also requires large
amounts of energy. The payback is uncertain, and
significant benefits would not be realized before the
1990s. Lowering oil production goals-without cut-
ting back oil exports and with the existing level of
energy consumption-could quickly lead to energy
constraints on economic activity. Because of the need
to maintain economic stability and reduce political
tensions in Eastern Europe, we believe that the
Soviets cannot afford to cut oil exports to Eastern
Europe drastically.
For these reasons, we believe that, if oil production
began to fall rapidly, Gorbachev would increase in-
vestment in the oil sector and that investment in other
parts of the energy sector-as well as in transporta-
tion, the modernization program, agro-industry, and
perhaps even the military-would be cut in varying
degrees.
The Bottom Line
Oil production is likely to fall by nearly 1 million b/d,
to about 11-1/4 million b/d in 1990. If Moscow-as
expected-is unable to substantially reduce domestic
oil consumption, oil exports would have to be cut. We
believe that exports to hard currency countries would
bear the brunt of any reduction in oil production.
Investment requirements to keep oil production near
11-1/4 million b/d, albeit large, are probably not
overly threatening to Gorbachev's economic agenda.
the Barents Sea. Ultimately, the impact of declining
oil production during the 1990s will depend on Soviet
success in moving the economy toward greater energy
efficiency, in building secondary refining units to
produce light products from heavy fuel oil, and in
substituting gas for oil. Although there is time to
make these improvements, the high resource costs
associated with attempts to sustain oil output at a
high level will impede efforts to begin rigorous imple-
mentation of these programs
The possibility exists, however, for oil production to
fall more sharply. In this circumstance, we judge the
political and economic imperatives would compel the
leadership to devote more resources to the oil industry
and cut investment for other programs.
After 1990, Soviet oil production could be in an even
more precarious position. Reserves from most of the
present complement of major West Siberian oilfields,
which were developed during the late 1960s and early
1970s, will be virtually exhausted. Barring the discov-
ery of giant oilfields, national output could fall sharp-
ly, and the Soviets would need to bring on line
substantial capacity from a new oil region, perhaps
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Appendix A
How Much Investment
Is Needed in 1986-90?
To keep oil production at about 11-1/4 million barrels
per day (b/d) during 1986-90, the Soviets would need
to drill as much as 190-200 million meters and to
complete 75,000 to 80,000 new wells averaging 2,600
meters in depth. We estimate that total investment for
these minimum considerations will amount to roughly
100 billion rubles, three-fourths of which will be spent
on West Siberian oil development.
Investment in the oil industry has increased
markedly-from about 4.2 billion rubles in 1975 to
more than 11 billion rubles in 1985. Replacement of
capacity that will be depleted will be the chief
consideration affecting Soviet oil investment decisions
during 1986-90. The portion of gross capacity added
nationwide that merely offsets depletion of online
capacity has increased sharply, from 1.2 million b/d
in 1975 to 2.7 million b/d in 1980 (table 4). Moreover,
the investment and manpower requirements for devel-
oping new capacity have escalated dramatically-
particularly in West Siberia. To offset increasing
depletion, the Soviets will have to step up sharply the
pace of development drilling and well completions at
steeply escalating cost. In 1985, the Soviets planned to
drill 29 million meters (we estimate 28 million meters
were actually drilled) to complete an estimated 12,000
wells nationwide.
Almost 18 million meters were drilled in West Siberia
in 1985, increasing the region's stock of wells by 6,500
and providing a gross addition of roughly 1.25 million
b/d of new capacity. About 7.5 billion rubles were
invested in West Siberia, roughly two-thirds of the
total amount spent by the oil industry that year. The
cost for a unit of new capacity in West Siberia has
increased substantially in recent years because of
steadily falling well flows, increasing well depths, the
development of more remote fields, and the rapid
transition from free-flowing wells to wells on pump.'"
(Press reports indicate that six out of seven new wells
require pumping equipment from the onset of produc-
tion.)
Because the productivity of West Siberian drilling
crews remained virtually the same during this period,
the drilling cost for providing a barrel of new capacity
from the region in 1985 was six to seven times as
great in 1985 as in 1975. (Our estimates for the
increase in West Siberian drilling costs between 1975
and 1985 are consistent with Soviet data for the
1975-80 period, which show drilling costs tripling.)
shutdowns of leaking lines and equipment.
In addition, the cost of maintaining existing online
production capacity grew as increasing volumes of
water were injected to maintain reservoir pressure.
The water cut increased from 15 percent in 1975 to 50
percent in 1985, and the cost of maintaining and
establishing the entire water injection, handling, and
disposition system rose accordingly. Because of age
and lack of effective corrosion inhibitors, many of the
water- and oil-handling systems are now being taken
out of service more frequently for repair and replace-
ment. At the Samotlor oilfield, thousands of barrels of
oil are reportedly not produced each day because of
Plans call for 130 million meters of development
drilling in West Siberia during 1986-90. We estimate
that drilling costs per meter are likely to increase
'? Average well depths increased from 2,200 meters in 1975 to
roughly 2,600 meters in 1985. The efficiency of Soviet turbodrills
falls sharply as the depth increases. Drilling wells 2,200 meters
deep in West Siberia is routinely accomplished in five to six days,
whereas drilling 500 to 700 meters deeper can take up to a month.
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Table 4
Soviet Oil Industry Investment, 1975-85 a
Annual investment
(billion 1984 rubles)
4.2
7.5
8.9
9.6
10.0
10.3
11.5
Oil production
(million barrels per day)
9.82
12.03
12.18
12.25
12.33
12.22
11.9
Gross capacity added
(million b/dJ
1.8
3.0
2.9
2.6
2.8
2.6
2.4
Depleted capacity
(million b/dJ
1.2
2.7
2.7
2.5
2.7
2.7
2.7
Development wells drilled
4,200
8,475
8,864
9,000
11,000
11,750
11,800
New-well flows (b/dJ 6
440
365
330
290
255
220
204
Average well depth
2,119
1,852
2,166
2,311
2,100
2,195
2,375
Investment for oilfield equipment (drilling and well completions)
and oilfield construction (well pads, gathering pipelines and centers,
oil treatment facilities, and storage tanks).
n Average daily oil flow from new wells.
about 20 to 25 percent. Thus, drilling 130 million
meters during the five-year period would cost about
30 billion rubles, and investment in all phases of West
Siberian oil development would amount to roughly 70
billion rubles. This assumes that the productivity of
drilling crews continues to show little improvement,
while costs rise because of worsening geologic condi-
tions, deeper wells, and increasing remoteness of fields
from existing infrastructure.
We believe that investment in oilfield construction
will-at a minimum-have to double, reaching an
estimated 25-30 billion rubles. During 1986-90, the
Soviets plan to bring on line 60 to 75 oilfields-about
the number of fields brought on line during 1965-85.
Although nearly all of the new fields are much
smaller than those currently in production and will
probably require less equipment and construction per
field, the sheer increase in the number of fields
implies a substantial increase in investment for oil-
field construction.
We estimate that the cost of maintaining and servic-
ing the well inventory and other support activities will
double during 1986-90 to about 12 billion rubles. The
press also suggests that the productivity of well-repair
brigades is not improving. Press reporting indicates
that the support infrastructure for oil production has
been sorely neglected in recent years and that a
substantial increase in investment is needed to redress
this imbalance between production and support.
Exploration Costs
Recently, Soviet economists have indicated that most
geologic and exploratory drilling costs associated with
the search for oil and gas are paid from the geology
ministry's current budget, paralleling Western prac-
tice. The economists also indicated that, for individual
oilfields, the costs of geologic exploration amount to
roughly 30 percent of the cost of producing a barrel of
oil.
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The chief Tyumen' geologist recently announced that
exploration drilling would double in 1986-90, to 14
million meters, from 6.9 million meters in 1981-85.
With the average exploration drilling cost rising to
about 1,000 rubles per meter in 1990, the new
Tyumen' drilling plan could boost total outlays for
exploration by 10 billion rubles in 1986-90, over and
above the officially reported oil-industry investment
projections for this period.
In the oil regions outside West Siberia, the USSR
completed about 45 million meters of development
drilling and added roughly 25,000 wells during
1981-85-about 9,000 more than were added during
1976-80. Although the collective output from these
regions has been falling since 1975, the rate of decline
has slowed in recent years. We believe that holding
the average annual decline in output to about 140,000
b/d would require increasing investment in these
regions about 50 percent from the 1981-85 level-to
about 25 billion rubles-to provide for 60-70 million
meters of development drilling and 35,000 new-well
completions during 1986-90.
Most of these oil-producing regions are old; the
individual oilfields are small, deep, and complicated.
Additional capacity from key fields in Kazakhstan
and in the Caspian Sea that are slated for expansion
or new development will be expensive. In Kazakhstan,
the oil is either heavy (requiring costly FOR tech-
niques) or contains dangerous amounts of hydrogen
sulfide (requiring the use of expensive imported corro-
sion-resistant equipment). Development of Caspian
Sea oilfields-in particular, the Kaverochkin field-
will be more costly as the Soviets venture into deeper
waters.
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Appendix B
Prospects for
Gas Condensate Production
Despite the potential for substantial increases in
condensate production and the numerous press state-
ments emphasizing its importance to the national
economy, we believe that output will grow slowly-by
about 30,000 b/d annually-during 1986-90. About
half the new production capacity will be needed to
offset declining gas condensate production from aging
gasfields elsewhere in the USSR. Recent press reports
indicate that the oil and gas ministries still seem
uninterested in processing gas condensate. Moreover,
these reports note that the organization and planning
for the production, processing, and disposition of
condensate in West Siberia is in disarray.
Gas condensate-light-to-intermediate hydrocarbons
produced from both gasfields and oilfields-is usually
brought to the surface along with natural gas.15
Processed components of condensate are used as
petrochemical and refinery feedstocks, liquefied pe-
troleum gas, gasoline, and diesel fuel. The Soviets
have historically neglected the important energy and
chemical value of condensate and have not made
extensive use of it in the economy. Much of the
condensate is comingled with the crude oil sent to
refineries, but some is flared (burned), left in natural
gas reservoirs, or simply lost because of a lack of
processing facilities.
Gas condensate output rose steadily from roughly
270,000 b/d in 1975 to 600,000 b/d in 1982.16
Urengoy's condensate reserves, however, have been
brought on line slowly. As a result, condensate output
remained virtually level during 1983-84. We believe
that condensate output grew slightly in 1985 as new
capacity from Karachaganak and Urengoy finally
came on line.
15 The condensate plus methane produced from oilfields is often
referred to as associated gas. The condensate (usually butanes and
heavier hydrocarbons) liquefies at lower temperatures and higher
pressures, hence its name.
Several of the most important future condensate-
producing fields, such as Astrakhan' and Karacha-
ganak, are more than 4,000 meters deep and have
extremely high levels of corrosives, including toxic
hydrogen sulfide. Successful exploitation of these
fields will require imports from the West of drilling
equipment and corrosion-resistant production and
processing equipment that the Soviet oil-equipment
industry is currently unable to manufacture.
Regional Plans for Increasing Gas
Condensate Production in North Tyumen'
Gas condensate production from the Urengoy and
Yamburg gasfields is far behind schedule. Urengoy
was scheduled to produce roughly 50,000 b/d in 1984
and 100,000 b/d in 1985. However, filling of the
pipeline (400,000 b/d capacity) to transport conden-
sate to Surgut did not commence until early 1985. As
a result, roughly 50 wells in the condensate-producing
formation at Urengoy were shut in and not producing
during 1984. Press reports indicate that 150 wells had
been completed by the end of 1985. On the basis of an
estimated 100 well completions per year, reported gas
flows per well, and the reported amount of condensate
per cubic meter of gas produced, we estimate that the
Soviets could increase condensate production by
50,000 b/d annually for at least a decade. This,
however, is an optimum case and assumes that the
processing plant will be working properly.
the Soviets are seeking turbo-
expander technology for use at facilities where gas is
separated from liquids. We consider the most likely
scenario for condensate production from the north
Tyumen' gasfields to be a slow increase of about
30,000 b/d annually.
Astrakhan'
Development of the Astrakhan' gas condensate field
was launched in early 1983 with the award of a $400
million contract to a French firm for a gas separation
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and treatment facility. This plant and the awarding of
the field portion of the contract to a West German
firm represent the first stage of planned development
at Astrakhan'. Because of the high levels of hydrogen
sulfide and carbon dioxide in the gas and condensate
stream, the Soviets were forced to turn to the West to
obtain the necessary high-quality equipment. First-
stage development will eventually produce 50,000 to
60,000 b/d of condensate. Press reports indicate that
drilling is proceeding slowly and that the project is
behind schedule. In 1985, the Soviets awarded the
plant portion for second-stage development-with
identical production goals-to the same French engi-
neering firm. The Soviets at first planned to act as the
general contractor for the field development portion,
but they have recently named a Canadian firm to
head a consortium to oversee field development.
Karachaganak
Production at Karachaganak began in late 1984, and,
for the time being, the Soviets are shipping the gas
and condensate 120 kilometers via new pipelines to
Orenburg for final treatment. The existing plant at
Karachaganak-which has the capacity to separate
and prepare for pipeline transport 3 billion cubic
meters of gas and 30,000 b/d of condensate from
Karachaganak annually-and the gathering pipeline
system were built by West German firms. Further
development of the field awaits Moscow's decision on
where to build the main gas-processing plant: Oren-
burg or Karachaganak. Initial reports indicate plans
to eventually raise production to 20 billion cubic
meters of gas and about 200,000 b/d of condensate
annually. Negotiations are not planned to begin until
mid-1986. Further increases in gas condensate output
from Karachaganak probably will not be realized
until the late 1980s. The producing formations at
Karachaganak are deep (4,000 to 5,000 meters), and
the gas contains high levels of corrosive compounds-
hydrogen sulfide and carbon dioxide. Western equip-
ment will be required because the Soviets do not have
sufficient capability to make corrosion-resistant
steels.
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Figure 7
Oil- and Gas-Producing Regions in the Soviet Union
P
ar?chaganak'
Pre-Caspian
Depression
Azeibajjan
'S~SR,~. Sumg
1 71a'""'APr~
Turkmen
SSR
UrengoyU
Tyumen' Oblast
? utormin
Severo- ,
F dorovo ~Var'yegan
Lyan r ~ j
~/aryegan
amont vo 0 ?Samotlor`
(l~ra~s Nizhrlevartovsk~_
Kazakh
SSR
The United States Government has not recognizetl
the incorporation of Estonia, Latvia, and Lithuania
into the Soviet Union. Other boundary representation
is not necessarily authoritative.
Siberia
A?gala
1
Sea o/
Japan
708487 (545499111-86 25X1
~-
t~.
Baltic Sea
rth
asus
? Selected economic
region boundary
Selected administrative
boundary
Selected oilfield
O Selected gasfield
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 Sanitized Copy Approved for Release 2011/03/17 :CIA-RDP87T00787R000400450001-3
Secret
Secret
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