SOVIET GAS PRICING AND EXPORT STRATEGY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001400830001-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: September 2, 2010
• Sequence Number: 1
• Publication Date: August 27, 1984
• Content Type: MEMO

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Central Intclligcncc Agcncy
27 August 1984
Mr. Donald B. Kursch
Deputy Director for Economic Affairs
Office of Soviet Union Affairs
Department of State
Washington, D.C. 20520
The enclosed memorandum contains our analysis of issues
relating to,-Soviet vas n and export strategy raised in
paragraph 4 We hope
that our comments wi use u to the Mission. At the
discretion of the Department, the content of the memorandum is
releasable to the NATO committee.
If we can be of further service in this matter, please call
Sincerely,
Ch
Soviet Economy Division
Office of Soviet Analysis
Attachment:
As stated.
SOVM84-10143/84
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WNr,IL N...IAL
Soviet Gas Pricing and Export Strategy
A Memorandum Addressing Issues Raised in an Inquiry
from the US Mission to NATO.
Central Intelligence Agency
Office of Soviet Analysis
Soviet Economy Division
27 August 1984
SOVM84-10143/84
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WNr 1 J MV 1 irtI
Soviet Gas Pricing and Export Strategy
Background
A recent Oil and Gas Journal article (23 July 1984)
speculates that the USSR might trigger a gas price war in Western
Europe in order to achieve full utilization of the new Urengoy-
Uzhgorod export pipeline, lower its operating costs, and maximize
hard currency profits. The recent Soviet offer of a discounted
price to Belgium's gas utility (Distrigaz), reportedly 15 percent
below the price of Dutch gas then being supplied by the
Netherlands' gas utility (Gasunie), lends currency to this
speculation. It is further suggested that French, West German,
and Italian customers may press the Dutch for similar price
reductions. The NATO Economic Committee has raised questions as
to the Soviets' reliability as an energy supplier and as to their
marketing strategy. There is an underlying concern that
predatory pricing policies could forestall development of more
secure (i.e., Norwegian offshore) alternatives to Soviet gas once
West European demand recovers and existing supply contracts begin
to expire after 1992.
This memorandum discusses the Soviets' recent gas pricing
behavior in the soft West European market (the offer to Distrigaz
and implications for negotiations with other West European
buyers) and analyzes the outlook for longer-run Soviet gas
pricing and export policy. Before examining the questions of
Soviet market behavior and options, it is useful to review the
USSR's traditional export strategy and pricing policy. The
following judgments can be made for the post World War II period:
o Foreign trade and export policies usually have been
structured to achieve hard currency goals and make
possible the purchase of Western goods and services for
the domestic economy.
o All contract sales agreements with the West are monitored
closely, and Soviet performance has been exemplary. The
Soviet adherence to contractual obligations has been
widely acknowledged in the market.
o The Soviets take a long-term approach to foreign trade in
energy because of their limited influence in the
market. They are, however, astute market analysts and
quick to exploit changing market trends.
SOVM84-10143/84
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o Soviet marketing and pricing policies are pragmatic,
flexible, and quickly adapted to short-term market
fluctuations in order to meet hard currency revenue
goals. In other words, contract volumes and prices can
be renegotiated when justified by unforseen developments.
Recent Gas Negotiations with Belgium
Recent press accounts of a Soviet offer to sell gas at a
discount to Belgium's Distrigaz largely overlook the lingering
"softness" of the market for both natural gas and oil in Western
Europe. As early as last February, for example, French gas
prices to industrial users were at least 18 percent below the
price of fuel oil on a comparable BTU basis, according to the
press. In June, the Belgians could not compete with French or
Dutch ammonia producers, who were enjoying a 12 to 15 percent
price discount from Gaz de France and Gasunie, the Dutch gas
exporter. Gasunie, a major gas supplier to both France's Gaz de
France and Belgium's Distrigaz, was reluctant to lower the price
of gas sold to Belgium when asked to do so. The Soviets,
however, offered cheap gas for the Belgian fertilizer producers
on a "spot" market basis. The Soviet offer to Belgium's
Distrigaz, which specified a 15-percent discount for 0.5 billion
cubic meters W) of gas to be delivered over a 2- to 3-month
period, may have forced Gasunie's hand. Distrigaz eventually
obtained the desired gas at a discounted price from Gasunie, but
first had to develop a credible Soviet alternative. At the same
time, the Soviets may well have allowed themselves to be used.
If they were to compete in the soft market, they were obliged to
not only match the low prices prevailing in gas sales to industry
but also the discount to ammonia producers.
There have been numerous media accounts of Soviet
discounting on "spot" market sales of oil and gas to West
European buyers since late in the first quarter of 1983, when
discounting by OPEC members flourished before the cartel's $5.00
per barrel price cut. Soft market conditions for the sale of gas
in Western Europe reflected depressed economic activity,
unseasonally warm winters in 1982-83 and 1983-84, energy
conservation measures, and the relationship between oil and gas
prices. Throughout this period, the USSR was forced to price gas
exports about 15 percent below competing fuel oil on a BTU
equivalent basis. Total gas exports to the West, as well as the
associated revenues, actually declined in 1982 and 1983 (see the
table).
Most West European gas prices were indexed to oil prices
following the 1973-74 Arab oil embargo. Because of the lag in
application of the indexing formula, gas prices increased at a
much slower rate than oil prices during the two OPEC price run-
ups in 1974-81. When oil prices began to fall in late 1982, gas
prices once again followed. Over the last 18 months, changes in
official gas prices usually lagged those for oil by 3-6 months
and seldom reflected the lower prices posted in "spot" market
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L M1 1 M1Y1-1 AL
Soviet Gas Exports,
1980-90
Volume (billion ni)
1980
1981
1982
1983
1985
1990
European Camunist Countries 31.5e
32.2
33.8
34.3
42.0
55.0
Eastern Europe 30.0
30.0
30.8
37.0
38.5
50.0
Bulgaria 4.6
4.5
4.5
5.5
6.0
8.0
Czechoslovakia 8.3
8.5
9.0
11.1
11.0
11.0
East Germany 6.5
6.4
6.5
7.8
8.0
10.0
Hungary 3.8
3.8
3.7
4.5
5.0
6.0
Poland 5.3
5.3
5.6
6.0
6.5
11.0
Raman ia 1.5e
1.5
1.5
2.1
3.0
4.0
Yugoslavia 1.5e
2.2
3.0
3.3
3.5
5.0
Total Revenuel
(In million rubles) 1,564.4e
2,082.6
2,695.7
3,865
4,733.8
6,197.4
(In million dollars) 2,098.0e
2,791.0
3,612.0
5,179
6,342.0
8,304.5
Volume (billion nt3)
1980
1981
1982
1983
1985
1990
West European Non-Camunist Countries
25.0
28.6
28.5
25.4
37.0
55.0
ota
21.7
24.6
23.3
21.5
32.0
49.0
France
4.0
4.7
4.2
4.0
8.0
12.0
Italy
7.0
8.1
8.6
7.5
9.0
15.0
West Germany
10.7
11.8
10.5
10.0
15.0
22.0
Austria
2.4
3.2
4.4
3.2
4.0
4.6
Finland
0.9
0.8
0.8
0.7
1.0
1.5
Total Current Revenue
(In million dollars)
2,478.7
3,939.5
3,655.9
3,248.0
4,092.0
7,033.2
Average Unit Price (US dollars
(per million BTU)
2.81
3.90
3.63
3.62
3.62
3.62
1 All current revenues in rubles were revalued at $1.34 per ruble for purposes of caparison.
Constant 1983 prices were assumed in estimating 1985 and 1990 revenues fran export contracts now
in force.
e CIA estimate.
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wiII E 11JEiL A a cw
sales. In a depressed market, buyers of both oil and gas tend to
postpone delivery of contracted sales and switch to the "spot"
market for cheaper gas and oil supplies. Once seasonal
inventories exceed requirements, both fuel oil and crude oil are
apt to be dumped at distress prices. Distress prices for fuel
oil tend to drive down gas prices, further reducing demand for
oil and setting off a chain reaction. West European refiners
have reacted by using underpriced fuel oil for up to 10 percent
of total refinery feedstock and thereby lowering demand for crude
oil at the margin.
The Soviets have responded more quickly than the Dutch
Gasunie to these changing market conditions. They have
temporarily raised and lowered prices for both natural gas and
oil as required to meet hard currency revenue objectives from the
sale of minimum volumes. By comparison, the going price for
Dutch gas is less apt to reflect current "spot" market conditions
because of indexation lags.
Renegotiating Gas Prices in a Buyers' Market
The media have noted that, when the long-pending contract
for sales of Urengoy gas to Italy was signed, Soviet gas prices
to Italy were more than competitive. The Italian pr ss stated
that the Soviet gas price was about $125 per 1,000 ml, ($3.50-
$3.60 per million BTUs), which is low enough to undercut the
price of fuel oil. Disclosure of this low price prompted
speculation that Gaz de France would seek a 10-percent reduction
in price, as well as a 20-percent reduction in volume, on its
contract for Urengoy gas. West Germany's Ruhrgas was expected to
join cause with Gaz de France in these discussions. Obviously
the subject was raised with the Soviets, but no formal action is
required on their part outside the established semi-annual
meetings held in October and April of each year. In the present
buyers' market, Soviet restraint is to be expected because
reductions in official gas prices also influence the price for
Soviet oil--presently a much more important source of export
revenue. Soviet oil sales amounted to roughly $15 billion in
1983, about five times the amount of gas revenues of $3.2 billion
for that year.
The Soviets have no reason to be a spoiler by instigating a
gas price war in the near term. In today's depressed market, a
premature announcement of a permanent price cut might trigger a
price war between gas and oil that could get out of control.
Moreover, if the USSR did cut the price of gas, it would not be
able to boost gas export volumes fast enough to offset potential
declines in the combined revenues from oil and gas exports. The
recent Soviet oil price cut of $1.50 per barrel was intended to
give OPEC producers a signal to observe oil production quotas and
thereby shore up the price.
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WNr-IVriri IAL
Soviet Long-Term Gas Pricing and Export Strategy
Soviet marketing strategy and pricing policy in the future
could be radically different from that observed to date. Six
years hence Moscow will be facing a much wider selection of
options. The ability of the USSR to produce, transport, and sell
a vastly increased volume of natural gas at low prices can no
longer be questioned. Therefore, there is a real possibility
that a Soviet "gas weapon" could be brandished in the 1990s, just
as the OPEC "oil weapon" was used in the 1970s.
The Soviet Union has the capability to rival OPEC in terms
of natural gas exports in the next decade. The USSR, possessing
some 40 percent of the world's gas reserves, is now the world's
largest producer of both oil and gas and the world's largest
exporter of gas. (In 1983, it surpassed the US in gas
production.) Previously, the USSR became the world's largest
exporter of natural gas in 1980, when it overtook the
Netherlands.
Last ye ir, Soviet gas production reached 536 billion m3 and
66 billion m were exported, compared With Gasunie's exports of
38 billion m3. More than 25 billion m of the Soviet 1983
exports were delivered to Western Europe, and that volume will
more than double by 1990. Shipments to NATO countries (France,
Italy, and West Germany) shoul increase from over 21 billion m3
in 1983 to almost 50 billion m in 1990. Beyond 1990, the
Soviets' market share could expand sharply when up t2 50 percent
of Western Europe's gas supply, or 120-130 billion m /yr., will
be imported and energy dependency will be an issue. France,
Italy, and West Germany will be obtaining about 33 percent of
their total gas supply from the USSR by 1990. If gas imports
from the USSR are increased in order to close the expected supply
gap, the West European countries' gas dependency could exceed 50
percent in 1995.
Moscow has been actively pushing the sale of gas to a number
of other countries on the periphery of Western Europe. Earlier
this year, the Soviets eonc'uded a series of new gas contracAs
with Finland (1.8 billion m /yr.) and Austria (1.5 billion m
yr.). In addition, they discussed gas exports with Sweden (1-2
billion m3/yr.), Turkey (2-4 billion m3/yr.), and Greece (1-2
billion m /yr.). Prime Minister Tikhonov also proposed the
eQnstruction of a new export pipeline to deliver 21-22 billion
m /yr. of additional gas to Eastern Europe after 1986. East
European participation in construction of this pipeline would be
patterned after the "Soyuz" pipeline from Orenburg in 1977-78,
according to press reports.
Soviet long-term export policy could move in new directions,
politically and economically, after 1990. If the USSR's oil
supply becomes taut, gas sales will be pushed in an attempt to
sustain hard currency revenues. Competitively priced gas sold to
the West will most likely displace fuel oil in the household and
industrial markets. Refineries will continue to use excess fuel
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WN l' 1 ULN'1' 1 AL
oil for refining feedstock and upgrading material, a practice
that will lower demand for OPEC crude oil at the margin. Price
competition for a few years might serve the Soviets' strategic
interest, even though hard currency revenues would suffer
temporarily. Cutting the price of gas would be a necessary first
step if the Soviets aim to capture a vastly expanded share of the
West European market. Many Western governments would welcome
cheaper gas in order to reduce dependence on OPEC oil and
possibly to stimulate economic activity with more sales of pipe
and equipment.
The Soviets have the resources to mount an awesome natural-
gas export offensive in the next decade. If the USSR obtains a
much wider share of the market, Soviet gas could largely
determine demand for other fuels. The USSR could then gradually
exert political pressure on West European buyers who would lack
alternative secure supplies of natural gas. Present pipeline
capacity is being expanded in the Ukraine to exploit new market
opportunities, and 1 or 2 new Czechoslovakian transit lines could
be built in a year.
If Moscow. moves quickly to preempt the West European market,
it could delay or prevent development of more secure alternative
energy supplies in the North Sea. Twenty years ago, the fear of
Soviet oil flooding the West European market failed to
materialize because the Soviets lacked the oil. This time, they
have the gas and the potential ability to flood the market,
unless Western strategic and political considerations prevent
them from doing so.
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Distribution: (SOVM84-10143/84)
Original & 1 - Addressee
1 - ExDir/DCI
1 - SA/IA/DC
1 - DDI Action Staff
1 - DDI
2 - OD/SOVA
1 - Chairman/NIC
1 - NIO/E
1 - NIO/USSR-EE
1 - DC/PES/DDI
5 - CPAS/IMC/CB
1 - DDO/SAG
1 - D/OGI
1 - D/EURA
1 - SOYA/PS
1 - SOVA/ES
1 - Ch/DID
1 - Ch/EAD
1 - Ch/PAD
1 - Ch/TWAD
1 - Ch/SFD
1 - Ch/TFD
- SE/T
- SE/I
- SE/M
- SE/R
- State (EUR/RPE
- D /SE
SOVA/D/SE/R) I(27 Aug 84)
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