INTELLIGENCE MEMORANDUM SOVIET LIQUEFIED NATURAL GAS FOR THE UNITED STATES?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030021-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 21
• Publication Date: February 1, 1972
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Soviet Liquefied Natural Gas for the United States?
s DOCUMENT SERVICES BRANCH
FILE COPY Confidential
ER IM 72-21
DO ROT DESTROY February 19 2
Copy No. 74.
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GROUP I
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1972
INTELLIGENCE MEMORANDUM
SOVIET LIQUEFIED NATURAL GAS FOR THE UNITED STATES?
Introduction
1. A consortium of three US companies - Texas Eastern, Tenneco,
and Brown & Root - is considering entering into an arrangement to import
Soviet liquefied natural gas (LNG), beginning in 1978, at a rate of I billion
cubic feet (cu. ft.) per day and increasing to 2 billion cu. ft. per day by
1980.(1) The gas would come from deposits in Western .Siberia, and, if
delivery proceeds well, imports might eventually be increased to 4 billion
cu. ft. per day. The companies would undertake to finance construction
of an all-year LNG terminal and liquefaction plant at a Soviet port,(2) a
pipeline from the gas fields to the port, and up to 20 I NG tankers. The
total capital cost is expected to be in the neighborhood of $4.2 billion -
$2 billion for ships and ship terminals in the United States and $2.2 billion
for field facilities, pipelines, and an LNG plant in the Soviet Union. Of
the latter figure, the USSR would contribute $0.6 billion, probably mcstly
in domestic labor and materials, and would try to obtain Western credits
for the remaining $1.6 billion. The proposed facilities would be utilized
to full capacity at 2 billion cu. ft. per day and larger deliveries would
necessitate further investment. The consortium anticipates that the LNG
will be priced at about 500 per 1,000 cubic feet at the Soviet port, and
$1.25-$1.50 per 1,000 cubic feet landed on the US East Coast.
2. The present memorandum assesses the probab~e relia..ility of the
USSR as a source of such imports into the United States. In doing so it
will examine the availability of gas for export from the Soviet Union and
1. i billion cu. ft. per day equals 10 billion cubic meters (cu. in.) per year.
2. Riga on the Baltic Sea, Murmansk on the Barents, or Arkhangelsk on the White
Sea have been mentioned as possibilities.
Note: This memorandum was prepared by the Office of Economic Research.
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the terms on which such export would be economically feasible for the
USSR. More specifically, it will consider: (a) reserves of natural gas in the
USSR, especially those in Western Siberia; (b) problems of producing and
transporting gas from these reserves to an export port; acid (c) the likelihood
that the gas might be diverted to meet other commitments, either for
domestic consumption or for export to Eastern or Western Europe.
Conclusions
3. The USSR almost certainly will be capable of supplying the
United States with 2 billion cubic feet per day of liquefied natural gas
by 1980, if US credit, a ;uipment. and technical assistance are available.
Enormous high-quality gas reserves have been found in Western Siberia, but
Soviet technology is poorly suited to cope with the severe terrain and
climatic problems and to s,.ipply the kind of equipment needed to bring
the gas to market. Acquisition of LJ S technology and equipment thus would
facilitate not only export of LNG to the United States, but also long-term
development of the Soviet petroleum industry in the area, and probably
of other industries as well.
4. The quantity of gas proposed for sale to the United States
represents only about 4% of estimated Soviet supply in 1980, an amount
that probably could be made available even though it was not previously
taken into account in tentative long-range plans. Consideration i;$ already
being given to increasing Soviet imports of low-cost ga,. from Iran, beyond
currently planned levels, and, if necessary, adjustments could b's made
through increased use of coal by large energy consumers such as the electric
power and, metallurgical industries.
5. The proposed prices of 50? per 1,000 cu. ft. at a Soviet port
and $1.25-$1.50 per 1,000 cu. ft. delivered on the US East Coast appear
favorable for both the USSR and the US consortium, although perhaps
rather costly for the US consumer. The price at the Soviet port is nearly
50% higher than the prices of around 340 per 1,000 cu. ft. at which the
USSR has contracted to deliver gas, via pipeline, over roughly twice the
distance to Western Europe. The proposed price for Soviet gas delivered
to the US East Coast is 1-1/2 to 2-1/4 times the proposed landed cost
of 67 ? to 84 ? per 1,000 cu. ft. for LNG from Algeria, although the distance
that the Soviet gas must be transported is only about one-fifth longer than
that for the Algerian gas.
6. With the proceeds from the sales to the United States, the USSR
could repay anticipated foreign indebtedness for field facilities, pipelines,
and an LNG plant in the Soviet Union within six or seven years. Thereafter,
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it would earn (and the United States would pay) some $365 million per
year, an amount about equal to present hard currency earnings from Soviet
exports of oil. Over the portion of a 20-year agreement remaining after
debt retirement, Soviet earnings would total at least $4.7 billion.
7. The desire to realize such earnings of hard currency probably
constitutes the best guarantee that the Soviet Union would be a reliable
supplier. Moreover, the USSR has a good record of honoring contractual
obligations and has a stable government. The proposed US purchase of
Soviet LNG would give both countries a vested interest in continued
cooperation.
8. Although unforeseen, temporary domestic shortages might force
the USSR to decrease deliveries of LNG to the United States to make gas
available for use at home, prolonged diversion to such use does not seem
likely unless Soviet-US political relations deteriorate seriously. Diversion for
,.xp *c to other non-Communist customers appears even less likely, as it
is doubtful that other Western countries would accept gas diverted frtcm
the United States.
Soviet Gas Reserves
9. The USSR unquestionably has extensive reserves of natural gas.
In a speech before the Supreme Soviet on 27 November 1971, A.!,.
Kortunov, Minister of the Gas Industry, indicated that "explored"
reserves(3) now total about 16 trillion cu. m. (565 trillion cu. ft.)(4) This
would be a 75-year supply at the current rate of production. Soviet estimates
of explored reserves, however, are based on insufficient drilling and are
3. The Soviet concept of "explored" reserves is broader than the US concept of
"proved" reserves. Under the US definition, proved reserves are established on the basis
of drilling and include only the crude oil and natural gas liquids recoverable from known
deposits under existing economic and operating conditions. Soviet "explored" reserves
are inferred or estimated on the basis of less extensive drilling, and capability for
economic extraction is not a requirement for inclusion.
4. 1 cu. m. equals 35.3 cu. ft.
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often grossly inflated.(s) Soviet reserves that have been proved by drilling
and are available for production probably amount to only some 3 trillion
cu. m., about a 14-year supply at the current rate of production. By way
of comparison, in 1970 proved reserves of natural gas in the United States
were estimated at 8.2 trillion cu. in., about a 13-year supply, and proved
reserves in the world as a whole totaled approximately 45 trillion cu. m.
10. The location of Soviet gas reserves is a major problem. Kortunov
noted that abc?ut 80% are located east of the Urals Mountains, whereas
70% of the consumption occurs 2,500 to 3,000 kilometers (1,500 to 1,900
miles) to the west in the European USSR. At least half of the explored
gas reserves are located in permafrost regions of West Siberia (in the Ob'
River delta), and about one-fourth of the total are found in the deserts
of Central Asia. Most of the remainder lie in the Ukraine, North Caucasus,
and Urals-Volga Regions in the European part of the country.
11. Most Soviet gas is rich in methane and has a high calorific content.
However, the gas of Central Asia reportedly has some highly corrosive
properties, and that of Western Siberia in most cases is accompanied by
sand and water.
12. During the past five years, the Soviet Union claims to have
discovered 15 giant gas fields; 10 of these are located in the Ob' River
delta of Western Siberia and are expected to be major producers. However,
none of the latter have yet been developed, because of the overlying
permafrost, which complicates drilling, production, and pipeline
operations.(6)
5. For example, negotiations for sale of Soviet gas from Sakhalin to Japan were
suspended in 1970 when reserves of gas in
Sakhalin were actually only )'6 billion cu. in. and not 60 billion cu. in. as had been
claimed in official Soviet statistics. The actual reserves of gas would have been inadequate
to supply Japan with 2.4 billion cu. in. annually for 20 years as had been discussed
in the negotiations. As an alternative the USSR has suggested that Japan participate
in developing gas deposits in the Yakutsk area if East Siberia and take repayment in
gas, but thus far Japan has been unwilling to make the large investment required.
Similarly, in 1968 the estimate of reserves in the Kalmyk ASSR was reduced from
more than 50 billion cu. m. to about 15 billion cu. m. Downward revision of the
estimated Vuktyl gas condensate reserves also has caused plans for 1975 production
from these reserves to be reduced from 40 billion cu. in. to 15 billion cu. in.
6. The difficulty of extracting natural gas in permafrost areas is well illustrated by
the case of the Tazov gas field, one of the major fields in West Siberia. Failure to
insulate the well casing in permafrost resulted in the warm gas melting the permafrost
causing the casing to collapse and extensive cratering of the area. As a result a huge
amount of gas was lost, and the USSR no longer lists this field as one of the country's
most important gas deposits.
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13. Other factors affecting the development of these deposits are
poorly consolidated sand reservoirs in the Siberian structures, the presence
of natural gas liquids that must be disposed of, and the formation of gas
hydrates that freeze at the well head and stop the flow of gas. In addition,
Soviet engineers are faced with the formidable problem of building
long-distance, large-diameter pipelines over permafrost and difficult terrain
to move the gas to major consuming areas in the European part of the
USSR. It is from these West Siberian fields, however, that most . f the
gas must come to satisfy the anticipated growth in domestic demand during
the remaining years of the decade.
14. The gas for the proposed sale of LNG to the United States also
must come from these West Siberian deposits, although it is not clear which
of several fields in this area is the most likely source. The large Medvezh'ye
field is estimated to contain 1.0-1.5 trillion cu. m. of expi.'ired reserves
and is scheduled to be producing 35 billion cu. m. annually ; 3.5 billion
cu. ft. per day) by 1975. Gas from Medvezh'ye would have several
advantages for the LNG project. It is high in methane content (98%) and
is situated some 2,000 to 3,000 kilometers (1,230 to 1,900 miles) from
possible export ports on the White, Barents, or Baltic Seas. Although this
is a considerable distance, pipeline distances to other deposits would be
even greater (see the map). However, Soviet planners have already scheduled
the Medvezh'ye field for extensive development during 1971-75 and are
counting on it to provide about one-fourth of the increase in total Soviet
gas output for the period. It is likely that this gas probably is already
allocated in the plan, mainly to domestic uses.
15. The large Urengoy deposit, some 200 kilometers east of
Medvezh'ye, is estimated to -ontain 2-5 trillion Cu. in. Gas from this deposit
has tested 84%-91% methane. Unfortunately, however, it also is said to
contain large amounts of condensate (natural gas liquids) which would be
technically difficult to process and which would necessitate considerable
additional investment in equipment.
16. Among the more thoroughly explored and densely drilled
deposits, those of Zapolyarnyy, approximately 100 kilometers northeast of
Urengoy, and Gubkin and Komsomol'sk, about 100 kilometers to the south,
appear to be the best potential sources fo- the LNG proposed for sale to
the United States. Information on these deposits is summarized in the
following tabulation.
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Deposit
Methane
Content
(Percent)
Number
of
Wells
Drilled
"Explored"
Reserves
(Billion cu. m.)
Zapolyarnyy
98
24
1,500
Gubkin
96
31
352
Komsomol'sk
97
28
74 to 377
None of these fields would require drilling to depths of more than 1,350
meters. The methane content of all is high. The most promising candidate
for supplying the United States with LNG would appear to be the
Zapolyarnyy deposit. Its reserves are large enough to appear to be a
reasonable source for the proposed US imports of up to 40 billion cu. in.
per year (4 billion cu. ft. per day) for a prolonged period, even allowing
for the usual Soviet over-estimation of reserves and the possibility that
production difficulties could lead to a relatively low rate of recovery,
perhaps only about one-half of the claimed reserves. Moreover, its proximity
to the Ob' and the Tazov Gulfs would facilitate summer delivery of pipe,
drilling rigs, and other equipment required during development.
Production Levels: Present and Planned
17. The USSR produced slightly less than 200 billion cu. in. of gas
in 1970, and preliminary data indicate a production of about 212 billion
in 1971. It ranks second in world output, accounting for approximately
one-sixth of the total, but is well behind the United States, which in 1970
produced 620 billion cu. in., 54% of world output. The gap between Soviet
and US gas production, however, is closing. During 1966-70 the annual
rate of increase in Soviet natural gas production was 9.2%, about 45% greater
than that in t' he United States.
18. In 1975 the USSR plans to produce 320 billion cu. in. of natural
gas, an ambitious goal in light of the gas industry's chronic failure to fulfill
plans throughout the past decade. Attaining the target for 1975 will require
an, average annual rate of growth of about 10% during 1971-75 and an
annual increment in output of 24 billion cu. in. (2.4 billion cu. ft. per
day), about 70% more than the average increase of 14 billion cu. in. per
year (1.4 billion cu. ft. per day) attained during the previous five years.
About one-half of the Soviet production of natural gas in 1970 came from
four large deposits: Shebelinka in the Ukraine, Krasnodar and North
Stavropol' in the North Caucasus, and Gazli in Central Asia. However, all
of these gas fields have reached their peak levels of production, and
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~~North St vrop\
Nort
Cauca~bs
lBiku _ _ I +
u'nkrnenI ~
SSR I (.
chsoran
IRAN
AFGHANISTAN
Major gas area
0 Gas field
GAS PIPELINES
In operation
--Under construction
--Proposed
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production from them will decline in the future, perhaps at the rate of
6% or 7% annually. With production from the older fields declining,
achievement of the 1975 goal will be heavily dependent upon development
of reserves that thus far have been only partly explored, primarily the
reserves of West Siberia and Central Asia. Current plans call for bringing
gas from the Turkmen SSR, in Central Asia, to the Ukraine to supplement
supplies for local use, for transmission to the Moscow area, and for export
to Eastern and Western Europe - at least until more West Siberian gas
becomes available for these purposes.
19. As yet, nothing resembling a firm plan for production of natural
gas in 1980 is available. Three or four years ago, articles in Soviet technical
journals mentioned 550-600 billion cu. m. as a tentative target for 1980
production, but no such discussion has been noted recently. In view of
the extremely difficult production and transportation problems to be
overcome as a greater share of the gas comes from West Siberia, an annual
output of over 500 billion cu. m. by the end of the decade is by no means
certain. Attainment of this level would require an average annual increment
during 1976-80 of 36 billion cu. m. (3.6 billion cu. ft. per day), more
than 2.5 times the annual increases now being achieved. A considerable
injection of foreign equipment and technical assistance would, of course,
improve chances for reaching an annual production of 500 billion cu. m.
or more by 1980.
Production Problems
In the Older Producing Regions
20. Ability to offset the decline in reserves and to stabilize production
in the older producing regions of the European USSR will depend to a
large degree on improving capability for deep drilling to exploit :iew reserves
that occur at depths of 2,500 to 5,000 meters (8,200 to 16,400 feet).
Soviet turbodrilling equipment now used for 80% of the drilling becomes
inefficient at depths of more than 2,000 meters (6,600 feet). A similar
deep-drilling problem also e,usts in Central Asia.
In the New Producing Regions of West Siberia
21. In the permafrost regions of northern Tyumen Oblast, the area
from which LNG for the United States would come, a different set of
production problems will be encountered. Although Soviet turbodrills, mud
pumps, and mud systems may be adequate for average needs in the western
part of the country, they are ill-suited for permafrost conditions and the
tapping of possible high-pressure gas reservoirs in the far north. Lack of
reliable high-pressure mud pumps and blowout preventors will make gas
8 -
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well drilling particularly hazardous in this area. The temperature and
composition of drilling fluids is extremely important in permafrost drilling
if ground thaw, subsidence, and loss of the well and equipment are to be
avoided. Soviet drilling rigs are made of tubular steel, rather than of
angle-iron as in the United States, and are extremely heavy and bulky. One
of the newer "portable" models requires, as many as 12 tractors to pull
it, a factor that will cut down mobility in slightly thawed permafrost or
swampy areas. Soviet drill pipe also is heavy and made of lower quality
steel than its US counterpart. Impurities, flaws, or hairline cracks are
magnified in severe cold, which makes the steel more brittle and subject
to failure. The life of Soviet drill bits also can be expected to be extremely
short under the conditions that will be encountered in Siberian drilling.
22. Practically all of the deposits of northern Tyumen consist of
loosely consolidated sand and clay reservoirs with a water drive. This
condition is almost certain to create problems with hydrates and perhaps
severe abrasion of all tubular steel used in production. Thus, in addition
to developing methods for preventing ground thaw during drilling and
around producing wells or operating pipelines, Soviet technicians must equip
and produce welly in a manner designed to minimize formation of hydrates
(or in some cases of natural gas liquids) in the producing column and at
the wellhead. If the wells are permitted to flow properly, these liquids can
be removed at the surface prior to pipeline transport. If they are not, well
apertures may be clogged and flow rates reduced. Shutting down production
to correct these problems or for other maintenance during times of severe
cold will increase the danger of hydrate freezing and may result in cracked
or split valves and wellhead control fittings.
Pipeline Transport Problems
23. Development of the West Siberian gas fields for domestic supply
and for export will entail laying large quantities of large-diameter (48-inch
and 56-inch) linepipe. The current Five-Year Plan commits the Ministry
of the Gas Industry to construct 57,000 kilometers of pipelines during
1971-75, consisting of 27,000 kilometers of oil pipeline and 30,000
kilometers of trunkline for gas. This is an extremely ambitious target, almost
a two-thirds increase over the 35,000 kilometers laid during 1966-70.
Moreover, the shortages of large-diameter pipe, valves, and compressors that
led to chronic underfulfillment of pipeline goals during the 1960s will
continue ;o exist. Fulfillment of the goal will require at least 16 million
tons of pipe, which exceeds the total of currently planned imports and
domestic production capability during the five-year period by about 6
million tons. Perhaps one-third of the target for gas line - that is, about
10,000 kilometers - is associated with exploitation of the West Siberian
gas deposits.
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24. Thus far, Soviet technicians have not solved problems associated
with thawing of the permafrost, nor have they conducted sufficient research
on soil conditions to insure safe construction of pipelines in the Arctic.
Temperatures in West Siberia may fluctuate from -70?F. to +100., and
surface winds can gust up to 90 miles per hour. Both factors have led
to repeated failures and breaks in the pipeline constructed above ground
between Messoyakha and Norilsk, the only commercial-sized gas pipeline
above the Arctic Circle. Warm weather causes the line to expand and chafe
on its supports, the pilings shift, and sections of the line fall off the supports
and break. High surface winds have also caused sections to vibrate and
rupture. Soviet linepipe is made with thick walls of poor quality steel that
becomes quite brittle at -40*F. and is susceptible to breaking on any impact.
The same problem affects the quality of Soviet valves which are prone to
failure in Arctic service. Soviet welding is also not adequate for Arctic
service, and defective welds are known to have been a frequent cause of
pipeline failures.
25. Plans previously called for production during 1971-75 of linepipe
2,520 millimeters (99 inches) in diameter for use in connecting the gas
fields of northern Tyumen Oblast with consuming centers in the
Moscow-Leningrad area. However, these plans were abandoned in 1971
following initial tests of an experimental section near Vuktyl. The
2,520-millimeter line was expected to carry 90-100 billion cum. per year.
The alternative now would appear to be construction of three or four
pipelines each having a diameter of 1,420 millimeters (56 inches), but this
will increase the requirement for steel linepipe, valves, and compressors -
items already in short supply.
Availability of and Requirements for Gas
26. Any attempt at relating the availability of gas in the Soviet Union
to possible requirements in the last years of this decade and during the
next must be highly conjectural. As indicated above, achieving the goal
for production of 320 billion cu. in. of gas in 1975 will be difficult, and
production of more than 500 billion cu. in. by 1980 appears unlikely. There
is little basis for estimation of production beyond that date. The USSR
is, however, well endowed with natural gas reserves - even allowing for
overestimation - and production probably will continue to grow.
27. In 1970 the Soviet Union was a net importer of gas, importing
a total of 4.6 billion cu. in. of low cost gas from Afghanistan and Iran,
primarily to satisfy local demand in areas contiguous to those countries,
and exporting a little over 3 billion cu. m. to Eastern Europe and Austria.
By 1975, however, the USSR is scheduled to become a net exporter of
gas, and by 1980 it probably will have a net export surplus of some 20
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billion cu. m., not including any possible sales to the United States. In
the latter year, total exports of about 40 billion cu. m. probably will be
divided almost equally between non-Communist and East European
countries (see the table).
28. In recent years the share of the chearer and more efficient fuels --
oil and gas - in total Soviet consumption of energy has been increasing,
primarily at the expense of coal. The share of natural gas alone rose from
17% in 1965 to almost 21% in 1970. During these years, industry consumed
about 85% of the total supply of natural gas, with electric powerplants
being the largest users, followed by the metallurgical and construction
materials industries. Further increases in gas consumption are called for
during the current Five-Year Plan, especially in the chemical and
metallurgical industries and in the communal household sector.
29. The quantity of natural gas available for consumption in the USSR
increased at an average annual rate of about 9% during 1966-70, and it
is estimated that this yearly rate of growth will continue through 1980.
The supply of gas probably will increase from about 200 billion cu. m.
in 1970 to some 480 billion in 1980, as shown in the following tabulation:
Billion Cubic Meters
1965
1970
197~i
1980
Production
127.7
197.9
320
500 a/
Imports
0
+4.6
+14
+15 to +25
Exports
-0.4
-3.3
-20 to -23
-36 to -43
Avai Zab Ze
for con-
sumption
127.3
199.
311 - 314
472 - 489
a. Estimated output, based on present conditions
without assistance. Preliminary plans indicated
a goat of 550-600 billion cu. M.
Should production not reach these projected levels, the shortfall probably
would not be large enough to create serious problems.
30. We have no quantitative projections for gas production after 198r
when most of the proposed LNG deliveries to the United States woula
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Actual 1970
Exports 3.3
Non-Communist countries 1
Austria 1
Finland
France
Italy
West Germany
Subtotal to Western Europe
Japan
United States
Communist countries (Eastern Europe) 2.3
Bulgaria 0
Czechoslovakia 1.3
East Germany 0
Hungary
Poland
Imports 4.6
Afghanistan 2.6
Iran 2
1975
1980
20
- 23
35.5
- 43
810
- 11.0
16.5
- 24
1.5
- 3.0 a/
1.5
- 3.0 a/
0.5
1.5
0.5 b/
2.5
4.5
6.0
1.5
- 3.0 a/
3
?- 7
8.0
- 11.0 c/
14.5
- 20 c/
2 b/
2
- 4
0
10
- 20 b/
12
19
3
5
3
5
3
3
1
3
3
15
- 25
5
10
20 d/
a. Discussions are under way that may result in receipt of the larger volumes
gas shown.
b. Agreements remain unsigned, therefore not included in export totals.
C. Soviet supplies of gas to Western Europe will represent only about 5% of
Western Europe's estimated demand for gas in 1975 and 1980.
d. In recent months the USSR has been considering doubling the present commit-
ment to import 10 billion cu. m. from Iran in 1980. Such an ^nc:pease, however,
will require construction of a second pipeline.
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take place, although Soviet production undoubtedly will continue to
increase. It is possible that technology and equipment provided by US firms
in connection with the LNG arrangement not only would provide West
Siberian gas for export to the United States but- also would increase output
of gas from this region for domestic use. Increased imports of gas from
Iran, now being considered by the USSR, would be another means of
expanding Soviet gas supplies. If, in spite of increased production and
imports, domestic requirements should exceed supply, major Soviet
consumers -- such as the electric power and metallurgical industries - could
use more oil or coal. Production of coal could readily be increased, and
plans already exist for building large thermal powerplants that will burn
low-cost strip-mined coal from deposits east of the Urals. If the USSR places
a high enough priority on exporting gas to earn foreign exchange, any
necessary adjustments probably will be made.
Some Price Comparisons
31. The proposed prices of the LNG, about 500 per 1,000 cu. ft.
at a Soviet port and $1.25-$1.50 per 1,000 cu. ft. landed on the US East
Coast, appear quite favorable both for the USSR and for the US consortium,
but perhaps not for the US consumer. As indicated previously, the gas
probably would come from fields in the Ob' River delta and would be
transmitted by pipeline about 2,000 kilometers to Arkhangel'sk or perhaps
some 3,000 kilometers to the ice-free ports of Murmansk or Riga. The USSR
has entered into long-term contracts to deliver gas from essentially the same
area over a distance of some 5,000 kilometers to Western Europe for around
$12 per 1,000 cu. m. (340 per 1,000 cu, ft.)(7). Sale at this price over
the greater distance to Western Europe indicates that the anticipated price
of 500 per 1,000 cu. ft. at a Soviet port is quite generous for LNG destined
for the United States.
7. At the end of November 1969 the USSR entered into a 20-year agreement to
supply natural gas to West Germany. Deliveries will be via a pipeline through
Czechoslovakia, to begin at 500 million cu, in. in 1973 and increase to 3 billion cu. m.
per year within six years. The exact price of the gas has not been announced, but
unofficially has been indicated as being in the vicinity of $11.84$12.16 per 1,000 cu. in.
delivered at the Czechoslovak border.
In December 1969 the USSR and Italy's national hydrocarbon monopoly, ENI,
signed a 20-year agreement that reportedly calls for delivery of Soviet gas to Italy to
begin in 1973, with deliveries increasing gradually thereafter to 6 billion cu. in. annually
in about three years. The gas reportedly will be valued at approximately $11.20 per
1,000 cu. in. at the Italian border.
These prices are slightly lower than the export price of gas from the Netherlands
the price of British North Sea gas consumed in the United Kingdom, and of Algerian
LNG delivered to the French port or' Fos. Hence, they can be regarded as competitive
in Western Europe.
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32. To complete the comparisons, it is worth noting that negotiations
are now under way whereby Algerian LNG wouk be purchased at 30.5 ?
per 1,000 cu. ft. f.o.b. the Algerian port of Arzew and landed on the US
East Coast at 670 to 840 per 1,000 cu. ft., depending on the season.,
port of entry, and volumes involved. (The distance from Algeria to US
East Coast ports proposed for deliveries is about 15%-20% less than that
from Soviet ports under consideration.) US technical journals have indicated
that deliveries of LNG from Nigeria would be feasible only at a price of
$1.00 or more per 1,000 cu. ft. Deliveries from the latter source probably
would cost somewhat more than deliveries of LNG from Venezuela,
Trinidad, or Ecuador. Domestic gas from the southwestern United States,
the most likely source of supply, is expected to cost East Coast distributors
600 to 75 ? per 1,000 cu. ft. by 1978-80. The cost of gas delivered from
the Canadian Far North or from the Alaskan North Slope probably would
fall in the range of $1.10 to $1.25 per 1,000 cu. ft. (Delivery from Alaska
to Chicago at a price of 950 per 1,000 cu. ft. has been discussed, but
delivery of this gas to the East Coast seems unlikely.) Synthetic gas made
from Pennsylvania coal might be available at a cost of $0.75-$1.00 per
1,000 cu. ft. by 1980, or, if synthetic oil is produced in conjunction with
the gas, this price range probably could be reduced by about 150.
Debt Retirement and Foreign Exchange Earnings
33. Texas Eastern has tentatively estimated the capital costs of the
proposed LNG arrangement at about $4.2 billion, distributed as follows:
Billion
US $
In the USSR
(Field facilities,
pipelines, LNG
plant)
Outside the USSR
(Shipping) 2.0
The consortium has stated that the USSR must finance the total cost -
$2.2 billion - of facilities on Soviet soil. The USSR will contribute $0.6
billion of this total, probably mainly in domestic material and labor, and
the consortium has volunteered to help obtain financing for the balance.
The USSR, however, has indicated a reluctance to pay more than 6%
interest.
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34. If deliveries take place at the suggested rate of ! billion cu. ft.
per day during the first two years and 2 billion cu, ft. per day thereafter,
the 50? per 1,000 cu. ft. mentioned as the possible cost of the gas at
a Soviet port would be adequate to permit repayment of $1.6 billion at
6% interest per year within about six and one-half years, If the interest
rate should be as high as 8%, this delivery schedule would permit repayment
in a little over seven years. After repayment of the debt, the USSR would
be earning $365 million per year, which could be used to finance imports
of US equipment and technology.(8) This amount is approximately equal
to present annual c rnings of hard currency from Soviet exports of oil,
which in recent years have been the largest single source of such earnings
for the USSR. During the proposed 20-year life of the agreement, Soviet
earnings over and above the amount required for debt repayment would
total more than $4.7 billion.
35. As the initial system is expected to be capable of handling only
2 billion cu. ft. per day at full capacity, increasing the quantity of LNG
importer; to 4 billion cu. ft. per day, as is being contemplated for some
later dat? , would necessitate investment in additional facilities. Whether
doubling the US imports would bring about a corresponding increase in
Soviet earnings would depend on costs and terms negotiated at the time.
36. There has been some discussion that the USSR may share half
of the operating expenses of the LNG tankers. Should this be the case,
presumably this contribution would come from a Soviet share in the $0.75
to $1.00 per 1,000 cu. ft. that has been estimated as the necessary
allowance for fixed charges and transportation costs outside of the USSR.
Reliability of Supply
37. The USSR probably can be regarded as being as reliable a source
of supply as almost any foreign country if the technical problems of
extracting and transporting the gas can be overcome. It has extensive gas
reserves and many resources at its command with which to overcome
difficulties that might interfere with deliveries. It also has a stable
government. The Soviet record of honoring contractual obligations has been
good and probably will continue to be good, barring any drastic change
in the international political climate. In entering into long-term contracts
to purchase gas from the Soviet Union, the Austrians, West Germans, and
Italians have concluded that this will be the case, and the French and
Japanese apparently have no hesitation about negotiations that r.,ay lead
to similar contracts.
8. The USSR has indicated willingness to use the earnings for purchase of US goods.
Whether all funds earned will be so used will depend on final negotiations.
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38. A glance at the map will suffice to indicate that the possibility
of diverting gas destined for a liquefaction plant at Riga, Murmansk, or
Arkhangel'sk cannot be avoided. The gas will flow through part of the same
system that will be supplying the Moscow and Leningrad areas. Temporary,
critical domestic shortages might force the USSR to decrease deliveries of
LNG to the United States to make gas available for domestic use. Complete
or prolonged interruption of exports, however, does not seem likely. Exports
to the United States would be only about 4% of Soviet domestic supply
in 1980. It is probable that once the liquefaction and export facilities were
built, the USSR would wish to keep them operating at capacity, and it
is unlikely that other Western countries would accept gas diverted from
the United States.
39. The USSR has a growing requirement for technology, machinery,
and equipment from the West. Its exports to developed non-Communist
countries, however, have failed to keep pace with the growth in its imports
from these countries. The deficit in Soviet trade with hard currency
countries has averaged more than $300 million per year over the past decade.
Deficits are financed primarily by Western long-term credits, and total
outstanding Soviet indebtedness to the West by the end of 1971 was
estimated at more than $2 billion. The burden of servicing this debt has
become substantial and may soon force a slowdown in Soviet imports from
the West. This is a major Soviet motive for seeking Western credits for
export-oriented production. The best guarantee of the reliability of Soviet
deliveries of LNG to the United States will be the fact that these gas exports
will afford the USSR opportunity to earn foreign exchange that can be
used to finance further imports of Western technology and equipment.
Some Considerations of Relative Advantage
40. It is generally conceded that under current economic conditions
and policies the United States will become increasingly dependent on foreign
sources of supply for energy. According to calculations by the National
Petroleum Council, by 1980 foreign sources may satisfy nearly half of the
US market demand for oil and perhaps one-third of the demand for natural
gas. Other estimates place the dependency on foreign sources somewhat
lower, but are in agreement that unless domestic reserves with a potential
for supplying energy at higher cost are to be exploited, imports will account
for an increasing share of the US energy supply. Most US energy imports
probably will come from the Middle East, Africa, Canada, and Latin
America. The proposed imports of LNG from the USSR would afford some
slight diversification of supply but would not be large enough to affect
significantly dependence on the other sources.
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41. US equipment and technology provided under the proposed LNG
arrangement undoubtedly would help the USSR to solve the many problems
associated with development of Siberian gas fields and the transport of gas
for the LNG deal itself. Moreover, earnings from the sale of LNG to the
United States would, after the initial period of debt retirement, make
possible further imports of technology and equipment for use in general
development of the Soviet oil and gas industry, and probably other
industries as well. The LNG arrangement would create mutual vested
interests in the United States and the USSR. The United States would be
interested in continuing to receive the gas (at reasonable prices) and to
sell equipment. The USSR would be interested in earning forcip^ r'cchange,
especially for the purchase of technology and equipment.
42. The major disadvantage in the LNG proposal, from the US point
of view, would appear to be the high levee of prices that have been
mentioned thus far. Although a high price undoubtedly increases the Soviet
incentive to be a reliable supplier, the prices under discussion may be higher
than necessary and higher than the price of gas from other sources.
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