FINAL REPORT T O NATIONAL COUNCIL FOR SOVIET AND EAST EUROPEAN RESEARC H TITLE : Soviet Oil Policy and Energy Politics , 1970-198 5 AUTHOR : Thane Gustafso n CONTRACTOR : Columbia University, Research Institute on Internationa l Chang e PRINCIPAL INVESTIGATOR : Seweryn Bialer COUNCIL CONTRACT NUMBER : 627-1 3 DATE : March, 198 5 The work leading to this report was supported in whole or i n part from funds provided by the National Council for Sovie t and East European Research . -i - CONTENTS FIGURES i i TABLES Sectio n EXECUTIVE SUMMARY 1 I . THE DILEMMAS OF SOVIET OIL POLICY 3 II . THE BREZHNEV EMERGENCY RESPONSE, 1977-1980 1 8 A. Development 1977-1980 1 9 B. Exploration, 1977-80 26 III . SOVIET OIL POLICY SINCE 1980 3 1 A. Exploration in the 1980s 33 B. Development and Production Since 1980 3 7 C. The Latest Developments in West Siberia and Thei r Implications 5 5 IV . CONCLUSION 58 FIGURES 1 . Oil output versus investment - TABLE S 1 . Soviet Oil Output, 1975-1984 3 2 . Investment Data, Soviet Oil Industry, 1976-1983 (billions o f rubles) 3 . Drilling for Gas and Oil, Country-Wide 8 4 . Drilling for Gas and Oil, West Siberia 9 5 . Qualitative Trends in Soviet Oil Drilling : Key MNP Indicators 1 0 6 . Investment vs . Net Output Increments for Oil, Gas, and Coa l Compared (1982) 1 2 7 . Annual Rates of Increase in Soviet Oil Investment, 1978-8 2 (percent) 1 2 8 . All-Union and West Siberian MNP Drilling Compare d (development and exploration) 1 9 9 . New Well Flow Rates 20 10 . Relative Use of Different Drill Types in the Soviet Oi l Industry, 1970-1980 2 1 11 . Oil-Drilling Brigades Attached to Glavtiumenneftegaz 22 12 . Productivity of Development Oil Drillers in West Siberia , 1970- 1980) 23 13 . New Well Flow Rates in New and Old West Siberian Field s Compared 26 14 . Trend in Exploratory Oil Drilling in West Siberia, 1975-198 0 .. .. ... ... ... .. .... .. ..... .... .. .. ... .. .... ... .. ... 2 7 15 . Deterioration of Performance Indicators i n Glavtiumengeologiia, 1975-1978 2 7 16 . Anticipated Decline of Major West Siberian Oil Indicators _ (1970-1985) 32 17 . Qualitative 5-Year Drilling Goals (1980-1985) 33 18 . Share of Free Flowing Wells in Soviet Oil Output 39 19 . Installation of Gaslift Units 40 20 . Number of Wells to be Equipped with Electric Submersibles 42 21 . Average Time Between Repairs (Days), 1976, 1979 43 22 . Manpower Required for Well Maintenance and Repair, 1975-198 5 .... ... ... .... .. .... ... ... ... .... .... .... ..... .. ... 44 23 . Number of Producing Oil Wells, 1972-1985 44 24 . Allocation of Oil Industry Manpower in West Siberia , 1975-1985, as of total 45 25 . Incremental Production Attributable to Enhanced-Recover y Methods, 1975-1985 48 26 . Principal Tertiary Recovery Projects as of 1983 5 3 27 . Output Shares and Yield Per Meter Drilled, 1970-1985, Wes t Siberia 56 - v - KEY TO ABBREVIATION S SOURCES Ekonomika i organizatsii a promyshlennogo prozvodstva EKO Neftianoe khoziaistvo NK h Ekonomika neftianoi promyshlennosti EN P Narodnoe khoziaistvo SSSR Narkho z Geologiia nefti i gaza GN G Vestnik akademii nauk SSSR VA N Ekonomicheskaia gazeta EG Sotsialisticheskaia Industriia S I Planovoe Khoziaistvo PI Kh Oil and Gas Journal OGJ ORGANIZATION S Ministry of the Gas Industry M G P Ministry of the Oil Industry MN P Ministry of Construction for Oi l and Gas Enterprises MNG S Ministry of Geology Mingeo EXECUTIVE SUMMAR Y Since 1977 the Soviet leaders have staved off a decline in oi l output by doubling investment and shifting the oil industr y ' s resource s to West Siberia . As a result, the Soviet Union remains the world ' s leading oil producer, and its annual output has continued to increas e slowly but steadily, reaching 616 million tons (12 .32 million barrels pe r day) in 1983 . But the price has been high and the appearance of stabilization i s deceptive . The gains of the last seven years have come not fro m improvements in productivity but from a massive increase in infil l drilling and waterflooding, mostly using traditional technology . As th e benefits from the industry ' s move to West Siberia fade, it face s spiraling costs but few new opportunities . To maintain oil output a t its current level, the leaders may have to double oil investment ever y five years . Diminishing returns, of course, are the fate of all extractive industries, but the Soviet oilmen ' s failure to modernize thei r operations and improve their productivity, despite the high priority an d ample resources allocated to them, demands a special explanation . Th e answer, this report finds, is the intense campaign atmosphere that ha s surrounded the Soviet oil industry for most of its existence, bu t particularly since the leaders began pouring resources into oil seve n years ago . Leaders and planners demanded not merely that output b e stabilized but that it continue to grow year by year . Under suc h unremitting near-term pressure, the oil industry has been forced to pour the bulk of its resources into drilling, while neglecting vita l ancillary tasks, such as well completion, mechanization, an d maintenance . Exploration remains weak, labor turnover high, equipmen t inadequate both in quality and quantity, and infrastructure primitive . In 1982 and 1983 signs of trouble began to crop up in West Siberia , as for the first time in its history the Siberian oil association faile d to meet its annual output targets . The leaders responded with mor e emergency transfers of oil teams from the rest of the country to the 2 east of the Urals . At this writing (August 1984) the breach has been temporarily filled, but once again by heroic measures, not improve d efficiency . What are the larger costs of this brute-force strategy and why d o the leaders persist in it? Already the marginal capital costs of Sovie t energy in the form of oil are far higher than for gas, coal, or nuclea r power, and energy saved through conservation is two to four time s cheaper yet . Sound strategy, then, calls for reallocating resource s away from oil and letting its output fall to a level that can b e defended at more reasonable cost . Each year ' s delay is not onl y expensive in its own terms but -retards the inevitable transition of th e Soviet economy to l'apres-petrole. The Soviet leaders have already begun to make the shift towar d other energy sources, but if they have refused so far to accept a pea k of oil output, it is for four reasons : (1) National prestige is at stake ; (2) oil is the key to hard-currency earnings and to East Europea n commitments ; (3) the oil industry keeps promising that costs can be hel d back ; (4) the alternatives to oil are not yet ready to fill the void . The last point is especially important : gas output, in particular, i s growing rapidly, but there are limits to the rate at which it can b e absorbed into the economy . Coal and nuclear power, meanwhile, ar e having problems . In sum, despite the cost, Soviet leaders and planners dare not let up the oil campaign . Accordingly, in their recently published Energy Program, they hav e vowed to keep oil output growing steadily to the year 2000 . This report concludes, however, that in the absence of dramatic cost breakthroughs , which at this writing are nowhere to be seen, an attempt to maintain oi l output at its present level even to the end of the 1980s would b e expensive to the point of folly and would deny resources to the rest o f the energy sector, thus delaying the transition to gas, coal, an d nuclear . How long will the leaders persist in such a self-defeatin g course? I . THE DILEMMAS OF SOVIET OIL POLIC Y Nearly seven years have passed since the CIA predicted that Sovie t oil output would peak in 1980 and drop sharply thereafter .1 In th e risky world of oil forecasting (only one lonely expert, the now - legendary King Hubbard, predicted that U .S . oil production would peak when it did in 1970) the CIA ' s analysts came very close : ahead of an y foreign observer, they called attention to an impending crisis in th e Soviet oil industry ; and though Soviet oil production did not actuall y peak in 1980, since that year its growth has slowed to a crawl . What did not take place, however was the predicted sharp decline . It surely would have, if the Soviet leaders had done nothing . Bu t beginning in late 1977 they reacted vigorously, first by sharpl y shifting the oil industry ' s resources into West Siberia, and the n Table 1 SOVIET OIL OUTPUT, 1975-1984 1984 1975 1976 1977 1978 1979 1980 1981 1982 1983 (plan ) Tota l 490 .8 519 .7 545 .8 571 .5 585 .6 603 .2 608 .8 612 .6 616 .0 624 . 0 oil and condensat e West 141 . 4 175 .0 211 .1 245 .7 274 .4 313 .0 335 .0 353 .0 369 390 Siberia Sources : All Union : Narodnoe Khoziaistvo SSSR, various years . West Siberia : Through 1979, Tekhnicheskii progress v neftianoi promyshlennosti v desiatoi piatiletke , (Moscow, " Nedra " 1981), p . 90 . 1980-1983, Soviet Geography, Vol . XXV , No . 4 (April 1984) . 1 CIA, The International Energy Situation : Outlook to 1985 , ER77-10240 (April 1977) ; Prospects for Soviet Oil Production, ER77-1027 0 (April 1977) ; CIA Directorate of Intelligence, Prospects for Soviet Oi l Production : A Supplemental Analysis, (July 1977) . 4 4 following that up with a flood of additional money, manpower, an d resources .