Chapter V.6 Energy
- International Monetary Fund
- Published Date:
- December 1991
The USSR is well endowed with energy resources; according to Western estimates proven Soviet energy reserves include 58 billion barrels of crude oil, 52 trillion cubic meters of natural gas, and (according to Soviet sources) 240 billion tons of coal. Reserves of uranium are unknown but are estimated to be sufficient for 100 years assuming average development. Some 90 percent of Soviet energy resources are found in the RSFSR. Soviet oil production, having fallen to an estimated 570 million metric tons in 1990 from a peak of 624 million metric tons in 1988, still constitutes some 20 percent of world output. Gas production grew to 835-845 billion cubic meters in 1990, or 40 percent of world output. Coal production, down to 700 million metric tons in 1990, is still 15 percent of total world output. Total energy production in the USSR had risen steadily through 1989, albeit with a varying fuel configuration, accommodating both rising exports and growing domestic demand (Table V.6.4).
(Tons of oil equivalent per thousand 1985 U.S. dollars of output)1
|Refinery and chemical||1.91||1.68||1.73||1.37|
|Private road transport|
|(in kilograms of oil equivalent per|
|Residential sector (in kilograms of|
|oil equivalent per square meter)||36.8||32.1||27.5||22.6|
Services exclude transport but include communication; energy industry includes non-energy mining and water utilities, but excludes refineries.
Services exclude transport but include communication; energy industry includes non-energy mining and water utilities, but excludes refineries.
|Coal||Land alienation1 and subsidence; liquid waste discharges and acid mine drainage; solid waste; methane emissions||Fugitive dust emissions||Airborne emissions of PM, SO2, NOX, CO, CO2, radionuclides and heavy metals; thermal pollution; degradation of visibility in arctic; solid waste||Airborne emissions of PM, SO2, NOX, CO, CO2, radionuclides and heavy metals||Airborne emissions of SO2, NOX, PM from individual and block combustion units in smaller cities|
|Oil||Soil and water pollution from spills; brines; H2S and CH4 releases and CO2 from flaring; subsidence and seismic instability; blowouts||Maritime pollution; VOC emissions; soil and water pollution from pipeline ruptures and leaking underground tanks||Refineries; airborne emissions of SO2, NOX, PM, CO, CO2; soil and water pollution from product spills; liquid wastes; thermal pollution||Airborne emissions of SO2, NOX, PM, CO, C02, thermal pollution||Airborne emissions of SO2, NOX, PM, CO, lead, HC, CO2||Airborne emissions of SO2, NOX, PM, CO, CO2||Airborne emissions of SO2, NOX, PM, CO, CO2 from smaller combustion facilities|
|Gas||Land alienation||Explosions; land alienation||Airborne emissions of SO2 (only from sour gas), NOX, CH4, CO, CO2||Airborne emissions of NOX, CO, CO2, CH4 and SO2 (from untreated sour gas); thermal pollution||Airborne emissions of SO2 (from untreated sour gas), NOX, CO, CH4, CO2||Airborne emissions of SO2 (from untreated sour gas), NOX, CO, CH4, CO2 for individual heating units and stoves|
|Uranium||Land alienation, radon emissions; process effluents, tailings releasing radionuclides||Accidental radioactive contamination of soil and water||Gaseous or liquid fluoride effluents; radionuclide releases||Accidental operational radioactive releases; accidental exposure during disposal and storage of low-level and high-level waste and decommisioning; thermal pollution|
|Renewable energy||Hydroelectric dams: land alienation Geothermal: land alienation; releases of H2S; liquid wastes Biomass: land alienation||Biomass: Airborne emissions of PM, CO and NOX Municipal waste: toxic air pollutants, PM||Biomass: PM, CO and NOX emissions||Biomass: PM, CO, NOX from individual wood heaters in remote areas|
Underlined environmental impacts are the major sources of concern (i.e., cost to human health and ecosystems).
Underlined environmental impacts are the major sources of concern (i.e., cost to human health and ecosystems).
|Oil and gas exploration and development|
|Horizontal drilling techniques|
|Improved drill pipes|
|Modern mud technology|
|Offshore oil production equipment (floating platforms, underwater completion equipment)|
|Exploration equipment and techniques (seismic equipment, field computers, to map up to ten+ miles below the surface, stratigraphic exploration expertise, identification of hydrocarbons through layers of salt, drilling techniques to control sub-surface high pressure and corrosive gases)|
|Equipment for injection wells to control water flooding and maintain reservoir pressure|
|Hydraulic systems and control system (e.g., for deep well pumps for crude oil extraction)|
|CAD/CAM methods for development of oilfield equipment|
|Machines and plants for capture, treatment, and liquefaction of associated gas|
|Nonreservoir pumping and hermetically sealed gathering, treatment and transport systems|
|Multi-hydrocyclones for cleaning liquid discharges|
|Enhanced oil recovery equipment and techniques|
|Onshore and offshore arctic technology:|
|Improved pipeline coatings for low-temperature applications and service|
|Better thermal insulation: cheaper, thinner, lighter, and easier to apply|
|Better multiphase wellhead metering and automated control to reduce costs|
|Low-cost, high-capacity, reliable communications systems (note automated information)|
|Materials for handling high temperature corrosive fluids and use in cold environments|
|Low-temperature corrosion and erosion resistant plastic piping|
|Remote (on-side) power sources to eliminate or reduce power distribution costs to remote sites|
|Methods to recycle drilling wastes|
|Improved ice-surveillance technology, e.g., through SAR-equipped satellites|
|Moorings, hulls and pontoons resistant to ice floes|
|Methods to use sea ice spray as a construction material|
|Production disconnect methods for occasions when ice collides with platforms|
|Deepwater structures such as tension leg platforms and articulated columns|
|Oil, gas and coal transportation|
|Large-diameter steel pipe (with adequate yield strength, wall thickness and welding)|
|Turbines for compressor stations|
|Sour gas processing technology|
|Technology for gas collection at high temperatures and compression at high-volume output|
|Site-ready large-size compressors|
|Railway infrastructure (mainly for coal) including rolling stock|
|Sulphur recovery systems for gas processing facilities|
|State-of-the-art dust recovery, SO2 and hydrocarbon removal systems for exhaust gases|
|Flare gas collection and recycling systems|
|Replacement of gas-driven compressors with electric drives|
|Floating lid tanks and sealed purifying units|
|State-of-the-art condensators and pumps|
|Sludge separation processes|
|Catalytic cracking, visbreaking, hydrocracking, etc.|
|High pressure pneumatic pit transport and coal/rock lifts|
|Fuel enrichment and refining technology|
|Pit methane recovery equipment|
|Electricity generation and transmission|
|Gas turbine, steam/gas cycle or combined cycle gas-fired plants|
|Combustion technologies designed for burning Soviet soft coal (low-grade, high-mineral and moisture content and low heat value, containing sulphur)|
|Low-NOX burners, boilers with improved NOX performance and NOX control systems|
|Sulphur recovery units|
|State of the art dust recovery equipment|
|Liquid discharge purification units|
|Automatic control equipment|
|Linings for penstocks and tonnes|
|Refurbishment and reconfiguration of turbine generators|
|Automation/microwave signalling for centralized and instantaneous dispatching|
|Pumped storage facilities|
|Inherently safe reactors|
|Final disposal of radioactive wastes|
|Variable load voltage controllers|
|Live-line maintenance techniques|
|Automated metering and optimizing systems|
|More efficient engine designs|
|Efficient industrial process technologies|
|Weatherization (insulation, glazing)|
|More efficient household appliances and commercial lighting and motors|
|Efficient building design techniques|
|(In millions of tons of oil equivalent)|
|(In percent of total production)|
Energy consumption, three-quarters of which is industrial, has grown steadily with the growth of the Soviet economy, to a total of some 1,400 million tons of oil equivalent in 1989. The consumption mix for fossil fuels has changed significantly over time: coal, once dominant, accounts for less than 20 percent of total primary energy requirements, oil less than 40 percent, and gas 40 percent, with the clearest trends being towards more gas and nuclear power. Nuclear power accounts for about 12.5 percent of Soviet electricity generation, a contribution equivalent to almost 50 million tons of oil equivalent per year. Although energy exports are less than 20 percent of total energy production, they contribute significantly to the balance of payments, providing about 40 percent of convertible currency earnings.
Soviet plans for managing the energy economy have run into serious difficulties, partly because of its institutional arrangements. The organization of the energy industry is complex, with conflicting or overlapping jurisdictions. It is organized primarily under the management of eight agencies, specialized according to fuel: the Ministry for Oil and Gas Production, the Gas Industry Concern, Ministry of the Coal Industry, Ministry for the Chemical and Oil Refining Industry, Ministry of Power and Electrification, Ministry for the Construction of Oil and Gas Installations, the Ministry of Atomic Energy and the Ministry of Geology. Each ministry has its own producing enterprises, research, and construction concerns.
This group of agencies, called the Fuels and Energy Complex (FEC), is supervised by the Bureau of Fuel and Energy of the Council of Ministers. It accounts for about 40 percent of total investment in industry and 15 percent of investment in the whole economy (Table V.6.5), some 10-15 percent of industrial output and about 7 percent of the industrial labor force. In addition to the FEC, the Ministry for Heavy Machinery Industry has a large energy component; there is a State Committee for the Supervision of Safety of Nuclear Power and Industry; the Ministry on Environment deals with energy-related environmental problems, though it does not have sector-specific divisions; and the State Committee on Science and Technology (GKNT) coordinates all technological research and development, including energy technologies.1
|(In billions of rubles per year)|
Goskomstat collects a wealth of energy data, analyzed primarily by the various research institutes. Over one million respondents contribute to the Soviet energy data system. Data are difficult to access, however, because of outdated computer systems. Furthermore, the lack of dialogue between energy analysts and statisticians has produced a gap between provided and available data. Some vital energy data for pertinent analysis of the Soviet economy, such as oil and gas reserves, production, capacity by field and for transmission facilities, and energy consumption by industry, are not yet released to the public. Independent corroboration of official figures is not always possible; for this reason, statistics and estimates of Soviet energy reserves, output, consumption and trade are based on Western estimates, except where otherwise indicated.
Within the Soviet institutional structure relating to energy, prices and production quotas are assigned, supplies and investment allocated, and state orders or contracts issued for output of the energy complex. There is no direct interface between the energy producing and consuming sectors. State distribution monopolies buy and redistribute energy products according to state plans. The presidential guidelines imply that state orders for energy will be maintained firmly in state hands together with equipment allocation and the regulation of energy prices.
Until reforms are under way, additional investment under present conditions is unlikely to remedy the basic problems of the energy sector. Moreover, while investment needs in the producing industries are now assumed to be great, they are also acknowledged to be seriously overstated given the inefficiencies of both investment and output. There is potential for significant efficiency gains in investment, production, and consumption. Foreign capital investment and managerial efficiency are thus both vital benefits to be expected from joint ventures.
Changes in energy-related industries must come at several levels to achieve gradual rationalization and decentralization, and to introduce some measure of competition, efficient pricing and proper incentives. Reforms proposed herein for the energy industries, however, presuppose reforms in other sectors, including the legal infrastructure and ownership of resources, conducive to market reform.
2. PRICES AND INCENTIVES
Energy prices in the Soviet system are used primarily as an accounting device reflecting physical output and consumption balances. Under this system, the balancing of expenditures and revenues is generally achieved by a series of subsidies and taxes. The system does not as a rule reflect any notion of scarcity, economic rent, consumer preferences, or the time value of money. It therefore provides little basis for efficiently matching supply with demand, for allocating investment over time or across sectors, or for making efficient decisions about the use of input factors. The Soviet pricing system as regards energy has traditionally reflected the following principles: (1) coal prices must be lower than prices for other energy resources; (2) prices should be set and/or adjusted such that all producers remain viable; (3) prices for similar goods should be uniform throughout the USSR (with some adjustments for quality and transport); (4) consumer/retail prices should be left low and stable; and (5) domestic energy prices should be set centrally and in isolation from world market prices.
There are at least three different price lists for each fuel or energy product: producer prices, wholesale enterprise prices, and retail prices. Each of the price lists is constructed in a different way. Producer prices are essentially a form of “cost-plus” pricing, based on expenditures for inputs plus some assured profit level. This profit is calculated as an industry average on the basis of industry labor costs and the depreciation value of the industry’s fixed assets, which encourages investment, whether efficient or not. Unfinished construction and unused stockpiles can thus be counted as profitable. (It is therefore not surprising that capital stock turns over very slowly in the USSR, less than 5 percent per annum.) Various investment, labor and education funds must be paid from these profits.
The actual profitability of individual enterprises will differ from the allowable industry average. Higher-than-average-cost producers are eligible for subsidies and “positive rent payments” to cover costs and achieve average profitability. Enterprises with profits above the calculated industry average, after all fund payments are made, are subject to “negative rent payments” and/or to a turnover tax.
Wholesale prices, i.e., prices paid for fuels by industrial consumers, are based not only or even primarily on production costs, but incorporate also a goal of equalizing boiler fuel prices, a desire not to penalize manufacturers tied to high production cost fuels, and a goal to stimulate coal consumption. These prices are set on a regional basis and in such a way as to accommodate regional production cost differences without undue consumer differences and to maintain a desired fuel mix in each region. Consumption of local fuel is encouraged and the price of energy delivered from other regions must not be cheaper than local prices. Wholesale prices may therefore be paid for f.o.b. at the point of origin or the point of delivery. This is a device whereby consumer prices for energy in different regions and differences in production costs are equalized into a uniform countrywide price.
Wholesale prices in 1990 stood at rub 26-28 per metric ton for coal, rub 25 per thousand cubic meters for gas, rub 30 per metric ton for oil, and 1-4 kopeks per kilowatt-hour for electricity. These wholesale prices along with producer prices had last been set in 1982, when they were increased by 25 percent; previous price rises took place in 1947 and 1969. Retail prices, i.e., those at which fuel and energy are sold to the general public, are generally subsidized at levels considered to be politically acceptable. In 1990, plans were developed for the general revision of fuel and energy prices. As of January 1, 1991, they were expected to increase by at least 100 percent, although given the expected increase in price levels throughout the economy, their relative increase was to be considerably less. The presidential guidelines propose to phase in further increases in fuel and energy prices, but without specifying the timing for such increases. They make no suggestion for deregulating prices or even raising prices to cover production costs.
The proposed fuel price rises are accompanied by proposals for compensatory price increases for intermediate and manufactured goods and/or for wage increases. Soviet price reformers view some form of indexation or compensation as crucial to the new pricing system. Under such circumstances, energy price increases generally lead to inflation and to higher overall price levels, but rarely to decreased consumption or increased efficiency on the part of either producers or consumers. This has been true of the last two adjustments in general price levels made to remedy the general lack of profitability in the coal industry. All prices and some wages rose when coal prices were increased, and the coal industry enjoyed only brief profitability before becoming unprofitable again at a higher level of costs and prices.
Information on actual producer costs for the Soviet energy sector is sketchy at best, derived generally by a series of proxy measures or accounting prices. Nevertheless, by almost any measure used, estimates of the investment and expenditures required for maintaining declining production rates for the various energy sources have been generally seen as rising steeply in recent years. This has been a result of a whole range of factors, including inefficiencies in investment and distribution, idle investment in unfinished projects, idle capacity due to bottlenecks in the system, wage increases, labor and social unrest, neglected maintenance and repairs, declining quality of reserves, and increased transport requirements due to growing remoteness of reserves. One Soviet authority estimates that during 1981-90 production costs for oil rose 160 percent, for gas by 30 percent, and for hard coal by 50 percent. Investment in the energy sector in that same period rose from 30 to 40 percent of total industrial investment.
The failure of the Soviet energy pricing scheme to reflect economic values, and to instill efficient behavior, has forced Soviet planners to create an alternative system of incentives for producers and consumers. These incentives are as inefficient in their results as the pricing scheme itself, and their consequences are evident in virtually every aspect of the fuel and energy sector from exploration to final consumption.
Oil and gas resource recovery have suffered rather severely from these perverse incentives. The reported and more rapid than anticipated depletion of Soviet producing fields in recent years is due in large measure to an emphasis on rapid recovery techniques that damage ultimate resource recovery. Such shortsighted field management is exacerbated by the non-ownership of resources. In another example, significant volumes of associated gas are flared each year partly because profits are calculated on the basis of gas produced, but are taxed on the basis of gas sold, making waste profitable.
Similarly, among energy consumers, access to subsidized and allocated energy supplies provides little impetus or opportunity to use energy efficiently. This is well illustrated by the proposed changes in relative fuel prices to power generating plants in order to encourage the use of gas and especially coal instead of fuel oil. Yet fuel deliveries to power plants will continue to be allocated without regard to relative prices, which will be relevant only to power plants for calculating profits. Nevertheless, this situation is an improvement over pre-1982 pricing, when all energy was considered fungible and no distinction was made between oil, gas, and coal for pricing purposes.
Liberalization of energy prices should be rapid and substantial in its initial phase. The energy sector should not be exempt from immediate price liberalization; energy is such a crucial factor of production that a continuation of distorted energy prices would warp and frustrate the more general price and enterprise reforms. Moreover, if energy prices are not liberalized, some form of continued export allocations and controls will be required to assure continued supplies of energy to domestic markets. It is proposed to introduce a temporary and declining border tax on exports. The tax would constitute a wedge between domestic and world market prices and leave energy suppliers indifferent between supplying domestic or export markets, and would be phased out within three years so that domestic energy prices would eventually reach world market levels.2
Liberalizing energy prices when energy production and distribution are monopolized, however, does offer potential for monopoly pricing abuse. Nevertheless, complete privatization and demonopolization need not be a prerequisite for energy price reform. As noted earlier, the various energy ministries each control a number of producing enterprises, which could be made independent, though still state-owned, and self-sufficient as to decision-making. Privatization could follow a period of relatively independent operation under state ownership, at which point realistic valuation of the concerns and their assets would be facilitated.
The financing of investment also needs to be addressed. Energy industry investment is currently funded through a pooling scheme whereby energy complex profits above the state’s share are paid into a common fund from which financing is allocated. Such a system of cross-subsidies should be abolished and individual energy enterprises allowed to retain their own revenues to finance their own operations and investment. Commercial loans should ultimately be available to provide both required capital and the necessary check on the efficiency of energy investments, but the financial system to do this is not yet in place. Foreign investment will also have a positive effect on efficient resource allocation, but will occur only under favorable economic conditions and cannot be viewed as a substitute for sound domestic investment policies.
3. FUELS PRODUCTION
According to Western estimates, the USSR holds some 58 billion barrels (8 billion tons) of proved oil reserves (6 percent of the world reserves), and currently produces about 20 percent of world crude oil output. There are eight oil-producing regions, and five republics that have developed refinery industries but no crude production. The Ukraine, Volga-Urals and Caspian Sea areas are mature and intensively developed. West Siberia is presently the largest producing area, accounting for some 70 percent of actual production. East Siberia, the Barents and Kara Seas are unexplored and undeveloped. The RSFSR produces over 90 percent of Soviet oil, other principal producing republics being the Ukraine, Azerbaidzhan and the Central Asian republics. Some 50 percent of the reserves are in 10 percent of the fields, and most oil production comes from large fields, the Tyumen field in West Siberia accounting for about 95 percent of total West Siberian output.
Government management of oil exploration, development, and transport is complicated by the institutional allocation of functional responsibilities and conflicting incentives. The Ministry of Geology is responsible for exploration to the point when development plans are accepted, and for negotiating foreign investment in new fields still under its jurisdiction. It is rewarded on the basis of volumes of reserves discovered. The Ministry for Oil and Gas is responsible for developing the reserves of oil and associated gas onshore and offshore, and for maintenance, but not construction of, oil and some gas infrastructure and for negotiating foreign investments in fields under its control. Here it overlaps with the state concern in charge of non-associated gas (Ministry of Gas Industry). The Ministry for Oil and Gas has under its jurisdiction drilling enterprises, producing firms, and transport enterprises. The drilling concerns are rewarded on the basis of wells drilled and the producing enterprises on the basis of volumes of oil produced. Discussions concerning reorganization of the oil industry include proposals to group into several independent, vertically integrated oil companies all oil-related activities of the Ministry for Oil and Gas, the Ministry of Geology and the Ministry for the Chemical and Oil Refining Industry.
Soviet oil production throughout the 1980s fluctuated only slightly from the decade average although there were discrepancies between actual output and planned targets. Production reached a peak of 624 million metric tons in 1988, declining to some 607 million metric tons in 1989, with production in 1990 estimated at around 570 million metric tons. This decline has been attributed primarily to lack of oilfield equipment and spare parts, transport problems, labor and social unrest, lower investment levels and faster than anticipated declines in well productivity. Lack of maintenance and diminishing effectiveness of investment must also be considered as serious factors contributing to the decline.
According to Soviet authorities, oil field operating costs vary widely from rub 6 per metric ton in the Samatlor field to an average of rub 16-18 per metric ton in Siberia, to rub 120-140 per metric ton in the Arctic fields, Central Asia, Azerbaidzhan, and the Sakhalin fields. These cost estimates, however, are net of investment allocations. Soviet authorities estimate that including these capital costs would add another rub 60-100 per metric ton to total production costs.
Even the increased administered prices for oil in 1991 will not cover production costs for some of the higher cost enterprises, whose deficits will be subsidized. Yet these price rises will also result in profits above the allowed industry average for low-cost producers, subjecting them to a turnover tax which captures these profits for the state.
Under the presidential guidelines, the union will split a 45 percent profit tax on oil with the republics. The remaining industry profits are to be pooled to fund the investment needs of the energy complex. The scheme assumes heavy cross-subsidies from oil and gas to coal, and among individual producing enterprises. It is unclear what impact these self-financing schemes will have on investment. In 1990, rub 14.6 billion will have been invested in Soviet oil production, down from some rub 15.6 billion in 1989.
A similar fund with similar cross-subsidies has been instituted for retention and allocation of foreign exchange earnings from oil exports. Under this scheme, from the beginning of 1990, oil producers had the right to retain a share of foreign currency earned through exports of crude oil; retention shares increased from 5 to 20 percent on discrete tranches of exports over 98 million metric tons. Increases in foreign exchange retention have been announced for 1991 (see Chapter III.4).
According to the Ministry for Oil and Gas Production, average output of new wells has been declining 10 percent per annum for the last few years, drilling costs are increasing almost 5 percent per annum as more difficult terrain is being drilled, and overall output is becoming up to 20 percent more costly per year in recent years. The remedy to this decline is seen paradoxically in the opening of new large fields (which presumably are subject to these same trends). Whether these plans work or not will depend primarily on whether the recovery efforts are careful and thorough.
The focus on new large fields reflects an approach which aims to maximize current oil production, rather than ultimate recovery. Fields tend to be essentially abandoned (as were the Ukraine and Volga Urals fields) when production becomes difficult, and new fields opened without regard to infrastructure or proximity (as was West Siberia). Even today, elementary secondary recovery is used for only 2.5 percent of production. Moreover, water flooding as practiced by the Soviets, unlike in the West, actually lowers ultimate field recovery in order to boost short-term production rates.
Ministry figures for annual drilling rates in recent years have been in the range of 2.5 million meters for exploration (some 700-900 exploratory wells), and some 36-38 million meters for development and production (some 16,000-17,000 wells). In 1989 and 1990, drilling work fell to the lower end of this range. The Soviets claim a 43 percent rate of ultimate recovery (including secondary recovery techniques).
The Soviet oil delivery system also warrants attention. Crude oil moves primarily through a 90,000 kilometer pipeline network which is extensive, but old (average age over 12 years), poorly insulated and without cathodic protection. Maintenance is poor; only 1,500 kilometers of pipe are reconstructed a year, half of what is minimally needed. Pipelines to new fields are not being completed under present reduced budget allocations for construction. Oil products move generally by rail at a cost three times higher than pipeline transport, but these shipments are hampered by rail car shortages and bottlenecks.
Storage facilities, a key to flexibility in any delivery system, are totally inadequate. The lack of storage has impaired the Soviets’ ability to take advantage of oil price developments in international markets, and is partly responsible for the general lack of flexibility in the present Soviet oil industry. There is virtually no ability to deal effectively with fluctuations in demand due to weather. Cold winters have required burning diesel fuel in power plants, while a succession of warmer winters creates a surplus of heavy fuel oil that cannot be stored, refined into lighter products or exported readily for lack of additional capacity at port facilities. Pipeline failures and demand shortfalls can thus translate into production cutbacks.
The near term outlook for oil production is a matter of some debate. The presidential guidelines commit to a reversal of the decline in oil production and a maintenance of present oil export levels through 1992, but they fail to specify how or at what investment cost these goals will be fulfilled. Indeed, current expectations are that production and exports will decline in 1991 relative to 1990.
There is considerable evidence that the present and recent production declines have resulted in large part from mismanagement and perverse economic incentives, from social and labor unrest and other nonrecurring phenomena, and not from irreversible underlying tendencies. Given that oil has historically held a pre-eminent economic position as a key to industrial growth and because of its export and foreign exchange earnings potential, it is reasonable to assume that some measure of priority will be given to sustaining a level of oil production consistent with getting by on reduced industrial output and a declining but manageable standard of living, and continued, albeit reduced, convertible currency earnings.
Oil development could attract substantial foreign investment. Exploitation of the vast resources is of interest and benefit to both the USSR and to foreign firms. As oil is directly exportable to the world market, it offers a possibility for immediate convertible currency earnings. Joint ventures in this area could generate revenue through taxes and/or royalties for the USSR, and provide access to much-needed technology, equipment and market-oriented management skills.
Foreign interest in investing in the oil sector is widespread. International oil companies from most OECD oil-producing countries have commenced negotiations, with the support of many governments. However, only a limited number of joint ventures have been initiated, and most remain at the point of letters of intent, or agreements to perform preliminary studies.3 Lack of clear ownership rules, continued uncertainty about laws affecting commercial conduct, problems in securing domestic shares of investment, confusion as to the legality of existing contracts and agreements, and ongoing environmental debates underlie the reluctance of foreign enterprises to commit capital to joint ventures. Resolution of such issues will be critical in establishing a stable and secure investment climate necessary to attract significant investment in oil exploration and development.
b. Natural gas
The USSR has the largest natural gas reserves in the world, with 52 trillion cubic meters proven and still-growing reserves. They constitute 40 percent of the world’s total reserves, and are five times greater than its proven oil reserves. The gas fields are located primarily in Siberia, and also in the European part of the USSR, Central Asia, and around the Sakhalin Islands.
Soviet production of nonassociated gas, gas processing, transportation and storage are managed by the Gas Industry Concern, which runs almost 60 local producing enterprises, and operates some 215,000 kilometers of trunklines and storage facilities, mostly near European-area industrial centers and in some exhausted fields. The government proposes a massive construction program for pipeline expansion and a doubling of storage capacity. However, in the face of declining investment and economic activity, this may not be realized.
Extensive repair is a priority for the Soviet gas system that will ultimately affect expansion to meet growing demand. The rapid deterioration of the pipeline network forced a slowdown of the growth of natural gas production in 1989 and affected output in 1990. Compressors are lacking or need replacing, wells need repair, and corrosion is a serious problem. Gas- processing plants are in similar disrepair, which exacerbates the pipeline damage as unprocessed gas from nonfunctioning plants spills into pipelines. Gas-processing plants in some areas are health hazards because of the high sulphur content of the gas they process and because of plant leaks. Such maintenance problems are a result of overly hasty gas development.
Development of the giant West Siberian fields—Tyumen, Urengoy, Yam-burg and Yamal—has been hampered and delayed by difficulties due to lack of infrastructure (for building pipelines, gas treatment plants and other production facilities, including workers’ towns) and lack of equipment, notably pipeline compressors.
Despite these impediments, natural gas output in the USSR was nearly 800 billion cubic meters in 1989 (a fourfold increase since 1970); according to the Soviet authorities output was 816 billion cubic meters in 1990 and was expected to reach 830 billion cubic meters in 1991. Sixty percent of gas production is in Siberia. An estimated 10-15 percent of Soviet gas production is associated gas, some 20 percent of which is flared each year for lack of ability to sell it, and for lack of environmental policies prohibiting flaring. Government estimates of producer costs run rub 8-35 per thousand cubic meter, with transport adding another rub 5-11 per thousand cubic meter.
Gas now accounts for some 40 percent of energy consumption, concentrated mostly in industry and power generation. (Households and municipalities account for only about 13 percent of gas consumption, primarily because district heating satisfies much of this market.) The USSR has been making a concerted effort to substitute the use of gas for fuel oil and to free up oil for export. Increased gas use is also being planned for power generation as a partial replacement for the expected slowdown in the expansion of the nuclear program; some may also be needed to replace coal for combustion in polluted areas.
The development of natural gas resources, especially for export, provides an excellent prospect for joint ventures between Western and Soviet enterprises. For such joint ventures to flourish, an adequate framework of agreements between the countries concerned will be necessary to ensure access to markets, guarantees for the expatriation of profits in convertible currency (or commodities as appropriate) and guarantees of noninterference by governments in contracts freely entered into (subject to certain legal and competition rules). By this means, management techniques and technology may be introduced into the USSR and the inflow of convertible currency increased.
Coal production, preparation and processing are under the control of the Ministry of the Coal Industry. The Ministry runs more than 500 underground and 80 opencast mines. It also controls enterprises, including mine construction and coal equipment building plants, and over 50 scientific institutes and repair shops. The Ministry employs about 2.5 million people. For the supply and service of heavy equipment, the coal industry relies on the Ministry of Heavy Machinery Construction, and on the Ministry for Transport for transport infrastructure, mainly railway. The major customers of the coal industry are the electric utilities under the responsibility of the Ministry of Power and Electrification.
Total proven recoverable coal reserves (according to Soviet estimates) amount to some 240 billion metric tons, including 140 billion metric tons of hard coal (anthracite, bituminous and sub-bituminous) and 100 billion metric tons of lignite, which could theoretically support a steady growth in coal production for many decades. Reliance on readily accessible but substantially depleted coal reserves in the European part of the country is being reduced in favor of developing the Siberian reserves, which represent 75 percent of total coal reserves.
The eastern Basins include the Moscow Basin, the Pachora Basin, and the celebrated Donetsk Basin, a source of good quality coking and anthracite coal. The Asian Basins include the Kuznetsk Basin, the Ekibastuz Basin (sub-bituminous coal suitable only for mine-mouth power generation), the Kansk-Achinsk Basin (lignite), the Karaganda Basin (steam and coking coal), and the South Yakutian Coal Basin.
In the 1950s, coal was predominant in the energy balance, accounting for 68 percent of the total primary energy requirement. With accelerated oil and gas production in the 1960s and 1970s, the share of coal fell to and stabilized at some 20 percent. In the 1980s, coal output continued to grow, peaking in 1988 at just over 770 million metric tons. Output in 1990 was expected to be almost 710 million metric tons.
While the potential for coal is great, so too are the constraints on developing coal. Like the rest of the energy complex, the coal industry is burdened with obsolete and ill-maintained equipment, has an overall shortage of equipment and machinery, and it is in great need of investment for replacement, repair, and expansion. Coal processing plants badly need upgrading.
The shift in new production to eastern regions remote from consumption centers has caused a number of additional strains on coal delivery and use. Industrial boilers in the western regions were developed for western (Donetsk) coals and are ill-suited to some eastern coals. Power plants in the West now must be served by large amounts of Kuznetsk coal carried from East to West. This has imposed further strains on the already inadequate railroad network. Rolling stock is another constraint both in terms of quantity and quality. The number of railway cars does not cover the requirements for both grain and coal transport, and a great number of cars are made partly with wood which are suitable for grain but not for coal transport. Coal stocks, in particular in the Kuznetsk basin, are difficult to store because they self-ignite under the combined effects of local climate conditions and high moisture content in the coal.
Coal consumption, like production, has begun to shift substantially eastwards. The major factor in this geographical shift in coal consumption has been the development of coal-fired, mine-mouth power plants in the eastern regions. In contrast, there has not been much change in the sectoral structure of coal consumption. Electric power stations currently consume about 40 percent of coal; the iron and steel and nonferrous metal industries, 20-25 percent; construction and agriculture over 10 percent; and the household-municipal sector, about 20 percent. This sectoral structure has been almost unchanged since 1970.
The coal industry is facing a high level of redundancy (between 250,000-300,000 miners unemployed) in the Donetsk basin while there is a sharp manpower shortage in Asian coal fields. The transfer of manpower from the European to the Asian area is inhibited primarily by poor living conditions in the East, including heavy pollution, which have already led to health problems and social and labor tensions. More specifically, the move to remote mining regions entails a shift to harsher operational and climatic conditions as well as a decline in working and living conditions, including poor infrastructure and chronic shortages of housing, consumer goods and food staples. Bad and worsening work conditions have led to recurrent strikes and slowdowns, which started in July 1989 and have caused a substantial fall in production. Though the strikes have technically been settled, the authorities cannot implement the various agreed-upon improvements. This has resulted in renewed unrest and a breakdown in labor-management relations. The Ministry of the Coal Industry has tried to oppose all reforms and changes sought by both miners and government reformers (decentralization, moves to self-financing, freedom to export limited quantities of coal, greater involvement by miners in labor-management issues). Recently, however, it has allowed some relaxation of controls on mining enterprises with respect to the selection of managers, and since the beginning of 1990, it has granted them the right to keep profits from sales exceeding state orders.
d. Renewable energy
Nonconventional renewable energy (excluding hydro power and wood) provides less than a tenth of a percent of total energy consumption. Many sites of interest for wind and wave power, as well as tidal energy are too far away from energy-consuming centers to be economically viable. Nevertheless, Soviet experts see the share of renewable energy sources rising, although the total contribution of these resources will not be significant in the foreseeable future. Biomass and geothermal energy are the two areas with the largest technical potential.
Information on the uranium industry has not been officially released. The USSR is understood to contain the world’s largest uranium reserves, the world’s largest stockpile of uranium, and one of the largest uranium production capacities. The USSR currently produces 20 percent of the world’s annual uranium production.
Commercially viable uranium deposits are characterized by a great diversity in distribution and type. The most important deposits (about 60 percent) are found in sandstone and about 40 percent are found in vein-type deposits. Identified reserves are ample for more than 100 years of Soviet nuclear energy requirements assuming average development. Unofficially, the low-cost proven reserves are 160,000 tons and additional reserves are 1,075,000 tons. By comparison, Australia’s low-cost reasonably assured reserves are 480,000 tons and estimated additional reserves are 283,000 tons. According to some estimates, the total Soviet uranium resources (proven, additional and speculative) might amount to as much as 6 million tons.
The total uranium production capacity of the USSR is currently estimated at 7,000 tons per year. It is believed that the uranium production capacity is about 4,000 tons above current domestic requirements. The chief methods for producing uranium are through by-product (or co-product) mining operations and by in situ leaching. At present, in situ leaching accounts for about 20 percent of the uranium concentrate production, but could account for up to 45 percent in the future due to technological and cost improvements. The development of efficient ion exchange resins has been a notable achievement of the Soviet mining industry and their use offers significant cost advantages. Production costs for uranium are not available. There are at least 10 known plants producing uranium concentrate. There is also a large uranium metal extraction and enrichment complex. Three plants convert the uranium concentrate to uranium hexafluoride and enrichment occurs at either the Zholtye Vody or Chkalovsk plants.
The bulk of Soviet oil refineries are old and unsophisticated by Western industry standards. There are 39 refineries in operation under the jurisdiction of the Ministry for the Chemical and Oil Refining Industry. Precise figures for total capacity are not officially released, but it is estimated to be between 500 and 600 million metric tons per year. Over 10 percent of these refineries pre-date World War II and 60 percent pre-date 1970, i.e., before the advent of crude pipelines, and were therefore built near oil fields, with products shipped to consumers by rail. Refineries built after 1970 tend to be closer to consuming centers, realizing a threefold saving in transport costs by maximizing use of pipelines for crude instead of rail transport for products.
Soviet refinery configurations have remained largely unchanged since 1970. Any refinery upgrading has been mainly in the form of hydrotreating and catalytic reforming, which now represent over 80 percent of secondary refinery processes in the USSR. Converting heavy oils into lighter products, however, requires catalytic cracking, which currently comprises only some 9 percent of distillation capacity and some 12.5 percent of secondary processing (compared to 23 percent and more than 50 percent respectively for OECD countries). Major investment would be required to upgrade the Soviet industry to a level approaching OECD norms. Upgrading would also offer the opportunity of adding production capacity for a lead substitute, which would serve to reduce the amount of lead added to gasoline.
Soviet refineries produce 40 percent fuel oil and 52 percent medium and light products. By contrast, 75 percent of OECD refinery output is medium and light products. The only way that Soviet refineries can now meet a growing demand for light products is to run more crude, increasing fuel oil output in the process, much of which is exported, often at low margins, to Western Europe. This inefficiency has been exacerbated by the push to substitute gas for oil as boiler fuel, diminishing the demand for fuel oil, and by a growing need for transport fuels, i.e. lighter products. Upgrading refineries would bring output of Soviet oil products more in line with domestic market needs and would lower the amount of crude oil required to meet lighter product needs.
Overhaul of the Soviet refining industry will be a long process. It could well begin with the freeing of refiners from ministerial control, pricing and allocations, and permitting them to align themselves contractually with crude suppliers, distributors and exporters. Such independent refiners would also be more attractive to investment, including via joint ventures.
In general, Western and Soviet sources agree on the physical characteristics of the Soviet electricity sector. Installed electric generation capacity is 345 gigawatts, unchanged since 1988. Thermal capacity (coal-, oil- or gas-fired) has grown from 50 gigawatts in 1960 to 243 gigawatts in 1990. About 40 percent of thermal capacity consists of combined heat and power plants, hydroelectric capacity comprises 67 gigawatts, and, as of end-1989, nuclear capacity stood at 34 gigawatts. Non-hydro renewable energy capacity (from wind) is less than one megawatt.
Total electricity generation was about 1,720 terawatt hours in 1989. Natural gas-fired generation grew rapidly from 13 terawatt hours in 1970 to 528 terawatt hours in 1988, and now accounts for half of all thermal generation. Electricity generation consumes about 15 percent of total gas production, some 30 percent of coal output and about 10 percent of oil production. There are well over 400 hydroelectric installations, now being used increasingly as peaking facilities. Hydroelectric generation fluctuates according to rainfall, but average plant capacity factors have stayed near 40 percent since 1970. Hydro generation in 1988 (231 terawatt hours) and 1989 (224 terawatt hours) reflect the difference between a wet and a normal year. Nuclear power generation supplied 213 terawatt hours in 1989, a 1 percent decline from 1988.
The Soviet authorities estimate the costs of electricity generation per kilowatt hour to be between 4 and 5 kopeks, if all capital requirements are included. Average revenue per kilowatt hour is at present 2 kopeks. As of January 1, 1991, electricity tariffs expressed in kopeks per kilowatt hour will increase from a range of 1-2.5 to 1.5-3.75 for industry and from 1.5-4 to 2-6 for households. Even with the planned 50 percent increase in electricity prices, the Soviet authorities expect that one half of all power stations will still be unprofitable.
The electricity supply industry is managed by the Ministry of Power and Electrification. The system consists of 106 regional power systems, each covering one or two regions that serve approximately 98 percent of total electricity generation. These regional power systems comprise 110 kilovolts and 220 kilovolts alternating current transmission lines and supply power to an administrative region (oblast or kray) or to an industrial region. All but Moldavia have been linked by 220 kilovolt, 500 kilovolt, and 750 kilovolt lines to form thirteen consolidated electricity power systems. Eleven of these thirteen, with the Moldavian regional system, comprise the Unified Electric Power System, providing 90 percent of total electricity generation (1,530 terawatt hours) in the USSR.
The outstanding characteristic of the energy networks is the enormous distances involved. Fuel or electricity must be transported as far as 4,000 kilometers, as growing load centers are primarily in the West while fuel resources (primarily coal and gas) are moving to the East. Fuel must be shipped to generating facilities in the West or the electricity generated in the East must be transmitted (with concomitant losses) to the West.
There is a total of 215,000 kilometers of high-voltage transmission line. This ageing and not-well-maintained grid is stretched in terms of its carrying capacity, leading to increasing numbers of unplanned outages. From 1975 to about 1987, the power industry reported transmission losses of approximately 9 percent in high-voltage lines and the same amount again in low-voltage distribution. Their goal is to reduce these losses substantially. The development of extra- and ultra-high-voltage lines reduces losses on long lines and facilitates remote coal- and hydro-by-wire projects. Lines of 1,150 kilovolts alternating current and 1,500 kilovolts direct current are now being developed to carry power from the eastern hydro and coal areas to load centers in the European areas. A 1,150 kilovolt line (Ekibastuz-Kokchetav-Kustanai-Chelyabinsk and Ekibastuz-Barnaul) has been put into operation. Construction is still underway on the Ekibastuz-Centre 1,500 kilovolt direct current transmission line.
Three important trends characterized the electricity industry in the latter half of the 1980s: a decline in the annual rate of growth, a major setback for the nuclear power industry, and a lag in the replacement of worn-out capacity. From 1986 to 1990, 83 gigawatts of new capacity was to have been put into operation and 15 gigawatts of old capacity was to have been retired. However, the program was short of its target by 40 gigawatts, which prevented production increases in 1990. The Soviets estimate that about 100 gigawatts of obsolete thermal generating capacity needs to be replaced over the next ten years, about 25 gigawatts immediately. As a result, shortages in generating capacity may occur in the future mainly in winter periods of high demand and in certain regions. The primary impact of such shortages will be borne by the industrial sector because, as a rule, the residential sector is given higher priority.
There would appear to be substantial additional opportunity (perhaps 270 gigawatts) for the development of economically exploitable hydropower. Soviet planners assume that installed hydroelectric capacity could rise to 90 gigawatts by the turn of the century. However, most of the undeveloped hydroelectric resource is in the eastern part of the country, far from the major load centers, and further development of hydroelectric power is facing significant opposition based on economics, environmental consequences, and other socioeconomic impacts (flooding of agricultural lands and displacement of villages).
The nuclear power program expanded rapidly over the last 15 years. The net nuclear capacity connected to the grid nearly tripled from 1975 to 1980, and tripled again from 1980 to 1990. Currently, the USSR operates the third largest nuclear power program in the world, supplying about 12.5 percent of its own electrical needs and technical support to heavily dependent neighboring countries. Installed nuclear capacity at end-1989 stood at 34 gigawatts and a further 22 gigawatts of capacity were under construction.
Plans for the future role of nuclear power generation have come under intense scrutiny since the Chernobyl accident. In particular, the overall safety of the Soviet-designed reactor has been the subject of much controversy. Pressure has mounted on central and local governments through pressure groups to reduce the power of some facilities and close others. In August 1990, the Ukrainian Parliament passed a resolution calling for the immediate closure of the operating units at Chernobyl and launched a five-year moratorium on nuclear plant building in the region. In June, the new RSFSR government decided to halt work at Rostov, where the first of four pressurized-water type (VVER) 1,000 megawatt plants was nearing completion. Additionally, a newly formed nuclear safety committee proposed the retirement of all light-water, graphite-moderated type (RBMK) reactors after twenty years of operation. If adopted, this would mean that six such reactors would be retired by the year 2000. Alternatively, proposals have been made to restore nuclear plants in Lithuania and Armenia to offset electricity supply shortages.
With nuclear power plants providing about 12.5 percent of electricity supply (versus 18 percent in the United States and 26 percent in Japan) and a large part of generating capacity under construction, significant plant closures, for any reason, could exacerbate shortages of electricity supply and lead to further disruption of the economy. Cancellation of the reactors under construction could require building alternative replacement capacity of 22 gigawatts. If this capacity were oil- or natural gas-fired, and operating at the same load factor, 650,000 barrels of oil (5 percent of current production) or 40 billion cubic meters per year of natural gas (4.5 percent of current production) would be required. Significant plant closures would also limit nuclear power as one of the options for reducing emissions of oxides of nitrogen, sulphur dioxide, particulates, and carbon dioxide. There is, therefore, considerable urgency in the need to resolve the public concerns about the safety of the operation of nuclear plants. Consideration should be given to instituting a program which will increase the level of public understanding of the issues involved.
A major international project on the safety of the older Soviet-designed reactors is being coordinated by the International Atomic Energy Agency (IAEA). The project will concentrate initially on VVER 440/230 model reactors and up to fourteen plants will be visited in the USSR and Eastern European countries.
The Soviet plan is to close reactors which cannot be economically backfitted so as to guarantee that a severe accident will not occur more frequently than once every 100,000 reactor years of operation. Some backfitting identified as necessary has already been completed, and other backfitting is under review. Some of the more costly backfits, however, may be avoidable by merely changing the reactor’s operational parameters such as temperature, pressure or power. For example, power levels for the first generation RBMK reactors have already been ordered to be reduced to 70 percent of the nominal rate.
The benefits of hardware solutions are only likely to be felt over the longer term. This means that software solutions will be important. They can be implemented relatively quickly at low cost, and generally are not liable to COCOM-type restrictions. Introducing the types of nuclear safety and regulatory approaches employed in the West, and perhaps establishing regional offices, might strengthen the central nuclear safety regulatory authority. In addition, the development of a legal basis to underpin the safety authority should improve the safety efforts of the industry and assist in the restoration of public confidence. A basic law underpinning the regulation of the entire nuclear industry is expected soon. Current construction projects might also be advanced by the use of Western pre-operational testing assistance to assure safety. The infusion of such Western safety culture and quality assurance practices into the nuclear-related organizations will be beneficial to overall nuclear safety, and help to foster public confidence.
In the aftermath of Chernobyl, public acceptance problems are likely to lead to a reduction in the plans for nuclear power. Indeed, some reductions in nuclear capacity due to outages for safety upgrades and closures are expected in the early half of this decade. It is likely that some current construction projects will be delayed, depending on local attitudes and energy shortages. The nuclear controversy is likely to assume an increasingly local nature. Overall, nuclear generating capacity may perhaps dip over the next 5 years by several gigawatts to a range of 30-35 gigawatts. Beyond that time, unless public acceptance of nuclear power can be strengthened as described above, and in light of limitations to the expansion of hydroelectric capacity, demand will increase for fossil-fueled power, primarily natural gas.
Indeed, there are already plans that call for large-scale introduction of combined-cycle generation. Their realization would probably require cooperation with Western machine building firms and imports of equipment in order to construct the new facilities, as well as some enhancement of the existing natural gas pipeline network.
6. ENERGY INTENSITY AND EFFICIENCY
Overall energy intensity, measured as the amount of energy used per unit of GDP, has increased from an estimated 0.95 tons of oil equivalent per thousand U.S. dollars of GDP (in 1985 prices) in 1980 to 0.99 tons of oil equivalent per thousand U.S. dollars in 1988. Output figures used for this comparison are drawn from Western estimates of Soviet GDP in 1985 U.S. dollars, at an assumed exchange rate of rub 0.54 per U.S. dollar.4 Over the same period, energy intensity in OECD countries dropped from 0.50 to 0.41 tons of oil equivalent per thousand U.S. dollars of GDP. The lower and falling intensities for OECD countries reflect in large part capital-intensive improvements in energy-efficient equipment and technology, made in response to the sharp rise in world energy prices between 1973 and 1983. The shift in the industrial structure of Western countries towards services and high-technology-oriented industries has also helped to lower their overall energy intensity. Structural shifts in the USSR, by contrast, have been very small.
The Soviet industrial sector has a particularly high share of industrial activity which is by nature highly energy intensive. But Soviet industries also simply use more energy per unit of output than in other parts of the world. By way of illustration, Table V.6.1 shows energy intensities for broadly comparable sectors in the USSR and Canada.5 Inefficiencies in Soviet energy consumption are broadly based. With the exception of commercial and private transport, all sectors examined have a higher energy intensity than their Canadian counterparts. All Canadian sectors, except agriculture and commercial transport, reduced their energy intensity between 1980 and 1988. In the USSR, several sectors reduced their energy intensity. But the three sectors in which energy intensity increased are such an important part of the economy that overall energy intensity increased as well. In the transport sector, however, substantial structural and income differences between the USSR and Canada (commercial transport in the USSR is dominated by rail relative to road transport, while the reverse holds true in Canada) cloud any conclusions that might be drawn about the relative energy intensities of the two countries.
The Energy Research Institute of the Soviet Academy of Sciences (INEN) has estimated the potential for reducing energy intensity, assuming certain unspecified changes in pricing and other reforms. The Institute projects that, through the introduction of known technological improvements, an annual reduction of energy consumption equivalent to 500 million tons of oil could be feasible by the end of the present decade. Out of over 1,000 processes and technologies studied, the 20 most important changes directly designed to achieve higher energy efficiency could reduce annual consumption by some 266 million tons of oil equivalent. Examples of these 20 processes are extended use of combined cycle power generation, automatic regulation of electrical drives, introduction of individual meters and controls for residential consumption, and elimination of small uneconomic boilers. INEN has estimated that these 20 specific measures would have a total cost of rub 38 billion, whereas they estimate that investments to create additional production capacity of 266 million tons of oil equivalent per year would cost rub 61 billion. But the pricing and other economic assumptions underlying these estimates are not given.
In the total of 1,000 processes considered, there are some which would be introduced primarily for reasons of general economic efficiency. The ten most important of these non-energy specific modernizations include the more efficient management of commercial transport, construction of less metal-intensive machinery and equipment, and wider application of the continuous-casting process in the steel industry. It is only conjecture whether these could really be introduced over the time horizon considered so that the additional potential savings of 233 million tons of oil equivalent ascribed to these measures should perhaps be regarded as a best-case estimate.
Despite the difficulty of quantifying potential energy efficiency gains, there seems to be substantial potential for efficiency improvements both in the industrial and the housing sectors, though the impact on overall energy demand may be uncertain. The potential might also vary by end-use sector and fuel type. For instance, energy demand in the transport sector may well increase; although some improvements in technical efficiency may be possible with the introduction of new cars, this could be outweighed by higher energy use due to increased mobility. Electricity demand might also increase.
There is a relationship between reforms and efficiency gains. Assumptions as to specific improvements are highly speculative, ranging from 0.5 to 3 percent per annum declines in energy intensity. Certain reforms are crucial. First, a much larger increase in energy prices than the authorities at present envisage for 1991; second, a move to a more competitive market should provide both households and the industrial sector with the incentives to reduce their energy consumption in response to price rises; and third, industrial energy users should have sufficient financial autonomy and responsibility to make decisions on investment in energy-efficient technology.
7. ENERGY TRADE
The USSR is a major exporter of energy, exporting over 15 percent of its total annual energy output. Trade is dominated by oil and to a lesser extent natural gas. Oil and gas exports account for about 60 percent of convertible currency trade with OECD countries and, prior to CMEA pricing reforms in January 1991, almost 40 percent of convertible currency trade in total, with oil generating the largest percentage of these earnings. Energy trade is carried out under the auspices of the Ministry for Foreign Economic Relations, which operates a number of foreign trade organizations (FTOs), including one each for oil, gas, and coal. Most exports are allocated by volume under the central plan to be sold by the appropriate FTO. Soviet energy exporters generally sell under contract, and though some oil is sold on the spot market, Soviet traders do not usually have the flexibility to take advantage of market conditions. According to the presidential guidelines, state orders for oil and gas exports will be maintained at present levels through 1992. Energy trade and exports will continue to be centrally controlled to assure stability. Interrepublic exchanges will be determined by agreements between republics, but based on “proposals” from the union.
Crude oil comprises the bulk (almost 70 percent) of Soviet oil exports. Roughly one third of Soviet crude oil exports go to OECD countries, around 55 percent to Eastern European countries, and the rest to other countries, notably Cuba and India. The distribution of exports of oil products is quite different: over two-thirds to OECD countries, ten percent to Eastern Europe, and the rest to other countries.
Reported crude oil exports from the USSR, having steadily grown over the last three decades, declined in 1989, reflecting a decline in oil production. Latest figures for 1990 point to a decline in output and exports relative to 1989, and current expectations are for further declines in 1991. The bulk of the 1989 fall in Soviet oil exports affected trade with OECD countries, whose contracts are more flexible than those of other importers. OECD countries experienced a drop of some 20 percent in Soviet crude oil deliveries in 1989 from the previous year (Table V.6.6) while the decline was relatively small in 1990.
|Net Exports of Oil|
|(In millions of metric tons)|
|Eastern Europe 1||34.7||73.4||69.3||72.1||71.3|
|Net exports (crude oil and oil products)||91.2||155.4||152.3||183.6||168.9|
|Net Exports of Non-Oil Energy|
|(in millions of tons of oil equivalent)||11.9||12.7||11.2||15.7||15.5|
Including the former GDR.
Including the former GDR.
OECD (primarily OECD Europe) imports of refined products from the USSR have also dropped since 1988 but to a much lesser extent than crude oil. Western imports of Soviet oil products are mostly gas oil and heavy fuel oil, with more than half of the latter being used as refinery feedstocks. Because of poor refining capabilities, Soviet heavy fuel oil has a high content of lighter products, unlike residual fuel oil from more sophisticated refineries. Although Soviet fuel oil precisely for this reason often commands a premium of up to US$30 per metric ton over other fuel oils, it is still often sold at a lower price than crude oil.
Crude oil exports to Eastern European countries fell only slightly in 1989, but are estimated to have dropped significantly (about 30 percent) in 1990, and are expected to bear the brunt of declining exports again in 1991. Since the mid-1970s, Eastern Europe has paid for oil and gas imports on the basis of a five-year moving average of world market prices. The pricing formula and the exchange rates resulted at end-1990 in Eastern European prices for crude being lower than world market prices.6 Soviet trade in crude oil with Eastern Europe is to a large extent governed by infrastructure. Most Eastern European refineries are geared to process Soviet Urals crude, physical access to Western supply lines is limited, and transport costs are lower for Soviet supplies. Participation in construction of Soviet energy facilities—such as transit pipelines or refineries—has permitted Eastern European access to Soviet oil (or gas or electricity depending on the project), but also binds consumers and suppliers. Trade ties have historically been determined within the framework of the CMEA system, which will change fundamentally in 1991 (see Chapter IV.3)
The USSR also re-exports oil obtained as debt service payments on trade arrangements, primarily from the Middle East. Iraqi crude exports until recently made up the bulk (90 percent) of Soviet crude imports from the Middle East. The loss of these supplies following the UN sponsored embargo on Iraq will reduce Soviet exports. Soviet liftings of Iraqi crude had virtually all been re-delivered to India.
Oil trade with developing countries outside the Middle East consists entirely of exports, primarily to Cuba, Viet Nam, and India, but also to some African countries. Soviet imports of refined products are minor (3 percent of exports in 1989) and largely tied to trade agreements with Eastern European countries.
Certain oil exports (private sales of non state-controlled volumes, joint venture production, and enterprise and republic barter deals) are not governed by state orders. Incentives for nonregulated exports arise largely from the discrepancy between domestic producer prices and world prices for oil. Exports outside state orders were encouraged in 1990 by permitting oil producers to retain a proportion of foreign currency proceeds. Moreover, during the first half of 1990, state orders for oil output were reduced, central allocations of investment were cut, and oil producers were given access to a small amount of production for direct export on the world market.
Direct exports, however, may be constrained at least initially by access to and the configuration of oil export pipelines, and by the quality of port and storage facilities. Crude oil is delivered to Eastern Europe via the Friendship pipeline, but there are no oil export pipelines to the West; oil export pipelines also serve two ports, one on the Baltic and the other on the Black Sea. Some officials of the RSFSR envisage expanding the Friendship pipeline system, to connect to new export ports with a corresponding reorientation of oil exports.
b. Natural gas
Along with expansion of domestic consumption, exports of natural gas have increased rapidly, both to Western and Eastern Europe (Bulgaria, Czech and Slovak Federal Republic, the former GDR, Hungary, Poland, Romania, and Yugoslavia). Exports in 1989 were about 100 billion cubic meters (11-12 percent of output), about equally divided between the two regions. In Western Europe, Germany, Italy, and France account for most of Soviet gas exports. Overall, Soviet gas comprises almost 20 percent of gas demand in Western Europe. For both 1990 and 1991, the export level is expected to be over 100 billion cubic meters, approaching the current capacity of the export pipeline. Western European countries are tied to continued imports of Soviet gas through long-term supply agreements, which at present provide for continued but limited expansion of exports to Western markets.
In the case of Eastern Europe, contracts are governed by supply agreements or by participation in construction of the transit pipeline facilities, with payments taken in gas over time. (Similar agreements have been made regarding access to Soviet transit crude oil pipelines.) Future exports to Eastern Europe will depend largely on ongoing renegotiation of trade agreements between these countries and the USSR, with demand being driven in part by environmental concerns. Exports to Japan and the two Koreas and China are expected to flow from new gas developments in the Sakhalin Islands.
Soviet gas imports, like those of oil, are minor and largely strategic. In 1990, imports of Iranian gas were renewed, replacing discontinued imports from Afghanistan. While the latter were small, the potential for expansion of Iranian gas imports is considerable.
Soviet hard coal and coke exports in recent years have grown little, and reached in 1988-89 some 40 million metric tons. The same level was expected for 1990. Half of these exports go to Eastern Europe, whose coal is depleted or of inferior quality but whose economies are still largely coal-based. The other half goes mainly to OECD counties, primarily to Japan, which accounts for almost one-fourth of all Soviet coal/coke exports and more than half of OECD Soviet coal imports. The South Yakutian project was initially developed as a Far East export base of coking coal and steam coal with private Japanese financial assistance. Production reached 15 million metric tons in 1988 and exports of coking coal and steam coal to Japan amounted to 5 million metric tons and 1 million metric tons, respectively. The exports, which are directed through ports on the Pacific coast, involve more than 2,500 kilometers of rail transport.
The USSR imports some 12 million metric tons of coal from Eastern Europe. Pursuant to recent reform efforts in the coal industry, producers have the right to sell about one million tons of “decentralized” coal directly on international markets.
The USSR is currently taking vigorous steps to expand its nuclear fuel trade with countries in Western Europe, North America, and the Far East. Following the Chernobyl accident and the setback to its nuclear program, the USSR has had substantial excess uranium production capacity (approximately 4,000 tons per year) available for export. More significantly, a large portion of the huge uranium stockpile, estimated at between 250,000 to 500,000 tons, could be available for sale in world markets for convertible currency, although prices on these markets are currently very depressed. The USSR is also offering enrichment services to the West at very attractive costs that Western enrichers may find difficult to match. The first such contract with a U.S.-based utility was concluded in August of 1990, and more are expected.
Soviet electricity trade constitutes about 2.5 percent of production. Exports have been hampered since 1989 by technical difficulties with the grid and lack of reserve capacity.
Electricity trade for the USSR, as elsewhere, is governed by well-established contracts and to some extent by proximity. The Soviet grid has interconnections with Hungary and Romania (the two largest importers), Poland, Bulgaria, the Czech and Slovak Federal Republic, Finland, Norway, Turkey, and Greece. The bulk of Soviet electricity trade is accomplished via the “United Energy System of Eastern Europe Member States” grid. A bilateral clearing arrangement is currently being developed with Eastern European partners. In the past, countries such as Poland and Romania have undertaken to trade assistance in construction of power lines and generating stations for access to Soviet electricity. The concept of an all-European grid is being actively explored, but at present Soviet exports to Western Europe are small and primarily to Finland.
f. Export prospects
Soviet energy exports are under strain from increasing production costs, falling productivity and efficiency and in some cases deteriorating quality, leading to a fall in oil and coal exports and a slowdown in the expansion of gas trade. Maintaining or increasing energy exports will depend on improved productivity in the energy sectors, which in turn will depend on largely Western energy production-related imports such as oil drilling equipment, pipes and compressors and turbines.
Estimates of Soviet energy exports for the near term are somewhat uncertain, especially for oil. At present, oil output and exports are declining, and it will be difficult to fulfil the official goal of maintaining the level of oil exports through 1992. Availability of energy for export will depend on such unknown variables as the degree of responsiveness of domestic consumption to economic activity, higher relative energy prices, prospects for social and labor unrest, and on the levels of energy production.
Gas exports, in contrast to oil, have been increasing steadily. Despite a recent slowdown in output growth, gas exports are expected to be stable through 1992. By 1993, the normal expansion of exports under gas contracts, plus new contracts being negotiated, are expected to result in exports of over 60 billion cubic meters to Western Europe, an increase of some 10 billion cubic meters from present levels. Exports are also planned in the Asia-Pacific region, to Japan, the two Koreas and perhaps ultimately to China, from gas developments in the Sakhalin Islands.
Coal exports (all high grade bituminous and coking coal) are expected to remain stable despite declining domestic output, reflecting long-term contractual commitments. Electricity exports are also expected to continue at about present levels under present agreements. The growth of nuclear-related exports will depend largely on the response of Western governments to competition from the USSR in what are largely protected domestic markets.
8. ENVIRONMENT AND SAFETY PROBLEMS
The energy sector is a major contributor to many of the worst environmental and safety problems in the USSR. Poor air quality, a spate of very serious and costly accidents at energy facilities, extensive marine and water pollution, the spoiling of useful lands, and acid rain are the most notable examples. The USSR ranks second in the world in its emissions of the greenhouse-effect gases which contribute to global climatic change. The majority of these gases stem from the energy sector.
Energy-related environmental and safety problems can be categorized by specific stages of the fuel cycle for all fuels (Table V.6.2). While all of these environmental problems are important from health and ecological standpoints, those associated with electricity generation; coal, gas, and oil development; and oil-refining and gas-processing capacity have major strategic and/or direct and indirect cost implications for the future of energy development.
There are major uncertainties about the size, composition and cost of future electricity generation capacity, in part because of certain critical environmental and safety problems involving fossil-fueled, nuclear and hydroelectric generation. This fact will dominate decision-making regarding the replacement of obsolete generating facilities and the addition of new capacity, and could severely limit the capital available for pollution control and clean-up. Moreover, the failure to achieve even relatively low-cost efficiency improvements, not only in electricity generation but more importantly in electricity end-uses, has exacerbated the already severe environmental problems related to electricity generation.
Data published by the Soviet authorities in 1989 provide emissions trends, sources and information on control equipment. Since 1980, emissions from Soviet generation facilities have dropped by 11 percent despite the addition of over 40 gigawatts of new thermal generating capacity. To minimize these airborne emissions, the prevailing strategy has been a combination of relatively low-cost actions. Entrained particulate matter has been removed with end-of-pipe equipment before exhausting gases to the air. Fuel switching has been achieved mostly from high-sulphur oil to low-sulphur coal and gas, and (some 25 percent) from high-to low-sulphur coal. To date, these measures have been responsible for virtually all of the reductions in emissions of sulphur dioxide in this sector. Emissions of oxides of nitrogen for some boilers have also been lowered by up to 20 percent through boiler operational changes. Pollutants have been dispersed through the use of very tall exhaust stacks (up to 350 meters), and some generating facilities have been strategically relocated, with natural gas replacing coal-fired generating facilities in or near urban areas, and coal-fired stations being sited at remote minemouth locations. In very extreme cases, facilities have been shut down.
There are definite disadvantages to increased reliance on present strategies for control of these emissions. Tall stacks actually enhance transboundary fluxes and the remote location of facilities has no net effect, thus limiting the applicability of minemouth generation. This is important because the USSR has entered into binding international agreements with commitments to reduce (transboundary flux of) emissions of sulphur oxide and nitric oxide.
Fossil-fueled electricity generation accounts for 15 percent of all air pollutants or about two thirds of those from the fuel-energy complex, including very large quantities of particulate matter, 43 percent of sulphur dioxide emissions and 60 percent of oxides of nitrogen emissions. The overall efficiency of particulate matter removal is at best only about 70 percent as compared to well over 90 percent in OECD countries. Around one fifth of Soviet power plant particulate matter emissions are due to faulty (inoperable) equipment, some two thirds of which is over ten years old. Only about one tenth of the generating capacity has newer units with particulate matter removal efficiencies over 90 percent. There are plans to install more sulphur dioxide and nitrogen oxides removal equipment on new and existing power stations; however, the industry is already lagging behind by almost 50 percent on existing plans for installing exhaust gas systems on existing thermal generating plants.
As to cost, Western experience suggests that typical full-service end-of-pipe equipment to remove approximately 90 to 95 percent of the emissions of sulphur dioxide and oxides of nitrogen would add approximately 40 percent to the capital cost of a new coal power station, so that fitting 100 gigawatts of thermal generating capacity with flue gas desulphurization (FGD) and selective catalytic reduction (SCR) devices for nitrous oxide removal of oxides of nitrogen could require approximately US$30 billion of initial investment.
Other options should be examined to minimize the need for and the cost of additional air pollution control. Increased efficiency in the use of electricity could reduce the need for some new generation capacity. This would free up capital for rapid replacement of obsolete facilities, which in turn would eliminate emissions from the worst sources. The reform plan calls for renewal of the production apparatus, and already planned replacement of obsolete thermal generating capacity (up to 100 gigawatts in the next ten years and 25 gigawatts urgently needing replacement) may offer additional opportunities for cost-saving on pollution control. Consideration could be given to technologies, such as furnace sorbent injection and low-nitrogen oxides burners, which are generally somewhat less effective than flue gas desulphurization and selective catalytic reduction but have much lower initial capital costs.
The newer, inherently cleaner, coal-fired generation technologies or gas-fired combustion turbines require more initial capital, but offer the combined benefits of increased efficiency and pollution reduction. One limitation to this strategy is the lack of indigenous production of these more efficient technologies: joint ventures for the production, construction and operation of new generating facilities would have to be pursued.
Nuclear energy was developed as an alternative to fossil-fueled electric energy. The operation of nuclear power plants avoids the air and water pollution problems associated with fossil fuel combustion. However, one obstacle to the deployment of nuclear energy sources is the potential environmental impact in the case of a severe accident. The Chernobyl accident in April 1986, which contaminated large areas of the Ukraine and neighboring regions, demonstrated this potential.
Hydroelectric generation is a major contributor to irremediable “land alienation” (removal of land from other productive uses) to which there is also major, growing public opposition. The fuel-energy complex is responsible for about 10 percent of the present total annual land alienation in the USSR (not including that affected by Chernobyl), mostly for hydroelectricity development. A rather high percentage of this alienated land is near populated areas and about one third would have been suited for agriculture. In response to public pressure, the amount of land to be flooded by new dams has been reduced. Even existing plants have recently faced difficulties in terms of output when some water has been reallocated for agricultural purposes.
Plans for construction of hydroelectric stations have been abandoned for environmental (and economic) reasons at Nizhnaia Ob, Daugavpils, Latvia, and Turukhansk. The Rzhev station on the upper Volga has been canceled, the Katun River scheme in Gorno-Altai is being delayed, and the flooding of reservoirs for the massive Cheboksary, Nizhnekamsk, and Sayan-Sushenskoye plants has been delayed. There have been some efforts to find less environmentally damaging sites such as the proposed development of hydropotential of mountain rivers in the Caucasus, Pamir, Tian Shian and eastern regions of the country which would entail less flooding of lands having higher uses. Nevertheless, environmental objections, inter alia, will make it more difficult to meet the ambitious objective of 90 gigawatts of hydroelectric capacity by the turn of the century.
There are two big environmental issues related to the development of coal, gas, and oil. One is major environmentally damaging accidents associated with development and the second is the growing debt of land alienation, especially when it affects agricultural land. There is mounting and effective environmental opposition to new resource development projects. The proposed mega-petrochemical complexes in West Siberia in the Tyumen oblast were opposed by residents even though the government promised net environmental improvement. Final resolution included a scaling down of the number of units and agreement by the Western joint venturers to meet Western norms for admissible emissions.
Oil pipeline ruptures at oilfields are increasing (up an estimated 15 percent in 1990) with some 300,000 metric tons spilled in the first half of 1990. A major blowout at Tengiz took 18 months to control during which time about 2 million metric tons of oil and 1 billion cubic meters of associated gas were burned and an estimated 13 to 15 billion cubic meters of flue gas emitted. A major accident at Ufa on the existing West Siberia-Volga natural gas liquids pipeline in June 1989 killed more than 400 passengers in two nearby passing trains.
Protests against both the oil and gas industries in West Siberia and in Central Asia have caused the government to ease the pace of gas extraction in the Yamal peninsula. Only two fields (Bovanenkovskoye and Kharasavey) will be tapped for the moment as a result. The second stage of the Astrakhan gas condensate complex on the shores of the Caspian Sea in the Kalmyk autonomous republic was postponed in March 1989 on grounds of ecological unsuitability.
Surface production of coal accounts for only one percent of the annual energy-related land alienation, but this toll can be expected to grow as the 22,000 square kilometer Kansk-Achinsk opencast mining project progresses. The significant areas (over a million hectares) of unreclaimed land from both surface and deep coal mining are extremely visible proof to the populace that coal development affects both actively disturbed and adjacent land, fueling increasing hostility against development of new coal facilities, washeries and slurry pipelines. Rates of reclamation have been approximately half the rate of generation of spoiled land.
Oil development accounts for the remaining 13 percent of energy-related land alienation. Concerns about land degradation from oil development focus primarily on the fragility of the land and dependent ecosystems in the regions where undeveloped fields are located. Some of the mega-projects, like Tengiz, are considered to have “irrevocable” ecological impacts given the relatively low degree of sophistication of the development effort and complex geography of the site. Wasteful production practices, such as flaring of natural gas in association with oil production, also increase unnecessarily the extent of environmental damage.
There are government requirements for land reclamation which apply both to mining and to drilling, including restoration of soil fertility, relocation of residents, and payments for alienation. However, responsibilities for prevention and restoration are unclear, leading to major uncertainties about the cost and likelihood of development of new areas.
The refining sector is considered a major polluter, accounting for 9 percent of total mixed atmospheric pollutant emissions. Particulates account for about 4 percent of refinery emissions while gaseous and liquid agent pollutants account for over 95 percent. This industry has a very low level of waste gas recovery and detoxification (about 40 percent for solid particulates and 4 percent for liquid and gaseous agents). The industry also practices improper disposal of liquid effluents and suffers rampant product loss. Poor performance of pollution-abatement equipment also plagues the refining industry. Soviet authorities report that plans to put waste gas recovery and treatment facilities on-line for petroleum processing and petrochemical enterprises were only 55 percent implemented in 1988. More than 50 percent of the pollution-abatement equipment of these enterprises is over 10 years old and is obsolete.
There are strict regulations applying to air and water pollutants which are applicable to all facilities of the fuel-energy complex, and there exists a system for identifying and fining noncompliance. However, the present system is flawed because the legislation for its implementation is both ambiguous and incomplete. In addition, where levied, fines have not been effective because they were budgeted for by enterprises and were not set high enough to offset bonuses for production.
Until recently, pollution control and abatement plans have been drawn up by ministries, and funding for abatement was allocated in ministry budgets. Funds were often underspent and were reportedly allocated to places where violations of standards were the greatest, but the basis for evaluating alleged violations was unclear. Moreover, if funds were not allocated for a pollution abatement project, this became a de facto exemption from compliance, at least for that planning period. The expenditure planned for 1991-95 on environmental control in the fuels and energy complex is reported to be weighted 77 percent for water conservation and only 11 percent for protection of the atmosphere, which does not reflect the relative weights of the pollution problems facing the sector. The reform plan, however, advocates the establishment of local environmental pollution quotas, as well as locally established taxes on the use of natural resources, which would be partly “refunded” to local authorities.
Even performance indicators for environmental compliance are oriented towards money spent rather than the effectiveness of the expenditure. The existence of installed, but inoperable control equipment is common. The problem is further exacerbated by the delivery of substandard equipment, the lack of any equipment at all or the lack of maintenance.
Many environmental and safety problems in the energy sector are the result of the broader systemic problems in the USSR mentioned earlier. Poor maintenance and slow replacement of obsolete equipment are primary reasons for the numerous oil pipeline ruptures at oilfields. Excessive loss of natural gas and oil in transmission can be traced to ageing compressor stations and lack of cathodic protection. Lack of equipment, infrastructure and operational errors also contribute to accidents, excess energy use, and product spills. Equipment and project designs are often inadequate to the size and conditions of the resource development projects undertaken, with disastrous results. Premature commissioning of incomplete projects using substandard materials and equipment is also endemic. Finally, there are the investments tied up in incomplete projects. Many pollution control expenditures that are “on the books” have not realized any emission reductions because projects were never completed.
The result of these poor policies and practices is a legacy of environmental and safety damage which inevitably will have to be cleaned up. The cost of preventing further destruction is placed by Soviet authorities at about rub 80 billion over the next 20 years. This should be contrasted with the present level of spending for environmental control in the energy sector of approximately rub 0.5 billion annually.
9. ENERGY TECHNOLOGY
The State Committee on Science and Technology (GKNT) coordinates energy technology development in concert with a broad range of ministries, and pursues a variety of programs relevant to energy sector requirements.7 GKNT’s responsibility stops short of construction or manufacturing of the technology, which is the domain of the various construction and equipment manufacturing companies. There have been many breakdowns, some massive, in the supply of equipment essential to the Soviet energy sector. According to Soviet authorities, around 40 percent of the fossil fuel power generation capacity, one third to one half of the refinery capacity, and two-thirds of the exhaust-gas particulate-matter removal equipment on energy facilities needs replacement. There is also evidence that the USSR is falling further behind in technological capabilities to produce the more sophisticated items needed at this stage of the development and operation of its energy system.
There are many cases in which Soviet technological ability to design needed equipment has been overwhelmed by the problems in effective application. A few examples of the problems encountered with Soviet-developed technology are: high maintenance requirements, insufficient capacity for the intended application, and inadequate supporting or complementary equipment. Such problems have plagued the development of Soviet gas-lift and electric submersible pumps, the unique turbodrill, and ultra-high-voltage transmission lines. As a result, there are exceedingly pressing technology needs for practically every fuel sector and every part of the energy cycle (Table V.6.3).
Relatively low priority has been given to date to the design of energy sector technologies (at least with respect to their efficient performance and environmental characteristics). Testing and demonstration has not been rigorously and consistently conducted with respect to durability and efficiency in operation; flaws due to inadequate design and materials and poor workmanship have led to failure in the field. Overproduction of inadequate equipment and underproduction of needed or more appropriate equipment and poor maintenance have contributed as well. Replacement rates of obsolete equipment lag far behind Western practice, in part because of inadequate supply of needed technology.
The USSR can purchase Western technology either to obtain superior technology or to make up for inadequate production capacity. It has already widely imported technology (or acquired licences) from the West for key energy sectors, primarily to achieve superior technical performance.8 In some cases, entire manufacturing plants have been imported (e.g., oil refineries complete with minicomputers and microprocessors in control systems; drill bits; and a seamless pipe manufacturing plant). Within the energy sector, there can be “barter” with energy products, or the proceeds from their sale can be used as collateral for financing equipment purchases. For example, the USSR borrowed US$ 15-20 billion in the West to finance imports of pipe and equipment for the gas pipeline network from the Urengoi fields in Northern Siberia into Western Europe.
There are sometimes problems with the assimilation of Western technology into the Soviet economy. In the initial absorption phase, there are delays between the delivery of Western machinery and equipment and their installation and use in production, and lower performance (once in production) than in the West. Both problems are due to shortages of complementary inputs of Soviet origin and the failure to operate and maintain the equipment properly. The subsequent diffusion phase entails the replication of Western technology in other plants. This also is hampered by shortages of labor, materials, and equipment, as well as by problems in copying or adapting foreign technology.
The USSR recognizes joint ventures as a means to acquire technologies and technological know-how. Soviet companies have been actively seeking joint ventures in the oil and gas development sphere, and have been working with power generation equipment manufacturers to develop joint ventures in electricity generation which entail importing efficient electricity generation equipment, e.g., combined cycle plants. Joint venture activity is envisioned to extend to construction of new power stations and would include the transfer of managerial expertise. Gas pipelines are also considered by the Soviets as potential projects involving joint ventures.
There are many examples of on-going international cooperation agreements involving the USSR, some of which date back 30 years. Most of them are bilateral, and many include information exchange or exchange of experts, while a few are more “hardware” oriented.9 Some Soviet R&D priorities—passively safe nuclear technology, clean coal technology, combined cycle combustion turbines—would be particularly ripe for international collaboration since these technologies are still in the development stage in the West. Other areas of potential collaboration include solar and geothermal energy applications, and R&D in technologies and techniques for the use of fly ash as a byproduct.
Traditional bilateral government programs have been primarily in areas such as advanced nuclear power and fusion, alternative fuels and solar energy, but not in the area of exploration and production (and to some extent refining) of oil and gas resources, where the USSR urgently needs assistance. There are important mutual benefits to be gained from enhanced cooperation in the oil and gas sector. The USSR could receive improved management, enhanced environmental protection, and access to the latest technology, and a higher level of convertible currency earnings. For Western companies, there would be expanded trade opportunities and diversification of energy imports. Potential for fruitful collaboration exists, for example, in the development of technologies related to exploration and development of Arctic oil resources, of interest to the United States, Canada and Norway as well as to the USSR.
The USSR is currently also taking unprecedented moves to improve its safety culture and level of quality assurance, particularly with respect to nuclear power. It has increased its participation in international programs for nuclear safety such as the IAEA, the World Association for Nuclear Operators, the Economic Commission for Europe and the Nuclear Energy Agency of the OECD. At the same time, the USSR has established bilateral relations with many Western countries such as the United States, France, the United Kingdom, Germany and Finland, for the exchange of safety experience and techniques.
10. SUMMARY AND RECOMMENDATIONS FOR THE ENERGY SECTOR
The USSR is generously endowed with energy resources. Energy is crucial not only as a factor of production, but also because energy exports are the source of about 40 percent of convertible currency earnings, and the energy sector is an important revenue source for the union budget.
The USSR’s energy industries today are in a precarious position. Rising costs and growing inefficiencies are evident in all aspects and in all sectors of the fuels and energy complex. The energy complex now consumes about 40 percent of the union’s industrial investment budget, yet coal and especially oil production are falling, growth in gas output is slowing and the economy is facing energy shortages. Despite a history of heavy and growing investment, outdated technologies (in oil recovery, electricity generation, pollution control, pipelines and refining), and poorly maintained physical plant are endemic to much of the fossil energy sectors. Energy-related air pollution, water degradation and land alienation have grown largely unchecked. The fossil energy sectors have suffered accidents that reflect faulty construction and operation. Accidents will continue to occur with regularity if no steps are taken to improve the energy infrastructure and its overall operation. The nuclear sector has its problems, with some older plants acknowledged by the Soviet authorities as not meeting currently desired safety levels. Accidents at nuclear power plants have not been frequent, but the Chernobyl disaster has widely influenced opposition to the further use of nuclear power.
Compounding the technological problems in the sectors producing fossil fuels are the lack of economically rational field management and general management practices, which lead, inter alia, to inefficient and uneconomic field development and lower ultimate resource recovery. This has accelerated the move eastwards to new but more remote and higher-cost reserves in an attempt to maintain production levels. Coupled with the locational inefficiencies resulting from central planning, particularly for refineries and power generating plants, this has led to increased transport requirements and costs for coal, oil, oil products and electricity. Locational corrections must ultimately occur, and will depend in part on the ability to improve the environmental acceptability of energy facilities.
A desire to maximize oil exports and a need to compensate for reduced nuclear power growth have led the Soviets to take measures designed to increase the use of gas and coal. Relative fuel prices for industrial consumers have been set to reflect this, but fuels are generally allocated without regard to price. Increased delivery of gas for fuel substitution will be constrained by poorly constructed and maintained pipelines, and by requirements for export and normal demand expansion. Increased use of coal for fuel substitution poses serious transport and environmental problems. Planners are divided on whether coal or gas should be emphasized, or nuclear power further developed.
Consumer prices are below production costs and bear no relation to world market prices. Consequently, energy is used very inefficiently, with energy use per unit of GDP two and a half times higher than the average for OECD countries. Production is subsidized and cross-subsidized, accountability does not exist as to investment, production or consumption, and virtually no incentives to efficiency exist. In fact, inefficiency is frequently rewarded among producers. Profits above industry-assigned averages are claimed by the state while high-cost producers are compensated. Profits for some are calculated as a part of costs or on the basis of activity, but not necessarily productive activity. Investment is centrally allocated and divorced from internal enterprise considerations. Even performance indicators for environmental protection are based on money spent rather than on the effectiveness of the expenditure.
The energy sector is also characterized by a lack of flexibility. The system cannot deal with surprises. Oil and gas storage is insufficient to cope with unanticipated changes in demand, refinery shutdowns or pipeline bottlenecks. Electricity generating capacity is strained and new construction is delayed. Refinery capacity is unsophisticated and not matched to the structure of demand, particularly for transport fuels.
The Soviet energy industries are in need of drastic reform. There is a great temptation to recommend that this reform should follow a given strategy, or that investment in the energy sector should reflect a certain set of priorities. This would be a mistake. The present ills of the system stem largely from investment decisions and priorities being dictated inappropriately to industry participants by central planners. The transition to a market economy will be difficult. But, in the long run, a market economy would clearly improve the allocation of investment.
Recovery of the energy industries from their present difficult state will probably not take place without fundamental and prior reforms in the areas of pricing, along with institutional or structural reforms. Energy prices must be liberalized along with other prices, although this could be done through a mitigating mechanism which would phase in the effects of the price change over at most three years, considering the great disparity between domestic Soviet energy prices and those of exports and energy traded on world markets. This cushioning device could take the form of a progressively phased-out border tax on energy exports.
Price liberalization would facilitate rapid elimination of the present cumbersome scheme for generating and allocating energy industry investment through the pooling of enterprise revenues for reallocation within the energy complex. Free prices would permit self-financing within the energy sector without cross-subsidies and without additional claims on the state budget. Centralized allocation of materials, investment and output could therefore be phased out. These functions should become the responsibility of accountable and self-managed enterprises, whose management will need training, particularly in sales and marketing. Most important, the system of incentives and rewards that encourage profligacy and inefficiency in the energy sector must be eliminated.
Given the current inefficient use of energy, large reductions in energy intensity should be feasible. In the context of overall economic and industrial reform, energy price liberalization, with a substantial initial price increase, will ultimately lead to energy conservation. Over time, energy savings will increase as the economy’s capital stock is adapted to higher energy prices. In fact, more emphasis should also be placed in promoting investment in energy efficiency in production, transmission and consumption, coupled with measures for reducing the negative environmental impact of these activities. Efficiency gains induced solely by investment might, however, be delayed by the relatively low rate of capital turnover and by the presence of widespread rigidities in the economic system.
There are two priorities for institutional reform needed to facilitate competition and investment. First, regardless of how ownership of natural resources is ultimately resolved, a system of leasing arrangements needs to be devised to provide access to energy resources for exploration and development. A myriad of leasing arrangements exists in Western countries which could be explored and adapted by the USSR. Second, there is a need to rationalize and decentralize the energy complex. Specifically, the 700 or so oil, gas and coal-producing enterprises now ministry-owned should be made operationally independent (though remaining state-owned initially). This will introduce some measure of competition among producers even without or before privatization.
These producing enterprises must be assured legal access to resources through leasing, commercial access to transport, and the right to affiliate contractually among producers, refiners or processors, and exporters. It will also be crucial to assure continued free trade in energy throughout the USSR despite regionalization or privatization. Some aspects of the energy complex are less susceptible to decentralization, notably the nuclear industry and the pipeline and electricity transmission grids. However, in Western experience these too can be regulated to introduce some competition (see Appendix V.6.1).
For the nuclear sector, a number of specific organizational changes should be considered: strengthening the central regulatory authority through supplemental resources, upgrading its technical capabilities, adopting a basic safety law and Western-style regulations to underpin its authority, and creating regional offices to assist the central authority in effectively addressing local concerns.
Though increased investment has been the traditional Soviet panacea for energy industry problems, it has been an ineffective remedy over the longer term. Much previous investment has supported uneconomic operations or ended up in unfinished projects, e.g., partly finished but abandoned nuclear plants, or coal mines opened and operating with output dedicated to minemouth power plants never built. More efficient use of technology will be important in improving the performance of the energy sector, but new investment cannot be viewed as a substitute for effective reform and will not be productive without it. Nevertheless, in the long run and assuming effective reform, the energy industries will offer attractive opportunities for investment, including foreign investment, and for joint ventures. In fact, significant amounts of new and efficient investment will be necessary in the long run, particularly in oil extraction and in the infrastructure for delivering energy, which is in great need of improved technology and repair.
In the near term, efforts are urgently required in the oil sector to restore production and exports to previous levels, giving particular emphasis to improving field management practices, drilling (including horizontal drilling) and secondary recovery techniques. Refinery upgrading to install catalytic cracking capabilities is needed for greater and more efficient output of transport fuels, including more lead-free gasoline. Assuming some measure of reform in the near term, investment efforts should focus on these needs.
Efforts are also urgently required to shore up the faltering electricity utility system. In this regard, and again assuming the beginning of reform, timely completion—in conformity with generally recognized international environmental and safety norms—of power plants under construction, including nuclear, is vital; bringing on stream additional electricity generating capacity will also be critical.
Improved natural gas pipeline maintenance and particularly increased compression are sorely needed. In a new economic climate, improved compression would enhance delivery capabilities without major construction efforts and would permit increased reinjection of gas and an end to wasteful flaring. This would raise recovery rates of associated oil and would increase the availability of gas without a concomitant increase in gas production. Improved gas-processing equipment and practices are needed to reduce pipeline corrosion.
Efforts must be made to reform incentives for maintenance on, and repair of, the energy distribution system, and to enhance existing assets and infrastructure including pipelines, rolling stock and railways, electricity transmission and coal-handling facilities. Pipeline and transmission configurations may have to be altered; storage capacity for both oil and gas must be increased to provide more flexibility in energy marketing and distribution.
Energy efficiency gains and production capacity expansion will both be necessary to boost net exports and meet the rising domestic demand stemming from the future growth of economic activity, personal incomes and private transportation. This will require substantial new investment incorporating a large component of advanced foreign technology. Investment of such a nature and scale does not seem practicable without the extensive reforms of the energy sector suggested above, a sizeable commitment of domestic resources to these projects, and the establishment of better conditions to attract foreign capital or foreign direct investments.
The presidential guidelines devote some attention to the energy sector, including a commitment to implement a range of extraordinary measures to reverse the drop in oil production. In general, however, the proposals fall short of what is required. They provide that energy production, distribution (including export), and pricing will remain under central control to assure stability. The intended period for the phase-in of energy price deregulation remains unclear. The degree of gradualism implied and the continuing distortions in the form of price equalization and multiple prices do not allow a speedy progress towards efficiency and rationalization of the sector. The guidelines provide the energy industry with neither badly needed independence in the form of decentralized decision-making, nor the encouragement of entrepreneurial attitudes. Even the proposed introduction of an element of self-financing for the energy industries involves a central pooling and reallocation of revenues and investment funds. The industry will continue to be burdened by government intervention through the “contracts” that are in fact the continuation of the previous state orders. Moreover, the guidelines do not even address critical environmental and safety issues relevant to energy.
Emissions of sulphur dioxide and nitrous oxide must be reduced through such strategies as energy efficiency, fuel switching and pollution abatement in the electricity generating sector. In road transport and domestic coal heating, which are significant sources of urban ground-level pollution, higher-quality fuels and more efficient technologies are needed. The costs and limits of these various strategies must be recognized; a combination of such measures will be required for the USSR to comply with its commitments under international agreements to reduce relevant emissions.
Environmental regulations need to be clearly delineated and incorporated into the design and costs of energy development projects, including joint ventures. Foreign investors should consider imposing high environmental standards in their own operations. Eventually, the accumulated environmental debt (land alienation, damage to water resources, air pollution damage) will have to be dealt with; foreign assistance and technology would be useful and may be crucial to this effort.
Maintaining a long period with no major energy-related accidents is vitally necessary to regaining the public’s trust in the energy sector. Investment to this end should be guided by a systematic risk and cost-benefit analysis of measures that might be able to prevent or at least to lessen the effects of major accidents. A very good start has been made with respect to nuclear energy safety and should be complemented in other energy sectors. A program should also be developed to increase the level of public understanding of the issues involved in pursuing the Soviet nuclear program.
Well-channeled foreign assistance will be critical to the reform of the Soviet energy system. There will be limits to what can be achieved in the short term, particularly because Western firms will not be willing to make significant investments given the prevailing structural and regulatory uncertainties. In particular, the issue of ownership of energy resources needs to be clearly resolved before foreign companies can be expected to enter into significant, long-term contractual arrangements. The proposal in the reform plan on leasing of fuel deposits is a step in that direction. In addition, a safe and adequate supporting infrastructure must be assured, and clearly defined environmental requirements will need to be established.
Nevertheless, there are a number of specific areas where foreign assistance in the near term could effectively assist the transition to a market economy and the process of reform that this implies for the energy sector. Such assistance could be provided in seminars and workshops, exchange of statistics, technical experts and managers, provision of Western consultants, reviews by teams of experts from both the private and public sector, as well as by the provision of equipment and financing.
Management assistance and training can and should be provided immediately, and will be invaluable in the oil and electricity generating sectors which have the most urgent needs. At the enterprise level, management methods will have to be adapted to new macroeconomic conditions. Business management, assessment of cost-effectiveness, marketing and financing are some of the new skill areas to be introduced. Examples are load management in the electricity sector, long-term investment planning and optimization programs under conditions of uncertainty with respect to prices and exploration in the oil industry, and field management of oil and gas development. Technical assistance on assessing and implementing energy- saving practices and equipment (including cost-benefit analysis of technological options) and in performing joint energy/environment audits would also be useful in the early stages of reform.
In terms of specific actions for the oil industry, the focus of industrial assistance should be placed on improving field management practices, drilling and secondary recovery techniques and exploration methods. Industry information exchanges on techniques developed for operating in arctic conditions, including mitigation of environmental and socio-economic impacts of mega-projects in arctic areas would be mutually beneficial to all parties. Western governments could aid in devising a leasing system for energy resources, improving and standardizing energy statistics analysis, and by sharing information on energy pricing and regulatory approaches used elsewhere, including environmental rules for energy developments. In the short-term, producing enterprises could also be assisted in developing export channels. In this regard, export organizations could be encouraged to develop new sales and marketing functions.
In addition, a safety analysis of the danger points in the energy producing and delivery systems could be undertaken with foreign public assistance. The nuclear generating sector could benefit from a rapid infusion of Western safety culture and quality assurance into its operating organizations and construction projects, including greatly increased exchange of operating practices to impart Western know-how and assistance in the adoption of Western pre-operational testing practices; improvements in instrumentation and control equipment; and accelerated transfer of Western safety analysis techniques and capabilities in conjunction with longer-term backfitting of reactors with considerable remaining useful life or replacement of older reactors.
To attract Western firms, it is important to put into place an internationally agreed investment regime supported by effective international arbitration as quickly as possible. Such a system would not preclude the possibility of bilateral arrangements, but could provide a facilitating framework. The Soviets will need advice from Western governments on the appropriate fiscal and regulatory regimes to attract investors. Upon the adoption and implementation of a competitive foreign investment regime, the energy industries, particularly the oil and gas exploration and production sectors, would prove attractive for joint ventures and long-term investment.
Ultimately, however, internal reform, not foreign investment, will be the catalyst for revival in the Soviet energy sector. The needs are too great to expect infusions of new technologies and funds to raise productivity and production on either a quick or long-lasting basis, or to produce an energy sector that can sustain the requirements for both increased domestic energy consumption as the economy eventually expands, and enhanced export earnings required to finance capital equipment and technology imports.
Competitive market pricing, along with the other forces at work in a competitive market, operates to provide economic efficiency in production and consumption. These competitive characteristics by and large are lacking in the Soviet energy sector. It should also be noted that they have not historically prevailed throughout the energy economies of the Western industrialized countries either. In fact, many of the same flaws found in the Soviet energy pricing system have existed to some degree and for some period of time in the energy sectors of virtually all Western industrial countries. The differences are in degree and in duration rather than in nature. Over time, however, administered pricing practices which distorted production and consumption have been replaced by more competitive pricing practices.
Before drawing parallels, however, it is useful to note some major differences between the Western economies and that of the USSR. The former have functioning market price systems, although some parts of the energy sector, by virtue of being sanctioned monopolies, may constitute exceptions to competitive markets and market pricing. Such monopolies are viewed, however, as sometimes unavoidable exceptions to the desired norm of competition, whereas in the USSR, monopolies are the backbone of the industrial structure. The incentives of the market system—profit based on efficiency—are well imbued in Western entrepreneurs, whereas in the USSR such notions are generally alien. Nevertheless, administered pricing and allocation have been common features of parts of the energy sector in many Western countries, in primary production as well as in distribution, with monopolies prevailing among gas distributors and electricity utilities.
Energy markets in North America are considered to be among the most competitive. Yet in the field of primary production, following the 1973 crude oil price rise, both the United States and Canada instituted crude oil price controls. Both countries until recently also regulated at least some natural gas wellhead prices. In the United States, in addition to crude oil price controls, crude oil and petroleum products were allocated by law and decree to assure what was hoped to be an equitable distribution of a perceived shortage of crude oil (which probably would not have existed if prices had been allowed to rise). The experience with price controls and allocation was a failure. The general ceiling on producer prices discouraged ordinary production whereas supplementary price allowances for low-productivity (stripper) wells or for high-cost recovery techniques led to an inefficient concentration of investment in high-cost inefficient production and the shutting-in of lower-cost production. This raised unnecessarily the cost of recovering oil and defied normal resource recovery practice of maximizing recovery first from lower-cost resources and then moving to progressively higher-cost resource development. At the same time, artificially low oil prices stimulated demand, aggravating imbalances further. Administrative allocation of crude oil to refiners and refined products to distributors led to further distortions and inefficiencies in the oil supply chain. Refiners and distributors lost their choice of supplier. Refiners were precluded from paying the prices needed to obtain crude of appropriate quality in needed quantities, and efficiency in negotiating contracts was unrewarded. Integrated companies shifted profit margins from crude production to refining, thereby frustrating much of the initial intent of the price controls. Spot shortages necessarily occurred as market adjustments were precluded because central allocation could not effectively anticipate market needs, and price was not permitted to balance supply and demand. Distributional shortages were widespread in the United States even though no physical shortfall existed in world oil markets. When controls were finally lifted in 1979, shortages disappeared and, with competitive access restored to a variety of suppliers, prices fell. In Canada, by contrast, there was no allocation and no shortages. Domestic prices were gradually moved towards world prices under a system of price blending.
With regard to natural gas, regulated pricing prevailed in North America until 1978. In the sectors subject to price controls, demand for gas grew rapidly in response to gas prices set far below competing fuel prices; but supply began to flow into unregulated markets, seeking higher prices. Serious shortages appeared in regulated gas markets by the mid-1970s, particularly in the United States. Customers in regulated markets sought unregulated supplies to ease shortages of traditional supplies. Historical supply patterns became severely stressed, and producers, customers and some distributors sought regulatory relief. Administration of the industry had become irrelevant to the realities of the market. The pressures between regulated and unregulated sectors of the industry were inexorably resolved in the United States and in Canada in favor of competition and deregulation as it became obvious that partial regulation of an industry is not sustainable in the long run.
At first, regulated wellhead prices were reset at higher levels to attract gas to markets with shortages. But these newly established prices, like the crude oil prices established in 1973, encouraged high-cost production and exploration of high-cost areas, leading to an excess of high-cost gas with low-cost gas being shut in. Average gas prices in regulated markets more than doubled in five years and the prices of some gas rose 7-10 times; gas prices in unregulated markets rose less than 100 per cent in that same period. All such costs could be legally passed on to consumers, providing no clear incentive for cost-cutting among producers planning to serve gas-hungry markets. High-cost projects such as bringing gas down from Alaska and Canada to mid-continent United States were designed, premised on abnormally high prices and assuming unlimited and legal pass-through of all costs to consumers, with little incentive for project cost-cutting. Ultimately, prices were forced down by competition among shut-in suppliers with surplus and unsold gas, from nontraditional suppliers or from other fuel suppliers, and by consumers who began to refuse high-cost gas.
Since the early 1980s, regulatory reform in North America has institutionalized many of these market changes, lifting effective producer price controls, permitting and even encouraging competition among suppliers to regulated markets, encouraging consumer choice as to suppliers and free choice among markets for producers to replace long-term contractual assignments of gas, and providing competitive access to existing monopoly facilities. A greater variety of distributional and supply arrangements are now available to distributors and their customers, including the beginnings of competitive, flexible and efficient market-based pricing.
At the same time, rising production costs for coal in several Western countries have exceeded world market prices for coal, and governments have resorted to subsidies for coal producers and some coal consumers (such as electricity generators), in order to maintain the so-called “profitability” of the coal producers. The social and economic costs of these subsidies is high: in the Federal Republic of Germany, electricity sales that reflect these subsidies are twice as high as those of neighboring countries. Estimates of the costs of these subsidies (production-related only) to various Western countries in 1987 ranged from an equivalent of US$16 per ton in the United Kingdom and US$19 per ton in Spain, to US$71 per ton in Germany and US$96 per ton in Belgium and Japan. Countries are gradually committing themselves to reducing these subsidies.
Perhaps most parallel to the Soviet experience is the Western experience with the utility systems that deliver gas and electricity to industrial and retail consumers. These are sanctioned monopolies that exist amid market-oriented systems. Administered prices, such as occur in Western utility systems, are essentially cost-plus prices, with profit being assured as a percentage of revenues. In some European countries, utilities also receive government subsidies for their operations when revenues from consumer sales do not cover costs. There is little incentive for any of these firm—with or without subsidies—to cut costs or maximize efficiency. Utility prices may also include government-imposed social costs such as for regional development programs, which have little to do with providing utility services. Consumers have traditionally been tied by long-term contract to a single geographic monopoly supplier: consumer choice is limited, as is the ability of producers and consumers to respond to changes in costs or in prices or in market conditions.
Competition and efficient pricing are nonetheless beginning or being introduced in these regulated monopoly systems or at least on parts of some of them, with possible implications for how utility pricing might be carried out in the USSR. Reforms in the regulation of traditional utility systems—both as to pricing and to competitive access to markets—have begun to occur, first in North America, and more recently in Australia, New Zealand, and Western Europe. Natural monopolists are distinguished from institutional ones, and regulated accordingly. The pricing reforms are designed to provide flexibility, transparency and accountability; the reforms providing for easier access create competition while preserving the economies of scale provided by the natural monopolist.
Pricing reforms in and of themselves, however, are not sufficient to provide incentives for an efficient industry; there are limits to the effects and benefits of efficient pricing, unless producers and consumers are permitted to respond to prices rather than to allocation by decree or by fixed or dictated contracts. The ability of market participants to choose among transactions according to price (and other factors of their choice), is a key to industry efficiency.
Without competition it is difficult to enforce market pricing: planners and regulators do not and cannot have sufficient knowledge of the industry’s costs or markets to set and maintain prices efficiently, and monopolies have every incentive to price to their own advantage.