Soviet Oil

The Move Offshore

Stephen Lewarne

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9781000312638
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

This book details some of the problems experienced in the Soviet petroleum industry and includes a discussion on the downward trend in petroleum production. It reviews a geological assessment of the offshore region and presents a discussion of activities in the Soviet offshore waters.

1
The Importance of Soviet Petroleum and the Role of Offshore Oil: An Introduction

The Soviet Union has elicited close scrutiny in the West over its role as both an oil producer and exporter. This scrutiny has become more pronounced over the last decade when it became apparent that the Soviet Union was truly an oil "giant". It had become the largest producer of oil in the world by the mid-1970s, a position previously held by the United States. Further, when the Soviet Union in 1979 surpassed Iran, becoming second only to Saudi Arabia in oil exports, it became clear to analysts that petroleum was a key source of the Soviet Union's economic strength and was crucial to the Soviet Union's presence in the global economy. The production of oil for the Soviet Union, therefore, is more than just an economic necessity, it is a source of prestige and an instrument of political power.

Over the last decade the Soviet Union has experienced problems in its petroleum industry. Among these are, notably, the decreasing rates of growth both for petroleum production and the discovery of new petroleum reserves. The annual rate of growth in petroleum production has fallen from an average of 9% between 1960 and 1970 to 4% between 1975 and 1980, and to -0.25% between 1980 and 1985. Particularly disturbing to the Soviets was the absolute decline between 1983 and 1985 when production went from 616 million tons a year (mty) to 596 mty. This was increased to 611 mty in 1986 and is estimated at 624 mty in 1987. The production increases in these two years are, however, deceptive because they were produced at an increasing cost. Most of the increase is attributable to more discipline at the work sites than to long-term factors such as increased exploratory drilling and technical innovation. What has not been addressed is the crucial decline in the reserves-to-production ratio (the amount of known explored reserves as a share of oil production) of -3.9% between 1970 and 1984. It is unlikely that production figures like those of 1987 will continue if these problems are not addressed. Because petroleum is the Soviet Union's chief earner of hard currency, these problems are that much more acute.

Soviet petroleum is significant in five ways. First, if petroleum production begins to fall off to the extent that it cannot satisfy domestic needs, then serious bottlenecks will begin to form in the economy until other energy sources can be drawn upon. Second, petroleum has been and still is the Soviet Union's chief earner of hard currency. For quite a while it has been the preoccupation of Soviet planners to raise the quality of Soviet manufactured goods and increase their salability in hard currency markets. Yet to date for a number of reasons this has not occurred. The consequence is that petroleum is really the principal "tool" available to Soviet planners when they wish to reduce the country's trade deficit or increase earnings to pay for hard currency imports. Third, in the post-OPEC world, oil still equates with power. Security of reserves can allow a country considerable leverage in its economic and political dealings with both its allies and its enemies. In the case of the Soviet Union, a surplus of oil means it can remain aloof at times from the Middle East conflict when the conflict centers around oil. Fourth, Soviet oil is significant as an instrument of Soviet power in East Europe. Fifth, if the reserves-to-production ratio begins to seriously decline, then the Soviet Union and those who rely upon its petroleum for their energy needs may be forced to turn to the Middle East for petroleum. Such concentration could increase tension in a region already prone to conflict.

The Soviet Union has tended to benefit from being an oil giant, both in economic and political terms. It has, however, attributed much of its success to oil and oil alone. Oddly, just when the Soviet Union had become the world's largest producer and second-largest exporter of oil, the Soviet Union began to experience problems in its petroleum industry.

Soviet planners under Mikhail Gorbachev are now considering exploring and developing the country's offshore waters in hope of providing at least a partial solution to these problems. With an unstable rate of growth in petroleum production since 1984 and the inadequate exploratory drilling of the past fifteen years, the Soviet Union is now faced with a decline in the reserves-to-production ratio. Further, over the long term, its major source of hard currency is jeopardized.

Are Soviet planners concerned with the extent to which offshore oil can alleviate these problems? The answer depends.

If their concern is to know if petroleum from the offshore regions can provide a solution to current production problems of the Soviet petroleum industry, then the answer is "no". At the present time, the offshore regions of the Soviet Union produce around 10 mty, or 200 thousand barrels a day (tbd), which is about 1.5% of total Soviet petroleum production. On the other hand, if their concern is to know if the offshore regions have the potential to alleviate significantly the problem of a declining reserves-to-production ratio, then the answer is most definitely "yes".

However, the term "potential" is used cautiously. What is meant is that the geological potential of the offshore waters appears to be substantial, and few experts, both Soviet and Western, doubt the potential reserve capacity of the offshore waters. Some argue whether this potential capacity amounts to 98 billion barrels (bbl) or 151 bbl, but even pessimistic estimates place the reserve capacity among the largest in the world.¹ According to the East German journal Die Wirtschaft, Soviet waters contain about one-third of the country's ultimate recoverable reserves. The inland seas alone are said to have recoverable reserves of nearly 39bbl.²

Given that the offshore reserves are believed to exist in substantial quantities, this study will address the questions of the practical ability of these reserves to alleviate significantly the problems of a declining reserves-to-production ratio and to insure long-term petroleum production. To this end several issues are raised.

To what extent will problems in the onshore petroleum industry affect the decision to go offshore? That is, how crucial is petroleum to the Soviet Union in the years ahead? Is the Soviet Union prepared to spend a considerable amount of money and take severe risks to develop the offshore waters?

How is the Soviet Union to assess, explore and develop this new potential? In most of the petroleum-producing regions of the Soviet Union, the lack of adequate technology and the remoteness of the region are the major impediments. The ultimate problem, however, "...will be one of technology, because even if the most remote basin is explored successfully by geophysical means, it will take a modern, advanced drilling technology to develop the resource potential at the basin."³

The primary impediment, therefore, is a technological one. In this regard, the Soviet Union must know its technological requirements; e.g., what kind of offshore equipment is necessary to undertake seismological surveys, exploratory drilling and production? How significant is the difference between the more temperate offshore region of the Caspian Sea and the Arctic conditions of the Barents Sea and the Sea of Okhotsk?

The Soviet Union's domestic industry is not currently capable of meeting these requirements. As a result it has enlisted the support of Western firms and governments. The participation of Western countries, and in many cases NATO members, entails a number of problems.

First, how will the Soviet Union pay for this technology? One of the main points stressed in this study, is the paramount importance of petroleum in Soviet export earnings. Importing foreign technology, however, means that more hard currency must be paid out in order to acquire the equipment. Since over two-thirds of the Soviet Union's hard currency earnings are derived from oil sales, with every purchase of Western equipment, more oil must be produced to cover the cost of acquisition.

Second, what are the security considerations if Western partners are allowed to participate in the development of the offshore reserves? With the import of foreign technology and, perhaps, Western engineers and technicians to assist in the proper use of the equipment, there is a possibility of Western influence in a region traditionally off limits to foreigners.

Third, if Western firms or governments become involved in the development of the shelf, even at an arm's length via the licensing of technology, how will political conflicts between the United States and the Soviet Union—such as the Soviet invasion of Afghanistan or American sanctions of the Soviet-West Europe gas pipeline—affect business practices between the Soviet Union and its Western partners?

Fourth, to what extent will Soviet planners attempt to reduce systemic barriers inherent in the Soviet economy to facilitate the development of the offshore waters? The centrally planned structure of the Soviet economy and the monopoly over foreign trade by the foreign trade organizations (FTOs) more often than not slow down negotiations. This leads to frustration on the part of the Western partner.

Finally, what of the potential territorial disputes? The exploration and development of the offshore region involves in many instances conflict over boundaries with the Soviet Union's marine neighbors. While most of the regions around the Soviet Union have a potential for dispute, there are three regions of immediate consideration—the waters between the island of Sakhalin and Japan; the Barents Sea and Norway: and, the northern polar ice cap and Canada.

While the dispute over ownership of the island of Sakhalin was settled in 1952, with Japan renouncing claims to the region south of Karafuto, the dispute over possession of the Kuril islands still exists. The marine border between Sakhalin and the Kurils has not yet been formally resolved between the Soviet Union and Japan.

In the Barents Sea, there is what is known as the "Grey Zone" an area between Norway and the Soviet Union. The rights to mineral use have never been decided. As the Norwegians move farther and farther north towards Spitsbergen and into the Murmansk basin in an effort to expand their offshore oil industry, this area will be the most hotly debated. A similar dispute already exists between the two countries concerning Spitsbergen island and the waters around it.

Although there is no dispute with Canada yet, the potential certainly exists, because Canada has decided recently to explore more actively its Arctic waters. Canada may find itself having to settle boundaries with the Soviet Union. The region of potential dispute between the two countries is the Lomonosov ridge extending under the northern polar ice cap.

The island of Gotland in the Baltic Sea, where oil has been discovered, is a more innocuous dispute. Although the Soviet Union lays claim to half the island, Sweden claims an area encompassing the island, a distance halfway between Sweden and the Soviet Union.

There are other areas of potential concern. For example, the Bering Sea between the Soviet Union and the United States is the longest shared marine border in the world; however, the Convention of 1869, ceding Alaska to the United States, left the boundary between the Soviet Union and the United States unresolved. Also, the regions of the Arctic could present problems in the future, especially between Canada and the Soviet Union in the outer Beaufort Sea, between Norway north of Spitsbergen, and between Denmark and the Soviet Union north of Greenland.

Chapter 2 details some of the problems currently experienced in the Soviet petroleum industry and includes a discussion on the recent downward trend in petroleum production and the reserves-to-production ratio, and the role of petroleum in the Soviet Union's export earnings.

In Chapter 3, a geological assessment of the offshore region is reviewed and includes a discussion and assessment of the reserve potential of the basins.

In Chapter 4, a detailed discussion of present activities, both administrative and technical, in the Soviet offshore waters is presented. From the point of view of actual activity in the offshore waters of the Soviet Union, this is the most relevant section. Considerable detail is afforded the technological requirements and purchases of offshore equipment. Dealings with foreign firms and nations in the development of the industry are also considered.

Finally, in Chapter 5, there is a return to the questions posed at the outset concerning the practical ability of the Soviet Union to undertake petroleum exploration and production in the offshore waters. The factors ultimately affecting the decision of Soviet planners are discussed, and an attempt is made to predict the way in which the offshore petroleum industry will develop and to make the reader aware of some of the industry investment issues.

What follows is a speculative yet detailed study on a sector of the Soviet energy industry which, to date, remains virtually unnoticed in the West, especially in the United States. The Soviet Union is developing by all the means at its disposal an offshore industry to rival one day that of the United States. If the assistance of Western powers, such as the United Kingdom and Norway, continues, then the issue of limited, present-day Soviet technology will gradually be overcome.

In addition, because the Soviet Union is concentrating its petroleum exploration efforts in the waters of the Arctic, the strategic and military consequence of Soviet experience and technical expertise in this region will surely lead to yet another zone of conflict between the United States, its allies and the Soviet Union. That dispute will be both sensitive and extremely interesting.

Notes

1. It might be of some interest to the reader that the total proven reserves in the Soviet Union are around 79 billion barrels. The range I have estimated is, therefore, quite speculative. The estimate of 98 to 151 billion barrels of potential reserves does not, however, come close to the estimate for proven reserves in the Middle East which was 401 billion barrels as of the end of 1987. Nonetheless, if the estimate I have quoted is true, it would still be substantial by world standards. See American Petroleum Institute, The Basic Data Book (Washington D.C., 1987), vol. 7, no. 3, Table 1, sec. 2.

2. "Soviet Union: Offshore Prospects and Problems," Petroleum Economist (May 1977), p. 191.

3. A.A. Meyerhoff, The USSR Northern and Far Eastern Coasts: Petroleum Geology and Technology. Mining Activities. and Environmental Factors (Unpublished paper prepared for the Department of Indian and Northern Affairs, Ottawa, Canada, 1980), p. 167.

2
Problems in the Soviet Petroleum Industry: Background to the Move Offshore

It is first necessary to put the discussion of offshore petroleum within the context of the operation of the whole Soviet petroleum industry. An enumeration of the problems that currently beset the Soviet petroleum industry wi...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of Maps
• List of Tables
• Acknowledgments
• 1. The Importance of Soviet Petroleum and the Role of Offshore Oil: An Introduction
• 2. Problems in the Soviet Petroleum Industry: Background to the Move Offshore
• 3. The Geology of Soviet Offshore Petroleum: An Overview of Offshore Potential
• 4. Soviet Offshore Petroleum Exploration and Development
• 5. The Move Offshore: An Assessment
• Abbreviations, Acronyms and Definitions
• Bibliography
• Index