ing consumption, and the expected life of known European reserves began to drop. Furthermore, Norway and the Netherlands, concerned about the economic and social impact of rapid energy development, adopted conservative production policies designed to extend the life of their reserves. Taking these factors into account, European governments projected in 1980 that total European gas production would decline from about 18 billion cubic feet per day (BCF/D) in 1980 to about 16 BCF/D in 1990. The need for imported gas is expected to rise from about 3 BCF/D in 1980 to a projected 12 BCF/D in 1990. For a variety of technical, financial, and political reasons, the Soviet Union has seemed to the Europeans a promising source of imported gas. Soviet gas reserves are massive, more than one-third of total known world reserves. The Soviet gas can be shipped to Western European markets by overland pipelines, a cheaper and technically more reliable means than LNG tankers. Energy sales to Western Europe are an important source of Soviet hard currency earnings (over 50 percent in 1979), and help finance Soviet purchases of European machinery and manufactured products and technology. Expanded purchases of Soviet gas promise to generate major new orders and jobs for the ailing European steel and machinery industries. Finally, key European leaders view expanded East-West commerce as a means for building political ties and moderating Soviet behavior. These factors help explain why Europeans have sought to conclude agreements to finance the proposed pipeline, to sell equipment for its construction and to purchase the gas transported by it. As you know, the Soviets and West Europeans are nearing completion of negotiations on a pipeline which could move roughly 4.0 billion cubic feet per day (BCF/D), or the equivalent of about 700,000 barrels of oil daily, into Western European market. Table A presents rough estimates of how European dependence on Soviet gas would grow from 1979 to 1990 if the pipeline were built to deliver 4 BCF/D. With the 4 BCF/D pipeline, dependence on Soviet gas will be 6 percent or less of total energy consumption in all countries except Belgium and Austria. European dependence on oil and gas combined in 1990 is likely to be the same as for gas alone if, as we expect, Soviet oil exports to Western Europe are phased out over the decade. Rising imports of Soviet gas combined with falling oil imports from the Soviet Union would leave Western European dependence on Soviet energy, as a percentage of total European energy consumption, roughly at current levels. One could argue, and many European energy officials have, that projected levels of European dependence on Soviet gas are small. The Europeans conclude, therefore, that the Soviets would not gain any real leverage as a result of this pipeline. European officials further argue that their use of Soviet gas is a necessary part of their strategy to reduce their oil consumption and to diversify their sources of energy. They postulate that Soviet gas imports, by reducing their dependence on fuels from the Middle East, would, on balance, improve their overall energy security. They note that the Soviet Union has never in the past shut off energy shipments to West European countries for political reasons, and that Middle Eastern suppliers have. They believe that the Soviet Union is so dependent on energy exports for its foreign exchange receipts to pay for imports of grain and industrial goods that it cannot afford to cut off energy exports. They contend that the only immediate alternatives to increase Soviet gas imports would be continued dependence on oil and gas from what are perceived to be the least reliable Middle Eastern suppliers. However, in our view, the volume of Soviet gas as a percentage of total European energy consumption is not a sufficient indicator of economic and political vulnerability. This is true for three major reasons. First, gas is a difficult fuel to replace on short notice. Unlike oil, which now constitutes the bulk of Soviet energy exports, there is no spot market for gas. Gas trade requires large start-up investments in pipelines or LNG facilities. Furthermore, it is much more expensive and technically challenging to hold large strategic stocks of gas as compared to oil. Second, certain regions will be very heavily dependent on Soviet gas and might apply strong pressure on national governments to avoid actions which could result in an interruption. In the event of an interruption, Soviet gas could not be readily replaced unless there were excess capacity in other parts of the European energy grid. Third, as noted above, residential and commercial consumers are particularly dependent on gas. A cut-off of Soviet gas would be particularly onerous for these politically sensitive sectors. Thirty percent of gas from the pipeline is earmarked for residential use. Residential and commercial consumers are the least able to absorb an abrupt fuel supply interruption. Homeowners have limited capacity to switch easily to another fuel. Furthermore, gas prices would probably rise precipitously in the wake of a Soviet embargo and thus place a harsh financial burden on homeowners and commercial businesses. Hence, West European vulnerability to Soviet gas leverage could be more substantial than the total energy share might lead one to believe. And recognizing this, users of Soviet gas would be likely to urge their governments to avoid action which could provoke a Soviet cutoff or sharp price increase. It is this sort of leverage which, even without a direct Soviet threat to cut off flows, could have an impact on Western European political behavior. It is important, also, to note that in the past the Soviet Union has on occasion used energy exports as a political lever, interrupting supplies to Yugoslavia, Israel, and China. It is, of course, difficult to speculate on just how Soviet energy leverage might be applied in the future. But it is not unreasonable to assume that the Soviets might attempt to exploit its energy relationship with Western Europe to seek political and/or economic benefits. Even in the current bargaining stage, the Soviets have skillfully used the prospect of Soviet equipment purchases and gas sales to secure favorable terms and have gotten the Europeans to underwrite much of the risk. Since 1978, when discussions on the pipeline project began, the economic factors affecting the pipeline have changed. Overall energy growth rates are down. European gas demand last year declined by 4 percent. Official estimates of future gas demand are being revised downward. In view of these developments, we question whether the European market needs this amount of additional Soviet gas and whether it cannot obtain more reliable supplies elsewhere. We believe that there are alternatives which could be more economic, and particularly more secure, than increased imports of Soviet gas. For example, Norway appears to have the resource potential to supply even larger amounts of gas to Europe during the next decade than it now does. In addition, Nigeria is pursuing plans to export substantial quantities of liquefied natural gas by the late 1980's. Certain aspects of U.S. energy policy will increase the availability of oil and gas available on world markets. We have already decontrolled domestic oil prices and taken steps to accelerate leasing on Federal lands. We have a legislatively established program of natural gas price decontrol. These and other U.S. energy policy measures will reduce U.S. demand for oil and gas imports and leave more foreign oil and gas available to Europe. We also are prepared to increase exports of coal to Europe. We have raised these considerations in our consultations with Europe. The Europeans have indicated that they wish to pursue these and other alternatives with us. But they have been firm in characterizing energy alternatives as supplementing—but not replacing-increased pipeline imports of Soviet gas. Recognizing the need for emergency preparedness, the Europeans themselves are developing a mechanism to respond to interruptions through a safety net based on: "Surge" production capacity for European (especially Dutch) natural gas; Increased use of dual-fired boilers in electricity generation and industry, so as to permit emergency substitution of oil or coal for natural gas; Significantly expanded reserves of stored gas; and Better integration of the European gas grid. The issues raised by the pipeline are related to the more general question of our policy on the export to the Soviet Union of oil and gas equipment and technology. This Administration inherited a policy under which: Some items of multiple use oil and gas equipment (e.g. computers) were under security controls; and Equipment and technology specifically for oil and gas exploration and production were under foreign policy controls, with a general presumption to deny exports of technology of oil and gas equipment, and a presumption to approve exports of nonsubject to multilateral controls. strategic end use equipment that is not The Administration policy on this issue is under high level review. We are considering a number of options. During the Reagan Administration, no licenses for equipment or technology for use on this pipeline have been granted. The Administration de cision to approve a license for the export of 100 Caterpillar pipelayers stipulated that these pipelayers could not be used on the pipeline. The U.S. has a limited unilateral ability to hinder the pipeline by denying key components for its construction. Equipment to be used in the construction of the pipeline is currently produced, or probably could be produced, by foreign equipment suppliers not subject to U.S. technology controls. A U.S. embargo on equipment for the pipeline could serve to delay the pipeline's completion, but we expect that delays will occur in any case, with or without a U.S. embargo. A unilateral U.S. embargo of equipment for the pipeline could spawn or speed up the creation of alternate suppliers of equipment in which the U.S. is currently the world leader. Nevertheless, this is a policy option open to us. A multilateral equipment embargo toward the pipeline could be more effective in impeding the project. In this context, the cooperation of foreign equipment suppliers such as the U.K., Japan, France, Germany, and Italy would be crucial. However, it is questionable whether these countries would participate in a multilateral embargo. France, Germany, and Italy will buy the bulk of the pipeline's gas, and have already received large contracts to supply equipment for the project. It is unlikely that they would be willing to embargo equipment sales for the pipeline. Foreign suppliers who are not pipeline participants, such as the U.K., would be concerned about the risk of an open conflict with their European partners. Japan's participation in an embargo would likely depend on what Europe does. The U.S., at the Ottawa summit,25 expressed its desire to expand the Western dialogue on energy security. We are discussing with our European partners alternatives to Soviet gas which would limit potential Soviet leverage and improve the security of energy supplies. In addition, we plan to continue to consider in the IEA, and in the economic summits coordinated long term energy supply strategies, which will provide Western countries attractive alternatives to further dependence on Soviet resources, and set a common Western understanding for energy trade with the Soviet Union. I am confident that a cooperative effort working toward complementary U.S. and European energy futures will be able to 25 Regarding the Ottawa Economic Summit Conference, held from July 19 to 21, 1981, see Chapter 5, Part F. head off potential tensions, and build a stronger and more stable economic foundation for the Western alliance. In summary, Mr. Chairman, let me repeat that the central element of our policy on the pipeline is our serious concern about its implications for European vulnerability to Soviet pressure and the economic benefits it provides to the Soviets. We want to work with the Europeans to help them diversify their energy supplies, using alternatives which are more secure and economic than Soviet gas. We want to do this in a way which is based on a common assessment of the risk and a common approach to avoid it, and in a way which strengthens the U.S.-European relations rather than weakens them. This requires a process in which we raise our genuine and serious alliance security concerns, put forward suggestions, and attempt to help Europe to find alternatives and thus to minimize its vulnerability to Soviet leverage. Document 154 Statement by the Assistant Secretary of Defense for International Security Policy (Perle) Before the Senate Banking, Housing, and Urban Affairs Committee, November 12, 1981 (Extract)26 Department of Defense I am here to discuss the views of the Department of Defense on the proposed pipeline to convey Soviet natural gas to Western Europe. As you noted, having spent more than 10 years preparing for hearings such as this from your side of the table, I appreciate more than most the value of a full exchange between the two branches of Government. It's a process of mutual education, and a sharing of ideals, analysis and concerns. I am convinced that the public policy that emerges from hearings such as this and from consultation between us generally is better and more balanced than either of us can expect acting alone. . 26 Source: Proposed Trans-Siberian Natural Gas Pipeline, pp. 113-118. The Department of Defense is seriously concerned about the effect of increased Western dependence on Soviet energy, on the strength and cohesion of the Western alliance. We believe that the increasing dependence of our European allies on Soviet energy, and especially natural gas, will weaken the alliance politically and militarily, shifting an already adverse military balance still further in the direction of a Soviet advantage and threatening the unity of purpose on which our collective security ultimately depends. Before I explain our concerns in more detail, I just want to take a moment to comment on the attitude of our allies toward this issue. In the final analysis it is upon their judgment that the decision to contain or expand their dependence on Soviet energy will turn. We can advise, we can explain, we can take action that will make the costs of Soviet energy higher, and the costs of non-Soviet alternatives lower. But we cannot decide the energy policies for France, Germany, or the Netherlands in Washington, D.C. The oil embargo of 1973 stunned the Western industrial world. It brought home with an immediacy that grave forecasts were never able to summon, and there were such forecasts, the danger of reliance on a small number of suppliers, who were willing to use their near monopolistic market position for political as well as economic purposes, together with increasing energy prices, which have made previously prohibitive energy development projects commercially attractive. The desire to reduce dependence on OPEC has been the driving force behind the search for diversified sources of imported energy. In their desire to diversify, it is hardly surprising our European allies should have considered increasing their import of energy from the Soviet Union. After all, it was for several years American policy to encourage trade between East and West, in the belief, now so demonstrably mistaken, that as trade increased, Moscow's hostility would diminish. Moreover, it seemed like a natural symbiosis. The Soviets have large unexplored reserves of natural gas, but lack the technology and capital to develop them. The Europeans, on the other hand, have the capital and some of the requisite technology, but lack the reserves. Moreover, the Soviets have become desperately short of hard currency reserves with which to finance imports, including high technology and grain and capital equipment from the West, while the Western economies were searching for new outlets for their products. In short, the logic behind large scale Western investment in Soviet energy seemed self-evident. It began to gather momentum. In all of this there was and is an important political dimension. Many Europeans, particularly of the left, saw an emergence of an energy relationship with the Soviets as a useful device for fostering détente, and détente, in turn, was seen as a process that could transform an essentially hostile relationship between East and West into a more cordial and less volatile political arrangement that would lessen the need for burdensome defense budgets. In Germany especially, these elements fit neatly together with the political vision of the left wing of the Social Democratic Party, a vision captured by the German term, Ostpolitik, which became a prominent feature of German social policy. In describing this European view of the matter, I use the past tense deliberately, for much of the seeming logic of the situation has changed, and it has changed much faster than attitudes that were rooted in it, with the results that the case for broadening the Soviet European energy relationship has grown much weaker, at just the moment that deals long in the making are finally crystalizing. What has changed? And how do these changes bear on the way we ought to view such large energy projects as the West Siberian pipeline? First, the sense of urgency that accompanied the search for additional sources of energy in the aftermath of the 1973 embargo and through several years in which supplies were short has given way to the relative calm of the current situation, in which there is something of an energy glut. Rising prices have both diminished the rate at which the demand for energy has been growing, and they have stimulated new exploration and new technologies that promised to relieve the market pressures in the mid-1970's. Nowhere is this more dramatic than with respect to the demand for natural gas in Europe, which actually declined by 4 percent last year, after several years of rapid growth. Second, the notion that an increased volume of trade would lead to a lessening of political conflict and diminished Soviet emphasis on military power has been disproved. Political conflict has continued, largely unabated. The growth of Soviet military power has been relentless. Afghanistan has been invaded and continues to be occu pied by Russian troops. Poland struggles to find a workable internal political order in the shadow of Soviet, Czech, Hungarian, and East German divisions. A yellow rain of toxic agents has descended on hapless tribesmen in Southeast Asia. The principles of relations between the United States and the Soviet Union that were documented in treaty form in the heyday of détente have been transformed beyond recognition and have come in reality to resemble nothing quite so much as the Soviet policies of the cold war. It is simply no longer convincing to suggest that trade will moderate Soviet behavior or deflect it from its buildup of military power. If anything, the reverse has proven true. Increased trade has enabled the Soviet Union to accomplish its military expansion faster and at lower cost, as Western technology and industrial assistance has become increasingly available to them. Third, the notion that the West lacked energy reserves to exploit and was compelled, therefore, to turn to the Soviet Union to diminish dependence on OPEC has been disproved, first, by the development of North Sea energy resources by the United Kingdom and Norway, then by the emergence of a large number of new potential sources in such places as the Netherlands, Nigeria, Canada, Alaska, and the lower 48 States. It now appears questionable whether Western Europe needs to import natural gas from the Soviet Union on anything like the scale of the West Siberian pipeline's 35 billion cubic meters per year, if indeed, there is any requirement at all for turning east to satisfy Europe's requirements. The Department of Defense has a number of specific concerns about the security implications of the West Siberian pipeline. Let me enumerate them. First, it will generate substantial hard currency earnings for the Soviet Union that will finance a number of Soviet developments inimical to our interests. With the pipeline in full operation, several billion dollars annually will flow into the Soviet treasury. Five billion dollars per year in constant 1980 dollars is a minimum estimate, and it could go much higher. A significant part of these earnings will go to strengthen the Soviet military. These revenues will facilitate the purchase in the West of sophisticated Western technology, much of which will support the modernization of the Soviet military industrial establishment. Second, the revenues available to the Soviets will help to forge an economic link with Europe that will inevitably increase Moscow's influence among our allies. There is not a Senator on this or any other committee who does not feel an obligation to do what he can to promote the well-being of his constituents. That is as it should be. But the same holds true of governments and parliamentarians in the democracies of Europe. A centrally controlled economy like the Soviet Union can place orders where it likes and where jobs and profits in Europe emanate from Moscow, it would be naive to believe that politics will stay far behind. This will hold true day to day, even when the gas is flowing without interruption from fields in Siberia to homes in Bavaria. Third, we believe Europe will incur dangerous vulnerability to the interruption of supplies of natural gas from the Soviet Union. Gas pipelines create dependency because they are dedicated facilities, tied into an elaborate infrastructure of delivery networks and distribution facilities. A significant proportion of the gas that will flow through the pipeline will heat private homes in the recipient countries, especially Germany. In some regions, virtually all the homes and many industries will lack reliable substitutes for Soviet natural gas. Unlike oil or coal, for which there exists spot markets that can respond to short-term requirements, there is no ready alternative to fixed and long-term supply arrangements with respect to natural gas delivered through dedicated pipelines. The dependency about which we are concerned will reach significant proportions especially in some regions. With the pipeline in operation, some 30 percent or more of the natural gas consumed in Germany will come from the Soviet Union. That, in our judgment, is a dangerously high level. We have to anticipate that, in a crisis, the Soviets might interrupt the flow of gas to achieve political purposes. They have done so before, as the Israelis, the Yugoslavs, and the Chinese have learned, to their regret. I think, Senator, you added some other countries that have learned an unhappy lesson. Even as I speak, the Soviets are bringing political pressure to bear on Poland through a combination of political, economic, and military means. Among them has been the manipulation of energy sup |