Fueling Reform: Energy Technologies for

the Former East Bloc

July 1994

OTA-ETI-599

NTIS order #PB94-209863

GPO stock #052-003-01378-9
Recommended citation: U.S. Congress, Office of Technology Assessment, Fueling

Reform: Energy Technologies for the Former East Bloc, OTA-ETI-599 (Washington, DC:

U.S. Government Printing Office, July 1994).
Foreword

T

Trade,

he Senate Committee on Environment and Public Works, the House

Committee on Foreign Affairs, the House Committee on Energy

and Commerce, the Senate Committee on Foreign Relations, and

the House Subcommittee on International Development, Finance,

and Monetary Policy requested an assessment of energy and environmental technology transfer to Central Europe and the former Soviet

Union. The intent was to determine how U.S. energy technology can help

resolve the economic and environmental problems in the region.

This report is the second of two produced during this assessment. The

first, Energy Efficiency Technologies for Central and Eastern Europe (released May 1993), focused on ways to reduce waste in the use of energy.

The present report focuses on technologies to improve energy supply in

Central Europe and the former Soviet Union. The report is divided into two

parts. The first part reviews energy supply technologies for fossil–fuel and

nonfossil–based energy resources. In addition, it reviews the environmental consequences of energy production and consumption. The report highlights specific needs for U.S. technology and opportunities for U.S.

business. The second part of the report is devoted to policy considerations.

It describes the highly varied political, economic, and social context of reform. Next, it analyzes and catalogues Western energy–related assistance

and investment programs for the region. The final chapter of the report

presents policy options relating to energy supply and efficiency that will

promote the achievement of U.S. political and economic goals.

Energy is a key factor as the former East Bloc countries struggle toward

stability and economic recovery. The issues raised in both these reports are

therefore timely for congressional deliberations on assistance to the region,

on how to increase U.S. exports, and on how to reduce environmental

problems.

OTA appreciates the invaluable advice and assistance of the many

people who contributed to this project, including the advisory panel, contractors, and reviewers.

(7%ZQ -

ROGER C. HERDMAN

Director
Advisory Panel

Marshall Goldman, Chairman

Russian Research Center

Harvard University;

Wellesley College

Margaret Bowman

Environmental Law Institute

Robert Campbell

University of Indiana

William U. Chandler

Pacific Northwest Laboratory

Charles Ebinger

International Resources Group

Robert Ebel

Center for Strategic and

International Studies

Richard D. Jacobs

Newstar, Inc.

Richard A. Liroff

World Wildlife Fund

Simon K. Mencher

Alpha Finance & Management

Corp.

John P. Minneman

Chase Manhattan Bank

Espy P. Price

Chevron Overseas Petroleum Inc.

Matthew J. Sagers

PlanEcon, Inc.

Raymond Sero

Westinghouse Energy Center

Ray Snokhaus

Houston Industries, Inc.

Robert Socolow

Princeton University

Richard Spears

Spears and Associates

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report

and the accuracy of its contents.

iv
Preject Staff

Peter D. Blair

Assistant Director

Industry, Commerce, and

International Security Division

Emilia Govan

Program Director

Energy, Transportation and

Infrastructure Program

ADMINISTRATIVE STAFF

Lillian Q. Chapman

Division Administrator

Marsha Fenn

Office Administrator

Tina Aikens

Administrative Secretary

Linda Long

Administrative Secretary

ALAN T. CRANE

Project Director

Joy Dunkerley

Senior Analyst

Joanne Seder

Senior Analyst

Richard Brody

Contractor, Russian and

East European Specialist

CONTRIBUTORS

Susan Lusi

Mark Zinniker

Paul Komor

Gay Jackson

PC Specialist
contractors and Reviewers

CONTRACTORS Richard Wilson

Harvard University

Olga Bilyk

Continuum International, Inc. REVIEWERS

Richard Browning

International Resources Group

R. Caron Cooper

Private consultant

Peter Hauslohner

Private consultant

Udi Helman

Center for Strategic and

International Studies

Julia Karpeisky-Ryan

Private consultant

Mikhail B. Korchemkin

University of Pennsylvania

Igor Lavrosky

Siberian Trade Development Ltd.

Nancy Lubin

Private consultant

Sanders International

Washington, DC

Roger Beckman

U.S. Agency for International

Development

Wayne Beninger

The Scotia Group, Inc.

Edmund Cappuccilli

U.S. International Trade

Commission

R. Caron Cooper

Private consultant

Leslie Dienes

University of Kansas

C. Gibson Durfee

Westinghouse Electric Corp.

Robin L. Godfrey

Custom Coals Corp.

Ronnie Goldberg

U.S. Council for International

Business

Donald Guertin

Atlantic Council

Richard C. Horanburg

OPIC

Paul Komor

Office of Technology Assessment

Mikhail B. Korchemkin

University of Pennsylvania

Igor Lavrosky

Siberian Trade Development

Rutherford Peats

International Resources Group

Joseph P. Riva

Congressional Research Service

Robin Roy

Office of Technology Assessment

James Shea

Nuclear Regulatory Commission

Linda Sjoman

Petroleum Advisory Forum

David P. Stang

Congressional US–FSU Energy

Institute

Kathryn Van Wyk

Editor

vi
1

2

3

4

5

contents

. -

Introduction and Summary 1

Energy Technologies 3

Environmental Technologies 10

The Political, Economic, and Social Context for

Effecting Change 12

Current U.S. Programs Promoting Cooperation 15

U.S. Policy Goals and Options 17

Conclusion 22

Overview of Energy Supply

and Demand 23

Energy’s Role in the Economy 23

Energy Supply 24

Energy Demand 34

Fossil Fuel Technologies 39

Oil and Natural Gas 40

Coal Mining and Beneficiation 58

Coalbed Methane 64

Appendix 3-1: Experience with Joint

Ventures-Dresser Industries 67

Appendix 3-2: Case Study: Custom Coals Corp. 68

Non-Fossil Fuel Technologies 73

Nuclear Power Technologies 73

Electric Power Technologies 87

Renewable Energy Technologies 98

Energy-Based Environmental

Technologies 107

Regulatory Framework 108

Energy Production, Processing, and

Transportation 109

The Environmental Impacts of Fuel Consumption 116

Outlook for U.S. Technology Transfer 127

Conclusions 130
6

7

8

The Political, Economic, and

Social Context of Reform 131

The Vanguard: Countries in the First

Tier of Reform 132

Slow Reformers: Countries in the Second

Tier of Reform 136

Foot-Draggers: Countries in the Third

Tier of Reform 143

Building New Societies-The Culture

of Reform 147

Assistance, Trade, and Investment

Programs 149

Barriers to Energy Sector Development 149

Evaluation of U.S. Programs 153

Survey of Energy and Environmental Programs 156

U.S. Goals And Policy Options 173

U.S. National Goals 173

Policy Options 175

Policy Strategy 192

Conclusion 195

Index 197

. . . Vlll
Introduction

and

Summary 1

E

ncouraging the successful transition of the former East

Bloc into prosperous, market-oriented democracies is the

most important long-term foreign policy issue facing the

United States. A successful transition can convert former

enemies into friendly trading partners and allow reductions in

U.S. defense spending. Failure of the transition could have very

undesirable implications for the United States, including the rise

of nationalistic, authoritarian regimes, the possible resumption of

the Cold War, and dangerous international instability. ’

Reforming and revitalizing the energy sector will be a critical

factor in the overall transition, and energy technology transfer

will be one of the most influential tools the United States can use

in support. Russia and several other republics of the former Soviet

Union (FSU) have extensive reserves of oil, gas, coal, and uranium that can generate the hard-currency export earnings needed

to finance reform in all sectors. Tapping that potential will entail

adoption of market-economy business practices as well as the

modernizing of facilities, technologies, and techniques in the production and consumption of energy. The result will be a reduction

in the present wasteful use of energy and an enhanced ability to

develop and produce energy. Most importantly, successful reform

in the energy sector can make systemic reform easier by raising

I The forn]er East Bloc is made up of CentraVEastem Europe and the states of the former Soviet Union (FSU) as shown in figures ]-l and I-2. This report will focus on former

East Bloc countries with significant energy supply and processing industries. In Central

Europe, this includes Poland, the Czech Republic, and Hungary. In the FSU, this includes

Russia, Ukraine, Azerbaijan, Kazakhstan, Uzbekistan, and Turkmenistan. Other countries, especially Romania, also produce significant amounts of energy, but were beyond

the scope of this study.

St. Basik Ca!hedral, Red Square,

Moscow.

II
2 I Fueling Reform: Energy Technologies for the Former East Bloc

levels of economic well-being and by providing a

model for transition.

At present, almost the entire energy sector faces

serious problems. Technology is years behind that

of the West. Production facilities and the transportation infrastructure are deteriorating and require massive upgrading. Management frequently

is unfamil iar with concepts basic to market economies, such as minimizing costs, finding markets,

financing, and customer service. In all countries,

energy is an unnecessarily great economic cost because it is used so wastefully. Moreover, pollution

from energy production, transportation, and consumption is a large factor in the environmental

devastation that affects much of the region.

Revitalization of the energy sector will depend

primarily on changes in political and economic

decisionmaking in each country. It will involve

appropriate pricing of energy and the elimination

of subsidies so that proper cost signals are sent to

consumers and adequate investment capital is

made available to the energy industry. It will entail

fair and responsible treatment of both domestic

and foreign investors who can bring desperately

needed investment, technology, and expertise.

This is already happening in some of the Central

European countries, especially Poland, the Czech

Republic, and Hungary. There, economic recovery is occurring, and people see their economies

and political systems increasingly linked to the

West.

In the FSU, however, the present economic depression precludes instant reform. People earning

$30 per month simply do not have enough money

to pay world market prices for the energy required

to stay alive. Many people have yet to see any

benefit to reform and, in fact, are starting to blame

it for the steep drop in their standard of living. The

December 1993 parliamentary election in Russia

raised considerable doubt about future political

and economic directions.

The spread of corruption and racketeering also

seriously undermines prospects for reform, fanning popular discontent over declining living

standards and the inequitable distribution of

wealth. Corrupt practices pervert efforts to rationalize systems of pricing, supply, management, and

economic policymaking.

The West cannot force economic and political

reform and revitalization, but it can play a vital

role. In the energy sector, the United States can

provide advice on sorely needed changes in institutional structures and economic policies. U.S.

governmental assistance programs can provide information, training, technology, and direct assistance to energy-related enterprises trying to

modernize. Multilateral development banks can

stipulate that loans be made only to enterprises

and governments that make decisions on a more

rational basis. Private industry can provide modern technology through products and services as

well as investment in new facilities. Policy advice, financing, and technology can help build a

rational, productive, and noncorrupt system of energy supply and consumption that will be a model

of economic transformation for other sectors.

The potential benefits to the United States of

assisting in FSU energy sector reform are many.

Foremost is the reduction in future conflict and

geopolitical competition that should redound

from political stability and economic prosperity in

the former East Bloc. Modernizing energy-related

facilities and technologies through technology

transfer should also advance U.S. energy and environmental business interests, open up vast new

resources of fossil fuels to the world fuel supply,

and reduce pollutants that contribute to global

warming.

OTA has previously examined the importance

of improving the efficiency of energy use in its

companion report of 1993.2 This report explores

the role that the United States can play in revitalizing the energy supply sector. Chapters 2 through 5

examine the need for modem energy technology,

especially for oil and gas, coal, nuclear energy,

2 U.S. Congress, OffIce of Technology Assessment, Energy Eflciency Technologies jiw Cenfral and Eastern Europe, OTA-E-562 (Washington, DC: U.S. Government Printing OffIce, May 1993).
Chapter 1 Introduction and Summary | 3

electric power, renewable energy, and pollution

control. Chapters 6 through 8 review the political

and economic problems that inhibit reform, U.S.

and other Western programs intended to overcome

these barriers, and possible modifications to U.S.

policy to enhance support of national goals. The

remainder of this chapter summarizes the report.

Figures 1-1 and 1-2 show the region and its major

energy resources.

ENERGY TECHNOLOGIES

I Oil and Natural Gas

A major strength of the FSU is its abundant oil and

gas resource base. The FSU contains about 7 percent of the world’s proven oil reserves and has immense potential for new discoveries. Russia has

the lion’s share of proven reserves, about 85 percent. Kazakhstan accounts for much of the rest.

The gas reserves of the FSU are even more abundant—almost 40 percent of the global total. Russia again has the lion’s share. Khazahkstan,

Azerbaijan, and Turkmenistan, though less explored, are also well endowed.

The oil and gas sector is critical for the FSU. In

individual exporting and importing countries

alike, oil and gas are key inputs to economic

growth and stability. However, despite abundant

resources that supported the growth of the world’s

largest integrated oil and gas industry, the sector is

encountering severe problems. Oil production has

fallen by 40 percent over the past 5 years, and gas

production has stagnated, in sharp contrast to previous rapid rates of growth. There is little indication of an early recovery in production. This drop,

and the resultant drop in exports, is a major economic disaster for Russia. Rehabilitation and development of the oil and gas industry is crucial to

the economic recovery of many of the FSU countries, Russia in particular.

The failure of the oil and gas sector is in part

due to outdated technology and inadequate investment. Underpinning both is an economic and

institutional regime that does not offer adequate

incentives to either domestic or foreign investment or encourage the rapid adoption and diffusion of improved technology.

The need for extensive technological upgrading has created expectations among Western companies that the FSU will be a large export market.

Oil and gas technology is a generation out of date,

and inadequate to meet the challenges of future

development. In exploration, seismic equipment

is bulky and of low quality. The Russian industry

has not benefited from recent improvements in

drilling technologies that reduce the cost or risk of

exploration. Excessive and premature use of water

flooding during recovery has damaged reservoirs.

Lack of deep-water offshore technology holds

back the development of rich offshore deposits.

Pipeline infrastructure faces major problems of

technical performance, and equipment is frequently in short supply. Refinery technology is

chronically outdated, and does not match current

and 1ikely future demands for petroleum products.

However, economic and political factors in the

FSU will limit the role of imported technology.

The FSU has a comprehensive supply industry

that can produce most equipment, often more

cheaply, even if inferior to Western technology.

Russia in particular has a distinct preference for

domestic development and an acute shortage of

foreign exchange. There are some areas in which

foreign technology has compelling advantages.

These include technologies connected with workovers and rehabilitation of existing wells, advanced drilling systems, offshore technologies,

improved compressors, refinery upgrading, and

technology transfer to improve the production of

oil and gas field equipment currently produced in

FSU countries.

The adoption and diffusion of improved

technologies will depend on economic and institutional reforms. Until incentives are in place to

ensure that technology is correctly and efficiently

used, even the best technology will not be effectively deployed.

A major handicap to oil and gas development

(especially oil) has been the lack of funds for sector rehabilitation and expansion. After many years

of favored status in the investment budget, capital

expenditure in oil and gas has been sharply cut in

recent years. In principle, the shortfall in central

government expenditures was to be met from for-
4 I Fueling Reform: Energy Technologies for the Former East Bloc

RUSSIA

SOURCE Dewed from “Atlas of Eastern Europe,” Central Intelhgence Agency, August 1990.
Chapter1 Introduction and Summary | 5

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6 I Fueling Reform: Energy Technologies for the Former East Bloc

eign investment and from the surplus revenues of

the new operating entities, particularly the production associations. In practice, domestic industry resources have been squeezed by changes in

pricing policies. With the continued control of domestic oil prices and the decontrol of other prices,

added to higher taxes, production association

costs have risen much faster than revenues, thus

compressing the surplus available for investment.

Moreover, production associations have limited

access to hard-currency earnings from their oil exports.

In addition to domestic investment, external financing requirements are also substantial-estimated at between $5 billion and $7 billion

annually. Although major public sector commitments have been made (through the multilateral

development banks and the U.S. Eximbank

Framework Agreement), the bulk of the resources

for foreign investment in oil and gas must come

from the private sector.

Recognizing the need for foreign direct investment and its accompanying technology transfer,

Russia made major changes to its rules governing

foreign investment. Joint ventures were authorized in 1987, and later changes permitted foreign

companies to take majority ownership ‘and control. In response, the international oil industry has

shown a high level of interest. There are currently

over 100 projects in FSU countries with foreign

participants. The projects cover all branches of the

sector, all of the oil and gas producing republics,

and different sizes of companies of many nationalities. Over half of these projects had U.S. joint

venture partners. However, many projects have

been making modest progress.

The attractions of FSU countries to foreign investors are strong. Immense resources offer a wide

range of opportunities, at low geological risk.

Most republics have a trained work force at all levels of expertise, from scientists to oil field workers.

On the other hand, important obstacles block

foreign investment. Beyond the high level of

political uncertainty, there is as yet no legal and

regulatory framework governing oil and gas leasing, exploration, and development. Ownership

rights are hotly contested between the central federation, local governments, and the production

associations themselves, causing uncertainty

among potential foreign investors about the legality of their agreements and contracts.

Taxes are high compared with those of alternative areas, such as those near the North Sea, and

are based on revenues rather than profitability.

These taxes are also subject to retroactive change.

Differences in perception between Russian

hosts and foreign investors are a significant obstacle to foreign participation. To the Western eye,

the need for modem technologies throughout the

oil and gas industry is obvious and represents a

large export market. The Russian industry and

government have different views. Some parts of

the industry are eager for new technologies, but

others exhibit deep opposition to the involvement

of foreign capital in the oil and gas sector. Joint

ventures are viewed as necessary only to produce

oil that cannot be produced with current Russian

technology—hence the offering of depleted or

technically difficult oil fields to foreign investors.

Many of these perceptual differences stem from

differences in business practices. Russians are

generally unfamiliar with basic Western business

terms and concepts such as accounting, profit, depreciation, risk, market pricing, accountability,

quality control, contracts, and liability.

In sum, the rehabilitation of the FSU oil and gas

industry offers a tantalizing but challenging prospect for the foreign investor. FSU countries offer

exciting, rich possibilities for oil and gas development, but many obstacles threaten these mutually

beneficial outcomes. Overall, the picture is

mixed, showing some improvement of late but

suggesting that the rehabilitation of the oil and gas

sector will take more time and care than originally

thought.

| Coal

Coal is an abundant resource in Russia, Ukraine,

Kazakhstan, the Czech Republic, and Poland. In

recent decades, coal has declined in importance in

the Soviet economy, but it is still the major national energy resource (and source of employment) in
Chapter 1 introduction and Summary | 7

Poland, Hungary, and the Czech Republic. For example, in Poland, more than one-half of the residential/commercial sector’s energy needs are

derived from coal.

In the FSU, the coal industry is in crisis. Coal

production has been declining since 1988 and will

probably continue to decline for the near future,

owing to equipment shortages, inefficient

technologies, labor unrest, and a lack of capital investment in new mine development. Environmental concerns further cloud the industry’s future.

Coal production has had serious harmful environmental effects, some of which linger long after

mines have closed. The widespread burning of

low-quality coal is largely responsible for environmental degradation.

Some restructuring of the coal industry has begun in former East Bloc countries, including closure of inefficient mines, price increases, and

reduced subsidies. However, the industry is still

far from competitive.

Modem Western mining technologies may provide short-term improvements in productivity, efficiency, safety, and environmental impacts.

However, Western assistance alone will not reverse the coal industry’s downward slide. In the

long term, the success of the coal industry will depend on the success of economic reforms. Capital

must be invested in mine development and modernization, and labor and transportation problems

must be resolved.

Thus far, the U.S. coal industry has not actively

pursued former East Bloc markets. The characteristics of the region’s coal industry and related

problems have hampered foreign investment.

Also, differences in mining techniques render

much U.S. underground equipment unsuitable for

FSU mines. Longwall mining is the principal underground mining technique used in the FSU and

throughout Europe. Germany, a leader in longwall

mining R&D, is actively marketing its equipment

in Central Europe.

The biggest U.S. effort in the FSU has been part

of a much larger humanitarian program, Partners

in Economic Reform (PIER). With U.S. government funding and coal industry and labor support,

PIER administers the Coal Project, which proIdle drilling rig, Raduzhney Siberia,

vides technical assistance and training in health,

safety, efficiency, and productivity throughout the

coal regions of Russia, Ukraine, and Kazakhstan.

This focus is unlikely to change unless former

East Bloc countries make a successful transition

to a market economy and coal industry problems

are resolved.

As reforms are implemented and the coal industry stabilizes, transfer of U.S. coal mining

technology may become significant. In the near

term, however, U.S. companies might focus on

opportunities after the coal is extracted, such as

coal cleaning. There has been little cleaning of

coal in former East Bloc countries, but U.S. companies have extensive experience in this technology. Over 200 million tons of coal are cleaned each

year in the United States to remove ash and sulfur

impurities and to increase coal’s heating value.

Cleaning also reduces transportation costs by removing significant quantities of noncombustible

material from raw coal before shipment. Because

coal cleaning is relatively labor intensive, new or
8 I Fueling Reform: Energy Technologies for the Former East Bloc

expanded coal-cleaning facilities could provide

jobs in areas where mass unemployment looms.

In April 1993, a U.S. firm (Custom Coals

Corp.) announced that it was seeking to design,

construct, and operate three coal cleaning plants in

Poland. One facility will serve three mines, with a

capacity of 25 million tons. Another facility will

be a fine-coal cleaning plant to produce ultraclean coal products for home and district heating

systems in Krakow.

I Nuclear Energy

The Chernobyl accident demonstrated that Soviet

reactors had serious safety deficiencies. Subsequent analysis and inspection by Western experts

have confirmed that major accidents are far more

likely in these reactors than those of the West because of design problems and poor operation. The

greatest concerns are over the graphite-moderated

RBMK reactors, such as at Chernobyl, and the

oldest pressurized-water reactors, the VVER 440

Model 230. These reactors lack basic safety

equipment such as a containment vessel. The

RBMK, unlike Western reactors, is vulnerable to

an uncontrolled nuclear accident, as happened at

Chernobyl.

A nuclear accident could harm millions of

people and contaminate vast regions of Europe.

As the world’s leading manufacturer and operator

of nuclear powerplants, the United States has the

expertise and a particular responsibility to help reduce this risk. U.S. involvement can also mean

U.S. exports, such as the $434 million sale of

equipment and fuel by Westinghouse Electric

Corp. to the Czech Republic announced in 1993.

Ideally, the riskiest plants should be closed.

However, the power they produce is greatly needed, and none of these countries can afford to build

and fuel replacement powerplants. Even Ukraine

has decided to defer closing the Chernobyl station

on the grounds that the economic necessity outweighs the risk.

It should be noted that the actual level of risk is

not well understood. Soviet reactors have some

safety advantages, such as a large water inventory

in the VVER 440 that slows core heating following an accident and allows more remedial action

than that of Western reactors. Some experts believe that the newer reactors can be upgraded to

safety levels near Western standards. The uncertainty over risk complicates decisions over how

soon reactors should be closed. Nuclear assistance

is controversial because some critics believe that

none of these reactors can be made sufficiently

safe and that all should be shut done as soon as

possible.

U.S. nuclear assistance funding is rising from

$30 million in fiscal year 1993 to $100 million in

fiscal year 1994. The program has focused primarily on information transfer (e.g., training in operations, regulations). The increase will allow some

physical improvements at nuclear power stations.

Most attention has been paid to the newer plants

on the assumption that the riskier ones would be

shut down soon. However, since it appears that

these plants will be operated for a substantial period, they will present a disproportionate threat unless near-term safety upgrades are supported.

Nevertheless, it also is important not to upgrade

them to the point that they are kept operating longer than necessary. No funds are yet being allocated

for replacing any nuclear powerplants.

Western companies are concerned that their assistance could lead to liability if an accident occurs at a reactor despite upgrades. This concern is

a significant impediment to assistance. Recipient

countries may have to limit liability, as have many

in the West, because the potential consequences of

a major accident are so great.

Concerns about nuclear weapons proliferation

have increased because of political and economic

instability in the FSU. Analysts fear that with the

weakening of central control over weapons and

associated facilities, nuclear weapons or materials

could be stolen and sold to an irresponsible country or terrorist group. Alternatively, FSU weapons

experts could work for other countries.

The United States has already taken steps toreduce this danger, as discussed in other OTA reports. The key issue in this report concerns the use

of FSU weapons experts in the civilian nuclear

power industry. Many have a technical back-
Chapter l Introduction and Summary | 9

ground suitable for conducting research and analyzing nuclear reactor safety. Using them for this

purpose would serve the dual purpose of increasing safety and reducing proliferation risks.

International science and technology centers

have been proposed for Moscow and Kiev. Both

have been delayed because of difficulties in getting legislative approval. The Russian institute

was started in December 1993 by Presidential

proclamation, but it is uncertain how permanent

this arrangement will be. An alternative approach

would be to increase collaborative R&D activities

with existing institutions.

I Electric Power

All countries in the former East Bloc have a substantial and sophisticated electric network. In

some countries, electricity is more available than

oil and gas because it can be generated from nuclear energy or local coal. Nevertheless, the electric power industry faces many problems,

including decrepit generating stations, expensive

fuel, poor operations, and massive pollution.

Modernization is badly needed to improve operations, reduce costs, and reduce pollution. In

addition to physical plants, utility management

and government regulators need training to understand how to operate in a free market environment. Particularly in the FSU, rates are subsidized

heavily, so neither utilities nor users see incentives to make optimal decisions.

Several U.S. technologies would be of considerable benefit. Burning coal cleanly will be important in reducing pollution. Flue-gas

desulfurization, fluidized-bed combustion, and

integrated gasification combined cycle are ways

to use coal much more cleanly. These and other

technologies may be used widely as the electric

sector modernizes, if financing is available.

Demand-side management (DSM) could also

become important in countries that base rates on

costs. Utilities work with their customers to reduce waste so that the construction of new plants

will be minimized. Since capital is scarce and demand for electricity will soar as economies rebound, DSM may be critical in preventing

shortages.

The U.S. assistance program has created partnerships between U.S. utilities and their Central

European and FSU counterparts. The partners exchange information and expertise. The program

has been so successful that U.S. utilities are finding that the demands on their time are getting too

great, since they are reimbursed only for travel and

other expenses. The U.S. Agency for International

Development (AID) is adding a supplementary

program to pay for intensive projects such as large

training courses.

The major barrier to modernization is financial.

Many power companies in the region lack funds

for investment, and their borrowing capability is

limited. Export financing will be essential for

wide-scale sales. Present U.S. export financing

policies may not be adequate to support the electric equipment industry’s unusual opportunity.

Central European countries may open up new

markets and opportunities for American companies for investment and sale of electrical equipment-opportunities that have been limited by

protected domestic industries elsewhere in the

world.

Cooperation in electric technology should also

result in technology transfer to the United States.

Russia pioneered high-voltage transmission and

has built lines at twice the voltage of any in the

United States. Super-critical boilers are another

area where U.S. manufacturers and utilities can

learn valuable lessons.

I Renewable Energy Technology

Solar and other renewable energy technologies

contribute only a small share of total energy production in the former East Bloc, and that is unlikely to change soon. Nevertheless, the potential is

significant.

Soviet scientists conducted extensive research

on renewable resources over the last several decades, resulting in sophisticated technologies and

well-developed science, but few commercial successes, with the exception of hydroelectric power
10 I Fueling Reform: Energy Technologies for the Former East Bloc

Vertes Powerplant, Hungary New England Power Service is

paired with Hungarian Electric Companies, Ltd. under the

Utility Partnership Program.

projects. Russia inherited much of this technology

and expertise, although Ukraine has substantial

technical know-how in windpower and solar thermal areas. Little expertise, however, has emerged

over the years regarding project planning, development, and management.

The potential for renewable development varies since geography, climate, and weather patterns largely determine prospects. For example,

wind energy potential is enormous in Russia, Kazakhstan, and Ukraine. The U.S. Windpower project in Ukraine, which calls for the installation of

500 MW (megawatts) by 1995, typifies the country’s potential. Moreover, the southern areas of

Ukraine, Russia, and the Central Asian republics

are well suited to solar use. Solar water heating already is used in some areas. Also, Russia has significant amounts of hydroelectric capacity and

experience in developing its resources. Hydroelectric power contributes about 19 percent of total electric power capacity.

Other republics are pursuing renewable energy

projects out of economic necessity and to become

more self-sufficient. Estonia, which has extensive

forests, is taking the lead among former republics

in biomass development. Lithuania is exploring

its geothermal potential. Hungary is a leader in

geothermal use for horticultural purposes.

However, significant obstacles interfere with

renewable development and use. These include

artificially low conventional fuel prices, limited

capital, and the lack of political and institutional

commitment. For example, Russia’s institutional

structure is geared to producing fossil fuels, not

renewable. These obstacles are significant and

will hinder development in the near term.

In several countries, the situation is somewhat

different. The need to develop indigenous energy

resources, reduce dependency on foreign imports

and related costs, and address environmental concerns is creating niches for renewable, such as the

wind energy project in Ukraine. Defense conversion and the availability of idle or underutilized

industrialized plants may provide an added incentive to develop indigenous renewable resources.

Assistance from Western countries could improve the prospects for renewable development,

especially in those countries that have limited or

no indigenous fuel supplies. Technology transfer

is one avenue for developing these resources at a

more rapid pace. It can take many forms, including engineering and design expertise, management and training programs, licensing foreign

manufacture of technologies, and equipment

sales. Wind turbines, photovoltaic cells, and solar

thermal collectors could be manufactured under

joint ventures with the West.

Even if assistance is forthcoming, former East

Bloc countries must develop a favorable climate

for renewable development. Economic reform

and the development of domestic markets are essential to renewable use in the long term.

ENVIRONMENTAL TECHNOLOGIES

Uncontrolled production and use of energy has

been a leading cause of environmental degradation in the former East Bloc. The area’s centrally

planned economies placed a higher priority on the

quantity of industrial production than on economic efficiency, environmental protection, or

consumer demands. They provided cheap, statesubsidized fuels, which encouraged very high

consumption of energy relative to that of other in-
Chapter 1 introduction and Summary | 11

dustrialized countries. The nature of major fuel resources, such as the high-ash coal used in power

generation, has further increased pollution.

Environmental problems due to energy use

vary across the region. Programs to alleviate environmental damage from energy use must therefore

consider the problems of each region individually.

For example, regional air pollution patterns vary.

In Estonia, more than two-thirds of the emissions

of particulate, sulfur dioxide (S02), and nitrogen

oxide (NOX

) come from just three sources. In Poland, fuel use at a large number of small, decentralized boilers and home heating units is a

major source.

Solutions to environmental problems must also

address a variety of institutional constraints. An

ineffective regulatory structure is a prime impediment. Contrary to Western perceptions, all of the

countries in the region have stringent environmental standards. However, regulatory enforcement of these standards has been lax. Without

enforcement of regulations, there has been little

incentive to install, operate, or produce emissionabatement equipment. Doubts about future environmental standards have also discouraged local

entrepreneurs and potential foreign investors.

Lack of public and private capital also delays

the installation of pollution control equipment.

Public budgets are under extreme pressure to meet

a variety of investment, restructuring, and social

safety net costs, severely limiting the amount of

public money available for environmental purposes. While foreign sources of public and private

financing can provide some interim funds, these

sources are relatively small. This renders local private sector capital markets essential, since most

environmental expenditures will ultimately be

made by privatized companies. But these markets

barely exist now. A number of AID and other assistance programs are aimed at developing local

capital markets.

Coordinating environmental assistance with

larger economic and social reforms can maximize

overall effectiveness. Assistance should also target those energy plants and sectors that can withstand the economic reforms, and not those that

will probably be shut down. The structure of the

energy industry itself is an impediment to environmental reform. Public utilities and industries

are overstaffed and inefficient. Until they restructure and downsize, they will not be able to afford

pollution control.

All of these factors will constrain the market for

energy-related environmental technologies. Nevertheless, the United States, through its public

programs and private business activity, can help

upgrade environmental protection in the former

East Bloc. Opportunities for technology cooperation are excellent because the United States has a

commercial and technical advantage in several

areas.

One of the strongest areas of U.S. technological

expertise is in coal cleaning. U.S. firms are also

well positioned in emission-abatement equipment. One area of particular strength is in low

N OX combustion reburn technologies. Other

technologies include flue-gas desulfurization

units, electrostatic precipitators, and baghouse filters for powerplants; lean-bum technology for

mobile sources; and desulfurization equipment

for refineries.

U.S. companies can also help reduce the environmental impact of energy production. For example, as Russia expands gas production further

north, the sensitive tundra ecosystem would benefit from some of the lessons learned in Alaska.

U.S. mining firms are the world’s most experienced in dealing with acid mine drainage and have

extensive experience in land reclamation.

However, prospects for U.S. business may suffer because European Union emission standards

are generally stricter than U.S. standards. Countries aspiring to join the EU will need to meet these

standards with higher efficiency abatement systems than U.S. companies produce. Moreover,

since pollution coming from the region affects

Western Europe more than the United States, European countries might be more motivated to give

more financial and technical support to address

these issues. Thus, additional government efforts

are likely to be necessary to assure that U.S. environmental equipment is competitive.
12 I Fueling Reform: Energy Technologies for the Former East Bloc

Drilling equipment manufacturing plant in Kazakhstan.

THE POLITICAL, ECONOMIC, AND

SOCIAL CONTEXT FOR

EFFECTING CHANGE

The modernization of the energy sector of the former East Bloc is only one facet of a much larger set

of reforms that involve fundamental changes in

the political and social orders of these societies.

Energy sector reforms depend on the larger set and

will also contribute to it. This transition involves

several distinct but closely interrelated processes,

the most important of which is the establishment

of a new political order that embodies a popular

consensus about the need for economic reform.

Those countries where there is less popular consensus about reform and that have yet to enact new

political structures have moved much more slowly and less successfully to stabilize their economies and lay the foundations for a new economic

system. The energy-producing countries analyzed

in this report fall into three groups: those in the

vanguard of reform, those slow to reform, and

those lagging in reform.

I Countries in the Vanguard of Reform

Poland, the Czech Republic, and Hungary occupy

the first tier of reform. They were the quickest to

establish a political consensus on the need for

democratic and market transformations and to

translate this political will into effective mechanisms for the implementation of reform programs.

Poland launched the earliest, most radical, and, to

date, the most successful reform program. Although recent electoral gains by former Communists highlight the need to pay greater attention to

social protection during the period of transition,

Poland has been the first post-Communist country

to experience economic growth and is solidly on

the road to reform. The Czech Republic has pursued a more cautious approach toward economic

transformation and as a result has not experienced

the expansion that Poland has seen. Nevertheless,

the Czechs have weathered the breakup with Slovakia and made substantial progress in introducing structural and institutional change, stabilizing

the economy, and laying a firm basis for future

growth. Hungary pursued a deliberately more cautious strategy, hoping to minimize the social costs

of change. As a result, although Hungary remains

in the vanguard of reform, the costs of reform have

been strung out and even accentuated.

Despite problems, all three countries have

freed most energy prices, started privatizing state

industries, and welcomed foreign investment. Because of this, Western assistance programs are

producing promising results, especially for improving energy efficiency. There is also solid

ground for American trade and investment programs. U.S. exports and investments can support

reform and development in Central Europe.

| Countries Reforming Slowly

Russia and Kazakhstan occupy the next tier of reform. Both countries have yet to undertake the

types of domestic price, legal, and regulatory reforms that would make energy-efficiency projects

profitable, stimulate more extensive and efficient

energy production, and make it easier to structure

bilateral and multilateral lending for energysector modernization.

Since the coup attempt of August 1991, Moscow has been in the throes of a multifaceted

struggle over fundamental questions of power,

sovereignty, property, and the nature of the future

socioeconomic order. The most prominent aspect

of this struggle has been the debate by political

and social constituencies over the nature and
Chapter 1 Introduction and Summary | 13

course of economic reform. These debates are anchored in Russia’s uniqueness. Russia’s size, as

well as its much larger, more complex, and more

deeply troubled economy, render the country less

amenable to the types of Western-sponsored aid

and trade programs that have been instrumental in

the transformation of the economies of Central

Europe. Although impressive strides have been

made in price reform and private sector growth,

the Russian economy is still contracting. Unless

Russia resolves its crisis of authority so that it can

pursue consistent and coordinated monetary and

fiscal policies, it will not achieve the type of solid

economic stabilization that is an absolute prerequisite to economic reform and growth. Until then,

Russia will at best flounder or muddle through reform.

Under these conditions, an increase in U.S.

trade-promotion programs may stimulate nearterm sectoral stabilization and provide opportunities for American firms. But without strong

conditional it y, both aid and trade programs are unlikely to promote long-term, self-sustained, systemic reform.

In contrast to Russia, Kazakhstan has opened

its doors to foreign investment, providing potentially mutually beneficial opportunities for American energy companies and the Kazakhstani

government. But the country is suffering from the

dissolution of economic ties with the FSU and the

strains of being a multi-ethnic state. Although Kazakhstan’s current energy bonanza provides

grounds for optimism, oil development will be

limited in the short term by lack of export pipeline

capacity and the immense need for capital renovation and exploration. As a result, the Kazakhstani

economy is not likely to start growing substantially until the second half of the 1990s. In the interim, the United States can reward Kazakhstan’s

openness to foreign investment and encourage

further systemic reform through expansion of

American aid, trade, and investment programs.

I Countries Yet To Reform

Ukraine, Turkmenistan, Uzbekistan, and Azerbaijan occupy the final tier of reform. Despite the profound economic and political changes occurring

in the FSU, these countries have barely taken even

the first steps down the road of economic reform.

The reasons they lag so far behind are fundamentally political—in these states, Soviet-era bureaucrats remain entrenched in power and cling

tenaciously to the tenets of the old system. As a result, most of the distortions and inefficiencies of

the Soviet-era energy production, consumption,

and pricing system remain in place, and opportunities for Western investment and trade promotion

remain murky.

In Ukraine the debilitating competition for internal political power and continuing squabbles

with Russia over the legacy of Soviet-era property

and nuclear weapons have resulted in the neglect

of economic reform. Analysts warn that the consequences of this neglect-economic collapse and

hyperinflation-could lead to economic and

political disintegration.

Since 1991, economic conditions in Uzbekistan have also deteriorated, but state policies have

maintained many of the characteristics of the Soviet-era economy, such as subsidies and price controls. Economic reform will likely proceed slowly

in Uzbekistan under the official goal of “market

socialism. ” Political reform may be even slower.

Uzbekistan’s president has suppressed almost all

political parties, jailed opposition activists, enforced press censorship, and stifled the development of democratic politics.

The reins of economic and political power are

also held tightly in Turkmenistan by an authoritarian ruler who has created a Stalin-like “cult of

personality” and suppressed potential political

opposition. Although Turkmenistan’s vast gas

and oil wealth offers excellent opportunities for

development, potential revenues from energy development are likely to be squandered through

corruption.

Finally, in Azerbaijan, the continuing war with

Armenia over Nagomo-Karabakh, and attempts

by Russia, Turkey, and Iran to influence domestic

politics, have diverted attention from economic

reform. Despite the proliferation of small-scale

capitalism and negotiations with foreign compa-
—

14 I Fueling Reform: Energy Technologies for the Former East Bloc

FSU Central Europe

Program type (millions) (millions)

Policy and market reform assistance

Pricing policy and institutional reform

Energy sector restructuring and

privatization

Rule of law

Commercial law reform

Local governance

Democratic governance and public

administration

Privatization

Business development

Banking sector reform and bankers training

Fiscal sector reform

Financial and monetary sector reform

Training and macroeconomic advice

(Dept. of Treasury)

Market environment

Business and organizational training

Short- and long-term training

US/NIS partnerships

Exchanges (USIA)

SABIT Program (DOC)

CAST Program (NAS)

Eurasia Foundation

Energy efficiency

Efficiency & performance improvement

Production and delivery systems

Special earmarks (lab-to-lab, etc.)

Nuclear power

Nuclear power plant safety and

regulation

nies to develop the Caspian Sea’s energy resources, there has been no systematic program of

economic reform. Instead, corruption and a highly

lucrative illicit trade in oil and other valuable raw

materials have proliferated.

Given the leadership’s lack of interest in reform

in these countries, the most effective form of assistance to spur progress may be U.S. policies to

promote energy efficiency and training in market

skills. As in Russia, an increase in American trade

and investment support programs may do little to

promote market reform.

22.0

8.0

25.5 2.8

11.3

9.5

23.0

115.0 44.3

75.0 30.0

12.6

15.5

10.7 18,1

2.1

14.4

91.5

5.0

128,0

2.0

2.0

12.0

35.0 9.0

39.0

33.0

85.0 5.0

Continued next page

I Problems Common to All Countries

Despite their differences, the countries of the former East Bloc share a similar set of problems in

the transition from Communist authoritarianism

to market democracy. All need to minimize unemployment and other social disruption during the

transition period while fighting inflation and

maintaining budget discipline. These states must

also overcome a broad lack of understanding of

market principles and the mindset of the old system. This challenge is complicated by the charac-
Chapter 1 Introduction and Summary | 15

FSU Central Europe

Program type (millions) (millions)

Technical assistance

Russia Energy & Environment

Commodity Import Program

Krakow Power Project

Environment

Policy and institution building

Technology cooperation

Local NGO support

Trade and investment promotion

Transfer payments to DOC and TDA

American business initiative

Enterprise funds

Russian-American Enterprise Fund

Western NIS Enterprise Fund

Central Asian Enterprise Fund

Fund for Large Enterprises in Russia

EBRD Small Business Fund

Multi-Lateral Equity Fund

Central European Enterprise Funds

125.0

4.5

21.9

36.5

14.6

8.5

120.0

45.0

30.0

100.0

15.0

21.0

55.8

a This table Isnot a comprehenswe Ilstlng of USAID former East Bloc programs. It includes only those programs that are

either specifically targeted at the energy sector or that address general areas of economic and systemic reform that are

Important for energy-sector development,

All figures represent orlgmal appropriations

■ They do not reflect recslons under way m February 1994

~ They do not reflect considerable carryover of funds appropriated m fvscal year 1992-93

b ABI tryr-nlnaterj after frscal year 1994

SOURCE U S Congress, Ofhce of Technology Assessment, 1994

ter of newly emergent market relations, which

often create a negative image of capitalism and

highlight its very worst aspects. These factors

complicate the efforts of American companies to

conclude investment and purchase agreements

and render even more imperative U.S. government efforts to promote the principles of market

reform.

But even more important, the huge drop in living standards and the political chaos of the postCommunist era have led to a crisis of identity in

many areas of the FSU, especially Russia. With

Russia and the other FSU countries now in a weak

position on the world stage, with economies in

collapse, with crime on the rise, and with citizens

earning paltry incomes, nostalgia for the old system has grown. Unless these countries start

achieving economic and political progress soon,

the social consensus needed for the transition to

democratic politics and market economics will

not emerge.

CURRENT U.S. PROGRAMS PROMOTING

COOPERATION

The United States supports a wide range of programs designed to promote energy and environmental technology cooperation (see table 1-1.)

Bilateral aid programs operated by AID, the U.S.
16 I Fueling Reform: Energy Technologies for the Former East Bloc

Department of Energy (DOE), the U.S. Environmental Protection Agency (EPA), and others include technical assistance, training, provision of

information, policy advice, R&D, and technical

cooperation. Other bilateral programs managed

by the Export-Import Bank of the United States

(Eximbank), the Overseas Private Investment

Corp. (OPIC), and the U.S. Department of Commerce (DOC) provide backing to the U.S. private

sector, which can play a key role in the rehabilitation of the former East Bloc energy sector. As the

largest shareholder in the multilateral development banks (MDBs), the United States also actively exercises influence over their large project

lending programs. MDB lending has emphasized

the oil and gas industry and the power sector, but

there are also active programs for environmental

improvements and energy efficiency. Most of the

programs surveyed for this report are quite recent

in origin, but even on the basis of limited experience, their strengths and weaknesses have become

apparent.

I U.S. Program Evaluation

The U.S. government moved with exemplary

speed to develop assistance programs for the Central European countries and later the FSU. The energy sector has been an appropriate part of these

programs. Within overall ’budget constraints, the

existing programs are comprehensive in coverage

and address the main issues identified in OTA’s

technical analysis-capital constraints for both

energy supply and conservation projects, energy

sector and macroeconomic reform, and technical

assistance. Particularly strong efforts have been

made to include the U.S. private sector in these

efforts.

In addition, U.S. programs have shown considerable flexibility and responsiveness to changing

conditions, even over the short time they have

been in operation. There has been a clear shift

from the early emphasis on providing energy and

environmental technologies directly to building

underlying policy and institutional capacity. Efforts have been made to respond to early criticisms

of the U.S. effort, including too many temporary

consulting missions, lack of in-country expertise,

slow procurement, and confusion over country

needs due to a regional approach to aid disbursement.

Moreover, these programs have been developed and implemented under difficult circumstances, including budget constraints.

Considerable political pressure was put on agencies to disburse quickly to give visible evidence of

Western support for the new regimes. All agencies

have experienced difficulties recruiting permanent staff with the necessary area expertise.

An additional problem is that many programs

are lodged in institutions that were designed for

different types of operations. The World Bank and

AID were designed for projects in developing

countries, whose capabilities and needs differ

considerably from those of the former East Bloc.

The primary mission of Eximbank is to support

U.S. exports, but Eximbank’s Framework Agreement is both a major support to U.S. exports and a

cornerstone of U.S. financial assistance to the

FSU countries.

Moreover, unstable political and economic

conditions in some recipient countries have hampered program development. Several U.S. agencies report a shortage of viable projects in the

FSU, either because of unwillingness to accept

conditions attached to financial assistance or lack

of interest. In several countries, notably in the

Russian oil and gas sectors, foreign investment is

viewed with deep suspicion.

Several specific weaknesses of U.S. assistance

have emerged over the past several years. The

large number of U.S. agencies offering broadly

similar services raises issues of coordination and

duplication. Officials in the former East Bloc

complain that they are swamped by visiting missions and that the funds are going largely to foreign consultants rather than to the countries

themselves.

Coordination among the various donors, reportedly fairly low during the first years of assistance, has apparently improved as the energy and

environmental assistance efforts proceed. Even

so, there are several examples of lack of donor
Chapter 1 Introduction and Summary | 17

coordination, which seriously weakens the entire

effort. For example, while the World Bank insists

on conditionality in its loans, the Eximbank

Framework Agreement contains no conditionality, thus weakening World Bank requirements.

Underpinning these weaknesses in implementation is a more fundamental uncertainty over

the best means to achieve U.S. policy goals. The

optimal scale of U.S. assistance and its distribution between the many countries of the region

have not been defined. Allocations of assistance

within the energy sector are open to question, particularly the emphasis on supply expansion, given

the immense potential for energy conservation.

The reluctance of some host countries, notably

Russia, to cooperate in key parts of the assistance

program raises questions about the wisdom or feasibility of the present approach.

These mixed experiences suggest that the time

is opportune to reexamine the totality of U.S. efforts in the light of original U.S. policy objectives

and to suggest ways in which the programs that

support U.S. policies can be improved.

US. POLICY GOALS AND OPTIONS

| U.S. National Goals

The primary U.S. goal is to promote the transition

of formerly hostile East Bloc countries to democratic, market-oriented trading partners. Some

countries are well on their way to a successful

transition, but others face a much more uncertain

future. Energy technology transfer supports the

transition, but will have only modest impact unless accompanied by market reform measures

such as the elimination of subsidies, privatization,

and new legal structures.

U.S. goals toward the former East Bloc with

specific energy implications include the following:

10 Support Market Reform in the Energy

Sector

Modernization is unlikely without reform, and the

energy sector can lead the way for other sectors.

To Modernize Energy Sector Facilities and

Technologies.

Improving the technology of supply and use of energy can have major economic advantages by increasing exports of oil, providing new options,

and reducing unnecessary costs to the economy.

To Advance U.S. Energy-Related Business

Interests.

U.S. companies have many products and services

appropriate for export to the energy sector of the

former East Bloc.

To Reduce Energy-Related Pollution and

Threats to the Environment.

Local and global pollution can be significantly

ameliorated with modem technology.

To Augment World Fuel Supplies.

Increased exports of oil and natural gas from the

former East Bloc because of increased production

and reduced consumption will mean less strain on

world energy markets.

I Policy Options

Policymakers have a variety of options to support

the goals discussed above (see ch. 8 for a more extensive discussion). As listed in table 1-2, policy

options are available in the following areas:

U.S. Bilateral Development Assistance

U.S. development assistance to the FSU is intended to increase the flow of information and

skills needed to operate a modem, environmentally acceptable energy system; to assist in building

needed facilities; and to reduce the risk of nuclear

weapons proliferation. AID is the primary agency

for development, and it funds many of the programs run by other agencies. A large fraction of

U.S. assistance funding is spent in the United

States, and the assistance is delivered in the form

of goods and services. The activities listed (and

discussed under Element 2 in the following section) are those selected by this study as particular
—

18 I Fueling Reform: Energy Technologies for the Former East Bloc

U.S. Foreign Development Assistance

Increase funding for the following areas:

Policy assistance

Price reform, privatization, regulation, and policy training

Training in market activities and skills

Energy efficiency improvements

Demonstrations and assistance

Efficiency centers and information

Nuclear safety and proliferation control

Environmental information and assistance

Specific technology transfer programs

Utility Partnership Program

Powerplant renovations

Clean-coal demonstrations and assistance

Coal mine safety

Energy research and development

U.S. Export Promotion

Increase flexibility of financing

Increase feasibility studies

Direct Small Business Administration to create programs assisting small businesses

Enhance Foreign Commercial Service and other information programs

Upgrade visibility of exports within U.S. diplomatic policy

Remove barriers to exports

Multilateral Development Banks

Encourage smaller- scale loans

Make energy efficiency a higher priority

Investment Promotion

Raise limit on Overseas Private Investment Corporation insurance for oil and gas projects

Program Management and Coordination

Improve procedures to expedite activities

Improve coordination among agencies

SOURCE. OffIce of Technology Assessment, 1994.

ly effective. All could be considered for increased

funding if it is available.

U.S. Export Promotion

DOC, Eximbank, and the Trade and Development

Agency (TDA) have useful programs that support

U.S. businesses. Increased funding for export financing (e.g., through guarantees for commercial

bank loans that otherwise would not be available,)

feasibility studies, and information programs

would assist U.S. industry and contribute to economic modernization.

Multilateral Development Banks

Loans from The World Bank and the European

Bank for Reconstruction and Development

(EBRD) are major vehicles for development.

Congress could influence the MDBs to give a

higher priority to energy efficiency and smaller

projects that cumulatively can have a greater impact.

Investment Promotion

Foreign investment will be one of the prime forces

for development. OPIC provides project finance

and insures against political risk.
Chapter 1 Introduction and Summary | 19

AID

Streamline and accelerate the grants and procurement process.

Lift the hiring celling and require AID to hire more personnel with regional expertise.

Coordinate AID programs more closely with DOC to ensure maximum benefit to U.S.

business

Eximbank, OPIC, TDA

Increase operating budgets to

Permit the hiring of personnel with regional expertise.

Speed processing and improve monitoring of credit, insurance, and other applications.

Commerce and State Departments

Upgrade status of the Foreign and Commercial Service to ensure maximum coordination

between trade promotion and diplomatic efforts.

DOE

Provide more direct funding for international programs,

SOURCE Off Ice of Technology Assessment, 1994

Program Management and Coordination

Even at the current level of funding, programs can

be made more effective.

*** *

Most of these options are for changes in programs already in effect. They are listed because

the programs could usefully be enhanced with increased funding or a change in emphasis. Funding

has risen sharply in recent years, but the need for

assistance and financing remains enormous. Doing business as usual will mean relatively slow

progress at best and a substantial risk of serious

political instability, especially in Russia and other

countries in the FSU. U.S. budget problems suggest that additional funding can come only at the

expense of other priorities; however, measures to

restore economic growth in the region could, in

the long term, prove highly cost-effective if they

succeed in creating friendly, prosperous trading

partners.

| Policy Strategy

Some policy options (e.g., development assistance) support all U.S. policy goals simultaneous] y

in all areas of the former East Bloc. In other cases,

priorities must be set and choices made. The

United States must ensure that goals and initiatives are sufficiently flexible to account for differing local conditions. The options discussed above

fall into three groups, each of which can be considered separately or as elements of an overall strategy: low-cost changes to maximize the

effectiveness of current U.S. programs; additional

funding for effective programs; and options that

support some goals but can conflict with others in

some countries. A complete strategy to support

U.S. goals might consist of the low-cost changes

(which are largely noncontroversial), some additional funding for effective programs (depending

on the priority accorded energy revitalization in

the former East Bloc), plus whichever elements of

the last group support the highest priority goals.

Element 1: Maximize the Effectiveness of

Current US. Programs

Changes that could improve the effectiveness of

U.S. activities and programs for all countries in

the former East Bloc are listed in table 1-3. Improvements in program effectiveness should be

considered whether or not any further options are

entertained because they support all goals without

penalizing other national priorities.

Element 2: Expand the Most Effective

Assistance Programs

Reform and modernization of the FSU energy sector are clearly in the U.S. national interest, espe-
20 I Fueling Reform: Energy Technologies for the Former East Bloc

The early stages of assembly at the Skawina plant site. In the

background is the thickener with preassembled sections of

the absorber vessel in the foreground. The absorber vessel

sections are ready to be placed in position

cially if accompanied by overall economic and

political reform. As noted throughout this report,

there is a great need for assistance, and U.S. programs can have considerable impact in supporting

reform. The steps that could be taken if Congress

is willing to allocate more funding to enhance the

U.S. role, as listed in table 1-2, include the following:

Emphasize Government-to-Government Policy Assistance—U.S officials can supply information and encouragement for policy makers in the

former East Bloc to take the painful steps involved

in economic transformation and help them design

realistic reform programs that meet the need to

maintain domestic political and social stability.

Total additional costs might be $1 million per

agency-e. g., DOE, NRC—for time and travel.

Expand Business and Organizational Training—One of the most effective U.S. initiatives to

promote change is providing training in general

business-related skills—a transfer of the knowledge and skills necessary to support the development of new modes of economic organization and

technical processes. This type of technology

transfer promotes domestic reform while supporting U.S. economic interests. It provides former

East Bloc firms with the skills to organize their

work and efficiently employ advanced technologies from the West. Additional costs would depend on the level of activity. Several million

dollars would allow a significant amount of additional training.

Expand Energy-Efficiency Programs—American demonstration projects and information programs (especially the efficiency centers) area vital

component of technology transfer in the energy

sector. Energy-efficiency projects can promote reform by demonstrating that it is possible to cushion the effects of raising energy prices and

introducing market-based economic relations. An

additional $2 million to $5 million could easily be

justified simply on the basis of energy savings.

A more activist approach, at least for Russia,

where domestic oil is still subsidized, would be to

persuade the Russian government to commit to

raising energy prices to world levels over several

years. In the meantime, enterprises would be guaranteed their current quota of energy, but the state

would buy back at near-world prices all that was

not needed. This would provide a revenue stream

for investments in improved efficiency. The

EBRD could finance initial improvements based

on anticipated revenues. AID and DOE could provide training to create an energy service and

equipment industry. There should also be many

opportunities for American businesses which

could be funded by Eximbank. Such a program

would call for an unprecedented amount of planning and coordination, but it offers a way around

the problems (inadequate incentive, information,

and capital) that inhibit the reduction of energy

waste. Additional costs for the U.S. government

might be several tens of millions of dollars over 3

years for U.S. energy auditors and service companies to get the process moving and to start joint

ventures for investments in equipment manufacture and directly in efficiency improvements.

Expand Technical Assistance Programs—

Technical assistance programs provide access to

technologies essential to short-term stabilization

and long-term modernization and economic

growth. Since U.S. firms are leaders in several

areas, an expansion of technical assistance programs, consistent with an activist program of U.S.

policy, would provide benefits for U.S. business.

Priority projects, as listed in table 1-2, include
Chapter 1 Introduction and Summary | 21

additional assistance in installing nuclear safety

equipment, additional assistance in pollution control, an expanded utility partnership program,

powerplant renovations, more clean coal demonstrations, additional coal mine safety activities,

and R&D cooperation. Several of these initiatives

(nuclear safety, powerplant renovations, clean

coal demonstrations) could entail costs of several

tens of millions of dollars, depending on how

much activity is wanted.

Element 3: Select Priorities for Trade and

Development

In the case of conflicting goals, policies must be

tailored to each country or region to ensure their

appropriateness and consistency, especially

where economic reform is tenuous. This is most

important in the area of export- and investmentpromotion programs.

The key question for Congress is how actively

to promote market reform and long-term sectoral

modernization versus short-term economic stability and U.S. economic interests. The most important vehicle for expressing this policy preference

is the conditionality provision of export credits

and insurance.

Government financing of exports to modernize

the energy sector benefits U.S. business and jobs,

and it can stimulate increased energy production.

However, these credits may simultaneously harm

other American interests by discouraging Russian

firms from accepting Western firms as investors, a

potentially much larger, though more costly,

source of the enormous amounts of capital needed

for energy sector modernization. The availability

of public-sector financing may even inhibit reform by removing the incentive for firms to restructure their operations to attract commercial

credit and cooperation.

Nevertheless, there is good reason for the

United States to maintain its export-credit programs at a level sufficient to keep American firms

competitive with their Western rivals and to provide afoot in the door to potentially lucrative markets. The political importance of foreign

assistance and trade-promotion programs should

also not be underestimated. Thus, reconciling

trade and aid programs with one another and with

the larger goal of promoting market reform will

prove difficult, if not impossible.

The differing conditions among the former East

Bloc countries suggest two approaches for U.S.

policy, depending on which goals are to be supported:

1. Support near-term economic stabilization

through expansion of energy production. This

option seeks to support former East Bloc countries

by maximizing energy output to provide foreign

exchange, regardless of their progress on economic reform. It also aggressively emphasizes U.S.

exports.

Policies: Expand export-credit and MDB programs to ensure that financing is not a major

constraint; provide minimal conditionality and restrictions on loans. Higher subsidies might be necessary for OPIC and Eximbank to cover increased

losses on bad debt.

2. Support long-term energy sector modernization and systemic market reform. This approach may entail further declines in oil and gas

production in order to achieve long-term gains.

Policies: Expand export-credit programs only

insofar as they can support reforms and can be effectively used. Impose maximal conditionality on

credits: export-credit and investment assistance

would go only to firms actively engaged in a real

transition to market functions.

It is possible to satisfy these dual priorities only

in countries that have embarked firmly on a course

of economic reform. A balanced approach is appropriate for Poland, the Czech Republic, and

Hungary because their progress toward economic

reform makes it possible to promote both trade

and reform simultaneously. This option may also

be appropriate in Kazakhstan. Although market

reform has been limited there, Kazakhstan is open

to foreign investment and trade.

In other countries of the former East Bloc, the

choices are not so easy. Declining oil production is

a serious threat to Russia’s weak economy. Bolstering that economy may be essential for preventing social and political instability. The United
22 I Fueling Reform: Energy Technologies for the Former East Bloc

States has the technology and the resources to provide significant help, and U.S. industry would

benefit from supplying it. However, if the help is

provided without insisting on continued reforms,

U.S. long-term interests and Russia’s long-term

economic health could be damaged. Selecting the

appropriate balance depends on one’s views of the

urgency of Russia’s short-term energy problems

and the importance of U.S. equipment exports visa-vis long-term development.

CONCLUSION

Improved energy technology will be a critical factor in modernizing the economies of the former

East Bloc, and the transfer of energy technology

will be an important asset in achieving U.S. national goals. However, financial and institutional

constraints in these countries will limit Western

investment and sales of equipment and services. A

strong and active U.S. government role is necessary to expedite the transition to market economies and democracy and to assure that export

markets are available for U.S. industry. The policy

options discussed above, if implemented skillfully and with adequate funding, can help very significantly. Congress will face the issue of whether

increased efforts are warranted in light of other

U.S. national priorities and uncertainties over

progress toward reform in Russia and other countries of the former East Bloc.
Overview of

Energy

Supply and

Demand 2

E

nergy resources differ significantly among countries of

the former East Bloc. Russia and the Central Asian countries have substantial energy resources, Central Europe

has limited resources, and the Baltics are resource poor.

Patterns of energy use differ as well. For example, Russia and Romania use a high percentage of natural gas in their respective fuel

balances; Poland and the Czech Republic rely extensively on

coal; and Ukraine, Lithuania, Bulgaria, and Hungary generate

substantial amounts of electricity from nuclear powerplants.

Even so, two common threads are evident in the energy picture of

these countries: much of the energy consumed is wasted, and numerous cost-effective opportunities exist for improving energy

efficiency. This chapter discusses the role of energy in the economy and provides a broad overview of energy resources, energy

consumption, and the potential for improving efficiency.

ENERGY’S ROLE IN THE ECONOMY

Energy has played and continues to play a crucial role in the economies of former East Bloc countries. In the past, centrally planned

economies relied on abundant and easily accessible energy supplies to foster rapid industrialization, particularly of heavy industries. Between 1950 and 1989, energy production fueled an

impressive economic growth rate in the former Soviet Union

(FSU), averaging 5.8 percent annually. 1 Energy supplies increased sixfold during this same period (averaging 4.7 percent

annually).

I United Natif~ns Economic Commission for Europe, Energy RefOrmS in Cenfrd ad

Eastern Europ~The First Years, ECE Energy Series, No. 7 (New York, NY: United Nations Publications, 1991 ), p. 5.

Prague, Czech Republic.

123
24 I Fueling Reform: Energy Technologies for the Former East Bloc

Instead of becoming more energy-efficient as

they grew, however, centrally planned economies

experienced higher growth rates in energy consumption than did OECD (Organization for Economic Cooperation and Development) countries.2

Heavily subsidized energy prices, the lack of market incentives, and the importance given to fulfilling quotas and achieving state plans contributed

substantially to the high energy requirements and

corresponding production in the region.

In recent years, the energy picture has changed

somewhat. Energy production, particularly of oil

and coal, is falling, largely due to inadequate investment in exploration, the use of outmoded

technologies, the lack of spare parts, and poor

maintenance. The dissolution of the Soviet Union

and the resultant political and economic changes

further limit output. Energy demand has declined

because of reduced economic activities and higher

energy prices, although energy consumption as a

percent of GDP (gross domestic product) is still

high.

Increasing or stabilizing energy production is

critical to the economic well-being of former East

Bloc countries. Recent energy shortages have

constrained economic activities and slowed reform. Moreover, revenues generated by energy

exports are essential for financing reform initiatives and modernizing industries, buildings, and

transportation networks.

Even more important to the economic health of

these countries may be improvements to energy

efficiency. The past neglect of energy conservation and efficiency practices resulted in extensive

energy waste and contributed to high operating

costs, energy shortages, loss of foreign exchange,

and environmental damage. Improving energy efficiency can reduce energy waste and provide

additional fuel supplies for export, thus spurring

economic growth. Additional revenues will benefit exporting nations, especially Russia and Kazakhstan. Efficiency improvements also will

benefit Ukraine and the oil-importing countries of

Central Europe and the Baltics by reducing expenses and improving their balance of payments.

With energy prices still below market levels,

there is little incentive to improve energy efficiency. However, as these countries move to market

economies, energy prices will continue to rise until they reach world market levels, making energyefficiency measures more attractive.

Finally, a decrease in fossil fuel combustion

will reduce air pollution and C02 emissions, providing significant environmental benefits.

ENERGY SUPPLY

Russia, an energy giant, has the world’s largest

natural gas reserves and immense oil and coal reserves. How these supplies are developed and utilized will influence global markets for years to

come. Of the Central European countries, only

Poland has large energy resources, mostly coal.

The following brief overview describes the energy

resources in the former East Bloc in terms of reserves, production, and exploration.

I Oil Supply

Oil Reserves

Several FSU countries are rich in oil reserves:

Russia, Kazakhstan, Turkmenistan, Azerbaijan,

and Uzbekistan. Russia alone has proven reserves

of about 50 billion barrels (Bbbl), which is about

double that of the United States, though dwarfed

by Saudi Arabia’s resources. The largest oil fields

are located in Western Siberia and the VolgaUrals. The U.S. Geological Survey estimates that

Russia has additional oil reserves3 in the range of

‘A Report to the U.S. Working Group on Global Energy Efficiency, Energy tiifliciency. De\’e/oping Nafions, and Eastern Europe (June

1991 ), p. 2.

3~ese inc]ude discovered and undiscovered resources. Discovered resources are defined as reserves not ready for immediate prOdLJctlon;

undiscovered resources are those that take into account more remote geological probabilities.
Chapter 2 Overviewof Energy Supply and Demand | 25

40 to 171 Bbbl, with the most likely amount set at

60 Bbbl.4 The wide range indicates the high degree of uncertainty attached to these estimates.

The eastern regions of Siberia and the offshore

areas are relatively unexplored by international

standards. Future exploration and production of

these resources will be technically challenging

and more expensive because they are in remote

areas with harsh climates.

Most of Kazakhstan’s oil reserves (estimated at

16 Bbb15) are located in the northwestern region

near the Caspian Sea. The Tenghiz oil field may

add another 3.3 Bbbl to Kazakhstan’s oil reserves,

according to one estimate. 6 However, development of this field has been hampered by technical

challenges, enormous financial requirements, and

the difficult y of transporting the oil to internationnal markets.

Turkmenistan’s oil fields are located in the

Cheleken Peninsula and in the eastern part of the

country. According to Turkmen authorities, the

country may have oil reserves close to 5.1 Bbbl.7

Azerbaijan and Uzbekistan also have significant oil reserves. Most of Azerbaijan’s 1.2 Bbbl

reserves are located offshore in the Caspian Sea.8

Western companies are eager to exploit these resources, but the need for massive infrastructure

development hinders energy sector investment.

Other former republics have only small amounts

of oil. Romania is the only Central European

country that has significant oil reserves.

Oil Production

Major oil production activities are centered in

Russia, Kazakhstan, and Azerbaijan. Until recently, Russia was the world’s largest oil producer, but

production has been on a downward slide since

1987, when output peaked at 11.44 million barrels

(MMbbl) per day.9 In 1992, Russia produced 7.95

MMbbl per day, a drop of more than 30 percent.

(See table 2-l.) Oil output declined further in

1993. The greatest losses in output have occurred

in Western Siberian oil fields due to policy decisions that favored short-term production goals at

the expense of exploration and discovery, depletion of old giant fields, inefficient production

practices, and the lack of capital for more sophisticated drilling and export operations.

Future oil production in Russia is likely to occur in remote, inaccessible fields, entailing huge

capital investment and access to Western technology and expertise. Assistance from Western companies can improve future development prospects

and increase production of old fields. Technology

transfer, one avenue for developing resources, is

discussed in detail in the oil and gas section in

chapter 3.

Unlike Russia, Kazakhstan’s oil production has

been increasing steadily since the early 1980s. In

1992, Kazakhstan produced about 552,000 barrels per day. 10 Future increases in production will

depend on development of oil deposits in the remote and inhospitable Guryev region in northwest

Kazakhstan, particularly the Tenghiz field. Development will be expensive because of the technically challenging nature of the oil deposits. The

great depths, high pressures, and high sulfide content of the Tenghiz field will require using advanced technologies not yet available in the FSU.

Moreover, Kazakhstan’s lack of domestic infrastructure, such as pipelines to transport oil

through neighboring countries, will require mas4E~tlmate~ are derived from us. Geologic]” and oil and Gas J~uma] estimates as repo~ed in Joseph p. Riva, Jr., Oi/ adGas Ifi the Russian

Federation, CRS Repml for Congress, 3-732 SPR (Aug. 9, 1993), p. 4.

5&iKaz&h Llqulds, Gas Rese~es Ta]lied,” Oi/ and Gas Jourrud, vol. 91, No. 31, JUIY 26, 1993J P. 35.

6Matthew J. Sagers, ‘“The Energy Industries of the Former USSR: A Mid-Year Survey,” F’osf-Sovief Geography, vol. 34, No. 6,1993, p. 364.

7Nancy Lubin, “Fueling Refornr Central Asia,” OTA contractor report (January 1994), p. 15.

8J05eph p, Rlva, Ru~~ia a~fhe Common}tea//h ~f/~epen&nfS(a/es: Oil Resources, CRS Reportforcongmss, 92-78 SpR (Jan. 1 c, 1‘2)”

9Sagers, ‘The Energy Industries of the Former USSR,” p. 344.

1‘Ibid.
26 I Fueling Reform: Energy Technologies for the Former East Bloc

Country 1992 1991 1990 1989 1988 1987 1985 1980

Russia 7.949 9.260 10.362 11.144 11.423 11.437 10.891 10,979

W. Siberia 5.537 6.603 7.536 8.135 8.336 8.224 7.392 6.280

Kazakhstan 0.552 0.534 0.518 0.510 0.512 0.492 0.458 0.376

Azerbaijan 0.221 0.235 0.251 0.265 0.275 0.277 0.263 0.295

Turkmenistan 0.106 0.108 0.112 0.116 0.114 0.116 0.120 0.161

Ukraine 0.088 0.098 0.106 0.108 0.108 0.112 0.116 0.151

Uzbekistan 0.062 0.056 0.056 0.052 0.048 0.046 0,040 0.026

Belarus 0.040 0.042 0.042 0.042 0.042 0.040 0.040 0.052

Other 0.006 0.008 0.012 0.012 0.012 0.012 0.012 0.012

republics

Total FSUa

9.027 10,342 11.463 12.198 12.537 12.535 11,955 12.114

Romania 0.138 0.140 0.163 0.180 0.193 0.215 0.220 0.238

aDataeXCIUde condensate, Which accounterj for 37 percent of FSU total production m 1992 Sum of components may nOt equal total due to rounding.

SOURCE Malthew J. Sagers, “The Energy Industries of the Former USSR. A Mid-Year Survey,” Post-Sov;et Geogrz@y, vol. 34, No 6, 1993, p 344;

Energy information Admmlstratlon, /n(ernat/ona/EnerWAnua/ 1992, DOE/ElA-0219(92), January 1994, p 6, and/nternaliona/EnergyAnnua/ 1983,

DOE/EIA-0219(83), November 1984, p 16

sive capital investment. Western companies are

intensely interested in developing Kazakhstani resources, and the Kazakhstani government has

welcomed foreign interest quite openly, which

contrasts sharply with Western experience in Russia. Deals with Chevron, British Gas, Italy’s Agip,

and France’s Elf should bring about $38 billion in

foreign investment in Kazakhstan’s oil industry

over the next 40 years. 11 Kazakhstan hopes to use

oil revenues to finance development and modernization of the rest of its economy.

Azerbaijan has been producing oil since the

1870s. Most of its output comes from offshore

fields. Soviet development practices, which favored oil field investment in Siberia over that in

the Caucuses, left Azerbaijani exploration and

production inefficient. Consequently, output has

been declining since 1980, falling to 221,000 barrels per day. 12 Pervasive corruption and the lack of

economic reforms in Azerbaijan have dampened

Western enthusiasm for development and leave

open to doubt the degree to which these resources

will be used to support economic and political

modernization.

Other former republics—Turkmenistan, Uzbekistan, Belarus, Kyrgystan, Tajikistan, and Georgia—are also oil producers, but their

contributions are small compared with those of

Kazakhstan and Azerbaijan.

Exports

Within the FSU, only Russia and Kazakhstan are

currently net oil exporters, mostly to European

Countries. Exports are transported by pipeline to

Central and Eastern Europe and by tanker to Western Europe. Oil supplies are critical to economic

recovery in both exporting and importing countries of the former East Bloc.

In recent years, Russian oil exports have declined, mostly due to a decline in production. For

example, 1991 exports averaged about 1.4

I I“Tomorrow’s Gusher,” The Economist, w]. 324, No. 7769, Jul. 25, 1992, p. 72.

125agen, •*~e Energy ]ndustries of the Former USSR,” P. 364.
Chapter 2 Overview of Energy Supply and Demand | 27

MMbbl per day, a 33-percent decline from 1990,

with shipments to FSU countries registering the

biggest decrease. Exports to OECD countries remained fairly constant. To maintain export levels

to Western Europe, and thus hard currency payments, it is likely that Russian exports to the former republics of the Soviet Union will further

decline, at least in the near term.

I Natural Gas Supply

Natural Gas Reserves

Russia has the world’s largest gas reserves-about

1,626 trillion cubic feet (Tcf). Undiscovered gas

reserves are estimated to range from 927 to 4,083

Tcf, with 1,569 Tcf the most likely amount.13

Western Siberia has the largest gas fields, and vast

amounts of natural gas are also thought to lie beneath the Arctic Ocean. Foreign companies are

very interested in developing Russia’s large gas

reserves, particularly those in the Far East region.

It is clear that Russia’s huge resource base can support increased production, but new infrastructure

and markets are needed to make this happen.

Other former republics that have gas resources

are Turkmenistan, Uzbekistan, Kazakhstan, and

Ukraine. Much of Turkmenistan’s enormous gas

reserves (96 Tcf) are located along its border with

Iran. Kazakhstan’s gas reserves are estimated at

64.6 Tcf. Its main gas field, Karachaganak, is located on its northern border with Russia. Both exploration and development of this field have been

challenging because of the highly corrosive characteristics of the gas and the location of the deposits (4,000-5,000 meters deep). 14 Ukraine’s sizable

untapped reserves (37.8 Tcf) have been uneconomical to explore and produce, but given its hard

currency shortage, the country will be forced to reduce imports and maximize domestic production.

Poland also has natural gas reserves, estimated

at 12 Tcf. Much of its highly dispersed reserves

have low Btu (British thermal unit) value. To date,

the lack of capital has hampered the exploration

and development of this resource.

Natural Gas Production

Natural gas production in the FSU declined in

1992 for the second year in a row. This is in sharp

contrast to the growth rates of 6 to 8 percent annually in the 1980s. Despite the decline, the natural

gas industry is in better shape than its oil counterpart-it is relatively young, requires less sophisticated technologies, and may not need huge

amounts of capital to maintain present production

levels.

The largest declines in 1992 output occurred

outside Russia. (See table 2-2.) For example,

Turkmenistan’s production dropped by almost 29

percent in 1992. Its main fields have peaked, and

newer, smaller fields could not offset the drop in

output. In addition, the loss of its traditional export markets, particularly to Ukraine, contributed

to the decline. Even so, Turkmenistan remains the

second largest gas producer in the FSU and the

third largest in the world.

Also, Ukraine’s output declined by 14 percent.

Its heavy reliance on Russian gas imports has

forced Ukraine to seek alternative suppliers such

as Iran. In 1993, Ukraine, Iran, and Azerbaijan

formed a joint venture to build gas pipelines

through Azerbaijan to Western Europe. 15

Unlike the other former republics, Uzbekistan’s natural gas production continues to rise. Due

to expanded exploration and development, 1992

production increased by 2.1 percent. Uzbekistan

is the third largest natural gas-producing country

in the FSU.16

13Riva, Oil and Gas in the Russian Federation, p. CRS-6.

Iqsagen, •~~e Energy Irdwhies of the Fom)er USSR,” P. 377.

] 51bid., pp. 387-88.

‘sIbid.
28 I Fueling Reform: Energy Technologies for the Former East Bloc

Country 1992 1991 1990 1989 1988 1987 1985 1980

Russia

W. Siberia

Turkmenistan

Uzbekistan

Ukraine

Kazakhstan

Azerbaijan

Other

republics

Total FSUa

Romania

Hungary

Poland

22.616

20.292

2.122

1.511

0.738

0.311

0.275

0.014

27.588

0.78

0.17

0.14

22,704

20.271

2.977

1.480

0.858

0.279

0.304

0.018

28.619

0.88

0.18

0.15

22.623

20.105

3.101

1.441

0.992

0.251

0.350

0.018

28.775

1.03

0.16

0.14

21.747

19,056

3.175

1.451

1.088

0.237

0.392

0.021

28.114

1.13

0.22

0.19

20.829

18.039

3.118

1.409

1.144

0.251

0.417

0.018

27.193

1.28

0.22

0.20

19.222

16.414

3.111

1.406

1.257

0.222

0.441

0.025

25.688

1.32

0.22

0.20

16.316

13.271

2.938

1.222

1,515

0.194

0.498

0.025

22.704

1.27

0.26

0.23

8.970

5.523

2.490

1.229

2.002

0.152

0.494

0.025

15.369

1.20

0.21

0.22

aSum of components may not equal total due to rounding.

SOURCE. Matthew J. Sagers, “The Energy Industries of the Former USSR. A Mid-Year Survey,” Post-Soviet Geography, vol. 34, No. 6,1993, p. 378;

Energy Information Admu’mtratlon, International Energy Annual 1992, DOE/ElA-0229(92), January 1994, p. 10; and /ntemationa/ Energy Annual

1983, IXWEIA-0219(63), November 1964, p 20

For the first time ever, natural gas production

declined slightly in Russia. The fact that output

decreased by only 0.4 percent17 is remarkable given recent institutional changes in the gas industry

and the country-wide economic crisis.

In Russia, future natural gas production, like oil

production, is likely to come from remote areas.

Extraction and transmission costs will increase.

Major investments in exploration, development,

and transmission will be necessary to increase

production, and financial resources may not be

available.

Transport of gas to markets maybe even more

problematic than increasing production. Many

pipelines and compressors are in dire need of repair. Losses from leaky transmission and distribution lines are a serious problem. In the last years of

the Soviet empire, over 900 miles of pipeline were

replaced annually, but the need for pipeline replacement was double that amount. Today, capital

constraints dictate that only badly deteriorated

sections be scheduled for replacement. Natural

gas transmission systems in Kazakhstan, Uzbekistan, and Turkmenistan are particularly bad and

in dire need of repair/replacement. 18

Natural Gas Exports

Russia exports about 3.8 Tcf of natural gas annually, mostly to Western Europe.19 The need for hard

currency may ensure that Western European exports will be maintained at the expense of Central

European customers. However, maintaining the

flow to Western Europe may be complicated by

Russia’s dependency on pipelines that cross several former republics, particularly Ukraine, Belarus, and the Baltics. Ukraine’s periodic stoppages

of Russian gas exports to Europe are already a

171bid, p. 378.

18 Mikhai] K~rchemkin, “oil and Na~ral Gas Systems of the Former !hh union,” OTA contractor report (July 1993), p. 13.

lpRiva, oil ad GUS in the Russian Federation, p. CRS-6.
Chapter 2 Overview of Energy Supply and Demand | 29

bone of contention between the two countries.

This and other factors have prompted Central European customers to look elsewhere for gas supplies. Ukraine, which is very dependent on

Russian gas supplies, is building closer ties with

Iran, partly to diversify energy sources. Recently,

Ukraine and Iran agreed to build gas pipelines

through Ukraine to connect Iran to Western Europe.

Turkmenistan exports natural gas to other former republics, particularly Ukraine and Azerbaijan, and to Western Europe. Ukraine is the largest

single market for Turkmenistan natural gas. In

1993, Turkmenistan negotiated the sale of 1 Tcf to

Ukraine and 622 billion cubic feet (Bcf) to Azerbaijan. 20 Most of Turkmenistan’s hard-currency

earnings come from its natural gas exports. Like

Ukraine, Turkmenistan is planning to build export

pipelines through Iran and Turkey. This should

lessen Turkmenistan’s frustration over Russia’s

ownership of transmission pipelines and consequent control over lucrative Western markets.21

| Coal Supply

Coal Reserves

The FSU’s substantial coal reserves, estimated at

266 billion tons,22 are scattered throughout the

former republics. A large portion of its coal reserves comprise less desirable deposits because of

location and geological characteristics. Russia,

Ukraine, and Kazakhstan are the three major coal

producing countries.

Much of Russia’s immense coal reserves are located in Siberia. Kuznetsk, Kansk-Achinsk, and

South Yakutia are the major coal-producing regions in Siberia. Other major coal basins are located in western Russia and the Urals.

Ukraine’s coal reserves are estimated to be

about 44.1 billion tons.23 There are three major

coal fields in Ukraine: Donets Basin, located in

the eastern region; the L’viv-Volynsk Basin, located in the western region; and the Dnieper Basin. The Donets Basin is the major coal producer

and one of the oldest sites of underground mining.

Donets coal seams are very thin (many are less

than 1 meter thick) and steeply pitched, making it

difficult for miners to work. Over the years, the

quality of Donets coal has decreased: the ash and

moisture content has risen, whereas the energy

content has fallen.

Kazakhstan has substantial coal reserves—

about 55.1 billion tons24—making it one of the

largest coal-bearing countries in the world. Its

three primary coal basins, Ekibastuz, Maikyubensk, and Karaganda, are located in eastern and

central Kazakhstan. Coal quality varies from subbituminous in the Maikyubensk basin to anthracite in the southern part of the Karaganda basin to

poor quality in the Ekibastuz. This coal is exportable only to Russia because it is too abrasive and

contains high-ash components, making it uneconomical to transport.

Poland’s recoverable reserves are estimated at

about 45 billion tons. 25 Substantial hard coal reserves are found primarily in the Upper Silesian

Basin in the South, while lignite reserves are scattered throughout central and western Poland.

The Czech Republic and Hungary have sizable

coal reserves, but far less significant than that of

Poland, Russia, and Ukraine. Nevertheless, coal is

20Sagers, “Energy Industries of the Former USSR,” p. 385.

2 ]s*Turk~enlstan Moves closer t. Building (j~s Expfi ~peline,” East European Energy Rqx)~, Fi~nc.ia/ Times, Issue 26, NOV. 19, 199S,

p. 7.

22 Department of Energy, U.S. Department of Energy, Annual Energy Review 1992, LXXYEIA-0384(92) (Washington, DC: U.S. Government Printing Oflice, June 1993), p. 297.

23u s Genera] Accounting Office, L/kralne Energ~on d l/ions Affe(.fing U.S. Trade ad /n\~esrmenf, Repofi to the Chairman, SllbCOm-

. .

mittee on European Affairs, Committee on Foreign Relations, United States Senate, GAO/GGD-92- 129 (August 1992), p. 7.

2~harles Bingman, “Economic Development and Privatization in Kazakhstan,” Central Asian Monitor, NW 4, 1992, p. 27.

Z5E1A, Annul Energy Re\’iew 1992, P. 297.
30 I Fueling Reform: Energy Technologies for the Former East Bloc

Country 1992 1991 1990 1989 1988 1987 1985 1980

Russia

Ukraine

Kazakhstan

Uzbekistan

Kyrgyzstan

Tajikistan

Georgia

Total FSUa

Poland

Czechoslovakia

Romania

Hungary

371.775

147.740

140.022

5.182

2.426

0.221

0.551

667.916

227

102

38

17

389.526

149,504

143.330

6.505

3.859

0.331

0.882

694.046

231

111

36

19

435.832

181.698

145.094

7.166

4.079

0.551

1.103

775.413

237

119

42

19

452.040

198.677

152.591

6.836

4.410

0.551

1.323

816.207

275

130

68

22

469.129

211.356

157,773

6.064

4,410

0.772

1.544

851.047

294

137

58

23

457,222

211.687

156.670

5.513

4.410

0.662

1.764

837.707

290

137

50

24

435.722

208,379

144,212

5.513

4,410

1,103

1,874

800.882

275

140

51

27

431.533

217.310

127.233

6.284

4.410

1.103

2.095

789.857

254

136

39

28

aSum of components may not equal total due to rounding

SOURCE Matthew J Sagers, “The Energy Industries of the Former USSR A Mid-Year Survey,” Posf-Sovlet Geography, VOI 34, No. 6, 1993, p. 392,

Energy Informahon Admuvstrahon, /nternationa/ Energy Annua/ 7992, DOE/ElA-0219(92), January 1994, p 12, and /n/ernatlona/ Energy Annua/

1983, DOE/EIA-0219(83), November 1984, p 22

an important national energy resource and source

of employment in both countries.

Coal Production

The first mined coal fields in the FSU were located

in the west, near population centers. Some of these

deposits have been mined since tsarist times and

have thus become depleted. The industry was

forced to open new mines in Siberia and the Arctic, far from major population and manufacturing

centers and subject to harsh weather.

In 1992, coal production declined in all the former republics. (See table 2-3.) The decline can be

attributed to several factors, including the lack of

investment in mine development, equipment

shortages, and labor unrest. Low morale, poor salaries, and wretched working and living conditions have led to several crippling miners’ stikes

in the FSU in recent years.

Coal production activities have had serious

harmful environmental impacts. These include

land disturbances, saline water discharge, sewage

problems, methane emissions, and inadequate and

inappropriate storage of mine and coal washing/

cleaning wastes. Even after mines close, some of

these effects linger. (For a discussion on the extent

of environmental damage, see chapter 5.)

Russia produced about 371.8 million tons of

coal in 1992, a decline of 4.6 percent from the previous year.26 Because of declining production,

Russia is a net importer of coal. The bulk of Russia’s production comes from Siberian basins,

where coal is mined in both open pit and underground mines. The Kuznetsk Basin, located in the

southern part of Western Siberia, has been the

largest coal producer in Russia for years. It produces many grades of high-quality coal, with low

ash, moisture, and sulfur content. The next largest

producing basin, the Kansk-Achinsk, has a large

share of low-quality, high-moisture coal that tends

to self-combust during transport, making this coal

uneconomical to transport over long distances.

2%agers, “Energy Industries of the Former USSR,” p. 391.
Chapter 2 Overview of Energy Supply and Demand | 31

Ukraine is still the second largest coal producer

in the FSU, but Kazakhstan is a very close third.

Ukraine’s coal production has been on a downward slide since 1988. The biggest drop in output

occurred in 1991, when production decreased by

almost 18 percent. In 1992, Ukraine produced

147.8 million tons.27 Ukraine, too, is a net importer of coal.

Kazakhstan’s energy production and exports

are dominated by coal. Recent oil and gas discoveries are expected to change significantly the

country’s energy balance. In 1992, Kazakhstan

produced 140 million tons, a slight decline of 2.3

percent. Miners’ strikes in May and June 1992 and

the mutual indebtedness of the Kazakhstani coal

industry and its customers are largely responsible

for the decline.

Poland is a major coal producer, ranking

seventh in the world. In 1991, Poland produced

231 million tons.28 Its economy is heavily reliant

on coal; for example, more than one-half of the

residential/commercial sector’s energy needs are

derived from coal.29 In recent years, coal output

and exports have been declining. Despite the decline, Poland remains a major coal exporter.

In the Czech Republic, coal is the leading domestic energy resource. Brown coal provides the

bulk of production in recent years. Much like other former East Bloc countries, output has declined

in recent years, and the Czech government intends

to phase out one-third of its coal production by the

late 1990s.

Coal is also a major domestic energy resource

in Hungary, accounting for about 36 percent of total energy production in 1990.30 Production has

been declining since 1983. Hungary’s coal mining

industry is reorganizing, and mines are being privatized. Contraction of Hungary’s coal industry is

inevitable. 31

| Coalbed Methane

Russia is likely to have significant coalbed gas resources. Three basins, located east of the Ural

mountains, contain most of Russia’s resource: Pechora, Kuznetsk, and Tungusk. The Pechora basin’s coalbed methane resource is estimated at 80

to 120 Tcf, but the area’s harsh climate may limit

exploitation of this resource. The Kuznetsk basin’s estimated coalbed gas resource is 350 to 500

Tcf. There is no reliable estimate of coalbed gas

resources in the remote Tungusk basin.32

Ukraine and Kazakhstan, which have significant coal resources, boast estimated coalbed

methane resources of 60 and 40 Tcf, respectively.

Poland also has significant coalbed methane resources, and Western countries are interested in

developing this resource. For comparison, table

2-4 highlights major coalbed methane resource

countries.

Although the resource base is high in this region, development potential may be weak because

deposits are often located in remote areas with

harsh climates. Also, these remote areas may lack

the essential infrastructure to produce and transport this resource. Moreover, local markets may

not be well established. Currently, about 50 Bcf of

methane are produced in FSU mines.33

271bid.

Z8EIA, Annua/ Energy Review 1992, p. 209.

Z9U.S. Agency for ]ntematlona] ~ve](~pment, Office of Energy, Poland: An Energy and Environmenfa/ Overview, prepared by Argt~nne

National Laboratory (October 1990), p. 19.

3@ich~d Browning, “cu~ent Energy Economic Structure,” OTA contractor R?poll, “HIJngMY pr[)fi~e.”

Jlorganization” for Ec~n(~mic cooperation and Development, Energy Po/icies4un~a~, /99/ ~Urt’ey (pafis: 1992), p. 53.

s’2Jonathan R. Ke]afant, Scott H. Stevens, and Charles M. Boyer 11, “Vast Resource Potential Exists in Many countries, Oilund Gas Journal,

Vol. 90, N(). %, Nov. 2, ] 992, pp. 82-83.

331bid.
32 I Fueling Reform: Energy Technologies for the Former East Bloc

Coalbed methane

resources

Country (trillion cubic feet)

Russia

China

United States

Canada

Australia

Germany

Poland

Ukraine

United Kingdom

Kazakhstan

600-4,000

1,060-1,240

400

200-2,700

300-500

100

100

60

60

40

SOURCE VelloA Kuuskraa, Charles M Boyerll, andJonathan A Kelafant, “Hunt for Quality Basins Goes Abroad,” 01/ar?d Gas Journa/, VOI

90, No 40, oct 5, 1992, p 51

I Nuclear Power

Nuclear power is an important source of electricity in Lithuania, Hungary, Slovakia, Bulgaria, Ukraine, and the Czech Republic. Nuclear power

supplies 80 percent of Lithuania’s electricity and

nearly half of Hungary’s and Slovakia’s. Moreover, the Czech Republic has one of the largest nuclear industries in Central Europe and is the only

non-Soviet country to build Soviet-designed nuclear reactors.

At the end of 1992, there were 65 operating nuclear power reactors in the former East Bloc. (See

table 2-5 for a breakdown of the number of plants

and capacity, by country.) Russia has a heavy concentration with 28, and Ukraine has 15.34

About 40 percent of these reactors present serious safety concerns. Nevertheless, these plants

continue to operate for a variety of reasons, including the need for power supplies to fuel economic growth and the desire to reduce air

pollution. Also, the days of cheap Soviet energy

exports are gone, and some countries believe they

have no other choice but to pursue nuclear power.

Many of these countries have energy supply deficits, and nuclear energy helps fill the gap. Russia,

Ukraine, and the Czech Republic plan to increase

their nuclear capacity in the near future. Ukraine

also has postponed the closure of the Chernobyl

nuclear powerplant, a reflection of the desperate

situation the country now faces regarding energy

supplies. Other countries, including Poland, have

halted nuclear power development plans for the

time being. The safety problems of East Bloc reactors and what the United States and other Western

countries can do about them are discussed in detail

in chapter 4.

| Renewable Energy

In former East Bloc countries, renewable resources contribute only a small share of total energy production. In Hungary, for example,

renewable contribute only about 1 to 2 percent to

total energy supply,35 compared with 9 percent in

the United States. Also, the use of renewable is

relegated to a minor role in Poland’s and Russia’s

current and projected energy supply scenarios.

The Russian Ministry of Fuel and Energy has indicated that by the year 2010, nontraditional energy

resources are expected to provide only about 2 to 3

percent of total fuel supply and 2 to 5 percent of

electricity output. However, this small contribution could save 50 million tons of conventional

fuel per year.36

Hydroelectric power is the most developed renewable. In 1991, the FSU had 64.1 gigawatts of

hydro capacity, which is about 19 percent of total

installed capacity.37 Over the last several decades,

Soviet scientists have conducted research on other

renewable technologies, resulting in well-developed science and a few test installations scattered

3A1ntemationa] Atomic Energy Agency, “Intemational Data File,” VO]. 35, No. 4, Bcenlber 1993, P. 60.

35Hung~an Energy Pdky, Ministry of Industry and Trade, Buti~st (June 1991).

J@RUSSia should Use New Energy !%urCeS,” Interfu Business Report, May 3, 1993, p. 4.

37 EI,4, Annua/ Energy Review 1992, p. 305.
Chapter 2 Overview of Energy Supply and Demand | 33

Country

Bulgaria

Czech Republic

Hungary

Kazakhstan

Lithuania

Russia

Slovak Republic

Slovenia

Ukraine

Total

Nuclear share of

Operable Under construction electric generation

Units MWe Units MWe percent of total

6

4

4

1

2

28

4

1

15

65

3,538

1,632

1,729

135

2,760

18,893

1,632

632

13,020

44,193

0

2

0

0

1

18

4

0

6

31

0

1,784

0

0

1,380

14,175

1,552

0

5,700

24,591

32.5

20.7

46,4

0.6

80.0

11.8

49.5

34.6

25.0

KEY MWe=megawatts of electricity

SOURCE IAEA BulletIn, “lnternatlonal Data File,” VOI 35, No 4, December 1993, p 60

throughout the former republics. Today, the Russian national electric utility (RAO) is taking the

lead in the future development of renewable.

RAO, which is a private joint stock company, is

currently funding a solar photovoltaics project in

the northern Caucasus region. RAO has also encouraged joint ventures with Western renewable

energy companies.38

Of course, the potential for renewable development differs by country-with c1imate, weather

patterns, and other geographical factors largely

determining the prospects. Wind energy potential

is enormous in Russia, Kazakhstan, and Ukraine

(but most often is inaccessible). These countries

are now seeking joint ventures to help develop

their wind energy resources. The most impressive

joint venture for renewable technologies so far is

the U.S. Windpower project in Ukraine. Plans call

for 500 megawatt (MW) wind turbines to be

manufactured in Ukrainian factories and installed

in the Crimea by 1995.

However, the usual obstacles to renewable development interfere with joint ventures sought by

these countries and Western companies: artificially low prices for conventional fuels, capital

constraints, and the lack of political and institutional commitment. These obstacles are significant and will continue to hinder renewable

development and use in the near term.

With huge fossil fuel resources, Russia has had

little incentive to develop renewable. Also, Russia’s institutional structure is geared to producing

fossil fuels and not renewable. In other former republics, the situation is somewhat different. The

need to develop indigenous energy resources, reduce dependency on foreign imports and related

costs, provide decentralized power to rural areas,

and address environmental concerns have spurred

some interest in renewable technologies. Defense

conversion and the availability of idle or underutilized industrial plants may provide added incentives to develop renewable.

JgErlc Maflin{)[, ‘“Renewable Energy in Ft)mler !Sovie[ Republics: An Informal Report to the OTA,” NOV. 8, 1993.
. .

34 I Fueling Reform: Energy Technologies for the Former East Bloc

Country Oil Gas Coal Electricity Totala

Azerbaijan

Kazakhstan

Russia

Ukraine

Poland

Czech Republic

Slovak Republic

Hungary

47.77

16.81

26.77

15.48

11.77

16.30

32.62

31.61

45.89

14.86

39.32

37.37

8.20

13.63

21.90

33.20

0

59.11

25.01

38.70

69.75

62.65

27.86

22.62

6.34

9.23

8.90

8,45

9.50

7.42b

17.25b

12,57

26,59

100.55

964.37

247.43

114.70

43.97

18.21

27.05

aTotals m mllllon tons of oIl equwalent

bczech and Slovak Republics’ totals include nuclear- and hydro-generated electricity OnlY.

SOURCES: For 1992 FSU data, PlanEcon, Inc , P/arrEcon EnergyOut/ook ~orlhe Former Sovie/Repub/ics (June 1993);

for Czech and Slovak Republlcs (1991 data) and Hungary (1990 data), International Energy Agency, Errergy Statistics

and Balances of Non-OECD Countries 1990-1991

Technology transfer from the West could assist

in developing renewable at a more rapid pace.

Russia and Ukraine have substantial technical

know-how but little expertise in project planning,

development, and management. Wind turbines,

photovoltaic cells, and solar thermal collectors

could be manufactured under joint ventures with

the West. The potential for and impediments to

U.S. renewable technology transfer to the former

East Bloc are discussed in chapter 4.

ENERGY DEMAND

The countries of the former East Bloc vary in their

patterns of energy use. Poland, the Czech Republic, and Kazakhstan, for example, rely on indigenous coal for a large percentage of their energy

needs. Ukraine relies extensively on indigenous

and imported natural gas and coal, and Russia uses

considerable amounts of natural gas and oil to fuel

its economy. Although Hungary’s energy use is

more diversified than that of other former East

Bloc countries, nuclear energy supplies nearly

half of its electricity needs.

The Baltics are quite dependent on energy imports, particularly from Russia. Latvia imports almost all of its electricity and fuel, and Lithuania

imports almost all of its primary energy. Lithuania’s oil-fired and nuclear powerplants generate a

surplus of electricity for export. Estonia uses indigenous oil shale to satisfy half of its energy

needs.

Much of the energy used in former East Bloc

countries is wasted. The old economic system focused on quantity of production rather than quality or cost, resulting in an astonishing waste of

inputs, such as energy, and a near total disregard

for the environment. Although energy consumption has declined in recent years, further improvements are possible. The following provides a brief

overview of sectoral energy use in the former East

Bloc and of opportunities for improving energy

efficiency. Table 2-6 shows 1992 energy consumption by fuel type for selected countries.

| Energy Demand by Sector

The three major energy-consuming sectors—industry, buildings, and transportation—are diverse

and large. Industry is the single largest energy user

in the former East Bloc, accounting for almost half

of the energy used in the FSU and about 40 percent

in Hungary and Poland. The industrial sector uses

energy for a wide variety of purposes, such as direct heat, steam generation, machinery operation,

and feedstocks.
Chapter 2 Overview of Energy Supply and Demand | 35

Energy used in buildings accounts for about

one-fourth to one-third of all energy used in the

former East Bloc. Most urban and suburban housing consists of large, multifamily apartment buildings. Single-family homes are common in rural

areas. This contrasts sharply with the United

States, where single-family homes are the predominant housing type. Commercial buildings

are much less common in the former East Bloc.

According to one estimate, the FSU has less than

one-fifth as much commercial building floor

space per capita as does the United States.39

In the buildings sector, energy is used to heat

and cool homes and offices, cook, and power appliances and lights. Space heating dominates sector demand. Sources include district heat, direct

fuel use, and electricity. In the FSU, space heating

accounts for over 75 percent of all building energy

use. Onsite fuel use provides the bulk of energy

used for space heating (about 60 percent), with the

remaining coming from district heating plants.

Coal provides a large share of home and district

heating needs in Poland, the Czech Republic, Slovakia, and Hungary. Water heating is a significant

energy user too. Hot water is often supplied centrally by district heating plants. Buildings with access to natural gas service use this fuel to heat

water. Most household lighting is supplied by incandescent lamps, and lighting levels are often

relatively low.

In the transportation sector, freight accounts for

the largest share of total energy use. In the FSU,

long-distance rail and pipeline dominate, but

truck use is slowly rising. Passenger mobility is

very low compared with that of Western countries.

The bus is the most frequently used mode of passenger travel, followed by rail. However, travel by

private auto has been rising and probably will continue to rise, particularly in urban areas.

In the FSU, the transport sector accounts for

about 16 percent of total energy use, compared

with nearly 27 percent in the United States. In Poland, the sector’s share is even lower—l 3 percent.

These comparatively lower numbers are directly

linked to limited automobile ownership in former

East Bloc countries. However, over the last decade, modal shifts in transportation use have occurred, the most prominent being an increasing

reliance on autos and trucks.

Transport sector fuel use has changed over the

years. For rail transport, electricity and diesel

have replaced coal and residual oil. Diesel fuel is

slowly replacing gasoline use in trucks and buses.

Energy Efficiency

Artificially low energy prices and the emphasis

placed on large-scale industrial development resulted in high energy requirements in the former

East Bloc. Furthermore, past capital investment

strategies that favored energy production over

efficiency further contributed to a technically

outdated and energy-inefficient industrial infrastructure.

Former East Bloc countries are among the most

energy intensive in the world. In 1990, the FSU’s

energy intensity was 70 percent higher than that

of the United States and about 2.5 times that of

Western Europe.41

Industries in the former East Bloc typically require more energy to produce one unit of output

than do industries in Western Europe, Japan, or the

United States. Among the most energy-intensive

industries are iron and steel, chemicals, and petroJ9L. Schipper and R.C. C(x)Fr, Energy Use and Conservation in the U. S. S. R.: Patterns, Prospects, and Problems, LBL-29830 (Berkeley,

CA: Lawrence Berkeley Laborat(my, April 1991), p. 23.

‘%nergy intensity is defined as the ratio of primary energy consumption to GNP.

Al]gor Bashmakov, MOSCOW center for Energy Effkiency, Visiting Scientist, Pacific Northwest Laboratory, Battelle Memotial Insti~te,

“Energy Conservation Costs and Benefits for Russia and the Former USSR” (April 1992), p. 6.
— - ———

36 I Fueling Reform: Energy Technologies for the Former East Bloc

leum refining. The iron and steel industry, for example, requires about 50 percent more energy per

ton of iron output than is required in the United

States. Open hearth furnaces still produce the bulk

of steel in the FSI.

The energy intensity of buildings is also quite

high. Buildings in the FSU use about 50 percent

more energy to heat one square meter of floorspace than do buildings in the United States.42

Common inefficiencies found throughout the former East Bloc include the lack of building insulation, energy-inefficient lighting, poor-quality

motors and appliances, and inadequate construction. For example, in Poland, typical apartment

building walls have less than half the insulating

value of walls in typical U.S. houses, and new refrigerators use about 40 percent more energy than

is allowed by the 1993 U.S. appliance standard.

In addition, automobile and truck fuel efficiency is below Western standards, primarily because

of the use of less technically advanced equipment.

Other factors that affect efficiency include poor

vehicle and infrastructure maintenance, poor fuel

quality, traffic congestion, and cold weather

conditions. For example, FSU automobiles averaged about 20 miles per gallon (mpg) in 1985,

compared with 27.5 mpg in the United States.

Also, Aeroflot aircraft use 50 percent more energy

per seat per kilometer than those in Western countries. 43

| Opportunities for Improving Energy

Efficiency

Few of the many opportunities to improve energy

efficiency have been exploited to date. Identification of the most promising energy-saving technologies, projects, and policies has just begun. OTA’s

report, Energy Efficiency Technologies to Central

and Eastern Europe, discusses these opportunities in detail. They range from simple and inexpensive measures, such as fixing steam leaks and

radiator valves, to more capital-intensive investments, such as new boilers, electric motors, and

process control systems. In many cases, these

technologies offer paybacks of two years or less.44

New processes and facilities will improve energy

efficiency throughout the economy, but replacement is likely to take many years to accomplish.

One estimate indicated that replacing energy-using technologies in the FSU with Western European models could lower intensity by 25 to 40

percent. 45

Continued price subsidies and inadequate capital resources will limit implementation of these

measures. In addition, industries may recognize

the energy savings potential and have a financial

incentive to make the investment, yet not have the

needed capital. Other factors also impede energy

efficiency improvements, including management

practices and the lack of consistent and reliable information on energy use. Many factory managers

ignore energy-efficiency investments for various

reasons, including institutional obstacles. For example, managers who save energy fear that they

might be penalized by having their allocations reduced. Today, managers are most concerned about

keeping the business/plant open and workers

employed. Profits are given little consideration

because taxes and inflation are so high.

Assistance from Western countries could accelerate efficiency improvements and contribute to

the economic transition in former East Bloc countries. The following briefly discusses sectoral opportunities.

42 SchipPr ~d c~~r, Energy Use and Conservation in ~he U. S. S.R.* P. 58.

43L0 Schippr and E. M~ino(, ~wKnce Berkeley La&)rat~ry, “Ene~y Efficiency in Russia, Ukraine, and Belarus: Opportunities for the

West,” draft report prepared for the U.S. Department of Energy, January 1993, pp. 4-5.

%e amount of time required for the value of the energy savings to exceed the initial cost.

45~e CJchippr, ~*Imp~ving Energy uw in the soviet union: Opportunities for the West?,” paper prepared for the FritJiOf Nansen lnsti~te~

Oslo, Norway, January 1992, p. 4.
Chapter 2 Overview of Energy Supply and Demand | 37

Industrial Sector

The industrial sector is especially suited for rapid

efficiency gains. Four categories of generic

technologies could be used to improve industrial

energy efficiency: housekeeping, improved measurement and control, improved steam system,

and improved motors. Simple, low-cost housekeeping measures, such as insulating pipes, plugging leaks, turning off equipment when not in use,

and maintaining equipment can result in large energy savings. Of course, energy savings and paybacks will vary according to specific measures

and applications.

Improved measurement and control also offers

large potential energy savings. Examples include

energy management systems to operate equipment automatically and improved sensors and

controls to allow for fine-tuning of the temperature. Savings are site-specific but generally considerable.

Steam systems can be improved through

housekeeping measures and the installation of

sensors and controls and improved burners.

Electric motors account for the bulk of industrial electricity use in the former East Bloc. Replacing standard motors with high-efficiency

motors will result in substantial savings. Although high-efficiency motors typically cost

about one-third more than standard motors, this

investment often pays back rapidly, depending on

usage, electricity rates, and other factors.

In the short term, the first priority for industry is

to implement the numerous low-cost/no-cost

measures noted earlier. The use of these technologies is usually straightforward and does not require a highly trained engineer to install. In the

long term, major energy efficiency improvements

will come not just from retrofits but from replacement technologies and new facilities. Investments

in new technologies and facilities will most likely

be made for reasons other than efficiency; nevertheless, efficiency and environmental benefits

wil1 accrue from these investments. The capital requirements to rebuild industrial facilities will be

enormous. Industries may recognize the energysaving potential and have the financial incentive

to make the investment, but not have the needed

capital.

Also, structural changes are likely to make a

big difference in industrial energy use. Moving

away from heavy industry to less energy-intensive

consumer products will do much to reduce energy

use.

Buildings Sector

In the buildings sector, low-cost measures can

provide significant energy savings. Installing

thermostats to regulate heat and sealing windows

properly are two examples. Other measures, such

as fuel switching and making improvements to

building shells, appliances, and district heat delivery systems will require more capital but will improve energy efficiency significantly. Behavioral

changes can also save energy.

A number of factors will almost certainly lead

to increased energy use in buildings in the former

East Bloc. These include large increases in the size

of commercial buildings and residential housing;

growth in population; increased demand for energy-intensive services in the commercial sector,

such as air conditioning; and growing demand for

energy-intensive residential appliances, such as

color TVs, clothes dryers, and larger refrigerators.

The challenge will be to moderate this increase in

energy demand below what it would otherwise be.

Although much housing is in relatively poor

condition, the shortage of housing means that very

few residential buildings will be replaced in the

near term. Therefore, low-cost investments can be

justified even in older buildings. Properly designed and constructed new buildings are much

more efficient than even well retrofitted old buildings 46 Even though relatively few new buildings

will be constructed, they will be used for many

46s= u-s. Congess, Offlce of Technology” As~ssment, Bui/din~ Energy Etiiciency, OTA-E-518 (Washington, ~: U.S. Govemment

Printing Office, May 1992).
38 I Fueling Reform: Energy Technologies for the Former East Bloc

years. Hence, developing new technologies and

standards should have a high priority.

Transportation Sector

Improving efficiency in the transportation sector

depends on the replacement of existing vehicles

and on upgrading major infrastructure and transportation networks. There is great potential for

growth in the transportation sector, particularly

personal travel. Car ownership levels are rising,

and reliance on truck transport is increasing. Demand for automobiles in Central Europe is expected to grow by 133 percent in the 1990s. This

compares to an OECD rate over the same period of

just 10 percent.47

An increase in automobile use will drive gasoline demand up, unless fuel economy increases

faster. New demand will require additional refining capacity or greater capital expenditures for imports. Thus, the efficiency of new automobiles is

critical. For example, replacing the existing FSU

fleet with new automobiles that get 20 percent better fuel economy would save about 50 MMbbl of

oil per year. However, this will take many years to

accomplish and require enormous amounts of

capital.

Public transport systems are extensively developed and have prospered in former East Bloc countries. Continued government support and increased

investment in public transport systems could help

mitigate the expected surge in car ownership.

47’y. Kamlaki)]em, Intemationa] Finance Corp., The World Bank, “Automotive Industry Trends and Prospects for hwfnent in mvelWing countries’” ( 1 ~).
Fossil

Fuel

Technologies 3

T

he energy sector was a cornerstone of the East Bloc system. Cheap and abundant fossil fuel resources underpinned industrialization strategies, and fossil fuel exports

to the West provided the substantial hard-currency earnings needed to import capital equipment, food, and consumer

goods. ] With the dissolution of the Soviet Union and the restructuring of East Bloc trade ties, the region has now differentiated

into two groups-countries that are substantial net exporters of

energy (e.g., Russia and Kazakhstan) and those (e.g., Ukraine,

Hungary, and the Czech and Slovak Republics) that are dependent, often heavily, on imports for their energy supplies.

Supply problems in the resource-rich countries—the focus of

this chapter-concern the revival of flagging production through

renovation of existing facilities and the efficient exploitation of

new resources. This involves the acquisition of improved

technologies, major efforts to mobilize capital resources, changes

in sector organization and management, radical revisions of the

policies and regulations governing energy development, and immediate attention to the environmental damage associated with

energy use.

The pressing need to revitalize the energy sector of these countries could offer good opportunities for U.S. energy companies,

which are world leaders in most branches of oil, gas, and coal

technology, with extensive experience in working abroad. How1 For the energy .exP)~~ng cf)untries of the region-notably Russia—revenues fr(~n~

oil and gas provide 80 percent of convertible currency earnings. U.S. lntemational Trade

Commission, Trade and ln~vestment Patterns in the Crude Petroleum and Natural Gas

Sectors oj’the Ener~y-Pruducin~ States oj the Former So\iet Union, investigation No.

332-338, Publicati(m 2656 (Washingt(m, DC: June 1993), pp 2-8.

Marmsky Palace, Kiev, Ukraine.

~ 39
40 I Fueling Reform: Energy Technologies for the Former East Bloc

Wet/ site quarters for drilling crew in Kazakhstan.

ever, only a small faction of the full potential will

be realized unless political and economic barriers

to energy technology transfer are removed.

OIL AND NATURAL GAS

Rehabilitation of the oil and gas industry is crucial

to the economic recovery of the former Soviet

Union (FSU) countries. The FSU oil and gas sector has major strengths that could stand it in good

stead as it seeks to revitalize. These include a rich

resource base, long experience as a major energy

producer, and technically skilled personnel. At the

same time, the industry is presently facing critical

problems—poor technology; lack of capital,

largely related to inadequate economic incentives

and inappropriate legal and institutional frameworks; economic instability and political uncertainty; and a shortage of management skills. The

solution of these problems will require wide ranging energy sector reform. A start has been made,

but there is still a long way to go.

Western technology and resources have the potential for making an important contribution to the

solution of these problems. However, the FSU is

unlikely to attract western private sector capital on

the scale needed unless stronger assurances and

incentives governing foreign investment are

forthcoming. Major problems for the foreign investor, particularly in Russia, are the lack of a legal framework governing oil and gas investment,

a cumbersome decision- making process, and the

current tax regime that is, compared with competing provinces, high, poorly structured, and unpredictable.

| Oil and Gas Industry Problems

Signs of trouble in the oil sector appeared in the

1980s when recorded production,2 which had

been expanding rapidly, peaked at about 12 million barrels per day (MMbbl/d) and subsequently

fell sharply, by almost 40 percent. Virtually all of

this decline took place within Russia, by far the

largest producer among the FSU countries. Hence

the emphasis in this sector on revitalization of the

Russian industry.

The decline in oil production is attributable

largely to the maturing of two super-giant fields in

Western Siberia and, despite immense development expenditures until the mid- 1980s, lack of adequate exploration. Resources were funneled into

increasing production rather than developing an

adequate portfolio of new projects to take up the

slack as older fields matured.

The impacts of economic crisis and political

dislocation were superimposed on this longer

term stagnation. Shortages of capital and foreign

exchange prevented replacement and repair of existing equipment. Insurrection in Azerbaijan

(which provides almost 40 percent of the equipment needed by the oil and gas sector)3 disrupted

deliveries of essential oil field equipment to Western Siberia. Further delays have been caused by

intermittent stoppages of railroads, highways, and

Caspian Sea transportation. The changing, often

confrontational, relationship between central, rerecorded ~r~uction data d. not tie int{) account underreporting production or capacity, or deliberately holding back Production in anticipation of future price increases. These factors could moderate the extent of the decline.

3A, K[)nolplyanik, FOITIW ~~ty Minister, Russia Federation Ministry of Fuel and Energy, in “Russia Stmgg]ing to Revive pTOdUCtkML

Rebuild Oil Industry,” Oi/ and Gas Journa/, vol. 91, No. 31, Aug. 2, 1993, p. 44.
Chapter 3 Fossil Fuel Technologies | 41

gional, and local authorities discouraged orderly

development. Strikes and the introduction of short

working weeks because of lack of cash to pay salaries have held back production.4

On the demand side, the sharp contraction of

the economy, and the rapidly declining number of

customers able and willing to pay fuel bills has reduced oil consumption. Refineries, for example,

are not being full y paid for their deliveries, which

leads them to reduce crude oil orders from producers, or not pay for them.5 Strict export quotas limit

foreign sales, already suffering from the breakdown in the traditional East Bloc oil trade and the

disruption of the oil transmission system.6

Gas has avoided the sharp production decline

experienced by the oil sector. FSU production rose

sharply in the 1980s before leveling off toward the

end of the decade and subsequently declining

moderately (by about 5 percent).’ The failure of

the gas sector to continue expanding after 1989 is

associated with many of the factors causing the

decline in oil output—poor technology, the fall in

investment, declining domestic demand, and export disruptions,

Given the problems facing the gas industry, it

may be surprising that production has not declined

more. One reason is that the investment needs are

much less than for the oil industry. Reserves are

still plentiful, easier to access, and therefore

cheaper to develop. The gas sector infrastructure

is relatively new, and the industry requires less sophisticated technology to maintain current levels

of production. 8 Another reason could be institutional. Though an organization the size of Gazprom (a joint stock company owned by the

Russian government) may not be compatible with

longer term plans to liberalize and decentralize the

industry, its sector-wide, integrated structure may

have been able to provide greater stability during

the recent turbulent years.

| Opportunities for Technological

Upgrades

Poor technology is considered to have played a

major role in the decline of the oil and gas industry

in recent years. It is widely agreed that oil and gas

technology used in the FSU is far behind the

technology currently being used by the international oil and gas industry and that it must be upgraded if production is to recover and new fields

are to be explored and developed. As the following survey shows, opportunities for technological

upgrade are present in all stages of the oil and gas

industry-exploration, drilling, production,

transportation, refining, and offshore activities.

The large number of efficiency-enhancing, costsaving innovations in the international oil industry in recent years has largely bypassed the FSU

industry.

Exploration

The exploration stage identifies promising areas

for subsequent drilling. Because drilling is expen-

~F]nanCi~jTin}es, East European Energy Report, Issue 30, March 199’$, P. 27.

Sloor K L~vrov5~y, -’A case study of Joint Ventures in the oil sector of Russia,

e.. “ OTA contractor report (September 1993), p. 4.

~~e ~zhba (Frlendshlp) PIF]lne, for examp]e, bui]t to deliver crude oil to the former COMECON and the FSU mpubjics of Lithuania ~d

Latvia, was divided at the time of the dissoluti(m of the USSR into nine enterprises belonging to five independent states—Russia, Belarus, Ukraine, Latvia, and Lithuania-each introducing its own hard-cunency transit tariff. The governments of the 15 new states also t(x)k control [wer

the secti(ms of railroad (major carriers of Petr(deum products) situated in their territories.

7The dec]lne in ] 992 production” was attributed a]n]t~s[ entirely to a sharp fall in Turkmenistan tJr(~uctiW ~arf?e)y due to ?~e loss of ma~ke~s

in the other republics. Matthew J. Sagers, ‘The Energy Industries of the Fomler USSR: A Mid-Year Survey,” POSI So\)iel Geography, vol. 34,

N(). 6, June 1993, p. 384.

~SaUerS ..~e Energy ]ndustrics of [he Fom]er USSR,” p. 377; and U.S. lntemational Trade ComnllSSlOn, Trade and /n\’e.$ln?enl pfJllernS,

pp. 22-;0
42 | Fueling Reform: Energy Technologies for the Former East Bloc

Truck-mounted drilling rig used for oil well drilling at

Langepas, Western Siberia.

sive, accounting for 15 to 40 percent of offshore

development costs and up to 80 percent of land development costs, careful exploration is essential

for minimizing project costs.9

The first stage in the exploration process is the

identification of promising oil regions by measuring changes (by aircraft, satellite, and ground observations) in magnetic fields and variation in the

Earth’s gravity. Once promising regions have

been established, seismic surveys are performed

to identify exploratory drilling sites within the region. These surveys provide detailed maps of underground structures through information derived

from artificially generated shock waves. The detail of the maps depends on whether the seismic

survey is two or three dimensional. A two-dimensional (2-D) seismic survey (based on observations along single lines) maps vertical slices of the

subsurface. A three-dimensional (3-D) survey,

based on grid pattern observations yields more accurate and detailed information of underlying

structures. Both systems are currently used by the

international oil industry. The advantage of 2-D

technology is its lower cost, but 3-D technology is

increasingly used because it permits more efficient field development. Both types, but especially 3-D, require advanced computer capability to

process and interpret the large amounts of information produced.

Russian seismic technologies have not benefited from recent innovations. Equipment is

bulky, difficult to transport, and low quality,

yielding information that is inadequate for the

complexity of the structures. The quality and

availability of minicomputers to produce a rough

picture of the area, large computers to further refine the information, and the necessary software,

is limited. In the past, the abundant, easily accessible, and low-cost reserves may not have required

sophisticated seismic technology. But future development is likely to take place in more costly,

technically difficult environments, such as permafrost, that require advanced exploration technologies.

Drilling

Once promising reservoirs have been identified,

drilling for exploration and subsequent production takes place. Drilling involves a number of

components. The drill bit performs the boring action at the rock face. It is powered by either a turbo

or rotary action motor, and connected to the surface rigs, hoists, and derricks by drill pipe. The

borehole itself is lined with cement to anchor the

casing and stop corrosion and leakage. Chemically designed mud is used for lubrication. The debris in the mud as it returns to the surface provides

valuable information on the geology of the drilling area. Blowout preventers at the surface prevent sudden explosive escapes of gas or liquids

caused by high pressure. Computers to monitor

progress and interpret the information obtained

from the drilling operation are an essential part of

the drilling process.

Major innovations in Western technologies

over recent years have vastly improved drilling

precision and lowered drilling costs. A wide range

of advanced drill bits has been developed to match

specific site conditions. The quality of drill pipe,

cement, and chemical muds has been improved

gsh~]l Briefing Sewice, pro~li(.jng o;/andGas (London: Chup Public Affairs, Shell International Petroleum Company, Ltd., 1989), p. 2.
Chapter 3 Fossil Fuel Technologies | 43

and refined. Reductions in the size of the drilling

hole (slim-hole drilling) has yielded cost savings

of 25 to 40 percent over conventional drilling because they permit reductions in rig size, casing,

drilling muds, and cement. Slim-hole drilling also

results in less waste mud and debris than conventional drilling. 10 Automated drilling rigs reduce

manual labor requirements and are therefore inherently safer. Measurement while drilling

(MWD), where measurement instruments are incorporated into the drill string (or pipe) above the

bit, transmit information to the surface while the

drill is in operation. MWD permits continuous

drilling, which reduces costs, and provides more

information than conventional wire line surveying (where drilling must be stopped while measurements are taken). New technologies allow for

controllable directional drilling, particularly useful for tight, low permeability reservoirs and for

improving production potential.

The Russian industry has limited access to

these innovations. Drill bits and muds are of poor

quality. Drill pipe has low tensile strength and is

prone to corrosion. Defective connections do not

withstand the range of temperatures, torque, and

bending experienced in Russian conditions. Unresponsive fishing tools, used to retrieve broken

equipment downhole, lead to excessive downtime

in drilling operations. Worker safety is threatened

by lack of blow out preventers, including ancillary

equipment such as effective rubber seals, and remote control devices. The Russian industry has

lagged in MWD, slim hole, and accurate directional drilling techniques. There is inadequate use

of computers to optimize drilling programs and

equipment maintenance schedules. The reasons

for this lag in technological development is not

primarily a lack of technical knowledge, but rather

the incentive system, which in the past put priority

on achieving short-term volumetric goals and emphasized quantity rather than quality.

The development of drilling technologies in

Russia has differed from those used in most of the

rest of the world. There are two main types of drilling technologies, rotary and turbo. The rotary system, used by most of the international oil industry,

is powered from the surface, whereas the turbo

drill, widely used in the FSU, is situated down

hole, close to the bit. The widespread use of turbo

drilling in the FSU was largely due to the Soviet

inability to provide the high-quality steel drill

pipe necessary to withstand the torque of rotary

drilling, especially at greater depths. Turbo drilling thus allowed the Russian industry to dig farther and deeper than would otherwise have been

possible with rotary drills. However, turbo drilling cannot be used in conditions of high stress,

and requires frequent maintenance, thus adding to

drilling time. It also requires high pressure pumps,

not currently available domestically in sufficient

supply. Though adequate for the past, this technology may not be suitable for future developments

in more difficult geological environments.

Turbo drills are, however, essential for directional drilling because they allow the bit to take a

predetermined direction. The concept behind Positive Displacement Motors—a highly successful

directional drilling technology widely used by the

international oil industry—apparently originated

in Russia but was developed and commercialized

largely outside (by Drilex Services of Scotland

and the United States). A comment of John Forest,

president of Drilex Services, illustrates both the

strength and weakness of Russian petroleum

technology, “The design idea was brilliant, the industrial engineering poor, and the materials totally

unacceptable.”]

l~she]] Bfiefing Service, Research and De\’e/opment in /he Oil Industry, No. 4 (London: 1991) p. 4

I I J. Ka~ls~y.Ryan,’’Energy and Environnlen[a] Technology” Transfer from the Former Soviet Union to the United States,” OTA c~~ntractOr

report, November 1993.
44 I Fueling Reform: Energy Technologies for the Former East Bloc

U.S. manufactured pumping equipment, Ostrava, Czech

Republic.

Production

The production process consists of drawing the

underground deposit to the surface. Efficient production requires careful reservoir modeling and

management. Oil and gas flow from a reservoir at

varying rates, depending on natural reservoir pressures. Well stimulation technologies, such as hydrofracture stimulation, can enhance the natural

drive. This technology involves cracking the rock

by forcing fluid into the well at high pressures and

rates, thus increasing the permeability of the

formation. The cracks are propped open with material such as gravel, to keep the channels to the

well open. This technology could be of growing

importance to the Russian industry in the future

because an increasing share of recoverable oil reserves is located in reservoir rocks with low

permeability.

12 The domestic industry cannot

provide the necessary equipment. The only

manufacturer of hydrofracturing technology

“Krasnyi Molot” (Red Hammer) enterprise in the

Republic of Chechnya, has virtually stopped production. Domestic capability of acidizing, another

form of well stimulation is also limited.

At some point during production, primary

recovery mechanisms, depending on natural pressures, become insufficient and must be supplemented by secondary and tertiary recovery

technologies. Secondary recovery involves direct

displacement of oil by water flooding (the most

usual method) or gas injection. Tertiary recovery

consists of treating reservoir rock with chemicals

or heat and is not often used, especially at current

low oil prices. In all recovery techniques, artificial

lifi-reinfecting oil or gas into the oil flow-enhances drive.

Water flooding, the injection of water into a

well to supplement the natural pressures, is a

widely used recovery technology throughout the

world. In Russia, however, water flooding is both

excessive and implemented in an arbitrary manner, regardless of the individual characteristics of

the oil field. Wells are drilled and water injected

according to prescribed rules based on hectare of

field area. Russian oil field technologists believe

that early water flooding increases ultimate recovery rates. If arbitrarily used, however, water flooding runs the risk of breaking through the oil

bearing formations and damaging the producing

well, thereby reducing total output over the life of

the field.

In addition, excessive water flooding entails

enormous costs and raises major environmental

water disposal problems. The water cut in the Russian industry—the percent of water in total well

output—is high (75 percent) and rising. This

means that enormous amounts of fluid have to be

pumped from the wells, using either sucker rods

(situated on the surface and working like a plunger) or the higher precision electric submersible

pumps situated at reservoir depth. Russian domestically manufactured electric submersible pumps

are, however, of poor quality and prone to frequent

breakdown.

As a result of poor reservoir management and

production practices, a substantial number of

wells in Russia are now idle. Almost 28,000 wells

in the Russian Federation are officially listed as

12A~ording to Russi~ ex~rts, hydrofracturing should be introduced at Yuganskneftegaz, Nizhnevartovskneftegaz, Tomsbeft, SurgIJtncfte$az, Varyeganneftegaz, Noyabrskneflegaz, Kondpetroleum, and Permneft associations.
Chapter 3 Fossil Fuel Technologies | 45

1

idle, but potentially productive following repair

(in addition to 26,000 classed as abandoned or

awaiting abandonment). However, a much

smaller number of these wells (between 5,000 and

8,000) are attractive candidates for rehabilitation,

especially at present world oil prices, largely because of demage to the oil fields by poor management.

Offshore Operations

Offshore operations differ from onshore mainly in

the need for platforms for drilling equipment.

Here again, there have been many innovations in

recent years. In deeper waters, rigid platforms attached to the seafloor have been replaced by lighter platforms, floating on the surface and held in

place by cables fastened into the sea floor. Simplified deck or “top sides” reduce costs and complexity of operations. Temporary drilling rigs,

packaged rigs, or semi-submersible tenders can

reduce capital costs by up to 25 percent and operating costs by up to 40 percent. ] 4 Greater automation is reducing costs and environmental damage

while improving safety.

This area of technology is of particular interest

for the FSU where promising areas of future development have been identified in offshore Arctic,

Baltic, Black, Caspian, and Okhotsk Seas. Russia

has relatively little capability in this area—most

Russian production has taken place onshore—and

has in the past depended on technology directly

purchased from the West or reproduced from

Western designs. Because of the high technology

content, offshore projects may be particularly

suited to joint ventures with foreign partners.

Pipelines

Crude oil and gas are usually carried in pipelines.

Both oil and gas pipelines are equipped with devices—pumps in oil pipelines, and compressors

in gas pipelines—to maintain pressure and flow.

Due to the size of the country and the distance

between producing areas and markets, the FSU

has a vast network of oil and gas pipelines. Future

development of remote resources of oil and gas,

and rerouting of lines in accordance with new

political alignments following the dissolution of

the Soviet Union, imply that considerable additions will be needed to the pipeline network, requiring large quantities of large-diameter pipe for

gas transmission.

The pipeline infrastructure already faces major

problems of technical performance. Domestically

made pipe is defective in wall thickness, insulation, resistance to corrosion, and general workmanship. Welding procedures are not adequately

controlled; diagnostic and inspection technologies are poorly designed. Problems of pipeline

quality are particularly acute in the Central Asian

gas system, where a combination of poor anticorrosion treatment and the high electrochemical

activity of the soil results in accelerated deterioration. Leaks, especially in gas pipelines, are

frequent and difficult to detect, leading to catal5 pipelines can be under re- strophic explosions.

pair up to 20 percent of the time.

Essential pipeline components such as excavating and pipe laying equipment and modem pipeline inspection and monitoring equipment are in

short supply, especially since the dissolution of

the FSU, and variety is limited. The FSU frequently relied on imported supplies of large-diameter pipe, mainly from Germany and Japan.

Pipeline management, including maintenance and

leak detection, is hindered by the lack of modem

computer diagnostics.

Quality and performance of compressors are

acute problems. These machines, fueled by gas

13Troika Energy sewice~, for the U.S. Depaflment of Energy, ~eP)~ed in “Restoring ~dle Russian oil Capacity” Oi/ and C(LS ~Our/K?/, May

17, 1~~, vol. 91, No. 20, pp. 30-31.

I @he]] Briefing Service, Producing Oi/ and GUS, p. ~.

I Sne ~orst ~a~ an exploslon” of a IIquified ~tro]eum gas piFllne in June ] 989 that killed 575 and injured 623 passengers (m two trains that

were in a station a few yards from the pipeline.
46 | Fueling Reform: Energy Technologies for the Former East Bloc

from the pipeline itself, push the gas through the

pipeline. A system of well placed, efficient

compressors can substantially increase pipeline

capacity. Since domestically manufactured compressors were of poor quality, the Soviet Union

imported Western compressors, one of the few

areas where the Soviet Union relied on imports.

However, much of this capacity is now outdated or

worn-out. For example, the pipeline from Orenburg to the western border of the FSU, built in

1976-1978 with Cooper-Bessemer and Italian

Nuovo Pignone compressors, now loses 25 percent of transported gas through compressor consumption and corroded pipes. The latest export

pipeline, built from Yamburg to the western border in 1987-1988, loses “only” 14 percent of the

gas, despite being longer and having much bigger

compressor capacity.

Gazprom is attempting to remedy compressor

problems by developing domestic compressor

manufacturing capacity, based on Russian aero

derivative turbines, at factories in Perm and Yekaterinburg. Gazprom also plans to boost efficiency through the manufacture of recuperators.

Recuperators, not widely used in Russia, can raise

pipeline efficiencies from 20 percent up to 33 percent. But Gazprom still needs to import Western

compressors. In 1992, the company signed a

$1.46 billion contract to purchase compressors

from Nuovo Pignone. The United States lost the

Russian compressor market to Europe in the late

1970s and early 1980s, when an embargo was

introduced. However, this loss is not final, and

U.S. firms are well placed to increase sales in the

FSU since the majority of imported compressors

(typically 25-, 16-, and 1O-MW capacity) are of

General Electric design.

Refineries transform crude oil into products (such

as gasoline, diesel, kerosene, and residual fuel oil)

for use by the final consumer. Virtually all areas of

the former East Bloc have some refining. But here

again, this sector’s activity encounters major difficulties, in part due to lagging capital investment,

even in the days when upstream oil and gas were

being highly favored. 16 Since the dissolution of

the FSU, the regional refinery situation has become increasingly complex. Deliveries of crude

oil from Russia to some of the other republics

have fallen sharply: deliveries to Ukraine and Belarus, for example, are running at one-half previous levels. 17

Refinery technology is chronically outdated

throughout the region. Much of the refinery capacity was built in the 1960s. It is estimated that

between 60 and 80 percent of refinery fixed assets

are worn out.18 In addition, existing equipment

not well used and losses are exceptionally high.19

Product quality is low.

A basic problem is that current FSU refinery

technology (which maximizes heavy fuel oil output) does not match current and likely future demands for petroleum products (lighter products

such as gasoline and kerosene). Secondary refining technologies (such as hydrocracking and catalytic cracking) that permit a wider range of

product output and a larger share of light products

in the total account for a much smaller share of refinery capacity in the Former East bloc compared

with North America (see table 3-1 ). Consequently, heavy products, such as residual fuel oil, account for 36 percent of total output of refined

petroleum products in the FSU, compared with 6

lbln the em]y 1980s, when capital budgets for oil and gas rose by over 100 percent, budgets for refineries rose by only 34 ~rcent.

ITMikhai] Korchemkin, “oil and Na~ra] Gas Systems of the Former Soviet Union, OTA contractor report, Octokr 1993, p. 28

18 Kono]p]yanik,” “Russia Struggling to Revive,” p. 44.

19According to Russian estimates, the same amount of refined products could be produced out of three-quarters Of the Current inpUt Of cmde

if refineries were reeonstmcted.
Chapter 3 Fossil Fuel Technologies | 47

Former

East Bloc Us.

Vacuum distillation 27 44

Catalytic reforming 3 24

Catalytic hydrorefining 9 12

Catalytic cracking 5 34

Catalytic hydrocracking negligible 8

a Figures reflect maximum percentage of crude that may be converted

by each refmmg method

SOURCE “Worldw!de Refmng Report, ” Oil and Gas Jouma/, VOI 91,

No 51, Dec 20, 1993, pp 37 and 49

percent in the United States. The more valuable

lighter products such as gasoline, 46 percent of petroleum product output in the United States, represent less than 20 percent in the FSU.20

In the Soviet Union, the strategy used to meet

the rising demand for light products was expansion of output rather than technology: that is, increasing refinery throughput to the point of

adequate production of light products. This strategy had several drawbacks. Even when the crude

was available in sufficient quantities, there was an

oversupply of heavy products, notably residual

fuel, that was passed on to power stations (which

would have preferred to use natural gas) or to the

export market, frequently at unremunerative

prices. When production fell, crude was no longer

available in sufficient quantity, and acute shortages of light products, especially gasoline and jet

fuel, developed.

Critical Technologies

OTA’s survey of the state of technology in the oil

and gas sector yields a list of technologies that

could substantially increase FSU oil and gas output over both the short and long term. Those countries, such as Turkmenistan, Kazakhstan, and

Uzbekistan, that do not have domestic equipment

supply industries, will rely largely on imported

technology, especially in the near future. As their

oil and gas sectors develop, however, they may

wish to initiate domestic production of some

items of equipment. For those countries with substantial supply equipment capacity, such as Russia

and Azerbaijan, the situation is different. They are

likely to be more selective in their choice of imported technology, taking only those technologies

that cannot be provided by the domestic industry.

Taking this into account, the technologies identified here fulfill two criteria—they are critical to

FSU oil and gas sector rehabilitation and development, and they have a relative advantage overdomestic Russian technologies (see figure 3-1 ).

Technologies are needed both to rehabilitate

existing idle wells and to explore undeveloped resources. Technologies that could rejuvenate idle

wells at relatively low cost include advanced drill

bits, fishing and downhole tools, sucker rods, and

submersible electric pumps. Because of their durability, advanced drill bits could speed the drilling process and reduce downtime. Improved

fishing tools would have the same effect. Water

flooding on the scale practiced in Russian fields

necessitates more efficient electric submersible

pumps to lift large amounts of fluids. Improved

gas lift equipment is also needed for wells using

gas injection as a secondary recovery technique.

These items are all produced in the FSU, but the

need appears to be for a higher quality and larger

range of model and size than are immediately

available.

Also, existing wells can benefit from well stimulation technologies, such as fracture stimulation,

which enhances the natural reservoir drive by increasing the average permeability of the formation

and therefore increases recovery rates. This

technology is likely to be of continuing impor-

‘OEnergy lnforrnation Administration, U.S. Department of Energy, Inrernutiond Energy Annua/ 1992 (Washington, DC: U.S. Government

Printing Office) p. 42.
—

48 I Fueling Reform: Energy Technologies for the Former East Bloc

High

Criticality

Low

Workovers Reservoir engineering

Rehabilitation Arctic technology

Stimulation Offshore technology

Deep drilling Production equipment

Horizontal drilling Completion equipment

Conventional drilling

MWD

Wellhead equipment Drilling mud services

Drilling equipment

Helicopter services Seismic data packages

Drilling rigs Seismic survey services

Tubulars

Low Relative advantage High

SOURCE: Etlenne H Deffarges et al., “E and P. Opportunities for Serwce Firms Abound m the C I S ,“ Oi/and Gas Jouma/, VOI 90, No 38, p. 61

tance as an increasing share of new oil and gas reserves are found in less permeable structures.

Local availability of this technology is limited but

it is currently being provided by foreign firms.

Additional technologies will be highly beneficial to the longer term exploitation of oil and gas

reserves. Many of these are not currently available

in the FSU. Advanced seismic technologies such

as 3-D systems, by providing more detailed information than alternative technologies, shorten

the exploration process, enable improved reservoir development, and minimize expensive drilling. These considerations are particularly

important in developing resources in remote or

hostile environments. The FSU could also benefit

greatly from new drilling technology. MWD improves the precision of the drilling process and reduces drilling time—again, important factors in

exploitation of new resources. This technology is

apparently not available from local industry. Improvements in deep drilling and horizontal drilling technologies will increase the resource base

and improve recovery rates.

As much of the most attractive new petroleum

potential in the FSU is offshore, the FSU could

benefit from the major improvements in offshore

technologies that have taken place in recent years.

There is little experience with these technologies

because much FSU production takes place on

shore or in relatively shallow water.

Moving downstream, oil and gas transmission

systems will require compact, efficient compressors and higher quality pipe. The local industry

could benefit from recent advances in anticorrosion and seamless pipe, and in compressor design.

These technologies are likely to be increasingly

important as the pipeline network is expanded and

penetrates further into hostile environments. Refinery upgrading, including residual fuel oil conversion capacity, will be required to improve

system efficiency and meet current and expected

demand for petroleum products. These technolo-
Chapter 3 Fossil Fuel Technologies | 49

gies are good candidates for technology transfer

since they are now standard, mature, and predictable in operation. Moreover, the FSU is accustomed to importing refinery technology.

Information technology underpins many of

these technical improvements, making possible

the greater precision, speed, and efficiency that

has been the hallmark of technological development in this and other industries over the past 20

years. Advanced computers process geophysical

data quickly and provide high-quality interpretation, thus reducing the risk, time, and cost of

exploratory drilling. Computer diagnostic equipment can improve safety and reduce losses in both

pipeline and refinery operations. Although computers are produced in the FSU, they do not have

the range of Western models and lack the software.

However, as with all technologies, effective deployment depends on incentives. Until economic

and institutional incentives are in place to ensure

that technology is correctly and efficiently used,

even the best technology will not be used efficiently. The reform of the FSU energy sector is

critical to technology upgrading.

I Energy Sector Reform

The rehabilitation and development of the FSU oil

and gas industry will require massive investments. One estimate suggests that to achieve Russian oil production levels of about 7 MMbbl/d)

through the year 2000 will require external financing of about $3 billion annually, and double that

amount in domestic (ruble) financing. Increasing

production to the 1990 level of about 10 MMbbl/d

would require a doubling in external financing, as

well as substantial increases in domestic financing.21 In addition, substantial capital investments

will be needed in gas development, oil and gas

transmission systems, and refinery upgrading. An

added complication is that these sums must be

mobilized from unaccustomed sources-domestic producers rather than the central government,

and external sources including the international

oil companies. The scale of this effort implies major reforms to the energy sector.

The shortfall in domestic capital investment,

previously provided by the central government,

was presumably to be met from the surplus revenues of the new operating entities, particularly the

production associations. This strategy depended,

however, on changes in pricing policies and investment laws that would provide the necessary

incentives.

While changes have been made, they have so

far been inadequate to revive domestic investment. On the contrary, industry resources available for investment have, if anything, been

reduced by changes in pricing policies introduced

since the breakup of the Soviet Union. Prices of

virtually all of the materials and equipment purchased by the oil and gas sector were freed from

government control in 1992, and rose sharply.

Prices of all energy products, however, were exempted from decontrol. They have been raised

several times by decree, but the rise in nominal

prices has been offset to a considerable extent by

high rates of inflation and the depreciation of the

ruble. Oil prices in Russia and other parts of the

FSU are still under one half the level of comparable world prices, and gas prices are even lower.

Since the oil and gas industry’s costs rose faster

than its revenues, the funds available for capital

investment were therefore compressed. In addition, taxes increased in number and complexity.

Finally, there are reports that the foreign exchange holdings of several production associations, which had been earmarked for imported

equipment, were frozen in government accounts,

or held in the foreign commerce bank, which subsequently went bankrupt. All these factors have

made it difficult for the production associations to

z 1 Y. Bobylev and A. Chemyavsky, “The Impact of the Oil Industry Crisis on Russia’s Economy,” FBIS Report, Central Eurasia, FBI SUSR-93-006-1, July 151993, quoted in the Atlantic Council, Energy Po/iciesjiw Russia and Ukraine, Policy Paper (Washington, DC: November 1993), table 6.
50 I Fueling Reform: Energy Technologies for the Former East Bloc

take up the slack in capital investment from the

central government.

It is difficult to overestimate the importance of

price reform in the oil and gas sector. Raising oil

and gas prices not only creates the resources available to the production associations for investment,

but also makes the sector attractive to other domestic investors. Economic oil and gas pricing as

part of a broader program of macro economic reform could encourage the return of the substantial

amounts of capital presently being held outside

Russia. 22 (The importance of capital repatriation

in economic recovery has been amply demonstrated in Latin America in recent years.) Higher

energy prices would also encourage efficient energy use and therefore confer an important environmental benefit. Foreign exchange earnings would

be augmented by increased exports.

However, raising energy prices, especially to

residential consumers, can cause considerable

hardship. The question for the future is how to reduce the still substantial gap between domestic

and international prices currently being maintained by a system of export taxes and quotas. The

attainment of international parity by gradual reductions in controls and taxes may take unacceptably long. This could be the moment to consider

new approaches to price reform. One approach

would be to combine higher prices with increased

efficiency in energy use so that total energy bills

do not rise, or at least increase by less than the rise

in prices.

Though correct energy pricing is a necessary

condition for energy sector reform, it is frequently

not sufficient because institutional and market

imperfections can weaken or negate the signals

being provided by higher prices. For example,

many consumers in the FSU, particularly the

large, energy-intensive, industries, and the regional importing countries, do not pay their oil

and gas bills, so the specified price is an administrative fiction that does not provide incentives to

producers. Effective energy pricing will require

additional supporting actions.

Many of these can be achieved by moving toward a market system, through restructuring the

industry, and by setting up the necessary legal and

institutional framework. Some progress has already been made in industry restructure. The Ministry of Gas Production was transformed into the

giant, government-owned joint stock company,

Gazprom, in 1988. Beginning in 1992, a series of

decrees converted oil sector enterprises, formerly

under the jurisdiction of the energy ministries into

joint stock companies as a first step toward corporatization and eventual privatization. The oil industry is to be divided into three integrated

holding companies, all of world-class size (Yukos, Surgutneftegaz, and Lukoil), each of which

includes exploration, production, refining, and

distribution activities similar to the large vertically integrated, international oil companies. At a

lower level in the organizational structure are a

number of production associations, some of

which would rank among the world’s largest oil

companies on the basis of their annual oil production. In all cases, the state retains a controlling interest, but there are plans for some private

investment.23

This new structure, though introducing elements of corporatization and privatization, still

bears some common characteristics with the old

including the prominent position of large units

with considerable monopoly power, which are frequently staffed by top officials of the old regime—

the so called “oil generals.” On balance,

centralized political control of the industry has

‘zThe Institute of lntemational Finance has estimated the current scale ofcapital flight from Russia to be at least $1 billion a month, although

this will include foreign currency legally deposited by Russian companies into Russian banks that place it overseas.

‘3F{Jr further description of the structure of the oil and gas industry in the Former Soviet Union see U.S. International Trade Commission,

Trade and /n\!estmenr Pauerns, pp. 2-1 and 2-2; and Anthony Reinsch, lgor Lavmvsky, and Jennifer Considine, Canadian Energy Research

Institute, Oi/ in rhe Former .%~ie[ Union, Study #48 (Calgary, Alberta: October 1992), pp. 22-30.
Chapter 3 Fossil Fuel Technologies | 51

been considerably weakened. However, the last

word on the centralization/decentralization

struggle has not yet been said, and it may be many

years before a stable reorganization of the industry

is achieved.

There has been less progress on the other institutional underpinnings of the market economy.

The countries of the FSU lack a body of commercial law that spells out the rights and responsibilities of commercial enterprises and their

accountability to their shareholders, whether government or private. Bankruptcy legislation is ineffective. Private property rights and contracts are

still insufficiently protected. The land title system

is unclear, and the decisionmaking process is

clouded by a multiplicity of authorities all of

whom have effective veto power.

The privatization of the energy sector is also

hampered by unfamiliarity with basic Western

business practices and concepts such as profit, the

time value of money, depreciation, risk, quality

control, contracts, and liability. Management

skills are weak, and there is little experience in

project evaluation. However, Russians appear to

be well aware of these limitations and are eager to

acquire management skills.

I The Role of Foreign Investment

Anticipating the difficulty of raising adequate

capital resources, especially foreign exchange,

from domestic institutions during a transitional

restructuring period, there was considerable interest in attracting external financing from both the

international public and private sector.

The public sector responded promptly (see ch.

7). The Group of 7 (G-7)24 put oil and gas at the

top of its assistance agenda for the FSU. As part of

this effort, the United States is developing bilateral programs in the U.S. Agency for International

Development (AID), the U.S. Department of Energy (DOE), and the U.S. Environmental Protection Agency (EPA) programs; the Export-Import

Bank of the United States (Eximbank) Framework

Agreement, and expanded investment guarantees

from the Overseas Private Investment Corp.

(OPIC). Other G7 members are also providing bilateral support. The Japanese Eximbank, for example, is negotiating a $1.5-billion export credit

for oil and gas equipment. The European Energy

Charter, which provides a government-sponsored

framework for energy investors in the region, is

nearing completion. In addition, the multilateral

development banks (MDBs)—the World Bank,

the International Finance Corp. (IFC), and the European Bank for Reconstruction and Development (EBRD)—have made major new loans to

FSU countries. These loans have the potential for

leveraging much larger sums through cofinancing

with the private sector.

It is assumed, however, that the bulk of the external financing of FSU oil and gas will come

from the private sector, notably in the form of foreign direct investment. This is a particularly attractive form of investment (compared with

portfolio, licensing, and even MDB lending) as it

provides not only capital, but also management

and technology. Most public sector commitments

are explicitly designed to supplement and encourage rather than supplant private capital, though

some observers (see ch. 8) consider that these programs have failed to achieve this aim. Moreover,

the international oil companies have large development budgets that dwarf the resources available

from public sector institutions. They are reported

to foresee spending $30 billion to explore and produce oil in Russia over the next decade, but only if

conditions are favorable.

Recognizing the need for foreign direct investment and its accompanying technology transfer,

the Russian government introduced major

changes to rules governing foreign investment.

Previously, foreign investment was discouraged,

if not forbidden, and technology imports were

kept to a minimum. The first change was made in

2~e (_jroup ~)f -7 is the tem ~pp]led t. the ~oup of ]~ge indus~ia] economies (united states, Canada, Japan, France, Germany, United

Kingdom, and Italy) that meet regularly to consider the state of the global economy.
52 I Fueling Reform: Energy Technologies for the Former East Bloc

1987, when the Soviet Union authorized joint

ventures and allowed foreign companies to own

up to 49 percent of the equity. Later changes permitted foreign companies to take majority ownership and control. This liberalization was

reinforced by Russia’s membership in the International Monetary Fund, which promised additional

financial assistance and the creation of a ruble stabilization fund. Legislation specific to oil and gas

ventures is, however, still lacking.

In response to these initial changes, the international oil industry showed a high level of interest

in the FSU. A recent compilation of projects with

foreign participants listed over 100, including all

branches of the sector, all of the oil and gas producing republics, and different sizes of companies

of many nationalities. 25 Over one-half had U.S.

joint venture partners. Two-thirds of the projects

are in Russia itself, mainly in the oil sector, but

many of the Russian projects are small in scope

and investment. 26 planned investments in Kazakhstan on the other hand, if they materialize,

could amount to many billions of dollars.27 (Box

3-1 describes the main forms of investment to

date.)

Despite the large number of projects, progress

on the ground has been modest to date. Agreement

had been reached on only one-third of the projects,

mainly contracts to bring idle wells back into production.28 Joint ventures currently produce about

4 percent of Russian oil production, accounting

for 15 percent of Russia’s hard currency crude exports. This combination of a high level of interest

from the international oil company, and their relatively small commitments, reflects the balance between the attractions and problems attached to

foreign investment in the FSU (see appendix 3-1

to this chapter on Dresser Industries’ experience

with joint ventures).

Attractions to Foreign Investors

On paper, the attractions of foreign investment in

FSU countries are strong. As Jonathan Stem puts

it:

It is hard to think of a previous situation

where such an immense and potentially promising set of oil and gas provinces, denied to foreign investors for many decades has been

suddenly opened up.29

The FSU countries have immense resources offering a wide range of opportunities at low geological risk. Inefficient production practices in

existing fields initially held out the promise for

quick and easy projects—the deployment of improved production techniques in a short timeframe and a consequent quick return on

investment. Early optimism regarding the rehabilitation of idle wells has since been dampened,

though opportunities still exist. In addition, there

are projects involving the exploration and development of new fields. Russia, Kazakhstan, and

Azerbaijan offer the unique opportunity of a new

area with known and proven oil reserves, thus

minimizing the geological risk of opening up

promising but unknown areas, like those in countries of Africa, or the Antarctic. Turkmenistan and

Uzbekistan are amply endowed with gas reserves.

Though many of these new areas will be in hostile

climates, U.S. and other oil companies can adapt,

given their long experience in a wide variety of

countries and climatic conditions.

FSU countries offer other advantages to the foreign investor. Most republics have a trained work

force at all levels of expertise, from scientists to

oilfield workers. Though many of the sites are remote, they generally have abetter infrastructure of

roads, air service, trains, and telephones, than that

in many of the other countries competing for oil

Z5U s ]ntema[iona] Tmde Commissi(m, Trade and Invesfrnenr Patterns, appendix E. . .

26Jonathm p, stem, 0;/ ad Gas in ~~e F~rrner ~~,;ef (lni~n (London: Royal institute of Intemationa] Affairs, 1~~), pp. so, ~ 1.

271 bid., p. 30.

281 bid., p. 31.

291 bid., p. 53.
Chapter 3 Fossil Fuel Technologies I 53

Joint Ventures

Until now, joint ventures between foreign firms and local partners have been the main form of foreign

investment in the FSU Industry, The advantages for the host country partners (typically, production

associations) are seen to be the halting of production declines, an increase in convertible currency revenues, and the acquisition of technical and management skills. Foreign investors in joint ventures gain access to local information and expertise and assistance in dealing with FSU bureaucracies.

The major joint venture activities are fields with technical problems, well stimulation (including hydraulic

fracturing), drilling of horizontal wells, idle well reactivation, oil spill cleaning, and separation of Iiquid hydrocarbons. Well stimulation and reactivation of idle wells is the leading activity, as the service contract for

idle well reactivation (a Russian decree—1 Or of January 1992-entitles Western companies to receive contractors’ margins of up to 25 percent of the total cost of the workover) is the best developed instrument in

legal terms, In April 1993, 12 production associations had signed 34 contracts with foreign partners to

repair 7,407 wells with estimated production potential of 1.7 MMbbl/d. The Western companies, mainly

small to medwm-sized, receive about 15 percent of this volume as payment. They are to ship an estimated

$800 million of equipment, mainly service rigs and auxiliary equipment. The host production association

pays for much of the down hole equipment, pipes, materials, and chemicals. The production associations

receive about 40 percent of the export price for 011, with the rest retained by central and local fiscal authorities. A new decree envisages the transition to a system of payments in kind. There is less interest in natural

gas because investment IS needed primarily for rehabilitation of existing infrastructure rather than inincreased production

Production Sharing Agreement

At present, there iS no Iegislation governing production sharing agreements, and each agreement is

settled on a case-by-case basis. Russia’s first agreement was approved in early 1993 between Elf Neftegas (a subsidiary of the French company Elf Aquitaine) and Interneft, a Russian company. This agreement

calls for Elf to bear the full financial risks for exploring a tract in Volograd and Saratov estimated to contain

100 to 500 million tons of crude. Elf iS committed to revest $500 million over a 9-year period. Elf will be

repaid in petroleum in terms of specific formulae designed to protect Elf against changes in legislation,

particularly taxation Elf has also signed a similar agreement with Kazakhstan.

Equity-Sharing Agreements

These wiII depend on the effectiveness of the privatization programs. Russia plans to privatize 60 percent of state property in the near future. The state wiII retain a controlling share in privatized petroleum

companies whose dividends wiII be plowed back into the companies for investment in production facilities

and the provision of social services. Foreign investors may acquire up to 15 percent of the shares auctioned. Kazakhstan and Azerbaijan also allow foreign equity participation.

Tenders and Auctions

Several international tenders and auctions have been held in Russia, largely covering the Sakhalin province, for exploration and development rights. A notable example is a consortium of Marathon, McDermott,

Mitsui, Shell, and Mitsubishi to undertake an $80-million feasibility study to explore and develop a tract

offshore Sakhalin. At the conclusion of the feasibility study, the consortium will negotiate a final agreement

on development rights, though the original agreement did not guarantee the consortium development

rights.

SOURCE U S Internahonal Trade Comm!sslon, Trade and Investment Patterns mthe Crude Petroleum and Natural Gas Sectors of the

Energy Producing States of the Former Sowet Union, Inveshgatlon No 332-338 Pubhcahon 2656 (Washington, DC June 1993), pp

3-8 to 3-10, and Igor K Lavrovsky, “Case Study of Joint Ventures m the 011 Sector of Russia, ” OTA contractor report, (August 1993)
54 I Fueling Reform: Energy Technologies for the Former East Bloc

company investment. Finally, these opportunities

are becoming available at a time of U.S. spare capacity, which reduces the opportunity cost of going abroad. However, the FSU republics are not

the only investment opportunities in the world.

The oil companies will weigh the overall environment for investment in FSU countries with possibilities in other parts of the world.

Obstacles to Foreign Investment

On the other hand, there area number of obstacles

to foreign investment. These include a high level

of political uncertainty, lack of a legal and regulatory framework, a poor economic environment,

and different perceptions of the role of foreign investment.

| Political Uncertainty

Political uncertainty, especially as it affects the

sanctity of contracts, is of prime concern to prospective investors. The history of the international

oil industry has shown that perceptions of political uncertainty are not consistently associated

with any one type of political regime. Gulf Oil

(now part of Chevron) continued production in

Angola throughout its civil war, and many foreign

oil companies continue to be interested in Azerbaijan, despite a recent unilateral cancellation of

all previous agreements with foreign companies.

The perception of stability is important however,

and may explain the particular interest in Khazakhstan, despite major logistical problems in oil

transport. In Russia itself, where production potential may from many points of view be more attractive, there is considerable uncertainty over the

political environment.30 Programs such as OPIC

and the Multilateral Investment Guarantee

Agency (see ch. 7), which offer—at a cost—insurance against political risk, help reduce exposure.

I Lack of Legal and Regulatory

Framework

In addition to general political uncertainty, there

are more specific aspects of particular concern to

foreign investors in the oil and gas sector. There is

as yet no legal and regulatory framework governing oil and gas leasing, exploration, and development, and current draft laws do not resolve many

of the issues that foreign oil companies cite as limiting their greater participation. Nor is there legislation defining the rights and responsibilities of

the foreign investor. Each project must negotiate

its own terms, a long and complex business. For

example, it took Chevron over 3 years to negotiate

its agreement with Kazakhstan. There is also concern over the consistent application of laws and

decrees. According to Exxon:

“Laws and decrees are promulgated, discounted, ignored, exceptions are promised,

granted and revoked. There are also great voids

where no Russian legislation exists at all.”

Issues of owning and disposing of private property, intellectual property, due process in cases of

expropriation, and environmental liability have

not been addressed.

Unclear rights of ownership

In Russia, as in many other countries, oil and gas

resources are owned by the government. This, in

itself, is not a serious obstacle to investors. However, in Russia it is not clear how to obtain rights to

develop these resources, especially as surface

property rights lie within the jurisdiction of the regional and local governments. Ownership rights

are hotly contested between the central federation,

local governments, and the production associations, causing uncertainty among potential for30A ~cent ~nklng of counties by Countg risk (a weighted average of 11 factors, including indebtedness, current acCOLInt P)ShkJn, and

political stability) in The Economist, Aug.21, 1993, p. 84, ranked Russia as the second most risky country in the world, a few points behind Iraq,

and both just under 100, the highest number on the index.
Chapter 3 Fossil Fuel Technologies | 55

in equipment procurement and searching for investment sources.

Export tax: Levied at the rate of 30 ECUs per ton

($5.15/bbl) on crude oil sold abroad.

VAT: Twenty percent of the cost of all inputs (domestic

and imported) at the time of purchase, but refunded in

full after 24 months if production stream IS for export.

Profits tax: Levied at 32-percent rate on taxable income, but with straight-lme depreciation of most capital expenditures, expensing of certain outlays (but not

interest), full loss carry-forward provisions, and deduction for reinvested earnings (limit 50 percent of taxable

income).

Production royalties: Combined state and federal

assessment equal to 16 percent of the gross value

(world price) of production,

Currency exchange: Fifty percent of hard currency

receipts from exports to be exchanged for rubles at

market rates. We presume that the unstable value and

inconvertible status of the rubles acquired via such

transactions constitutes an impliclt tax of 25 percent on

the value of currency so exchanged,

Social reserve fund: A levy equal to 37.5 percent of

total wages, collected for the purpose of rebuilding

social Infrastructure.

Repatriation tax: In the case of U.S. Investors, 5 percent of remitted dividends, Could be higher or lower for

legal residents of other jurisdictions,

SOURCE James L Smith, Department of Economics, “Poor Economic

Prospects Face Investors m the Russian 011 Industry” (Houston, TX

Unwerslty of Houston, April 1993), p 2

eign investors about the legality of agreements

and contracts. Some U.S. companies sign contracts with all three levels of government. Even

within each level of government, there is an absence of established lines of decisionmaking.

Some recent improvement is reported. Relationships between the center and the provinces, a serious problem in the past, appear to be stabilizing,

with regional authorities receiving more freedom

Poor economic environment

The economic environment is crucial for foreign

investors, who need to be assured of their ability to

make profits and their freedom to remit them. Foreign investors, whose earnings are derived from

oil exports rather than from sales to the much lower priced domestic market do not suffer directly

from oil and gas price controls as do their Russian

counterparts. However, foreign investors are subject to a multiplicity of taxes (see table 3-2), which

taken together are seen by U.S. investors to represent an unrealistic and unstable tax regime.

Taxes are high compared with competing provinces, such as the North Sea, and based on revenues rather than profitability, a great disadvantage

when costs vary greatly between areas.31 Under

this tax regime, oil produced in Russia would have

to sell for nearly twice the price of oil produced in

the United States or Australia for a project to be

economically viable.32 This punitive tax situation

exists not so much by design, but because many of

the jurisdictions that have the authority to impose

taxes fail to realize the cumulative impact of their

tax decisions.

Taxes are also subject to change. An export tax

of $6 per barrel was imposed in 1992 to bridge the

great differences between domestic and export

prices. The tax virtually eliminated the profit of

one U.S. venture. Although some companies

managed to be grandfathered into the export tax

exemption, negotiating the exemptions took valuable time and energy and often tied up tax payments until a decision was reached.

One of the attractions of investment in oil and

gas, over other branches of industry in the FSU is

j 11n most Countries, the investors are first allowed to recover their costs from the initial revenue streams of the project. Higher tax rates are

imposed only after costs have been recovered. In Russia, under the present regime, high taxes are imposed hefore cost recovery.

s2James L. smith, Department Of Economics, “Poor Economic Prospects Face Investors in the Russian Oil industry” (Houston, TX: University of Houston, August 1993).
56 I Fueling Reform: Energy Technologies for the Former East Bloc

the ready ability to earn the hard currencies necessary to cover the cost of imported equipment and

to remit profits.33 For this purpose, it is necessary

to have clear title to the oil (which is sometimes in

doubt) and the freedom to export it. However, the

freedom of foreign investors to export oil is subject to changing regulations. In 1991, central control over oil exports was loosened, and joint

ventures were given the right to export a share of

their production. In December 1992, however,

controls over oil and gas exports were reinstated

because of suspected illegal sales. In 1993, the 80

licensed exporters were cut to 30, and further cuts

are contemplated. In the same year, Decree715 (of

July 23) specified that joint ventures involved in

incremental production projects would not own

the additional crude they produce but would

instead work on a contractual basis for cash.

These measures have increased central government control over Russian oil exports, including

those of joint ventures. However the situation is

still fluid and may change again especially as increased central control over exports is strongly opposed by many of the regional and local

associations. In theory, joint ventures should be

able to export oil under any combination of

centralized/decentralized governance; but in practice, constant changes in administrative systems

can be time consuming, costly, and destabilizing

for the foreign investor. A further cause for concern is the possible unwillingness of third parties

to allow transit of oil and gas across their territories.

Different perceptions of foreign investment

One obstacle becoming more apparent as experience with joint ventures and other foreign investments grows is the difference in perception about

technology transfer and foreign investment between the Russian hosts and the foreign investors.

Views are not consistent among participants on either side. In Russia, for example, the oil sector

shows more interest than the gas sector in foreign

investment. Within the oil production associations, views also differ over the merits of foreign

investment. And views vary among countries of

the FSU. Kazakhstan and Turkmenistan, with

little indigenous technical capability, encourage

foreign investment. Russia, which has considerable technical capability, is more ambivalent.

U.S. companies, too, have different perceptions. Several oppose public sector programs,

such as those implemented by the World Bank and

the EBRD, on the grounds that they supplant rather than supplement the private sector, and thus discourage Russia from making necessary reforms,

including granting access to Russian hydrocarbon

resources. Other companies, and suppliers of oil

equipment, on the other hand, support such programs on the ground that they help share the risk

of doing business with FSU countries.

Despite all the differences, some generalizations can be made. To the Western eye, the need for

up-to-date technologies throughout the oil and gas

industry is obvious and represents a large export

market. In influential parts of the FSU government and industry, however, there is a deep-seated

opposition to the involvement of foreign capital in

the oil and gas sector. This suspicion toward international oil companies is a common phenomenon in many countries of the world but is

particularly acute in Russia, a pioneer in the oil industry and, for much of its history, the world’s

largest oil producer.

Part of the opposition is based on Russia’s disappointment with foreign oil company performance so far. They regard the international oil

companies primarily as bankers and have been

disappointed at the sums actually forthcoming.

They feel that much foreign investment to date has

mainly benefited Western companies.

3J1n 1992, tie mb]e was ~de internally conve~ib]e and convertible forcurrent account transactions. But the shortage of foreign currency

has limited the practical operation of full internal and current account convertibility, and foreign investors in the oil sector seek to obtain foreign

currency through oil exports for payment for their services and investment.
Chapter 3 Fossil Fuel Technologies | 57

More fundamentally, influential elements of

both the Russian government and Russian industry do not consider Western technology to be a key

element in petroleum industry rehabilitation, but

rather, as in the past, a supplement or temporary

substitute for domestic technology. The new producing regions, like Turkistan, Kazakhstan, and

Uzbekistan that do not have a domestic equipment

supply industry, may be eager, or have no alternative than to encourage foreign investment if they

wish to develop their petroleum resources. Russia, however, is likely to want to preserve its domestic equipment supply industry, especially

because the development of oil and gas technology is considered a fruitful area for defense industry conversion.

U.S. Regulations Governing Private Sector

Participation

For many years, U.S. trade and investment with

the Soviet Union was prohibited or very strongly

controlled. The major legal obstacles (the Byrd

Amendment to the Trade Act of 1974, and the Stevenson Amendment to the Export-Import Bank

Act of 1945, both restricting U.S. Export-Import

Bank operations in the FSU) were repealed by

Joint Resolution of Congress on April 1, 1992.

Since then, U.S. firms have been able to export

equipment freely. However, industry considers

that restrictions remaining in the National Security Controls Act could constrain use of some recently available technologies, particularly

seismic or computer equipment.34

New bilateral tax and investment treaties (eliminating double taxation on interest and royalties

and defining the conditions of international investment) have also been concluded with Russia

and several other republics. An exception to these

new initiatives to encourage foreign direct investment in the FSU is the case of Azerbaijan, where

U.S. aid is specifically prohibited except for nuclear weapons disarmament until Azerbaijan

ceases uses of force against Armenia and Nagorno-Karabakh. 35 As a result, the International

Trade Commission reports that the government of

Azerbaijan has delayed signing a contract with a

U.S. firm for the development of an Azeri petroleum field, while negotiations continue with nonU.S. companies interested in the same project.36

Though much of the legal legacy of the Cold

War has been dismantled, U.S. industry still feels

at a competitive disadvantage with oil and gas

companies of other nations. (In addition to oil

companies based in Western Europe and Japan,

companies from the Middle East and Latin America are also active in the FSU.) This competitive

disadvantage is based on 3 factors. First, U.S. companies lack the long experience of other Organisation for Economic Cooperation and Development

(OECD) countries in conducting business with

the FSU. Contacts and knowledge of trading

conditions were not readily available to the industry in the early days, adding to the frustrations,

costs, and complexity of early initiatives. As time

goes by, and U.S. efforts to disseminate information about Russian trading conditions improve,

this initial disadvantage will be overcome, but in

the important early days it could have disadvantaged U.S. firms.

Second, there is widespread belief among U.S.

companies and policymakers that other governments provide much greater financial and diplomatic support to their national companies, many

of which are nationalized companies, than does

the United States. This issue has been a long

standing bone of contention between the United

States and its competitor allies in the OECD.

Third, U.S. business practices may differ in important respects from those of other countries.

U.S. companies, for example, maybe held by public opinion in this country to higher standards of

environmental practice than are the companies of

34u.s. ]n[ernationa] Trade Commission, Trude and Investment Patferns, pp. 4- I and 4-2.

JsSection 9c)7 of title IX of the Freedom SUppOti Act of 1992.

36u.s. ]nternationa] Trade Commission, Trade and Inveslrnenr PWernS, p. ‘$-~.
58 I Fueling Reform: Energy Technologies for the Former East Bloc

other countries. Also, U.S. companies, which are

forbidden by U.S. law to engage in bribery, must

compete with companies domiciled in other countries that lack similar legislation. This factor could

be of particular importance during the inevitable

disruptions occurring during the transition from a

state-owned to a market economy.

| Conclusions

The rehabilitation of the FSU oil and gas industry

through U.S. investment and technology offers a

mixed prospect. On the one hand, these countries

offer exciting and rich new possibilities for oil and

gas development and a well educated work force.

U.S. participation in the oil and gas sector could

provide benefits to both partners. It could contribute to the establishment of political and economic

stability in the FSU and provide a major area of

growth for the U.S. industry.

On the other hand, there are several obstacles to

these mutually beneficial outcomes. Some of the

more important have been outlined here. They include a severe lack of investment funds (largely

related to political uncertainty, insufficient economic incentives, and inadequate legal and institutional frameworks); economic instability,

including the disruption of the previously important energy trade that took place before the dissolution of the Soviet Union; a shortage of

management and some technical skills and information; and the frequently differing agendas of

the host country, foreign investors, and aid donors. The U.S. industry may be disadvantaged by

its unfamiliarity with this particular market and a

tradition of less aggressive government backing.

These are formidable barriers. Some progress

has been made in the past few years, but much remains to be done to help the energy sector of the

FSU attract domestic as well as foreign capital.

Despite a distinct cooling of the early euphoria,

the FSU energy industry is still regarded in the

West as the single most promising area of joint

business activity, and some companies have been

able to achieve considerable success in their Russian undertakings. Another good augury for the

future is the greater spirit of realism in Western

companies about the amounts of money, time, and

effort needed to succeed. On the Russian side, the

perception of whether foreign investment is needed is still a key issue. Eventually, the continuing

shortage of capital investment and technology

may make the foreign investment option more attractive—many other countries have changed

their views about foreign investment as the need

arose.

But the actual path of development has been

slow, lagging early expectations. The experience

of the past few years suggests that there is no quick

fix for either side. Overall, the picture is mixed,

showing some improvement of late, but suggesting that the rehabilitation of the oil and gas sector

will take more time and care than originally

thought.

COAL MINING AND BENEFICIATION

Coal is an abundant, widely distributed resource

in Russia, Ukraine, Kazakhstan, and Poland. Coal

deposits vary in geologic composition and quality. For example, the geologic characteristics and

location of some of Russia’s coal deposits—very

deep or thin, and located in areas far from consumers—make it difficult and expensive to mine. Deposits also range from high-quality hard coal to

lignite. In the former East Bloc, most coal is

mined underground using a variety of mechanized

equipment. Railroads are the dominant means of

transportation to markets.

Prior to World War II, coal was the dominant

fuel in the Soviet Union, as it was elsewhere in the

world. In 1940, coal supplied 75 percent of Soviet

energy needs.37 Since then, oil and natural gas use

has increased significantly, and today, coal ac37u.s. Cong~ss, OffIce of Technology” Assessment, Technology and Soviet Energy Availabi/iv, OTA-lSC-153 (Washington, ~: U.S.

Government Printing Ofice, November 1981), p. 82.
Chapter 3 Fossil Fuel Technologies | 59

Coal coring exploration rig, Kuznetz Basin, Kazakhstan,

counts for only 14 percent of energy use in Russia. 38 Coal, however, is still widely used in the Far

East and Siberia for industry and as a household

fuel in rural areas. Poland also relies on coal for a

large percentage of its energy needs. This reliance

is unlikely to diminish before the end of the century.

The coal industry in the FSU is a multifaceted

enterprise. In Russia, for example, the coal industry consists of more than 1,500 associations, enterprises, and structural units. The industry not

only mines coal but is responsible for mine

construction, mineshaft equipment production,

and geological surveys. The industry also provides housing (some 35 million square meters),

health care, children’s schools, and other facilities

for its employees.

39 This situation is similar to the

coal company town that existed in the United

States 70 years ago. Today, the coal industry is trying to divest itself of some of these community/

social activities, which have proven to be a

tremendous burden on resources.

In the FSU, the coal industry is in crisis. Production has been steadily declining since 1988,

and that will likely continue for the near future.

Moreover, production costs are escalating rapidly,

and transportation costs are high when compared

with that for natural gas. Continued government

management and control, environmental concerns, and labor unrest cloud the industry’s future.

Reasons for the decline in output are outlined in

this section, followed by a discussion of the potential for U.S. mining and beneficiation technology

transfer to former East Bloc countries. Reclamation technologies are examined in chapter 5.

I Declining Coal Production

In former East Bloc countries, coal production’s

downward slide is directly linked to the lack of

capital investment in new coal mines and in upgrading old, established ones. In recent decades,

government strategy dictated that the coal industry take a backseat to oil and gas development.

Thus, over the past 15 years, no new mines have

been opened in Russia. Moreover, over one-half

of the operating mines are at least 30 years old and

in poor working condition; few of these mines

have been upgraded.40 In Ukraine, no new mine

3g’’Rosugo]’s ” Ma]yshev: Coal Industry Privatizatitm ‘Problematic.’’” June 16, 1993, in FBISReport, Cenfru/ Eurasia, July 23, 1993, p. 90.

JPYUTIY Ma]yshev, “’coal: Uphill or Il)wnlllll’?,’” FB/S Report, Centra/ Eurasia; and “Rosugol’s’ Malyshev Analyzes Deep Crisis f~f Coal

Industry,” FBIS-USR-93-079, June 25, 1993, p. 52.

40Yur1y Ma]yshev, FB[S Report, Central Eura.sm, June 25, I ~~~ P. 5~.
60 I Fueling Reform: Energy Technologies for the Former East Bloc

construction has occurred in the last 10 years, according to the Minister of Geology.41

Equipment shortages have also contributed to

the decline. The failure to produce suitable equipment and spare parts in the required quantities has

been a longstanding problem in the FSU. Critical

equipment is idled because spare parts are not

available, and some equipment simply does not

exist; e.g., methane gas detectors and other safety

equipment. 42 More recently, the dissolution of the

FSU has further aggravated the situation. Economic ties between various sectors in former republics have been disrupted. For example,

Ukraine produced about 60 percent of the underground excavation equipment, as well as the face

cleaning machinery, mine rescue equipment, and

electric locomotives; Kazakhstan provided the

copper for the electric locomotives.

The uneven quality of equipment also contributed to the decline. Some mines have to make do

with old, decrepit machinery, while others command better, more sophisticated equipment. Improper maintenance and repair, and the lack of

spare parts, make a bad situation even worse.

Furthermore, the thickest coal seams closest to

the surface are now depleted, and miners must

work thinner seams at greater depths, making extraction slower, more difficult, and more expensive. This is particularly true in Ukraine. In

Russia, new mines located in the east are considerable distances from population centers. Moreover,

several of the Siberian basins have lower quality

coal, which is uneconomical to transport. Cold

climes further limit extraction and transportation.

Labor unrest adds to the problem. Wretched

working and living conditions and low salaries

have led to miners’ strikes. For example, many

miners work without safety equipment, such as

hand-held methane detectors. Methane gas explosions are the number one cause of death in underground mines. Also, medical facilities are

inadequate, and consumer goods are scarce, particularly in remote areas in Siberia and the Arctic.

Finally, the mutual financial indebtedness

among related industries has resulted in production decline. At the heart of this situation is the

coal industry’s indebtedness to the railroads. Recently imposed higher shipping rates and fines for

late payments have further strained relations. As a

result, coal is being stockpiled in storage areas,

where it is subject to degradation and spontaneous

combustion.

| Coal Mining Technologies

About 50 percent of coal output in the FSU is

mined underground, a decline of 13 percent since

1980.43 This decline reflects the former Soviet

government’s view that surface mining must expand to ensure the coal industry’s success. Of

course, there are differences between countries as

well as regions. Underground mining is still the

predominant coal extraction method in Ukraine.

Underground mining is more complex than

surface mining. Instead of scraping away the overburden (overlying soil and rocks), miners must

work underground, connected to the outside world

by shafts and passageways sometimes thousands

of feet long. Roof support, ventilation, drainage,

and lighting are some of the factors that complicate underground mining.

Equipment used in underground mining ranges

from relatively simple to highly automated machinery. The oldest method, hand labor, is still

used occasionally in small mines.

41 U.S. Genera] Accounting OffIce, Repot-( to the Chairman, Subcommittee on European Affairs, Committee on Foreign Relations, United

States Senate, Ukraine Energy-Conditions Aflec/ing U.S. Trade and lnves~men~. GAMGD-92-129 (Washington, DC: U.S. Government

Printing OffIce, August 1992), p. 7.

42~)]OKS Kern, ‘“Me]ting he ]Ce,” Cod Voice, vol. 16, No. 3 (MaY/June 1993), P. 14,

Q3Rich~d ~vine, U.S. Bureau Of Mines, personal communication, Sept. 13, 1993; and the OffIce Of Technology Assessment, Technology

and Soviet Energy Availability, p. 82.
Chapter 3 Fossil Fuel Technologies | 61

. . “ - *

Coal mine entrance in Upper Silesian Basin, Poland.

Longwall mining is the principal underground

mining technique used in the FSU and throughout

Europe. In the FSU, longwall mining accounts for

about 85 percent of total underground output.44 It

involves the creation of interconnected corridors

that are 300 to 600 feet apart. The long wall of the

interconnection is mined in slices, using a rotating

cutter that moves back and forth across a coal face.

As the machinery moves, it cuts the coal, which

falls onto a conveyor belt. The roof is held up by

steel jacks while the cutter makes a pass across the

face. The roof jacks are advanced with the shearer

to make a new pass. The roof collapses in the

mined-out area behind the jacks. Almost all of the

coal can be extracted by this process.45

In recent years, open pit mining in the FSU has

become more important, increasing from 35 percent of coal output in 198046 to 50 percent in 1992.

Surface mining is used extensively in the Czech

Republic and Estonia (see table 3-3). Surface mining equipment includes bulldozers, draglines, excavators, and large-capacity trucks.

I Potential for U.S. Mining Technology

Transfer

The FSU designs and manufactures coal mining

equipment. Although adequate, FSU equipment

is heavier and somewhat less sophisticated than

that of the United States and other western countries. Shortages of equipment, such as draglines

and large-capacity excavators have been met in

the past by Central Europe, particularly Poland

and the former East Germany. Western imports

provided only a small share.

Germany and Britain are leaders in longwall

mining research and development. Because of this

expertise and their proximity to former East Bloc

markets, German and British companies are in a

strong position to transfer technology. Germany is

now actively marketing its equipment in former

East Bloc countries.

The preferred method of underground mining

in the United States (down to 700 meters) is the

room and pillar with roof bolting system. Thus,

opportunities for U.S. export and technology

transfer of underground mining equipment largely

hinge on a change in mining techniques, i.e., from

single-entry longwall mining to roof bolting techniques. Changes in mining techniques are unlikely to occur in the near future. Moreover, geologic

differences render much U.S. equipment unsuitable for the narrow seams of many FSU mines.

Modifications must be made to U.S. equipment

prior to export, a major market disadvantage.

However, the United States is a leader in

surface mining technology and equipment. Examples of equipment that might increase productivity are large-capacity draglines and excavators.

While these technologies are not unique to the

United States, U.S. companies do produce equipment that typically have larger capacities than

‘%2entral Intelligence Agency, USSR Energy At/as (Washington, DC: U.S. Government Printing Office, January 1985), p. 32.

QsFc)r an indepth discussion of mining pr(~esses, See U.S. Congress, Office Of Technology Assessment, Direct Use CI\C~a~PrO~Pe~IS ad

Prob/ems oj’Production and Combustion, OTA-E-86 (Washington, DC: U.S. Government Printing Office, April 1979).

~OTA, Te(,hno/~gy and Sot’iet Energy Availability, p. 82.
62 I Fueling Reform: Energy Technologies for the Former East Bloc

Surface mined

Country (percent)

Russia

Ukraine

Kazakhstan

Estonia (shale)

Poland

Czech Republic

Hungary

Slovak Republic

55

4

70

50

70

75

32

0

SOURCES Przemysl (Warsaw 1992), p 20, Iparslatlsztlkal Evkonyv

(Budapest 1989), p 301, Stahstlska Rosenka (Prague 1992), p 388:

Okhrana okrushalushchel sredy I ratslonal’noe Ispol’zovan!e prlrodnykh resursov (Moscow Goskomstat, 1991), pp 202-203.

their Western European and Japanese counterparts.

To date, the U.S. coal industry presence in the

FSU has been part of a much larger humanitarian

effort, Partners in Economic Reform (PIER). With

U.S. government funding and coal industry and

labor support, PIER administers the Coal Project,

which provides technical assistance and training

in health, safety, efficiency, and productivity

throughout the coal regions of Russia, Ukraine,

and Kazakhstan. Technical assistance includes

demonstrations of U.S. mining technology and

equipment, as well as management, engineering,

and safety techniques. The Coal Project also funds

the purchase of safety equipment, such as methane

detectors, for FSU miners. The Coal Project has

liaison offices in Moscow, Kiev, and Almaty and

regional training centers in the Donbass, Kuzbass,

Karanganda, and Vorkuta mining regions.

| Coal Beneficiation

Coal beneficiation (cleaning) is done at the mine

prior to transport. Cleaning improves the quality

of coal so that it can be used more cleanly and efficiently and offers significant savings in transport

fees. Coal cleaning also reduces handling and

storage, and maintenance costs for pulverizers because of lower volume. Furthermore, pre-combustion cleaning can result in environmental

benefits; e.g., cleaning removes ash and some of

the sulfur47 found in coal, thus reducing particulate and sulfur dioxide, which are emitted during

combustion.

It is important to note that the benefits of coal

cleaning will vary among East Bloc countries and

will largely depend on the characteristics of the

coal. For example, in Ukraine, where coal is high

in pyritic sulfur, cleaning will offer significant reductions (up to 50 percent) in sulfur emissions. In

Poland, the primary benefits are reduced transport

costs and particulate emissions, especially in urban areas where a large percentage of households

use high-ash coal for heat. (See chapter 5 for a discussion of the environmental benefits and potential impacts of coal beneficiation.)

There has been little cleaning of coal in former

East Bloc countries. For example, during the

1970s and 1980s, only about 15 percent of coal

was cleaned in the FSU, mostly for coking coal.

Coking coal typically receives cleaning because

of the technical requirements of metallurgical operations. Polish coal is cleaned for the export

market.

Potential for US. Technology Transfer

The United States has extensive experience with

coal beneficiation. About one-third of U.S. steam

coal (over 200 million tons) is cleaned to remove

ash and sulfur impurities and to increase heat value. 48 This experience and technological expertise

could both benefit the coal industry and mitigate

the air quality impacts of coal combustion in several countries.

But before U.S. and other Western companies

invest in coal cleaning projects, coal data must be

collected and evaluated to determine appropriate

ATTW() ty~s of Su] fur are found in coal: pyritic and organic. Traditional coal cleaning methods can only remove the heavier, pyritic sulfur.

@Thonlas C. E]li(~[t, “Coa] Handling and Preparation,” Power, JanUaV 192* P. 17.
Chapter 3 Fossil Fuel Technologies 63

cleaning techniques and to ascertain the level of

newly generated wastes resulting from beneficiation. In most cases, such data are not available

and must be assembled by U.S. companies interested in doing business in former East Bloc countries, a major financial undertaking for small- and

medium-sized firms and a significant obstacle.

Although few U.S. firms are involved in coal

cleaning technology transfer to this region, Custom Coals is actively pursuing opportunities in

Poland. The U.S. company is planning to build

three facilities near Krakow, Poland. These plants

will have the capacity to clean 10 million tons of

coal annually for powerplant use. Appendix 3-2

details Custom Coals’ experience in Poland and

provides some perceptions of federal government

efforts to assist U.S. businesses.

| Conclusions

The coal industry in former East Bloc countries

continues to experience serious problems including declining output of mines near population centers, few additions to mine capacity, declining

coal quality, and labor unrest. The low priority

given the coal industry in the past has contributed

significantly to present-day instability. For example, capital investment decisions in the 1970s and

1980s favored oil and gas development and

starved the coal industry. Moreover, government

strategy to mine the thickest seams closest to the

surface quick] y depleted high-qua] it y, economical

coal. What is left is coal of poorer quality that is

located far from consumers. Production costs are

rising rapidly, and transportation costs are high,

when compared with those for natural gas.

The shortage of capital also hindered the development and production of coal mining technologies. The use of old, inefficient technologies is

commonplace. In addition, equipment manufacturers historically have been reluctant to develop

and produce new technologies. Fear of jeopardizing output plans and risking related bonuses are at

the root of this fear. Moreover, the reliability of

equipment has been a longstanding problem. Infrequent repair and maintenance, the lack of spare

parts, and the use of equipment that is unsuitable

for the conditions aggravate the situation. Equipment failure results in work stoppages, and poorly

maintained equipment results in an increased rate

of accidents and injuries in the labor force.

Some restructuring of the coal industry has begun in Russia, Poland, Hungary, and the Czech

Republic. Recently, Russia announced the closure

of 41 underground mines and one open pit mine by

2000. These mines produce about 3 percent of total output but account for 26 percent of all coal industry accidents. 49 Also, a new entity, Rosugol,

was created in 1993 to administer the coal industry. However, principal responsibility still resides

with the 28 coal associations that oversee production and transport. In other countries, restructuring is further along. Hungary, for example, has

closed several mines, raised coal prices, and reduced subsidies. In Poland, the Hard Coal

Agency, a state-owned, joint stock company, was

formed to encourage privatization and to close inefficient mines. Also, prices have been raised,

subsidies have been reduced, and some mines

have become independent entities. However, the

coal industry in former East Bloc countries is still

far from being a competitive structure of private

producers, distributors, and traders. Legal and

regulatory issues are two of the many concerns

that must be addressed before a truly competitive

industry emerges.50

Associated environmental problems further

cloud the outlook for the industry. The widespread

burning of low-quality lignite is largely responsible for the alarming degradation of the environment in the region. Cleaning up the pollution will

require many years of effort and large infusions of

capital. The Polish government, for example, esti49 Radio Free Eur[p/Radi(~ Liberty Daily Repon, “Forty-Two Mines to be Closed,” Oct. 29, 1993.

s~nergy Sector Management %ogramme, Polon~nergy Sector Restructuring Pro~ram, vol. 2: The Hard Coal Subsector, Repoti No.

153/93 (Washington, DC: World Bank, January 1993).
64 I Fueling Reform: Energy Technologies for the Former East Bloc

mates that $260 billion will be needed to attain

European Union environmental standards and

reach sustainable economic development. 51

Hence, technological advances in clean coal burning and pollution control equipment will not only

provide environmental benefits but also may help

stabilize coal output and use.

Modem coal mining technology offers shortterm improvements in productivity, efficiency,

and environmental impacts. It also buys time

while the transition is made to a market economy.

However, Western assistance alone will not reverse the coal industry’s downward slide informer

East Bloc countries. Efforts must be made by Central European and FSU governments to solve the

variety of problems now facing the industry. To

stabilize output and reverse the decline, capital

must be invested in mine development and modernization. Manufacturers must be able to produce

the required equipment and get it to the miners.

Western imports and joint ventures in production

facilities could provide some relief in this regard.

The industry’s social/community activities, such

as health care, housing, wages, taxes, and pensions, must also be addressed.

In the final analysis, however, the long-term

survival of the coal industry will depend on how

well governments make the transition to a market

economy. Economic reform is the key.

The U.S. coal industry has not thus far actively

pursued technology transfer to former East Bloc

markets, as compared with the oil industry. The

characteristics of the region’s industry and related

environmental impacts, labor, and transportation

problems have not been conducive to foreign investment. Furthermore, mining techniques and

geologic characteristics of coal deposits differ

from those found in the United States. Because

mining is generally done at deeper levels and on

thinner seams, U.S. companies would have to

modify their equipment for export to former East

Bloc countries, a major market disadvantage. As

reforms take hold, and the coal industry stabilizes,

there may be more interest in coal mining technology transfer to that region. One near-term possibility for U.S. companies might be to focus on

opportunities for U.S. technologies and expertise

after the coal is extracted, such as coal beneficiation. The United States is a leader in coal cleaning technologies and project development and

management. This expertise could provide significant energy efficiency and air quality benefits.

However, the lack of accurate coal data will present a challenge to Western companies interested in

technology transfer. Accurate data are essential to

the success of coal beneficiation projects.

In sum, there are many opportunities to rejuvenate the coal industry in former East Bloc countries and make it financially healthy. Whether

U.S. companies jump in will depend on the region’s and coal industry’s success in making the

transition to a market economy and addressing the

myriad of problems it now faces.

COALBED METHANE

Methane gas is often associated with coal. Generally, the amount of methane stored in a coal deposit is related to the quality and depth of a coal

deposit. Higher quality and deeper coal seams

have greater capacity to hold methane.

Large amounts of methane can be released during the mining process. For example, coal mining

operations in Poland release about 4.8 trillion cubic feet (Tcf) annually, most of which is vented to

the atmosphere.52 Unutilized methane is a potent

greenhouse gas and a safety hazard. Methane is estimated to be about 25 times more effective in

Sls[an]ey J. Kabala, ‘.~e Environrnentaj Mm-ass in Eastern Europe,” Currenf History, vol. 90, No. 558, November 1991, p. 388.

SZU.S. Environmental protection” Agency, Assessment oj”the Potential Economic Development and Utilization oj’Coalbed Methane in po-

/and, EPW400/1-91/032 (Washington, DC: U.S. Government Printing Office, August 1991 ), p. ii.
Chapter 3 Fossil Fuel Technologies | 65

I Coalbed Methane Technologies

Total Total Total

recovered used vented

Country (bcf) (bcf) (bcf)

FSU 43.4 9.8 33.6

Czechoslovakia 4.9 4,4 0.5

Poland 10,0 7.0 3.0

SOURCE Charles M Boyer, 11, and Jonathan R Kelafant, and Dma

Kruger, “Dwerse Projects Worldwlde Include Mine, Unmmed Coals,” 0//

and Gas Journa/, VOI %3 No 50, Dec 14, 1992, p 40

trapping heat than carbon dioxide (CO2) on a

weight basis,53

Methane gas explosions are the number one

cause of death in underground mines in the FSU.

In the past, miners took canaries down into the

mine with them as a warning that methane was

present. Gas detection equipment and mine ventilation systems are now used.

The methane can be captured and used instead

of being released. Coalbed methane is essentially

identical to natural gas and can be transported by

pipeline to households and industries. Extracting

and using coalbed methane improves mine safety

and provides environmental benefits. Its use could

thus reduce pollution in the heavily industrialized

areas of southwestern Poland, where adverse

health effects have been associated with high levels of sulfur dioxide emissions. There is great potential for methane recovery and use in Poland,

Russia, Ukraine, and Kazakhstan. They are

among the major coal bed methane resource countries in the world.

In gassy coal seams, ventilation systems are inadequate, and degasification technologies must be

used. These technologies can recover methane before, during, and after mining, and can be used inside the mine or from the surface. Degasification

systems have become more important in light of

growing concerns about greenhouse gas emissions. Methane degasification emissions for several areas are highlighted in table 3-4.

The four principal methods of degasification

are surface pre-mining drainage, in-mine drainage, surface gob recovery, and cross-measure

boreholes. Several factors, including the characteristics of the coal deposit, mining methods

employed, and surface conditions, determine

which degasification technology is used.

Surface pre-mining drainage uses vertical

wells that are drilled from the surface to recover

the methane before mining activities commence.

Drilling can occur from 2 to 15 years prior to mining. This method is used exclusively in the United

States, but can be used in other countries as well.54

Poland has expressed interest in surface pre-mining drainage.

In-mine drainage is preferable in areas where

surface mining is impractical because of land use

patterns and where immediate drainage is required. Boreholes are drilled into the coal seam

where they can be connected to the mine’s piping

system, which transports the gas out of the

mine. 55

Surface gob recovery is used after a coal seam

is mined. Wells are drilled to within a few feet of

the top of the coal seam. As mining is completed

underneath, gas is produced from the fractures

SJU s con.re~~, office ~) fTechno]ogy” Assessment, Chanxing by Degrees: Steps to Reduce Greenhouse Ga.res. OTA-O-~2 (Washin@~n* . .

DC: U.S. Govebmment Printing Office, February 1992), p. 59.

-$’$char]es M. Boyer, II, Jona[han R. Kelaf~t, and Dina Kruger, “Diverse Projects Worldwide Include Mines, Unmined coals,’” Oil ati Gas

Journa/, vol. 90, Nt). 50, Dec. 14, 1992, p. 39.

Sslbld.
66 I Fueling Reform: Energy Technologies for the Former East Bloc

created by the caved-in areas. Surface gob recovery often produces large quantities of methane.

However, the gas is not pipeline quality because it

has been contaminated by mine air.56

In many countries, including the FSU, Central

Europe, and the United States, cross-measure

boreholes are the principal recovery method.

Boreholes are drilled at an angle into the strata

above or below the coal seam being mined. Like

other in-mine recovery systems, the boreholes are

connected to the mine’s piping system.57

| Potential for U.S. Methane Technology

Transfer

The desire to reduce greenhouse gas emissions

and become energy self-sufficient has spurred interest in developing coalbed methane resources

worldwide. Poland, for example, is actively seeking Western assistance to explore and develop its

resources.

The United States has done extensive research

on coalbed methane exploration and development

technologies. This research paved the way for successful U.S. projects, such as that in the San Juan

Basin in Colorado and New Mexico and the Warrior Basin in Alabama. With a vast resource base

(400 Tcf) and production experience (over 1

billion cubic feet per day), the United States is a

recognized leader in coalbed methane development. 58 U.S. technologies and project management expertise can help expedite coalbed methane

development in former East Bloc countries.

Recently, two U.S. companies, Amoco and

McCormick Energy, have been awarded contracts

to extract coalbed methane in the Upper Silesian

coal fields in southern Poland. Most of the methane will be compressed and transported by pipeline. It is expected that the recovered methane will

561bid.

571bid.

Truck mounted drilling rig typically used for coal and coalbed

methane explorations in the former Soviet Union,

replace about 7 percent of Polish gas consumption, or 1 percent of the country’s total energy demand.59

U.S. and European companies are also pursuing coalbed methane exploration and production

projects in the Czech Republic, Hungary, Romania, and Bulgaria. Additionally, the EPA is actively promoting expanded coalbed methane recovery

and use in several countries, including Poland,

Russia, Ukraine, and the Czech Republic. Thus

far, EPA has funded resource assessments and established a coalbed methane information center in

Katowice, Poland. EPA also has established a

U.S./Poland working group to encourage projects

to reduce methane emissions from mines.

While interest in commercial coalbed methane

projects is growing, several factors have dampened Western enthusiasm for market development

in former East Bloc countries. The lack of appropriate regulations and the legal uncertainties

that relate to ownership and granting concessions

have hindered development. Also, the poor condi58J{)natha R. Ke]afant, Scott H. Stevens, and Charles M. Boyer, 11, “Vast Resource Potential Exists in Many Countries,” Oil and@$~cwrrud, Wt. 90, No. 44, Nov. 2, ] 992, p. 80.

59’’Flaring Coal,” The Economist, vol. 328, No. 7820, July 17, 1993, p. 65.
Chapter 3 Fossil Fuel Technologies | 67

tion of many coal mines and the continuation of

subsidized energy pricing have further reduced

the economic attractiveness of coalbed methane

projects.

Available and accurate geologic data, a fully integrated natural gas pipeline system, and tax incentives are also needed. Most of these conditions

do not exist in former East Bloc countries, making

coalbed methane development riskier. These

countries must address these legal, financial, and

political issues to attract Western investment and

fully realize their coalbed methane resource potential.

APPENDIX 3-1: EXPERIENCE WITH JOINT

VENTURES-DRESSER INDUSTRIES

I Background

Dresser Industries is a full-spectrum oil and gas

production equipment manufacturer that has been

selling oil- and gas-related equipment to the Soviet Union since 1936. Dresser began doing business with Moscow when Soviet Russia was

rapidly expanding its petroleum production capabilities to fuel the huge spurt of economic growth

that took place under the state-sponsored industrialization program of the 1930s. Dresser has remained in Russia ever since, selling a full

spectrum of highly engineered upstream and

downstream oil- and gas-related equipment.

Dresser’s business intensified in the early 1970s,

and the company established an officially accredited office in Moscow in 1979. With almost six decades of experience in the Soviet market, Dresser

is one of the most experienced American exporters to the FSU.

I Present Activities

The company is currently working on two large

projects in the FSU. In St. Petersburg, Russia,

Dresser is in the process of setting up a joint venture with the Kirovskii Zavod, a former military

enterprise, for the manufacture of oil and gas pipeline turbine compressor sets. This will be the company’s first manufacturing operation in Russia. In

Uzbekistan, Dresser has signed a $200-million

agreement to build a gas injection condensate recovery project.

| Doing Business in the FSU

Dresser officials who have worked recently in

Moscow note that many of the skills that the company learned in the Soviet era are still vital for doing business in the FSU. Of particular importance

are the company’s wide range of contacts within

the FSU oil and gas industry and the understanding that doing business in the FSU requires a longterm commitment and perspective. Moreover,

since Dresser’s activities have been almost exclusively commercial in nature and have not involved

resource extraction, the company has not been

greatly hampered by the legal and ownership uncertainties that have affected oil and gas exploration ventures since the breakup of the Soviet

Union.

But there have been substantial changes in the

way business is done and in the types of problems

Dresser has encountered since the Soviet Union

split apart. Whereas before 1991 the company

dealt almost exclusively with ministries and foreign trade organizations, it now sells directly to

end-user organizations such as enterprises, production associations, and refineries. This can be a

double-edged sword. Although it is easier to deal

with end-users than third parties, Russian enterprise directors have had little experience negotiating major purchases with foreign contractors.

Managers are often unfamiliar with Western price

norms, warranty standards, and other trade-related matters previously handled by professional

negotiators in Moscow. As a result, the customarily long Soviet-era negotiation process is often further attenuated in the FSU.

Moreover, the Soviet Union was such a reliable

creditor that Dresser never needed to require a letter of credit. Now, the need to obtain financial

guarantees from enterprises in the post-Soviet

states can create confusion and misunderstanding.

Post-Soviet enterprise managers are unfamiliar

with Western financial requirements and have

been slow to appreciate the need for confirmed letters of credit and other guarantees. Dresser thinks
68 I Fueling Reform: Energy technologies for the Former East Bloc

that a U.S. government sponsored training program to teach basic business management and

marketing skills to FSU energy sector managers

could improve understanding of the mechanics of

market economies and foreign trade. But the need

for such training is so great that company officials

wonder whether any foreseeable American training program could have a significant impact.

| U.S. Government Role

According to Dresser, recent U.S. government activity in the commercial sector has had a positive

impact on energy-sector exports to the FSU. The

relaxation of COCOM has been of particular help

to the company, allowing it to sell its hightechnology nuclear logging equipment and other

computer-driven systems to markets from which

they were previously prohibited. The company

also notes that the U.S. government has shown

greater interest in promoting American exports

over the past four or five years. This includes not

only greater coordination between agencies such

as DOE and Commerce, but also encompasses

changes in other aspects of U.S. government

policy. For example, the easing of visa restrictions

for Russians to visit the United States may not

have been seen as a commerce-enhancing step, but

it greatly eased Russian frustration at what was

perceived to be unequal treatment: Dresser officials could visit the Soviet Union, but Soviet citizens could not come to the United States. Dresser

notes that the easing of these restrictions and the

placing of former Soviet citizens on a more equal

footing with Americans in the business process

has eased relations with Dresser’s Russian partners and made it easier to do business.

Nevertheless, company officials maintain that

without substantial United States government assistance in the area of finance, Dresser and other

equipment supply companies will be unable to expand their export activities to the FSU. They say

that given the acute need for FSU countries to

raise hard currency, the U.S. government should

give greatest priority to promoting investment in

those FSU sectors, such as oil and gas production,

that will provide the quickest and most lucrative

hard-currency exports. But given the region’s economic and political instability, Western banks will

not lend money on an unsecured basis. Western resource extraction ventures such as Chevron can

afford to risk investing their own money because

the potential rewards are so great. But in the

equipment export sector, where the returns are

much smaller, Western firms such as Dresser cannot risk investing hundreds of millions of dollars

of their shareholders’ money in the turbulent

conditions of the FSU. Accordingly, Dresser advocates a large expansion of Eximbank guarantees

(at the standard 85 percent rate) for energy sector

investment projects. In his view, Eximbank guarantees (coordinated with similar guarantees by

other Western nations) will prove much more effective and will promote investment much more

quickly than other efforts currently under consideration, including the European Energy Charter

and attempts to set up escrow accounts or funnel

investment funds through multilateral organizations such as the World Bank.

APPENDIX 3-2: CASE STUDY: CUSTOM

COALS CORP.

Custom Coals Corp. is an Arizona corporation

headquartered in Pennsylvania and founded to

market a recently developed technology to reduce

the pre-combustion sulfur content of coal. According to the company, its cleaning process removes sulfur more economically than flue gas

desulfurization (scrubbers), the most widely used

post-combustion process. Company data show

that in many cases the Custom Coals process,

which employs physicial benefication and limestone and hydrated sorbent additives, reduces sulfur emissions at half the cost of scrubbers. The

company’s products are designed for electric utilities and for the district and home heating markets.

The company recently won a $76-million contract under the U.S. Department of Energy’s Clean

Coal Technology Program to construct and operate a demonstration coal cleaning plant in Somerset County, Pennsylvania. After this project goes

on line, Clean Coals plans to develop 9 to 10 fullscale plants in the United States.
Chapter 3 Fossil Fuel Technologies | 69

I The Project

In addition to U.S. markets, Custom Coals is seeking to sell its technology overseas in countries that

depend heavily on coal but lack effective and costefficient pollution-control technologies. At the

present time, the company’s most active project is

in Poland, though it is also working in China and

Mexico. Poland is a particularly attractive prospect because of its huge coal reserves, its dependence on coal for power generation and heating,

and the need to curtail the emissions of sulfur that

have contributed to the country’s nearly catastrophic levels of pollution.

Ideally and in the long term, the best way for

Poland to reduce toxic emissions is to convert its

powerplants to gas-fired operations. But conversion to gas would demand a great deal of capital,

which the country cannot afford. Coal cleaning

provides a good short-to medium-term solution to

Poland’s problem. It demands much less capital

investment and results in significant pollution reduction. Custom Coals estimates that its clean

coal product will contain 75 percent less particulate and heavy metals and 50 percent less sulfur

than raw Polish coal. In addition, the coal cleaning

technology will offer Poland the ability to clean its

high-sulfur coals and export the product to Western Europe.

The company has proposed an initial project involving three coal cleaning plants, which would

process about 10 million tons of Polish coal annually for sale on the domestic and export market. It

sees the potential for 25 plants, to process around

100 million tons (75 percent of Polish annual coal

production). The company has already spent one

year working on the project, in consultation with

government officials, as well as the managers of

coal mines, power generation plants and the electric grid. The company is presently studying the

technical characteristics of Polish coal; evaluating

project sites, supplies, builders, and operators;

and developing a detailed project for submission

to international lending agencies. It hopes to have

a financeable project ready for presentation to the

World Bank and the EBRD by the second quarter

of 1994, with groundbreaking set for the fourth

quarter of that year.

I Doing Business in Poland

Custom Coals reports a warm reception from Polish government and enterprise officials because it

actually proposes to build a project. Poles have

told Custom Coals officials that they feel “studied

to death” by fly-in, fly-out Western consultants

who spend a great deal of money identifying problems but do very little about solving them.

However, business negotiations have not been

problem free. The Poles’ lack of background in

free market economics and lack of knowledge

about the rates of return needed to attract investment capital has impaired their ability to evaluate

potential business deals. Polish managers have

difficulty judging whether they are receiving reasonable terms, in the context of the international

economy, and they worry about being taken advantage of by more knowledgeable Western business people. The lack of a consistent and reliable

system of cost accounting often makes it difficult

for Custom Coals to generate the types of data

needed to satisfy financial requirements. And the

many unusual attached costs borne by Polish enterprises (everything from bowling alleys to day

care centers) have to be taken into account in computing total project cost.

Nevertheless, Custom Coals has had few major

problems setting up its business. This is in large

part because the company has been able to find

professional service providers who are fluent in

U.S.-Poland business issues, the technical questions of coal production, and the English 1anguage. Beyond management training for future

senior Polish managers of Custom Coals projects,

the company does not foresee a need for substantial investment in training.

Custom Coals’ German competitors have been

active in the same market. German companies enjoy an advantage over Custom Coals because their

domestic operations are subsidized by the German

government. However, the German firms rely on

conventional pollution-control technologies, not
70 | Fueling Reform: Energy Technologies for the Former East Bloc

the advanced, pre-combustion technologies developed by Custom Coals. The German companies are also seeking direct financing or sovereign

financial guarantees from the Polish government

to underwrite their proposed projects. Custom

Coals is structuring its project proposals so that

the Polish government will not have to provide financing, making their proposal potentially much

more attractive from the Polish point of view.

| International Lending Agencies and the

U.S. Government

Since commercial banks are still extremely reluctant to lend to projects in Central Europe, the success of Custom Coals’ Polish project depends on

funding from multilateral lending agencies such

as the World Bank and EBRD. Custom Coals officials have been solicitous of advice from representatives of both institutions and have remained in

continuous contact with them as they develop

their funding proposal. World Bank officials are

particularly enthusiastic about coal cleaning as a

more cost-effective answer to Poland’s pollution

problems than the installation of highly expensive

scrubbers. Custom Coals is optimistic about prospects for long-term project financing from these

institutions.

Custom Coals’ experience with U.S. agencies

has been more mixed. The company applied for

and received a $375,000 matching grant from the

AID to conduct feasibility studies for its Polish

project. But the application process was extremely slow. AID took 7 months to review the project

before approving it in May 1993, and another 7

months to disburse the funds.

In the company’s view, the World Bank and

EBRD are fulfilling their missions as multilateral

lenders financing development projects. The

company is therefore less concerned about project

funding than with financing the feasibility studies

and other initial costs involved in putting together

a project proposal. The company notes that these

initial costs can be quite high—around $2 million

to $3 million simply to put together a project financing proposal suitable for submission to a

multilateral lender. For a large corporation, this is

not a big expense, but for a relatively small business like Custom Coals, these development costs

constitute a considerable sum. The company’s

AID grant is designed to meet part of these costs,

but the AID application process is too slow.

The company would therefore like to see a new

and more timely way of providing development

assistance for U.S. firms, especially for small

companies, in the form either of loans or grants.

(Custom Coals would gladly take a commercial

loan to cover these costs if it could obtain one for

its Polish project.) The company points to the

DOE Clean Coals Technology Program as a model. The DOE program provides startup monies on

a timely basis, requires company matching funds

(which eliminates spurious projects), and requires

repayment to replenish the revolving fund. Unfortunately, these DOE funds cannot be used for projects abroad. The company thinks that something

like this would be ideal for projects in Central Europe.

| The International Perspective

Custom Coals notes one larger philosophical issue. The company sees coal cleaning not as a national issue, but as a global one. American firms

and the U.S. government have spent large sums of

money developing domestic technologies for coal

cleaning and for the reduction of sulfur dioxide

and particulate emissions. Domestically, where

all powerplants and industry are already meeting

previously established standards for pollution

control, recent investments in coal cleaning

technology will yield significant, but relatively

marginal improvements in pollution control. But

applying these technologies elsewhere, where the

basic technologies in use are far below the U.S.

standard or where no pollution-control technology exists, could yield much larger results in terms

of reducing worldwide sulfur emissions. In essence, $2 billion spent worldwide would have a

much greater impact on reducing pollution levels

than the same money spent in the United States.
Chapter 3 Fossil Fuel Technologies | 71

Overseas projects thus offer a much greater envi- government focus and a more global approach to

ronmental ‘*bang” for the investment buck. Ac- coal cleaning as a way of obtaining greater results

cordingly, the company advocates a shift in U.S. from technologies already developed at home.
Fuel

Technologies 4

F

ossil fuels dominate energy supply in the former East Bloc,

just as they do in the West. Some of the major energy issues, however, concern non-fossil technologies. Nuclear

safety and proliferation issues could pose global risks.

Electric powerplants are key elements in the energy picture, requiring major modernization to meet environmental standards.

Renewable energy is promising in the long term.

NUCLEAR POWER TECHNOLOGIES

Nuclear energy was a high priority in the Soviet Union. It was

seen as an advantageous spinoff from the necessary development

of military nuclear capability, an alternative to fossil fuel resources, and a symbol of modernity. The role that nuclear energy

plays in each country is listed in chapter 2.

This report discusses two major considerations relating to nuclear energy. The first is safety. Soviet reactors have proved to be

substantially less safe than Western reactors. As Chernobyl has

shown, a major nuclear accident can threaten millions of people,

even hundreds of miles away. However, improving safety is difficult, complex, and often expensive.

The second is nuclear weapons proliferation. Soviet weapons,

materials, or expertise could become available because of potentially inadequate control in the former Soviet Union (FSU). Analyzing that risk is beyond the scope of this report. However,

research and analysis on nuclear safety in the civilian sector is a

logical area for employing former weapons designers, thereby reducing the danger of proliferation.

There are other nuclear power issues such as economics, public

acceptance, and nuclear waste. Nuclear waste is already a subject

of technological cooperation between the United States and RusTown Hall, Kaunas, Lithuania.

I 73
74 | Fueling Reform: Energy Technologies for the Former East Bloc

sia but is beyond the scope of this study. Some

critics believe that nuclear power should be

phased out as quickly as possible, and that any

cooperation that will tend to prolong its use here

and in the former East Bloc is undesirable. This

section neither accepts nor rejects that view. It

merely lays out the issues related to nuclear reactor safety and weapons proliferation and discusses

what can be done to address them.

| Nuclear Safety

The pattern of nuclear power technology development in the Soviet Union was similar to that of the

United States: maritime and small power reactors

were constructed in the 1950s; pressurized water

reactors (PWR) and boiling water reactors (BWR)

were tested in the 1960s; and widespread deployment occurred in the 1970s. However, Soviet nuclear designs were largely indigenous, unlike

almost all other reactors in the world that were

derived from U.S. technology. Therefore, Soviet

reactor designs, although based on similar concepts, evolved quite differently from those in the

West. Furthermore, the institutional environment

for designing, constructing, and operating nuclear

powerplants was completely unlike anything in

the West.

Western observers have generally concluded

that the reactors in the former East Bloc are significantly less safe than Western reactors. The explosion at Chernobyl and other accidents have

reinforced this view. The disruption from the

breakup of the Soviet Union and the economic crisis affecting the entire region have aggravated the

problems as Russian operators and engineers have

returned home and spare parts have become unavailable.

Since the Chernobyl accident in 1986, Western

countries have increased efforts to reduce the risk

of another major accident, particularly one on the

scale of Chernobyl. Even an accident that disabled

a reactor with very little offsite contamination,

such as at Three Mile Island, would be a major

economic blow to a region the United States is trying to help.

Some reactors had been scheduled to be shut

down, largely for safety reasons, but economic

realities have made this difficult. All these countries suffer from severe energy shortages, and nuclear reactors have been an essential element in

keeping electric power available. As noted in

chapter 2, in six of these countries, nuclear is a

higher fraction of the power supply than in the

United States (about 20 percent). Shutting reactors down without adequate alternatives (new

generating capacity or improved efficiency of

electricity use) would aggravate the economic crisis. None of these countries can afford to replace

all operable but risky plants with new ones. Even

Ukraine, with its special sensitivity toward nuclear safety, has deferred the planned shutdown of

the two remaining Chernobyl reactors and may

consider repairing the Unit 2 reactor, which was

severely damaged by fire in 1990 (the 1986 explosion destroyed the Unit 4 reactor). In addition,

Armenia is giving serious consideration to rehabilitating two reactors shut down because of safety concerns following a major earthquake in

1988. 1 The only other recent shutdowns for safety

reasons have been in the former East Germany.

Nuclear safety is a complex subject. Accidents

can arise from a variety of faults involving design,

construction, operation, and maintenance. While

there is no consensus in the United States about

how safe reactors are, or how safe they should be,

regulation and public involvement has been much

stronger than in the former East Bloc. There has

been exhaustive analysis of reactor designs here

1 The damage then was slight, and the reactors were still operable. However, the powerp]ant was not very close to the earthquake epicenter.

Apparently, it was decided then to close the reactors because they might not ride out a stronger earthquake. More damage has occurred from

subsequent deterioration, and seismic resistance must be upgraded.
Chapter 4 Non-Fossil Fuel Technologies | 75

and in other Western countries, a process for learning from mistakes, and considerable incremental

improvement.2 Operations and maintenance have

also improved, as evidenced by the greatly improved performance of U.S. reactors.3

Evaluation and comparison of reactors based

on different technology and under different regulatory and institutional systems are much less certain. However, it does appear that the evolutionary

improvement experienced in the West was not duplicated in the Soviet Union. Reactor designs

were improved, but not as rapidly. There does not

appear to have been an organized policy for backfits to address safety deficiencies as they were

identified,4 or even a strong regulatory authority.

Operations and maintenance were never held to

high standards, and are actually slipping, in part

due to the economic crisis.

However, the situation is not entirely grim. The

Soviet-built plants in Hungary and Finland have

been among the most reliable in the world.5 Furthermore, there are different approaches to safety.

Soviet reactors have some advantages and can, at

least in theory, achieve safety levels equivalent to

Western reactors. Except for basic items such as

containment vessels and emergency core cooling

systems, the presence or lack of a specific safety

feature does not necessarily greatly affect overall

safety. Each reactor must be analyzed in its entirety. U.S. assistance must be designed to account for

specific technological needs, for the recipient’s

ability to make use of the assistance, and for the

role that nuclear energy plays in each country.

Improving safety in operating reactors requires

a variety of activities:

● identifying and fixing specific problems on individual reactors,

● enhancing analytical skills and regulatory expertise and authority,

● upgrading operations and maintenance of reactors,

 infusing the entire enterprise with a commitment to excellence.

This section reviews the safety problems of

reactors in the former East Bloc and what can be

done about them by the United States and other

Western countries. It identifies specific technologies and expertise that would be useful in reducing

risks and the current activities to transfer them.6

Design Safety Problems

Two main types of reactors were produced by the

FSU—the RBMK and the VVER (both are Russian acronyms). The RBMK is graphite moderated and water cooled. Its fuel assemblies are in

tubes inside graphite blocks, somewhat like the

high-temperature gas reactor (HTGR). Water

flows up through the tubes and emerges as a

steam/water mixture. The steam is separated and

drives a turbine, as in a BWR. Spent fuel is re2 These issues were discussed in: U.S. Congress, OftIce of Technology Assessment, Nuc/ear Power in an Age of Uncerlainfy, OTA-E-216

(Washington, DC: U.S. (lovemrnent Printing Office, February 1984). Subsequent developments have largely confirmed that analysis. Also see:

U.S. Congress, Office of Technology Assessment, Aging Nuclear Pow’erplan/s: Plan/ Lije and Decommissioning. OTA-E-575 (Washington,

DC: U.S. Government Printing Office, September 1993).

3 ]nstl~te Of Nuc]em power operations, Annua/ Reporl 1993, ” 1993 Performance Indications for the U.S. Nuclear UtiliW lndusw” March

1994.

A u s ~Pmment of Energy, f)ep~r[men( oj”~nergy’s Team’s Ana/ysis of Soviel Designed VVERS, ~WNE-~86 (Washingtm ~: ~to-

. .

ber 1988).

5 Reliability and safety are not equivalent. A reactor can achieve high ml iability if i! is operated despite safety problems—until an accident

occurs. However, under a stringent safety regime, (here is a significant comelation between the two because many of the measures needed to

improve safety (e.g., intensive operator training and scrupulous maintenance) also improve reliability.

6 Fuflher detail is included in Richard Wi]son, “NUclear Power Safety in Central ~d Eastern Europe,” OTA c(~nt~ctor re~)~! (SePtember

1993).
76 I Fueling Reform: Energy Technologies for the Former East Bloc

start

Russia Model operation MWe

Kursk 1

Kursk 2

Kursk 3

Kursk 4

Leningrad 1

Leningrad 2

Leningrad 3

Leningrad 4

Smolensk 1

Smolensk 2

Smolensk 3

Ukraine

Chernobyl 1

Chernobyl 2

Chernobyl 3

Chernobyl 4

Lithuania

Ignalina 1

Ignalina 2

1

1

2

2

1

1

2

2

2

2

3

1

1

2

3

2

2

1976 1000

1978 1000

1983 1000

1985 1000

1973 1000

1975 1000

1980 1000

1981 1000

1982 1000

1985 1000

1990 1000

1971 1000

1971 (shutdown) 1000

1975 1000

1983 (destroyed in 1000

1986)

1983 1500

1986 1500

SOURCE: Richard Wilson, ‘(Nuclear Power Safety In Central and Eastern Europe,” OTA contractor report, September 1993.

placed while the reactor is operating, unlike U.S.

reactors, which must be shut down for refueling.

The RBMK design evolved from early plutonium production reactors. It was never built outside the Soviet Union, possibly because of

concerns that it could be used to generate weapons-grade plutonium. The reactors at Chernobyl

in Ukraine are of this type. The design has no direct counterpart in the West. RBMKs exist in Russia, Ukraine, and Lithuania. In addition to these

operating reactors, construction has ceased or

slowed at Kursk 6, Smolensk 4, and Ignalina 3, in

part because of public opposition following the

Chernobyl accident.

The second type, the VVER, is similar conceptually to the PWR, the dominant reactor of the

West. It is water moderated and cooled, and

evolved from reactors used for icebreakers and

submarines. This reactor has been exported, including to Finland, Hungary, and Bulgaria. The

former Czechoslovakia later assimilated the design and constructed several independently. Several models are extant. The oldest is the 440/230,

which was followed by the 440/213, both at 440

megawatts of electricity (MWe). The latest model

is the 1000 MWe VVER-1OOO.

Tables 4-1 and 4-2 list the reactors of greatest

concern. These tables do not include other types of

reactors, such as the Canadian-built heavy-water

reactors in Romania.

There are two main areas of concern with the

RBMK: core neutronics and the hydraulics of the

pressure tubes. The first refers to the nuclear reactions in the core. The RBMK has a positive void

coefficient, meaning that if water is lost from the

core, the reaction tends to speed up. Both water

and graphite are moderators (which slow neutrons

so that they will be more likely to cause another

fissioning when they strike a uranium atom), but

water also absorbs some neutrons. Western reactors are designed so that water must be present for

the reaction to continue. If some is removed from

the core, either through excessive boiling or a

loss-of-coolant accident, the reactor will shut

down (a characteristic known as a negative void

coefficient). This is an inherently stable design,

and such stability was a prime criterion in the early

days of nuclear energy, when many different reactor concepts were investigated.7 In the RBMK,

graphite provides all the necessary moderation.

As water is lost, the number of neutrons increases

7 U.S. ~actom ~i~emntly s~e in terms of the chain reaction; the reactor will automatically shut down the chain reaction If c(xdant is lost.

The major safety problem following a loss-of-coolant accident comes from decay of the fission products—the highly radioactive waste from the

chain metion. Fission products produce sufficient heat as they decay that the reactor fuel can melt (as at Three Mile Island) unless cooling is

maintained.
Chapter 4 Non-Fossil Fuel Technologies | 77

Unit Model —

Armenia

Armenia

Bulgaria

Kozloduy

Czech Republic

Dukovany

Hungary

Paks

Russia

Kola

Novovornezh

Slovakia

Bohunice

Mochovce

Ukraine

Rovno

Start

operation

1

2

1

2

3

4

1

2

3

4

1

2

3

4

1

2

3

4

3

4

1

2

3

4

1

1

2

230

230

230

230

230

230

213

213

213

213

213

213

213

213

230

230

213

213

230

230

230

230

213

213

213

213

213

1977

1980

1974

1975

1980

1982

1985

1986

1986

1987

1983

1984

1986

1987

1973

1974

1982

1984

1972

1973

1978

1980

1984

1985

1994

1980

1981

SOURCE Richard Wtlson, “Nuclear Power Safety m Central and Eastern Europe, ” OTA contractor report, September 1993

because absorption decreases, thereby increasing

the chain reaction. Under some conditions, such

as occurred at Chernobyl Unit 4, this is an inherently unstable design: the chain reaction can

multiply rapidly, leading to an explosion. This accident might have been prevented had the design

precluded too many control rods from being withdrawn from the core, or if operators had been thoroughly trained to recognize the risk.8

The obvious solution is to remove enough

graphite so that the reaction shuts down if water is

not present. However, this would be extremely

difficult in an existing reactor that is structurally

dependent on the graphite and where all work

would have to be done by remote control. Fixed

neutron absorbers (to supplement the movable

control rods) are being installed in the cores

instead, and the operational reactivity margin is

being increased. Improved monitoring and controls would also be beneficial.

Two other weaknesses are already being corrected. First, each control rod had a graphite tip to

match the surrounding moderator below the core

when fully inserted. Unfortunately, control rods

are reinserted from the top, and this graphite tip

adds to the core reactivity as it passes through, apparently the proximate cause of the Chernobyl explosion. These rods can be modified to remove the

extra graphite, but it has not yet been confirmed if

all RBMKs have been modified.

The second correction was to add a fast-acting

scram system to all RBMK reactors. The original

shutdown rods were suspended by a cable that

winds around a drum. About 20 seconds were required to insert the rods. The new system will allow a much faster shutdown in case of emergency,

possibly forestalling a major accident.

The major hydraulic concern is over the possibility of fuel channel rupture. These tubes are at

high pressure, and rupture can have serious consequences. Reactivity increases, as discussed

above; and, if several tubes rupture simultaneously, pressure in the cavity below the reactor cover

can increase enough to lift the head off, breaking

all the tubes and lifting out the control rods, as

happened at Chernobyl. Additional pressure relief

capacity is being added to reduce, though not

eliminate, this risk. Russian RBMK specialists

8 Richard Wilson, Nuclear Powier Safery, pp 7-8,
78 I Fueling Reform: Energy Technologies for the Former East Bloc

contend that there are no mechanisms by which

several tubes could rupture simultaneously (common mode failure). Detailed analysis is required

to verify this conclusion, since the consequences

of such a failure would be catastrophic. Only three

tube ruptures have occurred in the entire operating

experience of RBMKs, indicating that a multitube

rupture is a low-probability event. The U.S.-pioneered probabilistic risk assessment (PRA) could

be very useful in quantifying this risk. In addition,

steps to reduce the risks that any tubes will rupture

are warranted. Improved testing, monitoring, and

valve systems are under consideration.

The oldest VVER reactors, the 440-megawatt

model 230, lack some of the basic safety features

of Western reactors, in particular, emergency core

cooling systems (to keep the core from melting after a loss-of-coolant accident) and containment

vessels (to prevent the escape of radioactive materials after a severe accident). Pipe breaks that

could be handled easily by a Western reactor

would cause a serious accident in one of these

reactors. It is not practical to install these safety

features on an existing plant. Furthermore, the

reactor vessel is susceptible to radiation-induced

embrittlement, introducing the risk of a fracture in

the vessel such that any core cooling would be impossible. Finally, these reactors were not designed

for the level of seismicity that exists at some sites,

including Armenia (especially the older Unit 1 )

and Bulgaria.

However, it also should be noted that even the

older Soviet reactors have some positive features,

including a large water inventory and a low power

density. These features can help them ride out

problems such as “station blackout” (extended

loss of power to run the pumps that cool the core)

that could cause accidents at U.S. reactors. In

addition, while lacking a containment vessel, the

model 230 has an “accident localization system,”

which condenses steam and reduces the release of

radioactivity following the break of most pipes in

the reactor system.

The newer model 213 included an emergency

core cooling system and an improved accident localization system, but not a full containment except when sold abroad to Finland and Cuba

(construction of Cuba’s two reactors has been suspended). This reactor could withstand a considerably larger pipe break than the model 230. The

reactor vessel was also improved.

A comparison of key features of the 440 with

standard U.S. PWRs is shown in table 4-3.

The VVER-1OOO design incorporates a full

containment vessel and rapid acting scram systems. In other ways it is also more like a Western

PWR. With some modifications, such as increased fire protection and improved protection of

critical instrumentation and control circuits, this

design might approximate Western safety standards.

Other Safety Issues

Even well-designed plants can be risky. Sloppy

construction can result in unexpected weak points

or in unexpected behavior. Poorly trained operators can turn a minor mishap into a major accident.

Inadequate maintenance can allow deterioration

of critical systems. Safety is primarily a function

of people—people operating and maintaining the

plant well and being prepared to catch problems

before they become serious, people analyzing

plants to recognize a deficiency before it causes

any problems, and managers farsighted and tough

enough to insist that their organizations do things

right. Not only are well-operated plants safer, but

they can function more smoothly, producing more

power, which can be critical during this period of

energy problems.

In this regard, most Soviet nuclear plants appear to have significant problems. Quality control

was weak in many industries in the Soviet Union,

and nuclear plants do not appear to be the exception. Construction was poor, regulation almost

nonexistent, and no one seems to have been in

charge of ensuring that safety was paramount. Although less easy to document than design problems, operating problems can present even greater

safety risks. Russian plants operated at a consis-
Chapter 4 Non-Fossil Fuel Technologies | 79

System or function VVER-440 model V230 VVER-440 model V213 Two IOOP U.S. PWR

Reactor Protection System 4 systems Same as model V230 2 independent, multifunction systems. Ten separate

trips input to an interlock for

additional reactor trip.

Safety Injection (S1) system.

Two high-pressure, two

low-pressure pumps.

Emergency Core

System (ECCS)

Cooling No Emergency Core Cooling System. Periodic water

makeup system provides

limited replenishment of primary coolant emergency.

Three high-pressure injection pumps. Three lowpressure shutdown cooling

pumps.

Emergency Feed-water

(EFW) System

None. Two pumps.

Two supplementary EFW

pumps.

Two subsystems

Emergency Power Sources Two 6kV diesel generators,

One is assumed to run

continually.

Three 6 kV diesel generators. One is in hot standby,

one in cold standby, and

one in reserve.

Two emergency diesel

generators.

Two 220V DC station

batteries.

Three 220V DC station

batteries.

Two fully redundant 125V

DC systems and station

batteries.

Full containment for primary

system.

Localizatlon/Contain merit

System

Accident localization system. Pressure suppression

by means of spray system,

Accident localization system. Pressure suppression

by means of bubbler tower

and spray system.

Spray System Spray pumps discharge

into the accident localization system.

Three spray pumps. Two pumps.

Missile Barriers

Combustible Gas Control

None. None.

None.

Concrete missile shields.

A hydrogen gas control

system.

Decay heat removal using

reactor heat removal system with containment spray

system.

None.

Post Loss-of-coolant

Accident (LOCA)

Decay Heat Removal

Decay heat removal heat

exchangers in spray

systems.

Decay heat removal heat

exchangers in ECCS/spray

system.

SOURCE Derwedfrom U S Department of Energy (DOE), DeparlmerrtofEnergyS TeamkAnalysls of SovietDesigned WERs, DOE/NE-0086, October 1988

tently high level from 1990 through 1993.9 How- terprise in each country. Unfortunately, this is the

ever a good operation record is no guarantee most difficult form of technology transfer to deagainst operating failures (as at Chernobyl). fine and to transfer. Yet it is critical because nuAn essential element in assuring safe operation clear plants have to be built and operated to the

is instilling a culture of excellence in the entire en- highest standards to be both productive and safe.

g Nuc./ear Engineering ]n~ernaliorud, vol. 39, No. 478, May 1994, P. 15.
80 I Fueling Reform: Energy Technologies for the Former East Bloc

Such standards cannot be imposed solely by regulations; they require a voluntary commitment by

everyone involved. The U.S. industry has made

great improvements in achieving this dedication,

but continuing poor performance at some U.S. nuclear stations indicates that the lessons have not

been fully assimilated here.

Assimilation of a culture of excellence will be

even more difficult in the former East Bloc. To

some degree, the commitment will be encouraged

by the previous activities. It can also be promoted

by frequent contacts between individuals in various Eastern and Western nuclear enterprises, especially at the powerplants. Encouraging visits of

operators to U.S. nuclear powerplants for training

and exposure to U.S. procedures will be a significant help.

| Safety Assistance

U.S. safety assistance comes both directly from

the Federal Government and through other agencies and private organizations. The U.S. Department of Energy (DOE) and the Nuclear

Regulatory Commission (NRC) got involved after the Chernobyl accident with a review of reactor

designs to identify safety deficiencies and discussions with Soviet nuclear officials. This activity

has continued with the VVER reactors.

A Joint Coordinating Committee for Civilian

Nuclear Reactor Safety (JCCCNRS) was established in accordance with a 1988 memorandum of

cooperation between the United States and the Soviet Union. NRC and DOE are the main U.S.

members. Following the breakup of the Soviet

Union, this agreement was redirected to both Russia and Ukraine and extended for 5 years. There is

no agreement with Armenia, Lithuania, or Kazakhstan, which has an experimental liquid metal

reactor and a nuclear desalination plant. Negotiations are currently under way. The NRC has

agreements with Hungary, the Czech Republic,

and Slovakia.

The JCCCNRS has established a variety of

working groups, which met with their Russian

counterparts for information exchanges. The four

current groups address:

■ radiation embrittlement, structural integrity

and life extension of reactor pressure vessels,

■ severe accidents,

● health effects and environmental considerations,

● plant aging and life extension.

The U.S. program shifted from cooperative exchanges to specific assistance after the May 1992

conference in Lisbon on assistance to the New Independent States. The “Lisbon Initiative” includes:

operational safety improvements for the

VVER-440/Model 230 reactors, including

training and emergency procedures,

establishing a regional training center in both

Russia and Ukraine, including computer-based

simulators,

modifications to reduce risk at selected RBMK

and Model 230 reactors,

fire safety, starting with two plants in Russia

and Ukraine, and

improving regulation and safety standards.

Improved training, maintenance, and other procedures can partially compensate for equipment

and manufacturing deficiencies. Well-trained

operators can avoid damaging mistakes and can

react appropriately to incipient accidents. The

NRC is providing advice and assistance to the

emerging regulatory agencies, while DOE has focused on activities to assist operations. The U.S.

program includes training of operators and regulators, exchanges of information and people, including a program with U.S. utilities coordinated by

10 Slmi]m]y, ~ proFr]y designed and bui]t reactor is less likely m suffer a major accident even if operated ineptly. However, because of tie

potential consequences of a maj)r accident, all reactors should be designed, built, and operated to the highest standards. Unfortunately, most

Soviet reactors fail all three of these standards.
Chapter 4 Non-Fossil Fuel Technologies | 81

the Institute for Nuclear Power Operations

(INPO), an entity organized by the U.S. industry

following the accident at Three Mile Island. These

programs have brought Russian and Ukrainian

operators to this country to visit U.S. powerplants

and vice versa. Recently, equipment to enhance

safety has been purchased.

One of the largest and most useful U.S. financial contributions to date has been for reactor simulators. These devices are extremely helpful in

training reactor operators by simulating normal

and accident conditions. Operators can practice

and become proficient in handling events only

rarely experienced at actual reactors. Soviet simulators had been for routine operations only. Abnormal events are much more complicated to

simulate. U.S. assistance was important in the

construction of an RBMK simulator now at Smolensk (Russia) and a VVER 1000 simulator at Zaporozhye (Ukraine).

Regional training centers now being established will be at Balakovo in Russia and Khmelnitskiy in Ukraine (both sites operate VVER- 1000

reactors). The United States is funding the development of training programs and simulators at the

centers. Both should become operational by early

1996.

U.S. help is also important in preparing a

manual for emergency operating procedures for

the Novoronezh VVER 440/230 reactor. This is

intended as a prototype for other reactors in

Russia.

Inadequate fire protection is a major deficiency.

The Soviets had not paid much attention to fire

safety, and even systems that were supposed to be

fireproof turned out to be flammable (a problem

not unknown in the United States). There have

been several serious fires in Soviet reactors. U.S.

personnel have inspected Russian and Ukrainian

plants and made recommendations for upgrades,

some of which are surprisingly basic, such as replacing wood fire doors at Smolensk with steel

doors.

Total funding supplied by the U.S. Agency for

International Development (AID) for nuclear

safety assistance was $25 million in fiscal year

1992 ($22 million for DOE, the rest for NRC) and

$19 million in fiscal year 1993 ($14 million to

DOE the rest for NRC). In addition, reactor simulators cost $11 million in fiscal year 1993 (funds

supplied by the Department of Defense). Congress has appropriated $100 million for fiscal year

1994. This funding should permit some limited

safety upgrades at reactors.

The regulatory assistance by the NRC is designed to fill a major void. None of the East Bloc

countries had a strong, independent regulatory

agency that had the authority to shut down unsafe

plants unilaterally. However, Hungary, Bulgaria,

and the Czech Republic have regulatory bodies

sufficiently strong to get high-level government

attention paid to safety concerns. For example, the

Bulgarian regulatory body has twice been able to

get reactors shut down.

In May 1993, Presidents Clinton and Yeltsin

agreed to establish the Joint Commission on Technological Cooperation in Energy and Space. The

commission is chaired by Vice President Gore and

Prime Minister Chernomyrdin of Russia. Improving nuclear plant safety and regulation will be major interests of the commission. The commission

has agreed to a joint study on Russian energy alternatives (funded by AID) to set the context for decisions on reactor safety.

The United States has supplied only a small

part of the total assistance. The International

Atomic Energy Agency (IAEA) provides active

help. An IAEA inspection team alerted the West to

the very dangerous situation in the older Bulgarian reactors in 1991. It is analyzing other former

East Bloc reactors to determine the need for upgrades. However, the IAEA does not have the resources or mandate to supply more than advice.

Moreover, the United States has opposed giving

the IAEA a more forceful regulatory role on the

grounds that safety regulation is a national role.

The European Union has allocated a total of

about $500 mill ion for nuclear safety teams to visit reactors and install equipment to improve safety, including $13 million for upgrading Bulgarian

reactors.

The Group of 7 Industrialized Nations (G-7)

agreed in March 1992 on an action plan to upgrade

the safety of Soviet-designed reactors. In Decem-
82 I Fueling Reform: Energy Technologies for the Former East Bloc

The Temelin Nuclear Powerplant, a VVER-1000 under

construction in the Czech Republic with major assistance by

Westinghouse Electric Corp.

ber 1992, (after extensive negotiations) the G-7

agreed to establish a fund for upgrading reactors in

the former East Bloc. A total of 118.4 million

ECU ($136 million) has been contributed so far,

led by Germany (ECU 31.4m), the European

Union (ECU 20m), and France (ECU 15m). The

United States has contributed ECU 2m.11 The

fund, called the Nuclear Safety Account (NSA), is

administered through the European Bank for Reconstruction and Development (EBRD). The first

grant (about $28 million) has gone to Bulgaria for

upgrades to the Kozloduy reactors. The grant was

contingent on Bulgaria indicating its intention

(but not pledging) to close units 1 and 2 by 1997

and 3 and 4 by 1998. Reliable alternative power

should be available by then, including Kozloduy

units 5 and 6. This grant will pay for fire protection, inspection equipment, safety valves, electrical components, a new emergency feedwater

system, and control room equipment. The second

grant, $38 million in February 1994, was for Lithuania to upgrade the Ignalina RBMK plant with

new instrumentation, fire protection, and a training simulator.

The World Association of Nuclear Operators

(WANO), essentially an international INPO, is

also encouraging the exchange of safety information and expertise. WANO’s U.S. office is colocated with INPO.

I Nuclear Weapons Proliferation

One of the most serious threats to international

stability resulting from the breakup of the Soviet

Union is the possibility that nuclear weapons may

fall into the hands of irresponsible, hostile nations, or even terrorist groups. Even if the weapons themselves are adequately safeguarded,

special nuclear material (plutonium or highly enriched uranium), parts, or expertise for weapons

manufacture may become available.

As weapons are dismantled, large amounts of

plutonium and highly enriched uranium (HEU)

are removed. This material must either be protected or burned up in a reactor. HEU can be used

as fuel in conventional reactors by blending it with

ordinary uranium, resulting in low-enriched uranium. HEU has substantial value since its use replaces the normal enrichment process. The United

States has offered to purchase such uranium from

the FSU, in part to encourage the dismantlement

of weapons. However, some details of the agreement still need to be resolved. Plutonium is more

difficult to use in commercial reactors because its

use changes the fuel cycle and requires stringent

safeguarding. If it is not used to generate power, it

must be indefinitely stored and carefully guarded.

Russia plans to build a large storage facility for

both HEU and plutonium from weapons and is

studying options for plutonium disposal. These issues, including cooperation with Russia on dismantlement, are discussed in a recent OTA

report. 12

Much smuggling has been reported from the

FSU, including some nuclear materials, though no

I I E@ European Energy Report, “Nuclear Safety Account Grants Lithuania’s Ignalina Leeway” Issue 29, February 1994, pp. 4-5.

12 U.S. Congess, c)ffIce of Technology Assessment, Dismantling the Bomb andh4anaging the Nuclear Materials, OTA-O-572 (Wshington, DC: U.S. Government Printing Office, September 1993).
Chapter 4 Non-Fossil Fuel Technologies | 83

significant transactions of nuclear weapons or

weapons-grade materials have been documented.

Many observers are very concerned because the

economic and political disruption may have reduced the effectiveness of controls. Military personnel, civilian workers in arms plants, and

nuclear weapons scientists are suffering from the

overall economic problems as well as the partial

demilitarization. It is possible that someone may

be tempted to sell out to a renegade nation engaged in a clandestine nuclear weapons program.

Russia has inherited the nuclear weapons state

status of the Soviet Union, but three de facto

weapons states (Ukraine, Belarus, and Kazakhstan) have been created, at least temporarily.

Leaders of these three have promised to turn their

weapons over to Russia, but this agreement has

proved difficult to put into practice, especially in

Ukraine. This diffusion of authority further complicates control.

Ukraine’s large civilian nuclear infrastructure

presents an additional complication. To become a

nonweapons state, Ukraine must not only give up

its weapons but place its civilian nuclear plants

under international safeguards to ensure that nuclear materials are not diverted. Ukraine’s large civilian nuclear program will place an additional

burden on the IAEA.

In Russia, the military and civilian nuclear sectors are both within the Ministry of Atomic Energy, and some nuclear facilities have dual

purposes. For example, the Tomsk reactors were

built to produce plutonium, but they also supply

steam for the city’s district heating plant. Russia

no longer needs the plutonium but hasn’t yet

closed the reactors because the heat is still needed.

Using unemployed weapons scientists and engineers in the nuclear power industry could be a

constructive way to reduce the likelihood that they

may contribute to proliferation. Improving nuclear safety will entail considerable research and

analysis. Many of the weapons scientists and engineers have expertise that would be useful in

reactor safety. However, it is not clear how many

can make the transition to an enterprise with very

different objectives and constraints. Developing

an industrywide commitment to excellence may

be easier with new employees than with retrained

weapons experts. Using the weapons experts in research and development may be the best solution.

The United States and several other countries

have agreed to fund two international science and

technology centers, in Moscow and Kiev, to provide constructive work for former weapons scientists and engineers. Ratification of the agreement

stalled in the Russian Parliament, but President

Yeltsin promulgated it in December 1993. Ratification is even less advanced in Ukraine. If this

center cannot be maintained, alternative mechanisms could be considered, such as direct R&D

cooperation with existing institutions.

A forthcoming OTA report, Proliferation Issues and the Former Soviet Union, will discuss

these issues in more detail.

| Considerations for the Future

Current activities will help reduce nuclear safety

risks, but they are not proceeding as rapidly as desirable. Recipients have generally praised the

United States for the effectiveness of its assistance. However, coordination among multilateral

donors could be improved. Funding for projects to

improve safety, especially for expensive plant

modifications, has been slow. In fact, nuclear officials in the former East B1OC reportedl y are getting

quite tired of visits that seem more intended to

procure information than to supply help.

The first question is how hard to push for the

closure of the oldest, riskiest reactors (RBMKs

and VVER/230s). It is clear that these reactors are

well below Western safety standards. However,

the actual level of risk is not well enough understood to permit an analytical comparison of the

costs and benefits of shutting them down. The

countries that operate them are reluctant to close

them because they see the energy as vital until replacement power is available. Chronic energy
84 I Fueling Reform: Energy Technologies for the Former East Bloc

shortages are very debilitating for an economy and

pose their own risks to public health and safety. ’3

A case can be made that the nuclear risks must be

high before a responsible government should

close plants and thereby subject its people to a significant, long-term shortage.

No one really knows if the risks of another

Chernobyl accident are that high. Chernobyl Unit

4 was grossly abused during a unique test. Such

conditions are unlikely to be repeated. Thus, this

one accident is not necessarily a guarantee that

others will follow. The first PRA is only now being done for the RBMK, but it probably will be

years before the data are adequate for an overall

risk evaluation. PRAs are useful only if they consider the design, the quality of the components,

and the behavior of the operators. The latter two

factors require extensive databases for valid analyses.

However, there is no controversy over the conclusion that the RBMKs are much more prone to

accidents than Western reactors, and that such accidents are more likely to turn into catastrophes

because of the lack of containment and the limited

accident mitigation capability. If the risk of a major accident is one in a thousand years of operation

(a very high risk level, which is assumed here for

illustrative purposes), then the 15 RBMKs collectively present a risk of 1.5 percent per year. If they

are operated for another 10 years, there is about a

14-percent chance that one of them will suffer

another major accident. While that means that

there is better than a five out of six chance that an

accident won’t happen, the risk is much too high

by Western standards, especially if the consequences of the accident would be equivalent to

that of Chernobyl. More accurate risk analysis is

important for improving our understanding of the

problem. However, analysis should not be a substitute for action in making needed improvements

in reactors that are likely to continue operating.

Replacement power would probably involve

either natural gas or coal or the completion of

newer, safer reactors currently under construction.

Building new powerplants, even gas turbines, is

very expensive, and none of these countries has

the funds to do that. The World Bank suggested

that $18 billion would be required to replace the

plants by 2000, exclusive of fuel costs. None of

the gas-importing countries can afford to pay for

the gas they already need, and Russia would prefer

to export the gas for hard currency rather than bum

it at home. Coal plants are much more expensive

to build than gas plants, and would require additional funds for the pollution control systems

(e.g., flue gas desulfurization) necessary to avoid

worsening the environmental devastation in the

region.

An alternative would be to emphasize energy

efficiency to reduce the demand for electric power.

As discussed in a prior OTA report”, the potential

for efficiency gains is huge in all the formerly centrally planned economies. Aggressive efficiency

programs almost certainly could reduce demand

for electricity significantly, at least until economic

growth resumes. With a surplus of generating capacity, local policy makers can decide which

plants to shut down, based on economics, safety,

public concern, environmental considerations,

and national priorities. When all these factors are

taken into consideration, nuclear plants might or

might not be the highest priority to shut down.

They are generally cheaper to operate than fossilfuel plants, and pollution from coal and some oilfired plants is very damaging. The risk of a nuclear

accident at any individual reactor site must be

weighed against the costs of closing it. Although

13 U*S. Congress, Office of Technology” Assessment, Physical Vulnerability oj’Electric Systems 10 Natural Disaster and Sabota~e, OTAE-453 (Washington, DC: U.S. Government Printing OffIce, June 1990).

I d U.S. congress, office of T~hn(~logy Assessment, Energy E~iciency Techno/ogiesjbr Central and Eastern Europe, OTA-E-562 (Washingt(m, DC: U.S. G(wemment Printing OffIce, May 1993).
Chapter 4 Non-Fossil Fuel Technologies | 85

the collective risk appears high, the risk entailed

by anyone plant may not appear unreasonably

high to its operator.

For the time being,it appears likely that most or

all of these reactors will continue to operate unless

the West contributes far more assistance than it

has yet considered. Upgrading thereto Western

safety levels would be even more expensive than

replacing them—$24 billion, according to the

World Bank. One possible compromise may be to

provide grants to upgrade the newer plants and

correct the worst problems in the older plants,

with closure of the latter as soon as practical, as is

planned for the NSA grant to Bulgaria. Until recently, it had been assumed that several of the riskiest plants, such as the two operable reactors at

Chernobyl, would be shut down soon. Thus, little

has been done to upgrade their safety. The recent

Ukrainian decision to continue operations results

in the worst possible situation, at least until the

modifications at other RBMKs are implemented

there, too. Ukraine has agreed to shut the reactors

down when the power is no longer needed but has

not committed to a firm schedule.

Increased assistance would have several advantages, most obviously in reducing the risk of a serious nuclear accident. It would also provide

business opportunities for the U.S. nuclear industry, possibly leading to even greater sales later.

The sale of instrumentation and control systems

and nuclear fuel for two Czech reactors by Westinghouse Electric Corp. is an example of the type

of business that may emerge (see box 4-1). For

Westinghouse, the Temelin project represents not

only a foothold in the market, but also a demonstration project to convince other countries in the

region, most notably Russia and Ukraine, of the

effectiveness and need for such comprehensive

modernization programs.

The market in the West for nuclear power generation technology is flat, but the former East

Bloc, which includes 25 percent of the world’s

pressurized light water reactors, represents a potential multibillion-dollar market. Supplying

equipment and services to foreign reactors helps

U.S. companies remain in business, which would

help keep U.S. reactors on line and increase the

possibility of a nuclear revival later. Whether this

is an advantage or a disadvantage depends on

one’s views of nuclear power.

One barrier to material assistance in the FSU is

the concern of companies installing safety upgrades that if an accident happens despite the upgrade, the Western company could be held liable

for all damages. Since the cost of the damages

could far exceed the value of the business involved, companies will insist on limiting their liability. This has been done in the United States

with the Price-Anderson Act, which also provides

a no-fault mechanism for reimbursing those hurt

by a nuclear accident. Negotiations are underway

with Russia, Ukraine, and the Baltics to address

this issue, and some agreements have been

reached on liability provisions for U.S. companies

providing assistance.

Increased assistance could also provide opportunities for former weapons scientists and engineers to work on constructive projects using their

expertise. If these experts can be employed in nuclear reactor safety efforts, proliferation risks will

be reduced. The creation of one or several centers

for nuclear safety analysis could provide the

double benefit of producing useful information

and contributing to international stability.

There are two main disadvantages to increased

assistance. First, the cost would increase commensurately at a time of serious U.S. budget

constraints. Second, some people believe that no

amount of improvement can make these reactors

sufficiently safe and advocate shutting down at

least the riskiest ones in the very near future; any

remedial measures could prolong their operation

and thus be counterproductive. Some critics object to assistance because it would support the industry in this country or promote its prospects.

Thus, any proposal to increase support is likely to

be controversial.

Opposition emerged to the Westinghouse sale

to the Czech Republic, in particular to Eximbank

(the Export-Import Bank of the United States) financing. The Austrian government prepared and
86 I Fueling Reform: Energy TechnoIogies for the Former East Bloc

After the collapse of the Communist government in 1989, the Czech Power Co. (CEZ) had to decide

whether to complete construction of a Soviet-designed WER 1000 nuclear powerplant at the village of TemeIin. Units 3 and 4 were canceled because the power was not needed, but units 1 and 2 were more than 50

percent complete. A safety review determined that modifications were necessary to upgrade the plant to

Western standards. CEZ decided that the cost of modifying and completing the two reactors was reasonable.

Furthermore, the plant would have environmental advantages since up to 2,000 MWe of coal-fired capacity in

Bohemia could be closed, eliminating a major source of pollution in a heavily polluted section of the country.

The utility solicited competitive bids for new instrumentation and control (l&C) systems and nuclear fuel.

Westinghouse Electric offered the West’s most advanced technology at competitive prices and won the contract. In May 1992, the company signed a $419-million contract to provide new l&C and Western-manufactured fuel for the Temelin plant. Westinghouse applied for a $31 7-million Eximbank guarantee for a loan from a

consortium of commercial banks.

Opposition to the project developed, primarily over safety concerns. The government of Austria protested

the sale on the grounds that the original Soviet design was unsafe and that melding Western technology onto

a half-finished plant would not adequately improve it. A U.S. interagency technical review concluded that Temelin would meet standards. Eximbank approved the application in January 1994, subject to congressional

review. Congress took no action by the deadline in March 1994, which was tantamount to approving it.

Safety Issues

According to a International Atomic Energy Agency review, the WER 1000 design has both deficiencies

and advantages compared with Western standards. The modifications address the deficiencies. However,

as Austria points out, ’ some concerns (e.g., protecting key components against Internal missiles that

might be generated by an explosion) may not be addressed because critical structures are already built.

Furthermore, a major effort is required to integrate the Westinghouse modifications, and much information

will be needed from the original Soviet designers. It is not clear if all the necessary data and assumptions

will be available. Finally, problems in quality control of the construction to date leave concerns that hidden

problems may compromise safety.

CEZ responds that adequate data are available from Russia and that the upgrades wiII be shown to make

the plant meet high standards of safety.2 Furthermore, the US. participation (several U.S. companies besides

Westinghouse are involved) will assure high-level designs and workmanship. In fact, one of the major reasons

Westinghouse got involved was to promote nuclear safety, especially since a major accident in the former East

Bloc could have negative consequences for the nuclear industry in the United States and elsewhere.

U.S. Government Role

Financial guarantees have proved crucial to this project. Political risks and economic uncertainties limit

commercial banks’ willingness to lend capital for projects in the region, and nuclear power projects are generally viewed as especially risky. Westinghouse believes that U.S. government involvement is vital in facilitating

the upgrading of the nuclear power sector in the former East bloc and that a systematic overall strategy is

required rather than an ad hoc approach focused only on short-term repairs to the most dangerous facilities.

Critics of nuclear power prefer to end government export support. However, the public has few opportunities to intervene on exports, unlike domestic nuclear power actvities. Export financing iS an indirect

route for expressing concern. The U.S. government has taken the position that nuclear safety is a sovereign issue, to be determined by individual countries.

1 Advisors on the Specla[ Delegation of the Government of Austria, “Technical Memorandum regarding the Temelm Nuclear pOwer

Plant “

2 CEZ, /mor~flon on the Teme/in M% unpublished rePOrt
Chapter 4 Non-Fossil Fuel Technologies | 87

delivered a list of concerns,15 based largely on deficiencies in the design identified by the IAEA and

a review by a U.S. consultant. Austria was unable

to obtain all the reports needed for its evaluation,

and the concerns listed generally stem from

unanswered questions on how the deficiencies

identified earlier will be handled. In this case, Eximbank decided that the interagency review was

sufficient y positive and approved the loan. Temelin will be a new nuclear powerplant and can be

expected to operate for many years. Thus it is particularly controversial. Assistance to existing

powerplants maybe less controversial, especially

because they are likely to operate whether or not

they are improved.

DOE and NRC would be the agencies most appropriate for enhanced assistance programs for direct improvements in safety since they are already

involved. If new energy supplies to replace the

most dangerous reactors are considered, funding

will have to be increased, probably to well above

the $100 million level for the next decade. Much

of this might be funneled through AID. DOC and

Eximbank would have a major role. The Department of State also has an important role with overall strategy and coordination with other countries.

One factor that needs to be addressed, whatever

level of assistance is selected, is coordination with

other donor countries and multilateral organizations. There have been many complaints of redundant visits and discussions. When the needs are so

great and the resources so limited, it is important

not to waste efforts. This need is widely recognized, and steps are being taken. In particular, the

Group of 24 Nations (G-24) has set up a Nuclear

Safety Committee in Brussels to coordinate assistance. This is an area that will require continued

oversight.

Two final areas of cooperation should be mentioned because they have the potential for providing very useful information to the United States.

The first is on health effects of radiation. The

Chernobyl accident and other nuclear catastrophes have exposed a great many people to radiation. Studies of public health effects could be

expanded with additional funding. Collecting and

analyzing this data will improve U.S. understanding of this important area of science. The

JCCCNRS has a working group on the subject,

but funding is very limited. In January 1994, Russia and the United States signed an agreement for

the exchange of information on health and environmental effects of radiation, which should be

useful.

The second, annealing of reactor vessels, is of

interest as U.S. reactors age. 16 Neutrons generated

in the core impinge on the reactor vessel and gradually embrittle it. After many years, the vessels

become so brittle that they could crack under certain conditions and lose their ability to maintain

cooling in the core, leading to a meltdown. If the

lifetimes of the current generation of reactors are

extended, reactor vessels may have to be annealed

to reduce the brittleness. Russia has already done

this on several reactors because their design and

materials leave them more subject to embrittlement. This has been an active subject of discussion (including a working group of the

JCCCNRS), and Russia has already provided considerable information to American researchers.

Further cooperation could be valuable.

ELECTRIC POWER TECHNOLOGIES

Unlike fossil energy supply discussed in chapter

3, electric power is well developed in every country of the former East Bloc. Generating capacity

(but not fuel supply) is adequate almost everywhere, if only because demand has dropped with

economic decline. Transmission and distribution

Is Advisors on the SWcia] Delegation of the Government of Austria, “Technical Memorandum regarding the Temelin Nuclear Power

Plant,” unpublished document February 1994.

lb Annea]ing involves hea[ing the reac[(~r vessel to a high temperature, which repairs damage to the metal. II is difficult to do because the

reactor vessel is very large, and both geometry and radiation limit access.
88 I Fueling Reform: Energy Technologies for the Former East Bloc

Capacity Gwe Production billion kWh

Country 1991 1990 1992 1991 1990

Russia

Ukraine

Kazakhstan

Moldova

Belarus

Kyrgyzstan

Turkmenistan

Uzbekistan

Tajikistan

Armenia

Georgia

Azerbaijan

Latvia

Estonia

Lithuania

213.0

54.4

NA

3.7

5.8

NA

NA

11.6

NA

NA

NA

5.8

2.1

NA

5.1

213.3

55.6

17.9

3.7

5.8

3.7

3.2

11.3

4.6

3.8

4.2

5.8

2.1

3.5

5.1

1018.0

253.0

81.0

11.0

37.6

11.8

13.1

50.9

16.8

6.8

11.5

19.8

8.5

15.9

28.2

1072

279

86

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

1082

299

87

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA = Not Available

SOURCE Matthew J. Sagers, PlanEcon Energy Outlook ~orthe former Soviel Union, (Washington, DC June 1993)

systems are largely equivalent, or even superior,

to those of the West. Lenin asserted that “Communism is Soviet Government plus the electrification

of the whole country.”17 Electric power thereafter

had a high priority among the central planners.

Nevertheless, the sector has severe problems.

In particular, many fossil fuel-generating plants

operate poorly and are among the worst sources of

pollution in the region. Furthermore, a high fraction are nearing the end of their expected lifetimes

and must be replaced. Finally, as in other sectors,

management is unfamiliar with the concepts of

operating under a market economy, such as finance, customer relations, pricing, and regulation.

Reliable, high-quality, electric power is essential for any modem economy. Upgrading electrical systems will make an important contribution

to realizing the U.S. goal of revitalizing these

economies. The surge in retrofitting old plants and

building new ones that must occur with revitalization should provide many commercial sales. U.S.

electrical equipment manufacturers could have an

unusual opportunity to export, unlike in Western

Europe, where markets are largely closed to foreign companies.

I Status of the Electric Power Sector

Generating capacity and recent production are

shown in table 4-4. Production has declined in all

these countries because of reduced demand and

sometimes fuel and parts shortages.

These statistics depict a relatively wellendowed sector, especially in comparison with

other energy sectors. In fact, in some countries,

such as Lithuania and Ukraine, electricity is much

17 ~~lie ~mme, ‘*connecting With Russian T& D,” EPR/ Journul, Jan/Feb 1992, p. 28.
Chapter 4 Non-Fossil Fuel Technologies | 89

less subject to interruptions than are oil and natural gas, which must be imported from Russia.

Many countries have indigenous sources of coal

and hydroelectricity, and nuclear fuel is relatively

cheap even if imported. In other areas, including

Georgia, Armenia, and Eastern Siberia, severe

shortages of electricity have occurred because of

fuel shortages, mostly due to ethnic struggles or

delays in construction.18

However, as in so many other sectors of these

economies, much equipment is old and in poor

condition. As discussed above, over 20,000 MWe

of nuclear capacity are likely to be shut down over

the next decade. Most fossil fuel technology

(though not all) is also well below Western standards. As Central European countries move toward integrating their economies (and their

electric grids) with Western Europe, they will

have to meet much higher environmental standards. Some powerplants can be retrofitted with

pollution control equipment, but others will have

to be replaced.

The major problem inhibiting rehabilitation is

the lack of capital. Powerplants are expensive.

None of these countries can afford to rebuild their

electric power systems with so many competing

needs for very limited capital. Electricity can still

be produced, and the inefficiency and pollution of

current facilities seem like minor problems

compared with massive unemployment and lack

of heat.

The power companies themselves are unable to

undertake costly construction because their revenues are still based mostly on what users can pay

and generally do not cover costs. Only in the

Czech Republic has any significant move toward

privatization of the electric sector taken place. In

general, market reforms in the electric utility sector depend on market reforms in the country as a

whole, and these have not been progressing very

rapidly anywhere. The status of market reform in

various countries is detailed in the country -specific discussions below and is summarized in table

4-5. Countries are listed in order of progress in

electric sector reform. Note that in the case of utilities, privatization is not a prerequisite for market

reforms. Many utilities in Western Europe and the

United States are government-owned, but still operate effectively in a market economy.

Russia

The Soviet Union controlled its entire electric system from Moscow through the Ministry of Energy

and Electrification. Eleven Regional Unified Energy Systems were responsible for generating and

delivering the power within their jurisdictions.

Three main transmission networks—the “national” integrated power grid extending over 3,000

miles from the border with Poland to Lake Baikal

in central Siberia, the Central Asian grid, and the

Far East grid-cover most of the FSU. After 1991,

ownership of the various components devolved to

the new republics, but the national grid is still operated as an integrated unit, much like the main

U.S. grids.

In 1993, the first step toward privatization was

taken when the Russian Joint Stock Company for

Power and Electrification (RAO ESS) was

created. It owns and operates the51 largest powerplants and the transmission grid. The plan is to sell

20 percent of the company to Russian citizens for

vouchers that already have been distributed.

Thirty percent will be assigned to regional development organizations, and the remaining 50 percent will be retained by the Federal government,

presumably temporarily.

Poland

Poland has reorganized but not privatized its

power industry. Formerly, almost all activities—

mining, power production, transmission, and distribution—were centralized in the Union of Power

and Brown Coal. This inefficient structure

I g Matthew J. sagen, ‘+~e Energy lnduswies Of the Former USSR: A Mid-Year Survey,” Posr-Sovier GeograPhy, vO!. 34, No. 6, 1 ~~. PP.

403-407.
90 I Fueling Reform: Energy Technologies for the Former East Bloc

General Power

market sector

Country reforms reforms Comments

Czech Republic

Hungary

Poland

Slovenia

Slovakia

Russia

Ukraine

Bulgaria

yes

yes

yes

yes

yes

some

some

yes

yes

plans

plans

plans

plans

plans

no

no

Generating utility already

partly private.

Moving to mixed private/

govt ownership.

Variety of ownership

structures possible.

May use Czech-type

vouchers,

SOURCE Office of Technology Assessment, 1994

has been split up. Power is generated by 28 enterprises, which sell their power to the Polish Power

Grid Co. There are 33 distribution companies that

buy power from the grid and sell to final consumers. Poland has embarked on a considerably more

radical reorganization than has been attempted in

the United States, though several European countries, such as the Netherlands, are following a similar scheme. An earlier OTA report analyzed such

a plan.19

Czech Republic

The Czechoslovakian government had carried out

a reorganization of the state power industry similar to that of Poland. The former power company

had owned and operated almost all powerplants,

the transmission and distribution grids, and some

electrical equipment manufacturing plants. Following the national and industry breakups, The

Czech Power Company (CEZ) controls only generation and transmission, and eight regional distribution utilities deliver the power to customers.

CEZ has been organized as a private corporation,

and one-third of the stock has been sold publicly.

The distribution utilities are expected to be fully

privatized by the end of 1994.

Hungary

The Hungarian Electricity Board (MVMT) maintains central control. Subsidiary companies are responsible for power generation, transmission, and

distribution. The subsidiary utilities are nominally independent, but MVMT regulates revenue

flow between producers and distributors. A plan

for privatization has been announced, but little

progress has yet been made. The government is

likely to retain up to 50 percent of the shares in the

companies.

Hungary has insufficient generating capacity

for its own needs and imports about 30 percent of

its power from Ukraine. This will conflict with

joining the Western European power grid because

19 U.S. Congress, Office of Technology” Assessmnt, Electric Power Wheeling and Dealing: Technological Considerations for Increased

Competition, OTA-E-409 (Washington, DC: U.S. Government Printing Office, May 1989).
Chapter 4 Non-Fossil Fuel Technologies | 91

individual members are expected to generate most

of their own power or import it from other members. New facilities and transmission lines would

have to be built.

| Technology Needs and Cooperation

Many technologies used for generating electric

power are behind Western standards, in large part

because relatively few new plants have been

constructed in recent years. Modernization is required across the region. The most pressing needs

for non-nuclear technologies involve clean coal,

gas turbines, and demand-side management. In

addition, expertise in operating and regulating

market-based utilities is almost completely absent.

There are many opportunities for Western investment and cooperation in the FSU electric

power sector. Russia and Ukraine are actively

seeking joint ventures and cooperative agreements to modernize their electric power industries. But Western involvement has been limited

by sector restructuring and political and economic

uncertainties. To date, Western companies have

focused their efforts on data collection and market

evaluations. Nevertheless, several joint ventures

have been established and more are sure to follow.

Clean Coal

Coal is the major domestic energy resource for

many countries, and wide-scale use is inevitable.

However, a large fraction of the pollution in Central Europe results from the uncontrolled combustion of coal in powerplants. These plants will have

to be either replaced or upgraded with environmental protection equipment such as flue gas desulfurization (FGD) systems (pollution control

technologies are discussed in the following chapter). The market for replacement and refurbishment of coal-fired powerplants could be very

large.

Coal can be burned quite cleanly (except for

carbon dioxide emissions) with the proper equipment. The United States has pioneered clean-coal

technologies with a large program at DOE. Some

of this expertise has already been made available

to Poland (see box 4-2). Coal cleaning, an attractive option for near-term reduction of pollution,

was discussed in chapter 3. Fluidized-bed combustion (FBC) and integrated gasification combined cycle (IGCC) are relatively new

technologies that can be employed in new plants,

resulting in efficient power production and very

low levels of emissions. FBC and IGCC technologies are emerging as competitors to conventional

coal-fired plants, particularly in areas where highsulfur coals are used and emissions are strictly

limited. Moreover, the IGCC technology requires

less land and water than conventional scrubberequipped coal-fired powerplants.

The United States is highly competitive in

these new technologies and in conventional, pulverized-coal combustion with FGD. Westinghouse Electric Corp. formed a joint venture with a

Polish partner in 1992 to retrofit seven power stations with new control and desulfurization systems. The contract will be worth about $2 billion.

Gas Turbines

Shifting to the use of natural gas instead of coal or

heavy oil in electric power stations is an option for

Russia and other gas-producing countries. However, gas is also a major earner of foreign exchange, and burning it at home will reduce

exports. Hence, its use must be as efficient as possible. Modem, high-efficiency gas turbines,

introduced recently by American manufacturers,

are based largely on aircraft engines. They are rapidly becoming the technology of choice for new

generating capacity in this country because the

captital costs are much lower per kilowatt than coal

or nuclear plants, they can be installed quickly in

small quantities as demand grows, they bum natural gas, which is still quite plentiful, and they produce only low levels of pollution.

Russian and Ukrainian military aircraft engine

factories, currently largely idle, could convert to

the production of turbine generators. Western finance and technology are needed to set up the new

assembly lines that would allow rapid production.

Several recent joint ventures illustrate the potential for gas turbine production in Russia. Siemens,
92 I Fueling Reform: Energy Technologies for the Former East Bloc

Krakow, Poland, suffers from severe air quality problems, due largely to the burning of coal for electricity

production and space heating. In 1989, President Bush visited Krakow and pledged U.S. support to help clean

up the air. The Support for East European Democracy (SEED) Act of 1989 authorized $10 million for DOE to retrofit a coal-fired powerplant there. This section of the Act was intended both to help cleanup Krakow’s air and

to promote U.S. clean coal technology, by specifying that the retrofit “shall be carried out by one or more United

States companies using United States technology and equipment manufactured in the United States.”

In 1990, DOE and Polish officials signed an agreement establishing a Bilateral Steering Committee to

oversee the retrofit. The committee selected the Skawina Power Station near Krakow, for the retrofit. Skawina

has 11 boilers of 50-MWe each. In August of 1990, DOE requested proposals from U.S. companies for clean

coal technologies that would reduce sulfur dioxide (S02

) emissions from one boiler by 65 percent.

The legislation left the definition of “U.S. companies” to DOE, and it proved difficult. DOE’s initial definition

was a company incorporated under U.S. laws and with at least 50% of the voting stock held by U.S. citizens

or firms. However, this definition would have excluded all but a very small number of firms. Furthermore, determining stock ownership, especially if the stock was held by mutual funds, would have been difficult. DOE

dropped the stock ownership requirement. By one estimate, this change allowed an additional six companies

to be eligible for the project.

In May 1991, DOE awarded a $7.8 million contract to AirPol Inc., of Teterboro, New Jersey, a subsidiary of

FLS miljo of Denmark, to design and install a flue-gas desulfurization unit. AirPol then showed that an additional boiler could be easily retrofitted by simply enlarging the size of the desulfurization unit. The Polish government agreed to cover the additional $3.9 million to extend the system to a second 50-MW boiler. Airpol

worked closely with several Polish companies, including Mostosal and Elektrim. The modification will allow

the boilers to meet Poland’s stringent 1998 S02 emission limits.

In November 1993, the new system was dedicated. Testing is under way and the system is expected to be

fully operational by Spring 1994.

a Germany company, and St. Petersburg Metallic an economic opportunity not otherwise available.

Plant formed a joint venture to produce gas turbines. Asea Brown Boveria (ABB), an international company with a 20-percent U.S.

component, is also very active in the Russian market. One of ABB’s most recent activities is the

formation of ABB Uniturbo, a joint venture to

produce gas turbines.

The advantages for Russia would be improved

technology that could replace polluting and unsafe generating stations and meet new needs at

low cost. In addition, production of advanced turbines could become a major economic asset, helping in stabilization. For the West, participation in

the form of investment and licensing would create

The U.S. national interest would also be served

because international stability will improve if military factories are redirected to civilian goals

instead of selling arms. 20 Russian-made turbines

need not be directly competitive with U.S.-made

models if the technology keeps improving, as appears possible.

Demand-Side Management

Many U.S. electric utilities promote energy efficiency by their customers. They provide information and sometimes financial support for

customers to install equipment that reduces their

Zo Robefl H. SWO]OW, Cqnversjon m Electric Power Objectit’es of the Russian Production Lines for Gu.$ Turbines for MilitaV Aircrafi,

unpublished notes from conversations in April 1992 with academicians Oleg Favorsky and Alexander Sheindlin.
Chapter 4 Non-Fossil Fuel Technologies | 93

Electrlcity savinga

Low ease High case

Residential end uses

sector

Space heating

Water heating

Central air conditioning

Room air conditioning

Dishwashers

Cooking

Refrigeration

Freezer

Residual appliances

Total residential*

Industrial end uses

Motor drives

Electrolytic

Process heating

Lighting

Total industrial*

Commercial end uses

Heating

Cooling

Ventilation

Water heating

Cooking

Refrigeration

Lighting

Miscellaneous

Total commercial*

Total*

32.2%

32.3

29.1

18.5

5.2

7.9

22.1

24.0

27.8

27.1%

28.5%

18.8

7.9

16.7

23.7%

12.7%

30.0

30.0

40.0

20.0

12.2

22.2

18.2

22.5%

24.4%

54.8°A

66.2

34.4

32.3

26.3

18.2

48.0

32.4

40.0

45.5%

45.0%

29.7

13.3

33.3

38.3%

23.6%

70.0

50.0

60.0

30.0

34.1

55.6

36.4

48.6%

43.9%

● Totals are weighted averages

SOURCE: U S Congress, Off Ice of Technology Assessment, Energy

Efficiency Challenges and Opportunities for Electric Utilities, OTAE-561 (Washington, DC: U S. Government Prmtmg Office, September

1993)

use of electricity. 21 Over the past 15 years, public

utility commissions and utilities (realizing that

prices will stay lower with lower growth because

new plants have become so much more expensive

than existing ones) have pioneered the concept of

demand-side management (DSM), where electric

utilities help their customers improve efficiency.

Utilities have been given incentives to ensure that

their interests correspond to their customers’ interests.

Power companies in the former East Bloc are

also accustomed to managing their customers’

consumption, but their approach used directives,

not incentives. Until the late 1980s, demand grew

rapidly, and construction did not always keep

pace. Shortages often developed, and large customers had to be rationed. Sometimes residential

areas were blacked out or, as in Romania, restricted to a very limited number of light bulbs and

appliances. Over the past several years, demand

has dropped with economic activity. Restrictions

have been minimal in most areas, though fuel

shortages for powerplants are increasingly likely

to revive them in some countries.

Interest is growing in ways to reduce demand to

minimize the new plants that must be built and to

reduce pollution. DSM and the closely related

concept integrated resource planning (IRP)-a

planning process that evaluates both supply and

demand options to determine the most economical and reliable system—have largely been developed in the United States. Applications for

efficient technologies and the range of savings

that could result in the United States are shown in

table 4-6. Savings in Central Europe and the FSU

should be even higher because efficiency has been

ignored for so long.

DSM techniques include information programs to alert customers to potential energy savings measures, rebates or loans to help finance

improvements, and performance contracts with

energy service companies to install energy-saving

equipment at customers’ facilities. Implementation of these techniques depends primarily on

utility management understanding of the opportunities available and having the appropri21 The U.S. expefie~ with DSM is deseribed in detail in a recent OTA report: U.S. Congress, Office of Technology As=s~nt, E~rgy

Eficiency: Cha//enges and Opportunities for Electric Utilities, OTA-E-561 (Washington, DC: U.S. Government Printing Oflice, September

1993).
94 | Fueling Reform: Energy Technologies for the Former East Bloc

U.S. partner East Bloc Partner

Central and Eastern Europe

Houston Power and Lighting

Southern Electric International

Commonwealth Edison

Central Maine Power

New England Electric Company

Boston Edison

Central Vermont Public Service

FSU

Pennsylvania Power and Light

Cincinnati Gas & Electric

National Hydropower Association

Edison Electric Institute

American Gas Association

American Gas Association

City of Anaheim Power Utility,

Southern California Edison, and

City of Pasadena Water & Power I

Czech Power Works

Slovak Power Enterprise

Polish Power Grid

Bulgarian Power Authority

Hungarian Electric Companies, Ltd.

Rumanian Electric Co.

Latvenergo (Latvia)

Kievenergo (Ukraine)

Kazakhstananegro

State Energy Co. of Kirgizstan

RAO EES Rossii (Russia)

Gasprom (Russia)

ROSGAZIFIKATFIA (Russia)

Ministry of Energy and Fuel (Armenia)

SOURCE U S Energy Assoclat!on, March 1994

ate incentives and resources. Western encouragement can involve policy advice (to get pricing,

regulations, and incentives correct), utility management advice (to improve understanding of cost

minimization and financing), advice on specific

DSM/IRP techniques, and assistance in manufacture of energy-efficient products. Regulatory

agencies have played an essential role in instituting DSM in the United States, and assistance in

setting up effective, cost-based regulation and

pricing is likely to be critical in the former East

Bloc.

Electric Power Company Management

The power industry is one of the few that has valued efficiency, at least in some ways. As noted below, the Soviet Union pioneered supercritical

boilers and ultra-high-voltage transmission because they reduce energy losses. However, this

thinking did not permeate utility operations. U.S.

utilities operate with far fewer personnel and use

more modem technology.

Managerial skills and operating procedures are

being upgraded by an intriguing program-the

Utility Partnership Program (UPP)--funded by

AID at the U.S. Energy Association (USEA). In

this program, U.S. utilities form partnerships with

counterparts in Central and Eastern Europe. A

similar program for FSU utilities—the Energy Industry Partnership Program (EIPP)—has been

created more recently. Partnerships are shown in

table 4-7.

The UPP and EIPP pay for visits in each direction to exchange information on engineering, finance, marketing, planning, plant operations, and

other aspects of utility operation. The types of activities are described in box 4-3. The program appears to be working well. Participants report that

the exchanges are fruitful.

The contacts developed have led to commercial

contracts. Part of the purpose is to introduce the

partners to U.S. vendors. For example, the Southern Company received a large contract from its

Slovakian partner to refurbish a power-plant.

Demands on the time of the U.S. partners has

grown, and they are hesitant to deepen their role

because of their accountability to their stockholders and Public Utility Commission. Only travel
Chapter 4 Non-Fossil Fuel Technologies | 95

The U. S.-Eastern Europe Utility Partnership Program, was implemented by AID and USEA in October

1991 to “provide a mechanism which enables the experience of U.S. electric utilities to be transferred to

Eastern European electric utilities, thereby helping address institutional Issues, including free-market managerial challenges and technical, financial, economic, regulatory and environmental issues. ”1,2

Central and Eastern European power companies are paired with an American utility and participate in a

variety of activities, including executive exchanges and seminars on topics such as customer service, environmental issues, and rate regulation. An Information exchange program provides general support for the

partnerships by supplying resource material, technical reports, and funds for utility officials to attend industry conferences in the United States. Industry groups such as the Edison Electric Institute, the Electric

Power Research Institute, North American Electric Reliabilty Association, and American Public Power

Association are often Involved in UPP activities,

The UPP has been mutually beneficial. Professionals at Central Maine Power (CMP) taught courses in

accounting and customer service practices to individuals at Bulgarian NEK. CMP participants gamed valuable managerial experience and learned from the technical expertise of the Bulgarians, s Overseas contacts established through the UPP offer U.S. utilities the possibility of future business,

As the program progresses, interactions have become focused on specific problems of the East European utlilties, demanding more of the U.S. partners, A seminar on financial management, for example, provided a general perspective on the field, but not the time and expertise necessary to develop and implement a corporate financial plan, In response, more intensive training activities are to be incorporated into

the UPP in 1994.

The UPP has grown in size as well as intensity Increased activity has required additional funding, Originally, the program was projected to cost $4,8 million over 3 years, A subsequent amendment to the agreement, signed in October 1993, estimated $226 million over 6 years (1992 to mid-1997).

Both sets of partners are enthusiastic in their support of the UPP, During a strategic planning session

held in Budapest in November 1993, representatives showed strong interest in integrated resource planning, demand side management, and environmental issues for future topics for cooperation,

I Amendment to USEA Cooperate Agreement EUR-0030-A-00-l 085-03

2 A more recently established program, the Energy Industry Partnership Program (E IPP), funded through AID and administered

by the USEA, arranges slmllar partnerships in the former Sowet Union

3 Phone conversation with Connie Irland of Central Maine Power, Dec 28, 1993

and incidental costs (not labor) are covered by the subsidiaries to participate in the consultancy grant

AID grant. AID has introduced a consultancy

. -

program. 22 The first round of proposals is now ungrant program for projects that require consider- der evaluation.

able time by the U.S. partner (e.g., intensive training) to encourage continued participation. This Reverse Technology Transfer

grant program, open to all utilities, provides an al- In some cases technology in the former East Bloc

ternative to UPP funds. Utilities can propose spe- is superior; therefore the United States can also

cific projects. Some utilities have created

22 phone Conversa(lon” with Eric Haskins, manager, Utility Partnership Program, USEA, ~c. 28, 1993.
96 I Fueling Reform: Energy Technologies for the Former East Bloc

Topic Brief description EPRI interest

Supercritical Powerplants

Boiler Efficiency and Emissions

Adjustable Speed Drives(ASD)

Thyristor Steam Turbine Startup

Gas turbines

Steam turbines

Electric Generator

Superconducting Electric Generator

Modified Oxygenated Chemistry

Coal Refinery

Slagging Boiler Studies for Lignite

District Heating Studies

Ash Metals Extraction

Oxygenated Hot Water Cleaning of

Boilers

Component Life Assessment

Boiler and turbine temperature and

flow conditions for low power

operation.

New combustion air admission

methods.

Assessment of EPRI guides.

Reduced temperature variation in

steam turbine. First of a kind for

steam turbine startup.

New water cooling scheme for high

temperature blades.

Titanium blades for high back-pressure turbines.

New design with water-cooled rotor

and stator.

300-MW design already built.

Improved oxygen treatment for steam

chemistry control.

Liquefaction and gasification of coal.

New modifications to reduce

slagging.

Optimization of cogeneration turbine

operation.

Ash melting and metals extraction.

New application for boiler cleaning

and reduction of waste disposal.

Life extension of power plant components.

Data on how to slide pressure through

the critical point. New approach for

Us.

Efficiency and NOx improvements.

Validation of EPRI ASD guidelines.

Step improvement in blade cooling

over current methods.

Possible solution to higher back pressures.

Elimination of hydrogen, more efficient generator, better reliability.

Reduces R&D costs.

Reduction of blade corrosion.

Use of low-rank coals for gasification,

smokeless fuel. Wide application in

Eastern Europe, China.

Non-slagging boiler for high-moisture,

high-ash coals.

Modification of existing plants for district heating.

Key elements of a coal refinery.

Reduced tube failures and less chemical cleaning.

Validation and updating of EPRI life

assessment tools.

SOURCE Adopted from Tony Armor, Director, FossIl Power Plants Department, EPRI, fax communlcatlon, Oct 12, 1993

profit from technological exchange. The highest and pressures). U.S.-Russian cooperation in such

voltage transmission line in the world is in Russia areas has already started, in particular at the Elec-

(1,150 kilovolts vs. a maximum of 700 kilovolts tric Power Research Institute. Table 4-8 lists some

in the United States). Furthermore, Russia has far recent fossil fuel technology interchanges with the

more experience with supercritical steam turbines FSU. Joint R&D cooperation could be very bene-

(which are more efficient than conventional tur- ficial.

bines because they operate at higher temperatures
Chapter 4 Non-Fossil Fuel Technologies | 97

I Barriers to Technology Cooperation

and Sales

As in all other areas, the two major constraints to

rapid increases in activity are the political situation in these countries and the limited financial resources. Other factors are also relevant, some of

which are peculiar to the electric power industry.

Political Constraints

Western electric utilities, whether private or government owned, operate in a very different milieu

from enterprises in the former East Bloc. There,

electricity is considered to be part of the social

safety net as well as a key industrial input. Prices

have been determined more on the basis of what

the customer could afford than the cost of the

power.

These countries are devising energy and regulatory policies but often do not have a clear concept

of the role that pricing, or the utilities themselves,

could play. Former regulations are no longer enforced, and agreements for power limitation are

often ignored. In theory, state-owned utilities can

easily implement national policies, but the practice will be difficult. The abolition of central planning could have a perverse impact on the rational

allocation of power. Considerable help-both advisory and material—will be needed to rationalize

energy policy and institute realistic pricing.

Financial Constraints

Technology and engineers are sufficiently good in

the former East Bloc that, given unlimited financial resources, power companies could construct

systems largely equivalent to those in the West.

However, few of these companies have the resources to buy much from the West, and few

equipment manufacturers can afford to modernize

their facilities and products.

Substantial equipment and service sales are

possible in this sector, but only if adequate financing is made available. Since many power systems

will eventually be integrated with the Western European grid, there will be a natural tendency toward Western European equipment unless U.S.

firms can offer favorable terms.

Holesovice Electric Substation, Prague Electric Distribution

Utility.

Institutional Constraints

In some of these countries, the structure of the

electrical power industry is changing. This

introduces uncertainty into their planning, even

though the intent is to make the utilities more responsive to market forces. In Russia, generation

may be divided into 70 utilities. In some countries, generation, transmission, and distribution

are being separated, a process that is difficult even

in countries without economic chaos in other sectors. Utility restructuring will remove some incentives since decisionmaking will be divided

between utilities that sell to end users and utilities

that generate power and build powerplants. These

changes will take time and considerable care to

ensure that reliability of power supply is not jeopardized.

Foreign investors have expressed considerable

interest in building independent powerplants. Although this would solve financial constraints and

upgrade technology, investors must see political,

legal, and regulatory stability before they invest.

DSM is even more uncertain. Low rates do not

justify efficiency investments by customers, and

low revenues do not permit utilities to invest. The

structure of electricity demand is also less favorable than in the United States. Residential and

commercial customers have proven more amenable to DSM than has U.S. industry. In the former

East Bloc, the residential and commercial sector

consumes one-third of the electricity, half the frac-
98 I Fueling Reform: Energy Technologies for the Former East Bloc

tion in the United States and thus a smaller target.

In addition, some industrial customers will close,

but it is not always easy to tell which. Obviously, it

is not worth improving the efficiency of plants

about to close.

Russia has a complete equipment supply industry, which in some ways rivals that of the West.

Therefore, it is unlikely that Russia will buy large

quantities of electric power equipment from the

West. Other countries are better prospects for

sales.

| Potential Policy Improvements

Steps that the United States could take to help

modernize the electric power industry are similar

to those for other sectors. High-level policy advice

and encouragement to introduce market reforms

and realistic pricing is essential. Enactment of legal protections and currency stabilization will be

needed to encourage foreign participation. Technical assistance is likely to be important. AID programs can be strengthened and expanded. UPP

and EIPP appear to be particularly attractive candidates for expansion.

On the commercial side, additional financing

will be essential to assure that U.S. firms remain

competitive. Eximbank loan guarantees and

Overseas Private Investment Corp. insurance are

vital parts of a U.S. presence there. Trade Development Agency feasibility studies are also working well and could be expanded.

RENEWABLE ENERGY TECHNOLOGIES

A vast array of technologies is used to capture and

convert wind, sunlight, geothermal heat, falling

water, and organic biomass into energy. Renewable energy sources can heat homes, supply electrical power and process heat, and fuel cars. Some

renewable sources can be converted to feedstocks

for producing chemicals. In general, renewable resources are inexhaustible and widely, but irregularly, distributed. Because of the latter, storage is

very important.

The potential for renewable is enormous, but

only a small amount of the resource is economically recoverable at the present time. In the United

States, for example, renewable provide about 9

percent of the total energy used annually, mostly

from hydroelectric power.23

Over the last two decades, significant advances

in renewable energy technologies have been

made. Many systems have reached either prototype or commercial development. Performances

have improved and costs have declined. Hydropower is the most developed renewable and enjoys widespread use. Windpower is competitive

or near-competitive with other sources for bulk

power production. Flat-plate solar collector systems for space heating and hot water are economically viable in some parts of the world, e.g., Israel,

Australia, and Cyprus. Photovoltaic systems

command an increasing number of market niches,

particularly for telecommunications and space,

but require further development before they will

be economically competitive for bulk power production. Biogas production in some locales is

viewed as an important energy source and is ecologically sound, as well. Geothermal resources are

enormous, but the amount that can be recovered

economically is small.

Environmental concerns and increased demand

for electricity have stimulated some interest in renewable resource development in former East

Bloc countries. The use of renewable can reduce

regional air pollution and mitigate global climate

change, environmental impacts to which former

East Bloc countries contribute substantially.

Moreover, renewable development can reduce

dependence on foreign energy supplies (and thus

improve a nation’s balance of payments), provide

decentralized power sources for rural areas, and

address nuclear safety concerns. These issues

have become more prominent since the dissolution of the FSU. Each country now requires independence and control over its energy resources

23R()~~ L. San Maflin, “Renewable Energy—Power for Tomorrow,” The Futurist, vol. 23, No. 3, May-June 1989, p. 40.
Chapter 4 Non-Fossil Fuel Technologies | 99

and production. Renewable resources can play a

vital role in realizing these goals.

Through technology transfer, the United States

can help these countries develop their renewable

resources. Under the terms of a recent energy

agreement, the United States and Russia will

cooperate on energy efficiency and renewable energy research and will exchange technology and

information. The United States is a leader in developing and manufacturing most renewable energy technologies and is experienced in bringing

projects on line. It has the largest installed geothermal-, hydro-, and wind-generated electricity

capacity in the world. Additionally, several U.S.

renewable companies are serious] y pursuing former East Bloc markets. For example, U.S. Windpower recently signed a joint venture agreement

with Ukraine to develop a 500-MW wind farm in

the Crimea.

This section discusses the potential for U.S. renewable technology transfer to the former East

Bloc. But first, it examines the obstacles to renewable development in this region. Brief descriptions are provided of specific technologies and

their applications. For further information, the

reader is referred to the forthcoming OTA report

Renewing Our Energy Future.

I Barriers to Renewable Development

As noted in chapter 2, renewable contribute only

a small share of total energy production in the former East Bloc, but there is potential for growth,

and interest is rising in several countries. However, there are significant obstacles to renewable

development, and competition from conventional

fuels will be stiff.

Past energy pricing policies discouraged the

introduction of renewable energy technologies

and the efficient use of energy. Conventional energy sources were priced so low that renewable

could not compete. In some countries, this is still

the case. Fuel prices, particularly of oil and natural

gas, will continue to have an enormous influence

on renewable development. As conventional energy prices rise, alternative sources will become

more attractive.

The lack of political and institutional commitment to renewable development is another barrier. Over the years, a strong institutional structure

developed to support the production of oil and

gas, while little attention was paid to renewable.

Successful U.S. experiences confirm that policies

and institutions are crucial to renewable development.

Funding priorities are also an important factor.

Over the last two decades, capital investment in

the FSU favored oil production over other energy

resources and other sectors of the economy. Moreover, foreign assistance programs also focused on

large-scale conventional energy projects, particularly bulk power and oil and natural gas. Renewable projects tend to be smaller and more

dispersed than conventional energy projects, thus

making them less attractive for traditional aid. In

addition, severe constraints on capital investment

will further limit investment in renewable.

Lack of accurate data is yet another barrier.

With wind energy, for example, simply measuring

annual average wind speeds may not indicate the

amount of power that can be generated; distribution of wind speeds over time must also be measured. Accurate data are essential to the success of

a renewable project.

The lack of technically trained personnel could

also bean obstacle to renewable development, as

well as for the staffing of local facilities and

plants. In all East Bloc countries, scientific and

technical training were directed at conventional

energy exploration and production, thereby exacerbating the personnel problem.

Finally, some alternative energy technologies

are viewed as immature and unrel iable, presenting

yet another obstacle to renewable development.

Because some renewable technologies are still relatively new, long-term experience is scarce. Reliability is a major concern for countries that have

neither the capital nor human resources to spend

on unproven technologies. These countries are

more likely to consider traditional, proven

technologies.
100 I Fueling Reform: Energy Technologies for the Former East Bloc

I Potential for U.S. Renewable

Technology Transfer

Wind’’wer

Wind turbines convert energy of the wind to electrical energy. All former East Bloc countries have

at least a few good wind sites. Several regions in

Russia, Ukraine, and Kazakhstan are very favorable to wind power development, but the bulk of

these are extremely remote and sparsely populated, i.e., the Far East and northern arctic coast in

Russia and central Kazakhstan. Others on the

northern and eastern shores of the Black Sea in

Ukraine and the North Caucasus area are more accessible. 24

There has been little wind power development

in the former East Bloc. In Russia, for example,

small wind turbines are used primarily for water

pumping in agricultural applications, although interest in wind energy development is growing.

Construction of Russia’s first wind power station

has begun near Novorossisk.25 Several factors

created a favorable climate for wind power development in this area, including the shortage of electricity in the Novorossisk area, termination of

construction of the Rostov nuclear powerplant,

and promising wind sites.

Also, prototype 100-kW (kilowatt) and 10-kW

turbines are being developed at several facilities

throughout Russia. Russia’s aerospace industry

has tremendous turbine manufacturing capability

and is actively seeking Western production partners. Dutch and German companies have established joint ventures in Russia to manufacture

small wind turbines.

Wind turbine R&D is being done in Ukraine, as

well. The Ukrainian Institute of Electrodynamics,

which has primary responsibility for renewable

energy research, is working on 1.5-kW and

100-kW turbine designs. The Institute is also collaborating with a former defense factory to

manufacture 250-kW turbines, several of which

have been sold to the Ukrainian Ministry of Energy to construct a wind farm in the Crimea. The

Ministry is also pursuing wind power joint ventures, which will convert Ukrainian factories to

wind turbine and photovoltaic facilities. German,

Norwegian, and U.S. firms have been contacted in

this regard.26

In March 1993, California-based U.S. Windpower and a Ukrainian utility formed a joint venture to supply 500 MW of wind power by 1996.27

When completed, this will be the second largest

wind power facility in the world (Altamont Pass in

California is the largest). Under the agreement,

Ukraine is licensed to manufacture turbine parts.

As payment, U.S. Windpower will receive components to service its turbines in the United States

and Europe.

Poland and the Czech Republic also manufacture wind turbines for export, primarily to Denmark. Polish and Czech domestic markets cannot

support wind turbine manufacturing capacity.

U.S. technology and extensive project development and management expertise could benefit

wind power development in former East Bloc

countries. The U.S. wind power industry is a leader in wind power technology and development. Its

technologies, particularly small wind machines

(under 50 kW), are the most advanced in the

world, according to DOE. The industry also has

tremendous site validation capabilities: our

instrumentation for measuring and evaluating

2@jc M~inot, “JVind.&ne~t~ Electric Power in the Former Soviet Republics: Geographical Prospects,” Posf-hief Geography, vol.

32, No. 4, 1992, p. 229.

Z5W fimt of six 250-kw wind turbines has been installed, and testing is under way. Together, the turbines, which Were Aveloped ~d

manufactund in Russiaj will generate a total of 15 MW. See “Wind Power Station Construction Begins,” in FBIS, Cenrral Eurasia, FBISLJSR-93-1 12, Aug. 27, 1993, p. 84.

26~c M~inot, “Wind Energy in Russia and (.kaine,” Summer 1992 research trip excerpts, Lawrence Berkeley Laboratory, no date.

27Civen~m PImS XX) MW Wmd Project in Ukraine,” New Technology Week, vol. 7, No. 14, Apr. s, 1993, P. lb.
Chapter 4 Non-Fossil Fuel Technologies | 101

wind data is the most advanced in the world.28

Furthermore, U.S. companies have crucial experience in developing, financing, and managing

large wind energy projects. U.S. Windpower, for

example, is a major wind turbine supplier and

wind farm developer.

In recent years, the U.S. wind power industry

has suffered setbacks from changes in the tax code

and opposition to wind power projects, but is now

making a comback. In Europe, wind energy development has made steady progress since the 1980s.

If development continues at the present pace, European wind energy development will equal

California’s present capacity by the year 1995.

(California’s 1992 installed wind power capacity

is 1,690 MW.)29 Moreover, Europe has significant

manufacturing capacity with over 25 wind turbine

manufacturers. 30 Because of these recent developments and proximity to former East Bloc markets, European companies are in a strong position

to compete. Even so, U.S. companies have a long

record of involvement in wind energy development and should be competitive.

Photovoltaics

Photovoltaics (PVs), or solar cells, convert sunlight directly into electricity. Although PV energy

is more expensive than conventional energy for

most uses, costs continue to drop. It is expected

that PV systems will produce electricity for 10 to

20 cents/kWh (kilowatt-hour) by 2000.31

The FSU has done extensive R&Don PVs for

use in spacecraft and ground installations. PVs are

used as a power source for navigation signal

installations and UHF relay transmitters, and are

used in cathodic protection systems for pipelines

in Central Asia and Azerbaijan.32

Russia has begun to commercialize its PV

technology. It is a large supplier of crystalline waSmall U.S.-made wind turbines.

fers to India and is trying to market its products in

other countries.

U.S. and European companies are interested in

marketing their PV systems in the FSU. Integrated

Power Corp., for example, has had some success

in Kazakhstan. It has developed a PV power system for telecommunications in that country. British Petroleum also sells PVs to the FSU to monitor

oil and gas pipelines.

Engineering and designing PV systems may

present technology transfer opportunities for U.S.

companies. Russia has manufacturing capability

but little experience in marketing and developing

commercial projects. The United States has extensive experience in these areas. Joint ventures that

Zapersonai communication, Dan Acona, Department of Energy, Junes, 1993.

29p~Ul GiP, C4w1n@W~~*~ ~O~l~i~~ Fu~~,” {~~~e~enr Energy, VOI. 23, No. 1, Janu~ ]993, p. 67.

3~mwe stein, ‘$Big p]~ in u~ine t. H~e~t tie wind,” &~ ~~anci~co Examiner, Business Section, &c. 11, 1992, p. B-1.

3] Foficoming OTA ~P~ Renewing Our Energy Future, Ch. 5: “Renewab]e Energy Resources and Technologies.”

sz’”Al~mative POWH SoUrCeS in Use in the USSR,” Ambio, wI. 19, No. 4, JUIY 1~, P. 222.
102 I Fueling Reform: Energy Technologies for the Former East Bloc

incorporate indigenous manufacturing capacity

with U.S. engineering, design, and project development expertise may make the most sense.

Solar Thermal Electricity

Solar thermal electric plants use mirrors or lenses

to concentrate sunlight, heating a fluid which is

then used to produce electricity. The FSU has

done R&D on solar thermal systems, including

work on coatings, collector manufacturing

technology, plant reliability, and interseasonal

storage of solar heat and solar salt ponds. However, research activities tended to focus on large

centralized facilities, with few practical results.

As of 1990, there were a little over 50,000

square meters of solar collectors in the FSU, producing the heat equivalent of about 5,000 tons of

fuel per year. 33 The Crimea republic in Ukraine is

well suited to solar use. Solar water heating is used

in major hotels in this area. The Crimea is also the

location of a 5-MW experimental solar power station which began operation in 1985. The republic

plans to build solar power stations with a total capacity of 50 MW in the near future.34

The United States has substantial experience

with solar thermal systems. Today, there are 354

MW of installed solar thermal powerplant capacity in California’s deserts. However, the United

States has lost its leadership position to European

countries. U.S. solar thermal development was seriously damaged by the bankruptcy of Luz, Inc., in

1992. Today, European companies are actively

marketing their solar thermal technologies worldwide, and the Israelis are pursuing the FSU

market.

Geothermal

Natural heat below the Earth’s surface can be used

directly for space and process heat or converted to

electricity. Geothermal energy is commonly referred to as a renewable energy resource, but it can

be depleted if oversubscribed. Also, geothermal

energy production can cause environmental damage; i.e., when hot brines are released from wells.

Hydrothermal energy has been used in a wide

variety of markets: power production, district

heating, greenhouses, and therapeutic pools and

spas. There are 11,300 MW of installed geothermal capacity worldwide for direct-heat applications, and 20 countries generate 5,700 MW of

electricity. 35 The United States has the largest

installed capacity in the world, with about 2,700

M W .

3 6

Estimates of total hydrothermal water reserves

in the FSU are equivalent to over 200 million tons

of fuel per year. There are more than 200 wells located throughout the FSU, and extraction exceeded 20 million cubic meters in 1990.37 Much of the

geothermal heat is used in greenhouses. There is

only one operational hydrothermal power station

in the FSU, located in Kamchatka.

The Kamchatka area, in far Eastern Russia,

shows the most promise for geothermal development. Japanese companies have shown interest in

developing geothermal power stations there. Geothermal resources are also located in Central Russia, particularly in the Nizhny Novgorod and

Yaroslav regions.

The FSU has continued its R&D work on hot

dry rock (HDR) geothermal energy resources, but

financial difficulties have slowed progress. Ac331bid, pp. 221-222.

S’$’’Southern I?epub]ics Draw Up Their Own ~ogmms,’” Interfu Business Report, May 3, 1993, p. 6.

Ssstatemen( of [he Na(ional Geo(herma] Association for the Hearing of the Subeomrnittee on Energy and the Environment of the House

Committee on interior and Insular Affairs, Jan. 23, 1992.

36Ronald Dlplpp), “Geo(herrna] Energy: )Wc(rkiw Generation and Environmental Impact,” Energy po/icy, vol. 19, ~khr 1991, pp.

798-807.

3T’’A]temative power Sources in Use in the USSR,” p. 223.
Chapter 4 Non-Fossil Fuel Technologies | 103

cording to one expert, HDR technology transfer

would benefit both the United States and Russia.

The United States has more sophisticated instrumentation, such as microseismic monitors, while

the Russians have an edge in rock mechanics and

thermal physics in geothermal resource development. 38

Lithuania also has some geothermal resources,

located in the western part of the country. The

Lithuanian government, with help from Denmark,

is exploring geothermal potential in this region.

Currently, several wells are producing hot water.

The Ministry of Energy indicates that geothermal

energy will be used to heat resorts in the future .39

In Central Europe, Hungary is a leader in geothermal use for horticulture. About 2 million

square meters of greenhouses are heated by geothermal water. 40 Poland is interested in developing its geothermal energy resources for space

heating and hot water, particularly in those areas

having high pollution or a long heating season.

Low-energy resources are located throughout the

country; the Podhale field in Southern Poland is

the most developed. Several wells are producing

hot water for greenhouse use, and an experimental

district heating system is in the design phase.41

U.S. drilling and site validation technologies

can help expedite the development of geothermal

resources in former East Bloc countries. However,

drilling and extraction costs continue to be a major

constraint to greater geothermal energy development in this region.

Biomass Technology

Biomass refers to materials from biological

sources that can be used directly as a fuel or converted to other forms for use as a fuel or feedstock.

The principal energy use of biomass is the production of heat, via direct combustion, for use in process heating, space heating, and cogeneration

systems. The use of biomass for electricity production is usually uneconomical because the dispersed production and low energy content make

transportation costs high.

Biomass may be a significant energy resource

in rural areas. Consumption, however, is difficult

to measure because so much of it never enters the

commercial market. Wood, for example, is gathered by individuals and families as the need arises.

Among former Soviet republics, Estonia appears to be taking the lead in biomass development. Estonia’s large fuel wood resources, plus

the escalating costs of oil and gas imports, have

spurred interest in converting heating boilers from

oil to wood. Several projects are now under way,

using both foreign and domestic technology, and

many more are planned. In 1994, the World Bank

will begin a large-scale boiler conversion investment program; total converted capacity may reach

200 MW. However, questions have been raised

about the sustainability of Estonia’s forests.42

There is some interest in the FSU in utilizing

organic wastes from industry and agriculture for

biogas production. This interest is spurred by the

need to manage waste and improve sanitary conditions primarily at large livestock complexes.

However, the potential contribution of biogas to

FSU’s total energy supply is insignificant (about

1.5 percent) and will probably remain so in the

near future.43

A variety of liquid fuels can be produced from

biomass, including ethanol and methanol, synJ8Te~tlmony ~)f ~ofe~~[)r p~U] K~~~~, ov~r~l~h[ Heafing on Hot D~ R(~k (HDR) Geothema] Energy, before the House Committee on

interior and Insular Affairs, Subcommittee on Energy and the Environment (Washington, DC: Jan. 23, 1992), pp. 4-5.

J9’’Mjnjster Assesses Lithuania’s Energy options, “in Vilnius 7iesa, Mar. 12, 1993, p. 5, in FBIS, Centra/ Eurasia, FBIS-USR-93-049, Apr.

21, 1993, p. 95.

‘%hld Energy Council, Geothermal Energy: Slalus, Conslratnts and Opportunities, Geothermal Chapter (9th Draft) April 1992, p. 17.

41 Biy&ow5ki Wjeslaw and Dlugos~ ~(~tr, “Geothermal Energy Utilization in Poland, State of Development,” n.d.

QZErlc M~jnot, .* Renewable Energy in F{)mer Soviet Republics: An ]nfo~a] Rep)rt to OTA,” unpublished document NOV. 8, 1993.

43’’ Altematjve power Sources in Use in the USSR,” p. 224.
104 I Fueling Reform: Energy Technologies for the Former East Bloc

Photovoltaic array

thetic gasoline, jet, and diesel fuel. These fuels

have the potential to address some environmental

concerns, such as urban ozone and greenhouse gas

emissions. However, there are substantial barriers

to the introduction of liquid biofuels into transportation markets. These fuels cost more to produce than gasoline and lack the highly developed

and massive infrastructure that already exists to

support the production, distribution, and use of

gasoline. The financially strapped countries of the

former East Bloc do not have the substantial capital needed to build new production and distribution networks. There are far more pressing

considerations, such as upgrading existing transportation infrastructure and systems and improving vehicle energy efficiency.

Hydroelectric Power

Hydroelectric facilities use the energy in flowing

water to turn a turbine connected to a generator.

Hydropower is considered a clean energy source

that can respond quickly to utility demand. But

large hydroelectric projects can be very expensive, construction times can be long, and environmental costs can be high. The development of this

resource can flood large tracts of land, displacing

people and leading to loss of forests and wildlife.

It can also disrupt the flow of rivers.

The FSU has substantial hydroelectric capacity

and expertise in developing the resource. In 1991,

the FSU had 64,100 MW of hydroelectric power,

which is about 19 percent of total installed capacity. 44 Russia has more than two-thirds of the

FSU’s installed capacity.

In Poland, hydroelectric resources are very limited and are not expected to be significant in the

future. As of 1991, Poland had 1,900 MW of hydroelectric capacity, or about 6 percent of total

installed capacity. 45 In the former Czechoslovakia, hydropower provides 2,900 MW of installed

capacity, or about 16 percent of the total.46

Hydroelectric technologies are considered mature, with efficiencies greater than 90 percent.

Nevertheless, several technological developments offer improvements in hydropower economics and environmental impacts. These

include new ultralow-head turbines designed for

use at sites with elevation differentials of less than

10 feet; cross-flow turbines that improve efficiency; and improvements in dam design, construction techniques, and materials. U.S. work on these

and other hydroelectric technologies can help former East Bloc countries fully realize their hydro

potential.

There is some interest in the use of small hydroplanes in areas where ample water resources exist.

Microhydropower (less than 100 kW) could make

a contribution in rural areas that have no access to

the power grid. Microhydro electric plants are

common in China and India. Although initial capMEnergy Information” Administration, ~p~ment of Energy, Annual Energy Review /992, DO~EIA-0384(92) (Washington, ~: U.S.

Government Rinting Office, June 1993), p. 305.

451bid.

‘Ibid.
Chapter 4 Non-Fossil Fuel Technologies | 105

ital costs can be high,47 these systems can be

installed quickly and do not entail flooding large

areas.

| Potential for Development of

Renewable “

Although there has been little renewable development in the former East Bloc, there is considerable potential. The usual obstacles to renewable

development interfere, however: artificially low

conventional fuel prices, capital constraints, and

the lack of political and institutional commitment.

These and other obstacles may prove to be insurmountable in the near term, but ongoing economic

reform and price restructuring should enhance renewable development and use in the long term.

Several factors argue for renewable development in former East Bloc countries. These include

the need to develop indigenous energy supplies,

provide decentralized power to rural areas, and address environmental concerns. Also, the modular

nature of some renewable technologies allows for

shorter construction time, and they can be targeted

at specific needs. Wind turbines and PV systems,

for example, can be sized to fit any application.

Moreover, the availability of idle or underutilized industrial plants and defense facilities provides opportunities for renewable technologies

production, especially wind turbines, PV cells,

and solar collectors. Several aerospace factories in

Russia and Ukraine are now manufacturing or

planning to manufacture wind turbines. However,

the lack of domestic markets means that production must be oriented toward exports.

Assistance from Western countries could improve the prospects for renewable development

in former East Bloc countries, especially in those

countries that have limited or no conventional energy resources. Technology transfer provides an

important avenue for developing indigenous alternative energy resources at a more rapid pace.

U.S. firms are world leaders in developing and

manufacturing renewable technologies, but other

countries have expertise, as well. European renewable energy companies continue to grow and

are aggressively competing with U.S. firms for

global markets. U.S. renewable R&D funding is

dwarfed by EU spending: the EU spends about

$170 million per year on wind energy compared

with $24 million per year in the United States.48

Even so, U.S. photovoltaic and wind technologies are among the most advanced in the world.

The United States “wrote the book” on PV

technology for terrestrial applications, and today,

U.S. industry accounts for about one-third of total

world PV production. Seventy percent of domestically manufactured PVs are shipped overseas.49

U.S. small wind machine technology (under 50

kW) and wind site validation capabilities are the

best in the world. Finally, the United States has

tremendous renewable project planning, development, and management expertise. This experience is derived from having the largest installed

geothermal and wind-generated electricity capacity in the world.

To compete in a significant way, U.S. firms

must overcome several obstacles. The first is the

cost disadvantage of some U.S. technologies relative to foreign competitors. Second, U.S. machines, such as wind turbines, must be adapted to

the metric system to compete in European markets. According to DOE, this is a major disadvantage for U.S. companies, and conversion to the

metric system would be a tremendous boost to

U.S. industry. Third, the U.S. renewable industry, much like the energy efficiency industry, is

composed primarily of small- and medium-sized

firms. These companies do not have the financial

4TTYP1C-1 ~()~t~ range fronl $ [ ,~.$2,~/kW. For further information, see U.S. Congress, Office Of Technology Assessment, Fue/Ing ‘et’e/opment: Energy Technologies jtir De\’e/oping Coun/ries, OTA-E-5 16 (Washington, DC: U.S. Government Printing OffIce, April 1992).

~NUTFK, [EA Wind Energy Annua/ Repor[ /992, (Stockholm 1993), P. 43.

49Jirn Reyno](jS, ]n[ematlona] SOIW Program, U.S. Department of Energy, perSona] c(~mmnlunication, June 21, 1993.
106 I Fueling Reform: Energy Technologies for the Former East Bloc

resources to deal with the political uncertainties

and financial risks associated with doing business

in former East Bloc countries, risks that are intimidating even for the largest corporations.

Demonstration programs could bean effective

way to penetrate former East Bloc markets and

build confidence in unfamiliar technologies. Because some renewable technologies are perceived to be unreliable and very expensive,

decisionmakers would see first-hand how the

technology works, how to compile data, and how

to develop operating experience.

Even if assistance is forthcoming, former East

Bloc countries must provide a favorable climate

for renewable development. The energy sector is

currently undergoing restructuring, including privatizing industries and market pricing, but with

varying degrees of success. Energy sector reform

is a very important step to enhancing renewable

development. As conventional energy prices rise

and the cost of power production increases, renewable energy resources will become more attractive.

Because some of the renewable technologies

are relatively new and/or commercial experiences

are limited, political and institutional support will

also be required. For example, wind energy development requires cooperation among equipment

manufacturers, electric power producers, and land

resources ministries. Without political commitment, small alternative energy projects will receive little or no financial support.

In the near term, renewable resource development will take a back seat to conventional fuels,

particularly oil and gas. Russia has tremendous reserves and will continue to develop them in order

to fuel its own economy and to obtain the hard currency so desperately needed. However, the desire

and economic necessity to become self-sufficient

will drive some countries to develop their renewable; for example, Ukraine’s efforts in wind

energy.
Environmental

Technologies 5

T

he extent of the staggering environmental problems facing many former East Bloc countries is finally apparent.

In Poland, 65 percent of rivers are unfit even for industrial

use. Inversion layers over Prague result in concentrations

of sulfur dioxide (S02

) 10 times the World Health Organization’s

(WHO) recommended standards for peak concentrations. High

levels of S02 have been linked to increases in respiratory disease,

particularly among school children in the most polluted areas of

the Czech Republic. One powerplant in Kazakhstan emits almost

four times the amount of particulate released by all powerplants

in the United States. The examples go on and on. ]

Environmental damage comes from a variety of sources, including industrial processes, agriculture, and municipal waste.

Insufficient or nonexistent pollution abatement equipment further contributes to environmental damage.

Energy production, transportation, and consumption play ma-

:

jor roles in the environmental problems in former East Bloc coun- j 1-

tries. Growing domestic energy needs were met by increased fuel

production rather than fuel conservation or efficiency. State subsidization of fuels and raw materials further stimulated energy

consumption levels far higher than that in other industrialized

countries. Exacerbating the problem, many of the fuels produced

in the region were of low quality and thus more polluting. Although the countries of the region had strong environmental laws

Parliament Building, Budapest.

I For ~Xample, Hi]a~ French, “Green Revo]u[i(ms: Environmental Reconstmction in

Eastern Europe and the Soviet Union,” Wor/dwa/ch Paper, No. 99, November 1990;

Murray Feshbach and Alfred Friendly, Jr., Ecocide in the USSR (New York, NY: Basic I 107

Books, 1992).
108 I Fueling Reform: Energy Technologies for the Former East Bloc

and standards (more stringent than WHO recommendations), enforcement was weak. As a result,

emission abatement equipment (installed or produced) was insufficient to address pollution problems.

Although environmental activism played an

important role in the overturn of Communist governments, the transition from environmental activism to action has not been easy. There are many

obstacles to cleaning up the environment, many of

which are imbedded in issues of economic reform.

Little money is available to pay for mitigation

equipment or regulatory enforcement. Also, since

closing polluting facilities will exacerbate unemployment and reduce municipal revenues, many

regulatory agencies have found themselves powerless to stop pollution.

Nevertheless, reducing pollution is an essential

part of economic modernization. In many areas, a

cleaner environment will directly increase economic well being because the benefits (e.g., improved human health, reduced corrosion of

materials, and greater availability of usable water)

will outweigh the costs. In addition, pollution

control is a promising area for U.S. exports.

This chapter examines the possibilities for using U.S. equipment and expertise to reduce the

environmental effects of energy production, transportation, and consumption in this region.2 With

the recent slowdown in economic activities, all

former East Bloc countries have experienced an

overall decline in pollution. However, it is extremely important that abatement equipment be in

place before these economies turn around. If not,

air quality problems will be magnified in the

future.

REGULATORY FRAMEWORK

Given the region’s severe environmental problems, many Westerners were surprised to learn

that the former East Bloc countries have very

stringent standards for air and water quality, legislated many years ago, and that in some countries

mining reclamation laws were on the books before

similar regulations in the United States. In fact, almost all ambient standards were much stricter

than U.S. standards or WHO recommended standards. Lack of enforcement rendered the standards

meaningless, however, Even when exercised, enforcement depended on a system of fines. Communist industries were much less responsive to

financial incentives than to production quotas.

Standards themselves have also been a problem. Environmental regulations focused almost

exclusively on ambient standards rather than unified source standards.3 Specific site emission limits were generally determined by local authorities,

based on modeling practices that allowed for regional air or water quality standards to be met, but

there were no national targets for abatement. This

complicated the design and manufacture of abatement equipment. Focusing on ambient rather than

source standards is at odds with environmental

regulation in Western industrialized countries,

where source limits to both air and water pollution

have been implemented in the past 20 years.

Every country in Central Europe and some former Soviet republics aspire to membership in the

European Union (EU). As a result, they favor establishing environmental standards consistent

with existing and anticipated EU standards.4

Much work must be done, however, to bring pol2This study does not examine the human health and environmental impacts of the nuclear fuel cycle, nuclear accidents, or problems that

result from past practices; e.g, toxic waste dumps.

3Ambient standards genera]ly set maximum concentrations of a targeted pollutant in a particular media (air, water, Soil). Cornplkiflce requires that pollutant levels do not exceed this maximum. Source standards specify a maximum level of a pollutant that can be discharged over a

given period of time from a regulated source (smokestack, well, factory) into the air or water.

4Margaret B(Jwn~an and David Hunter, “Envir(mnlenta] Reforms in Post-Communist Central Europe,” Michigan Journal of Inlermtio?d

Luw, vol. 13, No. 4, summer 1992, p. 970.
Chapter 5 Energy-Based Environmental Technologies | 109

luters into compliance. Many countries are debating whether to phase in strict EU standards

quickly or institute weaker transitional standards,

to be revised after economic recovery. This debate

has been strongest in the Czech Republic.

Although environmental activism played a major role in the revolutions in Central Europe and

fanned dissatisfaction with centralized authority

in the former Soviet Union (FSU), the environment has taken aback seat to the present economic

dislocations. In Poland, for example, although environmental regulations were off to an impressive

start in 1989, economic troubles in the following

years took their toll on environmental law reform. 5

Another legacy of the previous systems is the

reluctance and skepticism of local officials and industry toward regulatory enforcement. Many of

the old, centralized bureaucratic structures remain, especially at the local and regional levels.

Decentralization may create opportunities for improved environmental decisions since local offices should have better knowledge of local

environmental concerns. Unfortunately, local authorities are also more susceptible to strong local

pressures not to enforce regulations that may increase local unemployment and economic hardship. Moreover, local and regional environmental

agencies are often understaffed, underfunded, and

underequipped.

Reliable environmental data are critical for determining the scope of environmental problems,

setting priorities for pollution abatement, and understanding the impacts of new regulations, but

the data for many environmental problems are

questionable. Due to the lack of monitoring equipment, most data are not determined through measurement of actual emissions. Instead, analysts

make calculations based on assumptions that have

not been rigorously scrutinized, or that are derived

from data such as the sulfur content of fuels, rated

efficiencies of engines, abatement equipment, estimates of average distance driven, and mobile

source emission factors.6

ENERGY PRODUCTION, PROCESSING,

AND TRANSPORTATION

The production, processing, and transportation of

fossil fuels (oil, natural gas, and coal) can have

significant negative consequences for the environment. The following section examines the effect of these activities on the region’s environment

and the opportunities for U.S. technology and expertise to address these problems.

| Oil and Natural Gas

As noted in chapter 2, most of the oil and gas activities in the region are centered in the FSU, specifically Russia, Kazakhstan, and Azerbaijan.

Romania is the only non-FSU country with notable oil and gas production. All countries in the region, however, have refining capacity, pipelines,

and other forms of oil product transport that can

have environmental consequences.

Production

The drilling and production of oil and natural gas

includes many activities with potentially harmful

direct and indirect results for the environment.

The main direct environmental concerns during

drilling of oil and natural gas involve the proper

handling of fuels and chemicals (including drilling mud) at the drilling site, which, if spilled or

leaked, can contaminate groundwater and riverways.

Oil production activities pose a greater direct

environmental threat than gas production. Faulty

valves, well casings, and collection facilities can

leak oil to the ground, forming large pools (such as

at Baku) or traveling to streams and rivers. In Russia, discharges resulting from waterflooding pro-

‘Ibid., P. 930.

6R.c. C(x)Fr, “Envjr[)nmen~] problems and Pollution Abatement in Central and Eastern Europe, “contractor report prepared for the Office

of Technology Assessment, Aug. 6, 1993.
110 I Fueling Reform: Energy Technologies for the Former East Bloc

:

Typical field flares.

duction techniques have caused oil to enter

waterways. The Ob river, which flows through the

oil-producing region of Tiumen north to the Arctic

Ocean, has been especially affected by all of these

problems. Environmentalists have said that millions of barrels of oil in Tiumen Oblast are spilled

through pipeline ruptures or lax production controls, resulting in the death of bottom fisheries.7

The indirect environmental impacts of oil and

gas drilling and production include the consequences of construction activities and human

settlements. In Russia, the climate adds additional

concern. The largest oil- and gas-producing areas

of Russia are in Western Siberia. Western Siberia

is frozen in winter, but the spring thaw causes the

land around the rivers to become waterlogged or

flooded, drawing pollutants from areas contaminated by oil. As drilling and production have

moved further northward, the industry has entered

areas of permafrost that require stringent practices

for sensitive ecosystems preservation. But no

areas in the oil or gas regions of Western Siberia

have been protected through the establishment of

nature reserves (zapovedniki) or national parks.

Given the present economic crisis and pressures to

increase fuel production, it is unlikely that new

areas will be protected in the immediate future.

In the major gas-producing region of Western

Siberia, future production will be found beyond

the Arctic Circle, at Yamburg and the Yamal Peninsula, in areas of continuous permafrost. Pipelines must be cooled and buildings must be raised

off the permafrost to avoid melting the frozen soil

beneath. If trees are cut away, forests that overlay

permafrost can be turned into irreversible

marshes. 8 While the development of the Yamal

Peninsula was put on hold by the Soviet government in 1989 (the same year that travel across the

bare tundra was prohibited), the Russian government has recently permitted the work to resume.9

Offshore oil and gas drilling also present a

number of environmental concerns, most importantly, leaks or spills of oil and chemicals that can

harm marine life. The major offshore producing

area has been the Caspian Sea, where drilling and

production has taken place since the 1920s, in the

shallow waters off the coast of Azerbaijan. Minor

oil spills and slicks are noted periodically off this

coast, ’” but the specific reasons for these accidents are unclear. Offshore drilling and production activities have occurred to a lesser extent in

the Black Sea (near Romania), the Baltic Sea, off

Sakhalin Island, and the Barents Sea.

Environmental technology options

Market incentives, combined with increased regulatory enforcement, may redress some of the environmental problems presently found in oil

production. For example, when oil has a real market price for the producer, increased economic efficiency will result in less oil on the ground and

more in the pipeline moving to consumers. Foreign equipment does not appear to be needed for

such efforts, only the adaptation of the Russian (or

TMike Edwards, “Sl&rla: In Fronl the C()]d,” Nationu/ Geographic, V(J1. 177, Nt). ~, March 1990, P. 35.

8phlllp R. @de, En},fronnlenla/ Management in /he S~\ie/ (Jni~n (Canlbridge, MA: Cambridge University press, ]99] ), p. 203.

9Matthew Sagers, “News Notes~ “ Pos[-Sot’ie/ Geography, vol. 34, No. 6, April 1993, p. 383.

I%yde, En\’ironmental Monqgement in the So\iet Union, p. 88.
Chapter 5 Energy-Based Environmental Technologies | 111

Azerbaijani) and other equipment manufacturers

to address market needs.

In several specific areas, such as offshore and

arctic operations, Western environmental technologies and expertise are needed. While the Russians have had more experience in arctic oil and

gas operations than any other country, their efforts

have not focused on mitigating environmental

hazards. Western technologies (such as transport

vehicles or equipment that can withstand saline or

arctic conditions) and field management expertise

are needed to reduce the impact of operations.

U.S. opportunities to transfer technology

U.S. firms have had many years of experience in

the Alaskan oil fields that would be applicable to

the needs of Western Siberia. For example, in

Alaska, workpads were built along pipeline

ditches to protect the tundra from the wear and tear

of construction, and crossings were provided for

the caribou migration. 11 Also needed are vehicles

that do not damage the sensitive tundra.12 U.S.

firms will compete in this area with manufacturers

from other countries, particularly Canada.

U.S. firms also have a great deal of experience

in offshore oil and gas operations, although the

market advantage for U.S. firms is not clear. With

the development of North Sea fields, some European firms have developed expertise that would

readily apply to regions such as the Barents and

Baltic Seas. U.S. firms would have a logistical advantage if drilling and production activities are to

take place in the East Siberian Sea region, due to

its proximity to Alaska. But given the great distances from markets, it is not clear whether this region will be exploited in the near future.

Processing

Refineries are generally located in market areas,

with crude oil del ivered by pipeline. At oil refineries, the major air pollution concerns stem from hydrogen sulfide (H2S), which is formed in

hydroprocessing (catalytic reforming, hydrotreating, and hydrocracking) and cracking (catalytic

and thermal) and from CO (released primarily

during catalytic cracking) and hydrocarbon vapors. Given the relative importance of primary

distillation technology in the region, refinery

emissions are probably determined by the sulfur

content of fuels consumed, rather than from technical processes. Waste waters from refineries,

without sufficient processing, may contain oil or

other byproducts of the production process. The

discharge of oil products in refinery effluent to

waterways has been a significant problem in Russia (where 29,000 tons entered waterways in

1989) and Uzbekistan (24,000 tons in 1989).13

Petroleum discharge into rivers appears particularly troublesome along the Tom river (a tributary

of the Ob), where petroleum product concentrations exceed standards by 8 to 10 times because of

point sources at Mezhdurechinsk, Novokuznetsk,

Kemerovo, and Tomsk.14

Gas processing, on the other hand, occurs at or

near gas production sites, since the gas must be

processed before entering transmission pipelines.

Environmental problems resulting from natural

gas processing are mainly the result of insufficient

controls at sulfur-removing facilities. North Caspian Basin fields and all significant fields of Central Asia suffer from high sulfur content. The only

notable environmental problems in the gas processing industry have occurred at the Astrakhan

I IJ(~hn Fow]er, Energy ~~ Ihe Em’ironment, 2d ed. (New York, NY: McGraw-Hill, 1984), p. 210.

l~Edwmds ~.sl~tia: ]n Frf~m the Cold,’” P. 39.

1 sG()~k()mp~(~a, Sostolanle prir~nol sredv i prirodookhranmia deialel’nest’ v SSSR v 1989 godu (The State of the Envirf~nment and .

Environmental Protection Activities in the USSR, 1989) (Moscow: Goskompriroda, 1990), p. 68.

141bid.
112 I Fueling Reform: Energy Technologies for the Former East Bloc

complex in Russia, where there have been repeated leaks of H2S and S02

.

15

Environmental technology options

The most immediate problems in the oil and gas

processing sectors are water purification and

emission abatement. Simple effluent treatment

plants for oil and suspended solids removal and

neutralization are greatly needed. Those facilities

with secondary refining processes would benefit

from H2S treatment, while more traditional sulfur-scrubbing units are needed at facilities burning

high-sulfur residual fuel oil.

Given the archaic refinery structure that is

found in most East Bloc countries, refinery upgrades are likely in the coming years. Upgrades

are needed not only to produce more of the lighter

fractions, such as gasoline, but also to produce unleaded fuels and to desulfurize residual fuel oil.

Environmental technologies will be needed for

these projects.

U.S. opportunities to transfer technology

U.S. firms are certainly experienced suppliers,

manufacturers, designers, and constructors of advanced oil refineries. However, they face significant competition from other suppliers, primarily

the Japanese. U.S. firms have a clearer advantage

in the area of gas processing, especially for highsulfur (sour) gases. While U.S. firms did not play

a large role in the Astrakhan gas complex, they are

active in the development of gas processing facilities at the Tenghiz (Kazakhstan) field.

Transportation

Accidents during transport of crude and refined oil

products to market can result in severe environmental consequences. In the region, crude oil

transport depended largely on pipelines, while

railroads have played a major role in product

transport. Inland waterways-in particular, the

Volga river system—are also used for product

shipments. Small tankers ply the Caspian Sea to

link the oil-producing regions of Baku, Turkmenistan, Emba, and Mangyshlak, with refineries,

regional markets, and the Volga river system.

Many concerns have been voiced about the reliability of both crude oil and natural gas pipelines

in the region. The greatest direct environmental

consequences come from leaky oil pipelines. Natural gas leaks present safety more than environmental concerns. In 1989, an explosion of escaped

gas from a natural gas liquids pipeline killed

hundreds of people on a passing train.16

There are indirect environmental impacts from

pipelines. When constructed above ground (as

they must be in areas of permafrost), pipelines can

inhibit the migration of wildlife. For example, in

the Siberian city of Norilsk, when major pipelines

were built to supply natural gas, insufficient provisions were made for reindeer crossings along

migratory routes. Reindeer became trapped between parallel pipelines, and whole herds were

funneled into downtown Norilsk, where they became the victims of cars and poachers. *7

Because a large share of FSU oil exports went

to Central Europe through pipelines, oil tankers

have played only a minor role in crude oil and petroleum product transport. Shipments of oil and

petroleum product by sea accounted for only 8

percent of oil shipments for the Soviet Union as a

whole. 1

8 Tanker transport has been used primarily

for shipments to countries outside continental Europe (Cuba, the United Kingdom, the Scandinavian countries, and others). The main crude oil

and petroleum product export ports have been

Ventspils (Baltic Sea) and Novorossisk (Black

15D.J. peterson, Tr~ub/ed LUndS: The Legacy of Sovie/ Environmental Destruction (Boulder, CO: Westview hSS, 199s), p. 255.

‘%yde, Environmental Management in the Soviet Union, p. 98.

171 bid., p. 174.

ISGoskom~~t, Narodnoe kho~iais~o SSSR v 1990 (The National Economy of the USSR in 1990) (Moscow: Finansy 1 Statistika, 1991 ), p.

577.
Chapter 5 Energy-Based Environmental Technologies | 113

Sea). Several notable tanker accidents have occurred in the Baltic Sea and the Volga River. Given

the inherent risks of oil transport, it is not clear if

the frequency or magnitude of these accidents is

worse than industry averages elsewhere.

Environmental technology options

As noted earlier, if market incentives and regulatory enforcement were adequate, domestic

equipment could address some environmental

problems, such as oil pipeline leaks. But new

problems and new technology needs may arise. As

trading partners diversify, so might fuel transport

activities. If Russian oil and product exports shift

away from Central Europe, and these countries diversify their petroleum suppliers, tanker traffic

could increase dramatically in the region. Increased spill protection and spill response equipment would then be needed to match the increased

risks.

With extensive reserves of natural gas in Russia, and significant resources in Uzbekistan and

Turkmenistan, gas exports are likely to increase.

Gas pipeline construction will increase in the

coming years, with extensive construction in Arctic areas if the gas fields on the Yamal Peninsula

are exploited. In the long term, liquefied natural

gas (LNG) tankers could provide an expanded

market for Russian gas. Since LNG is flammable

and heavier than air, a tanker collision would be

disastrous.

U.S. opportunities to transfer technology

U.S. firms have a limited advantage in oil and gas

transportation technologies. Given the economics

of shipping pipe long distances and the previously

established ties with West European pipeline

manufacturers, U.S. firms will not be able to compete in the pipeline market. However, U.S. firms

with experience in pipeline construction might be

able to provide expertise and services in upcoming pipeline projects. The only other major market

for U.S. suppliers is likely to be control equipment

for pipeline operations, both in the field and in

long-distance transport.

U.S. firms have a great deal of experience in

spill response equipment and technologies. Nevertheless, given the location of ports and shipping

patterns, it is not clear whether or not U.S. firms

will have a market advantage because of the transboundary nature of oil spills and the European response capabilities.

Conclusions

A mix of technologies, expertise, market reforms,

and regulatory enforcement is needed in the region to reduce the impacts of oil and gas operations. The highest priorities for Western

equipment and expertise would be in arctic operations, oil separation equipment, refinery equipment (both water and air purification systems),

and offshore operations.

One difficulty in assessing future needs for environmental equipment is the uncertainty about

what impacts might arise from the disruption of

historic trading relationships or the influx of

Western oil exploration and service companies.

Changes in export patterns could result in increased use of tankers, which might increase the

likelihood of oil spills. Since it is unclear if domestically produced tankers would be involved,

the most important technology transfer opportunities may lie in American experience in rapid response to oil spills. Also, the entrance of Western

firms could expand the reach of the oil and gas industries to previously unexplored or produced regions, particularly in offshore areas and remote

locations, resulting in unforeseen environmental

problems.

| Coal and Shale

The initial effects of mining are land disturbances.

In surface mining, huge shovels remove the soil

above the coal or shale seam, causing the most visible environmental damage. In underground mining, waste is deposited above the mine, causing

land degradation at the surface. The environmental impacts of both methods of mining, however,

extend beyond the initial extraction process. Mining can lead to the disruption of hydrologic cycles,

pollution of surface and groundwater by acidic or
114 I Fueling Reform: Energy Technologies for the Former East Bloc

Strip mining site outside Pees, Hungary

saline discharge, and sedimentation of rivers by

the runoff from barren or sparsely vegetated sites.

Even after mines are shut down, these environmental problems linger.

Surface Mining

As noted in chapter 3, surface mining is used extensively in the Czech Republic, Kazakhstan,

Russia, and Estonia. In the Czech Republic alone,

surface mining of lignite results in 500 million

tons of mining waste each year.19 Associated environmental problems include soil erosion, loss of

vegetative cover, and water pollution (through

sedimentation and acid mine drainage). The natural revegetation of mined areas is a very slow process, due to low levels of soil nutrients in the

disturbed areas.

Reclamation efforts attempt to return mined

areas to biological productivity. During reclama-.

tion, excavated areas are refilled and regraded,

then fertilized and seeded. It is sometimes necessary to create a drain with a culvert to carry the water away quickly, before it can form sulfuric acid.

Successful reclamation depends on fertile soils

and local climatic conditions (e.g., elevation, rainfall). The conservation of fertile soil is extremely

important to reclamation efforts. Topsoil must be

removed and stored as part of the mining process,

and replaced after the coal (or shale) has been extracted.20

Starting with Poland, all of the countries in the

region implemented legislation in the 1960s,

1970s, and 1980s requiring reclamation of mined

areas. 21 It is difficult to judge the past success and

current needs of reclamation because detailed data

are not readily available. Secondary literature,

however, suggests that reclamation laws are not

sufficiently enforced and that reclamation efforts

are much needed in the region.

Underground Mining

Mine spoils and water discharge from underground mining can result in environmental problems. Underground mining—the main form of

coal extraction in Ukraine, Slovakia, and Hungary-accounts for a large share of coal mining in

Russia and shale production in Estonia. Mine

wastes, piled up around the mine entrances, create

unfavorable conditions for revegetation: altered

soil texture and structure, high or toxic concentrations of sulfates, inadequate levels of plant nutrients, and low pH levels.

Mine wastes have created significant environmental problems in Ukraine. At the Donets Basin,

piles of overburden have created mounds on the

surface up to 100 meters high. Ukrainian coal enterprises have almost 1,200 waste dumps (370

presently in use), occupying an area of over 5,000

hectares and containing nearly 1.4 billion cubic

lpstan]ey J. Kaba]a, ‘b~e Reftlrm of Environmental Policy,” Report on Eastern Europe, voi. 2, No. 8, Feb. 22, 1991, p. 11.

z~owler, Energy and the Environment, p. 199.

2 I M*JO Chadwick, N-H+ Highton, and N. Lindrnan (eds.), Environmenra/ Impacls cfcoa~ Mining und Uli/izalion (Oxford: pergamOn press,

1987), p. 35.
Chapter 5 Energy-Based Environmental Technologies | 115

meters of barren rock.22 Vegetating these waste

piles has been difficult because the material is

generally infertile.23

Another problem associated with underground

mining is fire. In operating mines, fires result from

accidents. At waste dumps, fires result from spontaneous combustion (a noted problem in Ukraine).

Despite a program to reduce these fires by switching to flat dumps insulated with inert materials,

spontaneous combustion has occurred at 15 of the

flat waste dumps now in use.24

Mine Discharge

A major problem associated with underground

mining is the discharge of polluted waters to

ground and surface water. When water reaches the

coal seams, from either producton or natural seepage, it can react with the sulfur-containing pyrites

or other minerals and form very destructive pollutants, such as sulfuric acid. Mine drainage also

contributes increased amounts of sediments, sulfates, iron, and salts. Acid or saline discharge can

affect both surface and underground mines, depending on the mineral content of the coal seams,

overburden, and groundwater. Polluted mine discharge is a particularly tenacious problem because

it can occur at abandoned mines as well as surfacemined areas that have not been reclaimed for

hydrologic features.

In Poland and Ukraine, most of the problems

with mine drainage have occurred from underground mines and runoff from tailing piles. Water

draining from underground Polish mines is largely saline which has increased the salinity of the

two major rivers, the Vistula and the Ordra, rendering the water too corrosive even for industrial

consumption. 25 In Ukraine, saline discharge is

also a problem, caused principally by suspended

substances, mineral salts, organic ingredients, and

trace elements. According to Ukrainian sources,

water purification systems still leave about 10 percent of intake water polluted.26 In Russia, where

the sulfur content of mined coal is lower, acid

mine drainage has been less significant (with the

possible exception of the high-sulfur Kiselovsk

field in the Urals region).

Special measures must be taken in mining areas

where acid-producing substances are present. The

main techniques rely on isolating the acid-forming materials and preventing contact with oxygen,

by either water or overburden. Unfortunately,

both options have limitations, and if they cannot

prevent acidification, then the only recourse is

27 Commonly, a f

-

treatment of the mine discharge.

ter mining operations have stopped, the mine is

sealed and water allowed to fill the mine shafts.

This method works as long as there is no “breakout” of the acidic water filling the mine. Unfortunately, when a breakout occurs, it is often difficult

to detect and respond to before significant damage

has occurred to water bodies .28

Processing

As noted earlier, there is relatively little processing of energy coal in the region, and therefore the

environmental consequences of coal processing

has been limited. However, the introduction of

additional coal cleaning capacity, although reducing pollution at the point of use, will produce significant amounts of waste that are difficult to

zz’’~lne: ~vlronmenta] Pmtecti(m Needed in Coal-Producing Regions,” Ugol Ukroiny 1993, No. 1, as translated in JPRSEn\’ironmenfd Series, May 21, 1993.

23 Pryde, Environmental Management in the So\iet Union, pp. 205-206.

z~$~lne: Environmental Protection Needed in Coal-producing Regions.’”

25 WOrld Bank, p~lati Emironmental Strategy, Apr. 24, 1993, P. ~.

z~$~ine: Environmental protection Needed in Coal-Producing Regions.’”

27ja~s M. McElfjsh Jr. ~d Ann E, Beier, Enl,lronmenta/ Regu/afi~n t,)j”Cfja/ Mining (Washington, ~: Envir~)nnlenta] Law 1nStltU(e,

1990), pp. 138-39.

281 bid., p. 139.
116 I Fueling Reform: Energy Technologies for the Former East Bloc

dispose of or reclaim. In the United States, for example, coal mining is the third-ranking industrial

producer of mineral waste; 90 percent of this

comes from the washing of coal to remove impurities. 29

Environmental technology options

Technical expertise more than specific equipment

is needed to remediate environmental problems at

coal and shale mines. Hydrologic expertise is

needed to deal with mine discharge and to reduce

the formation of acidic or saline discharge. Water

purification systems and expertise are needed to

clean up existing sites. Attention should be given

to incorporating reclamation (such as grading,

soil, and substrata separation and storage) into

production. But reclamation of previously mined

areas will likely be too difficult to attempt in the

short term, unless it becomes economical to reprocess mine tailings.

U.S. opportunities to transfer technology

The United States has had significant experience

dealing with problems similar to those found in

the coal and shale sectors of the former East Bloc,

in particular, land reclamation efforts and the reduction of acid mine discharge. The need for assistance in the reclamation of surface-mined areas

appears greatest in the Czech Republic and Estonia. Problems in tailings reclamation and polluted

water discharge from underground mining are

greatest in Ukraine and Poland.

While the United States does not have a clear

advantage in the desalinization equipment needed

in Poland, there are many opportunities for firms

with experience in mine hydrology.

THE ENVIRONMENTAL IMPACTS OF

FUEL CONSUMPTION

When fuels are burned, minerals within are released in either particulate or gaseous forms.

Thermal NOX

, hydrocarbons, CO, and carbon

dioxide (C02) are also formed during the combustion process. In sufficient quantities, many of

these compounds can affect human health, damage the economy (e.g., corroding structures and

stunting crop growth), and cause transboundary

pollution.

High energy use combined with lax enforcement of env ironmental standards resulted in widespread air quality problems in the region. Acid

rain exists in all countries of Central Europe and

most of the FSU. In the Czech Republic, there is

evidence that soil acidity has increased significantly since the 1960s, representing one of the few

examples of large-scale soil acidification caused

by acid deposition. 30 This increase in soil acidity

could be contributing to problems in soil toxicity,

because aluminum, zinc, and beryllium are liberated from soil primarily under extremely acidic

conditions. 31

Smokestacks historically have been used to reduce pollution problems from stationary sources

such as powerplants by elevating emissions above

the ground where they may be more effectively

dispersed. However, other environmental problems are aggravated by tall stacks. In particular,

tall stacks release pollutants at a sufficient height

to allow chemical transformations and precipitation as acid rain. Increased mobile-source activities—in particular, private car use-create a host

of other pollution problems (such as lead emissions, CO, and hydrocarbons that react to form

zgF(JW]er, Energy and the Em’ironment, p. 202.

3oBedrich M{)ldan and Jera]d schn(x~r, ‘“Czechoslovakia: Examining a Critically 1]1 Environment,” En\’ironmenra/ &“lenC’e and Technoh~-

gy, Vol. 26, N(). 1, 1992, p. 16.

311bid.
Chapter 5 Energy-Based Environmental Technologies | 117

ozone) at ground level. Therefore, in the last decade, many technologies have been developed for

the control of emissions from fossil fuel use

through pre-combustion fuel cleaning or processing, combustion modifications, and post-combustion cleaning of flue gases for both stationary and

mobile sources. In former East Bloc countries,

however, the lack of regulatory enforcement resulted in a lower level of technology (and applications) of abatement equipment than that in the

West. Existing abatement equipment appears inefficient compared with Western models and is

based on particulate removal, rather than gaseous

components such as S02.

The following section examines problems arising from fuel use in former East Bloc countries.

The focus is on particulate, S02

, and NOX because there is insufficient data about emission patterns of other pollutants (e.g., CO, hydrocarbons,

lead) for a comparative analysis. The reader is

cautioned that the following analysis is based on

official data, which might contain errors.

I Particulate

Particulate matter is composed of dust, mist, ash,

smoke, and fumes. Fuel burning, industrial processes (particularly smelting), and waste incineration are the major sources of manmade particulate

emissions. The smaller particles (from 0.1 to 1 micron) are mostly combustion-related, and consist

of particles of tar (heavy hydrocarbons) and soot

(carbon) that escape unburned in the exhaust

gas. 32 In the cyclone (or wet-bottom) furnaces ‘hat

dominate capacity in the region, as much as 70

percent of the incombustible material in coal

leaves with combustion gases as fly ash, and the

remainder is collected at a bottom grate as slag, or

bottom ash.33

Wet flue gas desulfurization system for the Skawina Power

Plant in Krakow, Poland: completed absorber vessel with lime

silo and hold tank in foreground.

The size of these particles largely determines

their effects. Large particles are the most visible

pollutants and can carry damaging materials, such

as sulfuric acid, to the surfaces they strike. Smaller particles, however, present a greater health

threat because they can evade the human respiratory system’s defense mechanisms.

Regional Issues

Particulate emissions in the former East Bloc area

much more significant problem than in the United

States, where they have been substantially re-

.r!

32 Fowler, Energy and (he b“n~vronment,p. 161.

33U.S. ~pafinlent of Energy, Enerx}, TC(.hn~/O~jeS ad the En},ir~nmen/(Washington, ~: 1988), p. 29.
118 I Fueling Reform: Energy Technologies for the Former East Bloc

duced through the installation of abatement equipment.34 In 1989, particulate emissions from fuel

use and industrial sources35 in Russia (7.8 million

tons) were 75 percent higher than in the United

States (4.5 million tons). Particulate emissions in

Poland and Ukraine were less than 2.4 million

tons. High levels of particulate emissions are due

to the use of high-ash coal, lignite, and shale without pre-combustion cleaning and without sufficient post-combustion abatement equipment.

Table 5-1 shows the major sources and densities of regional particulate emissions measured as

kilograms per capita. (Note that this measurement

does not reflect health risks; instead, it is a general

indicator of the intensity of emissions in the various economies.)36

Environmental technology options

For large sources, two very efficient (99+ percent)

types of post-combustion cleaning are now commonly in use in the West: electrostatic precipitators (ESP) and baghouse filters. The decision to

use ESPs or baghouse filters is largely determined

by the coal type used at the boilers; low-sulfur

coals of the Western United States have had resistivity problems with ESPs.

No comprehensive statistics exist on the type of

particulate abatement equipment installed in former East Bloc countries. While Soviet sources

have referred to the use of ESPs at large powerplants, there is little information about their effectiveness. The Polish environmental handbook

provides some background information on pollution control equipment installed in the region.37 In

1991, 88 percent of stationary particulate emission sources had some sort of particulate removal

system in place, but most used cyclone technology which is much less effective than ESP and baghouse filters. Only 20 percent of all equipment

was rated above 90 percent efficiency. Only half of

the relatively few ESP units were rated above 95

percent efficiency, although the standard in the

West is generally higher than 99 percent.38

A different approach to particulate emissions in

this region would be cleaning coal to remove

some of the ash matter before combustion (see

also chapters 3 and 4). Because the coal burned in

this region tends to be of high ash content, simple

coal cleaning could provide a significant reduction in particulate emissions, especially for

smaller fuel consumers, where post-combustion

cleaning would not be feasible. In Katowice, Poland, tall powerplant and industrial stacks account

for only 55 percent of particulate emissions, with

the remainder coming from low stacks associated

with households, district heating plants, and small

industry. 39 cleaning would also reduce particulate emissions in the Czech Republic, Slovakia,

and Hungary whose home heating needs are largely met by coal. Coal cleaning also provides benefits to large coal consumers by reducing the wear

on ESPs, baghouse filters, and sulfur removal

systems.

U.S. opportunities to transfer technology

As noted in chapter 3, U.S. firms have a significant advantage in hard-coal cleaning technologies. However, U.S. experience in cleaning

lignites does not provide a good match for the

needs of former East Bloc countries. Since the sul -

3Au.s. Environmental ~otectit)n Agency, Nariona/ Air Po//utant Emission Esfirna/es /940-1989 (Triangle park, NC: 1991).

sspa~icu]ate emission data from mobile soumes, solid waste burning, and forest fires are not available for the Central and East European

countries noted here.

JbMany analysts use the measure Of @]ution per dollar of GNP. Given the problems of GNP accounting and dollar conversion rates among

the countries in this region, the pollution-intensity of economic output has not been calculated. It can be said, however, that given the large

disparities in per capita economic output, the emission intensities of this region are much higher than the case in other European countries.

3T@.hr~~ Sr~oWj5~ 1992 (Warsaw: Glowny Urzad Statystyczny, 1992), p. 152.

381bid.

SgWorld Bank, Po/a& Em’ironmental Strategy, p. 4.
Chapter 5 Energy-Based Environmental Technologies | 119

Country Kg/per capita Main sources

Estonia (1989) 162 Use of locally produced shale and

industrial facilities,

Shale-fired powerplants 55%

Cement plants 35%

Kazakhstan (1989)

Czech Republic (1988)

Russia (1 989)

Poland (1990)

Slovak Republic (1988)

Ukraine (1989)

Hungary (1988)

U.S. (1989)

122

81

57

55

51

44

40

24*

Use of high-ash Ekibastuz coal

Use of locally produced lignite

(primarily powerplants) and industrial facilities:

Powerplants 50%

Industrial sector 35%

Coal use, industrial sources

Powerplants 50%

Metallurgy 25%.

Industrial sector, coal use

Industry 40%

Residential/commercial 30%

Powerplants 30%

Lignite use, industrial sector

Industrial processes; use of highash Donets coal

Industrial sector, use of lowquality coal

Industry 50%

Powerplants 20%

Residential 20%.

Industrial processes 45%

Highway vehicles 22%

Residential 18’%.

Other countries with reported emrsslons” Romania (1990) 30, Moldova (1989) 18, Belarus (1989) 17, Latwa (1989) 14,

L!thuanla (1989) 11

*For comparahve purpases, this figure does not include emlsslons from mcmerahon, waste dumps, or forest fires

SOURCES R C Cooper, “Environmental Problems and Pollution Abatement m Central and Eastern Europe, ” contractor

report prepared for the Office of Technology Assessment, Aug 6, 1993, pp 42, 127, and U S Environmental Protect Ion

Agency, National&rPollutanl Emiss\on Estimates 1940-1989 (Research Triangle Park, NC March 1991)

fur content of the lignite deposits in the western re- fur coals in recent years has increased baghouse

gions of the United States is very low, sulfur re- filter usage.

moval has not been a major goal of U.S.

technologies. | Sulfur Dioxide

U.S. firms also have a great deal of experience Sulfur dioxide is formed when sulfur contained in

in post-combustion particulate removal. While the fuel combines with oxygen during the comESPs have been the main focus of particulate bustion process to form S02

. It is released in the

abatement, the exploitation of Western, low-sul-
120 I Fueling Reform: Energy Technologies for the Former East Bloc

combustion gases. Certain industrial processes,

such as the smelting of sulfur-containing ores,

also result in S02 emissions. When S02 is carried

into the upper respiratory system and the lung, it

can increase airway resistance. While this may be

merely troublesome for a healthy person, it can be

fatal to someone already afflicted with chronic

bronchitis or emphysema.

In recent years, concerns about S02 emissions

have focused on acid rain. Acid rain is the result of

an additional chemical change in the atmosphere,

when some S02 is oxidized to form sulfuric acid

(H2S04

). NOX can also be oxidized to form the

pollutant nitric acid (HN03

). Aerosols containing

these acids have a short residence time in the atmosphere (from two days to a week), and are then

deposited on the ground through rain or snow.

Acid rain can lower the pH of lakes, with consequent damage to fish and other aquatic life, and it

is suspected that acid rain harms crops and forests.

Coal is generally considered the main contributor to fuel-based S02 emissions. However, because of the lack of desulfurization equipment in

the refinery system, S02 emissions from residual

fuel oil are greater than emissions from coal use in

some regions, even on an energy-equivalent basis.

Without desulfurization equipment, the sulfur

contained in crude oil is concentrated in the heavier components. Because much refinery technology in the region is based on primary distillation,

high shares of high-sulfur components, such as residual fuel oil, are produced, exacerbating the

problems of sulfur emissions. Although low-sulfur residual fuel oil is produced in the region, most

is high- or medium-sulfur grade.40

Regional Problems

There have been very few controls to reduce S02

emissions in the region. Instead, taller stacks have

been used at large polluting sources to disperse

sulfur emissions away from residential areas. As

shown in table 5-2, the Czech Republic had the

highest density of S02 emissions (measured per

capita) in the region, due to high-sulfur lignite use.

Since the energy content of this lignite is very low,

large volumes must be consumed.

Although not evident from table 5-2, emissions

of S02 fell in many countries of the region during

the 1980s because of changes in the fuel balance.

During the 1980s, large amounts of natural gas

from the Urengoi fields started to move westward

through large-diameter pipelines. Increased gas

availability, coupled with a stagnation in oil production, resulted in a gas-for-oil substitution program at powerplants in the former Soviet Union.

Between 1980 and 1985, natural gas consumption

at powerplants in the former Soviet Union almost

doubled. 41 The initial increase in gas use came

from powerplants located nearest the production

region of Western Siberia (the Urals and Volga regions) or along the newly constructed export line

(Ukraine). By the early 1990s, powerplants in

Moldova, Belarus, and Latvia had switched to gas

use. Natural gas not only replaced high-sulfur residual fuel oil, but also coal and peat.42

According to Soviet statistics, S02 emissions

dropped dramatically in the 1980s, from a peak of

20.2 million tons in 1983 to 16.8 million tons in

1989, a 17-percent decline.43 However, this was

due almost exclusively to a reduction in residual

‘%%nEcon, Inc., Petroleum Product Marketing: Eastern Europe and Former Soviet Republics (Washington, DC: PlanEcon, Inc. and DR1/

McGraw-Hill, March 1993), p. 7.

41A. A. Troitskll (@, Energetika SSSR iI ]986-f990 godakh (Power Engineering in the USSR, 1986-] ~) (Moscow: Energoatomizdat,

1987), p. 90.

QR. Caron C(x)pr, *+petro]eum DISp]aCe~nt in the Soviet Economy: The Case Of Electric Power Plants,” Soviet Geography, wI. 27, No. G,

June 1986.

43By comparison, during the same period, S02 emissions in the United States fell by only 8 percent. R. Caron Cooper, “Sulfur Dioxide

Emissions in the Republics of the USSR,” joint meeting of the Association for Comparative Economic Studies and the Association for Environmental and Resource Economics, Allied Social Science meetings, New Orleans (January 1992).
Chapter 5 Energy-Based Environmental Technologies | 121

Country Kg/per capita Main sources

Bulgaria (1985)

Estonia (1989)

193

124

Hungary (1988)

Slovak Republic (1988)

Kazakhstan (1989)

Poland (1990)

Russia (1989)

115

112

95

90

71

Czech Republic (1988) 200 High-sulfur lignite consumption:

Powerplants 66%

Industrial sector 13%

High sulfur lignite consumption

Use of locally produced shale:

Shale-fired powerplants 70%

Other sources 30%

Use of locally produced coal

and residual fuel oil, industrial

activities:

Powerplants 40%

Industry 33%

Home heating 22%

Not available

Industrial processes

Coal consumption:

Powerplants 50%

Home heating 25%

Industrial processes, highsulfur residual fuel oil consumption:

Metallurgy 50%

Powerplants 35%

Romania (1989) 67 Industrial activities, coal, and

residual fuel oil

U.S. (1989) 85 Coal consumption (powerplants), industry

Other countneswlth reported emlsslons: Ukraine (1989) 60; Belarus (1989) 58; Moldova (1989) 55, Llthuanla (1989) 51,

Latvia 22

SOURCES R C Cooper, “Environmental Problems and PollutonAbatement m Central and Eastern Europe, ’<contractor

report prepared for the Office of Technology Assessment, Aug. 6, 1993, p. 39, 125; and U S. Environmental Protection

Agency, Natlona/Ai? Po//utant Emission Estimates 7940-7989 (Research Triangle Park< NC: March 1991)

fuel oil and high-sulfur coal use, rather than the

installation of post-combustion abatement equipment.

In Central Europe, gas consumption increased

slightly in the 1980s, based on imports from the

Soviet Union. However, in recent years, new import pricing and the industrial downturn reduced

gas use in the region. Gas was used primarily in

the industrial sector, with the residential sector

only recently increasing in importance. Gas has

not been used extensively in powerplants, except

for Hungary (35 percent of fossil-fired generation)

and Romania (45 percent of fossil-fired generation).

Environmental technology options

Besides switching to low-sulfur fuels, there are

many ways to reduce S02 emissions. Only the

most common commercial practices are explored
122 I Fueling Reform: Energy Technologies for the Former East Bloc

here. Sulfur can be removed from the fuel before

combustion through coal cleaning and desulfurization of fuel oil. Modifications can be made in

combustion, or exhaust gases can be treated after

combustion.

Little has been done in the region to reduce S02

emissions. Only a small amount of coal is cleaned

or processed, and there is little abatement equipment in place. In Poland, only 58 of the almost

1,600 S02

-emitting sources regulated had S02

abatement equipment, and only six of these had

sulfur removal efficiencies greater than 90 percent. Almost half the S02 abatement equipment

had efficiencies of less than 50 percent.44 Only

three powerplants in the FSU had scrubbers, and

these were experimental units.

Coal cleaning can reduce the amount of sulfur

in fuel before combustion. It is also the only method, besides fuel switching, to address emissions

from small boilers and individual consumers in

the residential sector. Although coal cleaning

technologies are advancing rapidly, commercial

coal cleaning can presently remove only the pyritic sulfur components found in coal, not the organic sulfur. In Polish coal, the share of organic sulfur

is high (60 percent) .45 Since conventional coal

cleaning can remove 30 to 70 percent of the pyritic

sulfur, 46 cleaning of Polish coal would offer only a

10 to 30 percent reduction in S02 emissions.

While cleaning Polish coal provides a number of

benefits (e.g., reducing particulate, lowering

transport needs), it does not provide a significant

reduction in sulfur emissions. In Ukraine, on the

other hand, coal cleaning offers a larger reduction

in sulfur emissions, because a large share of the

sulfur is in pyritic components. Donets Basin coal

has from 60 to 75 percent of sulfur in pyrites.47

Therefore, high-efficiency conventional coal

cleaning could reduce sulfur emissions by up to 50

percent. However, since the sulfur content of Donets coal is high (from 2.5 to 3.5 percent sulfur),

S02 emissions even with coal cleaning would still

be much higher than EU standards would allow.

Desulfurization of fuel oil at refineries (hydrotreating) is particularly important in this region

because much of the refining capacity, especially

in the FSU, is based on primary distillation, which

results in high shares of heavier components, such

as residual fuel oil. Residual fuel oil accounted for

the largest share of fuel-based S02 emissions in

Russia, Belarus, Moldova, and Lithuania, and a

significant share of S02 emissions in Romania.

Sulfur scrubbers can be used to reduce S02 emissions, but fuel oil-consuming plants are usually

dual-fired, using natural gas when it is available in

the summer, which reduces the economic effectiveness of installing abatement equipment.48

Several technologies reduce S02 in the combustion process. Fluidized-bed combustion

(FBC) employs a circulating bed design to capture

almost 95 percent of the sulfur (compared with 85

percent capture in deep-bed designs, and 60 percent in shallow-bed designs) .49 The circulating

bed also has the best performance in reducing NOX

emissions. In the FSU, some FBC boilers have

been installed in industry, and a 135-megawatt

(MW) bubbling-bed utility version has been under

development, using coal from the Kansk-Achinsk

region of Siberia.50 This project, however, does

440chrom hdmvhka 1992, P. 152.

45R[,&n A. Meyepj, cw/ Llew/jiurj~dkm (New York, NY: Marcel Dekker, 1977), P. 4.

tiDoE, Energy TeC.hn~/~gjes and (he Environment, p. 13.

q7Energelic.heskoe T~p/i\o SSSR, 2d ed. (MOSCOW:” Energoatornizdat, 1991 ), pp. 16-17.

@M. A. !jtyrak(wich and A. K. Vnukov, ‘U@ostavlenie ekologo-ekonornicheskoi tselesoobraznosti udleniia sery na neftepererabaty -

vaiushchikh zavodakh i TETs,” (Determining the Ecologic-Economic Goals for Sulfur Abatement, Refineries and Cogeneration Plants), Teploenergetika, No. 12, 1989, p. 39.

49]ntematl{)nal Energy Agency, Emission Con/rO/s in E/eC./ri~.i~ Genera~i~n ad /~us[ry (ptis: OECD/lEA, 1988), p. 72.

soJon Cohen, “-me Soviet Power Industry opens Its DOWS,” EPRIJowud, vol. 15, NW 2, March 1990, p. 34.
Chapter 5 Energy-Based Environmental Technologies | 123

not have much potential for reducing sulfur emissions, because Kansk-Achinsk coal is a low-sulfur

lignite. Another combustion modification currently being explored is furnace sorbent injection.

This technology injects a dry sorbent (usually

lime) into the furnace, where it reacts with sulfur

and forms solid particles, which can be collected

by the particulate control device. While S02 removal can be up to 65 percent, this still might not

be sufficient to meet regulations.51

Flue-gas desulfurization (FGD), a post-combustion S02 removal technology, is the most

widespread method in the West. FGD systems use

a sorbent to react with and scrub sulfur directly

from flue gas. A 90-percent reduction or more of

S02 is common with wet scrubbers. The disadvantages of wet scrubbers include space and energy requirements and relatively high retrofit costs.

An additional problem is the high-volume of byproduct. 52 The choice of FGD technologies often

depends on waste-disposal regulations. The spray

dryer FGD is the second-most-common system in

use and has been popular in Europe. This FGD

process injects lime into an absorber vessel, which

reacts with the sulfur, leaving dry particles of the

sulfur for collection in the particulate filter system. The advantages of the spray dryer system include lower energy losses, ease of handling

byproduct, and lower capital and opera

costs.53

Combined S02 and NOX control systems

presently being developed. A combined appro

the

ing

are

ach

to post-combustion cleaning would offer lower total capital and operating costs than the installation

of separate equipment for control of each pollutant. The limestone-injection, multi-stage burners

(LIMB) is a promising type of combustion

technology designed to reduce both S02 and NOX

emissions. It also reduces particulate emission

levels. It is a relatively simple system and attractive for retrofit applications. LIMB should

achieve reductions of 50 to 60 percent in S02 and

50 percent in NOX emissions. However, these levels of reduction might not be enough to meet standards.

54 Advanced FGD systems, which

potentially reduce both S02 and NOX to compliance levels are under long-term development. 55

FGD systems could play a role in reducing SOL

emissions in some former East Bloc countries. If

regulatory priorities mirror those of the West,

standards will be strictest and the need for FGD

greatest at large fuel-consuming units such as

powerplants. The facilities best suited to the use of

FGDs or similar sulfur-abatement equipment are

the coal-fired powerplants in Poland, the Czech

Republic, Ukraine, and Russia, and possibly the

shale-fired plants in Estonia. Post-combustion removal of sulfur would probably not make sense in

Slovakia or Bulgaria (powerplants are small),

Hungary (coal consumption has been displaced by

gas and nuclear power), and Belarus or Moldova

(large powerplants have been converted to gas,

and S02 emissions are from residual fuel oil at

smaller facilities). In Ukraine, a new coal-fired

powerplant (a 300-MW unit at Dobrotvor, on the

border with Poland) received a $50-million investment grant from the German Environmental

Ministry for the installation of FGD and particulate control technologies.56 In Poland, a Dutch

firm will build two smokestack scrubbers for the

S I Jason M&ansi, “controlling S02 Emissi(ms,” Power, vol. 137, No. 3, May 1993, p. 50.

521bid.

‘31bid.

541 bid., pp. 67-68.

551 bid., p. 68.

s6.,Gemany t(, HeIp ~ovide Financing 10 clean Coal-Powered plant in ~raine, “ International Ern’ironment Reporter, vol. 15, No. 19,

Sept. 23, 1992.
124 I Fueling Reform: Energy Technologies for the Former East Bloc

Belchatow Powerplant, and provide engineering

for two others.57 The Czech government has

called for the installation of FGD equipment at the

country’s largest and most modem powerplant,

Prunerov II, and funding has been received for this

project from the World Bank, the EU, and the German government.58

U.S. opportunities to transfer technology

Technologies for sulfur abatement extensively

used and manufactured by U.S. firms have some

advantages in the region. FGD systems in the

United States can handle coals with much higher

sulfur contents than their overseas counterparts.59

This could be a significant advantage in countries

with high-sulfur coal such as the Czech Republic

and Ukraine. The United States also holds an edge

in FBC, having the largest share of installed capacity (among International Energy Agency

members) of circulating-bed plants.60 However,

Europe has greater experience in

| Nitrogen Oxides

NOX is a mixture of nitric oxide

When combustion occurs at high

spray dryers.61

(NO) and N02.

temperatures—

regardless of the fuel used—some nitrogen contained in the air is oxidized to NO and N02

(thermal NOX). Nitrogen contained in some fuels,

such as coal, is also oxidized during the combustion process (fuel NOX

). At stationary sources, the

quantity of NOX emissions is determined by the

temperature of combustion and the amount of excess air in the furnace unit. For large, pulverizedcoal boilers, the highest rate of NOX emissions

occurs at cyclone furnaces, followed by wall-freed

units and tangential-fired boilers.62 Cyclone furnaces are common throughout the former East

Bloc. For example, Ukraine alone has 85 of these

units.63 The health effects of long-term NOX exposure are still unknown, but emissions of NOX are

linked to acid precipitation and ozone formation.

The major sources of NOX emissions include

cars and trucks, powerplants, and the industrial

sector (from fuel use rather than industrial processes). With the advent of catalytic converters on

cars, NOX emissions have decreased in many

countries, even where vehicular ownership increased. For example, in the United States, NOX

emissions from the transport sector as a whole fell

from 9.8 million metric tons in 1980 to 7.9 million

tons in 1989.64 In the former East Bloc, most NOX

emissions come from industry, although most

large cities experience high NOX levels due to the

use of cars without catalytic converters. Moreover, the future of NOX emissions in the region is

presently unclear. In many countries, the low level

of private car transport has kept NOX emissions at

artificially low levels. Increases in car ownership

may significantly increase NOX emissions.

Regional Problems

One of the difficulties in assessing NOX emissions

in former East Bloc countries is that the emission

statistics for thermal NOX are almost impossible

sT’’Dutch Firm t.Build !jcrubbers for a Polish Power Plant,” International Ertvironment l?eporter, vol. 15, NO. 8, Apr. 22, 1992, P. z@.

Ssstanley J. Kabala, “EC Helps Czechoslovakia Pay Debt to the Environment,” RFE4RL Researeh Report, VOI. 1, No. 20, May 15, 1992, P.

55; “Czech Government Accepts German Grant to Install ScrubberSat Coal Plants in N~]ti,’’fnter~rio~l Envim~ew Reporter, vol. 15, No.

24, Dec. 2, 1992; “World Bank Approves Loan to Cut Power Plant Pollution,” Internationtd Environmen/Reporter, vol. 15, No. 12, June 17,

1992, p. 425.

sgM&ansi, ‘Ccontro]]ing S02 Emissions,” p. 28.

~EA, Emission Controls in Electricity Generation and Industry, p. 73.

G] M~~si, “Controlling S02,” p. 46.

S21EA, Emission contr~ls in Electricity Generation and ItiuStry, p. 65.

G3*6US, Utiine, ~d Russia to produce New ‘Rebum’ Technology,” Environrnenta/ Watch, East Europe, Russia & Eurasia, vd. 1, No. 4,

November 1992, pp. 6-7.

@EpA, Nafional Air P~[[utant Emission Estimates 1940-1989, p. 21.
Chapter 5 Energy-Based Environmental Technologies | 125

Country Kg/per capita Main sources

Czech Republic (1988)

Romania (1990)

Poland (1990)

Slovak Republic (1988)

Bulgaria (1985)

Estonia (1989)

Hungary (1988)

U.S (1989)

83

39

36

37

34

31

24

80

Stationary sources 75%

Mobile sources 25%

Not available

Stationary sources 67% (half

from powerplants)

Mobile sources 33%

Stationary sources 80%

Mobile sources 2570

Not available

Stationary sources 55%

Mobile sources 45%.

Stationary sources 55%

Mobile sources 45%

Stationary sources 60%

Mobile sources 401%0

Other countries with reported emm.ions. Kazakhstan (1989) 22,a Ukraine (1 989) 21, Lithuania (1 989) 21, Russia (1989)

lg,a Moldova (1989) 19, Belarus (1989) lo;a Latvia (1989) 5

aMoblle-source data not included.

SOURCES R C Cooper, “Environmental Problems and Pollution Abatement m Central and Eastern Europe, ” contractor

report prepared for the Office of Technology Assessment, Aug 6, 1993, p. 39, 125, and U S Enwronmental Protect Ion

Agency, Natlona/AiiPo//utant Emission Estimates 1940-1989 (Research Triangle Park, NC March 1991)

to verify. Furthermore, for many former Soviet republics, no data on mobile-source emissions by

specific pollutant have been reported.

To calculate mobile-source NOX emissions, a

large data base containing information on gasoline consumption, engine efficiency, operating

conditions, miles driven, emissions, and other

factors for many categories of transport modes is

needed. However, most of this data have not been

tracked, recorded, or reported.

Therefore, the emission figures in table 5-3

must be approached with some caution. Although

the Czech Republic again tops the list of polluters,

the density of NOX emissions in the Czech Republic was very similar to that of the United States.

However, stationary sources play a much more

important role in NOX emission in the Czech Republic than they do in the United States.

Environmental technology options

Combustion modifications were the first methods

employed to reduce NOX emissions in the West.

Originally used to reduce mobile-source emissions, they are now used almost exclusively on

stationary sources. The success of combustion

modification methods depends on the type of furnace and burner. In general, wall- and tangentially

fired units are easier to retrofit for lOW-NOX burners than are cyclone furnaces. In the cyclone units

common to the FSU, fuel reburning is thought to

be the only option to reducing NOX emissions during combustion.65

bslbid.
126 I Fueling Reform: Energy Technologies for the Former East Bloc

For post-combustion NOX removal, selective

catalytic reduction (SCR) has been the primary

commercialized technology. While SCR technology is much more efficient than combustion modification in removing NOX (as high as 90 percent

removal, compared with approximately 50 percent for combustion modification), SCR systems

have high operating and capital costs compared

with combustion modification.

A second, recently commercialized technique

for removing NOX from flue gases is selective,

noncatalytic reduction (SNCR). This system has

lower costs and lower NOX removal efficiencies

(about 50 percent) than SCR.66 Also, SCNR is extremely sensitive, and additional NOX can form if

temperatures are too high. Another problem preventing widespread use of SNCR is that some NO

is converted to N20, a greenhouse gas.

Advanced generation technologies, such as

high-efficiency gas turbines, also emit NOX

. Injection of steam from the exhaust boiler into the

gas turbine burner can be used to control NOx

emissions from the basic gas turbine. Conventional NOX control techniques, such as combustion

control, SCR, or SNCR can also be employed.

U.S. opportunities to transfer technology

The primary advantage of U.S. firms in reducing

NOX emissions at stationary sources is reburn

technology, which can reduce NOX emissions by

up to 50 percent. Reburning is an in-furnace technique for reducing NOX by creating a reducing

zone downstream from the primary combustor.

The injection of natural gas into the reducing zone

with insufficient oxygen bums the fuel completely. A demonstration project to retrofit a powerplant boiler at the Ladyzhin PowerPlant (located

in Ukraine, 150 kilometers southeast of Kiev)

with U.S. reburn technology was sponsored by the

U.S. Environmental Protection Agency, working

with ABB Combustion Engineering (Windsor,

Connecticut). While retrofitting was very laborintensive, this factor was not a deterrent in

Ukraine, where wages for skilled workers are very

low. Reburn technology was also the cheapest

method for retrofitting cyclone boilers.67

In post-combustion NOX removal, however,

the United States is at a disadvantage. While SCR

has been commonly used in gas-turbine cogeneration and combined-cycle systems in the United

States, the first full-scale utility applications (one

coal-fired, one oil/gas-fired powerplant) are just

starting up. Meanwhile, tens of thousands of

megawatts of fossil-fired boilers are operating

with SCR in Japan and Europe.68

| Other Pollution Problems

Hundreds of other pollution problems are noted

during fuel combustion. Principal among them are

hydrocarbon, carbon monoxide, and lead emissions and photochemical smog formation. Motor

vehicle traffic is a major source of these problems.

There are relatively few trucks in the FSU

compared with the United States,69 but the potential for expanding truck transport in the former

East Bloc is substantial. Under almost any scenario of economic development, trucks will play a

much greater role in freight transport, particularly

if regions, industries, and consumers have more

autonomy in the production and purchase of

goods.

The pattern of passenger transport in the region

varies from other industrial countries, as well.

Passenger transport has been dominated by collective carriers (buses and trains), although private vehicles have started to make inroads. By

661EA, Emission Con[rO/s in Electricity Generation and Industry, p. 67.

671bid.

~Makansi, “controlling S@ Emissions,” p. 22.

69whl]e Statistics are “nc]ear, it ap~ars that in the late 1980s them wem 5.4 million tmcks in the s~}viet union, compared with ~ million in

the United States. See Vavilov, “Vce krugi chada,” Energetika, ekonomika, tekhnika, eko/ogiia, No. 10, 1989.
Chapter 5 Energy-Based Environmental Technologies | 127

Western standards, there are very few private cars

in the FSU.70 In Central Europe, car ownership

levels are higher, but vary significantly.71 There is

tremendous potential for motor vehicle usage to

increase rapidly if market conditions permit.

As noted earlier, data on emissions from mobile sources are insufficient to perform a detailed

analysis at this point. Even given the scant data, it

appears that emissions are quite high, despite the

low level of truck transport and private car ownership. For example, in 1987 for the Soviet Union as

a whole, hydrocarbon emissions from mobile

sources were at 90 percent of U.S. levels for mobile sources. Carbon monoxide was at 65 percent,

and NOX was at 25 percent,72 even though the U.S.

had almost eight times the number of cars and

three times the amount of freight haulage (measured as ton-kilometers) by trucks.

Emissions control equipment on cars manufactured in the region has been minimal. Very few vehicles manufactured in the FSU were equipped

with catalytic converters, owing in part

ages of platinum and palladium and the

duction levels of unleaded gasoline.

Environmental technology options

Most domestic auto industries, in joint

to shortlow proventures

with Western firms, are shifting to production of

cars with catalytic converters. But due to financial

constraints and the lack of unleaded gasoline, it is

not clear how rapidly these new vehicles will

penetrate the market. The problem of the highly

polluting existing car fleet will remain for many

years because cars are typically held and operated

for much longer periods of time in former East

Bloc countries than in the West. Therefore, an important engine emission control system under development for retrofit to four-stroke engines is the

lean combustion system. This system uses a microprocessor with a lean-mixture sensor, and

works to ensure the leanest fuel mixture under varying engine loads. This system not only reduces

emissions, but it also increases overall fuel efficiency. Recentl y, a Maryland firm won a patent for

its lean-bum design, which can be retrofitted to

pre-1980 cars and trucks.73 While emission reductions with lean-bum technology are not as large as

with catalytic converters, lean bum technology

could play an important role in reducing automotive emissions in the region.

U.S. opportunities to transfer technology

Opportunities to transfer U.S. mobile source

emissions abatement technologies are limited in

former East Bloc countries. U.S. firms face stiff

competition from European and Japanese firms

that have significant manufacturing capacity and

technical expertise. Also, vehicle emissions are

not likely to be a pressing concern in former East

Bloc countries because of the present low level of

car ownership. Moreover, it is likely that emissions control technologies, such as catalytic converters, will be tied in with the automobile

manufacturing process.

OUTLOOK FOR U.S. TECHNOLOGY

TRANSFER

U.S. abatement equipment manufacturers are well

positioned to meet some regional needs (see table

5-4). Specifically, U.S. suppliers could supply the

ToIn 1990, for the Soviet Union as a whole, there were only 50cars per 1,000 people, compared with over 250 in Japan, w in the ~G, and

nearly 600 (including personal light trucks) in the United States. See Goskornstat, Transport i st’iaz’ (Moscow: lnforrnatsionno-izdatel ‘skii

Tsentr Goskornstata, 1991 ).

Tlcar ownership levels have been highest in the former Czechoslovakia(219 cars per 1,000 people), followed by Hungav (202), and Poland ( 155),

72E0 Iu Be~Uglaia, G,p. Rastorgueveva, I.V. Smironova, Chem dysirpromysh/ennyi ~orod (HOW 1% Industrial Cities Breathe) (~ning~d:

Girdrometeoizdat, 1991), p. 219.

73wanen Br{)wn, *. Cafiure[i)r ~vlce May He]p Mexico C]ean Up Its Air,” Washing/on Posr, Washington Business Section, June Z8* ‘~~r

p. 9.
—

128 I Fueling Reform: Energy Technologies for the Former East Bloc

Country Environmental equipment or expertise needed

All countries

Russia

Ukraine

Kazakhstan

The Baltics

Poland

Czech Republic

Slovak Republic

Hungary

Monitoring equipment, air and water purification systems for refineries, low-sulfur residual fuel oil production, unleaded gasoline production, low NOX combustion modifications, lean-burn, mobilesource reductions.

Offshore drilling expertise, arctic operations and equipment reclamation of mined areas, ESPs or baghouse filters.

Coal reclamation, acid mine drainage abatement, coal cleaning, FGD

for powerplants (when operated on coal year-round), ESPs or baghouse filters for particulate removal.

Coal reclamation, ESPs or baghouse filters for particulate removal.

Reclamation of shale areas (Estonia), abatement equipment to reduce particulate and sulfur dioxide emissions from shale combustion.

Control of saline discharge from mines, reclamation of tailing piles,

coal cleaning, FGD at large power plants, ESPs or baghouse filters

for particulate removal.

Reclamation of surface mined areas, coal cleaning, FGD at large

powerplants, ESPs or baghouse filters for particulate removal.

Coal cleaning.

Coal cleaning.

SOURCE: R.C Cooper, “Environmental Problems and Pollutlon Abatement m Central and Eastern Europe,” contractor

report prepared for the Office of Technology Assessment, Nov. 9, 1993.

needs for FGD units, electrostatic precipitators,

baghouse filters, reburn technology for lOW-NOX

combustion, lean-bum technology for mobile

sources, desulfurization equipment for refineries,

and coal cleaning and improved mining techniques. U.S. firms have had a significant amount

of experience in a range of activities that are needed to produce fuels with less environmental damage and to mitigate the damage that has already

occurred. For instance, the sensitive tundra ecosystem in Russia could benefit from some of the

lessons learned in Alaska. U.S. mining firms also

have more experience dealing with acid mine

drainage than does any other country in the world,

as well as extensive experience in land reclamation.

However, unlike energy supply investments,

most environmental improvements are diffilcult to

finance because they produce no direct revenue

stream. FGD systems might be of interest to avoid

future fines, but much of the electricity in the former East Bloc is still sold at low rates, leaving the

power company without means to invest. Thus

government export financing may be necessary.

However, the transboundary effects of some pollutants (S02 and NOX

, in particular) mean that

Western European countries are more impacted by

pollution coming from the region than the United

States is. Western Europe thus has additional incentive to offer financial and technical support to

address these issues.

In addition, U.S. regulatory standards and the

phase-in periods for the Clean Air Act have put

U.S. firms that supply pollution abatement equipment at a competitive disadvantage in the region.

The EU standards to which many countries in the

region aspire are, in general, stricter than U.S.

standards, giving European (and Japanese)
t

Chapter 5 Energy-Based Environmental Technologies | 129

manufacturers of abatement equipment a market

advantage. Because of differences in regulatory

framework, European and Japanese firms have

much more experience in retrofit designs and

equipment for powerplant abatement equipment

than do U.S. firms. For example, while U.S. lowNOX combustion modifications provide a lowcost means of reducing NOX emissions, the

reductions are not enough to meet upcoming EU

standards. Differences in regulatory regimes have

resulted in higher prices for some U.S. domestic

equipment as compared with other countries. For

example, the allowance for some operational

downtime of control systems due to failure, as in

Germany and Japan, lowers FGD system costs in

comparison with the United States, where no period of nonattainment is allowed, and systems must

be built with additional redundancies.74

Environmental technology transfer is also

plagued by a number of problems in former East

Bloc countries. These include the lack of experience in regulatory enforcement, the uncertain

results of economic reform, the costs of environmental technologies, and the number of other

pressing environmental problems not directly related to energy.

Lack of regulatory enforcement will delay environmental reform. Enforcement is being postponed in part by the need first to develop new

environmental laws and regulations.75 But the enforcement problem also stems from overlapping

and uncertain authorities among ministries, as

well as competition between republic-level and

local authorities.76

The uncertain path of regulatory reforms reduces the incentives to install abatement equipment. Even in the Czech Republic, where

regulatory reform has been greatest, there is little

incentive. For example, under the new environmental law in the Czech Republic, annual pollution fees for a 1,000-MW powerplant will rise

steadily from 80 million to 200 million korunas

($2.4 million to $6 million), but the installation of

abatement equipment would cost 12 billion

korunas ($360 million) .77 In this case, the fee for

pollution is smaller than interest on a loan to

install a scrubber and particulate removal device.

Abatement will be very expensive throughout

the region. Although labor and material costs

might be lower, the capital requirements for abatement control emission, particularly for air purification, are high. For example, the costs of FGD

alone for a 1,000-MW coal-fired powerplant (in

the United States) would be $170 million. Adding

particulate removal equipment would bring this

figure to over $300 million.78 Assistance would

be needed not only for capital investments, but

also for operations and maintenance ($60 million

for the annual operation and maintenance of the

above-noted FGD system), because electricity

rates are presently too low to generate sufficient

revenue to support abatement programs.

Another issue is how to plan environmental

protection for an economy in transition. In addition to the immediate difficulties of financing and

currency convertibility, these countries must design environmental regulation for a mix of economic activities that have no historic basis in the

region. While NOX and hydrocarbon emissions

are not a significant concern at this point, ownership levels of private cars can increase quite rapidly, which could present new abatement

requirements for both mobile and stationary

sources. Further, a large share of the technology

transfer needs identified in chapter 3 to stimulate

fuel production have environmental impacts of

their own. New types of drilling muds might re741EA, Emission Cijrttrds in Electricity Generation and Industry, Q. 125.

TsBt~~man and Hunter, “EnvirfJnmental Reforms in Post-Communist Central Europe,” p. 972.

‘bIbid., pp. 972-73.

77.* Genera] Envlrt)nmnta] Law Adopted by Federal parliament, ]n/er~(iona/ Envir~nmen~ Rep~rler, Jan. ] 5, 1992, p. 8,

78]EA, Em;ssl~n Con fro/s in Electricity Generation and Industry, p. I 11.
130 I Fueling Reform: Energy Technologies for the Former East Bloc

quire different containment linings; increased remote sensing and exploration could damage

pristine regions; increased drilling and production

from offshore sites could result in increased spills;

and coal cleaning wastes need reclamation and

proper disposal systems.

The pace of economic reform is also an important aspect of pollution planning. For example,

coal production from the Donets basin has long

been subsidized by the Soviet, and now Ukrainian, government. The Donets basin produces a

high energy value coal (although it is also high in

sulfur and ash) and is located near the sources of

demand. However, mines must now penetrate

deeper, to less economical portions of the basin.

Production costs and incremental capital requirements are very high, and production has been falling. The Ukrainian government will need to

decide whether to invest billions of dollars in sulfur scrubbers for powerplants that currently use

Donets coal, or to shut mines and purchase natural

gas from Russia or Turkmenistan. Until subsidies

are removed throughout the economy (resulting in

large energy savings) and some sort of safety net is

established to mitigate labor dislocations, the signals for environmental technology will be adverse.

Finally, it is unclear whether the pollution from

fuel production, processing, transportation, and

consumption is the most pressing environmental

problem in some countries in the region. For example, Belarus and Ukraine still have to face the

long-term consequences of the Chernobyl accident. Toxic and hazardous waste disposal has resulted in extremely dangerous environmental

conditions. Many areas do not have safe drinking

water. Also, in the FSU, since fuel production,

particularly of oil and gas, usually occurs away

from population centers, it is difficult to correlate

the impact of fuel production on human health.

Instead, it is the health of surrounding ecosystems

that is at risk, but the economies of the region

might not be able to afford such protection in the

short term.

CONCLUSIONS

At present, economic, scientific, and regulatory

uncertainties make specific recommendations for

U.S. involvement in the transfer of environmental

technology and expertise to the energy sector difficult. Serious consideration should be given to

projects that will play a significant role in protecting human health, which means thinking primarily about pollution at the ground level (low stacks

and mobile sources). The Environmental Action

Programme (EAP),79 a product of the collaborative efforts of Western governments and multilateral organizations, has recommended that health

and productivity costs be used as guiding priorities for environmental policy formulation and for

investment in environmental cleanup.

Perhaps the best way to reduce the impacts of

fuel production, processing, and transportation, is

to plan environmental protection as part of the

transition to a market economy. Environmental

mitigation needs to be encompassed in all new

Western activities in the region, from coal cleaning operations to offshore drilling activities.

Finally, it is important to remember that environmental problems cannot be addressed without

considering the wider context of the economies in

transition. Environmental problems are linked to a

host of issues that must be addressed in the near

future: investment and industrial policy, energy

policy, subsidies, unemployment, and privatization. Examining environmental problems in isolation from economic and social policies will result

in misguided and ineffective programs.

7~e Envir{Jn~enta] Actj~n RogMmme for Cenba] and ~stern Europe is based on the principles and priorities outlined at the Ministerial

Conference “Environment for Europe,” which took place in Lucerne, Switzerland, in April 1993. The report outlines a broad strategy forenvironmental reform in the region and is based on studies funded jointly by the governments of the Netherlands, Switzerland, Denmark, the United

States, Germany, Italy, the United Kingdom, the European Union Commission, OECD, and the World Bank.
The

Political,

Economic, and

Social Context

of Reform 6

E

conomic reform in the societies of the former East Bloc is

a tremendously complex process. The post-Communist

transition is not just a process of economic restructuring

and modernization-the reforms under way involve fundamental changes in the political and social orders of the societies

of the former East Bloc. The relationship between economic reform and energy technology transfer is an interactive one. Although the introduction of new energy technologies can facilitate

reform, undue slowness in economic restructuring can undermine

the effectiveness of energy technology transfer. Without the adoption of market structures and business practices, the modernization of facilities, technologies, and techniques in the production

and consumption of energy will be extremely difficult.

To understand the prospects for economic and energy sector reform, especially in the former Soviet Union (FSU), we must consider the larger context in which the transition from Communist

authoritarianism is taking place. This transition involves several

distinct but closely interrelated processes: the conversion to capitalist economies, sectoral economic restructuring, the establishment of democratic political orders, the design of a new set of

state institutions to regulate political and economic relations, the

implementation of new methods of social protection, and the

development of the broader “cultural” changes necessary for

successful transition from Stalinist dictatorship to market democracy.

Of all these processes of transformation, the most important

change is the establishment of a new political order that embodies

a popular consensus about the need for economic reform. Without”

a stable and popularly recognized political order it is difficult to

achieve popular consensus and then to translate it into political

St. Andrew’s Church, Kiev, Ukraine.

| 131
132 I Fueling Reform: Energy Technologies for the Former East Bloc

action on questions of economic reform. Governments that attempt to move too quickly without

substantial popular and political support for their

programs run the risk of failure. As economist

Stanley Fischer has observed, “[T]he pace of reform cannot get too far ahead of its political

base.”1

Democratization may not be an absolute prerequisite to the establishment of this popular consensus and the enactment of an effective economic

reform program. However, it is not surprising that

the Central European countries, which have

moved most quickly to replace old Communistera political structures with new constitutional orders and popularly elected governments, have also

made the most progress in pursuing economic reform. Other former East Bloc countries, where

there is less popular consensus about reform and

which have yet to consolidate new political structures, have moved much more slowly and less successfully to stabilize their economies and lay the

foundations for a new economic system. The result has been a multi-tiered portrait of reform in

the region, with three groups of countries at different levels of transformation.

As chapter 8 will discuss, it is important for

U.S. policymakers to consider a country’s progress toward reform, because the degree of success

in economic and political restructuring will affect

the appropriateness of U.S. policy. In particular,

assistance for those countries that have made the

least progress toward reform will be most useful if

it emphasizes policy changes, while the more advanced countries can benefit more from development assistance. Similarly, trade and development

programs may be more effective and appropriate

in promoting U.S. goals in those countries that

have already made substantial progress in reform.

THE VANGUARD: COUNTRIES IN THE

FIRST TIER OF REFORM

Poland, the Czech Republic, and Hungary occupy

the first tier of reform. They were the quickest to

establish a political consensus on the need for

democratic and market transformations and to

translate this political will into effective mechanisms for the implementation of reform programs.

They can assimilate the broadest range of U.S.

programs in the region.

| Historical and Political Background

The Poles, Czechs, and Hungarians moved so

quickly and decisively for several reasons, among

the most important of which is their historical

legacy. Between World War I and World War II,

these countries were politically independent, operated functioning (though problematic) representative constitutional orders, and had market-based

economies. The memory of this period has been

strong, providing a base of experience in the operation of participatory political institutions and

market economies, as well as previously tested

models for reform.

Another factor in the rapid pace of economic reform in Poland and Hungary is the fact that their

economies were never fully “sovietized.” Polish

agriculture remained, for the most part, in private

hands. Hungary developed a strong semiprivate

service and small-scale manufacturing sector that

has been an important factor in economic transition. Also, an underground economy thrived in

both countries.

The close proximity of the Polish, Czech, and

Hungarian lands to Western Europe also provided

an impetus for reform.

I Stanley Fischer, “Socialist Economy Reform: Lessons of the First Three Years,’’AEA Papers and Proceedings, vol. 38, No. 2 (May 1993),

p. 393.
Chapter 6 The Political, Economic, and Social Context of Reform | 133

Finally, the geographically small and ethnically homogeneous nature of these countries has

bolstered efforts to break decisively with Communist-era institutions and policies (perceived as

having been forced upon the area from outside),

promoted social stability, and facilitated the

construction of representative political institutions. 2

| Poland

Poland launched the earliest, most radical, and to

date, the most successful reform program. Under

“shock therapy,” the state drastically cut subsidies

to industry, placed strict controls on the budget,

checked the inflationary growth of wages, and

raised interest rates. Backed by an International

Monetary Fund-sponsored currency stabilization

fund, the government devalued the zloty and

introduced currency convertibility. Simultaneously, Poland started the process of privatization. Finally, prices were freed and laws on foreign

trade and investment were liberalized to encourage capital investment and export activity.

The initial costs of the Polish program were

quite high: industrial output declined initially by

24 percent, and unemployment, almost nonexistent in Communist times, shot up to 15.7 percent

by the end of 1993. However, inflation, which had

reached 2,000 percent in late 1989, is currently

running at about 35 percent.3 After several years

of economic contraction, Poland’s gross domestic

product (GDP) rose in 1992 by 1 percent, and industrial production expanded by 4.2 percent-the

first economic growth in any post-Communist

country. In 1993, Polish GDP grew by 4 percent.4

Even more important are the structural changes

the Polish economy has experienced. The private

sector is now the engine of Polish economic

growth. Although privatization of large-scale industry is just beginning in earnest, almost all

small-scale retail business and most mediumsized enterprises have been privatized. Employment in Poland’s non-agricultural private sector,

which accounted for only 13 percent of the work

force in 1989, has expanded to 45 percent. And, in

1992, the expansion of private employment

(500,000 jobs) completely compensated for the

loss of state-sector jobs. Private employment now

constitutes almost 60 percent of the total Polish

work force.5

Nevertheless, the nature and speed of Poland’s

transition have produced political problems. Although the country appears to have turned the economic comer, and significant numbers of Polish

citizens have prospered under the new program,

large portions of the population, especially senior

citizens and the hundreds of thousands of workers

still employed in unreformed sectors of the state

economy, have suffered and face uncertain futures.

During 1992 and 1993, dissatisfaction with the

disproportionate benefits of economic reform,

and nostalgia for the social protections provided

by the previous state-sponsored economy, fueled

resistance to the reform program in Poland’s politically fractured parliament In May 1993, President Lech Walesa dissolved parliament after the

reformist government of Hannah Suchocka lost a

no-confidence vote to Solidarity-led forces demanding pay and pension increases. In elections

in September 1993, a coalition of ex-Communist

and peasant parties came into power.

Although these post-Communist parties campaigned on a populist, antireform platform, they

z czechos]~v~ia split apm because Of the ethnic division between Czechs and Slovaks and the more radical approach to economic reform

advocated by the more economically advanced Czech lands of Bohemia and Moravia. Although the split entailed large economic and social

costs, the Czech Republic is now freer, as a result of the breakup, to pursue a program of radical economic change.

J Organ jmtjon for Economic Coowmtion and Development, Regional Development Problems andPo/icies in poia~(p~is: 1992)~ P“ 19;

FBIS, Eastern Europe Reporr, FB1S-EEU-94-021 (Feb. 1, 1994), p. 9.

4RFE/RL Resear<,k Report, vol. 2, No. 32 (Aug. 13, 1993), p. 43; FBIS, Eastern Europe Report, FBIS-EEU-94-021 -A (Feb. 1, 1994)7 P. 8.

5 “’Poland Stays the Course Despite Political Turmoil,” RFE/RL Research Bu//etin, vol. 10, No. 17 (Sept. 7, 1993), p. 1.
134 I Fueling Reform: Energy Technologies for the Former East Bloc

have been moderate in their legislative plans. The

new ruling coalition has raised taxes on entrepreneurs and increased spending to mitigate social

hardships. But a retreat on the core issues of economic reform is unlikely because all parties know

that critical international financial support for Poland would dry up if the country pursued fiscally

irresponsible policies. In fact, in late December

1993, Prime Minister Pawlak stated that despite

campaign pledges to reverse the economic policies of the previous government, his government

would continue the economic policies instituted

by its predecessors. 6 In March 1994, the new coalition passed a fiscally conservative 1994 budget

that limits the deficit to 4.1 percent of the GDP.

Prognosis for Reform

Poland is well on the way to market reform. So

much progress has already been made in restructuring and stabilizing the economy that many observers feel that the country has passed the point of

no return. The biggest threat to continued success

in economic transformation is political backsliding in the legislature. But even this potential reaction against reform would only delay economic

progress, not reverse the course of reform.

| Czech Republic

The Czech economy, which once was one of the

leading industrial powers of Europe, has been

very responsive to change. The Czech Republic

entered into a program of fiscal austerity and

shock therapy and in some ways enjoys better economic conditions than Poland. In 1992 and 1993,

it had the lowest regional inflation rate. Its per

capita indebtedness is much lower than that of Poland or Hungary. The country ran a $268 million

trade surplus in 1993. Unemployment stood at

just 3.5 percent at the end of 1993. Monetary

policy has been tight, the koruna has maintained

6 RFEIRL Daily Report (Dec. 30, 1993).

Vltava Rive< Prague, Czechoslovakia

its value against Western currencies, and the

Czech banking system is the most highly developed in the region. Virtually all consumer service

enterprises have been privatized, mostly through

private sales and auctions.

Due to a more cautious approach toward economic transformation, however, the Czech economy has not experienced the expansion that Poland

has. Moreover, several political and economic

shocks have hindered progress. First, the economy suffered a severe shock from the division of

Czechoslovakia into two countries.7 Further, a national value-added tax, introduced in January

1993, had a greater-than-expected effect on the

inflation rate, which ran at 20 percent in 1993,

compared with 11 percent in 1992. GDP fell by 7

percent in 1992 but remained steady during 1993.

Industrial production fell by over 5 percent during

1993.8 And finally, despite levels of unemployment that are among the lowest in Europe, economists suspect that levels of real underemployment

and unemployment are higher.

The Czechs are counting on privatization as the

basis of economic transformation. Privatization is

particularly important in the Czech Republic be7 GDP dropped by 2.3 percent in the first quarter of 1993. Financial Emes, Aug. 6, 1993, p. I I.

8RFE}RL Re~earC.h Report, V{)I, 3, NO. 1, Jan. 7, 1994, p. 73. RFEIRL Daily Reporl, Aug. 19, 1993; The Economist, Dec. 18, 1993, p. 58.

FBIS, Europe Economic Rel’iew, Nov. 16, 1993.
Chapter 6 The Political, Economic, and Social Context of Reform | 135

cause, unlike its neighbors, the Czech private sector was virtually nonexistent during the

Communist era. The Czechs have undertaken two

ambitious and innovative waves of privatization,

involving 1,500 state firms, based on the distribution of privatization vouchers to all Czech citizens. By distributing vouchers to all adults, the

Czechs solved two problems. They created a capital market where there had been very little liquidity, and they gave each citizen a chance to

participate in the privatization process. The

Czechs’ voucher scheme was the first of its kind

and is serving as a model for privatization in

Russia.

Although privatization has proceeded more

slowly than planned, it has produced substantial

results. Over 50 percent of the country’s 10 million citizens have bought shares. By the end of

1993,60 percent of the country’s large enterprises

had been privatized. The Czech private sector accounted for almost half of 1993 GDP and 23 percent of total employment.9

Yet there are questions about the privatization

process and the depth of change in the Czech economy. High-pitched speculation in vouchers and

unrealistic promises about returns on investment

funds may have created serious financial risks. If

large investment funds are unable to fulfill their

high-yield promises, the government may have to

step in to restore liquidity to capital markets or

bail out bankrupt funds. This would place severe

stress on the state budget and slow economic recovery. Economists are also concerned about high

levels of inter-enterprise debt and the fact that onethird of all privatized enterprises are in de facto

bankruptcy.

Prognosis for Reform

Despite the tremendous political and economic

shocks of the past two years, the Czechs have

made substantial progress in introducing structural and institutional change, as well as stabilizing

the economy. Czech entrepreneurism has shown

new vibrancy in an energetic private economy.

Like Poland, the country has laid a firm basis for

future growth.l0 Potential short-term setbacks in

the areas of privatization and finance should not

threaten the success of long-term transformations

already well under way.

| Hungary

Although Hungary was at the forefront of Central

European economic reform during the Communist era, the country currently lags behind Poland

and the Czech Republic. Hungary’s problems are

due partly to the high levels of foreign debt (at

$2,000 per person, the highest in the world) that it

inherited from the Communist era. The country

has also suffered from the influx of 100,000 refugees from the Yugoslav civil war and the disruption of trade ties caused by the trade embargo on

Yugoslavia.

But Hungary’s economic problems are also

caused by the choices it has made with regard to

reform. Instead of launching economic shock

therapy, like the Poles and Czechs, Hungary pursued a deliberately more cautious strategy, hoping

to minimize the social costs of change. Precisely

because there has been no economic “big bang” in

Hungary, the costs of reform have been strung out

and even accentuated. Hungary is experiencing

many of the negative effects of economic reform

without many of its benefits.

Despite a sizable private sector (estimated at 40

percent of GDP) and the highest levels of foreign

investment in the former East Bloc, the economy

remains in recession. A privatization program has

been launched, but it is proceeding slowly, in part

because Hungary has depended on foreign capital

to provide funds for the privatization process and

has not developed the financial structures necessary to underwrite and support the process from

9 RFEIRL Research Report, vol. 2, No. 32, Aug. 13, 1993, p. 50; also, vol. 3, No. 1, J~. 7, 1994, P. 72.

10 me Vienna ]nst]tute for Comwmtive R(momic Studies and Comrnerzbank predict 3-percent GDP growth in the Czech Republic during

1994. The Economist, Dec. 18, 1993, p. 58.
136 I Fueling Reform: Energy Technologies for the Former East Bloc

within the country. As a result, less than 17 percent of the 1992 work force was employed in the

private sector.11

There are signs, however, of stabilization and

the beginnings of economic growth. Hungarian

GDP, which fell by an estimated 5 percent in 1992,

may have leveled off in 1993.12 Industrial production increased by over 3 percent in 1993.13 Hungary’s annual inflation rate remained steady at 23

percent in 1992 and 1993. Throughout 1993, unemployment hovered at about 13 percent.14 The

government tried to remedy some of its problems

in 1992 with the passage of a strict bankruptcy

law. And in March 1994, the government announced the Small Shareholders Program, a new

mass privatization program that will lend citizens

about $1,000 each to buy shares in privatized state

enterprises.

The political situation is a greater cause of concern than the economy. During 1993, the government coalition, led by the Hungarian Democratic

Forum (HDF), came under increased pressure

from both left and right. On the left, as in Poland,

thousands of pensioners and workers hurt by the

economic decline demanded that the government

spend more money on social protection measures.

This fueled renewed support for the Hungarian

Socialist Party (HSP), the successor to the Communists, which, in alliance with trade unions, advocated a social-democratic type program,

On the political right, an increasingly nationalistic tone in Hungarian politics manifested itself

in exchanges of criticism with Slovakia and Romania over the status of Hungarian minorities living in those countries. The emergence of Istvan

Csurka, a right-wing politician pressing for policies more favorable to “native Hungarians,” may

further inflame tensions within the country and

with Hungary’s neighbors.

The country’s economic ills and political

troubles reduced support for radical reform in the

parliament. Political maneuvering in preparation

for 1994 general elections and government disputes with the independent media also impeded

efforts to push ahead more aggressively with restructuring. One of the major issues of the 1994

Parliamentary election was the proper balance between the requirements of economic transformation and the need to provide social protections to

the many people adversely affected by the reforms.

In the first round of elections in May 1994, the

HSP led with one third of the vote. The HDF came

in third with only 12 percent. The HSP is likely to

form a governing coalition when the elections are

complete.

Prognosis for Reform

Despite Hungary’s problems, the country’s

emerging market economy and high engagement

with foreign investors place it firmly within the

vanguard of regional economic reform. Like both

Poland and the Czech Republic, Hungary is building a sound legal and institutional infrastructure

for long-term economic growth.] 5 The victory of

ex-communists at the polls may further complicate reform, but is unlikely to undermine progress

already made.

SLOW REFORMERS: COUNTRIES IN THE

SECOND TIER OF REFORM

Kazakhstan and Russia occupy the next tier of reform. Whereas the Central European states have

~ ~ RFEIRL Research Report, Aug. 13, ~W3, P. 52.

12 me ~i= of HungW9~ blackmuk~t, ~s(ima(ed a[ aboutone.qu~erof GDP, makes it diff]cu]t to measure GDpexact]y. ]n January 199J$,

the country’s finance minister announced that economic growth had finally begun. Financial 71mes, Jan. 19, 1994, p. 2.

13 ~lS, Europe Economic Review, Dec. 28, 1993, p. 50.

lb RFEIRL Daily Report, k. 28, 1993.

IS Commmti ~edic~ I Pement GNP growth for 1994. The Economist, hc. 18, 1993, p. 58.
Chapter 6 The Political, Economic, and Social Context of Reform | 137

established new political orders and have embarked on programs of radical economic reform,

the course of change has not yet been decisively

resolved in Almaty or Moscow. This indecisiveness over reform will limit U.S. policy options,

making it more difficult to promote reform and energy sector modernization simultaneously.

| Historical and Political Background

Kazakhstan is a Central Asian country with no

legacy of prior independence. The second largest

republic of the FSU, Kazakhstan is an ethnically

diverse country in which only 40 percent of the

population is native Kazakh, while 38 percent of

its citizens are ethnic Russians. The population is

also differentiated geographically and occupationally, with Russians concentrated in the northern part of the country in industrial, scientific, and

administrative positions. Ethnic Kazakhs are concentrated in the south and are more heavily represented in agriculture, health care, and other lower

paying sectors of the economy.

Under Soviet rule, Kazakhstan was industrialized (though not to the extent of the Slavic republics), and its economy was closely integrated into

the Soviet system. Both Kazakhstan’s industry

and agriculture are oriented toward and heavily

dependent upon the other republics of the FSU, especially Russia, for markets and for supplies of

raw materials and manufactured goods. However,

Kazakhstan’s huge reserves of oil and minerals

make the country an attractive prospect for foreign

investment and economic development.

Soviet Russia saw itself as the rightful inheritor

of the empire built by the tsars and remained the

center of the Soviet multinational state.

Russia was also the center of Soviet economic

development. Although Moscow pursued economic policies that made the republics highly dependent upon one another for supplies of raw

materials and manufactured goods, Soviet economic policies favored the European portion of

the country, which was consistently better supplied with goods and which experienced higher

and more integrated forms of economic development. Other regions-especially the non-Slavic

areas and much of Siberia-were often over-exploited for one product such as oil and were turned

into economic dependencies, supported by subsidies and material aid from the center.

When the Soviet Union broke up, this complex

system of economic inter-relations was tom apart,

leaving 15 separate countries with highly interdependent economies based on economically irrational systems of pricing, distribution, and

manufacture. Although Moscow is no longer the

center of the Soviet empire, it is still by far the

most important economic and political entity in

the FSU. While the Central European countries

may already be too far advanced economically

and too independent politically for events in Russia to seriously threaten their stability, the nature

of Russian economic reform and the battles over

Russia’s future are of crucial importance to all the

other countries in the region. A successful, comprehensive, and peaceful transition to a market

economy and representative democracy in Russia

could greatly facilitate similar processes in all the

remaining countries of the FSU. Conversely, the

failure of Russian economic reform or continued

“muddling along” could promote economic and

political instability, not only in Russia, but among

all of its neighbors.

I Kazakhstan

Independence has come hard to Kazakhstan. The

country faces two major sets of problems: an

economy still highly integrated into the FSU and

suffering from the disintegration of inter-republic

economic ties, and the conflicting political interests of newly emergent Kazakh national forces

and the large contingent of ethnic Russian residents. The country’s president, Nursultan Nazarbaev, has pursued a delicate economic and

political balancing act, seeking to introduce

economic reform and establish a multi-ethnic

state while maintaining economic and political

stability.

The breakup of the Soviet Union and the economic instability of Russia have had devastating

effects on the Kazakhstani economy. Still highly

dependent upon Russia for markets for agricultur-
.

138 I Fueling Reform: Energy Technologies for the Former East Bloc

al and manufactured products, the economy has

contracted as markets and sources of supply have

dried up. In 1993, Kazakhstan’s GDP fell by 15

percent. 16 This decline, combined with rapidly escalating energy prices and ruble instability, has

contributed to a soaring inflation rate—about

1,500 percent in 1992 and about 30 percent per

month in 1993. ’7

Progress toward reform has been slow. Most

prices have been freed, but subsidies remain for

some items, especially food and energy products.

Substantial progress has been achieved in enacting a legal framework for privatization and market

relations, as well as in the conversion of small service and retail establishments to private ownership. But the privatization of medium- and

large-scale enterprises is only just beginning. And

although Kazakhstan has been a leader within the

FSU in opening its economy to foreign investment, sectoral development outside the oil and gas

sector has been limited.

The slowness of Nazarbaev’s reform strategy

has been deliberate. He and his economic ministers have criticized the effects of rapid economic

reform programs in Poland and Russia and have

given greater priority to slowing the growth of

wages and prices, increasing state industrial productivity, and directing a slow, “controlled” privatization process. 1 8

The pace of democratization has also been

slow. Although there is a multiplicity of parties of

all political orientations—possibly more than

100-only three parties have been permitted to

register officially. In early 1993 a constitution was

enacted, guaranteeing basic rights, but political

and press freedoms have been restricted. Morover,

the parliamentary elections of March 1994 were

criticized by West European and Russian observers for arbitrariness, media harassment, and favoritism toward ethnic Kazakh candidates.

Nazarbaev has maintained what has been called

a “mild authoritarianism,” partly in response to

the political tensions plaguing the country. With

the advent of independence, tensions developed

between newly emergent Kazakh nationalists and

ethnic Russians over political power and the socioethnic character of the Kazakhstani state. One

of the biggest issues of contention has been language. Ethnic Kazakhs have demanded that their

language be recognized as the only official language, while Russians have advocated giving

both languages legal status. Nazarbaev has backed

a compromise, making Kazakh the official

tongue, but establishing Russian as the language

of “inter-ethnic communication. ” The conflict

over language is symbolic of a larger tension within Kazakhstani society: the extent to which ethnic

Russians will adapt to Kazakh ways, which includes not just language, but schooling for their

children, new interpretations of history, and asserting Kazakhstan’s interests against those of

Russia.

Although the emergence of Kazakh nationalism has raised concern in Russia and the West

about the possible rise of radical Islamic fundamentalism, Kazakhs are not like] y to take the fundamentalist path. Other ties, such as those of clan

or region, are strong and compete with Islam as a

means of cultural identification among ethnic Kazakhs. A more serious nationalist danger may

come instead from Kazakhstan’s ex-Communists,

who may join with Kazakh nationalists and coopt

the nationalist agenda. The “partocrats,” intent on

restoring the old relations of power, may try to undermine Nazarbaev and the Western-oriented reformers by accusing them of “selling out” to the

lb The E~.~n~mis[, WC. 18, 1993, p. 58.

17 Ahmed Rashid, ‘.~e Next Frontier,’” Far Eastern Economic Review’, Feb. 4, 1993, p. 49; RFEIRL Daily Report, JUIY z], 1993.

I f3 me minister of the econon~y” has sp)ken of the need not to “lurch” from one extreme to another, from a Soviet-type economy to lai.SSeZfaire policies. FBIS, Centra/ Eurasia Bu//e(in, FBIS-USR-93-086, July 13, 1993, p. 78.
Chapter 6 The Political, Economic, and Social Context of Reform | 139

Russians. 19 This kind of politics could stir largescale emigration of ethnic Russian specialists and

managers from Kazakhstan, with catastrophic effects on the economy.

One other issue threatens Kazakhstan’s economic prospects in general and the full development of its oil export industry in particular.

Kazakhstan’s oil can be exported only through

other countries. At present, the only practical

route is through Russia. However, Russia has arbitrarily restricted exports through its Transneft

pipeline system to one-third of Kazakhstan’s present export capacity. The Russian oil industry

(which considers itself the heir of the Soviet-era

industry) has also recently demanded a 30-percent

share in revenues from all oil-export ventures in

former Soviet republics. Russian restrictions and

demands contributed to a recent decision by

Chevron to curtail its ambitious development program for the Tengiz field.

Alternative pipelines to the Black Sea via Iran

and Turkey or Azerbaijan and Georgia have been

proposed, but both are polically problematic and

may be possible only in the long term. Moreover,

Turkey will not permit the large increase in oil

tanker traffic through the straits (two tankers per

hour) that would be required to develop oil exports fully.

Thus, surmounting Russian opposition to increased Kazakhstani exports and controlling Russian economic demands will be vital to

Kazakhstani economic development. This is likely to require sustained U.S. policy pressure.

Prognosis for Reform

Political and economic uncertainties, together

with Nazarbaev’s cautious approach toward market reform, render it difficult to make firm predictions about Kazakhstan’s prospects. Although the

current energy bonanza provides grounds for optimism, oil development is extremely capital-intensive and will have only a limited effect in the short

term. As a result, international institutions such as

the World Bank do not expect the Kazakhstani

economy to start growing substantially until the

second half of the 1990s.

| Russia

Politics of Reform

Russia has not yet established either the popular

consensus or the vast legal and regulatory structure that are vital to successful economic transformation. Instead, since the coup attempt of

August 1991, Moscow has been in the throes of a

complex battle about the country’s future. Westerners have too often viewed Russian politics in

simplistic and bipolar terms as a fight between

democratic, capitalist modernizers and Communist, nationalist reactionaries. Instead, Russia is

experiencing a multifaceted struggle over questions of a more fundamental nature: power, sovereignty, property, and the nature of the future

socioeconomic order.

The central arena in this struggle is economic

reform, where principled disagreements also exist

between political and social constituencies over

the nature and course of reform. These debates

about the best course of reform are anchored firmMoscow, the “kiosk” economy

I g For a discussic~n Of these issues, see M~ha Brill Olcott, “Central Asia on its Own,’ ’journu/ oj”Democracy, v(~]. 4, N(). 1, January 1993, pp.

92-103.
140 I Fueling Reform: Energy Technologies for the Former East Bloc

ly in Russia’s uniqueness. Unlike the relatively

small and ethnically homogeneous states of Central Europe, Russia is a gigantic country with a

much larger, more complex, and more deeply

troubled economy. As a result, Russia is less amenable to the types of Western-sponsored aid and

trade programs that have been instrumental in the

transformation of the economies of Central Europe. Whereas multinational lending has had a

profound impact in Central Europe, Russia’s size

makes its capital requirements much larger. Moreover, success in Russia depends on the conversion

of the immense defense sector to civilian production. Finally, Central European countries had a

history of market economic relations before and

during Communism, but the legacy of the market

in Russia is much weaker.

The dilemmas raised by Russia’s uniqueness

are reflected in a struggle between several different and competing visions of economic reform,

some more radical than others, but very few of

which envision a return to the old system of

centralized state ownership and planning. Among

a multiplicity of approaches to economic reform,

three main blocs have emerged.20 The first bloc,

centered around President Boris Yeltsin and officials of the 1992 and 1993 Russian government,

includes the liberal democratic reformers, who advocate a rapid and radical program of economic

transformation based on the Polish model.

The second group, the centrist opposition,

includes a broad spectrum of Russians, some

affiliated with enterprise managers, others representing disadvantaged social groups, a portion of

whom identify themselves as Communists. These

Russians favor the transition to a market economy

but advocate a more gradual approach to economic change. They would prefer a transition in which

the state maintains greater levels of support for

large industrial enterprises and managers receive

greater powers over the direction of industry.

They also endorse a much more active program of

state-sponsored social protection. Representatives of this group, led by Prime Minister Viktor

Chemomyrdin, appear to have replaced reformers

in the Russian government in the winter of 1994.

The third group, the “irreconcilable opposition,” is a small but vocal collection of ultranationalists and some ex-Communists who oppose

both market reform and democratization.

Although Vladimir Zhirinovsky, the most

well-known member of this group, enjoyed parliamentary electoral success in the December

1993 elections, neither he nor the other parties that

share his view point have articulated a specific

economic program.

In addition to divisions over economic reform,

Russia is also riven by disagreements over the

country’s future internal and external political

course. This struggle has expressed itself in several ways. The power struggle between Boris Yeltsin and Ruslan Khasbulatov, which culminated in

the battle of October 4, 1993, was on one level a

personal political rivalry. At the same time it was

an institutional struggle for power and political legitimacy between the executive and legislative

branches of the Russian government. The struggle

also reflected at least two different visions of Russia’s future geopolitical orientation. Advocates of

one vision hope for a Russia more oriented toward

the West, with Western-style political and economic institutions, cooperating as a partner with

the United States and Europe in matters of foreign

policy. Advocates of the other vision are Russian

nationalists who suspect the motives of Western

governments, want Russia to establish a powerful

independent identity, see Russia’s foreign policy

interests separate from those of the West, and wish

to find a distinctly “Russian” course of governmental and economic reform. These more fundamental issues have yet to be resolved. This

struggle and its eventual resolution will have profound effects on Russia’s openness to foreign assistance and investment in the energy sector.

20~i~ ~roupconceptualimtion is b~ed in pm on a fimework in Stuart D. Goldman, CRSlssue Briej~” Russia (Wmhington, ~:Lib~ of

Congress, May 3, 1993), pp. 4-5.
Chapter 6 The Political, Economic, and Social Context of Reform | 141

In fact, the victory of Vladimir Zhirinovsky’s

party in the December 1993 elections indicated

the extent to which questions of both Russia’s economic and political future remain unresolved.

Zhirinovsky’s strong electoral support was widely

interpreted a sign of disenchantment with declining standards of living and with Russia’s reduced

world stature. It served as a warning to radical reformers, as well as to moderates, of the need to

find compromise solutions to avert catastrophe.

Another component of the struggle over political and economic reform is the battle over sovereignty and property between Moscow and

Russia’s ethnically and geographically autonomous regions. The devolution of power from

Moscow may be a healthy development if it resuscitates moribund local governments and opens the

way for innovative reformers to take initiatives

from below. But demands for local autonomy,

sovereignty, and even independence, endanger the

viability and integrity of the Russian state. Until

the interests of the central government are balanced against those of the regions within a workable and commonly accepted constitutional

framework, attempts to promote democratization

and economic stabilization will stagnate.

Progress Toward Reform

On January 1, 1992, under the direction of acting

prime minister Yegor Gaidar, Russia entered into

a rapid program of economic stabilization and reform similar to Poland’s shock therapy. The first

results of Russian reforms were quite promising.

Despite huge price hikes for many staple items, a

large assortment of previously unavailable goods

appeared for sale in state retail outlets and in a rapidly expanding network of private establishments.

The initial inflationary effects of the price rises

were mitigated by tight state monetary policies.

The effects of the rest of the economic program

were more negative. Instead of laying off underemployed workers, modernizing production, and

changing their product mix to adapt to market

conditions, Russian enterprises entered upon a

massive spree of borrowing. Initially, without

central bank credits, firms simply borrowed from

one another, and the size of inter-enterprise debts

skyrocketed. Later, enterprise managers asserted

their political power and forced the Russian Central Bank to issue massive new credits and to forgive old debt.

The results of the liberalization of prices and

the explosion of state and inter-enterprise credit

were a hyperinflationary spiral and a huge devaluation of the ruble. By the end of 1992, inflation

had reached 2,000 percent per year, and the ruble/

dollar exchange rate had soared from 100 to near

1,000. Simultaneously, the steady contraction of

Russian production accelerated. During 1992,

Russian economic output fell by about 20 percent.

The spring of 1993 brought some hopeful

signs. After a year of bickering over monetary

policy, the Russian government came to an agreement with the Central Bank to limit credits to state

enterprises. Inflation was reduced to a lower,

though still unacceptable, level. Despite a sudden

rise in October 1993, inflation fell to 12 percent

per month by the end of the year. 21 Although the

ruble/dollar exchange rate continued to climb, the

ruble moved closer to the dollar in purchasing

power parity, and average salaries more than

doubled their hard-currency value.

However, industrial production continued to

decline during 1993 and GDP fell by 12 percent.22

Industrial production in the first quarter of 1994

was 25% below the same period in 1993. Simultaneously, the payments arrears crisis worsened

considerably. By the winter of 1994, arrears totaled 32 trillion rubles, one half of which was

owed to enterprises in the energy sector. Moreover, a January 1994 International Labor Organization (ILO) study placed the level of real

z ~ RFEIRL Daily Report, Jan. 4, 1994.

22 FBIS, Centra/ Eurasia Bulletin, USR-94-015, Feb. 17, 1994, P. 24.
142 I Fueling Reform: Energy Technologies for the Former East Bloc

unemployment in Russia at over 10 percent, much

higher than the official level of 1-2 percent.23 Although inflation fell to 10 percent per month in the

beginning of 1994, Russia’s economic situation

remains highly uncertain.24

Nevertheless, reformers can point to one area of

real success: Russia’s private sector. In mid-1992,

the Russian government announced a two-year

program to privatize state firms based on a Czechtype voucher system. That fall, vouchers were distributed to all Russian adults. Russians can use the

vouchers to purchase shares in privatizing enterprises directly, to buy shares in investment funds,

or to sell on the open market. Although the privatization process started slowly and the value of

vouchers fell by as much as 60 percent, they now

exceed their nominal value (unadjusted for inflation), and the pace of privatization has accelerated. By the end of 1993, over two- thirds of

Russia’s small service enterprises had been privatized through conversion to employee ownership

or public sale. Of Russia’s 14,500 large state enterprises, 11,000 had been converted into jointstock companies, of which 7,000 were fully

privatized.25

Russia’s new private sector has also undergone

a huge expansion in the past year. The development of new private enterprise is even more important than the privatization process because, as

experience in Central Europe has shown, the new

private sector is the true engine of economic

growth. Although the size of the private sector is

hard to measure, it is estimated that private enterprise constitutes about 20 percent of Russian gross

national product (GNP) and employs over 15 percent of the Russian labor force.26

However, the character of private sector development has been extremely problematic. Although many small and large Russian enterprises

have been formally “privatized,” ownership of

shares has remained concentrated in state hands.

Moreover, the types of new private enterprises

that have developed under the market reforms

have been characterized as a type of “kiosk” economy—small businesses importing Western goods

to be sold at a high markup. Relatively little has

been done to reform the manufacture of domestic

goods and stimulate market-oriented production

at home.

Moreover, in the absence of strong governmental authority and freely functioning markets for

capital and goods, criminal elements (commonly

referred to as the Russian Mafia) have proliferated

and corruption by government officials assigned

to supervise market relations has been rampant.

The proliferation of organized criminal power is

dangerous not only for the type of market that is

developing in Russia, but also for the negative

public perceptions of capitalism that are being

created in the process.

Finally, high levels of inflation, political uncertainty, and ruble instability have led to enormous

levels of capital flight that dwarf the size of Western aid proposals.27 Until Russian capitalists can

be persuaded to invest their capital at home, little

progress can be made in building a larger, more

vigorous market.

23 only a Sma]i fraction of the unemployed actually register with government agencies because the process is diflicult, benefits are small,

and job-seekers are given little help finding new employment. RFE/RL Dui/y Reporf, Feb. 1, 1994.

24 Margaret Shapiro, “lMF Agrees to Release $1.5 Billion, Says Russia,” Washington Post, Mar. 23, 1994, p. A24.

ZS RFEIRL Daily Report, Dec. 29, 1993.

26 Keith Bush, “Light at the End of the Tunnel?,” RFE/RL Research Report, vol. 2, No. 20, May 14, 1993, p. 61.

z7During 1993, capita] outflow” fronl Russia was estimated at $ I billion per month, far exceeding h flows of private capital and western

development assistance. The Russian Investment Dilemma” }Iartard Business Ret’iew, May-June 1994, p. 36.
Chapter 6 The Political, Economic, and Social Context of Reform | 143

Prognosis for Reform

Despite the impressive strides that have been

made in price reform and private-sector growth,

the Russian economy is in a state of limbo. The

central problem blocking progress in reform is

Russia’s crisis of state authority—that is, the lack

of a political consensus on issues of political power, property, institutional and regional sovereignty, and the nature of the future socioeconomic

order. Unless Russia resolves this crisis and its

government pursues consistent and coordinated

monetary and fiscal policies, it will not achieve

the type of solid economic stabilization that is an

absolute prerequisite to economic reform and

growth. Until then, Russia will at best flounder or

muddle through reform.

FOOT-DRAGGERS: COUNTRIES IN THE

THIRD TIER OF REFORM

Despite the profound economic and political

changes occurring in the FSU, one group of countries has barely taken even the first steps down the

road of economic reform. The reasons for this substantial lag are fundamentally political—none of

these states has achieved a political and social

consensus about the need for market reform.

| Historical and Political Background

Ukraine, Turkmenistan, Uzbekistan, and Azerbaijan differ in profound ways. But they share some

fundamental characteristics that promote irresolution about reform.

Ukraine is a Slavic country in the European

portion of the FSU. Unlike its neighbors in Central Europe, Ukraine has not had significant experience in modern times as an independent, state.

For the first time in their history, Ukrainian citizens can elect their own leaders, choose policies,

and decide a host of political, economic, and social questions never before within their purview.

Ukraine has also had to resist what it perceives as

undue Russian influence in its affairs while maintaining (or restoring) economic stability based on

existing ties to the FSU. Finally, Ukraine faces the

difficulty of defining and asserting a national ethnic identity in a multinational state.

Unlike Ukraine, Turkmenistan and Uzbekistan

are Central Asian, Muslim countries. Turkmenistan emerged from the Soviet era as one of the poorest countries in the FSU. An overwhelmingly

agricultural country, Turkmenistan concentrated

during Soviet times on the cultivation of cotton,

which occupied over half of all arable land. Soviet

planners also created a cotton monoculture in Uzbekistan (cotton still employs 40 percent of Uzbekistan’s labor force), which is the third largest

producer of cotton in the world. Low levels of industrial development in both countries, especially

Turkmenistan, have left them extremely dependent upon economic and political ties to Moscow

Azerbaijan is a country at war. Since the

mid-1980s, Azerbaijan has been locked in a

struggle with neighboring Armenia over the status

of the predominantly Armenian area of NagornoKarabakh. After the breakup of the Soviet Union,

the conflict worsened considerably. Since May

1992, Armenians have achieved military control

over the territory and have sought to consolidate

their position by conquering Azeri areas bordering on Karabakh. Despite international efforts to

mediate the conflict, cease-fires have not held, the

parties have not yet been willing to agree to peace

terms, and Azerbaijan’s military losses have promoted domestic political disarray.

| Ukraine

Since it attained statehood, Ukraine has been

plagued by a debilitating competition for political

power and by an escalating process of economic

disintegration. The mixed nature of the Ukrainian

economic and political record is symbolized by

Leonid Kravchuk, the former head of the Ukrainian Communist Party, who outmaneuvered his nationalist rivals and won election to the Ukrainian

presidency in December 1991.

Kravchuk’s victory was not just a personal

triumph. It also represented the victory of an entire

cadre of state apparatchiks behind him: bureaucrats who had maneuvered to survive the transition from Communism to nationalism, more

interested in protecting their state positions than

reforming the economy. The result of this phe-
144 I Fueling Reform: Energy Technologies for the Former East Bloc

Podol district, Kiev Ukraine

nomenon, along with Ukraine’s preoccupation

with nationality issues and the attention to

squabbles with Russia over the legacy of Sovietera property and weapons, has been the neglect of

economic reform. Despite the efforts of prime

minister Leonid Kuchma, who was forced to resign in the summer of 1993, the Ukrainian parliament spent 1992 and 1993 debating competing

reform proposals without implementing a systematic program.

Consequently, despite some monetary, fiscal,

and regulatory reforms, major elements of the

state economy remained in force (e.g., price controls and public ownership of most land and property), and the authority of Kiev to manage the

process of economic change eroded substantially.

Economic reform in the provinces was characterized not by conversion to private ownership, restructuring, or modernization, but by a process of

“spontaneous” privatization whereby the majority

of state enterprises were converted to the de facto

ownership of managers and workers through the

abuse of a very liberal law on leasing. Simultaneously, in both the capital and the provinces, corruption proliferated.

The increasing economic chaos caused a precipitous decline in production and stimulated hyperinflation. According to the World Bank, output

(measured in net material product, NMP) has been

falling continuously since 1990 by 16 percent in

1992 and at the same rate throughout 1993.28 By

December 1993, inflation was running at 200 percent per month and 9,000 percent for the year as a

whole. 29

The economic crisis has been felt acutely in the

energy sector. The Ukrainian government has

been unable to pay hard currency prices for imports of natural gas from Russia and Turkmenistan. In the winter of 1994, Turkmenistan cut off

gas supplies to Ukraine for nonpayment of $700

million in gas debt. Ukraine’s energy debt to Russia is even higher: $900 million. However, since

90 percent of Russia’s gas exports to Western Europe travel through Ukraine, the Russians cannot

simply shut off gas supplies to Ukraine. Instead,

Russia’s Gazprom has restricted gas supplies to

Ukraine in an effort to pressure payment, either in

cash or in the form of energy-related assets.

Complicating these issues is the fact that Ukraine is not ethnically homogeneous. Almost onequarter of the Ukrainian population is Russian.

The Russians are concentrated in coal-mining regions in the east and in the Crimea in the south, an

area that became part of Ukraine only in 1956. Although ethnic Russians in the past have generally

been supportive of Ukrainian independence, Russian miners struck in June 1993, demanding wage

increases, greater local autonomy, and a referendum on Kravchuk’s leadership and the performance of parliament. The strike contributed to a

28 Wf(lrld B~k, Ukraine: coun~~ Ec~~mic Memoratium (June 2, 1993), p. 2. The Vienna Institute for COmpiUative &OnOmiC Studies

measured the contraction of GDPat 18.5 percent in 1992 and 15 pereent in 1993. The Economisf (Dec. 18, 1993), p. 58. The Ukrainian Ministry

of Statistics reported a 14-percent drop in GDP for 1993. FBIS, Cenfra/ Eurasia Bu//erin, FBIS-USR-94-024 (Mar. 14, 1994), p. 36.

29 The Ec~n~misf, WC. 18, ]993, p. 48. BISNIS, “Ukraine-Economic and Trade Overview” (Washington, w: U.S. ~pirtment of Commerce, April 1994), pp. 4, and Simon Johnson and Oleg Ustenko, “Ukraine Slips Into Hyperinflation, ’’RFE/RL Research Reporr, vol. 2, No. 26,

June 25, 1993, p. 24. Inflation ran at 4,000 percent in 1992 (an average of 35 percent per month). FBIS, Ceno-a/ Eurasia Bu//efin, FBISUSR-94-018, Feb. 28, 1994, p. 21.
Chapter 6 The Political, Economic, and Social Context of Reform |145

summer-long political crisis in Kiev, to Kuchma’s

resignation, and to new elections in March and

April 1994. Thus, a resolution to Ukraine’s crisis

is not likely for quite some time.

Prognosis for Reform

Ukraine is in the throes of a possibly catastrophic

economic crisis. Unless a political consensus is

reached in Kiev over questions of political and

economic policy, the economy will continue to

contract, and hyperinflation will spiral even further out of control. The political consequences of

such economic disintegration could be extremely

serious, including the assumption of power by an

authoritarian leader and/or secession efforts by

non-Ukrainians.

| Turkmenistan

Political and economic reform have not yet come

to Turkmenistan. Instead, the country is dominated by its president, Saparmurad Niyazov, an

authoritarian ruler who has created a Stalin-like

cult of personality around himself and who has

suppressed potential political opposition. Niyazov has imposed official censorship, restricted

freedom of speech, and harshly repressed political

opposition.

Although Niyazov has negotiated potentially

very lucrative gas and oil extraction deals, the

country has remained one of the poorest in the

FSU. Its 1991 GNP was less than 1 percent of that

of the FSU, and poverty is endemic. 30 Niyazov

has pursued economic reform and the introduction

of private property rights very slowly. There has

been some attempt at reducing the country’s dependence on cotton, but Niyazov does not envision a process of radical economic reform or

diversification. Rather, he has advocated a very

gradual process of change in which state-owned

enterprises will co-exist with an emerging private

economy for quite some time. For example, in his

economic plan for the next 3 to 5 years, the oil,

gas, mineral, and agricultural sectors—which

constitute 80 percent of the economy—will remain under state ownership and control.

As in Kazakhstan, the potential for an Islamic

fundamentalist movement is low. Turkmenistan is

characterized by intense clan loyalties that inhibit

not only the spread of Islamic fundamentalism,

but also the formation of a strong common Turkmen national identity.

Prognosis for Reform

In theory, its vast gas and oil wealth presents Turkmenistan with an excellent opportunity to overcome the economic distortions of the Soviet era,

develop a diversified agricultural, industrial, and

commercial economy, and build the physical and

social infrastructure that the country so sorely

lacks. Energy revenues, however, may be squandered through corruption and the operation of Niyazov’s self-aggrandizing political machine. The

result may very well be the development of a

small, wealthy elite, loyal to the Niyazov political

regime, in a country that retains high levels of

poverty and underdevelopment.

| Uzbekistan

After Turkmenistan, Uzbekistan is the most politically repressive state in Central Asia. Uzbekistan

is a good example of what can happen when the

partocrats retain power in a post-Soviet country.

The country is headed by president Islam Karimov, Uzbekistan’s Soviet-era president, and the

Popular Democratic Party (PDP), the successor to

the Uzbekistani Communist Party. Karimov has

suppressed almost all other parties, jailed opposition activists, enforced press censorship, and

stifled the development of democratic politics.

Citing the civil wars in Tajikistan and Afghanistan, he justifies his repressive political policies

by saying that only he and the PDP can ensure stability in Uzbekistan. Karimov openly asserts that
146 I Fueling Reform: Energy Technologies for the Former East Bloc

law and order must take priority over the propagation of democratic values.

Since the breakup of the Soviet Union, economic conditions in Uzbekistan have deteriorated

but have been moderated by state policies that

maintain many of the characteristics of the Sovietera economy. Although prices were liberalized in

January 1992, the prices for most basic items are

still regulated. Heavy subsidies for goods sold

through the state retail sector and for staple foods

keep these products cheaper than those sold on the

open market, thereby creating supply problems.

Large state subsidies have also contributed to a

substantial budget deficit, which constituted

about 5 percent of GNP in 1993.31 Despite some

diversification away from cotton, the country still

depends on imports of grains, cooking oil, and

other staple products from FSU countries.

Karimov has moved with deliberate slowness

in the area of economic reform. His stated goal is

to create “market socialism,” a combination of the

old and new orders. Accordingly, any type of

shock therapy has been rejected. Privatization has

barely started and is destined to proceed very

slowly. Industry and almost the entire retail sector

remain in state hands, and the private sector produces less than 10 percent of GNP.

Prognosis for Reform

Like Turkmenistan, a rich energy endowment

gives Uzbekistan excellent potential for economic

recovery. But the entrenchment of partocrats in

power and their determination to retain many of

the fundamentals of the old system bode poorly

for Uzbekistan’s economic future. Energy revenues are much more likely to be squandered

through corruption and wasted on old, state-centered economic structures, rather than used to

modernize Uzbekistan and build a market economy. And continued political repression in the face

of rising opposition from democratic, nationalist,

and Islamic fundamentalist forces raises the possibility of violent conflict in the future.

| Azerbaijan

Systematic economic reform has also not yet begun in Azerbaijan. Instead, the country’s attention

has been diverted to the military conflict with Armenia. With tens of thousands of Azeri refugees

demanding retribution and a foreign power occupying 10 percent of the country, it is difficult to focus on imperatives for domestic economic

restructuring and political reform.

However, Azerbaijan’s domestic political

troubles are not rooted just in the conflict with Armenia. Strategically located at the crossroads between Russia, Turkey, and Iran, Azerbaijan has

also been a target of the political, economic, and

social ambitions of its neighbors. Although Azerbaijan has some economic ties with Iran, the Iranians have not been successful in their attempts to

spread Islamic fundamentalism in the Caucasus.

Turkey gained commercial and political influence

in Azerbaijan during the short tenure of President

Abulfaz Elchibey, who attempted to reorient the

country’s economy away from the FSU. But in

June 1993, Elchibey was overthrown by the forces

of Colonel Suret Huseinov, in concert with former

Azerbaijan Communist Party leader Geidar Aliev.

Elchibey lost power in large part due to his military failures in Karabakh and a drastically worsening economic situation. Huseinov and Aliev

enjoyed the support of Moscow against Elchibey

and have reoriented government policy toward

Russia and the rest of the FSU.

In light of the tumultuous domestic military

and political situation, economic reform has received relatively little attention. Despite the proliferation of small-scale capitalism and

negotiations with foreign companies to develop

the Caspian’s energy resources, there has been no

systematic program of economic reform. Instead,

31 B]SNIS, .. Uz&kiStan_&)nO~ic and T~de @e~iew” (Wa5hingt(Jn, ~: U.S. ~patiment of Commerce, J~u~ ] ~~), p. ~.
Chapter 6 The Political, Economic, and Social Context of Reform | 147

corruption and a highly lucrative illicit trade in oil

and other valuable raw materials have proliferated. Despite a relatively low government budget

deficit and modest foreign trade surpluses, inflation has hit rates of 1,500 percent, and the government has been criticized for incompetence, for

rampant corruption, and for merely substituting

its own people for the old nomenklatura, instead

of building a new system.

Prognosis for Reform

In the short to medium term, Azerbaijan may be

able to maintain a semblance of economic stability, supported by ad hoc deals with Western oil

companies and semilegal exports of raw materials. But until reform-minded leaders assume power in Baku, the country is unlikely to enact the

sweeping legal and structural changes needed to

convert to a market economy. U.S. oil companies

could participate in the development and improvement of Azerbaijan’s oil production with

considerable mutual benefit. However, that cooperation is unlikely to be a major force for reform

until the political situation stabilizes. Furthermore, Azerbaijan resents the U.S. prohibition on

assistance imposed in response to the conflict over

Nagomo-Karabakh.

BUILDING NEW SOCIETIESTHE CULTURE OF REFORM

Despite their differences, the countries of the former East Bloc share a similar set of problems in

the transition from Communist authoritarianism

to market democracy. One such problem is providing social protection during the transition period. These countries will need to transfer

traditional responsibilities for housing, medical

care, and pensions from enterprises to the state,

while devising systems to deal with new problems, such as unemployment and job retraining.

This will be particularly difficult, because new expenditures must be justified in light of the pressures of fighting inflation and the need to adhere to

the monetary and fiscal requirements of the International Monetary Fund, the World Bank, and

other multilateral institutions.

Moscow skyline

These states also face an even broader set of

cultural problems in building societies based on

new political and economic orders. To make the

transition from state-directed economies to markets, they will have to overcome a broad lack of

understanding of market principles. After decades

of Communist rule, at least some of the principles

of socialist economic relations have sunk strong

roots in the popular psyche or resonate with already extant popular values of communalism and

preferences for state-directed economic relations.

For example, if market relations are to work effectively, people must learn the function of distributive prices and the harmful effect that subsidies

and price controls can have on the rational distribution of goods.

If the goal is to promote a thoroughgoing capitalist system, the mentalities and characteristics

of the old system must also be eliminated. After

decades of state economic planning and direction,

it will be difficult to adjust to the idea that the individual, not the state, is most responsible for his or

her own fate. Instead of a system where personal

contacts and access to resources are paramount,

citizens must also build and become accustomed

to a system where money, personal initiative, and

merit determine success. Communist-era customs

of lackadaisical work must be overcome, entrepreneurship must be nurtured, and firms-in retail

and other sectors—must become much more customer oriented.

Unfortunately, this process is complicated by

the character of newly emergent market relations,
148 I Fueling Reform: Energy Technologies for the Former East Bloc

which often creates a negative image of capitalism

and highlights its worst aspects. The appearance

of wide disparities in income and personal wealth

in societies that previously were noted for economic homogeneity has created feelings of unease

and perceptions of injustice. The conspicuous

consumption of many of the area’s new capitalists

in the face of mass economic misery incites popular anger. Finally, the rapid growth of violent, organized crime has produced deep anxiety about

 personal security and may further poison popular

attitudes toward capitalism.

Cultural adjustment is also an important subject on the political level. After the initial euphoria

about the achievement of national independence,

these new states must now deal with a fractious set

of new political issues. Independence has brought

new conflicts between various ethnic groups and

the rise in some countries of new radical rightwing parties. In the countries understudy here, the

most serious national conflicts have occurred in

Azerbaijan. Nevertheless, although there have

been fewer disputes over national boundaries than

might have been expected, questions over border

areas and disputes over land and ethnic minorities

continue to smolder and threaten long-term regional stability.

Perhaps as serious is a more general mass disillusionment with politics and a growing political

apathy. This is compounded by a lack of experience among the political leadership with democratic institutions.

Finally, the huge drop in living standards and

the political chaos of the post-Communist era has

led to a crisis of identity in many areas of the FSU,

especially Russia. Before the decline of Communist economies and the breakup of the Soviet

Union, Soviet people felt themselves to be citizens of an economic, political, and military superpower. With Russia and the other FSU countries

now in an extremely weak position on the world

stage, with economies in collapse, with crime on

the rise, and with citizens wearing hand-me-down

clothing and earning paltry incomes, nostalgia for

the old system has grown. The perception is that

no matter how repressive or stagnant the old system was, it still provided basic levels of sustenance, security, and national pride. Unless these

countries start achieving economic and political

progress soon, this nostalgia is bound to grow, and

the popular support or social consensus needed for

the transition to democratic politics and market

economics will evaporate.
Assistance,

Trade,

and

Investment

Programs 7

T

he countries of the former East Bloc are in the midst of a

major energy and environmental transition and could

benefit immensely from the knowledge, technologies,

and services that the United States and other advanced industrial countries can provide. However, there are significant obstacles to the rapid rehabilitation and development of the energy

supply sector. OTA’s previous report reviewed the obstacles to

improving energy efficiency in the region and U.S. programs to

promote more efficient use of energy resources. ] This chapter

will address similar issues about technologies affecting energy

supply?

The first section of this chapter reviews the barriers to energy

sector modernization and market reform in the former East Bloc energy sector and briefly describes the U.S. and multilateral programs

designed to address them. The next section offers an evaluation of

U.S. bilateral programs and of multilateral programs addressing

energy and the environment in the former East Bloc. The final section presents a survey of bilateral and multilateral programs.

BARRIERS TO ENERGY SECTOR DEVELOPMENT

A broad range of institutional, economic, and technical barriers

are impeding market reform and technology transfer to the former

East Bloc energy sector. These barriers are listed in table 7-1.

1 u-s, Congress, Off_lce of TechntJl(~gy Assessment, Energy Efficiency Techno/ogles

@ Cen/ru/and Eastern Europe, OTA-E-562 (Washington, DC: U.S. Government Printing Office, May 1993).

Zp]ease note that this chapter will address programs in all areas except nuclear Wwer.

That subject is analyzed inch. 4.

Gum Department Store, Moscow.

I 149
150 I Fueling Reform: Energy Technologies for the Former East Bloc

Institutional barriers

Lack of comprehensive legal framework

Multipliclty of governmental authorities

Weak enforcement of regulatory standards

Lack of market information

Lack of market and r’management training

Ambivalence about foreign investment

Bilateral trade restrictions (in West and East)

Economic barriers

Lack of domestic capital

High levels of political and financial risk

inconsistent and punitive tax regimes

Government energy-price subsidies

Low emissions fines

Lack of feasibility financing for U.S. small business

Technical barriers

Inadequate physical infrastructure

Lack of trained personnel (in East and West)

Differences in technical standards

—

SOURCE U S Congress, Off Ice of Technology Assessment, 1994

| Institutional Barriers

The policy and institutional climate remains the

major inhibitor to technology adoption and diffusion in many countries of the region. The most serious institutional barrier to market reform and

modernization is the lack of a comprehensive legal and regulatory framework to govern energy

sector development, to define the rights and responsibilities of joint ventures, and to prevent reconsideration of completed contracts. In addition

to this basic framework, most countries in the region lack a well elaborated system of intellectual

property rights. Since recipient countries often do

not have adequate patent protection, U.S. industry

has been reluctant to transfer proprietary technologies. An absence of a clear system of title and

ownership over land also inhibits energy exploration and production. The multiplicity of governmental authorities, each of whom has a veto over

the decision of other parties, has further complicated the development of joint ventures.

Environmental regulations have been a major

factor in promoting energy facility modernization

in the west, but that has not been true in the former

East Bloc. Many countries, particularly in the former Soviet Union (FSU), lack regulations to ensure environmental quality (despite economic

costs). But even in Central Europe, where there is

a highly developed regulatory framework for the

environment, enforcement is extremely weak.

Another important institutional impediment to

energy-sector development is the lack of a systematic means of disseminating information to potential users about the benefits and costs of improved

technologies, as well as how to obtain and use

them. Inadequate information for U.S. producers

about export markets and a lack of contacts in foreign markets also discourages more aggressive

export activity. Even when market information is

available, its high cost puts it out of reach.

Finally, unfamiliarity with basic Western business practices and concepts such as profit and

depreciation greatly complicates business negotiations. A widespread lack of training in free market economics and a lack of knowledge about the

rates of return needed to attract investment create

unrealistic expectations among enterprise managers. Weak management skills and little experience

in project evaluation or least-cost energy planning

also impede technology transfer.

As noted in chapter 6, the countries of Central

Europe have made a great deal more progress addressing the above issues than have the FSU

states. One of the reasons for institutional inertia

in the FSU, especially in Russia, is a deep ambivalence toward foreign investment and ownership.

Continuing barriers to trade in both donor and recipient countries also reduce the incentive for

institutional reform in both Central Europe and

the FSU.

| Economic Barriers

The second set of barriers to diffusion of energy

technology is economic in nature. A severe lack of

domestic capital and foreign currency constrains

the ability of former East Bloc states and enterprises to purchase improved energy and environ-
Chapter 7 Assistance, Trade, and Investment Programs | 151

mental equipment. These constraints may be

somewhat less severe for oil and gas because they

are highly exportable commodities. However,

capital constraints are 1ikely to be acute for renewable, coal, electricity y, and environmental

technology. But even in the oil and gas sector, advanced Western technology is typically more expensive than domestic technology, even when the

average life of equipment is taken into account.

Continuing high levels of political and economic instability in former East Bloc countries

translate into high levels of economic and foreign

currency risk, even in Central Europe. Commercial banks remain reluctant to loan on a conventional basis.

Government policy—in both East and at

home—also contributes to economic impediments to technology transfer in the former East

Bloc. In the East, uncoordinated, inconsistent, uncertain, and frequently punitive tax regimes increase the cost of doing business. Subsidized

energy prices reduce incentives to invest in more

efficient or environmentally improved equipment, or to increase supplies. Low fines for emissions violations provide little economic incentive

for the purchase and installation of environmental

equipment in many countries.

In the United States, inadequate access for

smaller suppliers to risk capital, or to financing for

feasibility studies and startup costs, greatly restricts the ability of U.S. small business to take advantage of newly opened markets in the former

East Bloc. Other governments are believed to offer more generous export credits, thus putting

U.S. companies at a competitive disadvantage in

these markets.

| Technical Barriers

The final set of barriers to trade and technology

transfer is technical in nature. These barriers

include an inadequate regional support infrastructure for high-quality technology. Trained manpower, spare parts, and supplier systems may also

not be available locally. Differences in technical

standards can block transfer of U.S. technology.

Many countries of the region are adopting European Union (EU) emissions standards that are

much stricter than the U.S. standards. U.S.

technology, designed to meet U.S. conditions,

may not correspond to the needs of the recipient

country. And the costs of adaptation may be too

high.

Integration of Western and local technologies

may prove difficult. In some cases, improved

technology may not be as flexible as existing

technology. Difficulties arise when enterprises attempt to mix imported and local technologies.

And the energy equipment supply industry in

some countries is so large that Western technologies can only supplement rather than replace it.

Finally, former East Bloc governments lack adequate numbers of technical and business trained

personnel. And in the United States, companies

suffer from a lack of U.S. personnel who are

knowledgeable about the countries and regions

and proficient in local languages

| Overview of U.S. and Multilateral

Assistance Programs

The United States supports a large number of programs designed to overcome these barriers by promoting the mutual benefits of energy and

environmental technology cooperation and encouraging the economic and institutional reforms

necessary for the diffusion of improved technology. Western energy and environmental assistance

began in 1989-90, with the extension of aid to Poland, Hungary, and Czechoslovakia. Energy and

environmental assistance to the FSU began in

1992, and has grown rapidly (see box 7-1 ).

Current bilateral development assistance programs, operated primarily by the U.S. Agency for

International Development (AID), the U.S. Department of Energy (DOE), and the U.S. Environmental Protection Agency (EPA), encompass a

wide range of functions. These include technical

assistance, training in market-related skills, provision of market information, government policy

advice, research and development (R&D), and

technical cooperation.

Other bilateral programs, managed primarily

by the Export-Import Bank of the United States
152 I Fueling Reform: Energy Technologies for the Former East Bloc

U.S. assistance to the former East Bloc is mandated under two major pieces of legislation, the Support

for East European Democracy (SEED) Act of 1989 (PL 101-1 79), and the Freedom for Russia and Emerging Eurasian Democracies and Open Markets (FREEDOM) Support Act of 1992 (PL 102-51 1). Funds for

the assistance effort have also been appropriated under other foreign aid bills as well as reprogrammed by

some agencies.

Central Europe

The SEED Act was passed by the Congress and approved by the Administration in November 1989. It

authorized $930 million for fiscal years 1990-92. Foreign aid appropriations for fiscal year 1990 included

$659 million for Poland and Hungary. Amid much debate over the appropriate scope of U.S. assistance,

Congress provided about $370 million in assistance for fiscal year 1991, along with $70 million for the newly formed European Bank for Reconstruction and Development (EBRD) and $3 million for Romania. In September 1991, Congress reprogrammed $11 million in aid to start SEED programs in the Baltics. Funding for

fiscal year 1992 was appropriated under a Continuing Resolution which made $370 million available for the

entire region. The Foreign Appropriations Act of 1993 (PL 102-391) provided $400 million in assistance in

fiscal year 1993 for Central Europe and the Baltics, plus $69 million for EBRD. Although fiscal year 1994

appropriations were signed into law in September 1993 (PL 103-87), portions of this appropriation were

rescinded in February 1994 (PL 103-211 ) to offset the costs of earthquake relief for California. Under the

revised 1994 appropriation, foreign assistance for Central Europe and the Baltics totaled $390 million and

EBRD received no funds.

Former Soviet Union

U.S. assistance to the FSU has consisted of a number of commitments made bilaterally and to multilateral organizations. Assistance to the FSU, and in particular to Russia, began in 1990 with the extension of

food credits ($5,1 billion) and assistance in the destruction of weapons ($800 million). In 1992, Congress

passed the FREEDOM Support Act, which provided a comprehensive framework for U.S. foreign aid programs for the FSU and authorized $410 million for humanitarian and technical assistance for fiscal year

1993. On April 1993, at the U.S.-Russian Vancouver Summit, President Clinton announced a $1.6-billlon

aid package for Russia, composed completely out of funds that had already been appropriated, including

under the FREEDOM Support Act. Shortly thereafter, on April 15, 1993, at a meeting of G-7 ministers, the

U S. announced an additional $1.8 billion in assistance. Congress funded $1.6 billion of this assistance

through a supplemental appropriation for fiscal year 1993, attached to the foreign operations appropriation

bill for fiscal year 1994 (PL 103-87). That bill provided an additional $904 million for fiscal year 1994, for a

total of $2.5 billion in additional assistance.

SOURCES Congressional Research Serwce, selected Issue briefs and reports for Congress

(Eximbank), the Overseas Private Investment

Corporation (OPIC), and the U.S. Department of

Commerce (DOC), provide backing to the U.S.

private sector to encourage U.S. business to play a

key role in the rehabilitation of the regional energy

sector.

As the largest shareholder in the multilateral

development banks (MDBs), the United States

also actively exercises influence in their large

project lending programs. Much of the past and

anticipated lending has been to the oil and gas industry and the power sector. However, there are

also active programs for coal and energy efficiency.

Bilateral and multilateral lending is designed to

provide the capital to overcome economic barriers

to technology transfer. Conditions attached to

some lending programs, especially from the
Chapter 7

Fiscal years 1990-94

Source funding ($ million)

World Bank

Central Europe 1,651

FSU (Russia) 1,210

Total 2,860

European Union

Central Europe (PHARE) 550

FSU (TACIS) 123

Total 673

EBRD

Central Europe 220

FSU (Russia) 250

Total 470

United States

Central Europe 151

FSU 93

Total 244

* Does not Include bilateral trade-promotion programs

SOURCE U S Congress, Office of Technology Assessment, 1994

MDBs, are intended to force countries to make the

institutional changes that are crucial to reform.

As illustrated in table 7-2, the bulk of assistance

for energy-sector development comes in the form

of World Bank loans. Lending by the European

Bank for Reconstruction and Development

(EBRD), though smaller, also provides energyrelated development financing. European Union

energy-related development programs provide almost three times the level of resources as U.S. bilateral assistance programs.

U.S. government agencies have pursued different energy-related development assistance policies in Central Europe and the FSU. In Central

Assistance, Trade, and Investment Programs | 153

Europe and the Baltics, U.S. assistance has focused on diversifying sources of energy supply,

rehabilitating and modernizing the energy supply

infrastructure, improving end-use energy efficiency, and controlling pollution. In the FSU, maintaining and increasing oil and gas production has

had clear initial priority.

While much U.S. energy assistance has environmental components, particularly with regard

to air pollution and greenhouse gas emissions, the

overall assistance effort has not been nearly as environmentally oriented as was anticipated in its

earliest phase. This is due, in part, to the recognition of other priorities, especially economic revitalization. 3

EVALUATION OF U.S. PROGRAMS

Since most programs addressing energy and the

environment in the former East Bloc are quite recent in origin, it is not possible at this point to offer

detailed critiques. Nevertheless, even on the basis

of limited experience, it is possible to identify

both particular strengths and incipient weaknesses in the collection of programs dealing with

assistance to the energy sector. It is also possible

to identify the external constraints that limit the

effectiveness of U.S. and multilateral programs.

Before considering the strengths and weaknesses

of U.S. programs, it would be useful to review

these constraints.

| Constraints on U.S. and Multilateral

Programs

U.S. programs have been developed and implemented under difficult circumstances and under a

variety of political, institutional, and financial

pressures. Considerable political pressure was put

on agencies to disburse funds quickly to give visible evidence of Western support for the new regimes following the end of the Cold War. All

agencies have experienced difficulties in recruit3For ~xample, see: G(Jrdf~n Hughes, “Are the Costs of Cleaning Up Eastern Europe Exaggerated? Economic Reform and the Environment!’”

OxjbrdRe\ieu oj’Economic Policy, vol. 7, No. 4, 1991, pp. 106- I 35.
154 I Fueling Reform: Energy Technologies for the Former East Bloc

ing permanent staff with the necessary area expertise. AID programs have been developed and

carried out during its own reorganization, and

with staff cuts affecting personnel in programs for

the region. The ongoing reorganization at AID is

designed to provide the agency with further flexibility and streamlined contract procedures, but in

the meantime has hampered program development. Continuing pressure on all agency budgets

has limited resources available to finance development and lending programs.

A further extenuating circumstance is that

many programs are lodged in institutions that

were designed for different types of operations.

The World Bank and AID, for example, were designed for projects in developing countries whose

experiences and needs differ considerably from

those of the former East Bloc. In some cases, such

as the World Bank negative pledge waiver, agencies have been asked to abandon policies that they

consider crucial for carrying out their worldwide

mission in order to provide assistance to the former East Bloc countries.

Eximbank is a striking example of an agency

being obliged to combine differing functions in

carrying out programs for former East Bloc countries. The primary mission of Eximbank is to support U.S. exports. The bank is not a development

assistance agency; but the Oil and Gas Framework

Agreement for Russia, which is a major support to

U.S. exports, is also a cornerstone of U.S. financial assistance to the FSU countries. Eximbank

therefore has had to balance the different political

and economic pressures arising from the perception that it is an instrument of industrial, trade, and

development policy.4 In addition, the Eximbank

Framework Agreement has encountered major organizational and procedural problems that

delayed its final implementation for almost a year.

Conditions in the recipient countries have also

not been conducive to rapid and efficient disbursement. In several countries, especially in the FSU,

highly unstable political conditions have hampered or prohibited program development. It is

difficult to plan specific energy improvements in

the context of a drastic economic restructuring,

falling living standards, and institutional disarray.

An important additional factor affecting the

success of U.S. and multilateral programs is the

difficulty of ensuring that countries adhere to the

political and economic conditionality attached to

assistance. To receive World Bank loans, for example, countries are typically expected to raise

energy prices and encourage market reform

throughout the energy sector. In practice, however, governments often resist the discipline of

price reform and the privatization of energy enterprises, and thus make it difficult to advance assistance. This has been one of the principal factors

holding up aid for Russian economic reform in

general, and for Russian energy sector assistance

in particular.

Reluctance to accede to conditionality can affect demand for assistance as well. Several U.S.

agencies report a shortage of viable projects in the

FSU countries, either because of lack of interest or

unwillingness to accept conditions attached to financial assistance. In several countries, notably in

the Russian oil and gas sectors, there is both a

marked ambivalence toward the type of assistance

the United States can offer, and a deep-seated suspicion of foreign investment.

| Strengths of U.S. Programs

The U.S. government and Congress moved with

exemplary speed to develop energy assistance

programs in support of reform efforts. Agencies

4For ~ dlxu~~lon of Eximbank’s multiple roles, see Richard E. Feinberg and Stuart K. Tucker, “ExPofl Credits in U.S. Tmdet Development?

and Industrial Policy,” in Rita M. Rodriguez, The Export-Import Bank at Fi&: The International Ern’ironment and the Institution’s Role (Lexington: Lexington Books. 1987). See also U.S. General Accounting Office, Exporl Finance: The Role of the U.S. Export-Import Bank, GAO/

GGD-93-39 (Washington, M: U.S. Government Printing Office, December 1992).
Chapter 7 Assistance, Trade, and Investment Programs | 155

have been quick to develop new programs or expand the scope of old ones as new needs have arisen. These programs appear to have been

prosecuted with vigor and enthusiasm.

OTA’s survey of the existing programs shows

them to be comprehensive in coverage. Within

overall budget constraints, they address the main

barriers to reform previously discussed. Programs

have been developed to help ease capital

constraints for both energy supply and conservation projects, to promote energy sector and macroeconomic reform, and to provide a wide range

of technology and technical assistance. Particularly strong efforts have been made to include the

U.S. private sector in these efforts. All in all, there

are no obvious major gaps in the coverage of U.S.

programs, though their size, design, and implementation are open to debate (see below and

ch. 8).

U.S. programs have shown considerable flexibility and responsiveness to changing conditions,

even over their short period of operation. There

was a clear shift in the early years of the assistance

effort from promising to provide energy and environmental technologies directly, to a strategy of

building the policy and institutional capacity to

enable countries to absorb new technologies. Efforts have also been made to respond to early criticisms of the U.S. effort, some of which were cited

in the previous OTA report. These included too

many temporary consulting missions, lack of incountry expertise, slow procurement, and confusion over country needs due to a regional approach

to aid disbursement. The energy projects in Central Europe are now developed on a country-bycountry basis. In the FSU, contract delays at AID

have apparently slowed project startups, but AID

has established in-country missions at an early

stage.

| Weaknesses of U.S. Programs

Despite the many achievements of the past years,

major weaknesses to U.S. assistance have

emerged. One major set of weaknesses is related

to the scale of the assistance effort and to problems

in program design and implementation. The proliferation of initiatives has caused problems.

There are abundant reports from officials of former East Bloc countries of their being swamped

by visiting missions and the resulting technical assessments. There is a further perception that the

assistance available is going largely to foreign

consultants rather than the recipient countries.5

The large number of agencies offering broadly

similar services raises major problems of coordination and duplication.

Coordination between the various donors, fairly low during the first years of assistance, has continued to be a problem.6 There are several cases of

lack of donor coordination that seriously weaken

the entire effort. For example, while the World

Bank supports an oil export tax as an efficient

means of bridging the wide gap between domestic

and export oil prices, other government agencies,

more concerned with the promotion of foreign investment, strongly oppose it. There also continues

to be lively competition among bilateral assistance programs to influence technology choices in

former East Bloc countries. This can result in duplication of effort and a concentration on too narrow a group of technologies.

However, progress is being made in other areas.

Currently, the World Bank, EBRD, AID, and the

EU have several joint energy projects, including a

major power sector restructuring project in Poland. Also, there is a more systematic data collection process under way to keep track of energy

Ssee for example, Barry NewMan, ‘“Disappearing: Act: West Pled:ed Billions Of Aid to Poland—Where Did It All Go’?,” The Wall Swcc(

Journa/ (Feb. 23, 1994), pp. A 1, 8; John J. Fialka, ‘“Helping Ourselves: U.S. Aid I(J Russia IS Quite a Windfal—lF(Jr U.S. Consultants,” The Wa//

Street Journal, Feb. 24, 1994, pp. A 1, 8.

%e lack of coordination is repined in U.N. Ec(m(mlic and !N)cial C(mncil, Ec(mornic Commissi(m for Europe, Comrniltee on Energy,

“Multilateral Assistance to Economies in Transition m the Field of Energy: A Preliminary Overview and Evaluation,” Geneva: Aug. 28, 1992, p.

9.
156 I Fueling Reform: Energy Technologies for the Former East Bloc

project requests in the FSU, managed by the International Energy Agency.

Underpinning these weaknesses in implementation lies a more serious and fundamental

problem: a developing uncertainty over the best

means to achieve U.S. policy aims in the region, if

not the nature of those policy aims themselves.

The original program emphasis in the FSU—

widely shared by all agencies and most Western

industrial countries—was on oil production projects, mainly through private sector investments.

This emphasis was accompanied by MDB lending

programs designed to supplement and leverage

private investment. Oil and gas received the most

attention because production in that sector could

most quickly generate the extra foreign exchange

needed to underwrite the reconstruction of the entire economy.

The assumptions behind this strategy are now

in doubt. It is proving more difficult to achieve the

anticipated production increases, partly because

of the lack of enthusiasm in some host countries,

notably Russia, for Western programs and the

conditions that accompany them. There is also the

belief in some international oil circles that government support of an active MDB oil policy and expansion of bilateral export credits undermines

foreign investment by reducing the need for governments and enterprises to deal directly with private Western companies on an equity-stake basis.

The rationale that underlies the distribution of

funds among the many countries of the region is

also not clear. The allocation of assistance within

the energy sector is open to question, particularly

the emphasis on expanding supply, despite the immense potential for energy conservation. The reluctance of some host countries, especially

Russia, to cooperate in key parts of the assistance

program raises questions about the wisdom or feasibility of the present approach.

This is an opportune moment to use this experience in the assistance programs to re-examine the

totality of U.S. efforts toward the former East

Bloc in light of original U.S. policy objectives,

and to suggest improvements in programs that

support those our policies. These issues, especially the need to define U.S. goals and priorities, are

elaborated in greater detail in the next chapter.

SURVEY OF ENERGY AND

ENVIRONMENTAL PROGRAMS

Energy and environmental programs fall into two

broad categories: development assistance and private sector support. In principle, the primary objective of development assistance is direct

assistance to the recipient country. Trade and investment support, on the other hand, is primarily

designed to help domestic industry. In practice,

the distinction between the two is becoming increasingly blurred, for a number of reasons. First,

benefits to U.S. industry can create a strong constituency for development assistance, especially

important in times of budget stringency and recession. Second, export and investment promotion

efforts are a natural concomitant to the recent emphasis on privatization and the primacy of the private sector in technology transfer. Third, project

finance is becoming increasingly complex, including both multilateral, bilateral, and private

sector participants. Fourth, greater private sector

participation can screen ill-designed projects.

On the other hand, critics complain that the

merging of development assistance and export

promotion can compromise developmental goals

and skew existing development programs in the

direction of export promotion.

| U.S. Programs to Assist Former East

Bloc Development

Assistance programs were designed first for Central European countries and then the FSU. The two

regions will be discussed separately because of the

differences between the programs. Additional information is included in chapters 3 and 4. Current

budget data are listed in chapter 8.
Chapter 7 Assistance, Trade, and Investment Programs | 157

Central Europe and the Baltics7

U.S. energy and environmental assistance to Poland has centered around a group of projects demonstrating U.S. know-how in Krakow. The

Skawina Retrofit project has installed advanced

U.S. clean-coal technology at a 550-MW (megawatt) plant near Krakow chosen by a U.S.-Polish

project steering committee. This technology

choice reflects the growing priority given to the

export of U.S. clean-coal technologies by DOE,

building on its extensive Clean Coal Technology

Program in the United States.8 In July 1991, Airpol, a New Jersey-based firm, was awarded a

$7.6-million contract to install emission Controls

on two 50-MW boilers.9 The powerplant subsequently bought another.

Polish power sector assistance has several elements. The Power Sector Restructuring, Privatization, and Management program provides

support for a multidonor power sector restructuring initiative developed by the World Bank and

the Polish Ministry of Industry. AID contractors

are working on increasing the efficiency of powerplants and transmission and distribution systems,

privatization, and corporate management. A demand-side management and demonstration program is under way, and a utility partnership

between Commonwealth Edison Co. and the Polish Power Grid is examining management issues.

In Hungary, the power sector and energy efficiency are also the primary focus of U.S. assistance. The New England Electric Co. and the

Hungarian Power Cos. Ltd partnership has focused on improving management, financial systems, and consumer relations. A complementary

Combined Heat and Powerplant, Krakow, Poland

program will address key regulatory and privatization issues. Building on energy audits undertaken in 1991, AID is assisting in commercializing

low-cost efficiency technologies, developing local private energy service companies and joint

ventures, and establishing training programs for

promoting private investment in oil, gas, and coal.

Energy efficiency is also a major element of

U.S. assistance in the Czech Republic and Slovakia. SEVEn, the energy efficiency center in

Prague, conducts outreach to the private sector.

Several towns in the Czech Republic, including

Cesky Krujlov, Plzen, and Ostrava, have ongoing

energy efficiency and pollution reduction demonstration projects.

TThl~ ~ectl(}n summarizes and U@ates projects by country or at a regional level (where new information k available), f(wusing on clean

coal, electric power, oil and gas, and environmental components. For additional inf(mnati(m, see OffIce of Technology Assessment, Energy

E~iciency Technologies jtir Central and Eastern Europe.

Ssee u s 

. .~pa~ment of Energy, c/can cod Technology Export Programs, National Energy Strategy Technical Annex 6, ~WS-oo95p

( 1991/2).

gwhile ]Inllted to U.S.-based firms, the specificati(ms for the pro~ct had to be adjusted (restrictions on foreign ownership were relaxed ~d

the S02 emissions reduction target reduced from 70 percent to 65 percent) to allow for a sufficient number of U.S. bidders. Further detail can be

f{mnd in ch. 4. Background to the project and the bidding process can be found in U.S. General Accounting Office, Fossil Fue/s: DOE’s Ejtirt fo

Prmide C/can Coal Technology 10 Po/and, GAO/RCED-91 -155 (Washington, DC: U.S. Government Printing Office, May 1991 ).
158 I Fueling Reform: Energy Technologies for the Former East Bloc

In the power sector, Houston Lighting and

Power Co. and the Czech Power Co. (CEZ) have

formed a partnership. AID contractors will provide additional technical assistance to CEZ and

support for privatization efforts.

In Slovakia, a utility partnership has been

formed by Southern Electric International (Georgia) and the Slovak Electric Power Company

(SEP), focused on management, organization, and

finance. Follow-on power sector restructuring

measures are being defined by AID in cooperation

with SEP and the Ministry of Economy. In the oil

sector, a study of options for upgrading heavy oil

processing has been undertaken at the Slovnaft refinery in Bratislava.

In the Baltic countries, AID is attempting to

stimulate the development of a domestic energy

service industry. The first phase had focused on a

series of energy efficiency audits. In the power

sector, AID is assisting in pricing and model contracts for international electricity contracts. A utility partnership has been formed between Central

Vermont Public Service and Latvenergo (Latvia).

A partner is being sought for the Lithuanian

utility.

AID is also conducting regional efforts in Central Europe and the Baltics. A major initiative is a

project to rationalize the refining and oil transport

sector. This will include developing a database,

identifying policy. legal, and institutional factors

to improve competitiveness, and identifying a list

of potential capital projects.

The Former Soviet Union

As in Central Europe, U.S. energy and environmental assistance to the FSU is undertaken by

AID, DOE, and EPA. AID has attempted to build

in-country representation more rapidly than in

Central Europe.

NIS Task Force

In January 1992, AID formed the Washingtonbased New Independent States (NIS) Task Force,

linked to AID field missions, which currently include Moscow (Russia), Kiev (Ukraine, Belarus,

and Moldova), Almaty (Kazakhstan, Turkmenistan, Kyrgyzstan, Tajikistan, and Uzbekistan), and

Yerevan (Armenia, Georgia and Azerbaijan). The

task force’s energy program has four stated strategic objectives: 1. energy pricing policy and institutional reform. 2. energy efficiency and

performance improvements. 3. energy production

and delivery system improvements. and 4. nuclear

power safety. 10

Energy Pricing Policy and Institutional Reform. This component aims to introduce energy

pricing reforms and sector restructuring and privatization. Another key element is training and

exchanges between energy companies in the

United States and the Former Soviet Union.

In Russia, assistance included planning for privatizing state-owned energy producers, reforming

the price and tariff structure, and introducing an

appropriate regulatory framework in the energy

sector. The Institute for International Education is

providing technical assistance and training to develop a petroleum commodity exchange in Moscow. Technical assistance has been given to

Ukraine, Kazakhstan, and Armenia in drafting national energy plans and formulating privatization

strategies. DOE is heavily involved in drafting a

new oil and gas law, and implementing legislation

for Russia.

As in Central Europe, AID has begun a program of twinning and exchanges between U.S. energy companies and those in the FSU. This

program is discussed in chapter 4.11 The Energy

Industry Partnership Program (EIPP) for the Newly Independent States includes companies and

loNucIear ~)wer safety prtyyanls are reviewed in ch. 4.

1 l~e Elpp’5 pro:re55 15 rep)ne~ ~ua~er]y in /JsEA_Fo(,us on (he Ne\+ [n(iependent S(a(es and in the USEA Annual Report 1992.
Chapter 7 Assistance, Trade, and Investment Programs | 159

associations from the electric power, gas, and petroleum sectors. AID funding for the EIPP is $7.2

million over three and a half years, with additional

funding from participating companies.

Energy Efficiency and Performance Improvement. This component has focused on improving efficiency in electric power, refineries,

industries, and residential buildings. Some funding was also directed to support the Moscow Energy Efficiency Center. Three U.S. engineering and

consulting firms assessed efficiency options in selected district heating systems in Armenia, Belarus, Kazakhstan, Kyrgystan, Russia, and Ukraine

and identified appropriate instrumentation and

equipment to improve efficiency.

Energy Production and Delivery Systems

Improvements. This component will improve

production from existing power facilities, develop additional power generation capacit y from safe

sources, and promote demand-side efficiency in

key parts of the energy sector. One of the longterm goals is to provide alternative energy sources

needed to decommission unsafe nuclear reactors.

Partners in Economic Reform, a U.S. nongovernmental organization consisting of the National

Coal Association and the AFL-CIO, is providing

advice on the management and safety of coal

mines in Russia, Ukraine, and Kazakhstan. In Armenia, AID contractors helped prepare a $57-million loan from the EBRD to complete the Hrazdan

power generation facility. AID is also conducting

feasibility studies in Russia on greater efficiency

in gas transmission.

DOE is proposing Oil and Gas Centers for the

major oil- and gas-producing areas of Russia, providing information about U.S. technology and

services. Functions would include seminars and

training, matching of U.S. companies with Russian production associations, and technical assistance for economic, financial, and field analysis.

Gore-Chernomyrdin Commission

President Clinton and President Yeltsin agreed at

the Vancouver summit meeting in May 1993 to establish a joint commission on energy and space

cooperation. Vice President Gore and Russian

Prime Minister Chemomyrdin were appointed to

chair the commission, which met for the first time

in September 1993. Agencies involved with the

commission include DOS (overall policy and international coordination), AID (funding coordination), DOE and the Nuclear Regulatory

Commission. Nuclear assistance is discussed in

chapter 4.

Much of DOE’s activity in the Russian energy

sector is focused around the Gore-Chernomyrdin

Commission. DOE has divided this program into

three working groups. DOE’s commercial and

legislative working group sets up energy-infrastructure demonstration projects to educate Russians in business practices. Its largest effort so far

has been a project to open 25 gas stations in the

Moscow area. This group has also promoted the

development of production-sharing agreements

as an interim measure to facilitate U.S. involvement in oil and gas development. In the legislative

area, DOE was heavily involved in drafting oil

and gas law. Finally, the commercial and legislative working group sends U.S. academic advisors

to the FSU to provide policy assistance.

An oil, gas, and coal development working

group has developed seven projects to promote

technology transfer and joint research. Its main

project so far has been an oil and gas technology

center located in the Russian city of Tiumen, the

capital of the West Siberian oil and gas region.

This technology center is designed to link Western

companies and technologies with Russian enterprises.

DOE’S energy efficiency working group is currently working on 24 projects. The largest project,

financed by a one-time transfer of $125 million

from the AID commodity import program (fiscal

year 1994 funds), facilitates purchases of U.S. energy-efficiency technologies. The working group

is also conducting a study of energy use and alternative sources, with an emphasis on replacing the

FSU’s most dangerous nuclear reactors.

DOE’s total budget for FSU activities is only

$3 million (with a separate nuclear safety line of

$73 million). Agency personnel note that the

small size of the budget limits their activities.
160 I Fueling Reform: Energy Technologies for the Former East Bloc

They also note that the way in which funding is

routed (all money must pass through AID before

coming to DOE) adds a layer of bureaucracy to an

already cumbersome system. Finally, DOE officials would like to have more direct authority to

negotiate energy-related agreements. These officials note that the United States is the only Western country in which the State Department (or its

equivalent), not the Department of Energy, takes

the lead in negotiating energy-related agreements.

Environmental Assistance

AID and EPA are jointly undertaking a number of

environmental projects. EPA is focusing its programs on three areas of activity: strengthening the

capacity of environmental institutions, focusing

resources on environmental “hot spots” and regional environmental management, and demonstrating environmental and energy technologies.

EPA participated in a joint mission with the World

Bank to plan with the Russian government two

major Bank energy and environmental loans: the

Oil Rehabilitation Project and the forthcoming

Environmental Project. A key objective of the

joint mission was to leverage limited U.S. grant

assistance with the larger World Bank projects.

Bilateral Energy Agreements

and Working Groups

Energy cooperation with Russia and other FSU

countries has accelerated since 1992 but the immense potential for science and technology cooperation between the United States and Russia, as

well as other FSU states, has only begun to be

tapped. The United States and the Russian Federation Framework Agreement on Scientific and

Technical Cooperation in the Field of Fuel and

Energy provides for data exchanges, joint projects, and private sector contacts in a number of energy areas, including energy efficiency and

renewable. A U.S.-Russian Joint Committee established under the agreement meets annually.

DOE plans to pursue Fuel and Energy Agreements

with other FSU states, with an initial focus on Kazakhstan, Ukraine, and Azerbaijan.

DOE also supports the U.S./Gazprom Working

Group, which brings together U.S. and Russian

gas industry officials to develop joint projects,

and an Oil and Gas Equipment Working Group

under the U.S.-Russia Business Development

Committee. There have been delays, however, in

organizing the International Science and Technology Center headquartered in Moscow. The founding parties, which included Canada and Sweden,

pledged $70 million in fiscal year 1993, with a

$25-million share from the United States. There is

also an agreement (signed in June 1992) to establish a science and technology center in Kiev, Ukraine, with a $10-million donation from the

United States, but friction over Ukraine’s nuclear

arsenal has delayed the program.

| Multilateral Programs to Assist Former

East Bloc Development

Much of the energy and environmental assistance

to the former East Bloc is channeled through multilateral initiatives, primarily the World Bank

Group and the EBRD.12 The Central Asian Republics of the FSU have applied for membership

in the Asian Development Bank (ADB).13 The

Global Environmental Facility (GEF) also provides multilateral financing. Assistance on policy

and research issues is provided by the International Energy Agency, the U.N. Economic Commission for Europe, and the European Energy Charter

(see box 7-2).

Izof tie $28.4 bi]lion G-7 Mu]ti]ateral Assistance Package for the FSU announced at the Tokyo Ministerial Meeting in April 1%$ $] 7.9

billion was to be provided through the lntemational Monetary Fund, the World Bank, and EBRD.

13~ July 1, 1993, tie ADB*S Board of Directors proposed 10 approve the membership of Kazakhstan, Kyrgyzstan, and Uzbekistan tentatively for Nov. 30, 1993. Tajikistan, Turkmenistan, and Azerbai@n have also applied for membership. Like the other regional development

banks, the ADB provides loans and equity investments for projects, technical assistance, and other advisory services in support of projects. The

ADB annually lends over $6 billion, with energy/power and the environment being two mjw sectors. U.S. Department of Commerce, B/SNIS,

July/August 1993, p. 6.
Chapter 7 Assistance, Trade, and Investment Programs | 161

The European Energy Charter is a polltical declaration of principles, objectives, and actions that aims to

create a new framework for cooperation, investment, and trade in energy across Europe and possibly

across the world. The charter was Initiated by the European Community (now the European Union) with the

major objective of integrating former East Bloc countries into world energy markets, Following several

months of preparation, it was signed by 43 countries, including the United States, in December 1991, and

several others since then. A legally binding “basic agreement” to the Charter and additional protocols are

currently under negotiation.1

The charter’s objectives are organized around three functional areas energy trade, international cooperation in the energy field, and energy efficiency and environmental protection. The first two of these ininclude provisions to promote more sound legal frameworks for energy activities, access to energy resources, lower barriers to trade in energy goods and services, efficient management and use of energy

resources, modernization of Infrastructure, information exchanges, research and development, and policy

consultation. 2

1 Richard Greenwood, ‘cThe European Energy Charter A New Framework for Pan-European Energy Cooperation, ” Energym EurOfX3, NO 19, July 1992, pp 69-72

2 “Concluding Document of the Hague Conference on the European Energy Charter” (The Hague, Netherlands Dec 16-17,

1991)

The World Bank Group

The World Bank14 is the most influential multilateral organization affecting energy and the environment in the former East Bloc, lending almost

$3 billion for energy projects between 1989 and

1993. The policy framework for Bank energy

lending in the region is laid out in the country economic memoranda that typically precede lending,

and in energy sector conditionality attached to

loans. Conditions include raising energy prices to

world market levels, restructuring and privatization of energy sector enterprises, and encouraging

foreign investment. The power sector and district

heating have been the major focus of Bank energy

lending in Central Europe, while oil and gas will

dominate in the FSU.

Central Europe

The Bank has been assessing problems of common regional concern through the Central and

Eastern Europe Network for Regional Energy

(CEENERGY) program, in coordination with the

European Union, United States, and the Internaational Energy Agency. 15 CEENERGY seeks to facilitate technical assistance and pre-investment

activities in high priority areas. It has supported

studies of petroleum refining and transport, electrical power interconnection and trade, natural gas

trade, energy efficiency in the context of environmental impacts, and the impact of Soviet energy

exports on Central Europe.

World Bank energy and environmental projects

in Central Europe are heavily concentrated in Po1 me World Bmk Group Consls[s of [he International Bank for Reconstruction and ~vetopment, the lntemational wveltJPmnt Ass{~iation, the lntemational Finance Cm-p., and the Multilateral Investment Guarantee Agency.

I s~e followlng” project descriptions are drawn from Bernard G. Montfort ~d Harold E. Wackman, “The World Bank Support for Energy

Sector Transformation in Central and Eastern Europe” (World Bank, July 1992); and The World Bank, “Central Europe Department Projects

Related to Energy/Envirorm~ent” (May 17, 1993).
162 I Fueling Reform: Energy Technologies for the Former East Bloc

land, with loans of almost $1 billion approved in

1990-1993 (most of which are for the energy sector), and several more in the preparation stages.

The policy framework for the energy lending was

negotiated with the Polish government in 1990

and 1991. Energy price increases, were supported

in a structural adjustment loan in 1991 ($300 million) and also in the first energy loan the Energy

Resource Development Project approved in 1990

(the World Bank loan is for $250, million with $60

million in cofinancing from the European Investment Bank, toward a total project cost of $648

million). The project also sought to encourage

fuel switching from coal, and development of a

regulatory framework to support privatization and

joint venture arrangements.

The subsequent Heat Supply Restructuring and

Conservation Project approved in 1991 (the

World Bank loan is for $340 million, with $50

million in cofinancing from the EBRD, toward a

total project cost of $619 million) continues sector-wide restructuring and introduces modern

technologies into the district heating system. A

Cogeneration Privatization Project (the tentative

loan amount from the World Bank is $120 million

toward a total project cost estimated at $320 million), will promote private investment and ownership of major powerplants in Krakow and

throughout the country.

A Power Transmission Project will rehabilitate

and reinforce the existing electric power transmission system, and develop the transmission system

to meet essential reliability requirements and international standards.

There are two prospective World Bank energy

projects in Poland. The Coal Sector Restructuring

and Environment project, anticipated for Board

approval in early 1995, will support coal sector restructuring,. The Power Privatization project aims

to promote independent power production and

joint ventures between Polish powerplants and

foreign investors.

The power sector is the major focus of the

World Bank in the Czech Republic and Slovakia.

The Power and Environmental Improvement

Project ($246 million toward a total of $557.5 million) aims to reduce the environmental impact of

powerplants in Northern Bohemia, through increasing the efficiency of powerplants and the reliability of the CEZ transmission system. Flue gas

desulphurization equipment and particulate control (dust and ash) will be installed.

The Second Czech Power Project (about $200

million;) will improve system security and operational reliability and also assist in completing the

restructuring of CEZ.

There are two prospective projects in Slovakia.

The Slovak Gas project ($150 million, with proposed cofinancing with EBRD) would support a

new international gas pipeline to increase domestic consumption and security of supply. The Slovak Power project would assist the Slovak

Electric Power company in improving thermal efficiency and reducing pollution at the Vojany

power station through installation of circulating

fluidized-bed boilers.

In Hungary, the Bank is undertaking an energy/

environment project ($1 00 million for a total cost

of $213.2 million) to support diversification of energy supply, energy conservation, and environmental protection. The project would include:

| construction of a gas-fired combined cycle cogeneration unit of 230 MWe (megawatts electrical) and 240 MWt (megawatts thermal) at

Dunamenti powerplant;

| upgrading of Hungary’s existing Energy Management System;

■ assistance for environmental planning and

management and,

● training and institution building in the power

sector.

Former Soviet Union (FSU)

In Russia, priority elements of an initial energy

policy package consist of energy price reform and

the development of a regulatory framework to

stimulate investment in the oil and gas sectors. 16

l~e Wlorld Bmk, Ru~~lan E1.onomlt. Reform: cr~ssing [he Thresho/d ~j’Stru~./ura/ change (Washington, ~: World Bank, September

1992), pp. I 80-81.
Chapter 7 Assistance, Trade, and Investment Programs | 163

Bank energy and environmental lending to Russia

includes several large projects under way or in

preparation. A $610-million loan has been approved toward a $1-billion Oil Rehabilitation

Project aimed at reviving oil production in Western Siberia. A natural gas project has also been

identified $300 million) that would assist in reducing losses in gas distribution and enhance export potential. The petroleum sector could also be

affected by a $300 million environmental project

under preparation, to reduce gas flaring, repair

pipelines, and increase recovery of liquids from

natural gas. The Bank estimates that lending to the

Russian energy sector could average between

$500 million and $1 billion annually for the next

several years.

The Oil Rehabilitation Project is intended to be

the first in a series of large projects designed to

help stabilize oil and gas production in the FSU,

strengthen the managerial and technical capabilities and the financial viability of the participating

oil producer associations, and mobilize cofinancing. Three oil producer associations in Western

Siberia were chosen for the project: Kogalymneftegas, Pumeftegas, and Varyeganneftegas. A key

element will be promotion of a policy framework

that will increase foreign investment. The Bank

aims to stimulate levels of investment of between

$2 billion and $3 billion annually in Russia’s oil

and gas sector.

The project is intended to increase national oil

output by 3 percent per year and bring in $1.5 billion in annual oil revenue. The loan will support

repairs at 1,300 oil wells, drill 84 new wells in existing fields, and replace 1,000 kilometers of pipeline.

The Bank is also undertaking energy sector

technical assistance and preparing project lending

in Ukraine and Moldova (power sector) and the

Central Asian Republics (primarily oil sector rehabilitation). In Kazakhstan, two projects are in

preparation—a technical assistance loan of about

$20 million for fiscal year 1994 and a rehabilitaDrilling Rig, West Siberia

tion loan of about $150 million for the Uzen oil

field.

The International Finance Corp.

The International Finance Corp. (IFC) is the private sector arm of the World Bank. The IFC typically makes loan and equity investments of no

more than 25 percent of project cost and has an upper limit of $100 million.

In Russia, the IFC is currently supporting two

oil and gas projects. A loan of $60 million has

been made to the Polar Lights Co., a joint venture

between Conoco and Arkhangelskgeologia in the

Ardalin oil field in Northern Russia. About $11

million is being provided to a joint venture involving Canadian Fracmaster and two Russian entities
164 I Fueling Reform: Energy Technologies for the Former East Bloc

for increasing production at existing wells in

Western Siberia.17

The IFC is also increasing its participation in

private power projects.18 A new infrastructure investment group was formed in 1992 to assist the

IFC in increasing its portfolio of power projects,

including a 400-kV (kilovolt) transmission line

under consideration in Poland.

The European Bank for Reconstruction anti

Development (EBRD)

The European Bank for Reconstruction and Development (EBRD), through both its public sector

and merchant banking activities, has approved almost $800 million for the energy sector.19 Its larger energy loans have for the most part been

cofinancing components of World Bank power

sector and oil sector rehabilitation projects, although some smaller loans have been made for energy efficiency.

The Bank’s short-term priorities are as follows:

repairing and rehabilitating existing supply facilities (e.g., oil and gas pipelines); completing existing high-priority projects (e.g., transmission lines

and power stations already under construction);

assisting countries to diversify sources of energy

supply; and private sector projects that promote

diversification of supply and the injection of foreign capital (e.g., projects to bring existing oil and

gas fields on stream). The Bank will also assist

governments with emergency energy sector

technical assistance in response to energy shortages and hardships resulting from economic

restructuring.

Central Europe and the Baltics

The EBRD began its energy lending in 1991, with

a $50-million cofinancing of the World Bank’s

Heat Supply Restructuring and Conservation

project in Poland. In 1992, energy loans totaling

$200 million to public sector operations focused

on supply rehabilitation, completion of projects

under construction, and end-use efficiency improvement. The Bank has also increased technical

cooperation activities.20

Latvia, Lithuania, and Estonia were all recipients of loans to support Energy Sector Emergency

Investment for $37 million, $44 million, and $47

million, respectively. Each loan focused on rehabilitation of energy supply facilities and end-use

efficiency. On the merchant bank side of its operations, the EBRD has made several loans to energy

companies in Central Europe, including expansion of generator producing capacity.

Former Soviet Union

As in Central Europe, EBRD lending for major

energy projects in the FSU has typically been cofinanced with the World Bank and export credit

agencies. The Bank is providing $250 million in

cofinancing for the World Bank Oil Rehabilitation

Project in Russia and has loaned the Armenian

Ministry of Fuel and Energy $57 million to complete a powerplant. The Bank is also undertaking

feasibility studies for rehabilitation of gas pipelines.

On the merchant banking side, the Board had

approved five private projects on oil and gas for a

total of$188 million to Russia. Four of these projlyln~tjMa] ~lmce Corp., Oil and Gas Division, “lFC Investments in the CM and Gas Sector,” (June 1993).

ISJWk D. Glen, private Sector E/ectric@ in Developing Counrries: Supply and Demund, IFC Discussion %Per 15 (Washington, DC: me

World Bank and the International Finance Corp., 1992).

l% EBRDJS ~si~cy t. ]end too quickly orc~atively has been widely noted. Most countries in the former &st BIOC apparently ngwd

the Bank’s lending as too cautious, too little, skewed toward larger infrastructure projects, and not supportive enough of the private sector. Bank

officials concede that it is not cost effective for the Bank to lend less than 5 million ecus. Also, they maintain that the EBRD’s status as a merchant

bank necessitates a cautious 6eginning to its lending, See Karol Okolicsanyi, “Eastern Views of the EBRD,” RFE/RL Reseurch Report, vol. 2,

No. 23, Jun. 4, 1993, pp. 502.

%3RD, Ad Report, 1992.
Chapter 7 Assistance, Trade, and Investment Programs | 165

ects were joint ventures with U.S. and Canadian

companies, and cofinancing partners include the

IFC, OPIC, and Eximbank. These loans include:

$33 million toward a loan of $90 million for a Canadian Fracmaster project; $40 million for a

$300-million project by Chemogomeft in Tiumen

Province; and $90 million for Conoco’s Polyarnoye Siyanie project in Archangels province,

with OPIC lending $50 million and Eximbank a

possible $60 million.

The Global Environment Facility

The Global Environment Facility21 (GEF) currently has one energy project in Central Europe, a

coal-to-gas conversion project in Poland cofinanced with the World Bank. The GEF/World

Bank contribution is $26 million toward a $52

million project. The project has several objectives, including an investment component that

will initially convert two coal-fired boilers in Krakow to gas-fired, and a technical component that

will address institutional and energy efficiency issues. The project also has been allocated a portion

of a $4.5-million cofinancing grant from Norway

to simulate joint implementation arrangements

between Norway and Poland. Other prospective

GEF projects include providing lines of credit for

energy efficiency demonstration zones.

| European and Japanese Assistance

Programs

The EU has a large and multifaceted program of

energy and environmental assistance with former

East Bloc countries. The “request driven”

PHARE program engages in a diverse set of activities similar to the U.S. assistance program, including policy guidance, training, energy

efficiency audits, and installing flue-gas desulPumping Station Samotlor Field, Nizhnevartovsk.

phurization equipment. The EU’s Technical Assistance Programme to the Commonwealth of

Independent States (TACIS) was begun in December 1990. Energy had an allocation of $132

million in 1991 ($61 million for nuclear programs) and $167 million in 1992 ($115 million is

for nuclear programs). Non-nuclear activities include oil, gas, and power sector projects, energy

efficiency, and energy centers. The Directorate

General for Energy’s (DG XVII) Thermie program undertakes market assessments, trade

promotion events, and energy efficiency audits.

Energy projects are also financed by the European Investment Bank (EIB), an autonomous organization within the EU structure that funds

capital investment projects. Energy and the environment are a component of the “Europe Agreements,” signed with Poland, Hungary, the Czech

Republic, and the Slovak Republic that seek to

provide the basis for the future integration of those

countries into the EU.

A number of European countries and Japan

have bilateral energy and environmental activities

Zlln 192, the Global Environmental Facility (GEF) was designated as the interim financial mechanism for the Framework COnventi(Jn on

Climate Change. The GEF replenishment, estimated at between $2 billion and $3 billion, will be substantially devoted to projects that reduce

greenhouse gases, including energy efficiency, renewable energy, and cleaner fossil energy.
166 I Fueling Reform: Energy Technologies for the Former East Bloc

in Central Europe and the FSU.22 These programs

vary widely in scope. Most offer small technical

assistance programs on a grant basis and access to

export credits. Priorities for the Western European

countries include transboundary pollution control, power sector rehabilitation and transmission

connections between East and West, oil and gas

pipelines, and, increasingly, access to the oil and

gas resources in the FSU.

Bilateral relations often reflect a mix of historical ties, geographical proximity, and national interest. For example, Scandinavian environmental

assistance is concentrated in the countries that

share the Baltic sea coastline and that also account

for a large share of transboundary pollution.

Germany has focused its bilateral energy programs in Hungary and Russia. Austria’s energy

assistance programs are focused on pollution and

power sector rehabilitation in the Czech Republic

and Slovakia.

Japan’s assistance activities have included industrial energy efficiency audits in Hungary and

sending a survey team to Russia to establish the

basis for more extensive future contacts. Japan has

announced a $1 .2-billion package of bilateral aid

for the FSU, a large part of which will be devoted

to the construction of a facility for the disposal of

nuclear waste.

Like the United States, other bilateral donors

sometimes coordinate assistance with the World

Bank and other multilateral lenders. The United

Kingdom for example, is participating with the

World Bank on power sector restructuring in Poland, and the Netherlands is providing cofinancing for technical assistance to the World Bank oil

rehabilitation project in Russia.

| U.S. Trade and Investment Programs

Western assistance for the former East Bloc was

complemented from the beginning by efforts to

stimulate trade and investment.

A large number of U.S. government agencies

are involved in energy and environmental export

assistance to former East Bloc countries. DOC,

AID, DOE, OPIC, and the Trade and Development Agency (TDA) provide export and investment promotion, such as market information,

training, conferences, official visits, and in-country support for business. Eximbank, OPIC, TDA,

and, to a lesser extent, AID and DOE provide financing for exports, projects, and investments.

The proliferation of activities led to some confusion. Establishment of the Trade Promotion

Coordinating Committee (TPCC) should improve coordination. The TPCC was initiated by

the Export Enhancement Act of 1992 (Public Law

No. 102-429). Chaired by the Secretary of Commerce, it consists of all 19 federal agencies23 involved in export promotion plus the National

Security Council and the National Economic

Council. The purpose of the TPCC is to provide an

export promotion strategy, coordinate and prioritize the government’s export promotion activities,

and provide a central source of information.24

zzReviewsof these activities relating toenergy efficiency can be found in International Energy Agency, “Energy Efficiency Update, No. 14,

March 1992, and U. N., Economic Commission for Europe, East- West Energy Efficiency: Policies, Pro,grammes, Technologies, and Who’s Who

(New York, N. Y.: United Nations, 1992). On European and Japanese environmental aid programs generally see U.S. Congress Ofllce of

Technology Assessment, Development Assistance, Export Promotion, and Environmental Technology Background Paper, OTA-BPITA-107 (Washington, DC: U.S. Government Printing Office, August 1993), pp. 55-69.

zJ~pmments of Commerce, Agricu]~re, Interior, Labor, State, Treasury, Defense, Energy, and Tr~s~)flation; the Agency for International Development, Environmental Protection Agency, Export-import Bank, Council of Economic Advisers, United States Information

Agency, United States Trade and Development Agency, United State Trade Representative, Office of Management and Budget, Overseas Private Investment Corporation, Small Business Administration.

2~e Ct)mmitt= is ~qui~d t. submit ~lluai reP)rts to Congress. The first report, entitled, Towards a Na~iona/ EXp~rt Stralegy, w~ submitted in September 1993. This report emphasizes the need to combine functions, allocate resources strategically, involve the private sector,

practice aggressive advocacy, evaluate export promotion efforts, and reduce export controls.
Chapter 7 Assistance, Trade, and Investment Programs | 167

In Central Europe there has been modest but

growing demand for U.S. technologies and services in the power sector, in air pollution control,

and in energy efficiency. By far the greatest demand for U.S. investment could be in the oil and

gas sector in the FSU. While the large oil companies have operated extensively across the world,

many other U.S. energy companies and much of

the environmental industry have not had a strong

international orientation. Awareness of the large

potential offered by a large and growing global

market, a declining U.S. share of those markets,

and, in some cases, the concomitant maturation of

the U.S. market have increased industry interest in

government involvement in supporting exports

and overseas investment.25

Information Programs

U.S. information about business opportunities in

Central Europe and the FSU is channeled through

a variety of sources. DOC’s Eastern European

Business Information Center (EEBIC) and the

Business Information Service for the Newly Independent States (BISNIS) act as clearinghouses for

trade and investment opportunities for U.S. businesses. 26 DOC’s U.S. and Foreign commercial

Service (US&FCS) undertakes export promotion

activities in the region. Electric power technologies and oil and gas equipment are promoted as a

“best prospect” for U.S. trade in several countries.

International conferences, trade missions, and

reverse trade missions can also be cost-effective

means of promoting business. TDA and DOE

have funded, and cofunded, a number of energy

and environmental conferences and visits of officials. 27

In-country support of business development is

provided by a growing network of business centers that provide visiting company representatives

with services such as telephone and fax, temporary office space, market information, and assistance in making business contacts. The American

Business Center is open in Warsaw, Poland, and

the FSU American Business Center Program,

funded by AID, plans twelve centers. The

US&FCS also has offices throughout Central Europe and in the FSU and is planning a substantial

increase in personnel.

The DOE-managed energy efficiency centers

engage in business development, including U.S.

liaison support with U.S. companies, and in developing the Automated Eastern Europe and

Newly Independent States Information System.

The Czech and Slovak center, SEVEn, supports a

series of energy efficiency business weeks featuring energy management and efficiency programs

and appliances.

Other types of trade promotion activities involve increasing U.S. commercial opportunities

at the multilateral and regional development

banks. There is also support for firms seeking procurement opportunities at the banks. The DOC

Office of International Major Projects maintains a

reference room of World Bank and EBRD (and

other regional development banks) project documents, project pipelines, and provides procurement liaison officers.

Z5U.S. ~p~men[ of Energy, National Energy Strategy: Analysis oj’Options to Increase Exports of U.S. Energy TeC-hnology, Technical

Annex 5 (Washington, DC: U.S. Government Printing Office, 1991/1992); Interagency Environmental Technologies ExIMtis Working Group,

U.S. Department of Commerce, Environmermd Technologies Expor/s: Srralegic Framework jiw U.S. L.eudership (Washington, DC: U.S. Government Printing OffIce, November 1993).

‘2~e EEBIC pub]ishes the &.r/ern Europe Business Bu//e/in, on a monthly and sometimes bimonthly basis, which includes general information on trade and investment as well as specific business opportunities in the energy sector and in energy equipment. It also produces the

occasional publication, Easlern Europe Looks jbr Parmers, which provides information on joint ventures in specific sectors. BISNIS similarly

publishes the BISNIS Bulletin.

27TheW include a U.S. Power Technologies Conference in Prague in My 1992, followed by BuckPest, September I ~~, ~d visits by energy officials from Poland, Hungary, the Czech Republic, Latvia, and Lithuania.
168 I Fueling Reform: Energy Technologies for the Former East Bloc

Pre-Export and Pre-investment Financing

Several different U.S. government agencies, including Eximbank, OPIC, TDA, and AID, provide pre-export financing for energy firms, which

can lead to follow-on export or project opportunities. U.S. firms have lobbied in recent years for an

increase in government funding for feasibility

studies. The TPCC has recommended that all U.S.

government funding for feasibility studies be

centralized in the TDA.

TDA, the primary source of funding for feasibility studies, has steadily increased its energy and

environment activities in the former East Bloc.

These studies have been undertaken by U.S.

firms, including Westinghouse, Bechtel, Enron,

Fluor Daniel, Foster Wheeler, and Black &

Veatch. Other project development funds include

the Capital Development Initiatives for energy

and the environment, managed by AID.

Financing for Exports and Investment

Eximbank and OPIC financing for the region has

grown significantly since 1989. Both agencies

face persistent demands to increase financing in

the region. Energy capital goods are a key strate-,

gic sector.

Eximbank Programs

Eximbank programs are designed to support exports that would not otherwise attract private sector financing, by offering loans with longer term

maturities, providing export credit insurance, and

countering export credit subsidies of foreign governments. While not explicitly stated as such by

the Bank, which is not a development lender, the

credits to former East Bloc countries are integral

to U.S. foreign policy objectives of stabilizing the

region economically and demonstrating U.S. financial commitment to its development.

The Bank is directed to support “key industries” that, among other things, export high value-

-added products, develop new capital goods

technologies, and support highly skilled jobs in

the United States.** Energy capital goods exports,

particularly electric power and oil and gas, have

been a large component of Eximbank’s lending in

recent years. The Bank has also received congressional mandates to reach targets in certain other

energy and environmental sectors. A target for renewable energy exports of 5 percent of total energy exports was set in 1990 and adhered to since

then. 29 Under the Export Enhancement Act of

1992, Eximbank was required to support the export of goods and services that have “beneficial effects on the environment or mitigate potential

adverse environmental effects.”

Eximbank offers short-term and medium-term

loans and guarantees in most of Central Europe

and the Baltics. By fiscal year 1992, the Bank had

a total exposure of about $647 million in Poland,

$196 million in the Czech and Slovak Republics,

and $1.7 million in Hungary. The Bank began

lending to the then-Soviet Union in 1991. By fiscal year 1992, its exposure in Russia was $115.5

million .30

But the poor quality and unreliability of the nascent banking sector and the indebtedness of the

state sector in Russia makes sovereign borrowing

difficult. To promote capital goods exports, Eximbank has been seeking alternatives to sovereign

lending by offering various types of “limited recourse” financing, including project financing

and a large export credit line for oil and gas equipment.31

zgExP)~.]mPJ~ Bank, Ann~/ Reporf /992 (Washington, ~: 1993).

Zgsee U.S. Genera] Accounting OffIce, Export Promotion: Federal Eforts to Increase Exports oj”Renen*able Energy Te~.hnO@ies, GAO/

GGD-93-29 (Washington, DC: U.S. Government Printing OffIce, December 1992).

3~e Bank’s tota] exP)su~ as of Sept. 30, 1992 was $41.8 billion.

J 1 Limited rec(~ur~ fin~cing is lending that is securedon the cash flow and earnings of the pro~t rather th~ the gummtees from (rect)um

to) the pro~ct ownerdsponsors.
Chapter 7 Assistance, Trade, and Investment Programs | 169

The Bank’s project financing is available for

transactions that involve over $50 million in U.S.

content. It applies to new projects, not expansions,

which can be structured as BOT (Build Operate

Transfer), BOOT (Build Own Operate Transfer),

BOO (Build Own Operate), or variations. Project

finance loans are looked at more favorably if they

involve cofinancing with other ECAs and/or commercial banks. The first project financing deal put

together for the FSU was a $47-million joint venture between Anderman Smith and Chemogoneft,

a private, Russian-owned oil and gas production

company. Exporters benefiting will include Halliburton Company, National Oilwell, and National

Engineering and Constructors.32

But the bulk of limited recourse financing will

come under the U.S.-Russia Oil and Gas Framework Agreement signed in July 1993, estimated to

provide financing for $1 billion of U.S. oil, gas,

and petroleum equipment and services. The operation of the agreement was delayed pending negotiations over the World Bank’s negative pledge

clause. This clause requires World Bank borrowers to avoid further liens on any public assets already pledged for Bank loans and to allow the

Bank to claim priority over others in repayment of

debt. This clause has effectively precluded state

oil enterprises in the FSU from pledging their assets as security for foreign credit.33 The World

Bank recently agreed to waive this pledge for

lending to Russia’s oil and gas sector.

This waiver clears the way for Eximbank financing, which will be secured from the hardcurrency sales of the oil and gas produced under

the project. To qualify for a loan under the limitations set out by the World Bank as conditions for

the waiver, the oil and gas equipment must be

shown to provide incremental oil, that is, oil not

available without the equipment purchase. Applications for financing under the agreement thus

require a great deal of technical and financial information from all parties to the deal, notably including a yield consultant report on the technical

and economic feasibility of the transaction Another limitation of the agreement is that many oil and

gas equipment transactions are on a smaller scale

than the financing minimum of $25 million.

The offering of export credits can also

introduce a distorting effect into the recipient

country’s development path. Since export credits

typically support heavy capital goods on attractive

terms, or make accessible capital goods that

would otherwise be unavailable, borrowers may

be biased toward capital-intensive imports. This

question has also been raised with respect to the

Russian need for imports of U.S. oil and gas

equipment, given the existence of a huge Russian

and Azerbaijani oil and gas equipment industry,

which, while not as technologically sophisticated

as that of the United States, nevertheless supported the extensive development of Soviet oil

and gas. At this point (spring 1994) it is too early

to assess the likely success of the Eximbank

framework agreement (see ch. 8 for further discussion).

OPIC Programs

OPIC’s financing for U.S. investors in former East

Bloc countries, which includes political risk insurance, loans, and guarantees, is oversubscribed.

Political risk coverage, in particular, is a major requirement for many companies wanting to do

business in the region. Table 7-3 reviews OPIC

energy and environmental financing for the region.

OPIC is increasingly active in the FSU oil and

gas sector, with financing for projects by Anderman Smith, Conoco, and Texaco. Assistance in oil

and gas projects includes both political risk insurance and loan guarantees. However, OPIC has

limitations on the type of financing and size of the

3z..ca~pian ~oge~s Top C.1.S. Deals”, (?j/ and GUS Journa/ , vt~l. 91, NO 24! 1993, P“ 20”

JsJeffrey A. B~fl, ..pt)sltlve Mt~vement on the NegatiVe Pledge,” Russian Perro/eum /n~’eStOr, March 1993~ P. 52.
170 I Fueling Reform: Energy Technologies for the Former East Bloc

Country Recipient Amount (U.S.$) Type of assistance

Poland Air products and Chemicals 12,029,000 Insurance

(industrial gas)

Hungary General Electric (lighting) 150,000,000 Insurance

Czech Republic and Slovakia Environmental Systems Corp. 250,000 Insurance

(monitoring)

Russian Federation Anderman-Smith Overseas 7,000,000 Insurance

(oil and gas)

Russian Federation Conoco (oil and gas) 50,000,000 Loan guarantee

Russian Federation Texaco (oil rehabilitation) 28,000,000 Loan guarantee

SOURCE OPIC, 1994.

projects it supports. The ceiling on loan guarantees will probably be raised to $200 million (from

the previous $50 million) in line with Trade

Promotion Coordinating Committee recommendations.

OPIC has also supported a “Russia Country

Fund,” which is expected to generate several

hundred million dollars of investment in the Russian economy. 34 The fund will provide equity to a

wide range of new businesses, expansions, and

privatizations, with particular emphasis on energy

and environmental projects.

Enterprise Funds

Energy and environmental companies doing business in Central Europe and the FSU may also be

eligible for enterprise funds established by the

U.S. government to foster overseas investment

and private sector development. The funds are

converted to small and medium size funds Such

funds have been established in Poland (1990),

Hungary (1990), the Czech and Slovak republics

(1991 ), and Russia ( 1993). The funds emphasize

the financing of firms in the recipient countries

and the joint ventures with U.S. firms, but will

also finance U.S. companies doing business in the

recipient countries.

| European and Japanese Trade and

Investment Programs

Most European countries and Japan have export

credit agencies (ECAs) and investment promotion

and financing programs against which U.S. programs are often negatively compared.35 Indeed,

export financing supports a much higher percentage of many of these countries’ exports than do

U.S. programs. European and Japanese governments are reported to be more aggressive in supporting deals by their companies than is the

United States. But the exposure of the European

and Japanese programs in the former East Bloc

generally, and in the energy and environmental

sectors specifically, is difficult to monitor.

The Japan Export-Import Bank is preparing a

$1.5-billion line of credit for the FSU that would

include financing for a refinery in Uzbekistan beJdManaged by paine Webber, [nc. in cooperation with ]nternationa] Economic coo~mtk)n.

35F{)r Sumeys of other countfies programs, see U.S. General Accounting OffIce, Exporf Promofion: A Comparison oj’prwrarns in Five

lndusfria/ized Counmies,” AO/GGD-92-97 (Washington, DC: U.S. Government Printing Off’’ce, June 1992); William E. Nothdurft, Going

G/oba/: How Europe He/ps Small Firms Export (Washington, DC: The Brookings Institution, 1992); and Therese J. Belot and Dale R. Weigel,

Programs in Industrial Countries to Promote Forei~n Direct Investment in Developing Countries, Foreign Investment Advisory Service, Occasional Paper 3 (Washington, DC: The World Bank, 1992).
Chapter 7 Assistance, Trade, and Investment Programs | 171

ing constructed by Marubeni Corpo and Chiyoda

Corp. An EU political risk insurance fund for energy investors in the FSU has reportedly been

started by Energy Private Investment Support, a

private bank consortium with between $6 billion

36 Also, the invest- and $12 billion in resources.

ment activities in the former East Bloc of European state-owned energy enterprises, such as

Elf-Aquitaine (France) or Statoil (Norway), could

be considered a form of export assistance, given

these companies’ access to public finance. U.S.

companies benefit from European and Japanese

export financing, but are required to reduce sharply the level of U.S.-made components. For example, a U.S. supplier to a petrochemical project in

the FSU reported having to reduce U.S. components to less than 5 percent when financing was

sought at Italian and Japanese export credit agencies. 37

3bC1ted in u S. .]n[ematlona] Trade Commission, “Trade and Investment Patterns in the Crude Petroleum and Natural Gas sect~~rs ~Jf we

Energy-Producing States of the Former Soviet Union,” Publication 2656 (Washington, DC: U.S. lntemationa] Trade Commission, June 1993)

pp. 5-3 and 5-4.

J7U.S. ~paflment of Commerce, “Obstacles to Trade and Investment in the New Republics of the F(mner Soviet Uni(m” (Washington, DC:

U.S. Government Printing Office, March 1992), p. 21.
and

T

he U.S. national interest would be served well if all countries in the former East Bloc become prosperous, democratic trading partners. Some are very likely to do so;

others hold less promise. The reform transition is proving

extremely difficult, and in Russia and several other former East

Bloc countries there is no consensus that it is worthwhile. Failure

in reform could have very undesirable implications for the United

States, including a possible resumption of the Cold War and dangerous international instability.

U.S. policy must be based on a realistic understanding of the

situation and of the United States’ ability to influence decisions.

The transfer of energy technology can be a major vehicle for supporting reform and, if done wisely, can greatly benefit both the

United States and the recipient countries. However, poorly

thought-out programs may actually impede reform while providing only a marginal increase in U.S. exports. This chapter reviews

the main goals guiding U.S. policy toward the region and suggests specific policy options relating to energy that support U.S.

goals. Since national goals can conflict, it also considers how the

options can be coordinated in overall strategies.

U.S. NATIONAL GOALS

The chief U.S. goal, over which there is no disagreement, is to

promote the transition of formerly hostile East Bloc countries to

democratic, market-oriented trading partners. The primary justification for U.S. assistance has been the “historic opportunity” to

ensure world peace and the security and prosperity of American

citizens that has arisen from the collapse of Communism and the

end of the Cold War. Promoting political stability and economic

Policy

Options 8

National Theater, Sofia.

| 173
174 I Fueling Reform: Energy Technologies for the Former East Bloc

prosperity in the former East Bloc should lessen

the risk of future conflict and dampen geopolitical

competition.

| Energy-specific Goals

Reform and modernization of the energy sector is

a critical factor in the transition because of its

great economic importance. As a component of

overall American strategy in the former East Bloc,

U.S. goals with energy-specific implications include the following:

●

●

9

●

●

to promote market reform in the energy sector,

to modernize energy sector facilities and

technologies,

to advance U.S. energy-related business interests,

to reduce energy-related pollution and threats to

the environment, and

to augment world fuel supplies.

Promoting Market Reform

Energy sector reform is a crucial component in the

transformation of the countries of the former East

Bloc to market-oriented societies. It is unlikely

that energy production can be increased significantly, and energy use rationalized, unless broadbased policy changes are made. Successful

marketization of the economies of the region depends most fundamentally on introducing comprehensive programs of privatization, enacting

basic changes in legal structures, eliminating state

subsidies, freeing domestic prices, achieving currency convertibility, and establishing a favorable

climate for foreign investment. In particular, energy price reform is essential to economic transition

and has been a key condition of loans from the

multilateral development banks (MDBs) to Russia and other former Soviet Union (FSU) republics.

Modernizing Facilities and Technologies

Energy sector modernization is of special importance for several reasons. The enormous fossil

fuel reserves of several former East Bloc countries

represent the largest and most immediately exploitable source of exports that can generate the

hard currency so desperately needed to finance

general political-economic reforms. Since inefficient and antiquated supply and consumption patterns severely restrict the quantity of oil and gas

available for export, modernization of energy

technologies and facilities is imperative.

Countries lacking large oil and gas reserves

must import supplies. Imported energy is very

costly, especially as Russia moves to world prices

in its exports to other FSU republics. The bulk of

Ukraine’s huge debt to Russia stems from oil and

gas imports. Many countries must resort to burning high-pollution domestic coal, and several rely

on unsafe nuclear powerplants. The introduction

of cleaner and more efficient energy technologies

will enable these countries to spend less on imported fuels and to reduce pollution.

Advancing US. Energy-Related Business

Interests

U.S. companies are competitive in many energy

areas. Assisting them in former East Bloc markets

will lead to increased U.S. exports and jobs. In

particular, American oil and gas companies are

world leaders in exploration and production

technologies. The former East Bloc represents an

excellent opportunity for U.S. firms to find new

reserves, increase business, and employ their excess capacity. Increased activity in the FSU could

boost U.S. employment in the oil and gas industry,

which has shrunk by 400,000 jobs over the past 10

years.

Reducing Energy-Related Pollution and

Threats to the Environment

Pollution in the former East Bloc has caused great

devastation in some regions, adversely affecting

public health and the economy. Some pollutants

have global implications. Carbon dioxide emissions from the former East Bloc account for a disproportionate share of worldwide greenhouse gas

emissions. Addressing energy-related environmental problems in the former East Bloc also offers business opportunities and jobs to the United

States.
Chapter 8 U.S. Goals and Policy Options | 175

Augmenting World Fuel Supplies

World-wide availability of fuels will benefit significantly from energy sector modernization and

Western investment. Oil and gas are plentiful now,

but supplies are likely to tighten over the next decade, especially if Russia has to start importing oil.

Western technology can at least slow the decline

of Russian oil production. Kazakhstan and Azerbaijan have the potential for increased exports.

Even greater potential can be gained from improved efficiency of energy use, especially in the

near-term. l Reducing energy waste is equivalent

to increased production, and will make more energy available for export from the region. Increased

world energy availability, whether obtained from

increased production or reduced consumption,

will mitigate future world market oil price increases and diversify sources for energy imports.

| The Political Context of

Energy Sector Reform

As described in chapter 6, political reform and

economic reform are closely intertwined. Success

of market-oriented economic reform depends on

the creation of political systems that embody

some type of popular consensus about the nature

and pace of reform and in which leaders have the

political will to carry out the painful process of restructuring and reform. U.S. goals and priorities

must take account of this relationship.

It is important to recognize, however, that

Western priorities will not always coincide with

local preferences. What may seem to Westerners

the most economically rational course of action

might not be acceptable to local reformers. For

them, successful reform often means maintaining

employment, renewing human and physical capital, and creating future opportunities as well as

maximizing economic activity. This is not just a

question of political-cultural preferences, but a

recognition that the maintenance of social peace

requires a transition that balances economic needs

with social costs.

In Russia, this orientation--coupled with Russian 1eaders’ fear of appearing subservient to the

West—has profound implications for the energy

sector. Instead of importing Western equipment

and advisers, Russians have so far preferred to develop their own oil and gas “majors.” They want

to use the energy sector as an engine to modernize

decrepit and outdated enterprises and to convert

the former military-industrial economy to civilian

uses. In this context, it may make economic and

political sense for Russians to buy domestically

manufactured but inferior parts rather than import

Western equipment. Not only are first costs lower,

but buying domestic parts maintains domestic

employment and provides some basis for a slow

upgrade of manufacturing capacity.2

In effect, some former East Bloc governments

may find it a wise policy to “buy” social peace by

maintaining state support for old and inefficient

industries with only gradual conversion to a market economy. The cost—greater but more predictable inflation and higher budget deficits-may be

justified for local reformers if it results ultimately

in a peaceful transition to a more efficient marketbased economic system. The energy sector will

not be immune from this calculus. U.S. goals and

priorities should therefore be flexible enough to

take adequate account of local priorities in economic reform, particularly in the energy sector.

POLICY OPTIONS

Policymakers have a variety of instruments to

support the goals discussed above. These tools

can be categorized under bilateral development

assistance, export promotion, multilateral development institutions, and investment promotion.

In addition, improved coordination of all these

programs is desirable and may permit new, effective initiatives. Most of the specific programs

‘ For an overview of energy use and policy options to improve efficiency, see chapter 4 of OTA’S earlier assessment, Energy Efficiency

Technologies for Centra/ and Easrern Europe, OTA-E-562 (Washington, DC: U.S. Government Printing Office, May 1993).

2 It IS Wotih “otlng that our own “buy American” legislation aho aims to support domestic employment.
176 I Fueling Reform: Energy Technologies for the Former East Bloc

mentioned in this chapter were discussed in more

detail in chapter seven

| Bilateral Development Assistance

Congress recognized the great need for help in the

former East Bloc and created a substantial development assistance program with major energy and

environmental components. The assistance program is having some success, particularly with energy efficiency, but experience is limited. Most of

the elements have been well selected, and fundamental changes in direction appear unnecessary.

However, Congress could consider ways to improve the effectiveness of the overall assistance

program and its components.

The major purposes of the U.S. energy assistance program are to promote economic reform

and to modernize energy systems. Assistance can

play a significant role in promoting reform within

the energy sector, if properly directed. U.S. government aid programs must be coordinated with

advisory activities to promote internal price, regulatory, and other reforms.

U.S. resources are very limited compared with

the immense need for development projects to improve energy supply and consumption. However,

projects focused on specific areas (e.g., training,

technical assistance, institution building) can

maximize the impact of U.S. government resources and fill precise needs that large multilateral institutions such as the World Bank find

difficult to address.

Most programs are funded by the U.S. Agency

for International Development (AID), sometimes

with the involvement of other agencies such as the

U.S. Department of Energy (DOE). AID’s program budgets for Central Europe and the FSU are

shown in tables 8-1 and 8-2. These tables include

AID programs that are either specifically targeted

at the energy sector or that address general areas of

economic and systemic reform that are important

for energy-sector development and that are highlighted in this report.

Areas and programs that OTA’s analysis indicates are exceptionally effective for meeting urgent needs and satisfying U.S. goals in the former

East Bloc energy sector are listed in table 8-3 and

discussed below. This section also describes how

these programs can be improved through redirection and/or increased funding.

Policy Assistance

Policy assistance guides governments in establishing democratic processes and in adapting to a

market economy. Helping establish a new set of

economic ground rules that provide proper financial and regulatory incentives for producers and

consumers will provide a framework within

which other problems (including investment in oil

and gas production) may be resolved, either

through the operation of the market or with the aid

of U.S. development assistance programs.

The primary goal for the energy sector is price

reform. The advantages of price reform are compelling. Higher energy prices would provide producers with the necessary capital to develop new

energy supplies and would encourage efficient energy use in all sectors of the economy. Reducing

energy use would also have important environmental benefits since much pollution is energyrelated. Reduced subsidies to the energy sector

would help reduce budget deficits, a key requirement for improved fiscal management. Foreign

exchange earnings would be augmented by increased exports of oil and gas now consumed locally.

Exportable forms of energy, including oil, gas,

and coal, should be priced at world levels for economically rational decision making. The target for

electricity is to increase prices to a level that covers the full costs of production and distribution

and provides a surplus for future system expansion. Current prices in the FSU are far below either of these levels. For example, oil and gas

prices in Russia are still less than half world prices

because rapid inflation has diluted much of the

impact of the frequent price increases of the past

three years.

However, rapid energy price increases cause

considerable hardship, especially to residential

consumers, because long-established patterns of

consumption are based on low energy prices. That
Chapter 8 U.S. Goals and Policy Options I 177

FY 1994:

FY 1993 preliminary

Program type (millions) (millions)

Regional energy efficiency 7.0 9.0

Energy-sector restructuring and 7.0 8.0

privatization

Krakow Power Project 7.0 4.5

Nuclear safety (DOE and NRC) 5.0 5.0

Rule of law 2.1 2.8

Democratic governance and public 13.5 23.0

administration

Privatization 42.0 44.3

Small business development 32.0 30.0

Commercial law reform 9.3 11.3

Financial sector reform 18.5 18,1

American business initiative 5.1 3.0b

Trade enhancement 1.5 O.ob

Enterprise funds 110.0 55.8

aThis table IS not a comprehensive Ilst!ng of USAID Central Europe-related programs Instead, It Includes only those

programs that are either specifically targeted at the energy sector or that address general areas of economic and systemic reform that are Important for energy-sector development, areas that are highlighted m this report

All figures represent orlgmal approprlahons and do not reflect carryover

bABl Terminated after fiscal year 1994.

Trade Enhancement merged with Small Business Development program m fiscal year 1994

SOURCE U S Congress, Off Ice of Technology Assessment, 1994

is why the Russian government has resisted strict

programs of price reforms as a condition of receiving MDB loans. High political dissatisfaction and

accelerating inflation will make further progress

more difficult.

Though correct energy pricing is a necessary

condition for energy sector reform, it is frequently

not sufficient, because institutional and market

imperfections can weaken the signals provided by

higher prices. In the FSU, for example, many consumers, particularly large, energy-intensive, industrial enterprises, along with some FSU

importing countries, do not pay their oil and gas

bills. In this case, the specified price is an administrative fiction that has no restraining impact on

consumption patterns. Effective energy pricing

will require major policy changes and reforms

throughout all sectors.

Privatization is a close companion to price reform. In all countries of the region, conversion of

behemoth state energy industries into a system of

more rationally structured, profitable, private enterprises can serve as a model for economic transition in nonenergy sectors of the economy.

Rationalization of enterprise management and

elimination of government subsidies and price

controls in the energy sector can also reduce the

incentives driving the widespread corruption that

is undermining public confidence in economic reform.

Centrally planned economies rarely incorporated regulation as it is practiced in the West, but

several forms will be needed as privatization proceeds. Most obvious is environmental regulation

to meet modem standards. Most former East Bloc

countries have stringent regulations on the books,
178 I Fueling Reform: Energy Technologies for the Former East Bloc

FY 1992-3 funding FY 1994 funding

Program type (millions) (millions)

Policy and market reform assistance

Pricing policy and institutional reform

Rule of law

Local governance

Privatization

Business development

Banking sector reform and bankers training

Fiscal sector reform

Financial and monetary sector reform

Training and macroeconomic advice (Dept. of Treasury)

Market environment

Business and organizational training

Short- and Long-term training

US/NIS partnerships

Exchanges (USIA)

SABIT program (DOC)

CAST program (NAS)

Eurasia Foundation

Energy efficiency

Efficiency & performance improvement

Production and delivery systems

Special earmarks (Lab-to-lab, etc.)

Nuclear power

Nuclear power plant safety and regulation

Technical assistance

Russia Energy & Environment Commodity Import Program

Environment

Policy and institution building

Technology cooperation

Local NGO support

Trade and investment promotion

Transfer payments to DOC and TDA

Enterprise funds

Russian-American Enterprise Fund

Western NIS Enterprise Fund

Central Asian Enterprise Fund

Fund for large enterprises in Russia

EBRD Small Business Fund

Multi-Lateral Equity Fund

5.7

9.5

9.7

125.3

14.2

N A

b

13,2

13.4

NA

2.2

2.7

NA

56.3

2.0

2.0

8.0

22.4

15.7

NA

45.2

NA

3.4

5.7

2.3

23.2

20.0

NA

NA

NA

NA

NA

22.0

25.5

9.5

115.0

75.0

12.6

15.5

10.7

2.1

14.4

91.5

5.0

128.0

2.0

2.0

12.0

35.0

39.0

33.0

85.0

125.0

21.9

36.5

14.6

8.5

120.0

45.0

30.0

100,0

15.0

21.0

aThls table IS nof a comprehenswe hstmg of USAID FSU-related programs. Instead, It includes only those programs that are either specifically targeted at the energy sector or that address general areas of economic and systemic reform that are Important for energy-sector development, areas

that are highlighted m this report.

All figures represent ongmal approprlatlons:

● They do not reflect recisions under way m February 1994.

■ They do not reflect considerable carryover of funds appropriated m fiscal year 1992-93.

Thehlgherlevels of funding mflscalyear 1994 representaone-time mfuslon Flscalyear 1995approprlatlons will reverftoflscalyear 1992 -931evelsor

lower

bNA=Not applicable.

SOURCE U S Congress, Off Ice of Technology Assessment, 1994
Chapter 8 U.S. Goals and Policy Options | 179

Policy assistance

Price reform

Privatization

Regulation

Training in market activities and skills

Energy efficiency

Demonstrations and assistance

Efficiency centers and information

Nuclear safety and proliferation control

Environmental information and assistance

Specific technology transfer programs

Utility Partnership Program

Powerplant renovations

Clean-coal demonstrations and assistance

Coal mine safety

Energy research and development

SOURCE U S Congress, Office of Technology Assessment, 1994

but they are not enforced. Assistance is needed to

achieve a workable regulatory code and to train

regulators to administer and enforce the environmental laws, as discussed in chapter 5.

In addition, electric power must be regulated

appropriately. At present, rates in some countries

are held well below costs, but the opposite could

occur once the utilities are privatized. Yet few former East Bloc governments have any experience

with cost-based regulation, a role that is handled

in the United States by the Federal Energy Regulatory Commission and by state regulatory agencies. U.S. expertise should become very important

as central planning is reduced.

Policy assistance is not expensive. It generally

involves reciprocal visits and training. Government, industry, and academic personnel should be

involved. The main agencies coordinating the

work involving energy sector policy should be

DOE, AID, the Environmental Protection Agency

(EPA), the Nuclear Regulatory Commission

(NRC), and the Department of State (DOS). An

additional appropriation of about $1 million per

agency should allow for many visits in both directions and extensive training in skills needed for

operating a modem, market-oriented government.

Training in Market Activities and Skills

As privatization has progressed, officials of former East Bloc countries and Western observers

have realized that new skills are needed. These include specific technological expertise and market

economy skills that Westerners take for granted,

such as accounting, planning, and financial management. Developing these general market economy skills is essential for putting the energy and

environmental industries and their customers on a

rational and more efficient footing.

Training programs to transfer technical and

business-related skills will also help create an environment more conducive to reform and U.S. investment. Without the skills necessary to manage

financing, operations, and personnel within the

structures of a market economy, former East Bloc

firms will not be able to purchase and efficiently

make use of advanced technologies from the West.

The importance and effectiveness of this type of

training has been demonstrated in China by the

success of the American-sponsored Dalian Management School. The Department of Commerce

(DOC) assisted the founding of that school.

Business, technical, and cultural training is

possibly the most effective form of assistance at

the moment. With highly educated work forces,

the societies of the former East Bloc have excellent prospects for successfully absorbing training

in Western-style management techniques and

market-related skills. Education and training programs in these countries have produced high rates

of success. For example, the U.S. director of a major Russian-American oil production joint venture

in Western Siberia reports that the company plans

to turn its operations over completely to Russian

managers within just five years. In almost all other

countries where he has worked, it has taken at least

one generation to train local personnel to manage

production themselves.3

3R(&~ E. T~rns~(Jm, president and general manager, (lecidental Petroleum t~f the CIS, persona! C(~nlnluniCati(Jn, N(~venl~r 1993.
180 I Fueling Reform: Energy Technologies for the Former East Bloc

Furthermore, such programs are traditional activities for U.S. government agencies, especially

AID and the Peace Corps, and can directly support

all five goals discussed in the previous section.

Throughout the former East Bloc, these activities

fill avoid that the private sector cannot adequately

address. Finally, educational and training programs are inexpensive and have demonstrated

high cost-effectiveness.

It is important to ensure that these programs are

well defined, tightly focused, and closely supervised. They can have substantial long-term impact

if they are result-oriented (teaching appropriate

and measurable skills) and targeted toward countries or firms making significant progress in reform. Training can occur in the United States for

intensive sessions at universities and industrial facilities. But for maximum effectiveness, the bulk

of the programs should involve sending U.S.

trainers to the region to teach large groups and to

train local residents to teach the skills themselves.

Not only do such programs develop desperately

needed expertise, they spread the use of Engl ish as

the international language, a major advantage for

Americans involved in international activities,

and will create personal and institutional ties.

The costs involved would depend on the extent

of the program. The need is almost unlimited.

However, a series of short courses for enterprise

managers could have significant near-term impact

for several million dollars additional. AID or

DOC could fund these programs.

Energy Efficiency

Energy efficiency has been discussed previously, but it is so central to economic revitalization

that it is worth revisiting. Minimizing costs by reducing labor, materials, energy, and capital needs

is basic to a free market. Since energy is a major

cost in these energy-intensive economies, a focus

on efficiency provides a compelling demonstration of free market advantages as well as substantial, immediate economic benefits. Since

improvements can be implemented quickly, efficiency programs can also provide very rapid returns, improving the energy balance and

enhancing Western credibility at a time of great

skepticism about reform.

Increased efficiency is also vital to maintaining

and expanding export earnings. In Russia, oil and

gas exports currently account for more than 80

percent of convertible currency earnings-money

that is critical to Russia’s economic transition.

However, production continues to fall and, given

the normal time lag in bringing major projects on

line, is not expected to revive significantly for several years. In the short- to medium-term, the

amount of oil and gas available for export will

therefore depend on the amount freed up by reducing waste. The World Bank has estimated that reforms in domestic pricing and taxation in Russia

could produce additional oil exports worth $11

billion in the first year alone,4 much more than is

likely to result from increased production.

As discussed in the OTA energy efficiency report, options for helping achieve efficiency include: policy assistance, technical assistance

(including demonstrations), and other programs

designed to provide information about opportunities and incentives to save energy; and material assistance to support the purchase of equipment. In

addition, improved U.S. government agency

coordination and increased attention by the MDBs

are important.

AID has hired contractors to perform energy

audits and recommend improvements. It also supports (through DOE) energy efficiency centers in

Poland, the Czech Republic, Russia, and Bulgaria. In some cases, it has helped retrofit facilities

with energy-saving equipment. Retrofits that prod~ World Bank, Ru~~lan Ec~n~mi~ Reform (Washington, DC: September, 1992), p. 183. Given the fall in world oil prices since We World

Bank made this estimate in 1992, the present value of these incremental exports would be somewhat less than the original$11 - billion estimate.

However, the amount would surely be quite large in any case+lwarflng the amount of money available from bilateral and multilateral funding

sources.
vide tangible demonstrations of the feasibility and

benefits of energy efficiency measures are particularly effective. All these activities could be increased. Expanding current energy efficiency

activities might require several million dollars.

Greater assistance with the implementation of improvements would cost much more, maybe up to

several tens of millions of dollars, but would yield

more tangible gains.

An approach to coordinate the efforts of several

agencies to implement energy efficiency improvements is discussed below under Program Management and Coordination.

Nuclear Safety and Proliferation Control

As discussed in chapter 4, the risk of a major nuclear disaster is significant. As the world’s leading

manufacturer and operator of nuclear powerplants, the United States has significant experience in helping reduce safety risks. In addition,

U.S. safety analyses and procedures developed after the accident at Three Mile Island are partially

relevant to Soviet nuclear technology.

Considerable assistance is already being extended in the nuclear safety area. For example,

NRC and DOE review and exchange information

on plant designs, operation, and regulation of FSU

powerplants. The United States is also providing

two training centers (in Russia and Ukraine)

equipped with reactor simulators.

Nuclear safety cooperation has been valuable

even at its present modest cost. An increase in

funding could substantially enhance the program’s efforts to improve practical impact by expanding efforts to improve safety equipment at

nuclear stations. Much higher levels of funding

would be justified if U.S. concern over nuclear

safety is very high. In this case, consideration

should be given to supporting the construction of

replacement power, since none of these countries

can easily afford to build alternative plants or supply fuel for them.

Chapter 8 U.S. Goals and Policy Options | 181

Assistance that focuses on physical improvements rather than information would be expensive. Billions of dollars are likely to be required to

upgrade safety to near Western levels or to replace

the riskiest plants. Western European countries

and Japan would share much of this burden.

Proliferation control will involve two major

areas: safeguarding the nuclear materials from

dismantled weapons and reducing the chance that

expertise in weapons design and manufacture will

become available to other countries or terrorist

groups. The former is the subject of an earlier

OTA reports and is beyond the scope of this report.

The latter is relevant to civilian nuclear power because a constructive way to employ nuclear weapons experts is in analyzing and improving nuclear

reactor safety, or in nuclear power R&D. For example, U.S.-Russian collaboration on gas cooled

reactors could greatly speed progress and reduce

design and testing costs.

Assistance to Russia and Ukraine to establish

institutions for R&D has been offered. The Russian center was initiated in December 1993 by

presidential promulgation, but the Ukrainian Parliament has not yet ratified the agreement. Pending full operation, DOE could be encouraged to

seek joint R&D projects and other stabilizing activities.

Environmental Information and Assistance

Major improvements will be required simply to

reduce current pollution that is contributing to the

heavy contamination of the last several decades,

as discussed in chapter 5. Environmental degradation has damaged human health and economic

productivity in former East Bloc countries. The

United States has pioneered pollution control

measures and regulation, and has the world’s best

technology in many areas. U.S. equipment and expertise are particularly important for: preventing

environmental damage by oil and gas production

in the Arctic and offshore; coal mine runoff and

5 U.S. Congress, OffIce of Technology Assessment, Dismantling the Bomb and Managing the Nuclear Materials, OTA-O-572 (Washington, DC: U.S. Government Rinting OffIce, September 1993).
182 I Fueling Reform: Energy Technologies for the Former East Bloc

Russian fusion test equipment. Fusion R&D has benefited

from U.S. -Russian cooperation,

reclamation; coal cleaning; and control of particulate, sulfur dioxide, and nitrogen oxides.

A variety of U.S. programs provide environmental information, technical assistance, and financial assistance. The latter addresses the major

problem—lack of investment funds—which is especially critical since few environmental projects

are directly self-supporting. Several initiatives

funded by AID, EPA, and DOE contribute to environmental projects, but generally on a relatively

small scale. Since some activities lead to sales of

U.S. equipment, it is likely that increased financial assistance would benefit U.S. enterprises.

It is important to assure that environmental expertise and enforcement are in place before major

new energy facilities are constructed. Training, information, and policy programs could be usefully

augmented for this purpose.

Increasing the flow of information would not

be expensive. Another million dollars per year

would pay for significant activities. Assistance in

actual improvements in pollution control would

be much more costly because help is needed almost everywhere. If such help is profferred on a

wider scale, it will be important to select appropriate projects (e.g., control of air pollution sources

that affect human health and for which American

expertise is particularly appropriate.)

Specific Technology Transfer Programs

The following programs involve transfer of

American technology and expertise to specific

areas of the energy and environment sector. Each

of the programs relies heavily on technical training, which is intrinsic to technology transfer. The

skills of engineers and workers must be upgraded

to manage modern equipment and systems. Although the highly educated residents of former

East Bloc countries have shown great aptitude in

learning new skills, technical training (other than

that accompanying sales) is not likely to occur

rapidly without assistance.

The Utility Partnership Program (UPP) enables U.S. utilities to transfer their expertise directly to their counterparts in the former East

Bloc. It pays expenses for travel and seminars.

The program also allows U.S. utilities to learn of

new techniques and approaches. This program has

been instrumental in helping Central European

utilities make the transition to market economies

(as discussed inch. 4). Expansion of the program

to the FSU is too recent to have seen such results.

So far, the contacts have led to at least one contract

for the U.S. partner to implement some of its recommendations.

However, some U.S. partners are finding that

the demands on their time, which are not covered

by the program, are getting too great to be justified

before their public utility commissions. Additional funding of several million dollars would permit

an increased level of activity, such as more extensive training. To some extent, AID has opened the

door to greater funding of this program, but participants must bid competitively on specific proj-
Chapter 8 U.S. Goals and Policy Options | 183

ects, a cumbersome and uncertain process.

Expanding the scope of the UPP would increase

the transfer of some very useful technology, at relatively nominal cost.

Powerplant renovations are necessary because a large fraction of the generating capacity is

old and dilapidated. Major retrofits involving new

combustion technology with modem operational

and emissions controls should result in greater efficiency and less pollution, as discussed in chapter

4. As with clean-coal technology, discussed below, none of these countries can afford on their

own to do the work as rapidly as needed. Unlike

investments for pollution control, powerplant renovation can be self-supporting, but few projects

are likely to occur over the next several years without assistance.

Clean coal technologies (discussed in chs. 3

and 4) will be essential because many of these

countries have no choice but to continue heavy reliance on coal. The current demonstration project

in Poland is now undergoing tests. This project

has installed flue-gas desulfurization (FGD) and

other modernizations on two small coal-fired boilers. The total cost is about $12 million, about twothirds of which is funded by DOE.

Although the project is a small one, the potential for American business is huge. Assuming the

tests prove out and such equipment is installed on

all boilers, the market in Poland alone could

amount to $3.6 billion.6 However, neither Poland

nor any of the other coal-dependent countries can

afford such an investment for cleaner air, no matter how great the indirect benefits (e.g., improved

public health) may be. Foreign aid (including cost

sharing) will greatly speed the adoption of such

equipment, much of which can be supplied by

U.S. companies.

Continued demonstrations of other new

technologies will also open the door for major

U.S. exports and combat some very serious environmental problems. FGD will require further

demonstrations in other countries, especially if

different types of coal are to be used. Technologies

such as fluidized-bed combustion will also need

demonstration to achieve significant market penetration. Total costs of an expanded program

would depend on the level of expansion. Tens of

millions of dollars could easily be used between

demonstrations and export financing.

Coal mine safety has been sadly neglected in

the entire region, and miners have paid a heavy

price, as noted in chapter 3. AID has supported assistance through the United Mine Workers and the

National Coal Association to improve conditions.

Partners are sharing their expertise in reducing accidents. Equipment such as methane detectors (to

prevent explosions) has also been delivered.

This program is primarily a humanitarian gesture to a sector that has been badly exploited. And

although it has less potential to produce additional

business for U.S. companies than other programs

discussed here, the program will help a key sector

operate more efficiently. Even an expanded program would entail only modest costs. Nevertheless, policy makers should closely scrutinize coal

mine safety programs to ensure that they fulfill

these humanitarian and efficiency related goals

and not unwittingly prolong the operation of

mines that should more properly be closed.

Energy Research and Development

R&D, discussed in chapters 3 and 4, can bring

mutual benefits. Russia has considerable R&D

expertise that can be constructively employed in

projects that produce results useful for the United

States. The Russian focus on pure science dovetails with the U.S. strength in applied engineering

and commercialization. For example, Russia can

contribute significantly to R&D programs on flywheels, turbines, high voltage transmission and

cogeneration.

6 me $ ] z ~ll]ion IS for two 50 MW ~)l]ers. Polmd has ~0,)()() MW of Coal.fimd capacity. Some of this capacity wit] be replaced, not modified, but new units will also need pollution control equipment.
184 I Fueling Reform: Energy Technologies for the Former East Bloc

R&D programs could provide forums for the

exchange of R&D information and fruitful interchange of personnel. This area could attract support from a range of donors—bilateral and

multilateral, foundations, nongovernmental organizations (NGOs), and some industries hoping to

stimulate future sales through the contacts developed as well as with new products.

Some R&D institutions are already planned or

in existence; for example, a U.S.-Russian Joint

committee established under the U.S.-Russian

Federation Framework Agreement on Scientific

and Technical cooperation in the Field of Fuel and

Energy, and an International Science and Technical Center headquartered in Moscow. Ways of

augmenting their programs, activities, and participants could be investigated. Ultimately, cooperative R&D should be profitable, but startup costs

could be significant.

Problems in Program Execution

AID created its assistance programs for the former

East Bloc in just a very few years, yet it selected

quite appropriate energy and environmental topics. For this, AID deserves commendation. However, the execution of the program leaves more to

be desired.7 As noted in the OTA energy efficiency report, procurement is very lengthy and costly

and discourages small businesses. Current employees and contractors have been used despite a

lack of knowledge of the region or of the ways in

which it differs from developing countries. Some

of this was inevitable because of the speed with

which the program was created, but AID could be

encouraged to employ regional experts whenever

possible and to recognize that its mission in the

former East Bloc differs fundamentally from its

activities in less developed countries. Congress

could require AID to document the qualifications

of the people involved in the programs, especially

those in decisionmaking positions. Congress also

could consider lifting the hiring ceiling at AID if

necessary.

Another complaint (and not just about AID)

has been about the number of consultants proffering inappropriate advice while offering no tangible help, thus damaging American credibility.

These visits can interfere with work without offering compensating advantages. Focusing assistance on projects that will provide visible benefits

to the recipients will improve impressions of U.S.

involvement.

More attention can be paid to widening the

benefits to U.S. business of development assistance programs. AID’s missions are often in touch

with potential customers, and the contacts can

produce information that leads to additional business for U.S. companies. Thus, the net cost to this

country of the assistance program is less than the

appropriated funds. However, U.S. firms sometimes find AID unresponsive and bureaucratic.

Congressional initiatives may be necessary to

make business promotion an official function.

Perhaps AID could work more closely with the

Foreign and Commercial Service (FCS, part of

DOC).

| Export Promotion

From the beginning, the private sector has been

recognized as the major player in rejuvenating former East Bloc energy systems, and the promotion

of energy-related products and services exports

has been a fundamental goal of U.S. policy. Modernization of the energy sector is essential for economic health and good business for U.S

companies and workers.

The United States is highly competitive in a

wide range of energy and environmental technologies. Table 8-4 lists some of the areas where U.S.

technology is especially competitive. These products and services should find markets if the conditions are right. Often, however, support by the

7Va~ou~ ~roP)~al~ have ~n made t. revamp the entire foreign aid program. Congress is now considering the Administration’s rectJmmendations.

.
Chapter 8 U.S. Goals and Policy Options 185

Oil and gas

Exploration—seismic analysis, deep drilling, deep water & Arctic

Production—reservoir engineering, workovers, stimulation

Gas pipeline compressors and control equipment

Environmental protection

Refining

Spill cleanup

Coal

Coal cleaning

Fluidized-bed combustion

Gasification/combined cycle

Nuclear

Control systems

Safety equipment

Electric power

Advanced generation

Integrated resource planning

Energy efficiency

Control systems

Environment

Monitoring equipment

Pollution control (SOX and particulate at powerplants, refineries etc.)

Reclamation and acid mine drainage

SOURCE U S Congress, Off Ice of Technology Assessment, 1994

U.S. government is required. The main elements

of export promotion are well known: financing,

information procurement and dissemination to industry, and active trade promotion policy. In the

former East Bloc, U.S. companies have been at a

disadvantage because Japan and most countries of

Western Europe do more to support their exporters. U.S. export promotion programs are discussed in chapter 7.

Financing

Few customers have the money to pay for the

Western goods and services they need, particularly in the FSU. Hence financing is critical for maximizing exports. In many cases, private financing

is inadequate because of the risk or if foreign governments provide subsidies. U.S. government financing is usually provided in the form of loan

guarantees. The major policy issues concern the

level of funding for export credits and the extent to

which export financing can be used to leverage reform.

Congress has approved $2.5 billion in foreign

aid for the FSU, much of which will be channeled

through Eximbank and OPIC to involve American companies directly. These funds serve several

purposes: to provide FSU countries with the capital needed for crucial energy-related imports, to

provide financing for American exports, and, to

some extent, to provide incentives for firms and

governments to engage in economic reform. Eximbank’s Framework Agreement (see ch. 7) is one

of two main financing instruments in the overall

program and is the major vehicle for financing exports of American oil and gas equipment to the

FSU.
186 I Fueling Reform: Energy Technologies for the Former East Bloc

However, financing increased exports to the

FSU has been difficult (even for bilateral and multilateral credit agencies) because of the high levels

of political and economic instability. In addition,

Russia has ambiguous feelings about foreign involvement, especially in the oil and gas industry,

and even more particularly if conditions are attached. Although U.S. export-credit agencies and

the multilateral banks have tried to make loans

contingent on progress toward economic reform,

it has been extremely difficult in practice to

achieve conditionality.

These programs have forced U.S. export-credit

agencies to fulfill missions for which they were

not designed. Increased exports to Russia are a

U.S. policy goal even though the Russian financial situation does not warrant the loans necessary

to support them. As a result, Eximbank is accepting loans for Russia under conditions that it would

reject for other countries.

Eximbank’s traditional mission has been to finance exports, especially those that are threatened

by subsidized financing from other countries or

are too risky for commercial lenders. It is not a foreign aid agency, yet it has been asked to expedite

loans to Russia beyond its customary practices.

This has put a strain on the bank’s staff and forced

it to work in areas in which it has little experience.

Moreover, the financial costs of lending to highrisk countries may deprive Eximbank of opportunities to lend in other countries to enterprises that

are less risky and promise greater immediate economic benefit to the United States. Even other

countries of the FSU, such as Kazakhstan, may

present fewer risks than Russia, but they are being

neglected.

U.S. economic and political priorities will almost certainly dictate continued support for largescale export credit programs because they provide

great potential for growth and reform. However,

Congress should be aware of the explicit financial

costs of export-credit programs for the former

East Bloc. If too many risky loans fail, increased

subsidies will be required.

It is possible that the volume and impact of the

transactions resulting from the Eximbank Framework Agreement will be considerably smaller

than anticipated, at least over the next year or so.

To begin with, the mechanism for accessing these

loans is complex, highly information-intensive,

and time-consuming. For projects based on revenues from increased production of oil, a duly authorized expert must visit the site of the proposed

project, confirm the technical feasibility of the

project, and make an estimate of the additional oil

that could be produced through the use of the new

imported equipment. Proceeds from the sale of

this oil support the escrow account from which the

Eximbank loan is repaid. The near certainty of serious disagreements among all parties over baseline production estimates is liable to slow the

process further.

In addition, interest on the part of the Russian

production associations is reported to be less than

anticipated, largely because they are obliged to go

through the Ministry of Fuel and Energy to apply

for loans. That complication may deter some

associations from participating in the Eximbank

framework agreement. In addition, the minimum

loan for consideration is $25 million, a large sum

in relation to the cost of some of the items of

equipment such as special drills that are most likely to be in demand. Eximbank has suggested that

this minimum requirement could be met by combining several companies in one loan application,

but this adds an additional layer of complexity to

the already cumbersome system.

Additional production generated by the deals

may well be smaller than analysts had previously

anticipated, for two reasons. First, although the

framework agreement applies to all “incremental”

production—including green fields and rehabilitation projects—the program is predicated on the

idea that a speedy infusion of capital can produce a

significant short-term increase in production

through rehabilitation of many of the 30,000 wells

that currently stand idle. However, recent experience suggests that relatively few of these wells

(between 5,000 and 8,000) are realistic candidates

for rehabilitation at present world oil prices.

Second, the focus of the agreement—reflecting

opinion current at the time the agreement was being conceptualized—is the provision of technology. Observers of the Russian oil scene now see the
Chapter 8 U.S. Goals and Policy Options I 187

institutional and policy environment, rather than

technology, as the major factor behind the failure

of the Russian oil sector. However, the Eximbank

agreement does not impose any conditions with

regard to policy reform.8 Eximbank’s mission, after all, is to promote U.S. exports rather than Russian reform.

Nevertheless, the framework agreement is an

enterprising and imaginative endeavor to provide

better loan security and a much larger potential

market than any of the alternatives. The first transaction under the Oil and Gas Agreement was announced in early 1994. It provides $245 million in

loan guarantees for Permneft, a Russian oil production association, to assist in rehabilitating oil

fields.

In addition to direct financing, U.S. programs

include feasibility studies. These studies have

been valuable in promoting U.S. exports. The

U.S. Trade and Development Agency (TDA) has

won many plaudits from industry for its projects,

which frequently lead to contracts much larger

than the cost of the study. AID has also sponsored

feasibility studies that have proved fruitful. This is

an area that could usefully be expanded, benefiting both development and American exports.

Small companies have reported difficulty in competing for TDA studies because larger companies

often bid below costs to position themselves for

contracts later. Special programs or procedures in

qualifying might allow small companies to expand their foreign work. Alternatively, the Small

Business Administration (SBA), which now is essentially not involved in the region, could be directed to start such a program. The Overseas

Private Investment Corp. (OPIC) also offers limited financial support for feasibility studies, but if

the company secures any contracts as a result, it

must repay OPIC’s contribution. These conditions greatly limit OPIC’s activities.

Analysts in the oil equipment and supply industry and at DOC advocate a significant expansion of U.S. credit promotions through Eximbank,

OPIC, and TDA. They argue that U.S. programs,

such as Eximbank, are too conservative in their

activities—that the low levels of default on Eximbank loans and OPIC investment insurance prove

that these agencies are not promoting American

exports aggressively enough. According to this

view, American firms will have a unique opportunity over the next few years to establish strong

positions in markets just being opened to them if

the U.S. government provides credits for the first,

inherently risky projects.

Finally, trade promotion programs have a strategic dimension, especially in the former East

Bloc. Even if economic returns are less than optimal, U.S. programs demonstrate a commitment to

the region in its time of crisis. U.S. projects also

support and encourage those forces seeking to

open long-closed societies to the outside world.

Further, increased Western contact provides a positive and accessible example of a functioning capitalist-democratic society.

Conditionality

Virtually all bilateral and multilateral aid embodies elements of conditionality, which refers to

conditions a recipient is required to meet, over and

above normal agreements on repayment schedules. For the recipient country, conditionality is

g~e W{)rld Bank granted Russia a Waiver of i[s standard “negative pledge” pr(wisi(m in order to allow implementation of the Eximbank

Framework Agreement. The negative pledge requires that borrowing countries give the Bank a first and undiluted lien on all public assets and

promise not to use those assets against credits received from other s(mrces. In additi(m, they must have in place a program of structural refom~,

including a comprehensive set of pol icy refomls to promote” privatizati(m and a n]acr~)ec(monlic program that is satisfact(wy to the W(wld Bank.

According to the Bank, the negative pledge is a major reas(m why its txm~wing costs are so low, enabling it to provide otherwise unsecured

loans to the world’s neediest countries. Thus the waiver could reduce incentive for reform if it encourages Eximbank rather than World Bank

loans. The waiver also could elicit hostility from developing c(mntnes that have made great sacrifices in austerity programs mandated by the

World Bank and the lntemati(mal Mtmetary Fund (IMF). S(mle c(wntnes ctwld seize (m this example to resist further austerity measures, thus

undermining World Bank and IMF efforts in the developing world.
188 I Fueling Reform: Energy Technologies for the Former East Bloc

part of the price that must be paid to gain access to

funds that otherwise might not be available.

Conditionality gives the donor agency or government influence over policy in the recipient country. In general terms, the larger the financial

transaction, the greater the potential for conditionality.

In the former East Bloc energy sector, conditionality has applied to MDB loans and bilateral

development assistance programs. Such conditionality has usually required the recipient country

to institute a program of energy price increases,

market-oriented reforms, and sectoral restructuring. Though conditionality has always been a

prominent feature of MDB lending activities in

developing countries, it has received new focus in

MDB programs for the former East Bloc as a way

to overcome major obstacles to energy sector reform and development.

Expanding conditionality to bilateral export

credit programs could also be beneficial. At present, the United States supports conditionality in

MDB and U.S. Agency for International Development (AID) lending programs, but not in programs for export or investment promotion. There

are good reasons for this difference, since the purpose of OPIC and Eximbank is to support the U.S.

private sector, not to reform the Russian energy

sector.

However, Eximbank programs represent a major part of U.S. financial assistance to Russia, and

conditioned credit mechanisms could be the most

effective means of forcing adoption of necessary

price and structural reforms. To make the conditions effective and to articulate U.S. policy in the

clearest light, Congress could direct the Eximbank to enforce conditionality more strongly and

to deny export credits and development assistance

to those former East Bloc countries that refuse to

accept conditions.

Central European countries are already open to

foreign investment or committed to reform, but

the situation is different in most of the FSU.

There, Congress may be able to help U.S. firms

get a “foot in the door” and promote political-economic reform by directing U.S. export credit

agencies to assist only those enterprises that are

truly privatized (e.g., with a majority of shares

owned by private investors, not by the state). By

rewarding companies that have converted to private ownership and made politically difficult decisions to welcome foreign investors, the U.S.

government can encourage the type of fundamental reforms that are so sorely needed while also

promoting the needs of American business.

There are also solid arguments in favor of a substantial export-credit program for the FSU energy

sector even without imposing conditions to promote reform. U.S. exports of equipment and services help increase oil and gas production, which

is necessary for economic survival, especially in

the near-term. In addition, most observers agree

that American credit programs should be large and

versatile enough to allow U.S. firms to compete

against their foreign rivals. Western European

countries and Japan actively assist their companies through financing programs designed to support their ability to sell goods and services abroad.

Insisting on conditionality will slow the pace of

financing. Much of the impetus for rapidly expanding assistance and export-credit programs

has come from a sense of the need for providing

help rapidly. There is a clear tradeoff here between

speed and effectiveness, and the relative merits are

difficult to predict.

Business Information

Government agencies can play a key role in promoting U.S. business by notifying American

companies of business opportunities and organizing trade shows and conferences to introduce

American products to potential customers. Several DOC activities have received favorable reactions from business, including the FCS and the

American Business Centers (funded by AID).9

9 Olga Bilyk, Continuum International Inc., “U.S. Government Export Promotional Efforts,” OTA contractor report, January 1994.
Chapter 8 U.S. Goals and Policy Options | 189

Both programs could be expanded significantly,

especially in the FSU. The Business Information

Service for the Newly Independent States (BISNIS) and the Eastern Europe Business Information Center (EEBIC), located in Washington, are

very useful in helping U.S. companies enter the

market and in keeping them informed about business conditions in the region.

Neither DOE nor EPA appears yet to have had

great impact on promoting U.S. business, especially in the FSU, despite activities such as trade

shows and the Coal and Technology Export program. 10 Low program funding and lack of financing capability may be the reasons. Combining the

activities of these two agencies and giving them

funding at least for feasibility studies could

strengthen them. The Federal International Energy Trade and Development Opportunities Program may be a prototype.

Small businesses are particularly in need of information. Many are not even aware of the government help that is available. Those that have

marketed in the region have often become interested because of ethnic heritage connections, The

SBA apparently has not been involved in the region. Initiating a program in the SBA could be a

significant asset.

U.S. Policy Involvement

U.S. diplomatic representatives also can have a

significant impact on the level of exports. U.S.

embassies support U.S. firms, but not to the same

degree as other countries. Congress could direct

DOS to make such support a major part of U.S.

policy, possibly combined with an upgrading of

status for the FCS. A related step could be to enlarge the office of the U.S. Trade Representative.

U.S. policies not aimed at exports still can effect them. In particular, Congress might also reconsider the ban on assistance to Azerbaijan. 11

This ban was imposed because of Azerbaijan’s

blockade of Armenia, arising from the war over

Nagorno-Karabakh, the Armenian enclave in Azerbaijan. Armenian armies from Nagorno-Karabakh, apparently with backing from Armenia,

have conquered large areas of Azerbaijan outside

the enclave. Armenian-Azeri relations have been

difficult and often violent in the past, and this

study has not attempted to assign blame for the

current situation. However, the ban has, in effect,

given U.S. backing to one of the antagonists. The

ban is greatly resented in Azerbaijan because the

Azeris see themselves as victims of Armenian aggression. It has significantly hurt American business in Azerbaijan, a major producer of oil. Other

countries have not joined in the ban, and their oil

companies are enjoying the lack of competition

from the United States.

| Multilateral Development Banks

The MDBs are by far the largest contributors of

public finance to the energy sectors of the former

East Bloc. The World Bank has made loans of $1.7

billion to countries of Central Europe, mainly Poland. The European Bank for Reconstruction and

Development (EBRD) has loaned an additional

$225 million. Russia has received $600 million

from the World Bank with an additional $600 million under review and $250 million from the

EBRD. MDB lending is important because of its

size and also because of the leveraging effect of its

lending activities, which give rise to as much as

five or six times the value of the original contribution.

The World Bank has traditionally (in its developing country programs) concentrated on largescale conventional energy supply projects,

notably centralized power generation and hydroelectric projects. Few energy projects have been

devoted to efficiency or the development of smaller scale renewable energy resources even where

such projects might be more economical and appropriate. This criticism, made originally in the

context of the Bank’s developing country lending

10 Ibid., p. 35.

I I ~blic Law 102-5 I I, section 907.
190 I Fueling Reform: Energy Technologies for the Former East Bloc

Control center in the Dukovany Nuclear Power Plant, Czech

Republic. This site has 4 WER 440-213 reactors.

program, has again surfaced with regard to its new

lending activities in the former East Bloc, where

the loans are still heavily oriented toward the power sector and district heating in Central Europe,

and oil in Russia. Though these loans may result

in improved efficiency in the supply system, there

are few MDB activities directed at end-use efficiency, where the greatest gains are available.

There are several reasons for this neglect. Energy efficiency projects are complex and harder to

put into a project format for lending. The benefits

are harder to estimate and incorporate into energy

planning. Past emphasis in favor of traditional

supply-side projects is difficult to change. Moreover, there is no clear organized center of expertise

in the World Bank to support implementation of

energy efficiency projects.

In recognition of the MDBs’ role in energy

lending, Congress has taken an active interest in

their activities throughout the world, with particular reference to the World Bank developing country program. Congress has instructed the U.S.

Executive Directors to the MDBs to take into account end-use energy efficiency, renewable energy, and environmental impacts in making

decisions about new energy projects. Congress

has also addressed the issue of bundling, or combining small energy projects into large projects,

on the financial scale usually handled by the large

development banks. In addition, Congress has

promoted increased assistance and support for

NGOs in MDB activities.

Although programs for the former East Bloc

differ considerably from those for the developing

countries—the World Bank has made no largescale oil loans for developing countries—these

same congressional directives could be applied to

the Bank’s new activities in the former East Bloc.

The deteriorating energy situation in Russia particularly, but also in the other countries of the region, gives a new urgency to energy conservation,

and Congress could reiterate its insistence on

MDB attention to energy efficiency in this new

context.

The United States has considerable leverage

over the MDBs, and could be more explicit and

consistent in its advocacy of MDB priorities. In

particular, if Congress decides that promoting

economic reform supersedes the goal of raising

short-term energy production (see section on

conditionality, above), one of the most important

things it could do would be to instruct the U.S.

MDB representatives to insist on stronger enforcement of conditionality on existing and future

loans. Although the MDBs have been successful

in achieving conditionality in Poland and other

areas of Central Europe, they have had less success in Russia. For example, in its $600-million

oil sector rehabilitation loan to Russia, the World

Bank failed to secure a timetable for raising domestic Russian energy prices to world market levels. Instead, it received a promise that domestic

prices for oil and oil products would rise only

slightly faster than inflation through May 1994.

After that date, the Russians have agreed only to a

subsequent gradual approach to the level of average European prices.

Congress could bolster other American reform

goals by instructing MDB representatives to ensure that small projects and business are accommodated in the lending program and that priority

is placed on energy efficiency projects.

| Investment Promotion

The rationales for supporting exports and foreign

investment are different. Investment helps build

the industrial infrastructure of the receiving country, and it also can be good for the United States,
Chapter 8 U.S. Goals and Policy Options | 191

even though it does not result in additional jobs

here. It helps U.S. companies grow and become

low-cost producers. It makes available new resources and products. And it helps accomplish

what the U.S. foreign aid program is trying to

do-assist in development.

Central Europe, especially Hungary, has been

successful in attracting investment. Relatively

little investment has yet occurred in the FSU,

largely because of the unstable political situation

and the ambiguous feeling (or even xenophobia)

of many Russians toward foreign investment. Various levels of government have erected a formidable array of hurdles, including high and uncertain

taxes, that confront the would-be investor. The

Russian oil industry, in particular, opposes foreign

participation in major oil production projects because of a strong sense that the domestic industry

needs only loans and some occasional technology.

Nevertheless, only the international oil companies have the financial resources necessary to increase Russian oil production.

Countering this opposition will be difficult. Patient diplomacy and gradual demonstration of the

benefits will be required to overcome longstanding suspicions of the West and reluctance to accept

foreign investment. Even where investment is

welcome, as in Kazakhstan, opposition from Russia may cause serious problems because transport

of oil exports across Russia is a geographic necessit y.

Russia has a strong penchant for using domestic equipment in the oil industry, even though it is

generally inferior to that of the West. It may be

useful to encourage joint ventures between equipment manufacturers in both countries as a way of

promoting modernization. DOE and DOC could

be instructed to play an introductory and facilitative role.

OPIC has been a major force for foreign investment through its insurance against political risk.

However, OPIC is limited to $50 million for oil

and gas projects, which is inadequate for large

projects. Raising the limit and adding to OPIC’s

resources would provide a significant asset to U.S.

activities.

Foreign investment in independent powerplants is also of interest to U.S. companies, but

only if the revenue streams are adequate. Since

controlled prices of electricity in the FSU frequently do not cover costs, no one wants to invest.

Encouragement of market reforms is essential for

this type of investment to grow.

| Program Management and Coordination

The task of reform and modernization in the former East Bloc dwarfs even the Marshall Plan. Although mostly free of war damage, industrial

facilities and infrastructure are crumbling. Worse

problems are the lack of market economy expertise among managers and decisionmakers, and the

mindset of much of the population, which is unaccustomed to personal initiative. Funding will not

be as generous as it was for the Marshall Plan, so

great care must be taken to assure that policies are

implemented with the maximum possible effectiveness.

Improvements are possible, in particular in the

coordination of the various agencies involved. It

is not always clear that the agencies communicate

well and support one another’s activities as effectively as possible. Congress could require more

active coordination through DOS or DOE in some

cases (possibly including nuclear safety) to ensure, for example, that assistance projects and export promotion support the highest national

priority objectives.

Extensive collaboration between agencies

could reveal new approaches, which may be needed for intractable issues. In particular, the promotion of price reform in Russia must be based on a

realistic appreciation of the problems involved

and the tools that are available. One approach

would be to combine higher prices with increased

efficiency in energy use so that total bills do not

rise, or at least increase less than the rise in prices.

To implement this approach the Russian government could announce that oil and perhaps gas

prices will be brought to world levels over a specified period, perhaps five years. Industrial facilities, central heating plants, power stations, and
192 I Fueling Reform: Energy Technologies for the Former East Bloc

other large energy consumers would be promised

their full energy quota at prices starting at the current level and rising over the five years. All fuel

not used would be bought back by the supplier at a

high fraction (perhaps 90 percent) of the world

price in hard currency and could then be exported.

As efficiency measures are implemented, a substantial revenue stream would be generated for the

user, who could use them for further efficiency

gains. Initial improvements could be financed by

the World Bank or EBRD, based on the future revenue. This approach would require new Russian

institutions such as energy service companies that

finance themselves through their share of the savings they secure for energy users, and an energy

efficiency equipment supply industry.

The U.S. role would entail close coordination

between:

DOS to negotiate the program with Moscow

and the MDBs;

DOE to supply energy-efficiency expertise;

AID to assist in institution building in Russia;

DOC to coordinate U.S. businesses and export

activities; and

Eximbank to finance large-scale efficiency exports.

This plan would address the major barriers to

greater efficiency: lack of incentive, lack of capital to pay for improvements, and lack of information on how to do it. However, several factors

could interfere. It is complex and would require

unusually close coordination in the United States

and in Russia. Corruption would also be a real

concern when money is flowing.

POLICY STRATEGY

This report has emphasized the importance of focusing policy to ensure that U.S. programs support the fundamental U.S. goals that were listed at

the start of this chapter. The options discussed

above fall into three groups of activities: maximizing the effectiveness of current U.S. programs; additional funding for effective programs;

and selecting priorities on near-term trade vs.

long-term reform. This section suggests how the

options discussed above can be combined as elements of a comprehensive strategy.

| Maximize the Effectiveness of U.S. Aid

and Trade Programs

Administration of U.S. programs is discussed in

the previous section and in chapter 7. Improving

program effectiveness is a low cost option that

should be considered whether or not any further

options are pursued. Thus it is the first element in

an overall strategy.

The following changes could greatly improve

the effectiveness of all U.S. activities and programs in all countries of the former East Bloc:

AID

■ Streamline and accelerate the grants and procurement process.

● Lift the hiring ceiling and require the agency

to hire more personnel with regional expertise.

■ Coordinate AID programs more closely with

DOC to ensure maximum benefit to U.S. business.

Eximbank, OPIC, TDA

● Increase operating budgets to:

a. Permit the hiring of personnel with regional

expertise.

b. Speed processing and improve monitoring of

credit, insurance, and other applications.

Commerce and State Departments

● Upgrade status of the FCS to ensure maximum coordination

diplomatic efforts.

DOE

● Provide more

grams.

between trade-promotion and

funding for international pro-

| Expand Effective Assistance Programs

Bilateral and multilateral development aid supports all U.S. goals simultaneously. Government

assistance is small compared to overall needs, but

it can play an important role in showing the way to

reform and modernization. The level of funding

allocated depends, of course, on the priority

accorded rejuvenation of the former East Bloc visa-vis other U.S. budgetary priorities. The contro-
Chapter 8 U.S. Goals and Policy Options | 193

versial aspects of assistance have to do with the

level of funding that is appropriate. This section

reviews areas that have been effective and could

usefully be expanded if more funds are made

available, As noted in the detailed programmatic

discussion above, almost any level of funding

could be well-spent because the needs are so great.

Selecting the level of assistance is the second element in an overall strategy.

Emphasize Government-to-Government

Policy Assistance

Under any scheme of priorities, it is important that

the U.S. government continue to engage intensively in a dialogue with former East Bloc countries about the nature and philosophy of economic

reform. The more Congress wants to promote economic transition, the more actively should U.S officials try to persuade local policy makers to take

the painful steps involved in economic transformation and help them design realistic reform

programs that meet the need to maintain domestic

political and social stability. As a first order of

priority, Congress can direct the U.S. government

to continue to exert influence on these countries

through policy advice provided through diplomatic channels and through contact between American officials and representatives of former East

Bloc countries. In the energy sector, DOE, NRC

and other agencies can expand visits in both directions, host extended training sessions, and provide

analysis of specific issues.

Expand Business anti Organizational Training

Regardless of whether a country has embarked on

a course of radical reform or has yet to take steps

toward economic transformation, Americansponsored training programs in business skills are

essential to promoting the idea of reform, supporting reform processes already under way, and making it easier for American energy-related firms to

conduct business. The more active Congress

wishes to be in promoting stability, modernization, reform, and U.S. business interests, the more

it should expand programs in this area.

Coal coring exploration rig, Kuznetz Basin, Kazakhstan

Expand Energy-Efficiency Programs

Energy efficiency remains one of the most important priorities in the energy-intensive economies

of the former East Bloc. Even in countries that

have not undertaken programs of systemic reform,

energy-efficiency projects can promote reform by

demonstrating that it is possible to cushion the effects of raising energy prices and introducing market-based economic relations.

Given this potential, U.S. policy makers might

redirect policy priorities away from investing

public sector funds in energy production projects

and toward improving the energy consuming sectors. Although capital needs for FSU exploration

and development will be great under any set of priorities, concentration by Western governments

and companies on projects to enhance efficiency

promise to be much more effective than projects to

increase production.
194 I Fueling Reform: Energy Technologies for the Former East Bloc

Expand Technical Assistance Programs

Technical assistance programs—through demonstration projects and other activities—prov ide access to technologies essential to short-term

stabilization and long-term modernization and

economic growth. Since U.S. firms are leaders in

several areas, an expansion of technical assistance

programs-consistent with an activist program of

U.S. policy—would provide benefits for U.S.

business. Priority projects as discussed in the previous section include:

● Coal and Electric Power Generation

a. Utility partnerships

b. Powerplant renovation and advanced generation

c. Clean coal demonstrations

d. Coal mine safety

 Nuclear Energy

a. Safety information and assistance

b. Funds for safety upgrades or replacement

power

■ Collaborative Energy Research and Development

a. Nuclear safety and R&D

| Select Priorities for Trade and

Development

In Central Europe, U.S.-funded export-credit and

training programs provide privatized and new enterprises with the finances and education needed

to establish themselves and build toward future

profitability. There, ample financing both encourages U.S. exports and reinforces reform.

However, in Russia and other countries of the

FSU (with the partial exception of Kazakhstan),

some U.S. and multilateral export-credit programs may, under some conditions, be counterproductive to domestic economic and political

reform by strengthening old, statist economic

mindsets and government structures. 12 Read y

availability of Western public sector credits and

guarantees helps Russia avoid resorting to much

larger but more burdensome private sources of

Western capital. In particular, this weakens the incentive for Russia to allow foreign oil exploration

and production companies greater freedom of operation, including direct investments. Western

public sector credits, if not made conditional on

aspects of reform, also weaken U.S. efforts to promote a long-term change in mindset from Communist, centrally planned economies toward

private enterprise. Even the staunchest proponents of reform in the FSU seem to prefer Western

public sector credits or loan guarantees to building

the types of legal structures and nurturing the economic climate needed to attract large-scale Western investment projects based on investment in

Russia itself.

This reluctance to seek large-scale Western private investment is also fueled by a deep suspicion

of foreigners—particularly by Russia, which exhibits a pervasive reluctance to give up control of

even a portion of its patrimony to Westerners.

American oil exploration and production companies say that the availability of World Bank loans

and the potential for credits under the Export-Import Bank (Eximbank) Framework Agreement

have helped create the perception among managers of Russian state-owned enterprises and private

firms that there is a pool of “easy money” available to finance new exploration and workover

projects, thus obviating the need to grant equity

stakes to potential Western investors.

The final element in an overall policy strategy

involves a relative] y controversial selection of priorities on U.S. exports, modernization, and reform. As has been noted, some goals conflict,

especially in countries that have not yet embarked

on a solid course of economic reform. Policies

must be tailored to each country or region to ensure their appropriateness and consistency.

The key question for Congress is the priority

accorded to promoting market reform and longterm sectoral modernization versus near-term economic stability and maximization of immediate

I z As iIIu~tm~ed ~k)ve, the ~co~ of U.S. ex~)rts may ultima[e]y be limited by local preferences and reform priorities which maY ‘ictate ‘he

purchase t}f domestic (wer imported goods, even in cases where the ec(momic advantages of purchasing American products are clear.
U.S. economic interests. It should be noted that

this is not a clear choice; promoting market reform

will lead to increased U.S. business, and near-term

stability is necessary for long-term reform. Rather, it is a matter of degree and emphasis. The most

important vehicle for expressing this policy preference is the conditionality provision of export

credits and insurance. The question rises most visibly when a potential recipient refuses (or ignores)

conditions attached to the financing of an otherwise viable project. That poses a dilemma for the

U.S government or MDB since the goals of reform

and modernization conflict.

The differing conditions among the former East

Bloc countries suggest two alternative approaches

for U.S. policy:

1. Support near-term economic stabilization

through expansion of energy production. This option seeks to support East Bloc countries by maximizing their energy output to provide foreign

exchange, regardless of their progress on economic reform. It also aggressively emphasizes U.S.

exports.

Policies: Expand export-credit and MDB programs to ensure that financing is not a major

constraint; make only minimal provisions for

conditionality and restrictions on loans. Higher

subsidies might be necessary for OPIC and Eximbank to cover increased losses on bad debt.

2. Support long-term energy sector modernization and systemic market reform. This approach

may entail further short-term declines in oil and

gas production in order to achieve long-term

gains.

Policies: Expand export-credit programs only

insofar as exports support reforms and can be effectively used. Impose maximal conditionality on

credits: export-credit and investment assistance

would go only to firms actively engaged in a real

transition to market functions.

Congress can capitalize on the importance of

export-credit programs for opening up markets

previously closed to American products. But ConChapter 8 U.S. Goals and Policy Options | 195

gress may wish to balance this policy against the

possible disincentives that such programs can

create for internal reforms and for opportunities

for U.S. investment in the FSU.

A balanced approach is appropriate for Poland,

the Czech Republic, and Hungary because their

progress toward economic reform makes it possible to promote both trade and reform simultaneously. This option may also be appropriate in

Kazakhstan. Although market reform has been

limited there, Kazakhstan is open to foreign investment and trade.

In other countries of the former East Bloc, the

choices are not so easy. Declining oil production is

a serious threat to Russia’s weak economy. Bolstering that economy may be essential for preventing social and political instability. The United

States has the technology and the resources to provide significant help. However, an overemphasis

on providing help is likely to interfere with the reforms that are essential for long-term economic

health.

CONCLUSION

Improved energy technology will be a critical factor in modernizing the economies of the former

East Bloc, and the transfer of energy technology

will be an important asset in achieving U.S. national goals. However, internal constraints and the

lack of capital in these countries will limit Western

investment and purchases of equipment and services. A strong and active U.S. government role is

necessary to expedite the transition to market

economies and democracy, and to assure that the

U.S. economy shares in the growth. The policy

options discussed above, if implemented skillfully and with adequate funding, can contribute very

significantly to the process. Congress will face the

issue of whether increased efforts are warranted in

light of other national priorities and uncertainties

over progress toward reform in Russia and other

countries of the former East Bloc.
A

ABB. See Asea Brown Boveria

Acid mine discharge, 115

Acid rain, 120

ADB. See Asian Development Bank

AID. See U.S. Agency for International

Development

Air pollution. See Pollution

AirPol. Inc., 92, 157

Ambient standards, 108n

Annealing, 87

Armenia, 13,57,74,78,80,89, 143, 146, 158, 159,

164, 189

Asea Brown Boveria, 92

Ash removal, 62

Asian Development Bank, 160

Assistance programs. See Development assistance

programs

Automated Eastern Europe and Newly Independent

States Information System, 167

Automobiles

emissions, 116-117, 124-125, 127

fuel efficiency, 36

ownership levels, 35, 38, 127n

Azerbaijan, 143, 146-148. See also Former Soviet

Union

conflict with Armenia, 13, 57, 143, 158, 160, 189

energy resources and production, 3, 24-26, 27,

29,40,47,53,54, 109, 110, 169, 175

B

Baghouse filters, 118

Baltics, 23,24,28,34,45,85, 168

EBRD projects, 164

SEED Act, 152

U.S. assistance programs, 153, 157-158

Belarus, 26,28,46,83, 120

Beneficiation. See Coal beneficiation

Biomass technology, 103-104

BISNIS. See Business Information Service for the

I ndex

Newly Independent States

Buildings sector

energy demand, 35

improving energy efficiency, 37-38

Bulgaria, 32,76,78,81,82,85, 123, 180

Business Information Service for the Newly Independent States, 167, 189

Byrd Amendment to the Trade Act of 1974,57

c

Capitalism, 147-148

Carbon monoxide, 111, 127

Cars. See Automobiles

Catalytic converters, 127

Catalytic cracking, 46-47

Catalytic reforming, 47

CEENERGY. See Central and Eastern Europe Network for Regional Energy

Central and Eastern Europe Network for Regional

Energy, 161

Central Europe

EBRD projects, 164

SEED Act, 152

U.S. assistance programs, 157-158

World Bank program, 161-162

Central Maine Power, 95

Central Vermont Public Service, 158

Centrist opposition, 140

CEZ. See Czech Power Co.

Chernobyl, 73,74,76,77,80,84,85, 87

Chernomyrdin, Viktor, 81, 140, 159

Clean coal. See Coal beneficiation

Clean Coal Technology Program, 68,70, 157

CMP. See Central Maine Power

CO. See Carbon monoxide

Coal

electric power industry needs, 91

environmental issues, 113-116

need for industry reform, 6-8, 63

reserves, 29-30

I 197
. —

198 I Fueling Reform: Energy technologies for the Former East Bloc

Coal beneficiation

Custom Coals Corporation project, 68-71

description, 62

electric power industry needs, 91

environmental issues, 115-116

potential for U.S. technology transfer, 62-63

for sulfur removal, 62, 122

technology transfer programs, 183

U.S. reform support, 7-8

Coal cleaning. See Coal beneficiation

Coal mining

declining coal production, 59-60

drilling rig, 66

industry, 58-59

potential for U.S. technology transfer, 61-62

reclamation, 108, 114, 116, 128

safety technology transfer, 183

technologies, 60-61

Coal Project, 7,62

Coal Sector Restructuring and Environment project,

162

Coalbed methane

description, 64-65

major resource countries, 31-32

potential for U.S. technology transfer, 66-67

technologies, 65-66

Cogeneration Privatization Project, 162

Combustion modification, 125

Commonwealth Edison Co., 157

Conditionality, 186-188, 190, 195

Cross-measure boreholes, 66

Custom Coals Corporation, 8,68-71

Cyclone furnaces, 117, 124

Czech Power Company, 80,90, 158

Czech Republic. See also Former Soviet Union,

134-135

Dukovany nuclear power plant, 190

energy resources and production, 7,23,29,31,

34,35,39,61,66, 100, 104

environmental problems and remedies, 107, 109,

114, 116, 118, 120, 123, 124, 125, 129

nuclear power, 8,32,76, 80, 81, 85, 86

reform programs, 2, 12,21,63,89,90, 132,

134-135, 142

status of the electric power sector, 90

surface mining, 114

Czechoslovakia

coal production, 30

reasons for division, 133n

D

Dalian Management School, 179

Decree 715,56

Demand-side management, 9,92-94, 157, 159. See

also energy efficiency

Desulfurization, 120, 122

Development assistance programs, 16-21,51,62,

75,98,99, 105, 132, 141, 173, 188, 189, 191-195

comparative levels of multilateral and bilateral

funding, 153

constraints on U.S. and multilateral programs,

153-154

European and Japanese programs, 165-166

exceptionally effective programs, 176-184

multilateral programs to assist former East Bloc

development, 160-165

nuclear safety assistance, 80-82,85,87

overview, 151-160

Directional drilling techniques, 43

Discovered oil resources, 24n

DOC. See U.S. Department of Commerce

DOE. See U.S. Department of Energy

Donets Basin, 114-115, 122

DOS. See U.S. Department of State

Dresser Industries, 67-68

Drilex Services, 43

Drilling technologies, 42-43

DSM. See Demand-side management

E

EAP. See Environmental Action Programme

East Bloc. See Central Europe; Former Soviet

Union; individual countries by name

Eastern Europe Utility Partnership Program, 21,94,

95,98, 157, 158, 182, 183, 194

Eastern European Business Information Center, 167

EBRD. See European Bank for Reconstruction and

Development

ECAs. See Export credit agencies

Economic issues

barriers to energy sector development, 150-151

and countries yet to reform, 13-14, 143-147

the culture of reform, 147-148

energy’s role, 23-24

overview, 131-132

problems common to all countries, 14-15

EEBIC. See Eastern European Business Information

Center

EIB. See European Investment Bank

EIPP. See Energy Industry Partnership Program

Electric power, 9,87-98

capacity and production, 88

company management, 94-95

efficiency of use, 37, 159

potential policy improvements, 98, 176-179, 191,

194
Index | 199

reverse technology transfer, 95-96

status of reforms, 90

technology needs, 91-96, 162, 167, 168

utility partnership program. See Eastern Europe

Utility Partnership Program

Electric Power Research Institute, 96

Electrostatic precipitators, 118

Emissions figures

nitrogen oxides, 125

particulate, 119

sulfur dioxide, 121

Energy agreements, 160

Energy efficiency, 2, 12, 14, 16, 18,20,24,34-38,

74,84,93,98, 157-160, 164-167, 175, 176, 180,

181, 190-193

environmental issues, 116-127

by sector, 34-35

Energy Industry Partnership Program, 94, 158-159

Energy Private Investment Support, 171

Energy research and development, 9, 16,21,83,96,

151, 181, 183-184, 194

Energy Resource Development Project, 162

Energy sector development, 149-153

Energy Sector Emergency Investment, 164

Energy supply. See also specific energy sources and

technologies by name

coal, 29-31,58-64

coalbed methane, 31-32, 64-67

natural gas, 27-29, 40-58

nuclear power, 32, 33,73-87

oil, 24-27,40-58

renewable energy, 32-34,98-106

Energy technologies. See Coal; Electric power; Nuclear power; Oil and natural gas; Renewable

energy

Enterprise funds, 170

Environmental Action Programme, 130

Environmental issues. See also Energy and environmental programs

energy production, processing, and transportation, 109-116

impact of fuel consumption, 116-127

information and assistance, 181-182

need for technology reform, 10-11

outlook for U.S. technology transfer, 127-130

regulatory framework, 108-109

scope of environmental problems, 107-108

Environmental Project, 160

Environmental technology options

coal and shale mines, 116-

emissions control, 127

nitrogen oxides, 125-126

particulate, 118

processing oil and gas, 112

production of oil and gas, 110-111

sulfur dioxide emission, 121-124

transporting oil and gas, 113

EPA. See U.S. Environmental Protection Agency

Equity-sharing agreements, 53

ESPs. See Electrostatic precipitators

Estonia, 10, 11, 103

EU. See European Union

European Bank for Reconstruction and

Development

Custom Coals Corporation project, 70

energy project funding, 18, 20, 51, 56, 82, 153,

155, 159, 160, 162, 164, 165, 189-190, 192

European Community. See European Union

European Energy Charter, 160, 161

European Investment Bank, 165

European Union

assistance programs, 165-166

funding for nuclear safety assistance, 81

regulatory framework for environmental issues,

108-109

trade and investment programs, 170-171

Eximbank. See Export-Import Bank of the United

States

Eximbank Framework Agreement, 51, 154, 169,

185-187, 187n, 194

Exploration process, 41-42

Export credit agencies, 170

Export Enhancement Act of 1992, 166, 168

Export-Import Bank Act of 1945

Stevenson Amendment, 57 

Export-Import Bank of the United States

assistance programs, 151-152

financing export promotion, 168-169, 186

maximizing effectiveness of programs, 192

opposition to Temelin Nuclear Powerplant

funding, 85, 87

Exports

financing, 168-170

promotion, 184-189

F

FBC. See Fluidized-bed combustion

Federal Energy Regulatory Commission, 179

Federal International Energy Trade and Development Opportunities program, 189

FGD. See Flue-gas desulfurization

Flue-gas desulfurization, 123

Fluidized-bed combustion, 91, 122

Foreign Appropriations Act of 1993, 152

Foreign investment, 51-54

Former Soviet Union. See also individual countries

by name

assistance programs, 158-160

coal industry, 6-8
200 I Fueling Reform: Energy Technologies for the Former East Bloc

coal production, 30

EBRD projects, 164-165

electric power industry, 9

FREEDOM Support Act, 152

joint oil and gas ventures, 67-68

natural gas production, 28

nuclear energy industry, 8-9

oil and gas industry, 3-6

oil production, 26

reasons for energy reform, 1-3

renewable energy technology, 9-10

republics involved, ln, 4-5

technology interchange with EPRI, 96

World Bank program, 162-163

Fossil fuel technologies. See Coal beneficiation;

Coal mining; Coalbed methane; Oil and natural

gas

Framework Convention on Climate Change, 165n

Freedom for Russia and Emerging Eurasian Democracies and Open Markets Support Act of 1992, 152

FREEDOM Support Act. See Freedom for Russia

and Emerging Eurasian Democracies and Open

Markets Support Act of 1992

FSU. See Former Soviet Union

G

G-7. See Group of 7 Industrialized Nations

G-24. See Group of 24 Nations

Gas turbines, 91-92

Gazprom

compressor manufacturing, 46

formation of, 50

GEF. See Global Environment Facility

Geothermal energy, 102-103

Global Environment Facility, 165

Gore-Chernomyrdin Commission, 81,159-160

Group of 7 Industrialized Nations, 51,81-82

Group of 24 Nations, 87

H

Hard Coal Agency, 63

HDR. See Hot dry rock technology

Heat Supply Restructuring and Conservation Project, 162, 164

HEU. See Highly enriched uranium

Highly enriched uranium, 82

Hot dry rock technology, 102-103

Houston Lighting and Power Company, 158

H2S. See Hydrogen sulfide

HSP. See Hungarian Socialist Party

Hungarian Electricity Board, 90-91

Hungarian Socialist Party, 136

Hungary

coal production, 7,29-31,63,66

development assistance programs, 151, 157,162,

165, 166, 170, 191

energy demand, 34,35,39

environment, 114, 118, 123

Eximbank loans, 168

historical background, 132-133

natural gas production, 28

nuclear power, 32,75,76,80,81

political background, 132-133

reform programs, 2, 12,90, 121, 135-136, 195

renewable resources, 10,32, 103

status of the electric power sector, 90-91

World Bank projects, 162

Hydrocarbon emissions, 127

Hydrocarbon vapors, 111

Hydrocracking, 46-47

Hydroelectric power, 104-105

Hydrofracturing, 44

Hydrogen sulfide, 111

Hydrorefining, 47

Hyperinflation, 144

I

IAEA. See International Atomic Energy Agency

Idle well reactivation, 53

IFC. See International Finance Corporation

IGCC. See Integrated gasification combined cycle

ILO. See International Labor Organization

Industrial sector

energy demand, 34-35

improving energy efficiency, 37

Inflation rates

Czech Republic, 134

Hungary, 136

Kazakhstan, 138

Poland, 133

Russia, 141

Ukraine, 144

Information programs, 167, 188

INPO. See Institute for Nuclear Power Operations

Institute for International Education, 158

Institute for Nuclear Power Operations, 81

Institutional issues, 150

Integrated gasification combined cycle, 91

Integrated resource planning, 93-94

International Atomic Energy Agency, 81,83,87

International Energy Agency, 160

International Finance Corporation, 163-164

International Labor Organization, 142

International Monetary Fund, 133

International Science and Technology Center, 160

International Trade Commission, 57
Index | 201

Interneft, 53

Investment programs, 166-171

IRP. See Integrated resource planning

J

Japan

assistance programs, 165-166

trade and investment programs, 170-171

Japanese Eximbank,51

JCCCNRS. See Joint Coordinating Committee for

Civilian Nuclear Reactor Safety

Joint Commission on Technological Cooperation in

Energy and Space, 81

Joint Coordinating Committee for Civilian Nuclear

Reactor Safety, 80,87

Joint ventures, 53,67-68

K

Kansk-Achinsk region, 122-123

Kazakhstan. See also Former Soviet Union

coal mining, 58-64

drilling equipment manufacturing plant, 12

historical background, 137

nuclear weapons state status, 83

political background, 137

reform programs, 137-139

Khasbulatov, Ruslan, 140

Kiev, Ukraine, 144

Krakow, Poland

combined heat and powerplant, 157

retrofit of a coal-fired powerplant, 92

Skawina Power Plant, 117

Kravchuk, Leonid, 143

Kuchma, Leonid, 144

Kuznetz Basin, Kazakhstan, 59, 193

L

Langepas, Western Siberia, 42

Latvenergo, 158

Lean combustion system, 127

Lignite mining, 114

LIMBs. See Limestone-injection, multi-stage

burners

Limestone-injection, multi-stage burners, 123

Limited recourse financing, 168n, 169

Liquefied natural gas, 113

Lisbon Initiative, 80

Lithuania, 76,80,82,88, 103

LNG. See Liquefied natural gas

Longwall mining, 7,61

M

Marshall Plan, 191

MDBs. See Multilateral development banks

Measurement while drilling, 43

Methane. See Coalbed methane

Methane degasification emissions, 65

Microhydropower, 104-105

Mine discharge, 115

Ministry of Energy and Electrification, 89

Ministry of Gas Production, 50

Moscow Energy Efficiency Center, 159

Multilateral assistance programs, 151-154

Multilateral development banks, 151-152, 189-190

MVMT. See Hungarian Electricity Board

MWD. See Measurement while drilling

N

National Coal Association, 183

National Security Controls Act, 57

Natural gas. See Oil and natural gas

Negative pledge, 154, 169, 187n

New England Electric Company, 157

New Independent States Task Force, 158-159

NIS Task Force. See New Independent States Task

Force

Nitric acid, 120

Nitrogen oxides, 124-126, 127

Non-fossil fuel technologies. See Electric power;

Nuclear power; Renewable energy

NOX

. See Nitrogen oxides

NRC. See Nuclear Regulatory Commission

NSA. See Nuclear Safety Account

Nuclear power

considerations for the future, 83-87

need for industry reform, 8-9

nuclear safety, 74-80, 181

nuclear weapons proliferation, 82-83

reactor capacity, 32, 33

safety assistance, 80-82

technology issues, 73-74

Nuclear Regulatory Commission, 80

Nuclear Safety Account, 82

Nuclear Safety Committee, 87

Nuclear weapons proliferation, 82-83

0

OECD. See Organization for Economic Cooperation

and Development

Office of International Major Projects, 167

Offshore operations, 45

Oil and Gas Equipment Working Group, 160

Oil and Gas Framework Agreement for Russia, 154,

187
—

202 I Fueling Reform: Energy Technologies for the Former East Bloc

Oil and natural gas

critical technologies, 47-49

drilling, 42-43

effect of political uncertainty on investors, 54

energy sector reform, 49-51

environmental issues, 109-113

exploration, 41-42

exports, 26-29

foreign investment, 51-54

industry problems, 40-41

joint ventures, 67-68

legal and regulatory framework, 54-58

need for industry reform, 3-6

offshore operations, 45

pipelines, 45-46

production, 25-28,44-45

refining, 46-47

reserves, 24-25, 27

Oil Rehabilitation Project, 160, 163

OPIC. See Overseas Private Investment Corporation

Organic sulfur, 62n

Organization for Economic Cooperation and Development, 24, 27,38,57

Organized crime, 142

Overseas Private Investment Corporation

financing assistance programs, 169-170, 187

maximizing effectiveness of programs, 192

Ownership rights, 54-55

P

Particulate, 117-119

Partners in Economic Reform, 7,62, 159

Permafrost areas, 110

PHARE program, 165

Photovoltaics, 101-102, 104

PIER. See Partners in Economic Reform

Pipelines, 45-46, 112-113

Plant demonstration projects, EPRI and U. S., 96

Plutonium, 82

Poland. See also Former Soviet Union

coal mining, 58-64

coal production, 30

Custom Coals Corporation project, 68-71

development assistance programs, 157

geothermal resources, 103

historical background, 132-133

mine drainage problems, 115

natural gas production, 28

particulate emissions, 118

political background, 132-133

reform programs, 133-134

retrofit of a coal-fired powerplant, 92

status of the electric power sector, 89-90

sulfur dioxide reduction, 123-124

use of U.S. methane technology, 66

World Bank projects, 162

Policy assistance, 176-179

Polish Power Grid Company, 90

Political issues

and countries yet to reform, 13-14, 143-147

the culture of reform, 147-148

overview, 131-132

problems common to all countries, 14-15

and quickly reforming countries, 12, 132-136

and slowly reforming countries, 12-13, 136-143

Political risk insurance, 169-170

Pollution

from coal-fired powerplants, 91

coalbed methane, 64-65

control of, 181-182

Custom Coals Corporation project, 68-71

emissions control, 126-127

impact of fuel consumption, 116-117

nitrogen oxides, 124-126

particulate, 117-119

sulfur dioxide, 119-124

Positive Displacement Motors, 43

Power and Environmental Improvement Project

(Czech Republic), 162

Power Privatization project (Poland), 162

Power Sector Restructuring, Privatization, and Management program (Poland), 157

Power Transmission Project (Poland), 162

Powerplant renovations, 183

PRA. See Probabilistic risk assessment

Pressurized water reactors, 79

Price-Anderson Act, 85

Price reform, 13,50, 143, 154, 162, 174, 176-177,

191

Private sector support. See Investment programs;

Trade programs

Privatization: 17,63, 130, 144, 146, 154

energy sector reform, 50-51

electricity sector, 89-90

Poland, 133-134

Czech Republic, 134-135

Russia, 142-143

U.S. programs to assist former east bloc countries, 156-158

multilateral programs to assist former east block

countries, 161-162

policy assistance, 174, 177-178, 179

Probabilistic risk assessment, 78

Production process for fossil fuels, 44-45, 109-113

Production sharing agreements, 53

Proliferation control, 181

PVs. See Photovoltaics

PWR. See Pressurized water reactors
Index | 203

R

RAO. See Russian national electric utility

RBMK reactors

design, 75-76

in the former East Bloc, 76

safety problems, 76-78

R&D. See Research and development programs

Reactors

chain reactions, 76n

design safety problems, 75-78

Reburn technology, 126

Recuperators, 46

Refineries

environmental issues, 111-112

technology, 46-47

Regional Unified Energy Systems, 89

Regulatory framework

environmental issues, 108-109

private sector participation in oil and gas industry, 57-58

problems in oil and gas industry, 54-58

Renewable energy

barriers to development, 99

need for technology reform, 9-10

potential for development, 105-106

potential for U.S. technology transfer, 100-105

supply, 32-34

technologies, 98-99

Research and development programs, 183-184

Romania

coal production, 30

natural gas production, 28

oil production, 26

Roof bolting system, 61

Rotary drilling, 43

Ruble instability, 141

Russia. See also Former Soviet Union

coal mining, 58-64

effect of political uncertainty on investors, 54

effect on Kazakhstan’s oil export industry, 139

environmental issues, 109-110

financing energy sector reform, 49-51

foreign investment, 51-54

fusion test equipment, 182

gas exports to Ukraine, 144

historical background, 137

joint oil and gas ventures, 67-68

lack of legal and regulatory framework, 54-58

nuclear weapons state status, 83

oil and gas industry, 3-6, 40-49

particulate emissions, 118

political background, 137

rank by country risk, 54n

reform programs, 139-143

status of the electric power sector, 89

tax regime, 55

wind power development, 100

Russia Country Fund, 170

Russian Federation Framework Agreement on

Scientific and Technical Cooperation in the Field

of Fuel and Energy, 160

Russian Joint Stock Company for Power and

Electrification, 89

Russian Mafia, 142

Russian national electric utility, 33

s

Saline mine discharge, 115

SBA. See Small Business Administration

SCR See Selective catalytic reduction

Second Czech Power Project, 162

SEED Act. See Support for East European Democracy Act of 1989

Seismic surveys, 42

Selective catalytic reduction, 126

Selective noncatalytic reduction, 126

SEP. See Slovak Electric Power Company

SEVEn, 157, 167

Shale, 113-116

Siemens, 91-92

Skawina Power Plant, 117

Skawina Retrofit project, 157

Slim-hole drilling, 43

Slovak Electric Power Company, 158, 162

Small Business Administration, 187

Small Shareholders Program, 136

Smelting, 117, 120

Smokestacks, 116

SNCR. See Selective noncatalytic reduction

S02. See Sulfur dioxide

Soil acidification, 116

Soil toxicity, 116

Solar cells. See Photovoltaics

Solar thermal electricity, 102

Source standards, 108n

Southern Electric International, 158

Soviet Union. See Former Soviet Union

Stevenson Amendment to the Export-Import Bank

Act of 1945,57

Strip mining site, 114

Sulfur dioxide, 92, 119-124

Sulfur removal, 62

Support for East European Democracy Act of 1989,

92, 152

Surface gob recovery, 65-66

Surface mining, 61,62, 114

Surface pre-mining drainage, 65
. . . —

204 I Fueling Reform: Energy Technologies for the Former East Bloc

T

TACIS. See Technical Assistance Programme to the

Commonwealth of Independent States

TDA. See U.S. Trade and Development Agency

Technical Assistance Programme to the Commonwealth of Independent States, 165

Technical issues, 151

Technology transfer: 1,2,3,6,9, 10, 17,20,25,34,

131, 152, 156, 159, 182

oil and gas, 47-49,51,56

potential for U.S. coal and methane technology

transfer, 61-63,64,66-67

nuclear, 79

reverse technology transfer, 95-96

renewable, 100-105

environmental technologies, 111-113, 118,

124-127

obstacles to, 149-151

Temelin Nuclear Powerplant, 82,86

TPCC. See Trade Promotion Coordinating

Committee

Trade programs, 166-171

Trade Promotion Coordinating Committee, 166

Training programs, 179

Transportation sector

energy demand, 35

environmental issues, 112-113

improving energy efficiency, 38

Turbo drilling, 43

Turkmenistan. See also Former Soviet Union

historical background, 143

political background, 143

reform programs, 145

u

Ukraine. See also Former Soviet Union

coal mining, 58-64

historical background, 143

mine drainage problems, 115

nuclear weapons state status, 83

particulate emissions, 118

political background, 143

reburn technology, 126

reform programs, 143-145

sulfur dioxide reduction, 123

underground mining, 114-115

wind power development, 100

U.N. Economic Commission for Europe, 160

Underground mining, 60-61,114-115

Undiscovered oil resources, 24n

United Mine Workers, 183

United States

bilateral development assistance, 176-184

competitive technologies, 185

constraints on assistance programs, 153

energy-specific goals, 174-175

export promotion, 184-189

investment programs, 166-170, 190-191

legislation and funding for assistance programs,

152

and multilateral development banks, 189-190

national goals, 17, 173-174

nuclear power safety assistance, 80-82

opportunities to transfer environmental

technology, 111, 112, 113, 116, 118-119,

124, 126, 127

policy options, 17-19

policy strategy, 19-22, 192-195

political context of energy sector reform, 175

program evaluation, 16-17, 151-153

program management and coordination, 191-192

programs promoting cooperation, 15-16, 156-160

reasons for supporting East Bloc reform, 1-3

regulations governing private sector

participation, 57-58

strengths of programs, 154-155

trade programs, 166-170

weaknesses of programs, 155-156

UPP. See Utility Partnership Program

Upper Silesian Basin, Poland, 61

U.S. Agency for International Development

assistance program funding, 151, 177, 178

Central Europe budget allocations, 177

electric power program, 9

FSU program budget allocations, 178

funding for nuclear safety assistance, 81

maximizing effectiveness of programs, 192

NIS Task Force, 158-159

program budget allocations for 1994, 14-15

U.S. and Foreign Commercial Service, 167

U.S. Department of Commerce

assistance programs, 152

maximizing effectiveness of programs, 192

U.S. Department of Energy

Clean Coal Technology Program, 68,70

development assistance programs, 151

Gore-Chernomyrdin Commission, 159

maximizing effectiveness of programs, 192

nuclear power safety assistance, 80

Oil and Gas Centers proposal, 159

retrofit of a coal-fired powerplant, 92

U.S. Department of State, 192

U.S. Energy Association, 94

U.S. Environmental Protection Agency

development assistance programs, 151

environmental projects, 160
Index | 205

U.S.-Russia Oil and Gas Framework Agreement,

169

U.S. Trade and Development Agency

assistance programs, 168

financing assistance programs, 187

maximizing effectiveness of programs, 192

U.S. WindPower, 100, 101

U.S./Gazprom Working Group, 160

USEA. See U.S. Energy Association

US&FCS. See U.S. and Foreign Commercial

Service

Utility Partnership Program, 94, 182-183

Uzbekistan. See also Former Soviet Union

historical background, 143

political background, 143

reform programs, 145-146

v

Vacuum distillation, 47

Value-added tax, 134

VVER reactors

comparison with U.S. reactor safety, 79

design, 76

in the former East Bloc, 77

safety problems, 78

w

WANO. See World Association of Nuclear

Operators

Water flooding, 44

Well stimulation, 47-48,53

Western Siberia

oil fields, 40

World Bank projects, 163

Westinghouse Electric Corporation, 85,86

Wet flue gas desulfurization, 117

Wind turbines} 101

Windpower, 100-101

World Association of Nuclear Operators, 82

World Bank, 51,84,70, 103, 139, 144, 147, 169

energy project funding, 160-165, 189-190

negative pledge provision waiver, 154, 187n

World Bank Group, 161-163

Y

Yeltsin, Boris, 81,83, 140, 159

z

Zhirinovsky, Vladimir, 140, 141

b U.S. GOVERNMENT PRINTING OFFICE:l 994-301 -804/1 7415