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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
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,
Trade, and Monetary Policy requested an assessment of energy and envi-
ronmental 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 (re-
leased 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 environmen-
tal consequences of energy production and consumption. The report high-
lights 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 re-
form. 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, con-
tractors, and reviewers.

(7%ZQ -
ROGER C. HERDMAN
Director
Advisory Panel
Marshall Goldman, Chairman Richard D. Jacobs Matthew J. Sagers
Russian Research Center Newstar, Inc. PlanEcon, Inc.
Harvard University;
Wellesley College Richard A. Liroff Raymond Sero
World Wildlife Fund Westinghouse Energy Center
Margaret Bowman
Environmental Law Institute Simon K. Mencher Ray Snokhaus
Alpha Finance & Management Houston Industries, Inc.
Robert Campbell Corp.
University of Indiana Robert Socolow
John P. Minneman Princeton University
William U. Chandler Chase Manhattan Bank
Pacific Northwest Laboratory Richard Spears
Espy P. Price Spears and Associates
Charles Ebinger Chevron Overseas Petroleum Inc.
International Resources Group

Robert Ebel
Center for Strategic and
International Studies

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 ALAN T. CRANE
Assistant Director Project Director
Industry, Commerce, and
International Security Division Joy Dunkerley
Senior Analyst
Emilia Govan
Program Director Joanne Seder
Energy, Transportation and Senior Analyst
Infrastructure Program
Richard Brody
ADMINISTRATIVE STAFF Contractor, Russian and
Lillian Q. Chapman East European Specialist
Division Administrator
CONTRIBUTORS
Marsha Fenn
Susan Lusi
Office Administrator
Mark Zinniker
Tina Aikens Paul Komor
Administrative Secretary

Linda Long
Administrative Secretary

Gay Jackson
PC Specialist
c ontractors and Reviewers

CONTRACTORS Richard Wilson Richard C. Horanburg


Harvard University OPIC
Olga Bilyk
Continuum International, Inc. REVIEWERS Paul Komor
Office of Technology Assessment
Richard Browning Roger Beckman
International Resources Group U.S. Agency for International Mikhail B. Korchemkin
Development University of Pennsylvania
R. Caron Cooper
Private consultant Wayne Beninger Igor Lavrosky
The Scotia Group, Inc. Siberian Trade Development
Peter Hauslohner
Private consultant Edmund Cappuccilli Rutherford Peats
U.S. International Trade International Resources Group
Udi Helman Commission
Center for Strategic and Joseph P. Riva
International Studies R. Caron Cooper Congressional Research Service
Private consultant
Julia Karpeisky-Ryan Robin Roy
Private consultant Leslie Dienes Office of Technology Assessment
University of Kansas
Mikhail B. Korchemkin James Shea
University of Pennsylvania C. Gibson Durfee Nuclear Regulatory Commission
Westinghouse Electric Corp.
Igor Lavrosky Linda Sjoman
Siberian Trade Development Ltd. Robin L. Godfrey Petroleum Advisory Forum
Custom Coals Corp.
Nancy Lubin David P. Stang
Private consultant Ronnie Goldberg Congressional US–FSU Energy
U.S. Council for International Institute
Sanders International Business
Washington, DC
Donald Guertin
Kathryn Van Wyk Atlantic Council
Editor

vi
c ontents

.-
1 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

2 Overview of Energy Supply


and Demand 23
Energy’s Role in the Economy 23
Energy Supply 24
Energy Demand 34

3 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

4 Non-Fossil Fuel Technologies 73


Nuclear Power Technologies 73
Electric Power Technologies 87
Renewable Energy Technologies 98

5 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 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

7 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

8 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 ura-
nium 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 pro-
duction 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 for-
mer 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 St. Basik Ca!hedral, Red Square,
Europe, this includes Poland, the Czech Republic, and Hungary. In the FSU, this includes Moscow.
Russia, Ukraine, Azerbaijan, Kazakhstan, Uzbekistan, and Turkmenistan. Other coun-
tries, especially Romania, also produce significant amounts of energy, but were beyond II
the scope of this study.
2 I Fueling Reform: Energy Technologies for the Former East Bloc

levels of economic well-being and by providing a ning popular discontent over declining living
model for transition. standards and the inequitable distribution of
At present, almost the entire energy sector faces wealth. Corrupt practices pervert efforts to ration-
serious problems. Technology is years behind that alize systems of pricing, supply, management, and
of the West. Production facilities and the trans- economic policymaking.
portation infrastructure are deteriorating and re- The West cannot force economic and political
quire massive upgrading. Management frequently reform and revitalization, but it can play a vital
is unfamil iar with concepts basic to market econo- role. In the energy sector, the United States can
mies, such as minimizing costs, finding markets, provide advice on sorely needed changes in insti-
financing, and customer service. In all countries, tutional structures and economic policies. U.S.
energy is an unnecessarily great economic cost be- governmental assistance programs can provide in-
cause it is used so wastefully. Moreover, pollution formation, training, technology, and direct assist-
from energy production, transportation, and con- ance to energy-related enterprises trying to
sumption is a large factor in the environmental modernize. Multilateral development banks can
devastation that affects much of the region. stipulate that loans be made only to enterprises
Revitalization of the energy sector will depend and governments that make decisions on a more
primarily on changes in political and economic rational basis. Private industry can provide mod-
decisionmaking in each country. It will involve ern technology through products and services as
appropriate pricing of energy and the elimination well as investment in new facilities. Policy ad-
of subsidies so that proper cost signals are sent to
vice, financing, and technology can help build a
consumers and adequate investment capital is
rational, productive, and noncorrupt system of en-
made available to the energy industry. It will entail
ergy supply and consumption that will be a model
fair and responsible treatment of both domestic
of economic transformation for other sectors.
and foreign investors who can bring desperately
The potential benefits to the United States of
needed investment, technology, and expertise.
This is already happening in some of the Central assisting in FSU energy sector reform are many.
European countries, especially Poland, the Czech Foremost is the reduction in future conflict and
Republic, and Hungary. There, economic recov- geopolitical competition that should redound
ery is occurring, and people see their economies from political stability and economic prosperity in
and political systems increasingly linked to the the former East Bloc. Modernizing energy-related
West. facilities and technologies through technology
In the FSU, however, the present economic de- transfer should also advance U.S. energy and en-
pression precludes instant reform. People earning vironmental business interests, open up vast new
$30 per month simply do not have enough money resources of fossil fuels to the world fuel supply,
to pay world market prices for the energy required and reduce pollutants that contribute to global
to stay alive. Many people have yet to see any warming.
benefit to reform and, in fact, are starting to blame OTA has previously examined the importance
it for the steep drop in their standard of living. The of improving the efficiency of energy use in its
December 1993 parliamentary election in Russia companion report of 1993. 2 This report explores
raised considerable doubt about future political the role that the United States can play in revitaliz-
and economic directions. ing the energy supply sector. Chapters 2 through 5
The spread of corruption and racketeering also examine the need for modem energy technology,
seriously undermines prospects for reform, fan- 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 (Wash-
ington, DC: U.S. Government Printing OffIce, May 1993).
Chapter 1 Introduction and Summary | 3

electric power, renewable energy, and pollution The need for extensive technological upgrad-
control. Chapters 6 through 8 review the political ing has created expectations among Western com-
and economic problems that inhibit reform, U.S. panies that the FSU will be a large export market.
and other Western programs intended to overcome Oil and gas technology is a generation out of date,
these barriers, and possible modifications to U.S. and inadequate to meet the challenges of future
policy to enhance support of national goals. The development. In exploration, seismic equipment
remainder of this chapter summarizes the report. is bulky and of low quality. The Russian industry
Figures 1-1 and 1-2 show the region and its major has not benefited from recent improvements in
energy resources. drilling technologies that reduce the cost or risk of
exploration. Excessive and premature use of water
ENERGY TECHNOLOGIES flooding during recovery has damaged reservoirs.
Lack of deep-water offshore technology holds
I Oil and Natural Gas back the development of rich offshore deposits.
A major strength of the FSU is its abundant oil and Pipeline infrastructure faces major problems of
gas resource base. The FSU contains about 7 per- technical performance, and equipment is fre-
cent of the world’s proven oil reserves and has im- quently in short supply. Refinery technology is
mense potential for new discoveries. Russia has chronically outdated, and does not match current
the lion’s share of proven reserves, about 85 per- and 1ikely future demands for petroleum products.
cent. Kazakhstan accounts for much of the rest. However, economic and political factors in the
The gas reserves of the FSU are even more abun- FSU will limit the role of imported technology.
dant—almost 40 percent of the global total. Rus- The FSU has a comprehensive supply industry
sia again has the lion’s share. Khazahkstan, that can produce most equipment, often more
Azerbaijan, and Turkmenistan, though less ex- cheaply, even if inferior to Western technology.
plored, are also well endowed. Russia in particular has a distinct preference for
The oil and gas sector is critical for the FSU. In domestic development and an acute shortage of
individual exporting and importing countries foreign exchange. There are some areas in which
alike, oil and gas are key inputs to economic foreign technology has compelling advantages.
growth and stability. However, despite abundant These include technologies connected with work-
resources that supported the growth of the world’s overs and rehabilitation of existing wells, ad-
largest integrated oil and gas industry, the sector is vanced drilling systems, offshore technologies,
encountering severe problems. Oil production has improved compressors, refinery upgrading, and
fallen by 40 percent over the past 5 years, and gas technology transfer to improve the production of
production has stagnated, in sharp contrast to pre- oil and gas field equipment currently produced in
vious rapid rates of growth. There is little indica- FSU countries.
tion of an early recovery in production. This drop, The adoption and diffusion of improved
and the resultant drop in exports, is a major eco- technologies will depend on economic and insti-
nomic disaster for Russia. Rehabilitation and de- tutional reforms. Until incentives are in place to
velopment of the oil and gas industry is crucial to ensure that technology is correctly and efficiently
the economic recovery of many of the FSU coun- used, even the best technology will not be effec-
tries, Russia in particular. tively deployed.
The failure of the oil and gas sector is in part A major handicap to oil and gas development
due to outdated technology and inadequate invest- (especially oil) has been the lack of funds for sec-
ment. Underpinning both is an economic and tor rehabilitation and expansion. After many years
institutional regime that does not offer adequate of favored status in the investment budget, capital
incentives to either domestic or foreign invest- expenditure in oil and gas has been sharply cut in
ment or encourage the rapid adoption and diffu- recent years. In principle, the shortfall in central
sion of improved technology. 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

l \ t

i C-N
al
t? 0)

B* x i– ..3.7
6 I Fueling Reform: Energy Technologies for the Former East Bloc

eign investment and from the surplus revenues of rights are hotly contested between the central fed-
the new operating entities, particularly the pro- eration, local governments, and the production
duction associations. In practice, domestic indus- associations themselves, causing uncertainty
try resources have been squeezed by changes in among potential foreign investors about the legal-
pricing policies. With the continued control of do- ity of their agreements and contracts.
mestic oil prices and the decontrol of other prices, Taxes are high compared with those of alterna-
added to higher taxes, production association tive areas, such as those near the North Sea, and
costs have risen much faster than revenues, thus are based on revenues rather than profitability.
compressing the surplus available for investment. These taxes are also subject to retroactive change.
Moreover, production associations have limited Differences in perception between Russian
access to hard-currency earnings from their oil ex- hosts and foreign investors are a significant ob-
ports. stacle to foreign participation. To the Western eye,
In addition to domestic investment, external fi- the need for modem technologies throughout the
nancing requirements are also substantial-esti- oil and gas industry is obvious and represents a
mated at between $5 billion and $7 billion large export market. The Russian industry and
annually. Although major public sector commit- government have different views. Some parts of
ments have been made (through the multilateral the industry are eager for new technologies, but
development banks and the U.S. Eximbank others exhibit deep opposition to the involvement
Framework Agreement), the bulk of the resources of foreign capital in the oil and gas sector. Joint
for foreign investment in oil and gas must come ventures are viewed as necessary only to produce
from the private sector. oil that cannot be produced with current Russian
Recognizing the need for foreign direct invest- technology—hence the offering of depleted or
ment and its accompanying technology transfer, technically difficult oil fields to foreign investors.
Russia made major changes to its rules governing Many of these perceptual differences stem from
foreign investment. Joint ventures were autho- differences in business practices. Russians are
rized in 1987, and later changes permitted foreign generally unfamiliar with basic Western business
companies to take majority ownership ‘and con- terms and concepts such as accounting, profit, de-
trol. In response, the international oil industry has preciation, risk, market pricing, accountability,
shown a high level of interest. There are currently quality control, contracts, and liability.
over 100 projects in FSU countries with foreign In sum, the rehabilitation of the FSU oil and gas
participants. The projects cover all branches of the industry offers a tantalizing but challenging pros-
sector, all of the oil and gas producing republics, pect for the foreign investor. FSU countries offer
and different sizes of companies of many national- exciting, rich possibilities for oil and gas develop-
ities. Over half of these projects had U.S. joint ment, but many obstacles threaten these mutually
venture partners. However, many projects have beneficial outcomes. Overall, the picture is
been making modest progress. mixed, showing some improvement of late but
The attractions of FSU countries to foreign in- suggesting that the rehabilitation of the oil and gas
vestors are strong. Immense resources offer a wide sector will take more time and care than originally
range of opportunities, at low geological risk. thought.
Most republics have a trained work force at all lev-
els of expertise, from scientists to oil field work-
ers. | Coal
On the other hand, important obstacles block Coal is an abundant resource in Russia, Ukraine,
foreign investment. Beyond the high level of Kazakhstan, the Czech Republic, and Poland. In
political uncertainty, there is as yet no legal and recent decades, coal has declined in importance in
regulatory framework governing oil and gas leas- the Soviet economy, but it is still the major nation-
ing, exploration, and development. Ownership al energy resource (and source of employment) in
Chapter 1 introduction and Summary | 7

Poland, Hungary, and the Czech Republic. For ex-


ample, in Poland, more than one-half of the resi-
dential/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 in-
vestment in new mine development. Environmen-
tal concerns further cloud the industry’s future.
Coal production has had serious harmful environ-
mental effects, some of which linger long after
mines have closed. The widespread burning of
low-quality coal is largely responsible for envi-
ronmental degradation.
Some restructuring of the coal industry has be-
gun in former East Bloc countries, including clo-
sure of inefficient mines, price increases, and
reduced subsidies. However, the industry is still
far from competitive.
Modem Western mining technologies may pro-
vide short-term improvements in productivity, ef-
Idle drilling rig, Raduzhney Siberia,
ficiency, safety, and environmental impacts.
However, Western assistance alone will not re-
verse the coal industry’s downward slide. In the vides technical assistance and training in health,
long term, the success of the coal industry will de- safety, efficiency, and productivity throughout the
pend on the success of economic reforms. Capital coal regions of Russia, Ukraine, and Kazakhstan.
must be invested in mine development and mod- This focus is unlikely to change unless former
ernization, and labor and transportation problems East Bloc countries make a successful transition
must be resolved. to a market economy and coal industry problems
Thus far, the U.S. coal industry has not actively are resolved.
pursued former East Bloc markets. The character- As reforms are implemented and the coal in-
istics of the region’s coal industry and related dustry stabilizes, transfer of U.S. coal mining
problems have hampered foreign investment. technology may become significant. In the near
Also, differences in mining techniques render term, however, U.S. companies might focus on
much U.S. underground equipment unsuitable for opportunities after the coal is extracted, such as
FSU mines. Longwall mining is the principal un- coal cleaning. There has been little cleaning of
derground mining technique used in the FSU and coal in former East Bloc countries, but U.S. com-
throughout Europe. Germany, a leader in longwall panies have extensive experience in this technolo-
mining R&D, is actively marketing its equipment gy. Over 200 million tons of coal are cleaned each
in Central Europe. year in the United States to remove ash and sulfur
The biggest U.S. effort in the FSU has been part impurities and to increase coal’s heating value.
of a much larger humanitarian program, Partners Cleaning also reduces transportation costs by re-
in Economic Reform (PIER). With U.S. govern- moving significant quantities of noncombustible
ment funding and coal industry and labor support, material from raw coal before shipment. Because
PIER administers the Coal Project, which pro- 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 ing an accident and allows more remedial action
jobs in areas where mass unemployment looms. than that of Western reactors. Some experts be-
In April 1993, a U.S. firm (Custom Coals lieve that the newer reactors can be upgraded to
Corp.) announced that it was seeking to design, safety levels near Western standards. The uncer-
construct, and operate three coal cleaning plants in tainty over risk complicates decisions over how
Poland. One facility will serve three mines, with a soon reactors should be closed. Nuclear assistance
capacity of 25 million tons. Another facility will is controversial because some critics believe that
be a fine-coal cleaning plant to produce ultra- none of these reactors can be made sufficiently
clean coal products for home and district heating safe and that all should be shut done as soon as
systems in Krakow. possible.
U.S. nuclear assistance funding is rising from
I Nuclear Energy $30 million in fiscal year 1993 to $100 million in
The Chernobyl accident demonstrated that Soviet fiscal year 1994. The program has focused primar-
reactors had serious safety deficiencies. Subse- ily on information transfer (e.g., training in opera-
quent analysis and inspection by Western experts tions, regulations). The increase will allow some
have confirmed that major accidents are far more physical improvements at nuclear power stations.
likely in these reactors than those of the West be- Most attention has been paid to the newer plants
cause of design problems and poor operation. The on the assumption that the riskier ones would be
greatest concerns are over the graphite-moderated shut down soon. However, since it appears that
RBMK reactors, such as at Chernobyl, and the these plants will be operated for a substantial peri-
oldest pressurized-water reactors, the VVER 440 od, they will present a disproportionate threat un-
Model 230. These reactors lack basic safety less near-term safety upgrades are supported.
equipment such as a containment vessel. The Nevertheless, it also is important not to upgrade
RBMK, unlike Western reactors, is vulnerable to them to the point that they are kept operating long-
an uncontrolled nuclear accident, as happened at er than necessary. No funds are yet being allocated
Chernobyl. for replacing any nuclear powerplants.
A nuclear accident could harm millions of Western companies are concerned that their as-
people and contaminate vast regions of Europe. sistance could lead to liability if an accident oc-
As the world’s leading manufacturer and operator curs at a reactor despite upgrades. This concern is
of nuclear powerplants, the United States has the a significant impediment to assistance. Recipient
expertise and a particular responsibility to help re- countries may have to limit liability, as have many
duce this risk. U.S. involvement can also mean in the West, because the potential consequences of
U.S. exports, such as the $434 million sale of a major accident are so great.
equipment and fuel by Westinghouse Electric Concerns about nuclear weapons proliferation
Corp. to the Czech Republic announced in 1993. have increased because of political and economic
Ideally, the riskiest plants should be closed. instability in the FSU. Analysts fear that with the
However, the power they produce is greatly need- weakening of central control over weapons and
ed, and none of these countries can afford to build associated facilities, nuclear weapons or materials
and fuel replacement powerplants. Even Ukraine could be stolen and sold to an irresponsible coun-
has decided to defer closing the Chernobyl station try or terrorist group. Alternatively, FSU weapons
on the grounds that the economic necessity out- experts could work for other countries.
weighs the risk. The United States has already taken steps tore-
It should be noted that the actual level of risk is duce this danger, as discussed in other OTA re-
not well understood. Soviet reactors have some ports. The key issue in this report concerns the use
safety advantages, such as a large water inventory of FSU weapons experts in the civilian nuclear
in the VVER 440 that slows core heating follow- power industry. Many have a technical back-
Chapter l Introduction and Summary | 9

ground suitable for conducting research and ana- bound, DSM may be critical in preventing
lyzing nuclear reactor safety. Using them for this shortages.
purpose would serve the dual purpose of increas- The U.S. assistance program has created part-
ing safety and reducing proliferation risks. nerships between U.S. utilities and their Central
International science and technology centers European and FSU counterparts. The partners ex-
have been proposed for Moscow and Kiev. Both change information and expertise. The program
have been delayed because of difficulties in get- has been so successful that U.S. utilities are find-
ting legislative approval. The Russian institute ing that the demands on their time are getting too
was started in December 1993 by Presidential great, since they are reimbursed only for travel and
proclamation, but it is uncertain how permanent other expenses. The U.S. Agency for International
this arrangement will be. An alternative approach Development (AID) is adding a supplementary
would be to increase collaborative R&D activities program to pay for intensive projects such as large
with existing institutions. training courses.
The major barrier to modernization is financial.
I Electric Power Many power companies in the region lack funds
All countries in the former East Bloc have a sub- for investment, and their borrowing capability is
stantial and sophisticated electric network. In limited. Export financing will be essential for
some countries, electricity is more available than wide-scale sales. Present U.S. export financing
oil and gas because it can be generated from nu- policies may not be adequate to support the elec-
clear energy or local coal. Nevertheless, the elec- tric equipment industry’s unusual opportunity.
tric power industry faces many problems, Central European countries may open up new
including decrepit generating stations, expensive markets and opportunities for American compa-
fuel, poor operations, and massive pollution. nies for investment and sale of electrical equip-
Modernization is badly needed to improve op- ment-opportunities that have been limited by
erations, reduce costs, and reduce pollution. In protected domestic industries elsewhere in the
addition to physical plants, utility management world.
and government regulators need training to under- Cooperation in electric technology should also
stand how to operate in a free market environ- result in technology transfer to the United States.
ment. Particularly in the FSU, rates are subsidized Russia pioneered high-voltage transmission and
heavily, so neither utilities nor users see incen- has built lines at twice the voltage of any in the
tives to make optimal decisions. United States. Super-critical boilers are another
Several U.S. technologies would be of consid- area where U.S. manufacturers and utilities can
erable benefit. Burning coal cleanly will be im- learn valuable lessons.
portant in reducing pollution. Flue-gas
desulfurization, fluidized-bed combustion, and I Renewable Energy Technology
integrated gasification combined cycle are ways Solar and other renewable energy technologies
to use coal much more cleanly. These and other contribute only a small share of total energy pro-
technologies may be used widely as the electric duction in the former East Bloc, and that is unlike-
sector modernizes, if financing is available. ly to change soon. Nevertheless, the potential is
Demand-side management (DSM) could also significant.
become important in countries that base rates on Soviet scientists conducted extensive research
costs. Utilities work with their customers to re- on renewable resources over the last several de-
duce waste so that the construction of new plants cades, resulting in sophisticated technologies and
will be minimized. Since capital is scarce and de- well-developed science, but few commercial suc-
mand for electricity will soar as economies re- cesses, with the exception of hydroelectric power
10 I Fueling Reform: Energy Technologies for the Former East Bloc

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 con-
cerns is creating niches for renewable, such as the
wind energy project in Ukraine. Defense conver-
sion and the availability of idle or underutilized
Vertes Powerplant, Hungary New England Power Service is
paired with Hungarian Electric Companies, Ltd. under the industrialized plants may provide an added incen-
Utility Partnership Program. tive to develop indigenous renewable resources.
Assistance from Western countries could im-
projects. Russia inherited much of this technology prove the prospects for renewable development,
and expertise, although Ukraine has substantial especially in those countries that have limited or
technical know-how in windpower and solar ther- no indigenous fuel supplies. Technology transfer
mal areas. Little expertise, however, has emerged is one avenue for developing these resources at a
over the years regarding project planning, devel- more rapid pace. It can take many forms, includ-
opment, and management. ing engineering and design expertise, manage-
The potential for renewable development va- ment and training programs, licensing foreign
ries since geography, climate, and weather pat- manufacture of technologies, and equipment
terns largely determine prospects. For example, sales. Wind turbines, photovoltaic cells, and solar
wind energy potential is enormous in Russia, Ka- thermal collectors could be manufactured under
zakhstan, and Ukraine. The U.S. Windpower proj- joint ventures with the West.
ect in Ukraine, which calls for the installation of Even if assistance is forthcoming, former East
500 MW (megawatts) by 1995, typifies the coun- Bloc countries must develop a favorable climate
try’s potential. Moreover, the southern areas of for renewable development. Economic reform
Ukraine, Russia, and the Central Asian republics and the development of domestic markets are es-
are well suited to solar use. Solar water heating al- sential to renewable use in the long term.
ready is used in some areas. Also, Russia has sig-
nificant amounts of hydroelectric capacity and
experience in developing its resources. Hydro- ENVIRONMENTAL TECHNOLOGIES
electric power contributes about 19 percent of to- Uncontrolled production and use of energy has
tal electric power capacity. been a leading cause of environmental degrada-
Other republics are pursuing renewable energy tion in the former East Bloc. The area’s centrally
projects out of economic necessity and to become planned economies placed a higher priority on the
more self-sufficient. Estonia, which has extensive quantity of industrial production than on eco-
forests, is taking the lead among former republics nomic efficiency, environmental protection, or
in biomass development. Lithuania is exploring consumer demands. They provided cheap, state-
its geothermal potential. Hungary is a leader in subsidized fuels, which encouraged very high
geothermal use for horticultural purposes. consumption of energy relative to that of other in-
Chapter 1 introduction and Summary | 11

dustrialized countries. The nature of major fuel re- energy industry itself is an impediment to envi-
sources, such as the high-ash coal used in power ronmental reform. Public utilities and industries
generation, has further increased pollution. are overstaffed and inefficient. Until they restruc-
Environmental problems due to energy use ture and downsize, they will not be able to afford
vary across the region. Programs to alleviate envi- pollution control.
ronmental damage from energy use must therefore All of these factors will constrain the market for
consider the problems of each region individually. energy-related environmental technologies. Nev-
For example, regional air pollution patterns vary. ertheless, the United States, through its public
In Estonia, more than two-thirds of the emissions programs and private business activity, can help
of particulate, sulfur dioxide (S0 2), and nitrogen upgrade environmental protection in the former
oxide (NOX) come from just three sources. In Po- East Bloc. Opportunities for technology coopera-
land, fuel use at a large number of small, de- tion are excellent because the United States has a
centralized boilers and home heating units is a commercial and technical advantage in several
major source. areas.
Solutions to environmental problems must also One of the strongest areas of U.S. technological
address a variety of institutional constraints. An expertise is in coal cleaning. U.S. firms are also
ineffective regulatory structure is a prime impedi- well positioned in emission-abatement equip-
ment. Contrary to Western perceptions, all of the ment. One area of particular strength is in low
countries in the region have stringent environ- N OX combustion reburn technologies. Other
mental standards. However, regulatory enforce- technologies include flue-gas desulfurization
ment of these standards has been lax. Without units, electrostatic precipitators, and baghouse fil-
enforcement of regulations, there has been little ters for powerplants; lean-bum technology for
incentive to install, operate, or produce emission- mobile sources; and desulfurization equipment
abatement equipment. Doubts about future envi- for refineries.
ronmental standards have also discouraged local U.S. companies can also help reduce the envi-
entrepreneurs and potential foreign investors. ronmental impact of energy production. For ex-
Lack of public and private capital also delays ample, as Russia expands gas production further
the installation of pollution control equipment. north, the sensitive tundra ecosystem would bene-
Public budgets are under extreme pressure to meet fit from some of the lessons learned in Alaska.
a variety of investment, restructuring, and social U.S. mining firms are the world’s most experi-
safety net costs, severely limiting the amount of enced in dealing with acid mine drainage and have
public money available for environmental pur- extensive experience in land reclamation.
poses. While foreign sources of public and private However, prospects for U.S. business may suf-
financing can provide some interim funds, these fer because European Union emission standards
sources are relatively small. This renders local pri- are generally stricter than U.S. standards. Coun-
vate sector capital markets essential, since most tries aspiring to join the EU will need to meet these
environmental expenditures will ultimately be standards with higher efficiency abatement sys-
made by privatized companies. But these markets tems than U.S. companies produce. Moreover,
barely exist now. A number of AID and other as- since pollution coming from the region affects
sistance programs are aimed at developing local Western Europe more than the United States, Eu-
capital markets. ropean countries might be more motivated to give
Coordinating environmental assistance with more financial and technical support to address
larger economic and social reforms can maximize these issues. Thus, additional government efforts
overall effectiveness. Assistance should also tar- are likely to be necessary to assure that U.S. envi-
get those energy plants and sectors that can with- ronmental equipment is competitive.
stand the economic reforms, and not those that
will probably be shut down. The structure of the
12 I Fueling Reform: Energy Technologies for the Former East Bloc

Poland launched the earliest, most radical, and, to


date, the most successful reform program. Al-
though recent electoral gains by former Commu-
nists 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 pur-
sued 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 Slo-
vakia and made substantial progress in introduc-
ing structural and institutional change, stabilizing
Drilling equipment manufacturing plant in Kazakhstan. the economy, and laying a firm basis for future
growth. Hungary pursued a deliberately more cau-
THE POLITICAL, ECONOMIC, AND tious strategy, hoping to minimize the social costs
SOCIAL CONTEXT FOR of change. As a result, although Hungary remains
EFFECTING CHANGE in the vanguard of reform, the costs of reform have
been strung out and even accentuated.
The modernization of the energy sector of the for-
Despite problems, all three countries have
mer East Bloc is only one facet of a much larger set
freed most energy prices, started privatizing state
of reforms that involve fundamental changes in
industries, and welcomed foreign investment. Be-
the political and social orders of these societies.
Energy sector reforms depend on the larger set and cause of this, Western assistance programs are
will also contribute to it. This transition involves producing promising results, especially for im-
proving energy efficiency. There is also solid
several distinct but closely interrelated processes,
the most important of which is the establishment ground for American trade and investment pro-
of a new political order that embodies a popular grams. U.S. exports and investments can support
reform and development in Central Europe.
consensus about the need for economic reform.
Those countries where there is less popular con-
sensus about reform and that have yet to enact new | Countries Reforming Slowly
political structures have moved much more slow- Russia and Kazakhstan occupy the next tier of re-
ly and less successfully to stabilize their econo- form. Both countries have yet to undertake the
mies and lay the foundations for a new economic types of domestic price, legal, and regulatory re-
system. The energy-producing countries analyzed forms that would make energy-efficiency projects
in this report fall into three groups: those in the profitable, stimulate more extensive and efficient
vanguard of reform, those slow to reform, and energy production, and make it easier to structure
those lagging in reform. bilateral and multilateral lending for energy-
sector modernization.
I Countries in the Vanguard of Reform Since the coup attempt of August 1991, Mos-
Poland, the Czech Republic, and Hungary occupy cow has been in the throes of a multifaceted
the first tier of reform. They were the quickest to struggle over fundamental questions of power,
establish a political consensus on the need for sovereignty, property, and the nature of the future
democratic and market transformations and to socioeconomic order. The most prominent aspect
translate this political will into effective mecha- of this struggle has been the debate by political
nisms for the implementation of reform programs. and social constituencies over the nature and
Chapter 1 Introduction and Summary | 13

course of economic reform. These debates are an- found economic and political changes occurring
chored in Russia’s uniqueness. Russia’s size, as in the FSU, these countries have barely taken even
well as its much larger, more complex, and more the first steps down the road of economic reform.
deeply troubled economy, render the country less The reasons they lag so far behind are fundamen-
amenable to the types of Western-sponsored aid tally political—in these states, Soviet-era bureau-
and trade programs that have been instrumental in crats remain entrenched in power and cling
the transformation of the economies of Central tenaciously to the tenets of the old system. As a re-
Europe. Although impressive strides have been sult, most of the distortions and inefficiencies of
made in price reform and private sector growth, the Soviet-era energy production, consumption,
the Russian economy is still contracting. Unless and pricing system remain in place, and opportu-
Russia resolves its crisis of authority so that it can nities for Western investment and trade promotion
pursue consistent and coordinated monetary and remain murky.
fiscal policies, it will not achieve the type of solid In Ukraine the debilitating competition for in-
economic stabilization that is an absolute prereq- ternal political power and continuing squabbles
uisite to economic reform and growth. Until then, with Russia over the legacy of Soviet-era property
Russia will at best flounder or muddle through re- and nuclear weapons have resulted in the neglect
form. of economic reform. Analysts warn that the conse-
Under these conditions, an increase in U.S. quences of this neglect-economic collapse and
trade-promotion programs may stimulate near- hyperinflation-could lead to economic and
term sectoral stabilization and provide opportuni- political disintegration.
ties for American firms. But without strong Since 1991, economic conditions in Uzbekis-
conditional it y, both aid and trade programs are un- tan have also deteriorated, but state policies have
likely to promote long-term, self-sustained, sys- maintained many of the characteristics of the So-
temic reform. viet-era economy, such as subsidies and price con-
In contrast to Russia, Kazakhstan has opened trols. Economic reform will likely proceed slowly
its doors to foreign investment, providing poten- in Uzbekistan under the official goal of “market
tially mutually beneficial opportunities for Amer- socialism. ” Political reform may be even slower.
ican energy companies and the Kazakhstani Uzbekistan’s president has suppressed almost all
government. But the country is suffering from the political parties, jailed opposition activists, en-
dissolution of economic ties with the FSU and the forced press censorship, and stifled the develop-
strains of being a multi-ethnic state. Although Ka- ment of democratic politics.
zakhstan’s current energy bonanza provides The reins of economic and political power are
grounds for optimism, oil development will be also held tightly in Turkmenistan by an autho-
limited in the short term by lack of export pipeline ritarian ruler who has created a Stalin-like “cult of
capacity and the immense need for capital renova- personality” and suppressed potential political
tion and exploration. As a result, the Kazakhstani opposition. Although Turkmenistan’s vast gas
economy is not likely to start growing substantial- and oil wealth offers excellent opportunities for
ly until the second half of the 1990s. In the inter- development, potential revenues from energy de-
im, the United States can reward Kazakhstan’s velopment are likely to be squandered through
openness to foreign investment and encourage corruption.
further systemic reform through expansion of Finally, in Azerbaijan, the continuing war with
American aid, trade, and investment programs. Armenia over Nagomo-Karabakh, and attempts
by Russia, Turkey, and Iran to influence domestic
I Countries Yet To Reform politics, have diverted attention from economic
Ukraine, Turkmenistan, Uzbekistan, and Azerbai- reform. Despite the proliferation of small-scale
jan occupy the final tier of reform. Despite the pro- 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 22.0
Energy sector restructuring and 8.0
privatization
Rule of law 25.5 2.8
Commercial law reform 11.3
Local governance 9.5
Democratic governance and public 23.0
administration
Privatization 115.0 44.3
Business development 75.0 30.0
Banking sector reform and bankers training 12.6
Fiscal sector reform 15.5
Financial and monetary sector reform 10.7 18,1
Training and macroeconomic advice 2.1
(Dept. of Treasury)
Market environment 14.4
Business and organizational training
Short- and long-term training 91.5
US/NIS partnerships 5.0
Exchanges (USIA) 128,0
SABIT Program (DOC) 2.0
CAST Program (NAS) 2.0
Eurasia Foundation 12.0
Energy efficiency
Efficiency & performance improvement 35.0 9.0
Production and delivery systems 39.0
Special earmarks (lab-to-lab, etc.) 33.0
Nuclear power
Nuclear power plant safety and 85.0 5.0
regulation Continued next page

nies to develop the Caspian Sea’s energy re- I Problems Common to All Countries
sources, there has been no systematic program of Despite their differences, the countries of the for-
economic reform. Instead, corruption and a highly mer East Bloc share a similar set of problems in
lucrative illicit trade in oil and other valuable raw the transition from Communist authoritarianism
materials have proliferated. to market democracy. All need to minimize unem-
Given the leadership’s lack of interest in reform ployment and other social disruption during the
in these countries, the most effective form of as- transition period while fighting inflation and
sistance to spur progress may be U.S. policies to maintaining budget discipline. These states must
promote energy efficiency and training in market also overcome a broad lack of understanding of
skills. As in Russia, an increase in American trade market principles and the mindset of the old sys-
and investment support programs may do little to tem. This challenge is complicated by the charac-
promote market reform.
Chapter 1 Introduction and Summary | 15

FSU Central Europe


Program type (millions) (millions)

Technical assistance
Russia Energy & Environment 125.0
Commodity Import Program
Krakow Power Project 4.5
Environment
Policy and institution building 21.9
Technology cooperation 36.5
Local NGO support 14.6
Trade and investment promotion
Transfer payments to DOC and TDA 8.5
American business initiative
Enterprise funds
Russian-American Enterprise Fund 120.0
Western NIS Enterprise Fund 45.0
Central Asian Enterprise Fund 30.0
Fund for Large Enterprises in Russia 100.0
EBRD Small Business Fund 15.0
Multi-Lateral Equity Fund 21.0
Central European Enterprise Funds 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 collapse, with crime on the rise, and with citizens
often create a negative image of capitalism and earning paltry incomes, nostalgia for the old sys-
highlight its very worst aspects. These factors tem has grown. Unless these countries start
complicate the efforts of American companies to achieving economic and political progress soon,
conclude investment and purchase agreements the social consensus needed for the transition to
and render even more imperative U.S. govern- democratic politics and market economics will
ment efforts to promote the principles of market not emerge.
reform.
But even more important, the huge drop in liv- CURRENT U.S. PROGRAMS PROMOTING
ing standards and the political chaos of the post- COOPERATION
Communist era have led to a crisis of identity in The United States supports a wide range of pro-
many areas of the FSU, especially Russia. With grams designed to promote energy and environ-
Russia and the other FSU countries now in a weak mental technology cooperation (see table 1-1.)
position on the world stage, with economies in 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. Environ- consulting missions, lack of in-country expertise,
mental Protection Agency (EPA), and others in- slow procurement, and confusion over country
clude technical assistance, training, provision of needs due to a regional approach to aid disburse-
information, policy advice, R&D, and technical ment.
cooperation. Other bilateral programs managed Moreover, these programs have been de-
by the Export-Import Bank of the United States veloped and implemented under difficult cir-
(Eximbank), the Overseas Private Investment cumstances, including budget constraints.
Corp. (OPIC), and the U.S. Department of Com- Considerable political pressure was put on agen-
merce (DOC) provide backing to the U.S. private cies to disburse quickly to give visible evidence of
sector, which can play a key role in the rehabilita- Western support for the new regimes. All agencies
tion of the former East Bloc energy sector. As the have experienced difficulties recruiting perma-
largest shareholder in the multilateral develop- nent staff with the necessary area expertise.
ment banks (MDBs), the United States also ac- An additional problem is that many programs
tively exercises influence over their large project are lodged in institutions that were designed for
lending programs. MDB lending has emphasized different types of operations. The World Bank and
the oil and gas industry and the power sector, but AID were designed for projects in developing
there are also active programs for environmental countries, whose capabilities and needs differ
improvements and energy efficiency. Most of the considerably from those of the former East Bloc.
programs surveyed for this report are quite recent The primary mission of Eximbank is to support
in origin, but even on the basis of limited experi- U.S. exports, but Eximbank’s Framework Agree-
ence, their strengths and weaknesses have become ment is both a major support to U.S. exports and a
apparent. cornerstone of U.S. financial assistance to the
FSU countries.
I U.S. Program Evaluation Moreover, unstable political and economic
The U.S. government moved with exemplary conditions in some recipient countries have ham-
speed to develop assistance programs for the Cen- pered program development. Several U.S. agen-
tral European countries and later the FSU. The en- cies report a shortage of viable projects in the
ergy sector has been an appropriate part of these FSU, either because of unwillingness to accept
programs. Within overall ’budget constraints, the conditions attached to financial assistance or lack
existing programs are comprehensive in coverage of interest. In several countries, notably in the
and address the main issues identified in OTA’s Russian oil and gas sectors, foreign investment is
technical analysis-capital constraints for both viewed with deep suspicion.
energy supply and conservation projects, energy Several specific weaknesses of U.S. assistance
sector and macroeconomic reform, and technical have emerged over the past several years. The
assistance. Particularly strong efforts have been large number of U.S. agencies offering broadly
made to include the U.S. private sector in these similar services raises issues of coordination and
efforts. duplication. Officials in the former East Bloc
In addition, U.S. programs have shown consid- complain that they are swamped by visiting mis-
erable flexibility and responsiveness to changing sions and that the funds are going largely to for-
conditions, even over the short time they have eign consultants rather than to the countries
been in operation. There has been a clear shift themselves.
from the early emphasis on providing energy and Coordination among the various donors, re-
environmental technologies directly to building portedly fairly low during the first years of assist-
underlying policy and institutional capacity. Ef- ance, has apparently improved as the energy and
forts have been made to respond to early criticisms environmental assistance efforts proceed. Even
of the U.S. effort, including too many temporary so, there are several examples of lack of donor
Chapter 1 Introduction and Summary | 17

coordination, which seriously weakens the entire To Modernize Energy Sector Facilities and
effort. For example, while the World Bank insists Technologies.
on conditionality in its loans, the Eximbank Improving the technology of supply and use of en-
Framework Agreement contains no conditional- ergy can have major economic advantages by in-
ity, thus weakening World Bank requirements. creasing exports of oil, providing new options,
Underpinning these weaknesses in imple- and reducing unnecessary costs to the economy.
mentation is a more fundamental uncertainty over
the best means to achieve U.S. policy goals. The To Advance U.S. Energy-Related Business
optimal scale of U.S. assistance and its distribu- Interests.
tion between the many countries of the region
U.S. companies have many products and services
have not been defined. Allocations of assistance
appropriate for export to the energy sector of the
within the energy sector are open to question, par-
former East Bloc.
ticularly the emphasis on supply expansion, given
the immense potential for energy conservation.
The reluctance of some host countries, notably To Reduce Energy-Related Pollution and
Russia, to cooperate in key parts of the assistance Threats to the Environment.
program raises questions about the wisdom or fea- Local and global pollution can be significantly
sibility of the present approach. ameliorated with modem technology.
These mixed experiences suggest that the time
is opportune to reexamine the totality of U.S. ef- To Augment World Fuel Supplies.
forts in the light of original U.S. policy objectives Increased exports of oil and natural gas from the
and to suggest ways in which the programs that former East Bloc because of increased production
support U.S. policies can be improved. and reduced consumption will mean less strain on
world energy markets.
US. POLICY GOALS AND OPTIONS
I Policy Options
| U.S. National Goals
Policymakers have a variety of options to support
The primary U.S. goal is to promote the transition the goals discussed above (see ch. 8 for a more ex-
of formerly hostile East Bloc countries to demo- tensive discussion). As listed in table 1-2, policy
cratic, market-oriented trading partners. Some options are available in the following areas:
countries are well on their way to a successful
transition, but others face a much more uncertain
future. Energy technology transfer supports the
U.S. Bilateral Development Assistance
U.S. development assistance to the FSU is in-
transition, but will have only modest impact un-
tended to increase the flow of information and
less accompanied by market reform measures
skills needed to operate a modem, environmental-
such as the elimination of subsidies, privatization,
ly acceptable energy system; to assist in building
and new legal structures.
needed facilities; and to reduce the risk of nuclear
U.S. goals toward the former East Bloc with
weapons proliferation. AID is the primary agency
specific energy implications include the follow-
for development, and it funds many of the pro-
ing:
grams run by other agencies. A large fraction of
U.S. assistance funding is spent in the United
10 Support Market Reform in the Energy States, and the assistance is delivered in the form
Sector of goods and services. The activities listed (and
Modernization is unlikely without reform, and the discussed under Element 2 in the following sec-
energy sector can lead the way for other sectors. tion) 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 Multilateral Development Banks


funding if it is available. Loans from The World Bank and the European
Bank for Reconstruction and Development
U.S. Export Promotion (EBRD) are major vehicles for development.
DOC, Eximbank, and the Trade and Development Congress could influence the MDBs to give a
Agency (TDA) have useful programs that support higher priority to energy efficiency and smaller
U.S. businesses. Increased funding for export fi- projects that cumulatively can have a greater im-
nancing (e.g., through guarantees for commercial pact.
bank loans that otherwise would not be available,)
Investment Promotion
feasibility studies, and information programs Foreign investment will be one of the prime forces
would assist U.S. industry and contribute to eco-
for development. OPIC provides project finance
nomic modernization. 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 ing local conditions. The options discussed above
Even at the current level of funding, programs can fall into three groups, each of which can be consid-
be made more effective. ered separately or as elements of an overall strate-
**** gy: low-cost changes to maximize the
Most of these options are for changes in pro- effectiveness of current U.S. programs; additional
grams already in effect. They are listed because funding for effective programs; and options that
the programs could usefully be enhanced with in- support some goals but can conflict with others in
creased funding or a change in emphasis. Funding some countries. A complete strategy to support
has risen sharply in recent years, but the need for U.S. goals might consist of the low-cost changes
assistance and financing remains enormous. Do- (which are largely noncontroversial), some addi-
ing business as usual will mean relatively slow tional funding for effective programs (depending
progress at best and a substantial risk of serious on the priority accorded energy revitalization in
political instability, especially in Russia and other the former East Bloc), plus whichever elements of
countries in the FSU. U.S. budget problems sug- the last group support the highest priority goals.
gest that additional funding can come only at the
expense of other priorities; however, measures to Element 1: Maximize the Effectiveness of
restore economic growth in the region could, in Current US. Programs
the long term, prove highly cost-effective if they Changes that could improve the effectiveness of
succeed in creating friendly, prosperous trading U.S. activities and programs for all countries in
partners. the former East Bloc are listed in table 1-3. Im-
provements in program effectiveness should be
considered whether or not any further options are
| Policy Strategy entertained because they support all goals without
Some policy options (e.g., development assist- penalizing other national priorities.
ance) support all U.S. policy goals simultaneous] y
in all areas of the former East Bloc. In other cases, Element 2: Expand the Most Effective
priorities must be set and choices made. The Assistance Programs
United States must ensure that goals and initia- Reform and modernization of the FSU energy sec-
tives are sufficiently flexible to account for differ- tor are clearly in the U.S. national interest, espe-
20 I Fueling Reform: Energy Technologies for the Former East Bloc

pend on the level of activity. Several million


dollars would allow a significant amount of addi-
tional training.
Expand Energy-Efficiency Programs—Ameri-
can demonstration projects and information pro-
grams (especially the efficiency centers) area vital
component of technology transfer in the energy
sector. Energy-efficiency projects can promote re-
form by demonstrating that it is possible to cush-
ion 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,
The early stages of assembly at the Skawina plant site. In the
background is the thickener with preassembled sections of
where domestic oil is still subsidized, would be to
the absorber vessel in the foreground. The absorber vessel persuade the Russian government to commit to
sections are ready to be placed in position raising energy prices to world levels over several
years. In the meantime, enterprises would be guar-
cially if accompanied by overall economic and anteed their current quota of energy, but the state
political reform. As noted throughout this report, would buy back at near-world prices all that was
there is a great need for assistance, and U.S. pro- not needed. This would provide a revenue stream
grams can have considerable impact in supporting for investments in improved efficiency. The
reform. The steps that could be taken if Congress EBRD could finance initial improvements based
is willing to allocate more funding to enhance the on anticipated revenues. AID and DOE could pro-
U.S. role, as listed in table 1-2, include the follow- vide training to create an energy service and
ing: equipment industry. There should also be many
Emphasize Government-to-Government Pol- opportunities for American businesses which
icy Assistance—U.S officials can supply informa- could be funded by Eximbank. Such a program
tion and encouragement for policy makers in the would call for an unprecedented amount of plan-
former East Bloc to take the painful steps involved ning and coordination, but it offers a way around
in economic transformation and help them design the problems (inadequate incentive, information,
realistic reform programs that meet the need to and capital) that inhibit the reduction of energy
maintain domestic political and social stability. waste. Additional costs for the U.S. government
Total additional costs might be $1 million per might be several tens of millions of dollars over 3
agency-e. g., DOE, NRC—for time and travel. years for U.S. energy auditors and service compa-
Expand Business and Organizational Train- nies to get the process moving and to start joint
ing—One of the most effective U.S. initiatives to ventures for investments in equipment manufac-
promote change is providing training in general ture and directly in efficiency improvements.
business-related skills—a transfer of the knowl- Expand Technical Assistance Programs—
edge and skills necessary to support the develop- Technical assistance programs provide access to
ment of new modes of economic organization and technologies essential to short-term stabilization
technical processes. This type of technology and long-term modernization and economic
transfer promotes domestic reform while support- growth. Since U.S. firms are leaders in several
ing U.S. economic interests. It provides former areas, an expansion of technical assistance pro-
East Bloc firms with the skills to organize their grams, consistent with an activist program of U.S.
work and efficiently employ advanced technolo- policy, would provide benefits for U.S. business.
gies from the West. Additional costs would de- Priority projects, as listed in table 1-2, include
Chapter 1 Introduction and Summary | 21

additional assistance in installing nuclear safety also not be underestimated. Thus, reconciling
equipment, additional assistance in pollution con- trade and aid programs with one another and with
trol, an expanded utility partnership program, the larger goal of promoting market reform will
powerplant renovations, more clean coal demon- prove difficult, if not impossible.
strations, additional coal mine safety activities, The differing conditions among the former East
and R&D cooperation. Several of these initiatives Bloc countries suggest two approaches for U.S.
(nuclear safety, powerplant renovations, clean policy, depending on which goals are to be sup-
coal demonstrations) could entail costs of several ported:
tens of millions of dollars, depending on how 1. Support near-term economic stabilization
much activity is wanted. through expansion of energy production. This
option seeks to support former East Bloc countries
Element 3: Select Priorities for Trade and by maximizing energy output to provide foreign
Development exchange, regardless of their progress on econom-
In the case of conflicting goals, policies must be ic reform. It also aggressively emphasizes U.S.
tailored to each country or region to ensure their exports.
appropriateness and consistency, especially Policies: Expand export-credit and MDB pro-
where economic reform is tenuous. This is most grams to ensure that financing is not a major
important in the area of export- and investment- constraint; provide minimal conditionality and re-
promotion programs. strictions on loans. Higher subsidies might be nec-
The key question for Congress is how actively essary for OPIC and Eximbank to cover increased
to promote market reform and long-term sectoral losses on bad debt.
modernization versus short-term economic stabil- 2. Support long-term energy sector modern-
ity and U.S. economic interests. The most impor- ization and systemic market reform. This ap-
tant vehicle for expressing this policy preference proach may entail further declines in oil and gas
is the conditionality provision of export credits production in order to achieve long-term gains.
and insurance. Policies: Expand export-credit programs only
Government financing of exports to modernize insofar as they can support reforms and can be ef-
the energy sector benefits U.S. business and jobs, fectively used. Impose maximal conditionality on
and it can stimulate increased energy production. credits: export-credit and investment assistance
However, these credits may simultaneously harm would go only to firms actively engaged in a real
other American interests by discouraging Russian transition to market functions.
firms from accepting Western firms as investors, a It is possible to satisfy these dual priorities only
potentially much larger, though more costly, in countries that have embarked firmly on a course
source of the enormous amounts of capital needed of economic reform. A balanced approach is ap-
for energy sector modernization. The availability propriate for Poland, the Czech Republic, and
of public-sector financing may even inhibit re- Hungary because their progress toward economic
form by removing the incentive for firms to re- reform makes it possible to promote both trade
structure their operations to attract commercial and reform simultaneously. This option may also
credit and cooperation. be appropriate in Kazakhstan. Although market
Nevertheless, there is good reason for the reform has been limited there, Kazakhstan is open
United States to maintain its export-credit pro- to foreign investment and trade.
grams at a level sufficient to keep American firms In other countries of the former East Bloc, the
competitive with their Western rivals and to pro- choices are not so easy. Declining oil production is
vide afoot in the door to potentially lucrative mar- a serious threat to Russia’s weak economy. Bol-
kets. The political importance of foreign stering that economy may be essential for prevent-
assistance and trade-promotion programs should ing 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 pro- will be an important asset in achieving U.S. na-
vide significant help, and U.S. industry would tional goals. However, financial and institutional
benefit from supplying it. However, if the help is constraints in these countries will limit Western
provided without insisting on continued reforms, investment and sales of equipment and services. A
U.S. long-term interests and Russia’s long-term strong and active U.S. government role is neces-
economic health could be damaged. Selecting the sary to expedite the transition to market econo-
appropriate balance depends on one’s views of the mies and democracy and to assure that export
urgency of Russia’s short-term energy problems markets are available for U.S. industry. The policy
and the importance of U.S. equipment exports vis- options discussed above, if implemented skillful-
a-vis long-term development. ly and with adequate funding, can help very sig-
nificantly. Congress will face the issue of whether
CONCLUSION increased efforts are warranted in light of other
Improved energy technology will be a critical fac- U.S. national priorities and uncertainties over
tor in modernizing the economies of the former progress toward reform in Russia and other coun-
East Bloc, and the transfer of energy technology tries 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 coun-
tries 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 Ro-
mania 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 nu-
merous cost-effective opportunities exist for improving energy
efficiency. This chapter discusses the role of energy in the econo-
my 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 econ-
omies of former East Bloc countries. In the past, centrally planned
economies relied on abundant and easily accessible energy sup-
plies to foster rapid industrialization, particularly of heavy indus-
tries. 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 in-
creased sixfold during this same period (averaging 4.7 percent
annually).

Prague, Czech Republic.

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 Na- 123
tions Publications, 1991 ), p. 5.
24 I Fueling Reform: Energy Technologies for the Former East Bloc

Instead of becoming more energy-efficient as economic growth. Additional revenues will bene-
they grew, however, centrally planned economies fit exporting nations, especially Russia and Ka-
experienced higher growth rates in energy con- zakhstan. Efficiency improvements also will
sumption than did OECD (Organization for Eco- benefit Ukraine and the oil-importing countries of
nomic Cooperation and Development) countries.2 Central Europe and the Baltics by reducing ex-
Heavily subsidized energy prices, the lack of mar- penses and improving their balance of payments.
ket incentives, and the importance given to fulfill- With energy prices still below market levels,
ing quotas and achieving state plans contributed there is little incentive to improve energy efficien-
substantially to the high energy requirements and cy. However, as these countries move to market
corresponding production in the region. economies, energy prices will continue to rise un-
In recent years, the energy picture has changed til they reach world market levels, making energy-
somewhat. Energy production, particularly of oil efficiency measures more attractive.
and coal, is falling, largely due to inadequate in- Finally, a decrease in fossil fuel combustion
vestment in exploration, the use of outmoded will reduce air pollution and C0 2 emissions, pro-
technologies, the lack of spare parts, and poor viding significant environmental benefits.
maintenance. The dissolution of the Soviet Union
and the resultant political and economic changes ENERGY SUPPLY
further limit output. Energy demand has declined Russia, an energy giant, has the world’s largest
because of reduced economic activities and higher natural gas reserves and immense oil and coal re-
energy prices, although energy consumption as a serves. How these supplies are developed and uti-
percent of GDP (gross domestic product) is still lized will influence global markets for years to
high. come. Of the Central European countries, only
Increasing or stabilizing energy production is Poland has large energy resources, mostly coal.
critical to the economic well-being of former East The following brief overview describes the energy
Bloc countries. Recent energy shortages have resources in the former East Bloc in terms of re-
constrained economic activities and slowed re- serves, production, and exploration.
form. Moreover, revenues generated by energy
exports are essential for financing reform initia- I Oil Supply
tives and modernizing industries, buildings, and
transportation networks. Oil Reserves
Even more important to the economic health of Several FSU countries are rich in oil reserves:
these countries may be improvements to energy Russia, Kazakhstan, Turkmenistan, Azerbaijan,
efficiency. The past neglect of energy conserva- and Uzbekistan. Russia alone has proven reserves
tion and efficiency practices resulted in extensive of about 50 billion barrels (Bbbl), which is about
energy waste and contributed to high operating double that of the United States, though dwarfed
costs, energy shortages, loss of foreign exchange, by Saudi Arabia’s resources. The largest oil fields
and environmental damage. Improving energy ef- are located in Western Siberia and the Volga-
ficiency can reduce energy waste and provide Urals. The U.S. Geological Survey estimates that
additional fuel supplies for export, thus spurring 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 production has been on a downward slide since
60 Bbbl.4 The wide range indicates the high de- 1987, when output peaked at 11.44 million barrels
gree of uncertainty attached to these estimates. (MMbbl) per day.9 In 1992, Russia produced 7.95
The eastern regions of Siberia and the offshore MMbbl per day, a drop of more than 30 percent.
areas are relatively unexplored by international (See table 2-l.) Oil output declined further in
standards. Future exploration and production of 1993. The greatest losses in output have occurred
these resources will be technically challenging in Western Siberian oil fields due to policy deci-
and more expensive because they are in remote sions that favored short-term production goals at
areas with harsh climates. the expense of exploration and discovery, deple-
Most of Kazakhstan’s oil reserves (estimated at tion of old giant fields, inefficient production
16 Bbb15) are located in the northwestern region practices, and the lack of capital for more sophisti-
near the Caspian Sea. The Tenghiz oil field may cated drilling and export operations.
add another 3.3 Bbbl to Kazakhstan’s oil reserves, Future oil production in Russia is likely to oc-
6
according to one estimate. However, develop- cur in remote, inaccessible fields, entailing huge
ment of this field has been hampered by technical capital investment and access to Western technol-
challenges, enormous financial requirements, and ogy and expertise. Assistance from Western com-
the difficult y of transporting the oil to internation- panies can improve future development prospects
nal markets. and increase production of old fields. Technology
Turkmenistan’s oil fields are located in the transfer, one avenue for developing resources, is
Cheleken Peninsula and in the eastern part of the discussed in detail in the oil and gas section in
country. According to Turkmen authorities, the chapter 3.
country may have oil reserves close to 5.1 Bbbl.7 Unlike Russia, Kazakhstan’s oil production has
Azerbaijan and Uzbekistan also have signifi- been increasing steadily since the early 1980s. In
cant oil reserves. Most of Azerbaijan’s 1.2 Bbbl 1992, Kazakhstan produced about 552,000 bar-
reserves are located offshore in the Caspian Sea.8 rels per day. 10 Future increases in production will
Western companies are eager to exploit these re- depend on development of oil deposits in the re-
sources, but the need for massive infrastructure mote and inhospitable Guryev region in northwest
development hinders energy sector investment. Kazakhstan, particularly the Tenghiz field. Devel-
Other former republics have only small amounts opment will be expensive because of the techni-
of oil. Romania is the only Central European cally challenging nature of the oil deposits. The
country that has significant oil reserves. great depths, high pressures, and high sulfide con-
tent of the Tenghiz field will require using ad-
Oil Production vanced technologies not yet available in the FSU.
Major oil production activities are centered in Moreover, Kazakhstan’s lack of domestic infra-
Russia, Kazakhstan, and Azerbaijan. Until recent- structure, such as pipelines to transport oil
ly, Russia was the world’s largest oil producer, but through neighboring countries, will require mas-

4E~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.
7
Nancy 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 Report forcongmss, 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 open to doubt the degree to which these resources
intensely interested in developing Kazakhstani re- will be used to support economic and political
sources, and the Kazakhstani government has modernization.
welcomed foreign interest quite openly, which Other former republics—Turkmenistan, Uzbe-
contrasts sharply with Western experience in Rus- kistan, Belarus, Kyrgystan, Tajikistan, and Geor-
sia. Deals with Chevron, British Gas, Italy’s Agip, gia—are also oil producers, but their
and France’s Elf should bring about $38 billion in contributions are small compared with those of
foreign investment in Kazakhstan’s oil industry Kazakhstan and Azerbaijan.
over the next 40 years. 11 Kazakhstan hopes to use
oil revenues to finance development and modern-
ization of the rest of its economy.
Exports
Azerbaijan has been producing oil since the Within the FSU, only Russia and Kazakhstan are
1870s. Most of its output comes from offshore currently net oil exporters, mostly to European
fields. Soviet development practices, which fa- Countries. Exports are transported by pipeline to
vored oil field investment in Siberia over that in Central and Eastern Europe and by tanker to West-
the Caucuses, left Azerbaijani exploration and ern Europe. Oil supplies are critical to economic
production inefficient. Consequently, output has recovery in both exporting and importing coun-
been declining since 1980, falling to 221,000 bar- tries of the former East Bloc.
rels per day. 12 Pervasive corruption and the lack of In recent years, Russian oil exports have de-
economic reforms in Azerbaijan have dampened clined, mostly due to a decline in production. For
Western enthusiasm for development and leave 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, Poland also has natural gas reserves, estimated
with shipments to FSU countries registering the at 12 Tcf. Much of its highly dispersed reserves
biggest decrease. Exports to OECD countries re- have low Btu (British thermal unit) value. To date,
mained fairly constant. To maintain export levels the lack of capital has hampered the exploration
to Western Europe, and thus hard currency pay- and development of this resource.
ments, it is likely that Russian exports to the for-
mer republics of the Soviet Union will further
Natural Gas Production
decline, at least in the near term.
Natural gas production in the FSU declined in
1992 for the second year in a row. This is in sharp
I Natural Gas Supply
contrast to the growth rates of 6 to 8 percent annu-
Natural Gas Reserves ally in the 1980s. Despite the decline, the natural
Russia has the world’s largest gas reserves-about gas industry is in better shape than its oil counter-
1,626 trillion cubic feet (Tcf). Undiscovered gas part-it is relatively young, requires less sophisti-
reserves are estimated to range from 927 to 4,083 cated technologies, and may not need huge
Tcf, with 1,569 Tcf the most likely amount. 13 amounts of capital to maintain present production
Western Siberia has the largest gas fields, and vast levels.
amounts of natural gas are also thought to lie be- The largest declines in 1992 output occurred
neath the Arctic Ocean. Foreign companies are outside Russia. (See table 2-2.) For example,
very interested in developing Russia’s large gas Turkmenistan’s production dropped by almost 29
reserves, particularly those in the Far East region. percent in 1992. Its main fields have peaked, and
It is clear that Russia’s huge resource base can sup- newer, smaller fields could not offset the drop in
port increased production, but new infrastructure output. In addition, the loss of its traditional ex-
and markets are needed to make this happen. port markets, particularly to Ukraine, contributed
Other former republics that have gas resources to the decline. Even so, Turkmenistan remains the
are Turkmenistan, Uzbekistan, Kazakhstan, and second largest gas producer in the FSU and the
Ukraine. Much of Turkmenistan’s enormous gas third largest in the world.
reserves (96 Tcf) are located along its border with Also, Ukraine’s output declined by 14 percent.
Iran. Kazakhstan’s gas reserves are estimated at Its heavy reliance on Russian gas imports has
64.6 Tcf. Its main gas field, Karachaganak, is lo- forced Ukraine to seek alternative suppliers such
cated on its northern border with Russia. Both ex- as Iran. In 1993, Ukraine, Iran, and Azerbaijan
ploration and development of this field have been formed a joint venture to build gas pipelines
challenging because of the highly corrosive char- through Azerbaijan to Western Europe. 15
acteristics of the gas and the location of the depos- Unlike the other former republics, Uzbekis-
its (4,000-5,000 meters deep). 14 Ukraine’s sizable tan’s natural gas production continues to rise. Due
untapped reserves (37.8 Tcf) have been uneco- to expanded exploration and development, 1992
nomical to explore and produce, but given its hard production increased by 2.1 percent. Uzbekistan
currency shortage, the country will be forced to re- is the third largest natural gas-producing country
duce imports and maximize domestic production. 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 22.616 22,704 22.623 21.747 20.829 19.222 16.316 8.970


W. Siberia 20.292 20.271 20.105 19,056 18.039 16.414 13.271 5.523
Turkmenistan 2.122 2.977 3.101 3.175 3.118 3.111 2.938 2.490
Uzbekistan 1.511 1.480 1.441 1.451 1.409 1.406 1.222 1.229
Ukraine 0.738 0.858 0.992 1.088 1.144 1.257 1,515 2.002
Kazakhstan 0.311 0.279 0.251 0.237 0.251 0.222 0.194 0.152
Azerbaijan 0.275 0.304 0.350 0.392 0.417 0.441 0.498 0.494
Other 0.014 0.018 0.018 0.021 0.018 0.025 0.025 0.025
republics
Total FSUa 27.588 28.619 28.775 28.114 27.193 25.688 22.704 15.369
Romania 0.78 0.88 1.03 1.13 1.28 1.32 1.27 1.20
Hungary 0.17 0.18 0.16 0.22 0.22 0.22 0.26 0.21
Poland 0.14 0.15 0.14 0.19 0.20 0.20 0.23 0.22

a
Sum 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 EnergyAnnual 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 placement was double that amount. Today, capital
declined slightly in Russia. The fact that output constraints dictate that only badly deteriorated
decreased by only 0.4 percent17 is remarkable giv- sections be scheduled for replacement. Natural
en recent institutional changes in the gas industry gas transmission systems in Kazakhstan, Uzbe-
and the country-wide economic crisis. kistan, and Turkmenistan are particularly bad and
In Russia, future natural gas production, like oil in dire need of repair/replacement. 18
production, is likely to come from remote areas.
Extraction and transmission costs will increase.
Major investments in exploration, development,
Natural Gas Exports
and transmission will be necessary to increase Russia exports about 3.8 Tcf of natural gas annual-
production, and financial resources may not be ly, mostly to Western Europe.19 The need for hard
available. currency may ensure that Western European ex-
Transport of gas to markets maybe even more ports will be maintained at the expense of Central
problematic than increasing production. Many European customers. However, maintaining the
pipelines and compressors are in dire need of re- flow to Western Europe may be complicated by
pair. Losses from leaky transmission and distribu- Russia’s dependency on pipelines that cross sev-
tion lines are a serious problem. In the last years of eral former republics, particularly Ukraine, Bela-
the Soviet empire, over 900 miles of pipeline were rus, and the Baltics. Ukraine’s periodic stoppages
replaced annually, but the need for pipeline re- 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. gions in Siberia. Other major coal basins are lo-
This and other factors have prompted Central Eu- cated in western Russia and the Urals.
ropean customers to look elsewhere for gas sup- Ukraine’s coal reserves are estimated to be
plies. Ukraine, which is very dependent on about 44.1 billion tons.23 There are three major
Russian gas supplies, is building closer ties with coal fields in Ukraine: Donets Basin, located in
Iran, partly to diversify energy sources. Recently, the eastern region; the L’viv-Volynsk Basin, lo-
Ukraine and Iran agreed to build gas pipelines cated in the western region; and the Dnieper Ba-
through Ukraine to connect Iran to Western Eu- sin. The Donets Basin is the major coal producer
rope. and one of the oldest sites of underground mining.
Turkmenistan exports natural gas to other for- Donets coal seams are very thin (many are less
mer republics, particularly Ukraine and Azerbai- than 1 meter thick) and steeply pitched, making it
jan, and to Western Europe. Ukraine is the largest difficult for miners to work. Over the years, the
single market for Turkmenistan natural gas. In quality of Donets coal has decreased: the ash and
1993, Turkmenistan negotiated the sale of 1 Tcf to moisture content has risen, whereas the energy
Ukraine and 622 billion cubic feet (Bcf) to Azer- content has fallen.
baijan. 20 Most of Turkmenistan’s hard-currency Kazakhstan has substantial coal reserves—
earnings come from its natural gas exports. Like about 55.1 billion tons24—making it one of the
Ukraine, Turkmenistan is planning to build export largest coal-bearing countries in the world. Its
pipelines through Iran and Turkey. This should three primary coal basins, Ekibastuz, Maikyu-
lessen Turkmenistan’s frustration over Russia’s
bensk, and Karaganda, are located in eastern and
ownership of transmission pipelines and conse-
central Kazakhstan. Coal quality varies from sub-
quent control over lucrative Western markets. 21
bituminous in the Maikyubensk basin to anthra-
cite in the southern part of the Karaganda basin to
| CoalSupply poor quality in the Ekibastuz. This coal is export-
Coal Reserves able only to Russia because it is too abrasive and
The FSU’s substantial coal reserves, estimated at contains high-ash components, making it uneco-
266 billion tons,22 are scattered throughout the nomical to transport.
former republics. A large portion of its coal re- Poland’s recoverable reserves are estimated at
serves comprise less desirable deposits because of about 45 billion tons. 25 Substantial hard coal re-
location and geological characteristics. Russia, serves are found primarily in the Upper Silesian
Ukraine, and Kazakhstan are the three major coal Basin in the South, while lignite reserves are scat-
producing countries. tered throughout central and western Poland.
Much of Russia’s immense coal reserves are lo- The Czech Republic and Hungary have sizable
cated in Siberia. Kuznetsk, Kansk-Achinsk, and coal reserves, but far less significant than that of
South Yakutia are the major coal-producing re- Poland, Russia, and Ukraine. Nevertheless, coal is

20
Sagers, “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. Gover-
nment Printing Oflice, June 1993), p. 297.
23u .s . Genera] Accounting Office, L/kralne Energ~on d l / ion s 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 371.775 389.526 435.832 452.040 469.129 457,222 435.722 431.533


Ukraine 147.740 149,504 181.698 198.677 211.356 211.687 208,379 217.310
Kazakhstan 140.022 143.330 145.094 152.591 157,773 156.670 144,212 127.233
Uzbekistan 5.182 6.505 7.166 6.836 6.064 5.513 5.513 6.284
Kyrgyzstan 2.426 3.859 4.079 4.410 4,410 4.410 4,410 4.410
Tajikistan 0.221 0.331 0.551 0.551 0.772 0.662 1,103 1.103
Georgia 0.551 0.882 1.103 1.323 1.544 1.764 1,874 2.095
Total FSUa 667.916 694.046 775.413 816.207 851.047 837.707 800.882 789.857
Poland 227 231 237 275 294 290 275 254
Czechoslovakia 102 111 119 130 137 137 140 136
Romania 38 36 42 68 58 50 51 39
Hungary 17 19 19 22 23 24 27 28

a
Sum 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 land disturbances, saline water discharge, sewage
of employment in both countries. problems, methane emissions, and inadequate and
inappropriate storage of mine and coal washing/
Coal Production cleaning wastes. Even after mines close, some of
The first mined coal fields in the FSU were located these effects linger. (For a discussion on the extent
in the west, near population centers. Some of these of environmental damage, see chapter 5.)
deposits have been mined since tsarist times and Russia produced about 371.8 million tons of
have thus become depleted. The industry was coal in 1992, a decline of 4.6 percent from the pre-
forced to open new mines in Siberia and the Arc- vious year.26 Because of declining production,
tic, far from major population and manufacturing Russia is a net importer of coal. The bulk of Rus-
centers and subject to harsh weather. sia’s production comes from Siberian basins,
In 1992, coal production declined in all the for- where coal is mined in both open pit and under-
mer republics. (See table 2-3.) The decline can be ground mines. The Kuznetsk Basin, located in the
attributed to several factors, including the lack of southern part of Western Siberia, has been the
investment in mine development, equipment largest coal producer in Russia for years. It pro-
shortages, and labor unrest. Low morale, poor sa- duces many grades of high-quality coal, with low
laries, and wretched working and living condi- ash, moisture, and sulfur content. The next largest
tions have led to several crippling miners’ stikes producing basin, the Kansk-Achinsk, has a large
in the FSU in recent years. share of low-quality, high-moisture coal that tends
Coal production activities have had serious to self-combust during transport, making this coal
harmful environmental impacts. These include 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 tal energy production in 1990.30 Production has
in the FSU, but Kazakhstan is a very close third. been declining since 1983. Hungary’s coal mining
Ukraine’s coal production has been on a down- industry is reorganizing, and mines are being pri-
ward slide since 1988. The biggest drop in output vatized. Contraction of Hungary’s coal industry is
occurred in 1991, when production decreased by inevitable. 31
almost 18 percent. In 1992, Ukraine produced
147.8 million tons.27 Ukraine, too, is a net import-
er of coal.
| Coalbed Methane
Kazakhstan’s energy production and exports Russia is likely to have significant coalbed gas re-
are dominated by coal. Recent oil and gas discov- sources. Three basins, located east of the Ural
eries are expected to change significantly the mountains, contain most of Russia’s resource: Pe-
country’s energy balance. In 1992, Kazakhstan chora, Kuznetsk, and Tungusk. The Pechora ba-
produced 140 million tons, a slight decline of 2.3 sin’s coalbed methane resource is estimated at 80
percent. Miners’ strikes in May and June 1992 and to 120 Tcf, but the area’s harsh climate may limit
the mutual indebtedness of the Kazakhstani coal exploitation of this resource. The Kuznetsk ba-
industry and its customers are largely responsible sin’s estimated coalbed gas resource is 350 to 500
for the decline. Tcf. There is no reliable estimate of coalbed gas
Poland is a major coal producer, ranking resources in the remote Tungusk basin.32
seventh in the world. In 1991, Poland produced Ukraine and Kazakhstan, which have signifi-
231 million tons.28 Its economy is heavily reliant cant coal resources, boast estimated coalbed
on coal; for example, more than one-half of the methane resources of 60 and 40 Tcf, respectively.
residential/commercial sector’s energy needs are Poland also has significant coalbed methane re-
derived from coal.29 In recent years, coal output sources, and Western countries are interested in
and exports have been declining. Despite the de- developing this resource. For comparison, table
cline, Poland remains a major coal exporter. 2-4 highlights major coalbed methane resource
In the Czech Republic, coal is the leading do- countries.
mestic energy resource. Brown coal provides the Although the resource base is high in this re-
bulk of production in recent years. Much like oth- gion, development potential may be weak because
er former East Bloc countries, output has declined deposits are often located in remote areas with
in recent years, and the Czech government intends harsh climates. Also, these remote areas may lack
to phase out one-third of its coal production by the the essential infrastructure to produce and trans-
late 1990s. port this resource. Moreover, local markets may
Coal is also a major domestic energy resource not be well established. Currently, about 50 Bcf of
in Hungary, accounting for about 36 percent of to- 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

pollution. Also, the days of cheap Soviet energy


exports are gone, and some countries believe they
Coalbed methane have no other choice but to pursue nuclear power.
resources Many of these countries have energy supply defi-
Country (trillion cubic feet) cits, and nuclear energy helps fill the gap. Russia,
Russia 600-4,000
Ukraine, and the Czech Republic plan to increase
China 1,060-1,240 their nuclear capacity in the near future. Ukraine
United States 400 also has postponed the closure of the Chernobyl
Canada 200-2,700 nuclear powerplant, a reflection of the desperate
Australia 300-500 situation the country now faces regarding energy
Germany 100 supplies. Other countries, including Poland, have
Poland 100 halted nuclear power development plans for the
Ukraine 60 time being. The safety problems of East Bloc reac-
United Kingdom 60 tors and what the United States and other Western
Kazakhstan 40 countries can do about them are discussed in detail
in chapter 4.
SOURCE VelloA Kuuskraa, Charles M Boyerll, andJonathan A Kela-
fant, “Hunt for Quality Basins Goes Abroad,” 01/ar?d Gas Journa/, VOI | Renewable Energy
90, No 40, oct 5, 1992, p 51
In former East Bloc countries, renewable re-
sources contribute only a small share of total ener-
I Nuclear Power gy production. In Hungary, for example,
Nuclear power is an important source of electric- renewable contribute only about 1 to 2 percent to
ity in Lithuania, Hungary, Slovakia, Bulgaria, Uk- total energy supply,35 compared with 9 percent in
raine, and the Czech Republic. Nuclear power the United States. Also, the use of renewable is
supplies 80 percent of Lithuania’s electricity and relegated to a minor role in Poland’s and Russia’s
nearly half of Hungary’s and Slovakia’s. More- current and projected energy supply scenarios.
over, the Czech Republic has one of the largest nu- The Russian Ministry of Fuel and Energy has indi-
clear industries in Central Europe and is the only cated that by the year 2010, nontraditional energy
non-Soviet country to build Soviet-designed nu- resources are expected to provide only about 2 to 3
clear reactors. percent of total fuel supply and 2 to 5 percent of
At the end of 1992, there were 65 operating nu- electricity output. However, this small contribu-
clear power reactors in the former East Bloc. (See tion could save 50 million tons of conventional
table 2-5 for a breakdown of the number of plants fuel per year.36
and capacity, by country.) Russia has a heavy con- Hydroelectric power is the most developed re-
centration with 28, and Ukraine has 15.34 newable. In 1991, the FSU had 64.1 gigawatts of
About 40 percent of these reactors present seri- hydro capacity, which is about 19 percent of total
ous safety concerns. Nevertheless, these plants installed capacity. 37 Over the last several decades,
continue to operate for a variety of reasons, in- Soviet scientists have conducted research on other
cluding the need for power supplies to fuel eco- renewable technologies, resulting in well-devel-
nomic growth and the desire to reduce air oped 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

Nuclear share of
Operable Under construction electric generation
Country Units MWe Units MWe percent of total

Bulgaria 6 3,538 0 0 32.5


Czech Republic 4 1,632 2 1,784 20.7
Hungary 4 1,729 0 0 46,4
Kazakhstan 1 135 0 0 0.6
Lithuania 2 2,760 1 1,380 80.0
Russia 28 18,893 18 14,175 11.8
Slovak Republic 4 1,632 4 1,552 49.5
Slovenia 1 632 0 0 34.6
Ukraine 15 13,020 6 5,700 25.0
Total 65 44,193 31 24,591

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 Rus- However, the usual obstacles to renewable de-
sian national electric utility (RAO) is taking the velopment interfere with joint ventures sought by
lead in the future development of renewable. these countries and Western companies: artificial-
RAO, which is a private joint stock company, is ly low prices for conventional fuels, capital
currently funding a solar photovoltaics project in constraints, and the lack of political and institu-
the northern Caucasus region. RAO has also en- tional commitment. These obstacles are signifi-
couraged joint ventures with Western renewable cant and will continue to hinder renewable
energy companies.38 development and use in the near term.
Of course, the potential for renewable devel- With huge fossil fuel resources, Russia has had
opment differs by country-with c1imate, weather little incentive to develop renewable. Also, Rus-
patterns, and other geographical factors largely sia’s institutional structure is geared to producing
determining the prospects. Wind energy potential fossil fuels and not renewable. In other former re-
is enormous in Russia, Kazakhstan, and Ukraine publics, the situation is somewhat different. The
(but most often is inaccessible). These countries need to develop indigenous energy resources, re-
are now seeking joint ventures to help develop duce dependency on foreign imports and related
their wind energy resources. The most impressive costs, provide decentralized power to rural areas,
joint venture for renewable technologies so far is and address environmental concerns have spurred
the U.S. Windpower project in Ukraine. Plans call some interest in renewable technologies. Defense
for 500 megawatt (MW) wind turbines to be conversion and the availability of idle or underuti-
manufactured in Ukrainian factories and installed lized industrial plants may provide added incen-
in the Crimea by 1995. tives 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 47.77 45.89 0 6.34 26,59


Kazakhstan 16.81 14.86 59.11 9.23 100.55
Russia 26.77 39.32 25.01 8.90 964.37
Ukraine 15.48 37.37 38.70 8,45 247.43
Poland 11.77 8.20 69.75 9.50 114.70
Czech Republic 16.30 13.63 62.65 7.42 b 43.97
Slovak Republic 32.62 21.90 27.86 17.25 b 18.21
Hungary 31.61 33.20 22.62 12,57 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 nia’s oil-fired and nuclear powerplants generate a
in developing renewable at a more rapid pace. surplus of electricity for export. Estonia uses in-
Russia and Ukraine have substantial technical digenous oil shale to satisfy half of its energy
know-how but little expertise in project planning, needs.
development, and management. Wind turbines, Much of the energy used in former East Bloc
photovoltaic cells, and solar thermal collectors countries is wasted. The old economic system fo-
could be manufactured under joint ventures with cused on quantity of production rather than quali-
the West. The potential for and impediments to ty or cost, resulting in an astonishing waste of
U.S. renewable technology transfer to the former inputs, such as energy, and a near total disregard
East Bloc are discussed in chapter 4. for the environment. Although energy consump-
tion has declined in recent years, further improve-
ENERGY DEMAND ments are possible. The following provides a brief
The countries of the former East Bloc vary in their overview of sectoral energy use in the former East
patterns of energy use. Poland, the Czech Repub- Bloc and of opportunities for improving energy
lic, and Kazakhstan, for example, rely on indige- efficiency. Table 2-6 shows 1992 energy con-
nous coal for a large percentage of their energy sumption by fuel type for selected countries.
needs. Ukraine relies extensively on indigenous
and imported natural gas and coal, and Russia uses | Energy Demand by Sector
considerable amounts of natural gas and oil to fuel The three major energy-consuming sectors—in-
its economy. Although Hungary’s energy use is dustry, buildings, and transportation—are diverse
more diversified than that of other former East and large. Industry is the single largest energy user
Bloc countries, nuclear energy supplies nearly in the former East Bloc, accounting for almost half
half of its electricity needs. of the energy used in the FSU and about 40 percent
The Baltics are quite dependent on energy im- in Hungary and Poland. The industrial sector uses
ports, particularly from Russia. Latvia imports al- energy for a wide variety of purposes, such as di-
most all of its electricity and fuel, and Lithuania rect heat, steam generation, machinery operation,
imports almost all of its primary energy. Lithua- and feedstocks.
Chapter 2 Overview of Energy Supply and Demand | 35

Energy used in buildings accounts for about private auto has been rising and probably will con-
one-fourth to one-third of all energy used in the tinue to rise, particularly in urban areas.
former East Bloc. Most urban and suburban hous- In the FSU, the transport sector accounts for
ing consists of large, multifamily apartment build- about 16 percent of total energy use, compared
ings. Single-family homes are common in rural with nearly 27 percent in the United States. In Po-
areas. This contrasts sharply with the United land, the sector’s share is even lower—l 3 percent.
States, where single-family homes are the pre- These comparatively lower numbers are directly
dominant housing type. Commercial buildings linked to limited automobile ownership in former
are much less common in the former East Bloc. East Bloc countries. However, over the last dec-
According to one estimate, the FSU has less than ade, modal shifts in transportation use have oc-
one-fifth as much commercial building floor curred, the most prominent being an increasing
space per capita as does the United States.39 reliance on autos and trucks.
In the buildings sector, energy is used to heat Transport sector fuel use has changed over the
and cool homes and offices, cook, and power ap- years. For rail transport, electricity and diesel
pliances and lights. Space heating dominates sec- have replaced coal and residual oil. Diesel fuel is
tor demand. Sources include district heat, direct slowly replacing gasoline use in trucks and buses.
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 Energy Efficiency
used for space heating (about 60 percent), with the Artificially low energy prices and the emphasis
remaining coming from district heating plants. placed on large-scale industrial development re-
Coal provides a large share of home and district sulted in high energy requirements in the former
heating needs in Poland, the Czech Republic, Slo- East Bloc. Furthermore, past capital investment
vakia, and Hungary. Water heating is a significant strategies that favored energy production over
energy user too. Hot water is often supplied cen- efficiency further contributed to a technically
trally by district heating plants. Buildings with ac- outdated and energy-inefficient industrial infra-
cess to natural gas service use this fuel to heat structure.
water. Most household lighting is supplied by in- Former East Bloc countries are among the most
candescent lamps, and lighting levels are often energy intensive in the world. In 1990, the FSU’s
relatively low. energy intensity was 70 percent higher than that
In the transportation sector, freight accounts for of the United States and about 2.5 times that of
the largest share of total energy use. In the FSU, Western Europe.41
long-distance rail and pipeline dominate, but Industries in the former East Bloc typically re-
truck use is slowly rising. Passenger mobility is quire more energy to produce one unit of output
very low compared with that of Western countries. than do industries in Western Europe, Japan, or the
The bus is the most frequently used mode of pas- United States. Among the most energy-intensive
senger travel, followed by rail. However, travel by industries are iron and steel, chemicals, and petro-

J9L. 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 ex- report, Energy Efficiency Technologies to Central
ample, requires about 50 percent more energy per and Eastern Europe, discusses these opportuni-
ton of iron output than is required in the United ties in detail. They range from simple and inex-
States. Open hearth furnaces still produce the bulk pensive measures, such as fixing steam leaks and
of steel in the FSI. radiator valves, to more capital-intensive invest-
The energy intensity of buildings is also quite ments, such as new boilers, electric motors, and
high. Buildings in the FSU use about 50 percent process control systems. In many cases, these
more energy to heat one square meter of floor- technologies offer paybacks of two years or less.44
space than do buildings in the United States. 42 New processes and facilities will improve energy
Common inefficiencies found throughout the for- efficiency throughout the economy, but replace-
mer East Bloc include the lack of building insula- ment is likely to take many years to accomplish.
tion, energy-inefficient lighting, poor-quality One estimate indicated that replacing energy-us-
motors and appliances, and inadequate construc- ing technologies in the FSU with Western Euro-
tion. For example, in Poland, typical apartment pean models could lower intensity by 25 to 40
building walls have less than half the insulating percent. 45
value of walls in typical U.S. houses, and new re- Continued price subsidies and inadequate capi-
frigerators use about 40 percent more energy than tal resources will limit implementation of these
is allowed by the 1993 U.S. appliance standard. measures. In addition, industries may recognize
In addition, automobile and truck fuel efficien- the energy savings potential and have a financial
cy is below Western standards, primarily because incentive to make the investment, yet not have the
of the use of less technically advanced equipment. needed capital. Other factors also impede energy
Other factors that affect efficiency include poor efficiency improvements, including management
vehicle and infrastructure maintenance, poor fuel practices and the lack of consistent and reliable in-
quality, traffic congestion, and cold weather formation on energy use. Many factory managers
conditions. For example, FSU automobiles aver- ignore energy-efficiency investments for various
aged about 20 miles per gallon (mpg) in 1985, reasons, including institutional obstacles. For ex-
compared with 27.5 mpg in the United States. ample, managers who save energy fear that they
Also, Aeroflot aircraft use 50 percent more energy might be penalized by having their allocations re-
per seat per kilometer than those in Western coun- duced. Today, managers are most concerned about
tries. 43 keeping the business/plant open and workers
employed. Profits are given little consideration
| Opportunities for Improving Energy because taxes and inflation are so high.
Efficiency Assistance from Western countries could accel-
Few of the many opportunities to improve energy erate efficiency improvements and contribute to
efficiency have been exploited to date. Identifica- the economic transition in former East Bloc coun-
tion of the most promising energy-saving technol- tries. The following briefly discusses sectoral op-
ogies, projects, and policies has just begun. OTA’s portunities.

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 wil1 accrue from these investments. The capital re-
The industrial sector is especially suited for rapid quirements to rebuild industrial facilities will be
efficiency gains. Four categories of generic enormous. Industries may recognize the energy-
technologies could be used to improve industrial saving potential and have the financial incentive
energy efficiency: housekeeping, improved mea- to make the investment, but not have the needed
surement and control, improved steam system, capital.
and improved motors. Simple, low-cost house- Also, structural changes are likely to make a
keeping measures, such as insulating pipes, plug- big difference in industrial energy use. Moving
ging leaks, turning off equipment when not in use, away from heavy industry to less energy-intensive
and maintaining equipment can result in large en- consumer products will do much to reduce energy
ergy savings. Of course, energy savings and pay- use.
backs will vary according to specific measures
and applications. Buildings Sector
Improved measurement and control also offers In the buildings sector, low-cost measures can
large potential energy savings. Examples include provide significant energy savings. Installing
energy management systems to operate equip- thermostats to regulate heat and sealing windows
ment automatically and improved sensors and properly are two examples. Other measures, such
controls to allow for fine-tuning of the tempera- as fuel switching and making improvements to
ture. Savings are site-specific but generally con- building shells, appliances, and district heat deliv-
siderable. ery systems will require more capital but will im-
Steam systems can be improved through prove energy efficiency significantly. Behavioral
housekeeping measures and the installation of changes can also save energy.
sensors and controls and improved burners. A number of factors will almost certainly lead
Electric motors account for the bulk of indus- to increased energy use in buildings in the former
trial electricity use in the former East Bloc. Re- East Bloc. These include large increases in the size
placing standard motors with high-efficiency of commercial buildings and residential housing;
motors will result in substantial savings. Al- growth in population; increased demand for ener-
though high-efficiency motors typically cost gy-intensive services in the commercial sector,
about one-third more than standard motors, this such as air conditioning; and growing demand for
investment often pays back rapidly, depending on energy-intensive residential appliances, such as
usage, electricity rates, and other factors. color TVs, clothes dryers, and larger refrigerators.
In the short term, the first priority for industry is The challenge will be to moderate this increase in
to implement the numerous low-cost/no-cost energy demand below what it would otherwise be.
measures noted earlier. The use of these technolo- Although much housing is in relatively poor
gies is usually straightforward and does not re- condition, the shortage of housing means that very
quire a highly trained engineer to install. In the few residential buildings will be replaced in the
long term, major energy efficiency improvements near term. Therefore, low-cost investments can be
will come not just from retrofits but from replace- justified even in older buildings. Properly de-
ment technologies and new facilities. Investments signed and constructed new buildings are much
in new technologies and facilities will most likely more efficient than even well retrofitted old build-
be made for reasons other than efficiency; never- ings 46 Even though relatively few new buildings
theless, efficiency and environmental benefits 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 An increase in automobile use will drive gaso-
standards should have a high priority. line demand up, unless fuel economy increases
faster. New demand will require additional refin-
ing capacity or greater capital expenditures for im-
Transportation Sector ports. Thus, the efficiency of new automobiles is
Improving efficiency in the transportation sector critical. For example, replacing the existing FSU
depends on the replacement of existing vehicles fleet with new automobiles that get 20 percent bet-
and on upgrading major infrastructure and trans- ter fuel economy would save about 50 MMbbl of
portation networks. There is great potential for oil per year. However, this will take many years to
growth in the transportation sector, particularly accomplish and require enormous amounts of
personal travel. Car ownership levels are rising, capital.
and reliance on truck transport is increasing. De- Public transport systems are extensively devel-
mand for automobiles in Central Europe is ex- oped and have prospered in former East Bloc coun-
pected to grow by 133 percent in the 1990s. This tries. Continued government support and increased
compares to an OECD rate over the same period of investment in public transport systems could help
just 10 percent.47 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 mvelW-
ing countries’” ( 1 ~).
Fossil
Fuel
Technologies 3

T
he energy sector was a cornerstone of the East Bloc sys-
tem. Cheap and abundant fossil fuel resources under-
pinned industrialization strategies, and fossil fuel exports
to the West provided the substantial hard-currency earn-
ings needed to import capital equipment, food, and consumer
goods. ] With the dissolution of the Soviet Union and the restruc-
turing 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 depen-
dent, 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 im-
mediate attention to the environmental damage associated with
energy use.
The pressing need to revitalize the energy sector of these coun-
tries 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. How-

1 For the energy .exP)~~ng cf)untries of the region-notably Russia—revenues fr(~n~ Marmsky Palace, Kiev, Ukraine.
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. ~ 39
332-338, Publicati(m 2656 (Washingt(m, DC: June 1993), pp 2-8.
40 I Fueling Reform: Energy Technologies for the Former East Bloc

the scale needed unless stronger assurances and


incentives governing foreign investment are
forthcoming. Major problems for the foreign in-
vestor, particularly in Russia, are the lack of a le-
gal framework governing oil and gas investment,
a cumbersome decision- making process, and the
current tax regime that is, compared with compet-
ing provinces, high, poorly structured, and unpre-
dictable.

| Oil and Gas Industry Problems


Signs of trouble in the oil sector appeared in the
1980s when recorded production,2 which had
Wet/ site quarters for drilling crew in Kazakhstan.
been expanding rapidly, peaked at about 12 mil-
lion barrels per day (MMbbl/d) and subsequently
ever, only a small faction of the full potential will fell sharply, by almost 40 percent. Virtually all of
be realized unless political and economic barriers this decline took place within Russia, by far the
to energy technology transfer are removed. largest producer among the FSU countries. Hence
the emphasis in this sector on revitalization of the
OIL AND NATURAL GAS Russian industry.
Rehabilitation of the oil and gas industry is crucial The decline in oil production is attributable
to the economic recovery of the former Soviet largely to the maturing of two super-giant fields in
Union (FSU) countries. The FSU oil and gas sec- Western Siberia and, despite immense develop-
tor has major strengths that could stand it in good ment expenditures until the mid- 1980s, lack of ad-
stead as it seeks to revitalize. These include a rich equate exploration. Resources were funneled into
resource base, long experience as a major energy increasing production rather than developing an
producer, and technically skilled personnel. At the adequate portfolio of new projects to take up the
same time, the industry is presently facing critical slack as older fields matured.
problems—poor technology; lack of capital, The impacts of economic crisis and political
largely related to inadequate economic incentives dislocation were superimposed on this longer
and inappropriate legal and institutional frame- term stagnation. Shortages of capital and foreign
works; economic instability and political uncer- exchange prevented replacement and repair of ex-
tainty; and a shortage of management skills. The isting equipment. Insurrection in Azerbaijan
solution of these problems will require wide rang- (which provides almost 40 percent of the equip-
ing energy sector reform. A start has been made, ment needed by the oil and gas sector)3 disrupted
but there is still a long way to go. deliveries of essential oil field equipment to West-
Western technology and resources have the po- ern Siberia. Further delays have been caused by
tential for making an important contribution to the intermittent stoppages of railroads, highways, and
solution of these problems. However, the FSU is Caspian Sea transportation. The changing, often
unlikely to attract western private sector capital on confrontational, relationship between central, re-

recorded ~r~uction data d. not tie int{) account underreporting production or capacity, or deliberately holding back Production in antic-
ipation 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 of production. 8 Another reason could be institu-
development. Strikes and the introduction of short tional. Though an organization the size of Gaz-
working weeks because of lack of cash to pay sala- prom (a joint stock company owned by the
ries have held back production.4 Russian government) may not be compatible with
On the demand side, the sharp contraction of longer term plans to liberalize and decentralize the
the economy, and the rapidly declining number of industry, its sector-wide, integrated structure may
customers able and willing to pay fuel bills has re- have been able to provide greater stability during
duced oil consumption. Refineries, for example, the recent turbulent years.
are not being full y paid for their deliveries, which
leads them to reduce crude oil orders from produc- | Opportunities for Technological
ers, or not pay for them.5 Strict export quotas limit Upgrades
foreign sales, already suffering from the break-
Poor technology is considered to have played a
down in the traditional East Bloc oil trade and the
major role in the decline of the oil and gas industry
disruption of the oil transmission system.6
in recent years. It is widely agreed that oil and gas
Gas has avoided the sharp production decline
technology used in the FSU is far behind the
experienced by the oil sector. FSU production rose
technology currently being used by the interna-
sharply in the 1980s before leveling off toward the
tional oil and gas industry and that it must be up-
end of the decade and subsequently declining
graded if production is to recover and new fields
moderately (by about 5 percent).’ The failure of
are to be explored and developed. As the follow-
the gas sector to continue expanding after 1989 is
ing survey shows, opportunities for technological
associated with many of the factors causing the
upgrade are present in all stages of the oil and gas
decline in oil output—poor technology, the fall in
industry-exploration, drilling, production,
investment, declining domestic demand, and ex-
transportation, refining, and offshore activities.
port disruptions,
The large number of efficiency-enhancing, cost-
Given the problems facing the gas industry, it
saving innovations in the international oil indus-
may be surprising that production has not declined
try in recent years has largely bypassed the FSU
more. One reason is that the investment needs are
industry.
much less than for the oil industry. Reserves are
still plentiful, easier to access, and therefore
cheaper to develop. The gas sector infrastructure Exploration
is relatively new, and the industry requires less so- The exploration stage identifies promising areas
phisticated technology to maintain current levels for subsequent drilling. Because drilling is expen-

~F]nanCi~j Tin}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, “ OTA contractor report (September 1993), p. 4.
e..
~~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, Uk-
raine, 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

process and interpret the large amounts of in-


formation produced.
Russian seismic technologies have not bene-
fited 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 re-
fine the information, and the necessary software,
is limited. In the past, the abundant, easily accessi-
ble, and low-cost reserves may not have required
sophisticated seismic technology. But future de-
Truck-mounted drilling rig used for oil well drilling at velopment is likely to take place in more costly,
Langepas, Western Siberia.
technically difficult environments, such as perma-
frost, that require advanced exploration tech-
sive, accounting for 15 to 40 percent of offshore nologies.
development costs and up to 80 percent of land de-
velopment costs, careful exploration is essential Drilling
for minimizing project costs.9 Once promising reservoirs have been identified,
The first stage in the exploration process is the drilling for exploration and subsequent produc-
identification of promising oil regions by measur- tion takes place. Drilling involves a number of
ing changes (by aircraft, satellite, and ground ob- components. The drill bit performs the boring ac-
servations) in magnetic fields and variation in the tion at the rock face. It is powered by either a turbo
Earth’s gravity. Once promising regions have or rotary action motor, and connected to the sur-
been established, seismic surveys are performed face rigs, hoists, and derricks by drill pipe. The
to identify exploratory drilling sites within the re- borehole itself is lined with cement to anchor the
gion. These surveys provide detailed maps of un- casing and stop corrosion and leakage. Chemical-
derground structures through information derived ly designed mud is used for lubrication. The de-
from artificially generated shock waves. The de- bris in the mud as it returns to the surface provides
tail of the maps depends on whether the seismic valuable information on the geology of the drill-
survey is two or three dimensional. A two-dimen- ing area. Blowout preventers at the surface pre-
sional (2-D) seismic survey (based on observa- vent sudden explosive escapes of gas or liquids
tions along single lines) maps vertical slices of the caused by high pressure. Computers to monitor
subsurface. A three-dimensional (3-D) survey, progress and interpret the information obtained
based on grid pattern observations yields more ac- from the drilling operation are an essential part of
curate and detailed information of underlying the drilling process.
structures. Both systems are currently used by the Major innovations in Western technologies
international oil industry. The advantage of 2-D over recent years have vastly improved drilling
technology is its lower cost, but 3-D technology is precision and lowered drilling costs. A wide range
increasingly used because it permits more effi- of advanced drill bits has been developed to match
cient field development. Both types, but especial- specific site conditions. The quality of drill pipe,
ly 3-D, require advanced computer capability to 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 on achieving short-term volumetric goals and em-
hole (slim-hole drilling) has yielded cost savings phasized quantity rather than quality.
of 25 to 40 percent over conventional drilling be- The development of drilling technologies in
cause they permit reductions in rig size, casing, Russia has differed from those used in most of the
drilling muds, and cement. Slim-hole drilling also rest of the world. There are two main types of drill-
results in less waste mud and debris than conven- ing technologies, rotary and turbo. The rotary sys-
tional drilling. 10 Automated drilling rigs reduce tem, used by most of the international oil industry,
manual labor requirements and are therefore in- is powered from the surface, whereas the turbo
herently safer. Measurement while drilling drill, widely used in the FSU, is situated down
(MWD), where measurement instruments are in- hole, close to the bit. The widespread use of turbo
corporated into the drill string (or pipe) above the drilling in the FSU was largely due to the Soviet
bit, transmit information to the surface while the inability to provide the high-quality steel drill
drill is in operation. MWD permits continuous pipe necessary to withstand the torque of rotary
drilling, which reduces costs, and provides more drilling, especially at greater depths. Turbo drill-
information than conventional wire line survey- ing thus allowed the Russian industry to dig far-
ing (where drilling must be stopped while mea-
ther and deeper than would otherwise have been
surements are taken). New technologies allow for
possible with rotary drills. However, turbo drill-
controllable directional drilling, particularly use-
ing cannot be used in conditions of high stress,
ful for tight, low permeability reservoirs and for
and requires frequent maintenance, thus adding to
improving production potential.
drilling time. It also requires high pressure pumps,
The Russian industry has limited access to
not currently available domestically in sufficient
these innovations. Drill bits and muds are of poor
supply. Though adequate for the past, this technol-
quality. Drill pipe has low tensile strength and is
prone to corrosion. Defective connections do not ogy may not be suitable for future developments
withstand the range of temperatures, torque, and in more difficult geological environments.
bending experienced in Russian conditions. Unre- Turbo drills are, however, essential for direc-
sponsive fishing tools, used to retrieve broken tional drilling because they allow the bit to take a
equipment downhole, lead to excessive downtime predetermined direction. The concept behind Pos-
in drilling operations. Worker safety is threatened itive Displacement Motors—a highly successful
by lack of blow out preventers, including ancillary directional drilling technology widely used by the
equipment such as effective rubber seals, and re- international oil industry—apparently originated
mote control devices. The Russian industry has in Russia but was developed and commercialized
lagged in MWD, slim hole, and accurate direc- largely outside (by Drilex Services of Scotland
tional drilling techniques. There is inadequate use and the United States). A comment of John Forest,
of computers to optimize drilling programs and president of Drilex Services, illustrates both the
equipment maintenance schedules. The reasons strength and weakness of Russian petroleum
for this lag in technological development is not technology, “The design idea was brilliant, the in-
primarily a lack of technical knowledge, but rather dustrial engineering poor, and the materials totally
the incentive system, which in the past put priority 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

sures, become insufficient and must be supple-


mented 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-en-
hances drive.
Water flooding, the injection of water into a
well to supplement the natural pressures, is a
widely used recovery technology throughout the
U.S. manufactured pumping equipment, Ostrava, Czech world. In Russia, however, water flooding is both
Republic.
excessive and implemented in an arbitrary man-
ner, regardless of the individual characteristics of
Production the oil field. Wells are drilled and water injected
The production process consists of drawing the according to prescribed rules based on hectare of
underground deposit to the surface. Efficient pro- field area. Russian oil field technologists believe
duction requires careful reservoir modeling and that early water flooding increases ultimate recov-
management. Oil and gas flow from a reservoir at ery rates. If arbitrarily used, however, water flood-
varying rates, depending on natural reservoir pres- ing runs the risk of breaking through the oil
sures. Well stimulation technologies, such as hy- bearing formations and damaging the producing
drofracture stimulation, can enhance the natural well, thereby reducing total output over the life of
drive. This technology involves cracking the rock the field.
by forcing fluid into the well at high pressures and In addition, excessive water flooding entails
rates, thus increasing the permeability of the enormous costs and raises major environmental
formation. The cracks are propped open with ma- water disposal problems. The water cut in the Rus-
terial such as gravel, to keep the channels to the sian industry—the percent of water in total well
well open. This technology could be of growing output—is high (75 percent) and rising. This
importance to the Russian industry in the future means that enormous amounts of fluid have to be
because an increasing share of recoverable oil re- pumped from the wells, using either sucker rods
serves is located in reservoir rocks with low (situated on the surface and working like a plung-
12
permeability. The domestic industry cannot er) or the higher precision electric submersible
provide the necessary equipment. The only pumps situated at reservoir depth. Russian domes-
manufacturer of hydrofracturing technology tically manufactured electric submersible pumps
“Krasnyi Molot” (Red Hammer) enterprise in the are, however, of poor quality and prone to frequent
Republic of Chechnya, has virtually stopped pro- breakdown.
duction. Domestic capability of acidizing, another As a result of poor reservoir management and
form of well stimulation is also limited. production practices, a substantial number of
At some point during production, primary wells in Russia are now idle. Almost 28,000 wells
recovery mechanisms, depending on natural pres- in the Russian Federation are officially listed as

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

idle, but potentially productive following repair vices—pumps in oil pipelines, and compressors
(in addition to 26,000 classed as abandoned or in gas pipelines—to maintain pressure and flow.
awaiting abandonment). However, a much Due to the size of the country and the distance
smaller number of these wells (between 5,000 and between producing areas and markets, the FSU
8,000) are attractive candidates for rehabilitation, has a vast network of oil and gas pipelines. Future
especially at present world oil prices, largely be- development of remote resources of oil and gas,
cause of demage to the oil fields by poor manage- and rerouting of lines in accordance with new
ment. political alignments following the dissolution of
1
the Soviet Union, imply that considerable addi-
Offshore Operations tions will be needed to the pipeline network, re-
Offshore operations differ from onshore mainly in quiring large quantities of large-diameter pipe for
the need for platforms for drilling equipment. gas transmission.
Here again, there have been many innovations in The pipeline infrastructure already faces major
recent years. In deeper waters, rigid platforms at- problems of technical performance. Domestically
tached to the seafloor have been replaced by light- made pipe is defective in wall thickness, insula-
er platforms, floating on the surface and held in tion, resistance to corrosion, and general work-
place by cables fastened into the sea floor. Sim- manship. Welding procedures are not adequately
plified deck or “top sides” reduce costs and com- controlled; diagnostic and inspection technolo-
plexity of operations. Temporary drilling rigs, gies are poorly designed. Problems of pipeline
packaged rigs, or semi-submersible tenders can quality are particularly acute in the Central Asian
reduce capital costs by up to 25 percent and oper- gas system, where a combination of poor anti-
ating costs by up to 40 percent. ] 4 Greater automa- corrosion treatment and the high electrochemical
tion is reducing costs and environmental damage activity of the soil results in accelerated deteri-
while improving safety. oration. Leaks, especially in gas pipelines, are
This area of technology is of particular interest frequent and difficult to detect, leading to cata-
for the FSU where promising areas of future de- strophic explosions. l5 pipelines can be under re-
velopment have been identified in offshore Arctic, pair up to 20 percent of the time.
Baltic, Black, Caspian, and Okhotsk Seas. Russia Essential pipeline components such as excavat-
has relatively little capability in this area—most ing and pipe laying equipment and modem pipe-
Russian production has taken place onshore—and line inspection and monitoring equipment are in
has in the past depended on technology directly short supply, especially since the dissolution of
purchased from the West or reproduced from the FSU, and variety is limited. The FSU fre-
Western designs. Because of the high technology quently relied on imported supplies of large-diam-
content, offshore projects may be particularly eter pipe, mainly from Germany and Japan.
suited to joint ventures with foreign partners. Pipeline management, including maintenance and
leak detection, is hindered by the lack of modem
Pipelines computer diagnostics.
Crude oil and gas are usually carried in pipelines. Quality and performance of compressors are
Both oil and gas pipelines are equipped with de- acute problems. These machines, fueled by gas

13Troika Energy sewice~, for th U.S. Depaflment of Energy, ~eP)~ed in “Restoring ~dle Russian oil Capacity” Oi/ and C(LS ~Our/K?/,
e 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 Refineries transform crude oil into products (such
compressors can substantially increase pipeline as gasoline, diesel, kerosene, and residual fuel oil)
capacity. Since domestically manufactured com- for use by the final consumer. Virtually all areas of
pressors were of poor quality, the Soviet Union the former East Bloc have some refining. But here
imported Western compressors, one of the few again, this sector’s activity encounters major diffi-
areas where the Soviet Union relied on imports. culties, in part due to lagging capital investment,
However, much of this capacity is now outdated or
even in the days when upstream oil and gas were
worn-out. For example, the pipeline from Oren-
being highly favored. 16 Since the dissolution of
burg to the western border of the FSU, built in
the FSU, the regional refinery situation has be-
1976-1978 with Cooper-Bessemer and Italian
come increasingly complex. Deliveries of crude
Nuovo Pignone compressors, now loses 25 per-
oil from Russia to some of the other republics
cent of transported gas through compressor con-
have fallen sharply: deliveries to Ukraine and Be-
sumption and corroded pipes. The latest export
larus, for example, are running at one-half pre-
pipeline, built from Yamburg to the western bor-
vious levels. 17
der in 1987-1988, loses “only” 14 percent of the
gas, despite being longer and having much bigger Refinery technology is chronically outdated
compressor capacity. throughout the region. Much of the refinery ca-
Gazprom is attempting to remedy compressor pacity was built in the 1960s. It is estimated that
problems by developing domestic compressor between 60 and18 80 percent of refinery fixed assets
are worn out. In addition, existing equipment
manufacturing capacity, based on Russian aero
derivative turbines, at factories in Perm and Ye- not well used and losses are exceptionally high. 19
katerinburg. Gazprom also plans to boost efficien- Product quality is low.
cy through the manufacture of recuperators. A basic problem is that current FSU refinery
Recuperators, not widely used in Russia, can raise technology (which maximizes heavy fuel oil out-
pipeline efficiencies from 20 percent up to 33 per- put) does not match current and likely future de-
cent. But Gazprom still needs to import Western mands for petroleum products (lighter products
compressors. In 1992, the company signed a such as gasoline and kerosene). Secondary refin-
$1.46 billion contract to purchase compressors ing technologies (such as hydrocracking and cata-
from Nuovo Pignone. The United States lost the lytic cracking) that permit a wider range of
Russian compressor market to Europe in the late product output and a larger share of light products
1970s and early 1980s, when an embargo was in the total account for a much smaller share of re-
introduced. However, this loss is not final, and finery capacity in the Former East bloc compared
U.S. firms are well placed to increase sales in the with North America (see table 3-1 ). Consequent-
FSU since the majority of imported compressors ly, heavy products, such as residual fuel oil, ac-
(typically 25-, 16-, and 1O-MW capacity) are of count for 36 percent of total output of refined
General Electric design. 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

put over both the short and long term. Those coun-
tries, such as Turkmenistan, Kazakhstan, and
Uzbekistan, that do not have domestic equipment
supply industries, will rely largely on imported
Former technology, especially in the near future. As their
East Bloc Us. oil and gas sectors develop, however, they may
wish to initiate domestic production of some
Vacuum distillation 27 44 items of equipment. For those countries with sub-
Catalytic reforming 3 24 stantial supply equipment capacity, such as Russia
Catalytic hydrorefining 9 12 and Azerbaijan, the situation is different. They are
Catalytic cracking 5 34 likely to be more selective in their choice of im-
Catalytic hydrocracking negligible 8 ported technology, taking only those technologies
a
that cannot be provided by the domestic industry.
Figures reflect maximum percentage of crude that may be converted
Taking this into account, the technologies identi-
by each refmmg method
SOURCE “Worldw!de Refmng Report, ” Oil and Gas Jouma/, VOI 91,
fied here fulfill two criteria—they are critical to
No 51, Dec 20, 1993, pp 37 and 49 FSU oil and gas sector rehabilitation and develop-
ment, and they have a relative advantage overdo-
mestic Russian technologies (see figure 3-1 ).
percent in the United States. The more valuable Technologies are needed both to rehabilitate
lighter products such as gasoline, 46 percent of pe- existing idle wells and to explore undeveloped re-
troleum product output in the United States, repre- sources. Technologies that could rejuvenate idle
sent less than 20 percent in the FSU.20 wells at relatively low cost include advanced drill
In the Soviet Union, the strategy used to meet bits, fishing and downhole tools, sucker rods, and
the rising demand for light products was expan- submersible electric pumps. Because of their du-
sion of output rather than technology: that is, in- rability, advanced drill bits could speed the drill-
creasing refinery throughput to the point of ing process and reduce downtime. Improved
adequate production of light products. This strate- fishing tools would have the same effect. Water
gy had several drawbacks. Even when the crude flooding on the scale practiced in Russian fields
was available in sufficient quantities, there was an necessitates more efficient electric submersible
oversupply of heavy products, notably residual pumps to lift large amounts of fluids. Improved
fuel, that was passed on to power stations (which gas lift equipment is also needed for wells using
would have preferred to use natural gas) or to the gas injection as a secondary recovery technique.
export market, frequently at unremunerative These items are all produced in the FSU, but the
prices. When production fell, crude was no longer need appears to be for a higher quality and larger
available in sufficient quantity, and acute short- range of model and size than are immediately
ages of light products, especially gasoline and jet available.
fuel, developed. Also, existing wells can benefit from well stim-
ulation technologies, such as fracture stimulation,
Critical Technologies which enhances the natural reservoir drive by in-
OTA’s survey of the state of technology in the oil creasing the average permeability of the formation
and gas sector yields a list of technologies that and therefore increases recovery rates. This
could substantially increase FSU oil and gas out- 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
Workovers Reservoir engineering
Rehabilitation Arctic technology
Stimulation Offshore technology
Deep drilling Production equipment
Horizontal drilling Completion equipment
Conventional drilling
MWD
Criticality
Wellhead equipment Drilling mud services
Drilling equipment
Helicopter services Seismic data packages
Drilling rigs Seismic survey services
Tubulars

Low
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 re- ing technologies will increase the resource base
serves are found in less permeable structures. and improve recovery rates.
Local availability of this technology is limited but As much of the most attractive new petroleum
it is currently being provided by foreign firms. potential in the FSU is offshore, the FSU could
Additional technologies will be highly benefi- benefit from the major improvements in offshore
cial to the longer term exploitation of oil and gas technologies that have taken place in recent years.
reserves. Many of these are not currently available There is little experience with these technologies
in the FSU. Advanced seismic technologies such because much FSU production takes place on
as 3-D systems, by providing more detailed in- shore or in relatively shallow water.
formation than alternative technologies, shorten Moving downstream, oil and gas transmission
the exploration process, enable improved reser- systems will require compact, efficient compres-
voir development, and minimize expensive drill- sors and higher quality pipe. The local industry
ing. These considerations are particularly could benefit from recent advances in anticorro-
important in developing resources in remote or sion and seamless pipe, and in compressor design.
hostile environments. The FSU could also benefit These technologies are likely to be increasingly
greatly from new drilling technology. MWD im- important as the pipeline network is expanded and
proves the precision of the drilling process and re- penetrates further into hostile environments. Re-
duces drilling time—again, important factors in finery upgrading, including residual fuel oil con-
exploitation of new resources. This technology is version capacity, will be required to improve
apparently not available from local industry. Im- system efficiency and meet current and expected
provements in deep drilling and horizontal drill- demand for petroleum products. These technolo-
Chapter 3 Fossil Fuel Technologies | 49

gies are good candidates for technology transfer mobilized from unaccustomed sources-domes-
since they are now standard, mature, and predict- tic producers rather than the central government,
able in operation. Moreover, the FSU is accus- and external sources including the international
tomed to importing refinery technology. oil companies. The scale of this effort implies ma-
Information technology underpins many of jor reforms to the energy sector.
these technical improvements, making possible The shortfall in domestic capital investment,
the greater precision, speed, and efficiency that previously provided by the central government,
has been the hallmark of technological develop- was presumably to be met from the surplus reve-
ment in this and other industries over the past 20 nues of the new operating entities, particularly the
years. Advanced computers process geophysical production associations. This strategy depended,
data quickly and provide high-quality interpreta- however, on changes in pricing policies and in-
tion, thus reducing the risk, time, and cost of vestment laws that would provide the necessary
exploratory drilling. Computer diagnostic equip- incentives.
ment can improve safety and reduce losses in both While changes have been made, they have so
pipeline and refinery operations. Although com- far been inadequate to revive domestic invest-
puters are produced in the FSU, they do not have ment. On the contrary, industry resources avail-
the range of Western models and lack the soft- able for investment have, if anything, been
ware. reduced by changes in pricing policies introduced
However, as with all technologies, effective de- since the breakup of the Soviet Union. Prices of
ployment depends on incentives. Until economic virtually all of the materials and equipment pur-
and institutional incentives are in place to ensure chased by the oil and gas sector were freed from
that technology is correctly and efficiently used, government control in 1992, and rose sharply.
even the best technology will not be used effi- Prices of all energy products, however, were ex-
ciently. The reform of the FSU energy sector is empted from decontrol. They have been raised
critical to technology upgrading. several times by decree, but the rise in nominal
prices has been offset to a considerable extent by
I Energy Sector Reform high rates of inflation and the depreciation of the
The rehabilitation and development of the FSU oil ruble. Oil prices in Russia and other parts of the
and gas industry will require massive invest- FSU are still under one half the level of compara-
ments. One estimate suggests that to achieve Rus- ble world prices, and gas prices are even lower.
sian oil production levels of about 7 MMbbl/d) Since the oil and gas industry’s costs rose faster
through the year 2000 will require external financ- than its revenues, the funds available for capital
ing of about $3 billion annually, and double that investment were therefore compressed. In addi-
amount in domestic (ruble) financing. Increasing tion, taxes increased in number and complexity.
production to the 1990 level of about 10 MMbbl/d Finally, there are reports that the foreign ex-
would require a doubling in external financing, as change holdings of several production associa-
well as substantial increases in domestic financ- tions, which had been earmarked for imported
ing. 21 In addition, substantial capital investments equipment, were frozen in government accounts,
will be needed in gas development, oil and gas or held in the foreign commerce bank, which sub-
transmission systems, and refinery upgrading. An sequently went bankrupt. All these factors have
added complication is that these sums must be 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 S-
USR-93-006-1, July 151993, quoted in the Atlantic Council, Energy Po/iciesjiw Russia and Ukraine, Policy Paper (Washington, DC: Novem-
ber 1993), table 6.
50 I Fueling Reform: Energy Technologies for the Former East Bloc

take up the slack in capital investment from the gional importing countries, do not pay their oil
central government. and gas bills, so the specified price is an adminis-
It is difficult to overestimate the importance of trative fiction that does not provide incentives to
price reform in the oil and gas sector. Raising oil producers. Effective energy pricing will require
and gas prices not only creates the resources avail- additional supporting actions.
able to the production associations for investment, Many of these can be achieved by moving to-
but also makes the sector attractive to other do- ward a market system, through restructuring the
mestic investors. Economic oil and gas pricing as industry, and by setting up the necessary legal and
part of a broader program of macro economic re- institutional framework. Some progress has al-
form could encourage the return of the substantial ready been made in industry restructure. The Min-
amounts of capital presently being held outside istry of Gas Production was transformed into the
Russia. 22 (The importance of capital repatriation giant, government-owned joint stock company,
in economic recovery has been amply demon- Gazprom, in 1988. Beginning in 1992, a series of
strated in Latin America in recent years.) Higher decrees converted oil sector enterprises, formerly
energy prices would also encourage efficient ener- under the jurisdiction of the energy ministries into
gy use and therefore confer an important environ- joint stock companies as a first step toward cor-
mental benefit. Foreign exchange earnings would poratization and eventual privatization. The oil in-
be augmented by increased exports.
dustry is to be divided into three integrated
However, raising energy prices, especially to
holding companies, all of world-class size (Yu-
residential consumers, can cause considerable
kos, Surgutneftegaz, and Lukoil), each of which
hardship. The question for the future is how to re-
includes exploration, production, refining, and
duce the still substantial gap between domestic
distribution activities similar to the large vertical-
and international prices currently being main-
ly integrated, international oil companies. At a
tained by a system of export taxes and quotas. The
attainment of international parity by gradual re- lower level in the organizational structure are a
ductions in controls and taxes may take unaccept- number of production associations, some of
ably long. This could be the moment to consider which would rank among the world’s largest oil
new approaches to price reform. One approach companies on the basis of their annual oil produc-
would be to combine higher prices with increased tion. In all cases, the state retains a controlling in-
efficiency in energy use so that total energy bills terest, but there are plans for some private
do not rise, or at least increase by less than the rise investment.23
in prices. This new structure, though introducing ele-
Though correct energy pricing is a necessary ments of corporatization and privatization, still
condition for energy sector reform, it is frequently bears some common characteristics with the old
not sufficient because institutional and market including the prominent position of large units
imperfections can weaken or negate the signals with considerable monopoly power, which are fre-
being provided by higher prices. For example, quently staffed by top officials of the old regime—
many consumers in the FSU, particularly the the so called “oil generals.” On balance,
large, energy-intensive, industries, and the re- 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 Bank of the United States (Eximbank) Framework
word on the centralization/decentralization Agreement, and expanded investment guarantees
struggle has not yet been said, and it may be many from the Overseas Private Investment Corp.
years before a stable reorganization of the industry (OPIC). Other G7 members are also providing bi-
is achieved. lateral support. The Japanese Eximbank, for ex-
There has been less progress on the other insti- ample, is negotiating a $1.5-billion export credit
tutional underpinnings of the market economy. for oil and gas equipment. The European Energy
The countries of the FSU lack a body of commer- Charter, which provides a government-sponsored
cial law that spells out the rights and responsibili- framework for energy investors in the region, is
ties of commercial enterprises and their nearing completion. In addition, the multilateral
accountability to their shareholders, whether gov- development banks (MDBs)—the World Bank,
ernment or private. Bankruptcy legislation is inef- the International Finance Corp. (IFC), and the Eu-
fective. Private property rights and contracts are ropean Bank for Reconstruction and Develop-
still insufficiently protected. The land title system ment (EBRD)—have made major new loans to
is unclear, and the decisionmaking process is FSU countries. These loans have the potential for
clouded by a multiplicity of authorities all of leveraging much larger sums through cofinancing
whom have effective veto power. with the private sector.
The privatization of the energy sector is also It is assumed, however, that the bulk of the ex-
hampered by unfamiliarity with basic Western ternal financing of FSU oil and gas will come
business practices and concepts such as profit, the from the private sector, notably in the form of for-
time value of money, depreciation, risk, quality eign direct investment. This is a particularly at-
control, contracts, and liability. Management tractive form of investment (compared with
skills are weak, and there is little experience in portfolio, licensing, and even MDB lending) as it
project evaluation. However, Russians appear to provides not only capital, but also management
be well aware of these limitations and are eager to and technology. Most public sector commitments
acquire management skills. are explicitly designed to supplement and encour-
age rather than supplant private capital, though
I The Role of Foreign Investment some observers (see ch. 8) consider that these pro-
Anticipating the difficulty of raising adequate grams have failed to achieve this aim. Moreover,
capital resources, especially foreign exchange, the international oil companies have large devel-
from domestic institutions during a transitional opment budgets that dwarf the resources available
restructuring period, there was considerable inter- from public sector institutions. They are reported
est in attracting external financing from both the to foresee spending $30 billion to explore and pro-
international public and private sector. duce oil in Russia over the next decade, but only if
The public sector responded promptly (see ch. conditions are favorable.
7). The Group of 7 (G-7)24 put oil and gas at the Recognizing the need for foreign direct invest-
top of its assistance agenda for the FSU. As part of ment and its accompanying technology transfer,
this effort, the United States is developing bilater- the Russian government introduced major
al programs in the U.S. Agency for International changes to rules governing foreign investment.
Development (AID), the U.S. Department of En- Previously, foreign investment was discouraged,
ergy (DOE), and the U.S. Environmental Protec- if not forbidden, and technology imports were
tion Agency (EPA) programs; the Export-Import 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 Attractions to Foreign Investors
ventures and allowed foreign companies to own On paper, the attractions of foreign investment in
up to 49 percent of the equity. Later changes per- FSU countries are strong. As Jonathan Stem puts
mitted foreign companies to take majority owner- it:
ship and control. This liberalization was
reinforced by Russia’s membership in the Interna- It is hard to think of a previous situation
where such an immense and potentially promis-
tional Monetary Fund, which promised additional
ing set of oil and gas provinces, denied to for-
financial assistance and the creation of a ruble sta-
eign investors for many decades has been
bilization fund. Legislation specific to oil and gas suddenly opened up.29
ventures is, however, still lacking.
In response to these initial changes, the interna- The FSU countries have immense resources of-
tional oil industry showed a high level of interest fering a wide range of opportunities at low geolog-
in the FSU. A recent compilation of projects with ical risk. Inefficient production practices in
foreign participants listed over 100, including all existing fields initially held out the promise for
branches of the sector, all of the oil and gas pro- quick and easy projects—the deployment of im-
ducing republics, and different sizes of companies proved production techniques in a short time-
of many nationalities. 25 Over one-half had U.S. frame and a consequent quick return on
joint venture partners. Two-thirds of the projects investment. Early optimism regarding the rehabil-
are in Russia itself, mainly in the oil sector, but itation of idle wells has since been dampened,
many of the Russian projects are small in scope though opportunities still exist. In addition, there
and investment. 26 planned investments in Ka- are projects involving the exploration and devel-
zakhstan on the other hand, if they materialize, opment of new fields. Russia, Kazakhstan, and
could amount to many billions of dollars.27 (Box Azerbaijan offer the unique opportunity of a new
3-1 describes the main forms of investment to area with known and proven oil reserves, thus
date.) minimizing the geological risk of opening up
Despite the large number of projects, progress promising but unknown areas, like those in coun-
on the ground has been modest to date. Agreement tries of Africa, or the Antarctic. Turkmenistan and
had been reached on only one-third of the projects, Uzbekistan are amply endowed with gas reserves.
mainly contracts to bring idle wells back into pro- Though many of these new areas will be in hostile
duction. 28 Joint ventures currently produce about climates, U.S. and other oil companies can adapt,
4 percent of Russian oil production, accounting given their long experience in a wide variety of
for 15 percent of Russia’s hard currency crude ex- countries and climatic conditions.
ports. This combination of a high level of interest FSU countries offer other advantages to the for-
from the international oil company, and their rela- eign investor. Most republics have a trained work
tively small commitments, reflects the balance be- force at all levels of expertise, from scientists to
tween the attractions and problems attached to oilfield workers. Though many of the sites are re-
foreign investment in the FSU (see appendix 3-1 mote, they generally have abetter infrastructure of
to this chapter on Dresser Industries’ experience roads, air service, trains, and telephones, than that
with joint ventures). 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.
27
1 bid., p. 30.
28
1 bid., p. 31.
29
1 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 reve-
nues, and the acquisition of technical and management skills. Foreign investors in joint ventures gain ac-
cess 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 hy-
drocarbons. 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 con-
tractors’ 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 authori-
ties. 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 in-
increased production

Production Sharing Agreement


At present, there i S 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 Nefte-
gas (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 per-
cent 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 auc-
tioned. 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 prov-
ince, 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 I Lack of Legal and Regulatory


are becoming available at a time of U.S. spare ca- Framework
pacity, which reduces the opportunity cost of go- In addition to general political uncertainty, there
ing abroad. However, the FSU republics are not are more specific aspects of particular concern to
the only investment opportunities in the world. foreign investors in the oil and gas sector. There is
The oil companies will weigh the overall environ- as yet no legal and regulatory framework govern-
ment for investment in FSU countries with possi- ing oil and gas leasing, exploration, and develop-
bilities in other parts of the world. ment, and current draft laws do not resolve many
of the issues that foreign oil companies cite as lim-
Obstacles to Foreign Investment iting their greater participation. Nor is there leg-
On the other hand, there area number of obstacles islation defining the rights and responsibilities of
to foreign investment. These include a high level the foreign investor. Each project must negotiate
of political uncertainty, lack of a legal and regula- its own terms, a long and complex business. For
tory framework, a poor economic environment, example, it took Chevron over 3 years to negotiate
and different perceptions of the role of foreign in- its agreement with Kazakhstan. There is also con-
vestment. cern over the consistent application of laws and
decrees. According to Exxon:
| Political Uncertainty “Laws and decrees are promulgated, dis-
Political uncertainty, especially as it affects the counted, ignored, exceptions are promised,
sanctity of contracts, is of prime concern to pro- granted and revoked. There are also great voids
spective investors. The history of the international where no Russian legislation exists at all.”
oil industry has shown that perceptions of politi- Issues of owning and disposing of private proper-
cal uncertainty are not consistently associated ty, intellectual property, due process in cases of
with any one type of political regime. Gulf Oil expropriation, and environmental liability have
(now part of Chevron) continued production in not been addressed.
Angola throughout its civil war, and many foreign
oil companies continue to be interested in Azer-
baijan, despite a recent unilateral cancellation of Unclear rights of ownership
all previous agreements with foreign companies. In Russia, as in many other countries, oil and gas
The perception of stability is important however, resources are owned by the government. This, in
and may explain the particular interest in Kha- itself, is not a serious obstacle to investors. How-
zakhstan, despite major logistical problems in oil ever, in Russia it is not clear how to obtain rights to
transport. In Russia itself, where production po- develop these resources, especially as surface
tential may from many points of view be more at- property rights lie within the jurisdiction of the re-
tractive, there is considerable uncertainty over the gional and local governments. Ownership rights
political environment.30 Programs such as OPIC are hotly contested between the central federation,
and the Multilateral Investment Guarantee local governments, and the production associa-
Agency (see ch. 7), which offer—at a cost—insur- tions, causing uncertainty among potential for-
ance against political risk, help reduce exposure.

30A ~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 in-


vestment sources.
Export tax: Levied at the rate of 30 ECUs per ton
($5.15/bbl) on crude oil sold abroad. Poor economic environment
VAT: Twenty percent of the cost of all inputs (domestic The economic environment is crucial for foreign
and imported) at the time of purchase, but refunded in
full after 24 months if production stream IS for export. investors, who need to be assured of their ability to
make profits and their freedom to remit them. For-
Profits tax: Levied at 32-percent rate on taxable in-
come, but with straight-lme depreciation of most capi- eign investors, whose earnings are derived from
tal expenditures, expensing of certain outlays (but not oil exports rather than from sales to the much low-
interest), full loss carry-forward provisions, and deduc-
tion for reinvested earnings (limit 50 percent of taxable
er priced domestic market do not suffer directly
income). from oil and gas price controls as do their Russian
Production royalties: Combined state and federal counterparts. However, foreign investors are sub-
assessment equal to 16 percent of the gross value ject to a multiplicity of taxes (see table 3-2), which
(world price) of production, taken together are seen by U.S. investors to repre-
Currency exchange: Fifty percent of hard currency sent an unrealistic and unstable tax regime.
receipts from exports to be exchanged for rubles at
market rates. We presume that the unstable value and
Taxes are high compared with competing prov-
inconvertible status of the rubles acquired via such inces, such as the North Sea, and based on reve-
transactions constitutes an impliclt tax of 25 percent on nues rather than profitability, a great disadvantage
the value of currency so exchanged,
when costs vary greatly between areas.31 Under
Social reserve fund: A levy equal to 37.5 percent of this tax regime, oil produced in Russia would have
total wages, collected for the purpose of rebuilding
social Infrastructure. to sell for nearly twice the price of oil produced in
Repatriation tax: In the case of U.S. Investors, 5 per-
the United States or Australia for a project to be
cent of remitted dividends, Could be higher or lower for economically viable.32 This punitive tax situation
legal residents of other jurisdictions, exists not so much by design, but because many of
the jurisdictions that have the authority to impose
SOURCE James L Smith, Department of Economics, “Poor Economic taxes fail to realize the cumulative impact of their
Prospects Face Investors m the Russian 011 Industry” (Houston, TX
Unwerslty of Houston, April 1993), p 2
tax decisions.
Taxes are also subject to change. An export tax
of $6 per barrel was imposed in 1992 to bridge the
eign investors about the legality of agreements great differences between domestic and export
and contracts. Some U.S. companies sign con- prices. The tax virtually eliminated the profit of
tracts with all three levels of government. Even one U.S. venture. Although some companies
within each level of government, there is an ab- managed to be grandfathered into the export tax
sence of established lines of decisionmaking. exemption, negotiating the exemptions took valu-
Some recent improvement is reported. Relation- able time and energy and often tied up tax pay-
ships between the center and the provinces, a seri- ments until a decision was reached.
ous problem in the past, appear to be stabilizing, One of the attractions of investment in oil and
with regional authorities receiving more freedom 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: Univer-
sity of Houston, August 1993).
56 I Fueling Reform: Energy Technologies for the Former East Bloc

the ready ability to earn the hard currencies neces- Views are not consistent among participants on ei-
sary to cover the cost of imported equipment and ther side. In Russia, for example, the oil sector
to remit profits.33 For this purpose, it is necessary shows more interest than the gas sector in foreign
to have clear title to the oil (which is sometimes in investment. Within the oil production associa-
doubt) and the freedom to export it. However, the tions, views also differ over the merits of foreign
freedom of foreign investors to export oil is sub- investment. And views vary among countries of
ject to changing regulations. In 1991, central con- the FSU. Kazakhstan and Turkmenistan, with
trol over oil exports was loosened, and joint little indigenous technical capability, encourage
ventures were given the right to export a share of foreign investment. Russia, which has consider-
their production. In December 1992, however, able technical capability, is more ambivalent.
controls over oil and gas exports were reinstated U.S. companies, too, have different percep-
because of suspected illegal sales. In 1993, the 80 tions. Several oppose public sector programs,
licensed exporters were cut to 30, and further cuts such as those implemented by the World Bank and
are contemplated. In the same year, Decree715 (of the EBRD, on the grounds that they supplant rath-
July 23) specified that joint ventures involved in er than supplement the private sector, and thus dis-
incremental production projects would not own courage Russia from making necessary reforms,
the additional crude they produce but would including granting access to Russian hydrocarbon
instead work on a contractual basis for cash. resources. Other companies, and suppliers of oil
These measures have increased central govern- equipment, on the other hand, support such pro-
ment control over Russian oil exports, including grams on the ground that they help share the risk
those of joint ventures. However the situation is of doing business with FSU countries.
still fluid and may change again especially as in- Despite all the differences, some generaliza-
creased central control over exports is strongly op- tions can be made. To the Western eye, the need for
posed by many of the regional and local up-to-date technologies throughout the oil and gas
associations. In theory, joint ventures should be industry is obvious and represents a large export
able to export oil under any combination of market. In influential parts of the FSU govern-
centralized/decentralized governance; but in prac- ment and industry, however, there is a deep-seated
tice, constant changes in administrative systems opposition to the involvement of foreign capital in
can be time consuming, costly, and destabilizing the oil and gas sector. This suspicion toward in-
for the foreign investor. A further cause for con- ternational oil companies is a common phenome-
cern is the possible unwillingness of third parties non in many countries of the world but is
to allow transit of oil and gas across their territo- particularly acute in Russia, a pioneer in the oil in-
ries. dustry and, for much of its history, the world’s
largest oil producer.
Part of the opposition is based on Russia’s dis-
Different perceptions of foreign investment appointment with foreign oil company perfor-
One obstacle becoming more apparent as experi- mance so far. They regard the international oil
ence with joint ventures and other foreign invest- companies primarily as bankers and have been
ments grows is the difference in perception about disappointed at the sums actually forthcoming.
technology transfer and foreign investment be- They feel that much foreign investment to date has
tween the Russian hosts and the foreign investors. 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 clear weapons disarmament until Azerbaijan


both the Russian government and Russian indus- ceases uses of force against Armenia and Nagor-
try do not consider Western technology to be a key no-Karabakh. 35 As a result, the International
element in petroleum industry rehabilitation, but Trade Commission reports that the government of
rather, as in the past, a supplement or temporary Azerbaijan has delayed signing a contract with a
substitute for domestic technology. The new pro- U.S. firm for the development of an Azeri petro-
ducing regions, like Turkistan, Kazakhstan, and leum field, while negotiations continue with non-
Uzbekistan that do not have a domestic equipment U.S. companies interested in the same project.36
supply industry, may be eager, or have no alterna- Though much of the legal legacy of the Cold
tive than to encourage foreign investment if they War has been dismantled, U.S. industry still feels
wish to develop their petroleum resources. Rus- at a competitive disadvantage with oil and gas
sia, however, is likely to want to preserve its do- companies of other nations. (In addition to oil
mestic equipment supply industry, especially companies based in Western Europe and Japan,
because the development of oil and gas technolo- companies from the Middle East and Latin Ameri-
gy is considered a fruitful area for defense indus- ca are also active in the FSU.) This competitive
try conversion. disadvantage is based on 3 factors. First, U.S. com-
panies lack the long experience of other Organisa-
U.S. Regulations Governing Private Sector tion for Economic Cooperation and Development
Participation (OECD) countries in conducting business with
For many years, U.S. trade and investment with the FSU. Contacts and knowledge of trading
the Soviet Union was prohibited or very strongly conditions were not readily available to the indus-
controlled. The major legal obstacles (the Byrd try in the early days, adding to the frustrations,
Amendment to the Trade Act of 1974, and the Ste- costs, and complexity of early initiatives. As time
venson Amendment to the Export-Import Bank goes by, and U.S. efforts to disseminate informa-
Act of 1945, both restricting U.S. Export-Import tion about Russian trading conditions improve,
Bank operations in the FSU) were repealed by this initial disadvantage will be overcome, but in
Joint Resolution of Congress on April 1, 1992. the important early days it could have disadvan-
Since then, U.S. firms have been able to export taged U.S. firms.
equipment freely. However, industry considers Second, there is widespread belief among U.S.
that restrictions remaining in the National Securi- companies and policymakers that other govern-
ty Controls Act could constrain use of some re- ments provide much greater financial and diplo-
cently available technologies, particularly matic support to their national companies, many
seismic or computer equipment. 34 of which are nationalized companies, than does
New bilateral tax and investment treaties (elim- the United States. This issue has been a long
inating double taxation on interest and royalties standing bone of contention between the United
and defining the conditions of international in- States and its competitor allies in the OECD.
vestment) have also been concluded with Russia Third, U.S. business practices may differ in im-
and several other republics. An exception to these portant respects from those of other countries.
new initiatives to encourage foreign direct invest- U.S. companies, for example, maybe held by pub-
ment in the FSU is the case of Azerbaijan, where lic opinion in this country to higher standards of
U.S. aid is specifically prohibited except for nu- 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 West as the single most promising area of joint
forbidden by U.S. law to engage in bribery, must business activity, and some companies have been
compete with companies domiciled in other coun- able to achieve considerable success in their Rus-
tries that lack similar legislation. This factor could sian undertakings. Another good augury for the
be of particular importance during the inevitable future is the greater spirit of realism in Western
disruptions occurring during the transition from a companies about the amounts of money, time, and
state-owned to a market economy. effort needed to succeed. On the Russian side, the
perception of whether foreign investment is need-
| Conclusions ed is still a key issue. Eventually, the continuing
The rehabilitation of the FSU oil and gas industry shortage of capital investment and technology
through U.S. investment and technology offers a may make the foreign investment option more at-
mixed prospect. On the one hand, these countries tractive—many other countries have changed
offer exciting and rich new possibilities for oil and their views about foreign investment as the need
gas development and a well educated work force. arose.
U.S. participation in the oil and gas sector could But the actual path of development has been
provide benefits to both partners. It could contrib- slow, lagging early expectations. The experience
ute to the establishment of political and economic of the past few years suggests that there is no quick
stability in the FSU and provide a major area of fix for either side. Overall, the picture is mixed,
growth for the U.S. industry. showing some improvement of late, but suggest-
On the other hand, there are several obstacles to ing that the rehabilitation of the oil and gas sector
these mutually beneficial outcomes. Some of the will take more time and care than originally
more important have been outlined here. They in- thought.
clude a severe lack of investment funds (largely
related to political uncertainty, insufficient eco- COAL MINING AND BENEFICIATION
nomic incentives, and inadequate legal and insti- Coal is an abundant, widely distributed resource
tutional frameworks); economic instability, in Russia, Ukraine, Kazakhstan, and Poland. Coal
including the disruption of the previously impor- deposits vary in geologic composition and quali-
tant energy trade that took place before the dis- ty. For example, the geologic characteristics and
solution of the Soviet Union; a shortage of location of some of Russia’s coal deposits—very
management and some technical skills and in- deep or thin, and located in areas far from consum-
formation; and the frequently differing agendas of ers—make it difficult and expensive to mine. De-
the host country, foreign investors, and aid do- posits also range from high-quality hard coal to
nors. The U.S. industry may be disadvantaged by lignite. In the former East Bloc, most coal is
its unfamiliarity with this particular market and a mined underground using a variety of mechanized
tradition of less aggressive government backing. equipment. Railroads are the dominant means of
These are formidable barriers. Some progress transportation to markets.
has been made in the past few years, but much re- Prior to World War II, coal was the dominant
mains to be done to help the energy sector of the fuel in the Soviet Union, as it was elsewhere in the
FSU attract domestic as well as foreign capital. world. In 1940, coal supplied 75 percent of Soviet
Despite a distinct cooling of the early euphoria, energy needs.37 Since then, oil and natural gas use
the FSU energy industry is still regarded in the has increased significantly, and today, coal ac-

37u.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

construction, mineshaft equipment production,


and geological surveys. The industry also pro-
vides housing (some 35 million square meters),
health care, children’s schools, and other facilities
39
for its employees. This situation is similar to the
coal company town that existed in the United
States 70 years ago. Today, the coal industry is try-
ing 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. Pro-
duction 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 con-
cerns, 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 poten-
tial for U.S. mining and beneficiation technology
transfer to former East Bloc countries. Reclama-
tion technologies are examined in chapter 5.
Coal coring exploration rig, Kuznetz Basin, Kazakhstan,

counts for only 14 percent of energy use in Rus-


I Declining Coal Production
sia. 38 Coal, however, is still widely used in the Far In former East Bloc countries, coal production’s
East and Siberia for industry and as a household downward slide is directly linked to the lack of
fuel in rural areas. Poland also relies on coal for a capital investment in new coal mines and in up-
large percentage of its energy needs. This reliance grading old, established ones. In recent decades,
is unlikely to diminish before the end of the cen- government strategy dictated that the coal indus-
tury. try take a backseat to oil and gas development.
The coal industry in the FSU is a multifaceted Thus, over the past 15 years, no new mines have
enterprise. In Russia, for example, the coal indus- been opened in Russia. Moreover, over one-half
try consists of more than 1,500 associations, en- of the operating mines are at least 30 years old and
terprises, and structural units. The industry not in poor working condition; few of these mines
only mines coal but is responsible for mine 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, ac- hand-held methane detectors. Methane gas explo-
cording to the Minister of Geology. 41 sions are the number one cause of death in under-
Equipment shortages have also contributed to ground mines. Also, medical facilities are
the decline. The failure to produce suitable equip- inadequate, and consumer goods are scarce, par-
ment and spare parts in the required quantities has ticularly in remote areas in Siberia and the Arctic.
been a longstanding problem in the FSU. Critical Finally, the mutual financial indebtedness
equipment is idled because spare parts are not among related industries has resulted in produc-
available, and some equipment simply does not tion decline. At the heart of this situation is the
exist; e.g., methane gas detectors and other safety coal industry’s indebtedness to the railroads. Re-
equipment. 42 More recently, the dissolution of the cently imposed higher shipping rates and fines for
FSU has further aggravated the situation. Eco- late payments have further strained relations. As a
nomic ties between various sectors in former re- result, coal is being stockpiled in storage areas,
publics have been disrupted. For example, where it is subject to degradation and spontaneous
Ukraine produced about 60 percent of the under- combustion.
ground excavation equipment, as well as the face
cleaning machinery, mine rescue equipment, and | Coal Mining Technologies
electric locomotives; Kazakhstan provided the About 50 percent of coal output in the FSU is
copper for the electric locomotives. mined underground, a decline of 13 percent since
The uneven quality of equipment also contrib- 1980. 43 This decline reflects the former Soviet
uted to the decline. Some mines have to make do government’s view that surface mining must ex-
with old, decrepit machinery, while others com- pand to ensure the coal industry’s success. Of
mand better, more sophisticated equipment. Im- course, there are differences between countries as
proper maintenance and repair, and the lack of well as regions. Underground mining is still the
spare parts, make a bad situation even worse. predominant coal extraction method in Ukraine.
Furthermore, the thickest coal seams closest to Underground mining is more complex than
the surface are now depleted, and miners must surface mining. Instead of scraping away the over-
work thinner seams at greater depths, making ex- burden (overlying soil and rocks), miners must
traction slower, more difficult, and more expen- work underground, connected to the outside world
sive. This is particularly true in Ukraine. In by shafts and passageways sometimes thousands
Russia, new mines located in the east are consider- of feet long. Roof support, ventilation, drainage,
able distances from population centers. Moreover, and lighting are some of the factors that compli-
several of the Siberian basins have lower quality cate underground mining.
coal, which is uneconomical to transport. Cold Equipment used in underground mining ranges
climes further limit extraction and transportation. from relatively simple to highly automated ma-
Labor unrest adds to the problem. Wretched chinery. The oldest method, hand labor, is still
working and living conditions and low salaries used occasionally in small mines.
have led to miners’ strikes. For example, many
miners work without safety equipment, such as

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

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 coun-
tries. 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
Coal mine entrance in Upper Silesian Basin, Poland.
markets, German and British companies are in a
strong position to transfer technology. Germany is
Longwall mining is the principal underground now actively marketing its equipment in former
mining technique used in the FSU and throughout East Bloc countries.
Europe. In the FSU, longwall mining accounts for The preferred method of underground mining
about 85 percent of total underground output.44 It in the United States (down to 700 meters) is the
involves the creation of interconnected corridors room and pillar with roof bolting system. Thus,
that are 300 to 600 feet apart. The long wall of the opportunities for U.S. export and technology
interconnection is mined in slices, using a rotating transfer of underground mining equipment largely
cutter that moves back and forth across a coal face. hinge on a change in mining techniques, i.e., from
As the machinery moves, it cuts the coal, which single-entry longwall mining to roof bolting tech-
falls onto a conveyor belt. The roof is held up by niques. Changes in mining techniques are unlike-
steel jacks while the cutter makes a pass across the ly to occur in the near future. Moreover, geologic
face. The roof jacks are advanced with the shearer differences render much U.S. equipment unsuit-
to make a new pass. The roof collapses in the able for the narrow seams of many FSU mines.
mined-out area behind the jacks. Almost all of the Modifications must be made to U.S. equipment
coal can be extracted by this process. 45 prior to export, a major market disadvantage.
In recent years, open pit mining in the FSU has However, the United States is a leader in
become more important, increasing from 35 per- surface mining technology and equipment. Ex-
cent of coal output in 198046 to 50 percent in 1992. amples of equipment that might increase produc-
Surface mining is used extensively in the Czech tivity are large-capacity draglines and excavators.
Republic and Estonia (see table 3-3). Surface min- While these technologies are not unique to the
ing equipment includes bulldozers, draglines, ex- United States, U.S. companies do produce equip-
cavators, and large-capacity trucks. ment 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

ciently and offers significant savings in transport


fees. Coal cleaning also reduces handling and
Surface mined storage, and maintenance costs for pulverizers be-
Country (percent) cause of lower volume. Furthermore, pre-com-
bustion cleaning can result in environmental
Russia 55 benefits; e.g., cleaning removes ash and some of
Ukraine 4 the sulfur47 found in coal, thus reducing particu-
Kazakhstan 70 late and sulfur dioxide, which are emitted during
Estonia (shale) 50 combustion.
Poland 70
It is important to note that the benefits of coal
Czech Republic 75
cleaning will vary among East Bloc countries and
Hungary 32
will largely depend on the characteristics of the
Slovak Republic 0
coal. For example, in Ukraine, where coal is high
in pyritic sulfur, cleaning will offer significant re-
SOURCES Przemysl (Warsaw 1992), p 20, Iparslatlsztlkal Evkonyv
(Budapest 1989), p 301, Stahstlska Rosenka (Prague 1992), p 388:
ductions (up to 50 percent) in sulfur emissions. In
Okhrana okrushalushchel sredy I ratslonal’noe Ispol’zovan!e prlrod- Poland, the primary benefits are reduced transport
nykh resursov (Moscow Goskomstat, 1991), pp 202-203. costs and particulate emissions, especially in ur-
ban areas where a large percentage of households
their Western European and Japanese counter- use high-ash coal for heat. (See chapter 5 for a dis-
parts. cussion of the environmental benefits and poten-
To date, the U.S. coal industry presence in the tial impacts of coal beneficiation.)
FSU has been part of a much larger humanitarian There has been little cleaning of coal in former
effort, Partners in Economic Reform (PIER). With East Bloc countries. For example, during the
U.S. government funding and coal industry and 1970s and 1980s, only about 15 percent of coal
labor support, PIER administers the Coal Project, was cleaned in the FSU, mostly for coking coal.
which provides technical assistance and training Coking coal typically receives cleaning because
in health, safety, efficiency, and productivity of the technical requirements of metallurgical op-
throughout the coal regions of Russia, Ukraine, erations. Polish coal is cleaned for the export
and Kazakhstan. Technical assistance includes market.
demonstrations of U.S. mining technology and
equipment, as well as management, engineering, Potential for US. Technology Transfer
and safety techniques. The Coal Project also funds The United States has extensive experience with
the purchase of safety equipment, such as methane coal beneficiation. About one-third of U.S. steam
detectors, for FSU miners. The Coal Project has coal (over 200 million tons) is cleaned to remove
liaison offices in Moscow, Kiev, and Almaty and ash and sulfur impurities and to increase heat val-
regional training centers in the Donbass, Kuzbass, ue. 48 This experience and technological expertise
Karanganda, and Vorkuta mining regions. could both benefit the coal industry and mitigate
the air quality impacts of coal combustion in sev-
| Coal Beneficiation eral countries.
Coal beneficiation (cleaning) is done at the mine But before U.S. and other Western companies
prior to transport. Cleaning improves the quality invest in coal cleaning projects, coal data must be
of coal so that it can be used more cleanly and effi- 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 ing output plans and risking related bonuses are at
newly generated wastes resulting from benefici- the root of this fear. Moreover, the reliability of
ation. In most cases, such data are not available equipment has been a longstanding problem. In-
and must be assembled by U.S. companies inter- frequent repair and maintenance, the lack of spare
ested in doing business in former East Bloc coun- parts, and the use of equipment that is unsuitable
tries, a major financial undertaking for small- and for the conditions aggravate the situation. Equip-
medium-sized firms and a significant obstacle. ment failure results in work stoppages, and poorly
Although few U.S. firms are involved in coal maintained equipment results in an increased rate
cleaning technology transfer to this region, Cus- of accidents and injuries in the labor force.
tom Coals is actively pursuing opportunities in Some restructuring of the coal industry has be-
Poland. The U.S. company is planning to build gun in Russia, Poland, Hungary, and the Czech
three facilities near Krakow, Poland. These plants Republic. Recently, Russia announced the closure
will have the capacity to clean 10 million tons of of 41 underground mines and one open pit mine by
coal annually for powerplant use. Appendix 3-2 2000. These mines produce about 3 percent of to-
details Custom Coals’ experience in Poland and tal output but account for 26 percent of all coal in-
provides some perceptions of federal government dustry accidents. 49 Also, a new entity, Rosugol,
efforts to assist U.S. businesses. was created in 1993 to administer the coal indus-
try. However, principal responsibility still resides
| Conclusions with the 28 coal associations that oversee produc-
The coal industry in former East Bloc countries tion and transport. In other countries, restructur-
continues to experience serious problems includ- ing is further along. Hungary, for example, has
ing declining output of mines near population cen- closed several mines, raised coal prices, and re-
ters, few additions to mine capacity, declining duced subsidies. In Poland, the Hard Coal
coal quality, and labor unrest. The low priority Agency, a state-owned, joint stock company, was
given the coal industry in the past has contributed formed to encourage privatization and to close in-
significantly to present-day instability. For exam- efficient mines. Also, prices have been raised,
ple, capital investment decisions in the 1970s and subsidies have been reduced, and some mines
1980s favored oil and gas development and have become independent entities. However, the
starved the coal industry. Moreover, government coal industry in former East Bloc countries is still
strategy to mine the thickest seams closest to the far from being a competitive structure of private
surface quick] y depleted high-qua] it y, economical producers, distributors, and traders. Legal and
coal. What is left is coal of poorer quality that is regulatory issues are two of the many concerns
located far from consumers. Production costs are that must be addressed before a truly competitive
rising rapidly, and transportation costs are high, industry emerges.50
when compared with those for natural gas. Associated environmental problems further
The shortage of capital also hindered the devel- cloud the outlook for the industry. The widespread
opment and production of coal mining technolo- burning of low-quality lignite is largely responsi-
gies. The use of old, inefficient technologies is ble for the alarming degradation of the environ-
commonplace. In addition, equipment manufac- ment in the region. Cleaning up the pollution will
turers historically have been reluctant to develop require many years of effort and large infusions of
and produce new technologies. Fear of jeopardiz- capital. The Polish government, for example, esti-

49 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 thinner seams, U.S. companies would have to
European Union environmental standards and modify their equipment for export to former East
reach sustainable economic development. 51 Bloc countries, a major market disadvantage. As
Hence, technological advances in clean coal burn- reforms take hold, and the coal industry stabilizes,
ing and pollution control equipment will not only there may be more interest in coal mining technol-
provide environmental benefits but also may help ogy transfer to that region. One near-term possi-
stabilize coal output and use. bility for U.S. companies might be to focus on
Modem coal mining technology offers short- opportunities for U.S. technologies and expertise
term improvements in productivity, efficiency, after the coal is extracted, such as coal benefici-
and environmental impacts. It also buys time ation. The United States is a leader in coal clean-
while the transition is made to a market economy. ing technologies and project development and
However, Western assistance alone will not re- management. This expertise could provide signif-
verse the coal industry’s downward slide informer icant energy efficiency and air quality benefits.
East Bloc countries. Efforts must be made by Cen- However, the lack of accurate coal data will pres-
tral European and FSU governments to solve the ent a challenge to Western companies interested in
variety of problems now facing the industry. To technology transfer. Accurate data are essential to
stabilize output and reverse the decline, capital the success of coal beneficiation projects.
must be invested in mine development and mod- In sum, there are many opportunities to rejuve-
ernization. Manufacturers must be able to produce nate the coal industry in former East Bloc coun-
the required equipment and get it to the miners. tries and make it financially healthy. Whether
Western imports and joint ventures in production U.S. companies jump in will depend on the re-
facilities could provide some relief in this regard. gion’s and coal industry’s success in making the
The industry’s social/community activities, such transition to a market economy and addressing the
as health care, housing, wages, taxes, and pen- myriad of problems it now faces.
sions, must also be addressed.
In the final analysis, however, the long-term
survival of the coal industry will depend on how COALBED METHANE
well governments make the transition to a market Methane gas is often associated with coal. Gener-
economy. Economic reform is the key. ally, the amount of methane stored in a coal depos-
The U.S. coal industry has not thus far actively it is related to the quality and depth of a coal
pursued technology transfer to former East Bloc deposit. Higher quality and deeper coal seams
markets, as compared with the oil industry. The have greater capacity to hold methane.
characteristics of the region’s industry and related Large amounts of methane can be released dur-
environmental impacts, labor, and transportation ing the mining process. For example, coal mining
problems have not been conducive to foreign in- operations in Poland release about 4.8 trillion cu-
vestment. Furthermore, mining techniques and bic feet (Tcf) annually, most of which is vented to
geologic characteristics of coal deposits differ the atmosphere.52 Unutilized methane is a potent
from those found in the United States. Because greenhouse gas and a safety hazard. Methane is es-
mining is generally done at deeper levels and on timated 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


In gassy coal seams, ventilation systems are inad-
equate, and degasification technologies must be
Total Total Total used. These technologies can recover methane be-
recovered used vented fore, during, and after mining, and can be used in-
Country (bcf) (bcf) (bcf)
side the mine or from the surface. Degasification
FSU 43.4 9.8 33.6 systems have become more important in light of
Czechoslovakia 4.9 4,4 0.5 growing concerns about greenhouse gas emis-
Poland 10,0 7.0 3.0 sions. Methane degasification emissions for sev-
eral areas are highlighted in table 3-4.
SOURCE Charles M Boyer, 11, and Jonathan R Kelafant, and Dma The four principal methods of degasification
Kruger, “Dwerse Projects Worldwlde Include Mine, Unmmed Coals,” 0// are surface pre-mining drainage, in-mine drain-
and Gas Journa/, VOI %3 No 50, Dec 14, 1992, p 40
age, surface gob recovery, and cross-measure
boreholes. Several factors, including the charac-
trapping heat than carbon dioxide (CO2) on a teristics of the coal deposit, mining methods
weight basis,53 employed, and surface conditions, determine
Methane gas explosions are the number one which degasification technology is used.
cause of death in underground mines in the FSU. Surface pre-mining drainage uses vertical
In the past, miners took canaries down into the wells that are drilled from the surface to recover
mine with them as a warning that methane was the methane before mining activities commence.
present. Gas detection equipment and mine ven- Drilling can occur from 2 to 15 years prior to min-
tilation systems are now used. ing. This method is used exclusively in the United
The methane can be captured and used instead States, but can be used in other countries as well. 54
of being released. Coalbed methane is essentially Poland has expressed interest in surface pre-min-
identical to natural gas and can be transported by ing drainage.
pipeline to households and industries. Extracting In-mine drainage is preferable in areas where
and using coalbed methane improves mine safety surface mining is impractical because of land use
and provides environmental benefits. Its use could patterns and where immediate drainage is re-
thus reduce pollution in the heavily industrialized quired. Boreholes are drilled into the coal seam
areas of southwestern Poland, where adverse where they can be connected to the mine’s piping
health effects have been associated with high lev- system, which transports the gas out of the
els of sulfur dioxide emissions. There is great po- mine. 55
tential for methane recovery and use in Poland, Surface gob recovery is used after a coal seam
Russia, Ukraine, and Kazakhstan. They are is mined. Wells are drilled to within a few feet of
among the major coal bed methane resource coun- the top of the coal seam. As mining is completed
tries in the world. 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 recov-


ery 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 Truck mounted drilling rig typically used for coal and coalbed
methane explorations in the former Soviet Union,
The desire to reduce greenhouse gas emissions
and become energy self-sufficient has spurred in-
terest in developing coalbed methane resources replace about 7 percent of Polish gas consump-
worldwide. Poland, for example, is actively seek- tion, or 1 percent of the country’s total energy de-
ing Western assistance to explore and develop its mand.59
resources. U.S. and European companies are also pursu-
The United States has done extensive research ing coalbed methane exploration and production
on coalbed methane exploration and development projects in the Czech Republic, Hungary, Roma-
technologies. This research paved the way for suc- nia, and Bulgaria. Additionally, the EPA is active-
cessful U.S. projects, such as that in the San Juan ly promoting expanded coalbed methane recovery
Basin in Colorado and New Mexico and the War- and use in several countries, including Poland,
rior Basin in Alabama. With a vast resource base Russia, Ukraine, and the Czech Republic. Thus
(400 Tcf) and production experience (over 1 far, EPA has funded resource assessments and es-
billion cubic feet per day), the United States is a tablished a coalbed methane information center in
recognized leader in coalbed methane develop- Katowice, Poland. EPA also has established a
ment. 58 U.S. technologies and project manage- U.S./Poland working group to encourage projects
ment expertise can help expedite coalbed methane to reduce methane emissions from mines.
development in former East Bloc countries. While interest in commercial coalbed methane
Recently, two U.S. companies, Amoco and projects is growing, several factors have damp-
McCormick Energy, have been awarded contracts ened Western enthusiasm for market development
to extract coalbed methane in the Upper Silesian in former East Bloc countries. The lack of ap-
coal fields in southern Poland. Most of the meth- propriate regulations and the legal uncertainties
ane will be compressed and transported by pipe- that relate to ownership and granting concessions
line. It is expected that the recovered methane will have hindered development. Also, the poor condi-

561bid.
571bid.
58J{)natha R. Ke]afant, Scott H. Stevens, and Charles M. Boyer, 11, “Vast Resource Potential Exists in Many Countries,” Oil and@$~cwr-
rud, 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 agreement to build a gas injection condensate re-
subsidized energy pricing have further reduced covery project.
the economic attractiveness of coalbed methane
projects. | Doing Business in the FSU
Available and accurate geologic data, a fully in- Dresser officials who have worked recently in
tegrated natural gas pipeline system, and tax in- Moscow note that many of the skills that the com-
centives are also needed. Most of these conditions pany learned in the Soviet era are still vital for do-
do not exist in former East Bloc countries, making ing business in the FSU. Of particular importance
coalbed methane development riskier. These are the company’s wide range of contacts within
countries must address these legal, financial, and the FSU oil and gas industry and the understand-
political issues to attract Western investment and ing that doing business in the FSU requires a long-
fully realize their coalbed methane resource po- term commitment and perspective. Moreover,
tential. since Dresser’s activities have been almost exclu-
sively commercial in nature and have not involved
APPENDIX 3-1: EXPERIENCE WITH JOINT resource extraction, the company has not been
VENTURES-DRESSER INDUSTRIES greatly hampered by the legal and ownership un-
certainties that have affected oil and gas explora-
I Background
tion ventures since the breakup of the Soviet
Dresser Industries is a full-spectrum oil and gas Union.
production equipment manufacturer that has been But there have been substantial changes in the
selling oil- and gas-related equipment to the So- way business is done and in the types of problems
viet Union since 1936. Dresser began doing busi- Dresser has encountered since the Soviet Union
ness with Moscow when Soviet Russia was split apart. Whereas before 1991 the company
rapidly expanding its petroleum production capa- dealt almost exclusively with ministries and for-
bilities to fuel the huge spurt of economic growth eign trade organizations, it now sells directly to
that took place under the state-sponsored industri- end-user organizations such as enterprises, pro-
alization program of the 1930s. Dresser has re- duction associations, and refineries. This can be a
mained in Russia ever since, selling a full double-edged sword. Although it is easier to deal
spectrum of highly engineered upstream and with end-users than third parties, Russian enter-
downstream oil- and gas-related equipment. prise directors have had little experience negotiat-
Dresser’s business intensified in the early 1970s, ing major purchases with foreign contractors.
and the company established an officially accred- Managers are often unfamiliar with Western price
ited office in Moscow in 1979. With almost six de- norms, warranty standards, and other trade-re-
cades of experience in the Soviet market, Dresser lated matters previously handled by professional
is one of the most experienced American export- negotiators in Moscow. As a result, the customari-
ers to the FSU. ly long Soviet-era negotiation process is often fur-
ther attenuated in the FSU.
I Present Activities Moreover, the Soviet Union was such a reliable
The company is currently working on two large creditor that Dresser never needed to require a let-
projects in the FSU. In St. Petersburg, Russia, ter of credit. Now, the need to obtain financial
Dresser is in the process of setting up a joint ven- guarantees from enterprises in the post-Soviet
ture with the Kirovskii Zavod, a former military states can create confusion and misunderstanding.
enterprise, for the manufacture of oil and gas pipe- Post-Soviet enterprise managers are unfamiliar
line turbine compressor sets. This will be the com- with Western financial requirements and have
pany’s first manufacturing operation in Russia. In been slow to appreciate the need for confirmed let-
Uzbekistan, Dresser has signed a $200-million ters 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 pro- hard-currency exports. But given the region’s eco-
gram to teach basic business management and nomic and political instability, Western banks will
marketing skills to FSU energy sector managers not lend money on an unsecured basis. Western re-
could improve understanding of the mechanics of source extraction ventures such as Chevron can
market economies and foreign trade. But the need afford to risk investing their own money because
for such training is so great that company officials the potential rewards are so great. But in the
wonder whether any foreseeable American train- equipment export sector, where the returns are
ing program could have a significant impact. much smaller, Western firms such as Dresser can-
not risk investing hundreds of millions of dollars
of their shareholders’ money in the turbulent
| U.S. Government Role
conditions of the FSU. Accordingly, Dresser ad-
According to Dresser, recent U.S. government ac- vocates a large expansion of Eximbank guarantees
tivity in the commercial sector has had a positive (at the standard 85 percent rate) for energy sector
impact on energy-sector exports to the FSU. The investment projects. In his view, Eximbank guar-
relaxation of COCOM has been of particular help antees (coordinated with similar guarantees by
to the company, allowing it to sell its high- other Western nations) will prove much more ef-
technology nuclear logging equipment and other fective and will promote investment much more
computer-driven systems to markets from which quickly than other efforts currently under consid-
they were previously prohibited. The company eration, including the European Energy Charter
also notes that the U.S. government has shown and attempts to set up escrow accounts or funnel
greater interest in promoting American exports investment funds through multilateral organiza-
over the past four or five years. This includes not tions such as the World Bank.
only greater coordination between agencies such
as DOE and Commerce, but also encompasses
changes in other aspects of U.S. government APPENDIX 3-2: CASE STUDY: CUSTOM
policy. For example, the easing of visa restrictions COALS CORP.
for Russians to visit the United States may not Custom Coals Corp. is an Arizona corporation
have been seen as a commerce-enhancing step, but headquartered in Pennsylvania and founded to
it greatly eased Russian frustration at what was market a recently developed technology to reduce
perceived to be unequal treatment: Dresser offi- the pre-combustion sulfur content of coal. Ac-
cials could visit the Soviet Union, but Soviet citi- cording to the company, its cleaning process re-
zens could not come to the United States. Dresser moves sulfur more economically than flue gas
notes that the easing of these restrictions and the desulfurization (scrubbers), the most widely used
placing of former Soviet citizens on a more equal post-combustion process. Company data show
footing with Americans in the business process that in many cases the Custom Coals process,
has eased relations with Dresser’s Russian part- which employs physicial benefication and lime-
ners and made it easier to do business. stone and hydrated sorbent additives, reduces sul-
Nevertheless, company officials maintain that fur emissions at half the cost of scrubbers. The
without substantial United States government as- company’s products are designed for electric utili-
sistance in the area of finance, Dresser and other ties and for the district and home heating markets.
equipment supply companies will be unable to ex- The company recently won a $76-million con-
pand their export activities to the FSU. They say tract under the U.S. Department of Energy’s Clean
that given the acute need for FSU countries to Coal Technology Program to construct and oper-
raise hard currency, the U.S. government should ate a demonstration coal cleaning plant in Somer-
give greatest priority to promoting investment in set County, Pennsylvania. After this project goes
those FSU sectors, such as oil and gas production, on line, Clean Coals plans to develop 9 to 10 full-
that will provide the quickest and most lucrative scale plants in the United States.
Chapter 3 Fossil Fuel Technologies | 69

I The Project of 1994, with groundbreaking set for the fourth


In addition to U.S. markets, Custom Coals is seek- quarter of that year.
ing to sell its technology overseas in countries that
depend heavily on coal but lack effective and cost- I Doing Business in Poland
efficient pollution-control technologies. At the Custom Coals reports a warm reception from Pol-
present time, the company’s most active project is ish government and enterprise officials because it
in Poland, though it is also working in China and actually proposes to build a project. Poles have
Mexico. Poland is a particularly attractive pros- told Custom Coals officials that they feel “studied
pect because of its huge coal reserves, its depen- to death” by fly-in, fly-out Western consultants
dence on coal for power generation and heating, who spend a great deal of money identifying prob-
and the need to curtail the emissions of sulfur that lems but do very little about solving them.
have contributed to the country’s nearly cata- However, business negotiations have not been
strophic levels of pollution. problem free. The Poles’ lack of background in
Ideally and in the long term, the best way for free market economics and lack of knowledge
Poland to reduce toxic emissions is to convert its about the rates of return needed to attract invest-
powerplants to gas-fired operations. But conver- ment capital has impaired their ability to evaluate
sion to gas would demand a great deal of capital, potential business deals. Polish managers have
which the country cannot afford. Coal cleaning difficulty judging whether they are receiving rea-
provides a good short-to medium-term solution to sonable terms, in the context of the international
Poland’s problem. It demands much less capital economy, and they worry about being taken ad-
investment and results in significant pollution re- vantage of by more knowledgeable Western busi-
duction. Custom Coals estimates that its clean ness people. The lack of a consistent and reliable
coal product will contain 75 percent less particu- system of cost accounting often makes it difficult
late and heavy metals and 50 percent less sulfur for Custom Coals to generate the types of data
than raw Polish coal. In addition, the coal cleaning needed to satisfy financial requirements. And the
technology will offer Poland the ability to clean its many unusual attached costs borne by Polish en-
high-sulfur coals and export the product to West- terprises (everything from bowling alleys to day
ern Europe. care centers) have to be taken into account in com-
The company has proposed an initial project in- puting total project cost.
volving three coal cleaning plants, which would Nevertheless, Custom Coals has had few major
process about 10 million tons of Polish coal annu- problems setting up its business. This is in large
ally for sale on the domestic and export market. It part because the company has been able to find
sees the potential for 25 plants, to process around professional service providers who are fluent in
100 million tons (75 percent of Polish annual coal U.S.-Poland business issues, the technical ques-
production). The company has already spent one tions of coal production, and the English 1an-
year working on the project, in consultation with guage. Beyond management training for future
government officials, as well as the managers of senior Polish managers of Custom Coals projects,
coal mines, power generation plants and the elec- the company does not foresee a need for substan-
tric grid. The company is presently studying the tial investment in training.
technical characteristics of Polish coal; evaluating Custom Coals’ German competitors have been
project sites, supplies, builders, and operators; active in the same market. German companies en-
and developing a detailed project for submission joy an advantage over Custom Coals because their
to international lending agencies. It hopes to have domestic operations are subsidized by the German
a financeable project ready for presentation to the government. However, the German firms rely on
World Bank and the EBRD by the second quarter conventional pollution-control technologies, not
70 | Fueling Reform: Energy Technologies for the Former East Bloc

the advanced, pre-combustion technologies de- multilateral lender. For a large corporation, this is
veloped by Custom Coals. The German compa- not a big expense, but for a relatively small busi-
nies are also seeking direct financing or sovereign ness like Custom Coals, these development costs
financial guarantees from the Polish government constitute a considerable sum. The company’s
to underwrite their proposed projects. Custom AID grant is designed to meet part of these costs,
Coals is structuring its project proposals so that but the AID application process is too slow.
the Polish government will not have to provide fi- The company would therefore like to see a new
nancing, making their proposal potentially much and more timely way of providing development
more attractive from the Polish point of view. assistance for U.S. firms, especially for small
companies, in the form either of loans or grants.
| International Lending Agencies and the (Custom Coals would gladly take a commercial
U.S. Government loan to cover these costs if it could obtain one for
Since commercial banks are still extremely reluc- its Polish project.) The company points to the
tant to lend to projects in Central Europe, the suc- DOE Clean Coals Technology Program as a mod-
cess of Custom Coals’ Polish project depends on el. The DOE program provides startup monies on
funding from multilateral lending agencies such a timely basis, requires company matching funds
as the World Bank and EBRD. Custom Coals offi- (which eliminates spurious projects), and requires
cials have been solicitous of advice from represen- repayment to replenish the revolving fund. Unfor-
tatives of both institutions and have remained in tunately, these DOE funds cannot be used for proj-
continuous contact with them as they develop ects abroad. The company thinks that something
their funding proposal. World Bank officials are like this would be ideal for projects in Central Eu-
particularly enthusiastic about coal cleaning as a rope.
more cost-effective answer to Poland’s pollution
problems than the installation of highly expensive
scrubbers. Custom Coals is optimistic about pros-
| The International Perspective
pects for long-term project financing from these Custom Coals notes one larger philosophical is-
institutions. sue. The company sees coal cleaning not as a na-
Custom Coals’ experience with U.S. agencies tional issue, but as a global one. American firms
has been more mixed. The company applied for and the U.S. government have spent large sums of
and received a $375,000 matching grant from the money developing domestic technologies for coal
AID to conduct feasibility studies for its Polish cleaning and for the reduction of sulfur dioxide
project. But the application process was extreme- and particulate emissions. Domestically, where
ly slow. AID took 7 months to review the project all powerplants and industry are already meeting
before approving it in May 1993, and another 7 previously established standards for pollution
months to disburse the funds. control, recent investments in coal cleaning
In the company’s view, the World Bank and technology will yield significant, but relatively
EBRD are fulfilling their missions as multilateral marginal improvements in pollution control. But
lenders financing development projects. The applying these technologies elsewhere, where the
company is therefore less concerned about project basic technologies in use are far below the U.S.
funding than with financing the feasibility studies standard or where no pollution-control technolo-
and other initial costs involved in putting together gy exists, could yield much larger results in terms
a project proposal. The company notes that these of reducing worldwide sulfur emissions. In es-
initial costs can be quite high—around $2 million sence, $2 billion spent worldwide would have a
to $3 million simply to put together a project fi- much greater impact on reducing pollution levels
nancing proposal suitable for submission to a 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 is-
sues, however, concern non-fossil technologies. Nuclear
safety and proliferation issues could pose global risks.
Electric powerplants are key elements in the energy picture, re-
quiring 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 re-
sources, 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 nu-
clear 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 diffi-
cult, complex, and often expensive.
The second is nuclear weapons proliferation. Soviet weapons,
materials, or expertise could become available because of poten-
tially inadequate control in the former Soviet Union (FSU). Ana-
lyzing 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 re-
ducing the danger of proliferation.
Town Hall, Kaunas, Lithuania.
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 Rus- I 73
74 | Fueling Reform: Energy Technologies for the Former East Bloc

sia but is beyond the scope of this study. Some of another major accident, particularly one on the
critics believe that nuclear power should be scale of Chernobyl. Even an accident that disabled
phased out as quickly as possible, and that any a reactor with very little offsite contamination,
cooperation that will tend to prolong its use here such as at Three Mile Island, would be a major
and in the former East Bloc is undesirable. This economic blow to a region the United States is try-
section neither accepts nor rejects that view. It ing to help.
merely lays out the issues related to nuclear reac- Some reactors had been scheduled to be shut
tor safety and weapons proliferation and discusses down, largely for safety reasons, but economic
what can be done to address them. realities have made this difficult. All these coun-
tries suffer from severe energy shortages, and nu-
| Nuclear Safety clear reactors have been an essential element in
The pattern of nuclear power technology develop- keeping electric power available. As noted in
ment in the Soviet Union was similar to that of the chapter 2, in six of these countries, nuclear is a
United States: maritime and small power reactors higher fraction of the power supply than in the
were constructed in the 1950s; pressurized water United States (about 20 percent). Shutting reac-
reactors (PWR) and boiling water reactors (BWR) tors down without adequate alternatives (new
were tested in the 1960s; and widespread deploy- generating capacity or improved efficiency of
ment occurred in the 1970s. However, Soviet nu- electricity use) would aggravate the economic cri-
clear designs were largely indigenous, unlike sis. None of these countries can afford to replace
almost all other reactors in the world that were all operable but risky plants with new ones. Even
derived from U.S. technology. Therefore, Soviet Ukraine, with its special sensitivity toward nu-
reactor designs, although based on similar con- clear safety, has deferred the planned shutdown of
cepts, evolved quite differently from those in the the two remaining Chernobyl reactors and may
West. Furthermore, the institutional environment consider repairing the Unit 2 reactor, which was
for designing, constructing, and operating nuclear severely damaged by fire in 1990 (the 1986 explo-
powerplants was completely unlike anything in sion destroyed the Unit 4 reactor). In addition,
the West. Armenia is giving serious consideration to reha-
Western observers have generally concluded bilitating two reactors shut down because of safe-
that the reactors in the former East Bloc are signif- ty concerns following a major earthquake in
icantly less safe than Western reactors. The explo- 1988. 1 The only other recent shutdowns for safety
sion at Chernobyl and other accidents have reasons have been in the former East Germany.
reinforced this view. The disruption from the Nuclear safety is a complex subject. Accidents
breakup of the Soviet Union and the economic cri- can arise from a variety of faults involving design,
sis affecting the entire region have aggravated the construction, operation, and maintenance. While
problems as Russian operators and engineers have there is no consensus in the United States about
returned home and spare parts have become un- how safe reactors are, or how safe they should be,
available. regulation and public involvement has been much
Since the Chernobyl accident in 1986, Western stronger than in the former East Bloc. There has
countries have increased efforts to reduce the risk 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 learn- specific technological needs, for the recipient’s
ing from mistakes, and considerable incremental ability to make use of the assistance, and for the
improvement. 2 Operations and maintenance have role that nuclear energy plays in each country.
also improved, as evidenced by the greatly im- Improving safety in operating reactors requires
proved performance of U.S. reactors.3 a variety of activities:
Evaluation and comparison of reactors based ● identifying and fixing specific problems on in-

on different technology and under different regu- dividual reactors,


latory and institutional systems are much less cer- ● enhancing analytical skills and regulatory ex-

tain. However, it does appear that the evolutionary pertise and authority,
improvement experienced in the West was not du- ● upgrading operations and maintenance of reac-

plicated in the Soviet Union. Reactor designs tors,


were improved, but not as rapidly. There does not infusing the entire enterprise with a commit-
appear to have been an organized policy for back- ment to excellence.
fits to address safety deficiencies as they were This section reviews the safety problems of
identified, 4 or even a strong regulatory authority. reactors in the former East Bloc and what can be
Operations and maintenance were never held to done about them by the United States and other
high standards, and are actually slipping, in part Western countries. It identifies specific technolo-
due to the economic crisis. gies and expertise that would be useful in reducing
However, the situation is not entirely grim. The risks and the current activities to transfer them. 6
Soviet-built plants in Hungary and Finland have
been among the most reliable in the world.5 Fur- Design Safety Problems
thermore, there are different approaches to safety. Two main types of reactors were produced by the
Soviet reactors have some advantages and can, at FSU—the RBMK and the VVER (both are Rus-
least in theory, achieve safety levels equivalent to sian acronyms). The RBMK is graphite moder-
Western reactors. Except for basic items such as ated and water cooled. Its fuel assemblies are in
containment vessels and emergency core cooling tubes inside graphite blocks, somewhat like the
systems, the presence or lack of a specific safety high-temperature gas reactor (HTGR). Water
feature does not necessarily greatly affect overall flows up through the tubes and emerges as a
safety. Each reactor must be analyzed in its entire- steam/water mixture. The steam is separated and
ty. U.S. assistance must be designed to account for drives a turbine, as in a BWR. Spent fuel is re-

2
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

slowed at Kursk 6, Smolensk 4, and Ignalina 3, in


part because of public opposition following the
Chernobyl accident.
start The second type, the VVER, is similar con-
Russia Model operation MWe ceptually to the PWR, the dominant reactor of the
West. It is water moderated and cooled, and
Kursk 1 1 1976 1000
evolved from reactors used for icebreakers and
Kursk 2 1 1978 1000
Kursk 3 2 1983
submarines. This reactor has been exported, in-
1000
Kursk 4 2 1985 1000
cluding to Finland, Hungary, and Bulgaria. The
Leningrad 1 1 1973 1000 former Czechoslovakia later assimilated the de-
Leningrad 2 1 1975 1000 sign and constructed several independently. Sev-
Leningrad 3 2 1980 1000 eral models are extant. The oldest is the 440/230,
Leningrad 4 2 1981 1000 which was followed by the 440/213, both at 440
Smolensk 1 2 1982 1000 megawatts of electricity (MWe). The latest model
Smolensk 2 2 1985 1000 is the 1000 MWe VVER-1OOO.
Smolensk 3 3 1990 1000 Tables 4-1 and 4-2 list the reactors of greatest
Ukraine concern. These tables do not include other types of
Chernobyl 1 1 1971 1000 reactors, such as the Canadian-built heavy-water
Chernobyl 2 1 1971 (shutdown) 1000 reactors in Romania.
Chernobyl 3 2 1975 1000 There are two main areas of concern with the
Chernobyl 4 3 1983 (destroyed in 1000 RBMK: core neutronics and the hydraulics of the
1986) pressure tubes. The first refers to the nuclear reac-
Lithuania tions in the core. The RBMK has a positive void
Ignalina 1 2 1983 1500 coefficient, meaning that if water is lost from the
Ignalina 2 2 1986 1500 core, the reaction tends to speed up. Both water
and graphite are moderators (which slow neutrons
SOURCE: Richard Wilson, ‘(Nuclear Power Safety In Central and East- so that they will be more likely to cause another
ern Europe,” OTA contractor report, September 1993.
fissioning when they strike a uranium atom), but
water also absorbs some neutrons. Western reac-
placed while the reactor is operating, unlike U.S. tors are designed so that water must be present for
reactors, which must be shut down for refueling. the reaction to continue. If some is removed from
The RBMK design evolved from early pluto- the core, either through excessive boiling or a
nium production reactors. It was never built out- loss-of-coolant accident, the reactor will shut
side the Soviet Union, possibly because of down (a characteristic known as a negative void
concerns that it could be used to generate weap- coefficient). This is an inherently stable design,
ons-grade plutonium. The reactors at Chernobyl and such stability was a prime criterion in the early
in Ukraine are of this type. The design has no di- days of nuclear energy, when many different reac-
rect counterpart in the West. RBMKs exist in Rus- tor concepts were investigated.7 In the RBMK,
sia, Ukraine, and Lithuania. In addition to these graphite provides all the necessary moderation.
operating reactors, construction has ceased or 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

cident might have been prevented had the design


precluded too many control rods from being with-
drawn from the core, or if operators had been thor-
Start oughly trained to recognize the risk.8
— Unit Model operation The obvious solution is to remove enough
graphite so that the reaction shuts down if water is
Armenia
Armenia 1 230 1977
not present. However, this would be extremely
2 230 1980 difficult in an existing reactor that is structurally
Bulgaria dependent on the graphite and where all work
Kozloduy 1 230 1974 would have to be done by remote control. Fixed
2 230 1975
3 230 1980
neutron absorbers (to supplement the movable
4 230 1982 control rods) are being installed in the cores
Czech Republic instead, and the operational reactivity margin is
Dukovany 1 213 1985 being increased. Improved monitoring and con-
2 213 1986
3 213 1986
trols would also be beneficial.
4 213 1987 Two other weaknesses are already being cor-
Hungary rected. First, each control rod had a graphite tip to
Paks 1 213 1983 match the surrounding moderator below the core
2 213 1984
1986
when fully inserted. Unfortunately, control rods
3 213
4 213 1987 are reinserted from the top, and this graphite tip
Russia adds to the core reactivity as it passes through, ap-
Kola 1 230 1973 parently the proximate cause of the Chernobyl ex-
2 230 1974
plosion. These rods can be modified to remove the
3 213 1982
4 213 1984 extra graphite, but it has not yet been confirmed if
Novovornezh 3 230 1972 all RBMKs have been modified.
4 230 1973 The second correction was to add a fast-acting
Slovakia
scram system to all RBMK reactors. The original
Bohunice 1 230 1978
2 230 1980 shutdown rods were suspended by a cable that
3 213 1984 winds around a drum. About 20 seconds were re-
4 213 1985 quired to insert the rods. The new system will al-
Mochovce 1 213 1994
low a much faster shutdown in case of emergency,
Ukraine possibly forestalling a major accident.
Rovno 1 213 1980 The major hydraulic concern is over the possi-
2 213 1981 bility of fuel channel rupture. These tubes are at
high pressure, and rupture can have serious conse-
SOURCE Richard Wtlson, “Nuclear Power Safety m Central and East- quences. Reactivity increases, as discussed
ern Europe, ” OTA contractor report, September 1993
above; and, if several tubes rupture simultaneous-
ly, pressure in the cavity below the reactor cover
because absorption decreases, thereby increasing can increase enough to lift the head off, breaking
the chain reaction. Under some conditions, such all the tubes and lifting out the control rods, as
as occurred at Chernobyl Unit 4, this is an in- happened at Chernobyl. Additional pressure relief
herently unstable design: the chain reaction can capacity is being added to reduce, though not
multiply rapidly, leading to an explosion. This ac- 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 calization system, but not a full containment ex-
several tubes could rupture simultaneously (com- cept when sold abroad to Finland and Cuba
mon mode failure). Detailed analysis is required (construction of Cuba’s two reactors has been sus-
to verify this conclusion, since the consequences pended). This reactor could withstand a consider-
of such a failure would be catastrophic. Only three ably larger pipe break than the model 230. The
tube ruptures have occurred in the entire operating reactor vessel was also improved.
experience of RBMKs, indicating that a multitube A comparison of key features of the 440 with
rupture is a low-probability event. The U.S.-pio- standard U.S. PWRs is shown in table 4-3.
neered probabilistic risk assessment (PRA) could The VVER-1OOO design incorporates a full
be very useful in quantifying this risk. In addition, containment vessel and rapid acting scram sys-
steps to reduce the risks that any tubes will rupture tems. In other ways it is also more like a Western
are warranted. Improved testing, monitoring, and PWR. With some modifications, such as in-
valve systems are under consideration. creased fire protection and improved protection of
The oldest VVER reactors, the 440-megawatt critical instrumentation and control circuits, this
model 230, lack some of the basic safety features design might approximate Western safety stan-
of Western reactors, in particular, emergency core dards.
cooling systems (to keep the core from melting af-
ter a loss-of-coolant accident) and containment
vessels (to prevent the escape of radioactive mate- Other Safety Issues
rials after a severe accident). Pipe breaks that Even well-designed plants can be risky. Sloppy
could be handled easily by a Western reactor construction can result in unexpected weak points
would cause a serious accident in one of these or in unexpected behavior. Poorly trained opera-
reactors. It is not practical to install these safety tors can turn a minor mishap into a major accident.
features on an existing plant. Furthermore, the Inadequate maintenance can allow deterioration
reactor vessel is susceptible to radiation-induced of critical systems. Safety is primarily a function
embrittlement, introducing the risk of a fracture in of people—people operating and maintaining the
the vessel such that any core cooling would be im- plant well and being prepared to catch problems
possible. Finally, these reactors were not designed before they become serious, people analyzing
for the level of seismicity that exists at some sites, plants to recognize a deficiency before it causes
including Armenia (especially the older Unit 1 ) any problems, and managers farsighted and tough
and Bulgaria. enough to insist that their organizations do things
However, it also should be noted that even the right. Not only are well-operated plants safer, but
older Soviet reactors have some positive features, they can function more smoothly, producing more
including a large water inventory and a low power power, which can be critical during this period of
density. These features can help them ride out energy problems.
problems such as “station blackout” (extended In this regard, most Soviet nuclear plants ap-
loss of power to run the pumps that cool the core) pear to have significant problems. Quality control
that could cause accidents at U.S. reactors. In was weak in many industries in the Soviet Union,
addition, while lacking a containment vessel, the and nuclear plants do not appear to be the excep-
model 230 has an “accident localization system,” tion. Construction was poor, regulation almost
which condenses steam and reduces the release of nonexistent, and no one seems to have been in
radioactivity following the break of most pipes in charge of ensuring that safety was paramount. Al-
the reactor system. though less easy to document than design prob-
The newer model 213 included an emergency lems, operating problems can present even greater
core cooling system and an improved accident lo- 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, multifunc-


tion systems. Ten separate
trips input to an interlock for
additional reactor trip.
Emergency Core Cooling No Emergency Core Cool- Three high-pressure injec- Safety Injection (S1) system.
System (ECCS) ing System. Periodic water tion pumps. Three low- Two high-pressure, two
makeup system provides pressure shutdown cooling low-pressure pumps.
limited replenishment of pri- pumps.
mary coolant emergency.
Emergency Feed-water None. Two pumps. Two subsystems
(EFW) System Two supplementary EFW
pumps.
Emergency Power Sources Two 6kV diesel generators, Three 6 kV diesel genera- Two emergency diesel
One is assumed to run tors. One is in hot standby, generators.
continually. one in cold standby, and
one in reserve.

Two 220V DC station Three 220V DC station Two fully redundant 125V
batteries. batteries. DC systems and station
batteries.
Localizatlon/Contain merit Accident localization sys- Accident localization sys- Full containment for primary
System tem. Pressure suppression tem. Pressure suppression system.
by means of spray system, by means of bubbler tower
and spray system.
Spray System Spray pumps discharge Three spray pumps. Two pumps.
into the accident localiza-
tion system.
Missile Barriers None. None. Concrete missile shields.
Combustible Gas Control None. None. A hydrogen gas control
system.
Post Loss-of-coolant Decay heat removal heat Decay heat removal heat Decay heat removal using
Accident (LOCA) exchangers in spray exchangers in ECCS/spray reactor heat removal sys-
Decay Heat Removal systems. system. tem with containment spray
system.

SOURCE Derwedfrom U S Department of Energy (DOE), DeparlmerrtofEnergyS TeamkAnalysls of SovietDesigned WERs, DOE/NE-0086, Octo-
ber 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 de-
against operating failures (as at Chernobyl). fine and to transfer. Yet it is critical because nu-
An 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 regu- agreements with Hungary, the Czech Republic,
lations; they require a voluntary commitment by and Slovakia.
everyone involved. The U.S. industry has made The JCCCNRS has established a variety of
great improvements in achieving this dedication, working groups, which met with their Russian
but continuing poor performance at some U.S. nu- counterparts for information exchanges. The four
clear stations indicates that the lessons have not current groups address:
been fully assimilated here. ■ radiation embrittlement, structural integrity
Assimilation of a culture of excellence will be and life extension of reactor pressure vessels,
even more difficult in the former East Bloc. To ■ severe accidents,
some degree, the commitment will be encouraged ● health effects and environmental consider-
by the previous activities. It can also be promoted ations,
by frequent contacts between individuals in vari- ● plant aging and life extension.
ous Eastern and Western nuclear enterprises, espe-
cially at the powerplants. Encouraging visits of The U.S. program shifted from cooperative ex-
operators to U.S. nuclear powerplants for training changes to specific assistance after the May 1992
and exposure to U.S. procedures will be a signifi- conference in Lisbon on assistance to the New In-
cant help. dependent States. The “Lisbon Initiative” in-
cludes:
| Safety Assistance operational safety improvements for the
U.S. safety assistance comes both directly from VVER-440/Model 230 reactors, including
the Federal Government and through other agen- training and emergency procedures,
cies and private organizations. The U.S. Depart- establishing a regional training center in both
ment of Energy (DOE) and the Nuclear Russia and Ukraine, including computer-based
Regulatory Commission (NRC) got involved af- simulators,
ter the Chernobyl accident with a review of reactor modifications to reduce risk at selected RBMK
designs to identify safety deficiencies and discus- and Model 230 reactors,
sions with Soviet nuclear officials. This activity fire safety, starting with two plants in Russia
has continued with the VVER reactors. and Ukraine, and
A Joint Coordinating Committee for Civilian improving regulation and safety standards.
Nuclear Reactor Safety (JCCCNRS) was estab- Improved training, maintenance, and other pro-
lished in accordance with a 1988 memorandum of cedures can partially compensate for equipment
cooperation between the United States and the So- and manufacturing deficiencies. Well-trained
viet Union. NRC and DOE are the main U.S. operators can avoid damaging mistakes and can
members. Following the breakup of the Soviet react appropriately to incipient accidents. The
Union, this agreement was redirected to both Rus- NRC is providing advice and assistance to the
sia and Ukraine and extended for 5 years. There is emerging regulatory agencies, while DOE has fo-
no agreement with Armenia, Lithuania, or Ka- cused on activities to assist operations. The U.S.
zakhstan, which has an experimental liquid metal program includes training of operators and regula-
reactor and a nuclear desalination plant. Negoti- tors, exchanges of information and people, includ-
ations are currently under way. The NRC has ing 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 $19 million in fiscal year 1993 ($14 million to
(INPO), an entity organized by the U.S. industry DOE the rest for NRC). In addition, reactor simu-
following the accident at Three Mile Island. These lators cost $11 million in fiscal year 1993 (funds
programs have brought Russian and Ukrainian supplied by the Department of Defense). Con-
operators to this country to visit U.S. powerplants gress has appropriated $100 million for fiscal year
and vice versa. Recently, equipment to enhance 1994. This funding should permit some limited
safety has been purchased. safety upgrades at reactors.
One of the largest and most useful U.S. finan- The regulatory assistance by the NRC is de-
cial contributions to date has been for reactor sim- signed to fill a major void. None of the East Bloc
ulators. These devices are extremely helpful in countries had a strong, independent regulatory
training reactor operators by simulating normal agency that had the authority to shut down unsafe
and accident conditions. Operators can practice plants unilaterally. However, Hungary, Bulgaria,
and become proficient in handling events only and the Czech Republic have regulatory bodies
rarely experienced at actual reactors. Soviet simu- sufficiently strong to get high-level government
lators had been for routine operations only. Ab- attention paid to safety concerns. For example, the
normal events are much more complicated to Bulgarian regulatory body has twice been able to
simulate. U.S. assistance was important in the get reactors shut down.
construction of an RBMK simulator now at Smo- In May 1993, Presidents Clinton and Yeltsin
lensk (Russia) and a VVER 1000 simulator at Za- agreed to establish the Joint Commission on Tech-
porozhye (Ukraine). nological Cooperation in Energy and Space. The
Regional training centers now being estab- commission is chaired by Vice President Gore and
lished will be at Balakovo in Russia and Khmel- Prime Minister Chernomyrdin of Russia. Improv-
nitskiy in Ukraine (both sites operate VVER- 1000 ing nuclear plant safety and regulation will be ma-
reactors). The United States is funding the devel- jor interests of the commission. The commission
opment of training programs and simulators at the has agreed to a joint study on Russian energy alter-
centers. Both should become operational by early natives (funded by AID) to set the context for de-
1996. cisions on reactor safety.
U.S. help is also important in preparing a The United States has supplied only a small
manual for emergency operating procedures for part of the total assistance. The International
the Novoronezh VVER 440/230 reactor. This is Atomic Energy Agency (IAEA) provides active
intended as a prototype for other reactors in help. An IAEA inspection team alerted the West to
Russia. the very dangerous situation in the older Bulgari-
Inadequate fire protection is a major deficiency. an reactors in 1991. It is analyzing other former
The Soviets had not paid much attention to fire East Bloc reactors to determine the need for up-
safety, and even systems that were supposed to be grades. However, the IAEA does not have the re-
fireproof turned out to be flammable (a problem sources or mandate to supply more than advice.
not unknown in the United States). There have Moreover, the United States has opposed giving
been several serious fires in Soviet reactors. U.S. the IAEA a more forceful regulatory role on the
personnel have inspected Russian and Ukrainian grounds that safety regulation is a national role.
plants and made recommendations for upgrades, The European Union has allocated a total of
some of which are surprisingly basic, such as re- about $500 mill ion for nuclear safety teams to vis-
placing wood fire doors at Smolensk with steel it reactors and install equipment to improve safe-
doors. ty, including $13 million for upgrading Bulgarian
Total funding supplied by the U.S. Agency for reactors.
International Development (AID) for nuclear The Group of 7 Industrialized Nations (G-7)
safety assistance was $25 million in fiscal year agreed in March 1992 on an action plan to upgrade
1992 ($22 million for DOE, the rest for NRC) and the safety of Soviet-designed reactors. In Decem-
82 I Fueling Reform: Energy Technologies for the Former East Bloc

The World Association of Nuclear Operators


(WANO), essentially an international INPO, is
also encouraging the exchange of safety informa-
tion and expertise. WANO’s U.S. office is co-
located 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 na-
tions, or even terrorist groups. Even if the weap-
ons themselves are adequately safeguarded,
The Temelin Nuclear Powerplant, a VVER-1000 under special nuclear material (plutonium or highly en-
construction in the Czech Republic with major assistance by
Westinghouse Electric Corp. riched uranium), parts, or expertise for weapons
manufacture may become available.
ber 1992, (after extensive negotiations) the G-7 As weapons are dismantled, large amounts of
agreed to establish a fund for upgrading reactors in plutonium and highly enriched uranium (HEU)
the former East Bloc. A total of 118.4 million are removed. This material must either be pro-
ECU ($136 million) has been contributed so far, tected or burned up in a reactor. HEU can be used
led by Germany (ECU 31.4m), the European as fuel in conventional reactors by blending it with
Union (ECU 20m), and France (ECU 15m). The ordinary uranium, resulting in low-enriched ura-
United States has contributed ECU 2m.11 The nium. HEU has substantial value since its use re-
fund, called the Nuclear Safety Account (NSA), is places the normal enrichment process. The United
administered through the European Bank for Re- States has offered to purchase such uranium from
construction and Development (EBRD). The first the FSU, in part to encourage the dismantlement
grant (about $28 million) has gone to Bulgaria for of weapons. However, some details of the agree-
upgrades to the Kozloduy reactors. The grant was ment still need to be resolved. Plutonium is more
contingent on Bulgaria indicating its intention difficult to use in commercial reactors because its
(but not pledging) to close units 1 and 2 by 1997 use changes the fuel cycle and requires stringent
and 3 and 4 by 1998. Reliable alternative power safeguarding. If it is not used to generate power, it
should be available by then, including Kozloduy must be indefinitely stored and carefully guarded.
units 5 and 6. This grant will pay for fire protec- Russia plans to build a large storage facility for
tion, inspection equipment, safety valves, electri- both HEU and plutonium from weapons and is
cal components, a new emergency feedwater studying options for plutonium disposal. These is-
system, and control room equipment. The second sues, including cooperation with Russia on dis-
grant, $38 million in February 1994, was for Li- mantlement, are discussed in a recent OTA
thuania to upgrade the Ignalina RBMK plant with report. 12
new instrumentation, fire protection, and a train- Much smuggling has been reported from the
ing simulator. 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 (Wshing-
ton, DC: U.S. Government Printing Office, September 1993).
Chapter 4 Non-Fossil Fuel Technologies | 83

significant transactions of nuclear weapons or can make the transition to an enterprise with very
weapons-grade materials have been documented. different objectives and constraints. Developing
Many observers are very concerned because the an industrywide commitment to excellence may
economic and political disruption may have re- be easier with new employees than with retrained
duced the effectiveness of controls. Military per- weapons experts. Using the weapons experts in re-
sonnel, civilian workers in arms plants, and search and development may be the best solution.
nuclear weapons scientists are suffering from the The United States and several other countries
overall economic problems as well as the partial have agreed to fund two international science and
demilitarization. It is possible that someone may technology centers, in Moscow and Kiev, to pro-
be tempted to sell out to a renegade nation en- vide constructive work for former weapons scien-
gaged in a clandestine nuclear weapons program. tists and engineers. Ratification of the agreement
Russia has inherited the nuclear weapons state stalled in the Russian Parliament, but President
status of the Soviet Union, but three de facto Yeltsin promulgated it in December 1993. Ratifi-
weapons states (Ukraine, Belarus, and Kazakh- cation is even less advanced in Ukraine. If this
stan) have been created, at least temporarily. center cannot be maintained, alternative mecha-
Leaders of these three have promised to turn their nisms could be considered, such as direct R&D
weapons over to Russia, but this agreement has cooperation with existing institutions.
proved difficult to put into practice, especially in A forthcoming OTA report, Proliferation Is-
Ukraine. This diffusion of authority further com- sues and the Former Soviet Union, will discuss
plicates control. these issues in more detail.
Ukraine’s large civilian nuclear infrastructure
presents an additional complication. To become a
nonweapons state, Ukraine must not only give up
| Considerations for the Future
its weapons but place its civilian nuclear plants Current activities will help reduce nuclear safety
under international safeguards to ensure that nu- risks, but they are not proceeding as rapidly as de-
clear materials are not diverted. Ukraine’s large ci- sirable. Recipients have generally praised the
vilian nuclear program will place an additional United States for the effectiveness of its assist-
burden on the IAEA. ance. However, coordination among multilateral
In Russia, the military and civilian nuclear sec- donors could be improved. Funding for projects to
tors are both within the Ministry of Atomic Ener- improve safety, especially for expensive plant
gy, and some nuclear facilities have dual modifications, has been slow. In fact, nuclear offi-
purposes. For example, the Tomsk reactors were cials in the former East B1OC reportedl y are getting
built to produce plutonium, but they also supply quite tired of visits that seem more intended to
steam for the city’s district heating plant. Russia procure information than to supply help.
no longer needs the plutonium but hasn’t yet The first question is how hard to push for the
closed the reactors because the heat is still needed. closure of the oldest, riskiest reactors (RBMKs
Using unemployed weapons scientists and en- and VVER/230s). It is clear that these reactors are
gineers in the nuclear power industry could be a well below Western safety standards. However,
constructive way to reduce the likelihood that they the actual level of risk is not well enough under-
may contribute to proliferation. Improving nu- stood to permit an analytical comparison of the
clear safety will entail considerable research and costs and benefits of shutting them down. The
analysis. Many of the weapons scientists and en- countries that operate them are reluctant to close
gineers have expertise that would be useful in them because they see the energy as vital until re-
reactor safety. However, it is not clear how many placement power is available. Chronic energy
84 I Fueling Reform: Energy Technologies for the Former East Bloc

shortages are very debilitating for an economy and stitute for action in making needed improvements
pose their own risks to public health and safety. ’3 in reactors that are likely to continue operating.
A case can be made that the nuclear risks must be Replacement power would probably involve
high before a responsible government should either natural gas or coal or the completion of
close plants and thereby subject its people to a sig- newer, safer reactors currently under construction.
nificant, long-term shortage. Building new powerplants, even gas turbines, is
No one really knows if the risks of another very expensive, and none of these countries has
Chernobyl accident are that high. Chernobyl Unit the funds to do that. The World Bank suggested
4 was grossly abused during a unique test. Such that $18 billion would be required to replace the
conditions are unlikely to be repeated. Thus, this plants by 2000, exclusive of fuel costs. None of
one accident is not necessarily a guarantee that the gas-importing countries can afford to pay for
others will follow. The first PRA is only now be- the gas they already need, and Russia would prefer
ing done for the RBMK, but it probably will be to export the gas for hard currency rather than bum
years before the data are adequate for an overall it at home. Coal plants are much more expensive
risk evaluation. PRAs are useful only if they con- to build than gas plants, and would require addi-
sider the design, the quality of the components, tional funds for the pollution control systems
and the behavior of the operators. The latter two
(e.g., flue gas desulfurization) necessary to avoid
factors require extensive databases for valid anal-
worsening the environmental devastation in the
yses.
region.
However, there is no controversy over the con-
An alternative would be to emphasize energy
clusion that the RBMKs are much more prone to
efficiency to reduce the demand for electric power.
accidents than Western reactors, and that such ac-
As discussed in a prior OTA report”, the potential
cidents are more likely to turn into catastrophes
because of the lack of containment and the limited for efficiency gains is huge in all the formerly cen-
accident mitigation capability. If the risk of a ma- trally planned economies. Aggressive efficiency
jor accident is one in a thousand years of operation programs almost certainly could reduce demand
(a very high risk level, which is assumed here for for electricity significantly, at least until economic
illustrative purposes), then the 15 RBMKs collec- growth resumes. With a surplus of generating ca-
tively present a risk of 1.5 percent per year. If they pacity, local policy makers can decide which
are operated for another 10 years, there is about a plants to shut down, based on economics, safety,
14-percent chance that one of them will suffer public concern, environmental considerations,
another major accident. While that means that and national priorities. When all these factors are
there is better than a five out of six chance that an taken into consideration, nuclear plants might or
accident won’t happen, the risk is much too high might not be the highest priority to shut down.
by Western standards, especially if the conse- They are generally cheaper to operate than fossil-
quences of the accident would be equivalent to fuel plants, and pollution from coal and some oil-
that of Chernobyl. More accurate risk analysis is fired plants is very damaging. The risk of a nuclear
important for improving our understanding of the accident at any individual reactor site must be
problem. However, analysis should not be a sub- 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, OTA-
E-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 (Wash-
ingt(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 help keep U.S. reactors on line and increase the
by anyone plant may not appear unreasonably possibility of a nuclear revival later. Whether this
high to its operator. is an advantage or a disadvantage depends on
For the time being,it appears likely that most or one’s views of nuclear power.
all of these reactors will continue to operate unless One barrier to material assistance in the FSU is
the West contributes far more assistance than it the concern of companies installing safety up-
has yet considered. Upgrading thereto Western grades that if an accident happens despite the up-
safety levels would be even more expensive than grade, the Western company could be held liable
replacing them—$24 billion, according to the for all damages. Since the cost of the damages
World Bank. One possible compromise may be to could far exceed the value of the business in-
provide grants to upgrade the newer plants and volved, companies will insist on limiting their li-
correct the worst problems in the older plants, ability. This has been done in the United States
with closure of the latter as soon as practical, as is with the Price-Anderson Act, which also provides
planned for the NSA grant to Bulgaria. Until re- a no-fault mechanism for reimbursing those hurt
cently, it had been assumed that several of the risk- by a nuclear accident. Negotiations are underway
iest plants, such as the two operable reactors at with Russia, Ukraine, and the Baltics to address
Chernobyl, would be shut down soon. Thus, little this issue, and some agreements have been
has been done to upgrade their safety. The recent reached on liability provisions for U.S. companies
Ukrainian decision to continue operations results providing assistance.
in the worst possible situation, at least until the
Increased assistance could also provide oppor-
modifications at other RBMKs are implemented
tunities for former weapons scientists and engi-
there, too. Ukraine has agreed to shut the reactors
neers to work on constructive projects using their
down when the power is no longer needed but has
expertise. If these experts can be employed in nu-
not committed to a firm schedule.
clear reactor safety efforts, proliferation risks will
Increased assistance would have several advan-
be reduced. The creation of one or several centers
tages, most obviously in reducing the risk of a se-
for nuclear safety analysis could provide the
rious nuclear accident. It would also provide
business opportunities for the U.S. nuclear indus- double benefit of producing useful information
try, possibly leading to even greater sales later. and contributing to international stability.
The sale of instrumentation and control systems There are two main disadvantages to increased
and nuclear fuel for two Czech reactors by Wes- assistance. First, the cost would increase com-
tinghouse Electric Corp. is an example of the type mensurately at a time of serious U.S. budget
of business that may emerge (see box 4-1). For constraints. Second, some people believe that no
Westinghouse, the Temelin project represents not amount of improvement can make these reactors
only a foothold in the market, but also a demon- sufficiently safe and advocate shutting down at
stration project to convince other countries in the least the riskiest ones in the very near future; any
region, most notably Russia and Ukraine, of the remedial measures could prolong their operation
effectiveness and need for such comprehensive and thus be counterproductive. Some critics ob-
modernization programs. ject to assistance because it would support the in-
The market in the West for nuclear power gen- dustry in this country or promote its prospects.
eration technology is flat, but the former East Thus, any proposal to increase support is likely to
Bloc, which includes 25 percent of the world’s be controversial.
pressurized light water reactors, represents a po- Opposition emerged to the Westinghouse sale
tential multibillion-dollar market. Supplying to the Czech Republic, in particular to Eximbank
equipment and services to foreign reactors helps (the Export-Import Bank of the United States) fi-
U.S. companies remain in business, which would nancing. 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 Teme-
Iin. 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 con-
tract. In May 1992, the company signed a $419-million contract to provide new l&C and Western-manufac-
tured 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 Te-
melin 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 gener-
ally 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 oppor-
tunities 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 sover-
eign 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 de- ing very useful information to the United States.
ficiencies in the design identified by the IAEA and The first is on health effects of radiation. The
a review by a U.S. consultant. Austria was unable Chernobyl accident and other nuclear catas-
to obtain all the reports needed for its evaluation, trophes have exposed a great many people to radi-
and the concerns listed generally stem from ation. Studies of public health effects could be
unanswered questions on how the deficiencies expanded with additional funding. Collecting and
identified earlier will be handled. In this case, Ex- analyzing this data will improve U.S. understand-
imbank decided that the interagency review was ing of this important area of science. The
sufficient y positive and approved the loan. Teme- JCCCNRS has a working group on the subject,
lin will be a new nuclear powerplant and can be but funding is very limited. In January 1994, Rus-
expected to operate for many years. Thus it is par- sia and the United States signed an agreement for
ticularly controversial. Assistance to existing the exchange of information on health and envi-
powerplants maybe less controversial, especially ronmental effects of radiation, which should be
because they are likely to operate whether or not useful.
they are improved. The second, annealing of reactor vessels, is of
DOE and NRC would be the agencies most ap- interest as U.S. reactors age. 16 Neutrons generated
propriate for enhanced assistance programs for di- in the core impinge on the reactor vessel and grad-
rect improvements in safety since they are already ually embrittle it. After many years, the vessels
involved. If new energy supplies to replace the become so brittle that they could crack under cer-
most dangerous reactors are considered, funding tain conditions and lose their ability to maintain
will have to be increased, probably to well above cooling in the core, leading to a meltdown. If the
the $100 million level for the next decade. Much lifetimes of the current generation of reactors are
of this might be funneled through AID. DOC and extended, reactor vessels may have to be annealed
Eximbank would have a major role. The Depart- to reduce the brittleness. Russia has already done
ment of State also has an important role with over- this on several reactors because their design and
all strategy and coordination with other countries. materials leave them more subject to embrittle-
One factor that needs to be addressed, whatever ment. This has been an active subject of discus-
level of assistance is selected, is coordination with sion (including a working group of the
other donor countries and multilateral organiza- JCCCNRS), and Russia has already provided con-
tions. There have been many complaints of redun- siderable information to American researchers.
dant visits and discussions. When the needs are so Further cooperation could be valuable.
great and the resources so limited, it is important
not to waste efforts. This need is widely recog-
nized, and steps are being taken. In particular, the ELECTRIC POWER TECHNOLOGIES
Group of 24 Nations (G-24) has set up a Nuclear Unlike fossil energy supply discussed in chapter
Safety Committee in Brussels to coordinate as- 3, electric power is well developed in every coun-
sistance. This is an area that will require continued try of the former East Bloc. Generating capacity
oversight. (but not fuel supply) is adequate almost every-
Two final areas of cooperation should be men- where, if only because demand has dropped with
tioned because they have the potential for provid- 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 213.0 213.3 1018.0 1072 1082


Ukraine 54.4 55.6 253.0 279 299
Kazakhstan NA 17.9 81.0 86 87
Moldova 3.7 3.7 11.0 NA NA
Belarus 5.8 5.8 37.6 NA NA
Kyrgyzstan NA 3.7 11.8 NA NA
Turkmenistan NA 3.2 13.1 NA NA
Uzbekistan 11.6 11.3 50.9 NA NA
Tajikistan NA 4.6 16.8 NA NA
Armenia NA 3.8 6.8 NA NA
Georgia NA 4.2 11.5 NA NA
Azerbaijan 5.8 5.8 19.8 NA NA
Latvia 2.1 2.1 8.5 NA NA
Estonia NA 3.5 15.9 NA NA
Lithuania 5.1 5.1 28.2 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, economies. The surge in retrofitting old plants and
to those of the West. Lenin asserted that “Commu- building new ones that must occur with revitaliza-
nism is Soviet Government plus the electrification tion should provide many commercial sales. U.S.
of the whole country.”17 Electric power thereafter electrical equipment manufacturers could have an
had a high priority among the central planners. unusual opportunity to export, unlike in Western
Nevertheless, the sector has severe problems. Europe, where markets are largely closed to for-
In particular, many fossil fuel-generating plants eign companies.
operate poorly and are among the worst sources of
pollution in the region. Furthermore, a high frac-
tion are nearing the end of their expected lifetimes
I Status of the Electric Power Sector
and must be replaced. Finally, as in other sectors, Generating capacity and recent production are
management is unfamiliar with the concepts of shown in table 4-4. Production has declined in all
operating under a market economy, such as fi- these countries because of reduced demand and
nance, customer relations, pricing, and regulation. sometimes fuel and parts shortages.
Reliable, high-quality, electric power is essen- These statistics depict a relatively well-
tial for any modem economy. Upgrading electri- endowed sector, especially in comparison with
cal systems will make an important contribution other energy sectors. In fact, in some countries,
to realizing the U.S. goal of revitalizing these 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 natu- ic discussions below and is summarized in table
ral gas, which must be imported from Russia. 4-5. Countries are listed in order of progress in
Many countries have indigenous sources of coal electric sector reform. Note that in the case of utili-
and hydroelectricity, and nuclear fuel is relatively ties, privatization is not a prerequisite for market
cheap even if imported. In other areas, including reforms. Many utilities in Western Europe and the
Georgia, Armenia, and Eastern Siberia, severe United States are government-owned, but still op-
shortages of electricity have occurred because of erate effectively in a market economy.
fuel shortages, mostly due to ethnic struggles or
delays in construction.18 Russia
However, as in so many other sectors of these
The Soviet Union controlled its entire electric sys-
economies, much equipment is old and in poor
tem from Moscow through the Ministry of Energy
condition. As discussed above, over 20,000 MWe
and Electrification. Eleven Regional Unified En-
of nuclear capacity are likely to be shut down over
ergy Systems were responsible for generating and
the next decade. Most fossil fuel technology
delivering the power within their jurisdictions.
(though not all) is also well below Western stan-
Three main transmission networks—the “nation-
dards. As Central European countries move to-
al” integrated power grid extending over 3,000
ward integrating their economies (and their
miles from the border with Poland to Lake Baikal
electric grids) with Western Europe, they will
in central Siberia, the Central Asian grid, and the
have to meet much higher environmental stan-
Far East grid-cover most of the FSU. After 1991,
dards. Some powerplants can be retrofitted with
ownership of the various components devolved to
pollution control equipment, but others will have
the new republics, but the national grid is still op-
to be replaced.
erated as an integrated unit, much like the main
The major problem inhibiting rehabilitation is
U.S. grids.
the lack of capital. Powerplants are expensive.
In 1993, the first step toward privatization was
None of these countries can afford to rebuild their
taken when the Russian Joint Stock Company for
electric power systems with so many competing
Power and Electrification (RAO ESS) was
needs for very limited capital. Electricity can still
created. It owns and operates the51 largest power-
be produced, and the inefficiency and pollution of
plants and the transmission grid. The plan is to sell
current facilities seem like minor problems
20 percent of the company to Russian citizens for
compared with massive unemployment and lack
vouchers that already have been distributed.
of heat.
Thirty percent will be assigned to regional devel-
The power companies themselves are unable to
opment organizations, and the remaining 50 per-
undertake costly construction because their reve-
cent will be retained by the Federal government,
nues are still based mostly on what users can pay
presumably temporarily.
and generally do not cover costs. Only in the
Czech Republic has any significant move toward
privatization of the electric sector taken place. In Poland
general, market reforms in the electric utility sec- Poland has reorganized but not privatized its
tor depend on market reforms in the country as a power industry. Formerly, almost all activities—
whole, and these have not been progressing very mining, power production, transmission, and dis-
rapidly anywhere. The status of market reform in tribution —were centralized in the Union of Power
various countries is detailed in the country -specif- 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 yes yes Generating utility already


partly private.
Hungary yes plans Moving to mixed private/
govt ownership.
Poland yes plans Variety of ownership
structures possible.
Slovenia yes plans
Slovakia yes plans
Russia some plans May use Czech-type
vouchers,
Ukraine some no

Bulgaria yes no

SOURCE Office of Technology Assessment, 1994

has been split up. Power is generated by 28 enter- tribution utilities deliver the power to customers.
prises, which sell their power to the Polish Power CEZ has been organized as a private corporation,
Grid Co. There are 33 distribution companies that and one-third of the stock has been sold publicly.
buy power from the grid and sell to final consum- The distribution utilities are expected to be fully
ers. Poland has embarked on a considerably more privatized by the end of 1994.
radical reorganization than has been attempted in
the United States, though several European coun- Hungary
tries, such as the Netherlands, are following a sim- The Hungarian Electricity Board (MVMT) main-
ilar scheme. An earlier OTA report analyzed such tains central control. Subsidiary companies are re-
a plan.19 sponsible for power generation, transmission, and
distribution. The subsidiary utilities are nominal-
Czech Republic ly independent, but MVMT regulates revenue
The Czechoslovakian government had carried out flow between producers and distributors. A plan
a reorganization of the state power industry simi- for privatization has been announced, but little
lar to that of Poland. The former power company progress has yet been made. The government is
had owned and operated almost all powerplants, likely to retain up to 50 percent of the shares in the
the transmission and distribution grids, and some companies.
electrical equipment manufacturing plants. Fol- Hungary has insufficient generating capacity
lowing the national and industry breakups, The for its own needs and imports about 30 percent of
Czech Power Company (CEZ) controls only gen- its power from Ukraine. This will conflict with
eration and transmission, and eight regional dis- 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 to Poland (see box 4-2). Coal cleaning, an attrac-
of their own power or import it from other mem- tive option for near-term reduction of pollution,
bers. New facilities and transmission lines would was discussed in chapter 3. Fluidized-bed com-
have to be built. bustion (FBC) and integrated gasification com-
bined cycle (IGCC) are relatively new
| Technology Needs and Cooperation technologies that can be employed in new plants,
Many technologies used for generating electric resulting in efficient power production and very
power are behind Western standards, in large part low levels of emissions. FBC and IGCC technolo-
because relatively few new plants have been gies are emerging as competitors to conventional
constructed in recent years. Modernization is re- coal-fired plants, particularly in areas where high-
quired across the region. The most pressing needs sulfur coals are used and emissions are strictly
for non-nuclear technologies involve clean coal, limited. Moreover, the IGCC technology requires
gas turbines, and demand-side management. In less land and water than conventional scrubber-
addition, expertise in operating and regulating equipped coal-fired powerplants.
market-based utilities is almost completely ab- The United States is highly competitive in
sent. these new technologies and in conventional, pul-
There are many opportunities for Western in- verized-coal combustion with FGD. Westing-
vestment and cooperation in the FSU electric house Electric Corp. formed a joint venture with a
power sector. Russia and Ukraine are actively Polish partner in 1992 to retrofit seven power sta-
seeking joint ventures and cooperative agree- tions with new control and desulfurization sys-
ments to modernize their electric power indus- tems. The contract will be worth about $2 billion.
tries. But Western involvement has been limited
by sector restructuring and political and economic Gas Turbines
uncertainties. To date, Western companies have Shifting to the use of natural gas instead of coal or
focused their efforts on data collection and market heavy oil in electric power stations is an option for
evaluations. Nevertheless, several joint ventures Russia and other gas-producing countries. How-
have been established and more are sure to follow. ever, gas is also a major earner of foreign ex-
change, and burning it at home will reduce
Clean Coal exports. Hence, its use must be as efficient as pos-
Coal is the major domestic energy resource for sible. Modem, high-efficiency gas turbines,
many countries, and wide-scale use is inevitable. introduced recently by American manufacturers,
However, a large fraction of the pollution in Cen- are based largely on aircraft engines. They are rap-
tral Europe results from the uncontrolled combus- idly becoming the technology of choice for new
tion of coal in powerplants. These plants will have generating capacity in this country because the
to be either replaced or upgraded with environ- captital costs are much lower per kilowatt than coal
mental protection equipment such as flue gas de- or nuclear plants, they can be installed quickly in
sulfurization (FGD) systems (pollution control small quantities as demand grows, they bum natu-
technologies are discussed in the following chap- ral gas, which is still quite plentiful, and they pro-
ter). The market for replacement and refurbish- duce only low levels of pollution.
ment of coal-fired powerplants could be very Russian and Ukrainian military aircraft engine
large. factories, currently largely idle, could convert to
Coal can be burned quite cleanly (except for the production of turbine generators. Western fi-
carbon dioxide emissions) with the proper equip- nance and technology are needed to set up the new
ment. The United States has pioneered clean-coal assembly lines that would allow rapid production.
technologies with a large program at DOE. Some Several recent joint ventures illustrate the poten-
of this expertise has already been made available tial 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 ret-
rofit 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 (S0 2) 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, de-
termining 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 addi-
tional boiler could be easily retrofitted by simply enlarging the size of the desulfurization unit. The Polish gov-
ernment 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 S0 2 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 tur- The U.S. national interest would also be served
bines. Asea Brown Boveria (ABB), an interna- because international stability will improve if mil-
tional company with a 20-percent U.S. itary factories are redirected to civilian goals
component, is also very active in the Russian mar- instead of selling arms. 20 Russian-made turbines
ket. One of ABB’s most recent activities is the need not be directly competitive with U.S.-made
formation of ABB Uniturbo, a joint venture to models if the technology keeps improving, as ap-
produce gas turbines. pears possible.
The advantages for Russia would be improved
technology that could replace polluting and un-
safe generating stations and meet new needs at Demand-Side Management
low cost. In addition, production of advanced tur- Many U.S. electric utilities promote energy effi-
bines could become a major economic asset, help- ciency by their customers. They provide informa-
ing in stabilization. For the West, participation in tion and sometimes financial support for
the form of investment and licensing would create 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

than existing ones) have pioneered the concept of


demand-side management (DSM), where electric
utilities help their customers improve efficiency.
Electrlcity savinga Utilities have been given incentives to ensure that
Low ease High case
their interests correspond to their customers’ in-
terests.
Residential end uses Power companies in the former East Bloc are
sector also accustomed to managing their customers’
Space heating 32.2% 54.8°A consumption, but their approach used directives,
Water heating 32.3 66.2
Central air conditioning 29.1 34.4 not incentives. Until the late 1980s, demand grew
Room air conditioning 18.5 32.3 rapidly, and construction did not always keep
Dishwashers 5.2 26.3 pace. Shortages often developed, and large cus-
Cooking 7.9 18.2 tomers had to be rationed. Sometimes residential
Refrigeration 22.1 48.0
Freezer 24.0 32.4
areas were blacked out or, as in Romania, re-
Residual appliances 27.8 40.0 stricted to a very limited number of light bulbs and
Total residential* 27.1% 45.5% appliances. Over the past several years, demand
Industrial end uses has dropped with economic activity. Restrictions
Motor drives 28.5% 45.0% have been minimal in most areas, though fuel
Electrolytic 18.8 29.7 shortages for powerplants are increasingly likely
Process heating 7.9 13.3 to revive them in some countries.
Lighting 16.7 33.3 Interest is growing in ways to reduce demand to
Total industrial* 23.7% 38.3%
minimize the new plants that must be built and to
Commercial end uses reduce pollution. DSM and the closely related
Heating 12.7% 23.6% concept integrated resource planning (IRP)-a
Cooling 30.0 70.0
Ventilation
planning process that evaluates both supply and
30.0 50.0
Water heating 40.0 60.0 demand options to determine the most economi-
Cooking 20.0 30.0 cal and reliable system—have largely been devel-
Refrigeration 12.2 34.1 oped in the United States. Applications for
Lighting 22.2 55.6 efficient technologies and the range of savings
Miscellaneous 18.2 36.4
Total commercial* 22.5% 48.6% that could result in the United States are shown in
Total* 24.4% 43.9% table 4-6. Savings in Central Europe and the FSU
should be even higher because efficiency has been
● Totals are weighted averages ignored for so long.
SOURCE: U S Congress, Off Ice of Technology Assessment, Energy DSM techniques include information pro-
Efficiency Challenges and Opportunities for Electric Utilities,
OTA- grams to alert customers to potential energy sav-
E-561 (Washington, DC: U S. Government Prmtmg Office, September
1993)
ings measures, rebates or loans to help finance
improvements, and performance contracts with
energy service companies to install energy-saving
use of electricity. 21 Over the past 15 years, public equipment at customers’ facilities. Implementa-
utility commissions and utilities (realizing that tion of these techniques depends primarily on
prices will stay lower with lower growth because utility management understanding of the opportu-
new plants have become so much more expensive nities available and having the appropri-

21 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 Czech Power Works
Southern Electric International Slovak Power Enterprise
Commonwealth Edison Polish Power Grid
Central Maine Power Bulgarian Power Authority
New England Electric Company Hungarian Electric Companies, Ltd.
Boston Edison Rumanian Electric Co.
Central Vermont Public Service Latvenergo (Latvia)
FSU
Pennsylvania Power and Light Kievenergo (Ukraine)
Cincinnati Gas & Electric Kazakhstananegro
National Hydropower Association State Energy Co. of Kirgizstan
Edison Electric Institute RAO EES Rossii (Russia)
American Gas Association Gasprom (Russia)
American Gas Association ROSGAZIFIKATFIA (Russia)
City of Anaheim Power Utility,
Southern California Edison, and Ministry of Energy and Fuel (Armenia)
City of Pasadena Water & Power I

SOURCE U S Energy Assoclat!on, March 1994

ate incentives and resources. Western encourage- Utility Partnership Program (UPP)--funded by
ment can involve policy advice (to get pricing, AID at the U.S. Energy Association (USEA). In
regulations, and incentives correct), utility man- this program, U.S. utilities form partnerships with
agement advice (to improve understanding of cost counterparts in Central and Eastern Europe. A
minimization and financing), advice on specific similar program for FSU utilities—the Energy In-
DSM/IRP techniques, and assistance in manufac- dustry Partnership Program (EIPP)—has been
ture of energy-efficient products. Regulatory created more recently. Partnerships are shown in
agencies have played an essential role in institut- table 4-7.
ing DSM in the United States, and assistance in The UPP and EIPP pay for visits in each direc-
setting up effective, cost-based regulation and tion to exchange information on engineering, fi-
pricing is likely to be critical in the former East nance, marketing, planning, plant operations, and
Bloc. other aspects of utility operation. The types of ac-
tivities are described in box 4-3. The program ap-
Electric Power Company Management pears to be working well. Participants report that
The power industry is one of the few that has val- the exchanges are fruitful.
ued efficiency, at least in some ways. As noted be- The contacts developed have led to commercial
low, the Soviet Union pioneered supercritical contracts. Part of the purpose is to introduce the
boilers and ultra-high-voltage transmission be- partners to U.S. vendors. For example, the South-
cause they reduce energy losses. However, this ern Company received a large contract from its
thinking did not permeate utility operations. U.S. Slovakian partner to refurbish a power-plant.
utilities operate with far fewer personnel and use Demands on the time of the U.S. partners has
more modem technology. grown, and they are hesitant to deepen their role
Managerial skills and operating procedures are because of their accountability to their stockhold-
being upgraded by an intriguing program-the ers 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 man-
agerial 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, en-
vironmental 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 in-
dustry 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 valu-
able managerial experience and learned from the technical expertise of the Bulgarians, s Overseas con-
tacts 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 Euro-
pean utlilties, demanding more of the U.S. partners, A seminar on financial management, for example, pro-
vided a general perspective on the field, but not the time and expertise necessary to develop and imple-
ment 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, Origi-
nally, the program was projected to cost $4,8 million over 3 years, A subsequent amendment to the agree-
ment, 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 plan-
ning, 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 un-
grant program for projects that require consider- der evaluation.
able time by the U.S. partner (e.g., intensive train-
ing) 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 and turbine temperature and Data on how to slide pressure through
flow conditions for low power the critical point. New approach for
operation. Us.
Boiler Efficiency and Emissions New combustion air admission Efficiency and NOx improvements.
methods.
Adjustable Speed Drives(ASD) Assessment of EPRI guides. Validation of EPRI ASD guidelines.
Thyristor Steam Turbine Startup Reduced temperature variation in
steam turbine. First of a kind for
steam turbine startup.
Gas turbines New water cooling scheme for high Step improvement in blade cooling
temperature blades. over current methods.
Steam turbines Titanium blades for high back-pres- Possible solution to higher back pres-
sure turbines. sures.
Electric Generator New design with water-cooled rotor Elimination of hydrogen, more effi-
and stator. cient generator, better reliability.
Superconducting Electric Generator 300-MW design already built. Reduces R&D costs.
Modified Oxygenated Chemistry Improved oxygen treatment for steam Reduction of blade corrosion.
chemistry control.
Coal Refinery Liquefaction and gasification of coal. Use of low-rank coals for gasification,
smokeless fuel. Wide application in
Eastern Europe, China.
Slagging Boiler Studies for Lignite New modifications to reduce Non-slagging boiler for high-moisture,
slagging. high-ash coals.
District Heating Studies Optimization of cogeneration turbine Modification of existing plants for dis-
operation. trict heating.
Ash Metals Extraction Ash melting and metals extraction. Key elements of a coal refinery.
Oxygenated Hot Water Cleaning of New application for boiler cleaning Reduced tube failures and less chem-
Boilers and reduction of waste disposal. ical cleaning.
Component Life Assessment Life extension of power plant com- Validation and updating of EPRI life
ponents. 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 situa-
tion in these countries and the limited financial re-
sources. Other factors are also relevant, some of
which are peculiar to the electric power industry.

Political Constraints
Western electric utilities, whether private or gov-
ernment owned, operate in a very different milieu
from enterprises in the former East Bloc. There,
electricity is considered to be part of the social Holesovice Electric Substation, Prague Electric Distribution
safety net as well as a key industrial input. Prices Utility.
have been determined more on the basis of what
the customer could afford than the cost of the Institutional Constraints
power. In some of these countries, the structure of the
These countries are devising energy and regula- electrical power industry is changing. This
tory policies but often do not have a clear concept introduces uncertainty into their planning, even
of the role that pricing, or the utilities themselves, though the intent is to make the utilities more re-
could play. Former regulations are no longer en- sponsive to market forces. In Russia, generation
forced, and agreements for power limitation are may be divided into 70 utilities. In some coun-
often ignored. In theory, state-owned utilities can tries, generation, transmission, and distribution
easily implement national policies, but the prac- are being separated, a process that is difficult even
tice will be difficult. The abolition of central plan- in countries without economic chaos in other sec-
ning could have a perverse impact on the rational tors. Utility restructuring will remove some in-
allocation of power. Considerable help-both ad- centives since decisionmaking will be divided
visory and material—will be needed to rationalize between utilities that sell to end users and utilities
energy policy and institute realistic pricing. that generate power and build powerplants. These
changes will take time and considerable care to
Financial Constraints ensure that reliability of power supply is not jeop-
Technology and engineers are sufficiently good in ardized.
the former East Bloc that, given unlimited finan- Foreign investors have expressed considerable
cial resources, power companies could construct interest in building independent powerplants. Al-
systems largely equivalent to those in the West. though this would solve financial constraints and
However, few of these companies have the re- upgrade technology, investors must see political,
sources to buy much from the West, and few legal, and regulatory stability before they invest.
equipment manufacturers can afford to modernize DSM is even more uncertain. Low rates do not
their facilities and products. justify efficiency investments by customers, and
Substantial equipment and service sales are low revenues do not permit utilities to invest. The
possible in this sector, but only if adequate financ- structure of electricity demand is also less favor-
ing is made available. Since many power systems able than in the United States. Residential and
will eventually be integrated with the Western Eu- commercial customers have proven more amena-
ropean grid, there will be a natural tendency to- ble to DSM than has U.S. industry. In the former
ward Western European equipment unless U.S. East Bloc, the residential and commercial sector
firms can offer favorable terms. 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. The potential for renewable is enormous, but
In addition, some industrial customers will close, only a small amount of the resource is economi-
but it is not always easy to tell which. Obviously, it cally recoverable at the present time. In the United
is not worth improving the efficiency of plants States, for example, renewable provide about 9
about to close. percent of the total energy used annually, mostly
Russia has a complete equipment supply indus- from hydroelectric power.23
try, which in some ways rivals that of the West. Over the last two decades, significant advances
Therefore, it is unlikely that Russia will buy large in renewable energy technologies have been
quantities of electric power equipment from the made. Many systems have reached either proto-
West. Other countries are better prospects for type or commercial development. Performances
sales. have improved and costs have declined. Hydro-
power is the most developed renewable and en-
| Potential Policy Improvements joys widespread use. Windpower is competitive
Steps that the United States could take to help or near-competitive with other sources for bulk
modernize the electric power industry are similar power production. Flat-plate solar collector sys-
to those for other sectors. High-level policy advice tems for space heating and hot water are economi-
and encouragement to introduce market reforms cally viable in some parts of the world, e.g., Israel,
and realistic pricing is essential. Enactment of le- Australia, and Cyprus. Photovoltaic systems
gal protections and currency stabilization will be
command an increasing number of market niches,
needed to encourage foreign participation. Tech-
particularly for telecommunications and space,
nical assistance is likely to be important. AID pro-
but require further development before they will
grams can be strengthened and expanded. UPP
be economically competitive for bulk power pro-
and EIPP appear to be particularly attractive can-
duction. Biogas production in some locales is
didates for expansion.
viewed as an important energy source and is eco-
On the commercial side, additional financing
will be essential to assure that U.S. firms remain logically sound, as well. Geothermal resources are
competitive. Eximbank loan guarantees and enormous, but the amount that can be recovered
Overseas Private Investment Corp. insurance are economically is small.
vital parts of a U.S. presence there. Trade Devel- Environmental concerns and increased demand
opment Agency feasibility studies are also work- for electricity have stimulated some interest in re-
ing well and could be expanded. newable resource development in former East
Bloc countries. The use of renewable can reduce
RENEWABLE ENERGY TECHNOLOGIES regional air pollution and mitigate global climate
A vast array of technologies is used to capture and change, environmental impacts to which former
convert wind, sunlight, geothermal heat, falling East Bloc countries contribute substantially.
water, and organic biomass into energy. Renew- Moreover, renewable development can reduce
able energy sources can heat homes, supply elec- dependence on foreign energy supplies (and thus
trical power and process heat, and fuel cars. Some improve a nation’s balance of payments), provide
renewable sources can be converted to feedstocks decentralized power sources for rural areas, and
for producing chemicals. In general, renewable re- address nuclear safety concerns. These issues
sources are inexhaustible and widely, but irregu- have become more prominent since the dissolu-
larly, distributed. Because of the latter, storage is tion of the FSU. Each country now requires inde-
very important. pendence 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 The lack of political and institutional commit-
vital role in realizing these goals. ment to renewable development is another barri-
Through technology transfer, the United States er. Over the years, a strong institutional structure
can help these countries develop their renewable developed to support the production of oil and
resources. Under the terms of a recent energy gas, while little attention was paid to renewable.
agreement, the United States and Russia will Successful U.S. experiences confirm that policies
cooperate on energy efficiency and renewable en- and institutions are crucial to renewable develop-
ergy research and will exchange technology and ment.
information. The United States is a leader in de- Funding priorities are also an important factor.
veloping and manufacturing most renewable en- Over the last two decades, capital investment in
ergy technologies and is experienced in bringing the FSU favored oil production over other energy
projects on line. It has the largest installed geo- resources and other sectors of the economy. More-
thermal-, hydro-, and wind-generated electricity over, foreign assistance programs also focused on
capacity in the world. Additionally, several U.S. large-scale conventional energy projects, particu-
renewable companies are serious] y pursuing for- larly bulk power and oil and natural gas. Renew-
mer East Bloc markets. For example, U.S. Wind- able projects tend to be smaller and more
power recently signed a joint venture agreement dispersed than conventional energy projects, thus
with Ukraine to develop a 500-MW wind farm in making them less attractive for traditional aid. In
the Crimea. addition, severe constraints on capital investment
This section discusses the potential for U.S. re- will further limit investment in renewable.
newable technology transfer to the former East Lack of accurate data is yet another barrier.
Bloc. But first, it examines the obstacles to renew- With wind energy, for example, simply measuring
able development in this region. Brief descrip- annual average wind speeds may not indicate the
tions are provided of specific technologies and amount of power that can be generated; distribu-
their applications. For further information, the tion of wind speeds over time must also be mea-
reader is referred to the forthcoming OTA report sured. Accurate data are essential to the success of
Renewing Our Energy Future. a renewable project.
The lack of technically trained personnel could
I Barriers to Renewable Development also bean obstacle to renewable development, as
As noted in chapter 2, renewable contribute only well as for the staffing of local facilities and
a small share of total energy production in the for- plants. In all East Bloc countries, scientific and
mer East Bloc, but there is potential for growth, technical training were directed at conventional
and interest is rising in several countries. How- energy exploration and production, thereby exac-
ever, there are significant obstacles to renewable erbating the personnel problem.
development, and competition from conventional Finally, some alternative energy technologies
fuels will be stiff. are viewed as immature and unrel iable, presenting
Past energy pricing policies discouraged the yet another obstacle to renewable development.
introduction of renewable energy technologies Because some renewable technologies are still rel-
and the efficient use of energy. Conventional ener- atively new, long-term experience is scarce. Reli-
gy sources were priced so low that renewable ability is a major concern for countries that have
could not compete. In some countries, this is still neither the capital nor human resources to spend
the case. Fuel prices, particularly of oil and natural on unproven technologies. These countries are
gas, will continue to have an enormous influence more likely to consider traditional, proven
on renewable development. As conventional en- technologies.
ergy prices rise, alternative sources will become
more attractive.
100 I Fueling Reform: Energy Technologies for the Former East Bloc

I Potential for U.S. Renewable which has primary responsibility for renewable
Technology Transfer energy research, is working on 1.5-kW and
100-kW turbine designs. The Institute is also col-
Wind’’wer laborating with a former defense factory to
Wind turbines convert energy of the wind to elec- manufacture 250-kW turbines, several of which
trical energy. All former East Bloc countries have have been sold to the Ukrainian Ministry of Ener-
at least a few good wind sites. Several regions in gy to construct a wind farm in the Crimea. The
Russia, Ukraine, and Kazakhstan are very favor- Ministry is also pursuing wind power joint ven-
able to wind power development, but the bulk of tures, which will convert Ukrainian factories to
these are extremely remote and sparsely popu- wind turbine and photovoltaic facilities. German,
lated, i.e., the Far East and northern arctic coast in Norwegian, and U.S. firms have been contacted in
Russia and central Kazakhstan. Others on the
this regard.26
northern and eastern shores of the Black Sea in
In March 1993, California-based U.S. Wind-
Ukraine and the North Caucasus area are more ac-
power and a Ukrainian utility formed a joint ven-
cessible. 24
ture to supply 500 MW of wind power by 1996.27
There has been little wind power development
When completed, this will be the second largest
in the former East Bloc. In Russia, for example,
wind power facility in the world (Altamont Pass in
small wind turbines are used primarily for water
pumping in agricultural applications, although in- California is the largest). Under the agreement,
terest in wind energy development is growing. Ukraine is licensed to manufacture turbine parts.
Construction of Russia’s first wind power station As payment, U.S. Windpower will receive com-
has begun near Novorossisk.25 Several factors ponents to service its turbines in the United States
created a favorable climate for wind power devel- and Europe.
opment in this area, including the shortage of elec- Poland and the Czech Republic also manufac-
tricity in the Novorossisk area, termination of ture wind turbines for export, primarily to Den-
construction of the Rostov nuclear powerplant, mark. Polish and Czech domestic markets cannot
and promising wind sites. support wind turbine manufacturing capacity.
Also, prototype 100-kW (kilowatt) and 10-kW U.S. technology and extensive project devel-
turbines are being developed at several facilities opment and management expertise could benefit
throughout Russia. Russia’s aerospace industry wind power development in former East Bloc
has tremendous turbine manufacturing capability countries. The U.S. wind power industry is a lead-
and is actively seeking Western production part- er in wind power technology and development. Its
ners. Dutch and German companies have estab- technologies, particularly small wind machines
lished joint ventures in Russia to manufacture (under 50 kW), are the most advanced in the
small wind turbines. world, according to DOE. The industry also has
Wind turbine R&D is being done in Ukraine, as tremendous site validation capabilities: our
well. The Ukrainian Institute of Electrodynamics, 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, FBIS-
LJSR-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 experi-
ence 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 devel-
opment has made steady progress since the 1980s.
If development continues at the present pace, Eu-
ropean 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 devel-
opments and proximity to former East Bloc mar-
kets, European companies are in a strong position
to compete. Even so, U.S. companies have a long
record of involvement in wind energy develop-
ment and should be competitive. Small U.S.-made wind turbines.

Photovoltaics fers to India and is trying to market its products in


Photovoltaics (PVs), or solar cells, convert sun- other countries.
light directly into electricity. Although PV energy U.S. and European companies are interested in
is more expensive than conventional energy for marketing their PV systems in the FSU. Integrated
most uses, costs continue to drop. It is expected Power Corp., for example, has had some success
that PV systems will produce electricity for 10 to in Kazakhstan. It has developed a PV power sys-
20 cents/kWh (kilowatt-hour) by 2000.31 tem for telecommunications in that country. Brit-
The FSU has done extensive R&Don PVs for ish Petroleum also sells PVs to the FSU to monitor
use in spacecraft and ground installations. PVs are oil and gas pipelines.
used as a power source for navigation signal Engineering and designing PV systems may
installations and UHF relay transmitters, and are present technology transfer opportunities for U.S.
used in cathodic protection systems for pipelines companies. Russia has manufacturing capability
in Central Asia and Azerbaijan.32 but little experience in marketing and developing
Russia has begun to commercialize its PV commercial projects. The United States has exten-
technology. It is a large supplier of crystalline wa- sive 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 Geothermal


with U.S. engineering, design, and project devel- Natural heat below the Earth’s surface can be used
opment expertise may make the most sense. directly for space and process heat or converted to
electricity. Geothermal energy is commonly re-
Solar Thermal Electricity ferred to as a renewable energy resource, but it can
Solar thermal electric plants use mirrors or lenses be depleted if oversubscribed. Also, geothermal
to concentrate sunlight, heating a fluid which is energy production can cause environmental dam-
then used to produce electricity. The FSU has age; i.e., when hot brines are released from wells.
done R&D on solar thermal systems, including Hydrothermal energy has been used in a wide
work on coatings, collector manufacturing variety of markets: power production, district
technology, plant reliability, and interseasonal heating, greenhouses, and therapeutic pools and
storage of solar heat and solar salt ponds. How- spas. There are 11,300 MW of installed geother-
ever, research activities tended to focus on large mal capacity worldwide for direct-heat applica-
centralized facilities, with few practical results. tions, and 20 countries generate 5,700 MW of
As of 1990, there were a little over 50,000 electricity. 35 The United States has the largest
square meters of solar collectors in the FSU, pro- installed capacity in the world, with about 2,700
M W .3 6
ducing the heat equivalent of about 5,000 tons of
fuel per year. 33 The Crimea republic in Ukraine is Estimates of total hydrothermal water reserves
well suited to solar use. Solar water heating is used in the FSU are equivalent to over 200 million tons
in major hotels in this area. The Crimea is also the of fuel per year. There are more than 200 wells lo-
location of a 5-MW experimental solar power sta- cated throughout the FSU, and extraction exceed-
tion which began operation in 1985. The republic ed 20 million cubic meters in 1990.37 Much of the
plans to build solar power stations with a total ca- geothermal heat is used in greenhouses. There is
pacity of 50 MW in the near future.34 only one operational hydrothermal power station
The United States has substantial experience in the FSU, located in Kamchatka.
with solar thermal systems. Today, there are 354 The Kamchatka area, in far Eastern Russia,
MW of installed solar thermal powerplant capac- shows the most promise for geothermal develop-
ity in California’s deserts. However, the United ment. Japanese companies have shown interest in
States has lost its leadership position to European developing geothermal power stations there. Geo-
countries. U.S. solar thermal development was se- thermal resources are also located in Central Rus-
riously damaged by the bankruptcy of Luz, Inc., in sia, particularly in the Nizhny Novgorod and
1992. Today, European companies are actively Yaroslav regions.
marketing their solar thermal technologies world- The FSU has continued its R&D work on hot
wide, and the Israelis are pursuing the FSU dry rock (HDR) geothermal energy resources, but
market. financial difficulties have slowed progress. Ac-

331bid, 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 verted to other forms for use as a fuel or feedstock.
would benefit both the United States and Russia. The principal energy use of biomass is the produc-
The United States has more sophisticated instru- tion of heat, via direct combustion, for use in proc-
mentation, such as microseismic monitors, while ess heating, space heating, and cogeneration
the Russians have an edge in rock mechanics and systems. The use of biomass for electricity pro-
thermal physics in geothermal resource develop- duction is usually uneconomical because the dis-
ment. 38 persed production and low energy content make
Lithuania also has some geothermal resources, transportation costs high.
located in the western part of the country. The Biomass may be a significant energy resource
Lithuanian government, with help from Denmark, in rural areas. Consumption, however, is difficult
is exploring geothermal potential in this region. to measure because so much of it never enters the
Currently, several wells are producing hot water. commercial market. Wood, for example, is gath-
The Ministry of Energy indicates that geothermal ered by individuals and families as the need arises.
energy will be used to heat resorts in the future .39 Among former Soviet republics, Estonia ap-
In Central Europe, Hungary is a leader in geo- pears to be taking the lead in biomass develop-
thermal use for horticulture. About 2 million ment. Estonia’s large fuel wood resources, plus
square meters of greenhouses are heated by geo- the escalating costs of oil and gas imports, have
thermal water. 40 Poland is interested in develop- spurred interest in converting heating boilers from
ing its geothermal energy resources for space oil to wood. Several projects are now under way,
heating and hot water, particularly in those areas using both foreign and domestic technology, and
having high pollution or a long heating season. many more are planned. In 1994, the World Bank
Low-energy resources are located throughout the will begin a large-scale boiler conversion invest-
country; the Podhale field in Southern Poland is ment program; total converted capacity may reach
the most developed. Several wells are producing 200 MW. However, questions have been raised
hot water for greenhouse use, and an experimental about the sustainability of Estonia’s forests.42
district heating system is in the design phase.41 There is some interest in the FSU in utilizing
U.S. drilling and site validation technologies organic wastes from industry and agriculture for
can help expedite the development of geothermal biogas production. This interest is spurred by the
resources in former East Bloc countries. However, need to manage waste and improve sanitary condi-
drilling and extraction costs continue to be a major tions primarily at large livestock complexes.
constraint to greater geothermal energy develop- However, the potential contribution of biogas to
ment in this region. FSU’s total energy supply is insignificant (about
1.5 percent) and will probably remain so in the
Biomass Technology near future.43
Biomass refers to materials from biological A variety of liquid fuels can be produced from
sources that can be used directly as a fuel or con- biomass, including ethanol and methanol, syn-

J8Te~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

sive, construction times can be long, and environ-


mental 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 capac-
ity. 44 Russia has more than two-thirds of the
FSU’s installed capacity.
In Poland, hydroelectric resources are very lim-
Photovoltaic array ited and are not expected to be significant in the
future. As of 1991, Poland had 1,900 MW of hy-
thetic gasoline, jet, and diesel fuel. These fuels droelectric capacity, or about 6 percent of total
have the potential to address some environmental installed capacity. 45 In the former Czechoslova-
concerns, such as urban ozone and greenhouse gas kia, hydropower provides 2,900 MW of installed
emissions. However, there are substantial barriers capacity, or about 16 percent of the total.46
to the introduction of liquid biofuels into trans- Hydroelectric technologies are considered ma-
portation markets. These fuels cost more to pro- ture, with efficiencies greater than 90 percent.
duce than gasoline and lack the highly developed Nevertheless, several technological develop-
and massive infrastructure that already exists to ments offer improvements in hydropower eco-
support the production, distribution, and use of nomics and environmental impacts. These
gasoline. The financially strapped countries of the include new ultralow-head turbines designed for
former East Bloc do not have the substantial capi- use at sites with elevation differentials of less than
tal needed to build new production and distribu- 10 feet; cross-flow turbines that improve efficien-
tion networks. There are far more pressing cy; and improvements in dam design, construc-
considerations, such as upgrading existing trans- tion techniques, and materials. U.S. work on these
portation infrastructure and systems and improv- and other hydroelectric technologies can help for-
ing vehicle energy efficiency. mer East Bloc countries fully realize their hydro
potential.
Hydroelectric Power There is some interest in the use of small hydro-
Hydroelectric facilities use the energy in flowing planes in areas where ample water resources exist.
water to turn a turbine connected to a generator. Microhydropower (less than 100 kW) could make
Hydropower is considered a clean energy source a contribution in rural areas that have no access to
that can respond quickly to utility demand. But the power grid. Microhydro electric plants are
large hydroelectric projects can be very expen- common in China and India. Although initial cap-

MEnergy 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 important avenue for developing indigenous al-
installed quickly and do not entail flooding large ternative energy resources at a more rapid pace.
areas. U.S. firms are world leaders in developing and
manufacturing renewable technologies, but other
| Potential for Development of countries have expertise, as well. European re-
Renewable “ newable energy companies continue to grow and
Although there has been little renewable devel- are aggressively competing with U.S. firms for
opment in the former East Bloc, there is consider- global markets. U.S. renewable R&D funding is
able potential. The usual obstacles to renewable dwarfed by EU spending: the EU spends about
development interfere, however: artificially low $170 million per year on wind energy compared
conventional fuel prices, capital constraints, and with $24 million per year in the United States.48
the lack of political and institutional commitment. Even so, U.S. photovoltaic and wind technolo-
These and other obstacles may prove to be insur- gies are among the most advanced in the world.
mountable in the near term, but ongoing economic The United States “wrote the book” on PV
reform and price restructuring should enhance re- technology for terrestrial applications, and today,
newable development and use in the long term. U.S. industry accounts for about one-third of total
Several factors argue for renewable develop- world PV production. Seventy percent of domes-
ment in former East Bloc countries. These include tically manufactured PVs are shipped overseas. 49
the need to develop indigenous energy supplies, U.S. small wind machine technology (under 50
provide decentralized power to rural areas, and ad- kW) and wind site validation capabilities are the
dress environmental concerns. Also, the modular best in the world. Finally, the United States has
nature of some renewable technologies allows for tremendous renewable project planning, devel-
shorter construction time, and they can be targeted opment, and management expertise. This experi-
at specific needs. Wind turbines and PV systems, ence is derived from having the largest installed
for example, can be sized to fit any application. geothermal and wind-generated electricity capac-
Moreover, the availability of idle or underuti- ity in the world.
lized industrial plants and defense facilities pro- To compete in a significant way, U.S. firms
vides opportunities for renewable technologies must overcome several obstacles. The first is the
production, especially wind turbines, PV cells, cost disadvantage of some U.S. technologies rela-
and solar collectors. Several aerospace factories in tive to foreign competitors. Second, U.S. ma-
Russia and Ukraine are now manufacturing or chines, such as wind turbines, must be adapted to
planning to manufacture wind turbines. However, the metric system to compete in European mar-
the lack of domestic markets means that produc- kets. According to DOE, this is a major disadvan-
tion must be oriented toward exports. tage for U.S. companies, and conversion to the
Assistance from Western countries could im- metric system would be a tremendous boost to
prove the prospects for renewable development U.S. industry. Third, the U.S. renewable indus-
in former East Bloc countries, especially in those try, much like the energy efficiency industry, is
countries that have limited or no conventional en- composed primarily of small- and medium-sized
ergy resources. Technology transfer provides an 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 ‘e-
t’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 newable energy resources will become more at-
and financial risks associated with doing business tractive.
in former East Bloc countries, risks that are intim- Because some of the renewable technologies
idating even for the largest corporations. are relatively new and/or commercial experiences
Demonstration programs could bean effective are limited, political and institutional support will
way to penetrate former East Bloc markets and also be required. For example, wind energy devel-
build confidence in unfamiliar technologies. Be- opment requires cooperation among equipment
cause some renewable technologies are per- manufacturers, electric power producers, and land
ceived to be unreliable and very expensive, resources ministries. Without political commit-
decisionmakers would see first-hand how the ment, small alternative energy projects will re-
technology works, how to compile data, and how ceive little or no financial support.
to develop operating experience. In the near term, renewable resource develop-
Even if assistance is forthcoming, former East ment will take a back seat to conventional fuels,
Bloc countries must provide a favorable climate particularly oil and gas. Russia has tremendous re-
for renewable development. The energy sector is serves and will continue to develop them in order
currently undergoing restructuring, including pri- to fuel its own economy and to obtain the hard cur-
vatizing industries and market pricing, but with rency so desperately needed. However, the desire
varying degrees of success. Energy sector reform and economic necessity to become self-sufficient
is a very important step to enhancing renewable will drive some countries to develop their renew-
development. As conventional energy prices rise able; for example, Ukraine’s efforts in wind
and the cost of power production increases, re- energy.
Environmental
Technologies 5

T
he extent of the staggering environmental problems fac-
ing 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, in-
cluding industrial processes, agriculture, and municipal waste.
Insufficient or nonexistent pollution abatement equipment fur-
ther 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 sub-
sidization 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. Al-
though 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 recom- REGULATORY FRAMEWORK


mendations), enforcement was weak. As a result, Given the region’s severe environmental prob-
emission abatement equipment (installed or pro- lems, many Westerners were surprised to learn
duced) was insufficient to address pollution prob-
that the former East Bloc countries have very
lems.
stringent standards for air and water quality, legis-
Although environmental activism played an
lated many years ago, and that in some countries
important role in the overturn of Communist gov-
mining reclamation laws were on the books before
ernments, the transition from environmental ac-
similar regulations in the United States. In fact, al-
tivism to action has not been easy. There are many
most all ambient standards were much stricter
obstacles to cleaning up the environment, many of
than U.S. standards or WHO recommended stan-
which are imbedded in issues of economic reform.
dards. Lack of enforcement rendered the standards
Little money is available to pay for mitigation
equipment or regulatory enforcement. Also, since meaningless, however, Even when exercised, en-
closing polluting facilities will exacerbate unem- forcement depended on a system of fines. Com-
ployment and reduce municipal revenues, many munist industries were much less responsive to
regulatory agencies have found themselves pow- financial incentives than to production quotas.
erless to stop pollution. Standards themselves have also been a prob-
Nevertheless, reducing pollution is an essential lem. Environmental regulations focused almost
part of economic modernization. In many areas, a exclusively on ambient standards rather than uni-
cleaner environment will directly increase eco- fied source standards.3 Specific site emission lim-
nomic well being because the benefits (e.g., im- its were generally determined by local authorities,
proved human health, reduced corrosion of based on modeling practices that allowed for re-
materials, and greater availability of usable water) gional air or water quality standards to be met, but
will outweigh the costs. In addition, pollution there were no national targets for abatement. This
control is a promising area for U.S. exports. complicated the design and manufacture of abate-
This chapter examines the possibilities for us- ment equipment. Focusing on ambient rather than
ing U.S. equipment and expertise to reduce the source standards is at odds with environmental
environmental effects of energy production, trans- regulation in Western industrialized countries,
portation, and consumption in this region.2 With where source limits to both air and water pollution
the recent slowdown in economic activities, all have been implemented in the past 20 years.
former East Bloc countries have experienced an Every country in Central Europe and some for-
overall decline in pollution. However, it is ex- mer Soviet republics aspire to membership in the
tremely important that abatement equipment be in European Union (EU). As a result, they favor es-
place before these economies turn around. If not, tablishing environmental standards consistent
air quality problems will be magnified in the with existing and anticipated EU standards.4
future. Much work must be done, however, to bring pol-

2This 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 re
quires 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 debat- efficiencies of engines, abatement equipment, es-
ing whether to phase in strict EU standards timates of average distance driven, and mobile
quickly or institute weaker transitional standards, source emission factors.6
to be revised after economic recovery. This debate
has been strongest in the Czech Republic. ENERGY PRODUCTION, PROCESSING,
Although environmental activism played a ma- AND TRANSPORTATION
jor role in the revolutions in Central Europe and The production, processing, and transportation of
fanned dissatisfaction with centralized authority fossil fuels (oil, natural gas, and coal) can have
in the former Soviet Union (FSU), the environ- significant negative consequences for the envi-
ment has taken aback seat to the present economic ronment. The following section examines the ef-
dislocations. In Poland, for example, although en- fect of these activities on the region’s environment
vironmental regulations were off to an impressive and the opportunities for U.S. technology and ex-
start in 1989, economic troubles in the following pertise to address these problems.
years took their toll on environmental law re-
form. 5
| Oil and Natural Gas
Another legacy of the previous systems is the
reluctance and skepticism of local officials and in- As noted in chapter 2, most of the oil and gas acti-
dustry toward regulatory enforcement. Many of vities in the region are centered in the FSU, specif-
the old, centralized bureaucratic structures re- ically Russia, Kazakhstan, and Azerbaijan.
main, especially at the local and regional levels. Romania is the only non-FSU country with nota-
Decentralization may create opportunities for im- ble oil and gas production. All countries in the re-
proved environmental decisions since local of- gion, however, have refining capacity, pipelines,
fices should have better knowledge of local and other forms of oil product transport that can
environmental concerns. Unfortunately, local au- have environmental consequences.
thorities are also more susceptible to strong local
pressures not to enforce regulations that may in- Production
crease local unemployment and economic hard- The drilling and production of oil and natural gas
ship. Moreover, local and regional environmental includes many activities with potentially harmful
agencies are often understaffed, underfunded, and direct and indirect results for the environment.
underequipped. The main direct environmental concerns during
Reliable environmental data are critical for de- drilling of oil and natural gas involve the proper
termining the scope of environmental problems, handling of fuels and chemicals (including drill-
setting priorities for pollution abatement, and un- ing mud) at the drilling site, which, if spilled or
derstanding the impacts of new regulations, but leaked, can contaminate groundwater and river-
the data for many environmental problems are ways.
questionable. Due to the lack of monitoring equip- Oil production activities pose a greater direct
ment, most data are not determined through mea- environmental threat than gas production. Faulty
surement of actual emissions. Instead, analysts valves, well casings, and collection facilities can
make calculations based on assumptions that have leak oil to the ground, forming large pools (such as
not been rigorously scrutinized, or that are derived at Baku) or traveling to streams and rivers. In Rus-
from data such as the sulfur content of fuels, rated sia, 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

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 Pen-
insula, in areas of continuous permafrost. Pipe-
lines 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 govern-
ment in 1989 (the same year that travel across the
Typical field flares. bare tundra was prohibited), the Russian govern-
ment has recently permitted the work to resume. 9
duction techniques have caused oil to enter Offshore oil and gas drilling also present a
waterways. The Ob river, which flows through the number of environmental concerns, most impor-
oil-producing region of Tiumen north to the Arctic tantly, leaks or spills of oil and chemicals that can
Ocean, has been especially affected by all of these harm marine life. The major offshore producing
problems. Environmentalists have said that mil- area has been the Caspian Sea, where drilling and
lions of barrels of oil in Tiumen Oblast are spilled production has taken place since the 1920s, in the
through pipeline ruptures or lax production con- shallow waters off the coast of Azerbaijan. Minor
trols, resulting in the death of bottom fisheries.7 oil spills and slicks are noted periodically off this
The indirect environmental impacts of oil and coast, ’” but the specific reasons for these acci-
gas drilling and production include the conse- dents are unclear. Offshore drilling and produc-
quences of construction activities and human tion activities have occurred to a lesser extent in
settlements. In Russia, the climate adds additional the Black Sea (near Romania), the Baltic Sea, off
concern. The largest oil- and gas-producing areas Sakhalin Island, and the Barents Sea.
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 Environmental technology options
flooded, drawing pollutants from areas contami- Market incentives, combined with increased regu-
nated by oil. As drilling and production have latory enforcement, may redress some of the envi-
moved further northward, the industry has entered ronmental problems presently found in oil
areas of permafrost that require stringent practices production. For example, when oil has a real mar-
for sensitive ecosystems preservation. But no ket price for the producer, increased economic ef-
areas in the oil or gas regions of Western Siberia ficiency will result in less oil on the ground and
have been protected through the establishment of more in the pipeline moving to consumers. For-
nature reserves (zapovedniki) or national parks. eign equipment does not appear to be needed for
Given the present economic crisis and pressures to 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 Processing


to address market needs. Refineries are generally located in market areas,
In several specific areas, such as offshore and with crude oil del ivered by pipeline. At oil refiner-
arctic operations, Western environmental technol- ies, the major air pollution concerns stem from hy-
ogies and expertise are needed. While the Rus- drogen sulfide (H 2 S), which is formed in
sians have had more experience in arctic oil and hydroprocessing (catalytic reforming, hydrotreat-
gas operations than any other country, their efforts ing, and hydrocracking) and cracking (catalytic
have not focused on mitigating environmental and thermal) and from CO (released primarily
hazards. Western technologies (such as transport during catalytic cracking) and hydrocarbon va-
vehicles or equipment that can withstand saline or pors. Given the relative importance of primary
arctic conditions) and field management expertise distillation technology in the region, refinery
are needed to reduce the impact of operations. emissions are probably determined by the sulfur
content of fuels consumed, rather than from tech-
U.S. opportunities to transfer technology nical processes. Waste waters from refineries,
U.S. firms have had many years of experience in without sufficient processing, may contain oil or
the Alaskan oil fields that would be applicable to other byproducts of the production process. The
the needs of Western Siberia. For example, in discharge of oil products in refinery effluent to
Alaska, workpads were built along pipeline waterways has been a significant problem in Rus-
ditches to protect the tundra from the wear and tear sia (where 29,000 tons entered waterways in
of construction, and crossings were provided for 1989) and Uzbekistan (24,000 tons in 1989). 13
the caribou migration. 11 Also needed are vehicles Petroleum discharge into rivers appears particu-
that do not damage the sensitive tundra.12 U.S. larly troublesome along the Tom river (a tributary
firms will compete in this area with manufacturers of the Ob), where petroleum product concentra-
from other countries, particularly Canada. tions exceed standards by 8 to 10 times because of
U.S. firms also have a great deal of experience point sources at Mezhdurechinsk, Novokuznetsk,
in offshore oil and gas operations, although the Kemerovo, and Tomsk.14
market advantage for U.S. firms is not clear. With Gas processing, on the other hand, occurs at or
the development of North Sea fields, some Euro- near gas production sites, since the gas must be
pean firms have developed expertise that would processed before entering transmission pipelines.
readily apply to regions such as the Barents and Environmental problems resulting from natural
Baltic Seas. U.S. firms would have a logistical ad- gas processing are mainly the result of insufficient
vantage if drilling and production activities are to controls at sulfur-removing facilities. North Cas-
take place in the East Siberian Sea region, due to pian Basin fields and all significant fields of Cen-
its proximity to Alaska. But given the great dis- tral Asia suffer from high sulfur content. The only
tances from markets, it is not clear whether this re- notable environmental problems in the gas proc-
gion will be exploited in the near future. essing 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 sred v 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 re- transport depended largely on pipelines, while
peated leaks of H2S and S02.15 railroads have played a major role in product
transport. Inland waterways-in particular, the
Environmental technology options Volga river system—are also used for product
The most immediate problems in the oil and gas shipments. Small tankers ply the Caspian Sea to
processing sectors are water purification and link the oil-producing regions of Baku, Turkme-
emission abatement. Simple effluent treatment nistan, Emba, and Mangyshlak, with refineries,
plants for oil and suspended solids removal and regional markets, and the Volga river system.
neutralization are greatly needed. Those facilities Many concerns have been voiced about the reli-
with secondary refining processes would benefit ability of both crude oil and natural gas pipelines
from H2S treatment, while more traditional sul- in the region. The greatest direct environmental
fur-scrubbing units are needed at facilities burning consequences come from leaky oil pipelines. Nat-
high-sulfur residual fuel oil. ural gas leaks present safety more than environ-
Given the archaic refinery structure that is mental concerns. In 1989, an explosion of escaped
found in most East Bloc countries, refinery up- gas from a natural gas liquids pipeline killed
grades are likely in the coming years. Upgrades hundreds of people on a passing train.16
are needed not only to produce more of the lighter There are indirect environmental impacts from
fractions, such as gasoline, but also to produce un- pipelines. When constructed above ground (as
leaded fuels and to desulfurize residual fuel oil. they must be in areas of permafrost), pipelines can
Environmental technologies will be needed for inhibit the migration of wildlife. For example, in
these projects. the Siberian city of Norilsk, when major pipelines
were built to supply natural gas, insufficient pro-
visions were made for reindeer crossings along
U.S. opportunities to transfer technology
migratory routes. Reindeer became trapped be-
U.S. firms are certainly experienced suppliers, tween parallel pipelines, and whole herds were
manufacturers, designers, and constructors of ad- funneled into downtown Norilsk, where they be-
vanced oil refineries. However, they face signifi- came the victims of cars and poachers. *7
cant competition from other suppliers, primarily Because a large share of FSU oil exports went
the Japanese. U.S. firms have a clearer advantage to Central Europe through pipelines, oil tankers
in the area of gas processing, especially for high- have played only a minor role in crude oil and pe-
sulfur (sour) gases. While U.S. firms did not play troleum product transport. Shipments of oil and
a large role in the Astrakhan gas complex, they are petroleum product by sea accounted for only 8
active in the development of gas processing facili- percent of oil shipments for the Soviet Union as a
ties at the Tenghiz (Kazakhstan) field. whole. 18 Tanker transport has been used primarily
for shipments to countries outside continental Eu-
Transportation rope (Cuba, the United Kingdom, the Scandina-
Accidents during transport of crude and refined oil vian countries, and others). The main crude oil
products to market can result in severe environ- and petroleum product export ports have been
mental consequences. In the region, crude oil 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.
17
1 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 oc- U.S. firms have a great deal of experience in
curred in the Baltic Sea and the Volga River. Given spill response equipment and technologies. Nev-
the inherent risks of oil transport, it is not clear if ertheless, given the location of ports and shipping
the frequency or magnitude of these accidents is patterns, it is not clear whether or not U.S. firms
worse than industry averages elsewhere. will have a market advantage because of the trans-
boundary nature of oil spills and the European re-
sponse capabilities.
Environmental technology options
As noted earlier, if market incentives and regu- Conclusions
latory enforcement were adequate, domestic
A mix of technologies, expertise, market reforms,
equipment could address some environmental
and regulatory enforcement is needed in the re-
problems, such as oil pipeline leaks. But new
gion to reduce the impacts of oil and gas opera-
problems and new technology needs may arise. As
tions. The highest priorities for Western
trading partners diversify, so might fuel transport
equipment and expertise would be in arctic opera-
activities. If Russian oil and product exports shift
tions, oil separation equipment, refinery equip-
away from Central Europe, and these countries di-
ment (both water and air purification systems),
versify their petroleum suppliers, tanker traffic
and offshore operations.
could increase dramatically in the region. In-
One difficulty in assessing future needs for en-
creased spill protection and spill response equip-
vironmental equipment is the uncertainty about
ment would then be needed to match the increased
what impacts might arise from the disruption of
risks.
historic trading relationships or the influx of
With extensive reserves of natural gas in Rus-
Western oil exploration and service companies.
sia, and significant resources in Uzbekistan and
Changes in export patterns could result in in-
Turkmenistan, gas exports are likely to increase.
creased use of tankers, which might increase the
Gas pipeline construction will increase in the
likelihood of oil spills. Since it is unclear if do-
coming years, with extensive construction in Arc-
mestically produced tankers would be involved,
tic areas if the gas fields on the Yamal Peninsula
the most important technology transfer opportuni-
are exploited. In the long term, liquefied natural
ties may lie in American experience in rapid re-
gas (LNG) tankers could provide an expanded
sponse to oil spills. Also, the entrance of Western
market for Russian gas. Since LNG is flammable
firms could expand the reach of the oil and gas in-
and heavier than air, a tanker collision would be
dustries to previously unexplored or produced re-
disastrous.
gions, particularly in offshore areas and remote
locations, resulting in unforeseen environmental
U.S. opportunities to transfer technology problems.
U.S. firms have a limited advantage in oil and gas
transportation technologies. Given the economics | Coal and Shale
of shipping pipe long distances and the previously The initial effects of mining are land disturbances.
established ties with West European pipeline In surface mining, huge shovels remove the soil
manufacturers, U.S. firms will not be able to com- above the coal or shale seam, causing the most vis-
pete in the pipeline market. However, U.S. firms ible environmental damage. In underground min-
with experience in pipeline construction might be ing, waste is deposited above the mine, causing
able to provide expertise and services in upcom- land degradation at the surface. The environmen-
ing pipeline projects. The only other major market tal impacts of both methods of mining, however,
for U.S. suppliers is likely to be control equipment extend beyond the initial extraction process. Min-
for pipeline operations, both in the field and in ing can lead to the disruption of hydrologic cycles,
long-distance transport. pollution of surface and groundwater by acidic or
114 I Fueling Reform: Energy Technologies for the Former East Bloc

Successful reclamation depends on fertile soils


and local climatic conditions (e.g., elevation, rain-
fall). 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 ex-
tracted. 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
Strip mining site outside Pees, Hungary
are not readily available. Secondary literature,
saline discharge, and sedimentation of rivers by however, suggests that reclamation laws are not
the runoff from barren or sparsely vegetated sites. sufficiently enforced and that reclamation efforts
Even after mines are shut down, these environ- are much needed in the region.
mental problems linger.
Underground Mining
Surface Mining Mine spoils and water discharge from under-
As noted in chapter 3, surface mining is used ex- ground mining can result in environmental prob-
tensively in the Czech Republic, Kazakhstan, lems. Underground mining—the main form of
Russia, and Estonia. In the Czech Republic alone, coal extraction in Ukraine, Slovakia, and Hunga-
surface mining of lignite results in 500 million ry-accounts for a large share of coal mining in
tons of mining waste each year. 19 Associated en- Russia and shale production in Estonia. Mine
vironmental problems include soil erosion, loss of wastes, piled up around the mine entrances, create
vegetative cover, and water pollution (through unfavorable conditions for revegetation: altered
sedimentation and acid mine drainage). The natu- soil texture and structure, high or toxic concentra-
ral revegetation of mined areas is a very slow proc- tions of sulfates, inadequate levels of plant nutri-
ess, due to low levels of soil nutrients in the ents, and low pH levels.
disturbed areas. Mine wastes have created significant environ-
Reclamation efforts attempt to return mined mental problems in Ukraine. At the Donets Basin,
areas to biological productivity. During reclama-. piles of overburden have created mounds on the
tion, excavated areas are refilled and regraded, surface up to 100 meters high. Ukrainian coal en-
then fertilized and seeded. It is sometimes neces- terprises have almost 1,200 waste dumps (370
sary to create a drain with a culvert to carry the wa- presently in use), occupying an area of over 5,000
ter away quickly, before it can form sulfuric acid. 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 dering the water too corrosive even for industrial
piles has been difficult because the material is consumption. 25 In Ukraine, saline discharge is
generally infertile.23 also a problem, caused principally by suspended
Another problem associated with underground substances, mineral salts, organic ingredients, and
mining is fire. In operating mines, fires result from trace elements. According to Ukrainian sources,
accidents. At waste dumps, fires result from spon- water purification systems still leave about 10 per-
taneous combustion (a noted problem in Ukraine). cent of intake water polluted.26 In Russia, where
Despite a program to reduce these fires by switch- the sulfur content of mined coal is lower, acid
ing to flat dumps insulated with inert materials, mine drainage has been less significant (with the
spontaneous combustion has occurred at 15 of the possible exception of the high-sulfur Kiselovsk
flat waste dumps now in use.24 field in the Urals region).
Special measures must be taken in mining areas
Mine Discharge where acid-producing substances are present. The
A major problem associated with underground main techniques rely on isolating the acid-form-
mining is the discharge of polluted waters to ing materials and preventing contact with oxygen,
ground and surface water. When water reaches the by either water or overburden. Unfortunately,
coal seams, from either producton or natural seep- both options have limitations, and if they cannot
age, it can react with the sulfur-containing pyrites prevent acidification, then the only recourse is-
or other minerals and form very destructive pol- treatment of the mine discharge. 27 Commonly, a f
lutants, such as sulfuric acid. Mine drainage also ter mining operations have stopped, the mine is
contributes increased amounts of sediments, sul- sealed and water allowed to fill the mine shafts.
fates, iron, and salts. Acid or saline discharge can This method works as long as there is no “break-
affect both surface and underground mines, de- out” of the acidic water filling the mine. Unfortu-
pending on the mineral content of the coal seams, nately, when a breakout occurs, it is often difficult
overburden, and groundwater. Polluted mine dis- to detect and respond to before significant damage
charge is a particularly tenacious problem because has occurred to water bodies .28
it can occur at abandoned mines as well as surface-
mined areas that have not been reclaimed for Processing
hydrologic features. As noted earlier, there is relatively little process-
In Poland and Ukraine, most of the problems ing of energy coal in the region, and therefore the
with mine drainage have occurred from under- environmental consequences of coal processing
ground mines and runoff from tailing piles. Water has been limited. However, the introduction of
draining from underground Polish mines is large- additional coal cleaning capacity, although reduc-
ly saline which has increased the salinity of the ing pollution at the point of use, will produce sig-
two major rivers, the Vistula and the Ordra, ren- nificant 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\’ironmen-
fd 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.
28
1 bid., p. 139.
116 I Fueling Reform: Energy Technologies for the Former East Bloc

dispose of or reclaim. In the United States, for ex- THE ENVIRONMENTAL IMPACTS OF
ample, coal mining is the third-ranking industrial FUEL CONSUMPTION
producer of mineral waste; 90 percent of this When fuels are burned, minerals within are re-
comes from the washing of coal to remove impuri- leased in either particulate or gaseous forms.
ties. 29 Thermal NOX, hydrocarbons, CO, and carbon
dioxide (C02) are also formed during the combus-
Environmental technology options tion process. In sufficient quantities, many of
Technical expertise more than specific equipment these compounds can affect human health, dam-
is needed to remediate environmental problems at age the economy (e.g., corroding structures and
coal and shale mines. Hydrologic expertise is stunting crop growth), and cause transboundary
needed to deal with mine discharge and to reduce pollution.
the formation of acidic or saline discharge. Water High energy use combined with lax enforce-
purification systems and expertise are needed to ment of env ironmental standards resulted in wide-
clean up existing sites. Attention should be given spread air quality problems in the region. Acid
to incorporating reclamation (such as grading, rain exists in all countries of Central Europe and
soil, and substrata separation and storage) into most of the FSU. In the Czech Republic, there is
production. But reclamation of previously mined evidence that soil acidity has increased signifi-
areas will likely be too difficult to attempt in the cantly since the 1960s, representing one of the few
short term, unless it becomes economical to repro- examples of large-scale soil acidification caused
cess mine tailings. by acid deposition. This increase in soil acidity
30

could be contributing to problems in soil toxicity,


U.S. opportunities to transfer technology because aluminum, zinc, and beryllium are liber-
The United States has had significant experience ated from soil primarily under extremely acidic
dealing with problems similar to those found in conditions. 31
the coal and shale sectors of the former East Bloc, Smokestacks historically have been used to re-
in particular, land reclamation efforts and the re- duce pollution problems from stationary sources
duction of acid mine discharge. The need for as- such as powerplants by elevating emissions above
sistance in the reclamation of surface-mined areas the ground where they may be more effectively
appears greatest in the Czech Republic and Esto- dispersed. However, other environmental prob-
nia. Problems in tailings reclamation and polluted lems are aggravated by tall stacks. In particular,
water discharge from underground mining are tall stacks release pollutants at a sufficient height
greatest in Ukraine and Poland. to allow chemical transformations and precipita-
While the United States does not have a clear tion as acid rain. Increased mobile-source activi-
advantage in the desalinization equipment needed ties—in particular, private car use-create a host
in Poland, there are many opportunities for firms of other pollution problems (such as lead emis-
with experience in mine hydrology. sions, 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 dec-


ade, many technologies have been developed for
!
.r

the control of emissions from fossil fuel use


through pre-combustion fuel cleaning or process-
ing, combustion modifications, and post-combus-
tion cleaning of flue gases for both stationary and
mobile sources. In former East Bloc countries,
however, the lack of regulatory enforcement re-
sulted in a lower level of technology (and applica-
tions) of abatement equipment than that in the
West. Existing abatement equipment appears in-
efficient compared with Western models and is
based on particulate removal, rather than gaseous
components such as S0 2.
The following section examines problems aris-
ing from fuel use in former East Bloc countries.
The focus is on particulate, S0 2, and NOX be-
cause there is insufficient data about emission pat-
terns 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.
Wet flue gas desulfurization system for the Skawina Power
I Particulate Plant in Krakow, Poland: completed absorber vessel with lime
silo and hold tank in foreground.
Particulate matter is composed of dust, mist, ash,
smoke, and fumes. Fuel burning, industrial proc-
esses (particularly smelting), and waste incinera- The size of these particles largely determines
tion are the major sources of manmade particulate their effects. Large particles are the most visible
emissions. The smaller particles (from 0.1 to 1 mi- pollutants and can carry damaging materials, such
cron) are mostly combustion-related, and consist as sulfuric acid, to the surfaces they strike. Small-
of particles of tar (heavy hydrocarbons) and soot er particles, however, present a greater health
(carbon) that escape unburned in the exhaust threat because they can evade the human respira-
gas. 32 In the cyclone (or wet-bottom) furnaces ‘hat tory system’s defense mechanisms.
dominate capacity in the region, as much as 70
percent of the incombustible material in coal Regional Issues
leaves with combustion gases as fly ash, and the Particulate emissions in the former East Bloc area
remainder is collected at a bottom grate as slag, or much more significant problem than in the United
bottom ash.33 States, where they have been substantially re-

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 equip- sion sources had some sort of particulate removal
ment.34 In 1989, particulate emissions from fuel system in place, but most used cyclone technolo-
use and industrial sources35 in Russia (7.8 million gy which is much less effective than ESP and bag-
tons) were 75 percent higher than in the United house filters. Only 20 percent of all equipment
States (4.5 million tons). Particulate emissions in was rated above 90 percent efficiency. Only half of
Poland and Ukraine were less than 2.4 million the relatively few ESP units were rated above 95
tons. High levels of particulate emissions are due percent efficiency, although the standard in the
to the use of high-ash coal, lignite, and shale with- West is generally higher than 99 percent.38
out pre-combustion cleaning and without suffi- A different approach to particulate emissions in
cient post-combustion abatement equipment. this region would be cleaning coal to remove
Table 5-1 shows the major sources and densi- some of the ash matter before combustion (see
ties of regional particulate emissions measured as also chapters 3 and 4). Because the coal burned in
kilograms per capita. (Note that this measurement this region tends to be of high ash content, simple
does not reflect health risks; instead, it is a general coal cleaning could provide a significant reduc-
indicator of the intensity of emissions in the vari- tion in particulate emissions, especially for
ous economies.)36 smaller fuel consumers, where post-combustion
cleaning would not be feasible. In Katowice, Po-
Environmental technology options land, tall powerplant and industrial stacks account
For large sources, two very efficient (99+ percent) for only 55 percent of particulate emissions, with
types of post-combustion cleaning are now com- the remainder coming from low stacks associated
monly in use in the West: electrostatic precipita- with households, district heating plants, and small
industry. 39 cleaning would also reduce particu-
tors (ESP) and baghouse filters. The decision to
use ESPs or baghouse filters is largely determined late emissions in the Czech Republic, Slovakia,
by the coal type used at the boilers; low-sulfur and Hungary whose home heating needs are large-
coals of the Western United States have had resis- ly met by coal. Coal cleaning also provides bene-
tivity problems with ESPs. fits to large coal consumers by reducing the wear
No comprehensive statistics exist on the type of on ESPs, baghouse filters, and sulfur removal
particulate abatement equipment installed in for- systems.
mer East Bloc countries. While Soviet sources
have referred to the use of ESPs at large power- U.S. opportunities to transfer technology
plants, there is little information about their effec- As noted in chapter 3, U.S. firms have a signifi-
tiveness. The Polish environmental handbook cant advantage in hard-coal cleaning technolo-
provides some background information on pollu- gies. However, U.S. experience in cleaning
tion control equipment installed in the region.37 In lignites does not provide a good match for the
1991, 88 percent of stationary particulate emis- 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) 122 Use of high-ash Ekibastuz coal
Czech Republic (1988) 81 Use of locally produced lignite
(primarily powerplants) and indus-
trial facilities:
Powerplants 50%
Industrial sector 35%
Russia (1 989) 57 Coal use, industrial sources
Powerplants 50%
Metallurgy 25%.

Poland (1990) 55 Industrial sector, coal use


Industry 40%
Residential/commercial 30%
Powerplants 30%
Slovak Republic (1988) 51 Lignite use, industrial sector
Ukraine (1989) 44 Industrial processes; use of high-
ash Donets coal
Hungary (1988) 40 Industrial sector, use of low-
quality coal
Industry 50%
Powerplants 20%
Residential 20%.
U.S. (1989) 24* 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&r Pollutanl 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 com-
ESPs have been the main focus of particulate bustion process to form S0 2. 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, Regional Problems


such as the smelting of sulfur-containing ores, There have been very few controls to reduce S0 2
also result in S0 2 emissions. When S0 2 is carried emissions in the region. Instead, taller stacks have
into the upper respiratory system and the lung, it been used at large polluting sources to disperse
can increase airway resistance. While this may be sulfur emissions away from residential areas. As
merely troublesome for a healthy person, it can be shown in table 5-2, the Czech Republic had the
fatal to someone already afflicted with chronic highest density of S0 2 emissions (measured per
bronchitis or emphysema. capita) in the region, due to high-sulfur lignite use.
In recent years, concerns about S0 2 emissions
Since the energy content of this lignite is very low,
have focused on acid rain. Acid rain is the result of
large volumes must be consumed.
an additional chemical change in the atmosphere,
Although not evident from table 5-2, emissions
when some S02 is oxidized to form sulfuric acid
of S02 fell in many countries of the region during
(H 2S0 4). NOX can also be oxidized to form the
the 1980s because of changes in the fuel balance.
pollutant nitric acid (HN0 3). Aerosols containing
During the 1980s, large amounts of natural gas
these acids have a short residence time in the at-
from the Urengoi fields started to move westward
mosphere (from two days to a week), and are then
deposited on the ground through rain or snow. through large-diameter pipelines. Increased gas
Acid rain can lower the pH of lakes, with conse- availability, coupled with a stagnation in oil pro-
quent damage to fish and other aquatic life, and it duction, resulted in a gas-for-oil substitution pro-
is suspected that acid rain harms crops and forests. gram at powerplants in the former Soviet Union.
Coal is generally considered the main contribu- Between 1980 and 1985, natural gas consumption
tor to fuel-based S0 2 emissions. However, be- at powerplants in the former Soviet Union almost
cause of the lack of desulfurization equipment in doubled. 41 The initial increase in gas use came
the refinery system, S0 2 emissions from residual from powerplants located nearest the production
fuel oil are greater than emissions from coal use in region of Western Siberia (the Urals and Volga re-
some regions, even on an energy-equivalent basis. gions) or along the newly constructed export line
Without desulfurization equipment, the sulfur (Ukraine). By the early 1990s, powerplants in
contained in crude oil is concentrated in the heavi- Moldova, Belarus, and Latvia had switched to gas
er components. Because much refinery technolo- use. Natural gas not only replaced high-sulfur re-
gy in the region is based on primary distillation, sidual fuel oil, but also coal and peat. 42
high shares of high-sulfur components, such as re- According to Soviet statistics, S0 2 emissions
sidual fuel oil, are produced, exacerbating the dropped dramatically in the 1980s, from a peak of
problems of sulfur emissions. Although low-sul- 20.2 million tons in 1983 to 16.8 million tons in
fur residual fuel oil is produced in the region, most 1989, a 17-percent decline.43 However, this was
is high- or medium-sulfur grade.40 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.
43
By 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 Environ-
mental and Resource Economics, Allied Social Science meetings, New Orleans (January 1992).
Chapter 5 Energy-Based Environmental Technologies | 121

Country Kg/per capita Main sources

Czech Republic (1988) 200 High-sulfur lignite consumption:


Powerplants 66%
Industrial sector 13%
Bulgaria (1985) 193 High sulfur lignite consumption
Estonia (1989) 124 Use of locally produced shale:
Shale-fired powerplants 70%
Other sources 30%
Hungary (1988) 115 Use of locally produced coal
and residual fuel oil, industrial
activities:
Powerplants 40%
Industry 33%
Home heating 22%
Slovak Republic (1988) 112 Not available
Kazakhstan (1989) 95 Industrial processes
Poland (1990) 90 Coal consumption:
Powerplants 50%
Home heating 25%
Russia (1989) 71 Industrial processes, high-
sulfur residual fuel oil con-
sumption:
Metallurgy 50%
Powerplants 35%
Romania (1989) 67 Industrial activities, coal, and
residual fuel oil
U.S. (1989) 85 Coal consumption (power-
plants), 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 not been used extensively in powerplants, except
installation of post-combustion abatement equip- for Hungary (35 percent of fossil-fired generation)
ment. and Romania (45 percent of fossil-fired genera-
In Central Europe, gas consumption increased tion).
slightly in the 1980s, based on imports from the
Soviet Union. However, in recent years, new im- Environmental technology options
port pricing and the industrial downturn reduced Besides switching to low-sulfur fuels, there are
gas use in the region. Gas was used primarily in many ways to reduce S0 2 emissions. Only the
the industrial sector, with the residential sector most common commercial practices are explored
only recently increasing in importance. Gas has
122 I Fueling Reform: Energy Technologies for the Former East Bloc

here. Sulfur can be removed from the fuel before sulfur is in pyritic components. Donets Basin coal
combustion through coal cleaning and desulfu- has from 60 to 75 percent of sulfur in pyrites.47
rization of fuel oil. Modifications can be made in Therefore, high-efficiency conventional coal
combustion, or exhaust gases can be treated after cleaning could reduce sulfur emissions by up to 50
combustion. percent. However, since the sulfur content of Do-
Little has been done in the region to reduce S02 nets coal is high (from 2.5 to 3.5 percent sulfur),
emissions. Only a small amount of coal is cleaned S02 emissions even with coal cleaning would still
or processed, and there is little abatement equip- be much higher than EU standards would allow.
ment in place. In Poland, only 58 of the almost Desulfurization of fuel oil at refineries (hydro-
1,600 S02-emitting sources regulated had S0 2 treating) is particularly important in this region
abatement equipment, and only six of these had because much of the refining capacity, especially
sulfur removal efficiencies greater than 90 per- in the FSU, is based on primary distillation, which
cent. Almost half the S0 2 abatement equipment results in high shares of heavier components, such
had efficiencies of less than 50 percent. 44 Only as residual fuel oil. Residual fuel oil accounted for
three powerplants in the FSU had scrubbers, and the largest share of fuel-based S0 2 emissions in
these were experimental units.
Russia, Belarus, Moldova, and Lithuania, and a
Coal cleaning can reduce the amount of sulfur
significant share of S0 2 emissions in Romania.
in fuel before combustion. It is also the only meth-
Sulfur scrubbers can be used to reduce S0 2 emis-
od, besides fuel switching, to address emissions
sions, but fuel oil-consuming plants are usually
from small boilers and individual consumers in
dual-fired, using natural gas when it is available in
the residential sector. Although coal cleaning
the summer, which reduces the economic effec-
technologies are advancing rapidly, commercial
coal cleaning can presently remove only the pyrit- tiveness of installing abatement equipment.48
ic sulfur components found in coal, not the organ- Several technologies reduce S0 2 in the com-
ic sulfur. In Polish coal, the share of organic sulfur bustion process. Fluidized-bed combustion
is high (60 percent) .45 Since conventional coal (FBC) employs a circulating bed design to capture
cleaning can remove 30 to 70 percent of the pyritic almost 95 percent of the sulfur (compared with 85
sulfur, 46 cleaning of Polish coal would offer only a percent capture in deep-bed designs, and 60 per-
10 to 30 percent reduction in S0 2 emissions. cent in shallow-bed designs) .49 The circulating
While cleaning Polish coal provides a number of bed also has the best performance in reducing NOX
benefits (e.g., reducing particulate, lowering emissions. In the FSU, some FBC boilers have
transport needs), it does not provide a significant been installed in industry, and a 135-megawatt
reduction in sulfur emissions. In Ukraine, on the (MW) bubbling-bed utility version has been under
other hand, coal cleaning offers a larger reduction development, using coal from the Kansk-Achinsk
in sulfur emissions, because a large share of the 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), Te-
ploenergetika, 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 emis- (LIMB) is a promising type of combustion
sions, because Kansk-Achinsk coal is a low-sulfur technology designed to reduce both S0 2 and NOX
lignite. Another combustion modification cur- emissions. It also reduces particulate emission
rently being explored is furnace sorbent injection. levels. It is a relatively simple system and attrac-
This technology injects a dry sorbent (usually tive for retrofit applications. LIMB should
lime) into the furnace, where it reacts with sulfur achieve reductions of 50 to 60 percent in S0 2 and
and forms solid particles, which can be collected 50 percent in NOX emissions. However, these lev-
by the particulate control device. While S0 2 re- els of reduction might not be enough to meet stan-
moval can be up to 65 percent, this still might not d a r d s . 54 Advanced FGD systems, which
be sufficient to meet regulations.51 potentially reduce both S0 2 and NOX to com-
Flue-gas desulfurization (FGD), a post-com- pliance levels are under long-term develop-
bustion S0 2 removal technology, is the most ment. 55
widespread method in the West. FGD systems use FGD systems could play a role in reducing SOL
a sorbent to react with and scrub sulfur directly emissions in some former East Bloc countries. If
from flue gas. A 90-percent reduction or more of regulatory priorities mirror those of the West,
S0 2 is common with wet scrubbers. The disad-
standards will be strictest and the need for FGD
vantages of wet scrubbers include space and ener-
greatest at large fuel-consuming units such as
gy requirements and relatively high retrofit costs.
powerplants. The facilities best suited to the use of
An additional problem is the high-volume of by-
FGDs or similar sulfur-abatement equipment are
product. 52 The choice of FGD technologies often
the coal-fired powerplants in Poland, the Czech
depends on waste-disposal regulations. The spray
Republic, Ukraine, and Russia, and possibly the
dryer FGD is the second-most-common system in
use and has been popular in Europe. This FGD shale-fired plants in Estonia. Post-combustion re-
process injects lime into an absorber vessel, which moval of sulfur would probably not make sense in
reacts with the sulfur, leaving dry particles of the Slovakia or Bulgaria (powerplants are small),
sulfur for collection in the particulate filter sys- Hungary (coal consumption has been displaced by
tem. The advantages of the spray dryer system in- gas and nuclear power), and Belarus or Moldova
clude lower energy losses, ease of handling the (large powerplants have been converted to gas,
byproduct, and lower capital and opera ing and S02 emissions are from residual fuel oil at
costs. 53 smaller facilities). In Ukraine, a new coal-fired
Combined S02 and NOX control systems are powerplant (a 300-MW unit at Dobrotvor, on the
presently being developed. A combined appro ach border with Poland) received a $50-million in-
to post-combustion cleaning would offer lower to- vestment grant from the German Environmental
tal capital and operating costs than the installation Ministry for the installation of FGD and particu-
of separate equipment for control of each pollut- late control technologies.56 In Poland, a Dutch
ant. The limestone-injection, multi-stage burners 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.
54
1 bid., pp. 67-68.
55
1 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 cess air in the furnace unit. For large, pulverized-
for two others.57 The Czech government has coal boilers, the highest rate of NO X emissions
called for the installation of FGD equipment at the occurs at cyclone furnaces, followed by wall-freed
country’s largest and most modem powerplant, units and tangential-fired boilers.62 Cyclone fur-
Prunerov II, and funding has been received for this naces are common throughout the former East
project from the World Bank, the EU, and the Ger- Bloc. For example, Ukraine alone has 85 of these
man government.58 units.63 The health effects of long-term NOX expo-
sure are still unknown, but emissions of NOX are
U.S. opportunities to transfer technology linked to acid precipitation and ozone formation.
Technologies for sulfur abatement extensively The major sources of NOX emissions include
used and manufactured by U.S. firms have some cars and trucks, powerplants, and the industrial
advantages in the region. FGD systems in the sector (from fuel use rather than industrial proc-
United States can handle coals with much higher esses). With the advent of catalytic converters on
sulfur contents than their overseas counterparts. 59 cars, NOX emissions have decreased in many
This could be a significant advantage in countries countries, even where vehicular ownership in-
with high-sulfur coal such as the Czech Republic creased. For example, in the United States, NO X
and Ukraine. The United States also holds an edge emissions from the transport sector as a whole fell
in FBC, having the largest share of installed ca- from 9.8 million metric tons in 1980 to 7.9 million
pacity (among International Energy Agency tons in 1989.64 In the former East Bloc, most NO X
members) of circulating-bed plants.60 However, emissions come from industry, although most
Europe has greater experience in spray dryers.61 large cities experience high NOX levels due to the
use of cars without catalytic converters. More-
over, the future of NOX emissions in the region is
| Nitrogen Oxides
presently unclear. In many countries, the low level
NOX is a mixture of nitric oxide (NO) and N02. of private car transport has kept NOX emissions at
When combustion occurs at high temperatures— artificially low levels. Increases in car ownership
regardless of the fuel used—some nitrogen con- may significantly increase NO X emissions.
tained in the air is oxidized to NO and N0 2
(thermal NOX). Nitrogen contained in some fuels,
such as coal, is also oxidized during the combus- Regional Problems
tion process (fuel NOX). At stationary sources, the One of the difficulties in assessing NOX emissions
quantity of NOX emissions is determined by the in former East Bloc countries is that the emission
temperature of combustion and the amount of ex- statistics for thermal NO X 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) 83 Stationary sources 75%


Mobile sources 25%
Romania (1990) 39 Not available
Poland (1990) 36 Stationary sources 67% (half
from powerplants)
Mobile sources 33%
Slovak Republic (1988) 37 Stationary sources 80%
Mobile sources 2570
Bulgaria (1985) 34 Not available
Estonia (1989) 31 Stationary sources 55%
Mobile sources 45%.
Hungary (1988) 24 Stationary sources 55%
Mobile sources 45%
U.S (1989) 80 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 SEnwronmental Protect Ion
Agency, Natlona/Aii Po//utant Emission Estimates 1940-1989(Research Triangle Park, NC March 1991)

to verify. Furthermore, for many former Soviet re- important role in NOX emission in the Czech Re-
publics, no data on mobile-source emissions by public than they do in the United States.
specific pollutant have been reported.
To calculate mobile-source NO X emissions, a Environmental technology options
large data base containing information on gaso- Combustion modifications were the first methods
line consumption, engine efficiency, operating employed to reduce NOX emissions in the West.
conditions, miles driven, emissions, and other Originally used to reduce mobile-source emis-
factors for many categories of transport modes is sions, they are now used almost exclusively on
needed. However, most of this data have not been stationary sources. The success of combustion
tracked, recorded, or reported. modification methods depends on the type of fur-
Therefore, the emission figures in table 5-3 nace and burner. In general, wall- and tangentially
must be approached with some caution. Although fired units are easier to retrofit for lOW-NOX burn-
the Czech Republic again tops the list of polluters, ers than are cyclone furnaces. In the cyclone units
the density of NO X emissions in the Czech Repub- common to the FSU, fuel reburning is thought to
lic was very similar to that of the United States. be the only option to reducing NOX emissions dur-
However, stationary sources play a much more ing combustion.65

bslbid.
126 I Fueling Reform: Energy Technologies for the Former East Bloc

For post-combustion NOX removal, selective with U.S. reburn technology was sponsored by the
catalytic reduction (SCR) has been the primary U.S. Environmental Protection Agency, working
commercialized technology. While SCR technol- with ABB Combustion Engineering (Windsor,
ogy is much more efficient than combustion mod- Connecticut). While retrofitting was very labor-
ification in removing NOX (as high as 90 percent intensive, this factor was not a deterrent in
removal, compared with approximately 50 per- Ukraine, where wages for skilled workers are very
cent for combustion modification), SCR systems low. Reburn technology was also the cheapest
have high operating and capital costs compared method for retrofitting cyclone boilers.67
with combustion modification. In post-combustion NOX removal, however,
A second, recently commercialized technique the United States is at a disadvantage. While SCR
for removing NOX from flue gases is selective, has been commonly used in gas-turbine cogenera-
noncatalytic reduction (SNCR). This system has tion and combined-cycle systems in the United
lower costs and lower NOX removal efficiencies States, the first full-scale utility applications (one
(about 50 percent) than SCR.66 Also, SCNR is ex- coal-fired, one oil/gas-fired powerplant) are just
tremely sensitive, and additional NOX can form if starting up. Meanwhile, tens of thousands of
temperatures are too high. Another problem pre- megawatts of fossil-fired boilers are operating
venting widespread use of SNCR is that some NO with SCR in Japan and Europe. 68
is converted to N20, a greenhouse gas.
Advanced generation technologies, such as | Other Pollution Problems
high-efficiency gas turbines, also emit NO X. In- Hundreds of other pollution problems are noted
jection of steam from the exhaust boiler into the during fuel combustion. Principal among them are
gas turbine burner can be used to control NOx hydrocarbon, carbon monoxide, and lead emis-
emissions from the basic gas turbine. Convention- sions and photochemical smog formation. Motor
al NOX control techniques, such as combustion vehicle traffic is a major source of these problems.
control, SCR, or SNCR can also be employed. There are relatively few trucks in the FSU
compared with the United States,69 but the poten-
U.S. opportunities to transfer technology tial for expanding truck transport in the former
The primary advantage of U.S. firms in reducing East Bloc is substantial. Under almost any scenar-
NO X emissions at stationary sources is reburn io of economic development, trucks will play a
technology, which can reduce NOX emissions by much greater role in freight transport, particularly
up to 50 percent. Reburning is an in-furnace tech- if regions, industries, and consumers have more
nique for reducing NOX by creating a reducing autonomy in the production and purchase of
zone downstream from the primary combustor. goods.
The injection of natural gas into the reducing zone The pattern of passenger transport in the region
with insufficient oxygen bums the fuel complete- varies from other industrial countries, as well.
ly. A demonstration project to retrofit a power- Passenger transport has been dominated by col-
plant boiler at the Ladyzhin PowerPlant (located lective carriers (buses and trains), although pri-
in Ukraine, 150 kilometers southeast of Kiev) vate 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 Bloc countries than in the West. Therefore, an im-
in the FSU.70 In Central Europe, car ownership portant engine emission control system under de-
levels are higher, but vary significantly.71 There is velopment for retrofit to four-stroke engines is the
tremendous potential for motor vehicle usage to lean combustion system. This system uses a mi-
increase rapidly if market conditions permit. croprocessor with a lean-mixture sensor, and
As noted earlier, data on emissions from mo- works to ensure the leanest fuel mixture under va-
bile sources are insufficient to perform a detailed rying engine loads. This system not only reduces
analysis at this point. Even given the scant data, it emissions, but it also increases overall fuel effi-
appears that emissions are quite high, despite the ciency. Recentl y, a Maryland firm won a patent for
low level of truck transport and private car owner- its lean-bum design, which can be retrofitted to
ship. For example, in 1987 for the Soviet Union as pre-1980 cars and trucks. 73 While emission reduc-
a whole, hydrocarbon emissions from mobile tions with lean-bum technology are not as large as
sources were at 90 percent of U.S. levels for mo- with catalytic converters, lean bum technology
bile sources. Carbon monoxide was at 65 percent, could play an important role in reducing automo-
and NOX was at 25 percent, 72 even though the U.S. tive emissions in the region.
had almost eight times the number of cars and
three times the amount of freight haulage (mea- U.S. opportunities to transfer technology
sured as ton-kilometers) by trucks. Opportunities to transfer U.S. mobile source
Emissions control equipment on cars manufac- emissions abatement technologies are limited in
tured in the region has been minimal. Very few ve- former East Bloc countries. U.S. firms face stiff
hicles manufactured in the FSU were equipped competition from European and Japanese firms
with catalytic converters, owing in part to short- that have significant manufacturing capacity and
ages of platinum and palladium and the low pro- technical expertise. Also, vehicle emissions are
duction levels of unleaded gasoline. not likely to be a pressing concern in former East
Bloc countries because of the present low level of
Environmental technology options car ownership. Moreover, it is likely that emis-
Most domestic auto industries, in joint ventures sions control technologies, such as catalytic con-
with Western firms, are shifting to production of verters, will be tied in with the automobile
cars with catalytic converters. But due to financial manufacturing process.
constraints and the lack of unleaded gasoline, it is
not clear how rapidly these new vehicles will OUTLOOK FOR U.S. TECHNOLOGY
penetrate the market. The problem of the highly TRANSFER
polluting existing car fleet will remain for many U.S. abatement equipment manufacturers are well
years because cars are typically held and operated positioned to meet some regional needs (see table
for much longer periods of time in former East 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 Po-
land ( 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 Monitoring equipment, air and water purification systems for refin-
eries, low-sulfur residual fuel oil production, unleaded gasoline pro-
duction, low NOX combustion modifications, lean-burn, mobile-
source reductions.
Russia Offshore drilling expertise, arctic operations and equipment reclama-
tion of mined areas, ESPs or baghouse filters.
Ukraine Coal reclamation, acid mine drainage abatement, coal cleaning, FGD
for powerplants (when operated on coal year-round), ESPs or bag-
house filters for particulate removal.
Kazakhstan Coal reclamation, ESPs or baghouse filters for particulate removal.
The Baltics Reclamation of shale areas (Estonia), abatement equipment to re-
duce particulate and sulfur dioxide emissions from shale combus-
tion.
Poland Control of saline discharge from mines, reclamation of tailing piles,
coal cleaning, FGD at large power plants, ESPs or baghouse filters
for particulate removal.
Czech Republic Reclamation of surface mined areas, coal cleaning, FGD at large
powerplants, ESPs or baghouse filters for particulate removal.
Slovak Republic Coal cleaning.
Hungary 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, stream. FGD systems might be of interest to avoid
baghouse filters, reburn technology for lOW-NOX future fines, but much of the electricity in the for-
combustion, lean-bum technology for mobile mer East Bloc is still sold at low rates, leaving the
sources, desulfurization equipment for refineries, power company without means to invest. Thus
and coal cleaning and improved mining tech- government export financing may be necessary.
niques. U.S. firms have had a significant amount However, the transboundary effects of some pol-
of experience in a range of activities that are need- lutants (S0 2 and NOX, in particular) mean that
ed to produce fuels with less environmental dam- Western European countries are more impacted by
age and to mitigate the damage that has already pollution coming from the region than the United
occurred. For instance, the sensitive tundra eco- States is. Western Europe thus has additional in-
system in Russia could benefit from some of the centive to offer financial and technical support to
lessons learned in Alaska. U.S. mining firms also address these issues.
have more experience dealing with acid mine In addition, U.S. regulatory standards and the
drainage than does any other country in the world, phase-in periods for the Clean Air Act have put
as well as extensive experience in land reclama- U.S. firms that supply pollution abatement equip-
tion. ment at a competitive disadvantage in the region.
However, unlike energy supply investments, The EU standards to which many countries in the
most environmental improvements are diffilcult to region aspire are, in general, stricter than U.S.
finance because they produce no direct revenue standards, giving European (and Japanese)
t

Chapter 5 Energy-Based Environmental Technologies | 129

manufacturers of abatement equipment a market mental law in the Czech Republic, annual pollu-
advantage. Because of differences in regulatory tion fees for a 1,000-MW powerplant will rise
framework, European and Japanese firms have steadily from 80 million to 200 million korunas
much more experience in retrofit designs and ($2.4 million to $6 million), but the installation of
equipment for powerplant abatement equipment abatement equipment would cost 12 billion
than do U.S. firms. For example, while U.S. low- korunas ($360 million) .77 In this case, the fee for
NO X combustion modifications provide a low- pollution is smaller than interest on a loan to
cost means of reducing NO X emissions, the install a scrubber and particulate removal device.
reductions are not enough to meet upcoming EU Abatement will be very expensive throughout
standards. Differences in regulatory regimes have the region. Although labor and material costs
resulted in higher prices for some U.S. domestic might be lower, the capital requirements for abate-
equipment as compared with other countries. For ment control emission, particularly for air purifi-
example, the allowance for some operational cation, are high. For example, the costs of FGD
downtime of control systems due to failure, as in alone for a 1,000-MW coal-fired powerplant (in
Germany and Japan, lowers FGD system costs in the United States) would be $170 million. Adding
comparison with the United States, where no peri-
particulate removal equipment would bring this
od of nonattainment is allowed, and systems must
figure to over $300 million.78 Assistance would
be built with additional redundancies.74
be needed not only for capital investments, but
Environmental technology transfer is also
also for operations and maintenance ($60 million
plagued by a number of problems in former East
for the annual operation and maintenance of the
Bloc countries. These include the lack of expe-
above-noted FGD system), because electricity
rience in regulatory enforcement, the uncertain
results of economic reform, the costs of environ- rates are presently too low to generate sufficient
mental technologies, and the number of other revenue to support abatement programs.
pressing environmental problems not directly re- Another issue is how to plan environmental
lated to energy. protection for an economy in transition. In addi-
Lack of regulatory enforcement will delay en- tion to the immediate difficulties of financing and
vironmental reform. Enforcement is being post- currency convertibility, these countries must de-
poned in part by the need first to develop new sign environmental regulation for a mix of eco-
environmental laws and regulations.75 But the en- nomic activities that have no historic basis in the
forcement problem also stems from overlapping region. While NOX and hydrocarbon emissions
and uncertain authorities among ministries, as are not a significant concern at this point, owner-
well as competition between republic-level and ship levels of private cars can increase quite rapid-
local authorities.76 ly, which could present new abatement
The uncertain path of regulatory reforms re- requirements for both mobile and stationary
duces the incentives to install abatement equip- sources. Further, a large share of the technology
ment. Even in the Czech Republic, where transfer needs identified in chapter 3 to stimulate
regulatory reform has been greatest, there is little fuel production have environmental impacts of
incentive. For example, under the new environ- their own. New types of drilling muds might re-

741EA, 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 re- the impact of fuel production on human health.
mote sensing and exploration could damage Instead, it is the health of surrounding ecosystems
pristine regions; increased drilling and production that is at risk, but the economies of the region
from offshore sites could result in increased spills; might not be able to afford such protection in the
and coal cleaning wastes need reclamation and short term.
proper disposal systems.
The pace of economic reform is also an impor- CONCLUSIONS
tant aspect of pollution planning. For example, At present, economic, scientific, and regulatory
coal production from the Donets basin has long uncertainties make specific recommendations for
been subsidized by the Soviet, and now Ukraini- U.S. involvement in the transfer of environmental
an, government. The Donets basin produces a technology and expertise to the energy sector dif-
high energy value coal (although it is also high in ficult. Serious consideration should be given to
sulfur and ash) and is located near the sources of projects that will play a significant role in protect-
demand. However, mines must now penetrate ing human health, which means thinking primari-
deeper, to less economical portions of the basin. ly about pollution at the ground level (low stacks
Production costs and incremental capital require- and mobile sources). The Environmental Action
ments are very high, and production has been fall- Programme (EAP),79 a product of the collabora-
ing. The Ukrainian government will need to tive efforts of Western governments and multilat-
decide whether to invest billions of dollars in sul- eral organizations, has recommended that health
fur scrubbers for powerplants that currently use and productivity costs be used as guiding priori-
Donets coal, or to shut mines and purchase natural ties for environmental policy formulation and for
gas from Russia or Turkmenistan. Until subsidies investment in environmental cleanup.
are removed throughout the economy (resulting in Perhaps the best way to reduce the impacts of
large energy savings) and some sort of safety net is fuel production, processing, and transportation, is
established to mitigate labor dislocations, the sig- to plan environmental protection as part of the
nals for environmental technology will be ad- transition to a market economy. Environmental
verse. mitigation needs to be encompassed in all new
Finally, it is unclear whether the pollution from Western activities in the region, from coal clean-
fuel production, processing, transportation, and ing operations to offshore drilling activities.
consumption is the most pressing environmental Finally, it is important to remember that envi-
problem in some countries in the region. For ex- ronmental problems cannot be addressed without
ample, Belarus and Ukraine still have to face the considering the wider context of the economies in
long-term consequences of the Chernobyl acci- transition. Environmental problems are linked to a
dent. Toxic and hazardous waste disposal has re- host of issues that must be addressed in the near
sulted in extremely dangerous environmental future: investment and industrial policy, energy
conditions. Many areas do not have safe drinking policy, subsidies, unemployment, and privatiza-
water. Also, in the FSU, since fuel production, tion. Examining environmental problems in isola-
particularly of oil and gas, usually occurs away tion from economic and social policies will result
from population centers, it is difficult to correlate 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 forenvi-
ronmental 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 fun-
damental changes in the political and social orders of the societies
of the former East Bloc. The relationship between economic re-
form and energy technology transfer is an interactive one. Al-
though the introduction of new energy technologies can facilitate
reform, undue slowness in economic restructuring can undermine
the effectiveness of energy technology transfer. Without the adop-
tion of market structures and business practices, the moderniza-
tion 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 re-
form, especially in the former Soviet Union (FSU), we must con-
sider 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 ca-
pitalist economies, sectoral economic restructuring, the estab-
lishment 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 democ-
racy.
Of all these processes of transformation, the most important
change is the establishment of a new political order that embodies St. Andrew’s Church, Kiev, Ukraine.
a popular consensus about the need for economic reform. Without”
a stable and popularly recognized political order it is difficult to
| 131
achieve popular consensus and then to translate it into political
132 I Fueling Reform: Energy Technologies for the Former East Bloc

action on questions of economic reform. Govern- THE VANGUARD: COUNTRIES IN THE


ments that attempt to move too quickly without FIRST TIER OF REFORM
substantial popular and political support for their
Poland, the Czech Republic, and Hungary occupy
programs run the risk of failure. As economist
the first tier of reform. They were the quickest to
Stanley Fischer has observed, “[T]he pace of re-
establish a political consensus on the need for
form cannot get too far ahead of its political
democratic and market transformations and to
base.”1
translate this political will into effective mecha-
Democratization may not be an absolute pre-
nisms for the implementation of reform programs.
requisite to the establishment of this popular con-
sensus and the enactment of an effective economic They can assimilate the broadest range of U.S.
reform program. However, it is not surprising that programs in the region.
the Central European countries, which have
moved most quickly to replace old Communist- | Historical and Political Background
era political structures with new constitutional or- The Poles, Czechs, and Hungarians moved so
ders and popularly elected governments, have also quickly and decisively for several reasons, among
made the most progress in pursuing economic re- the most important of which is their historical
form. Other former East Bloc countries, where
legacy. Between World War I and World War II,
there is less popular consensus about reform and
these countries were politically independent, op-
which have yet to consolidate new political struc-
erated functioning (though problematic) represen-
tures, have moved much more slowly and less suc-
tative constitutional orders, and had market-based
cessfully to stabilize their economies and lay the
economies. The memory of this period has been
foundations for a new economic system. The re-
strong, providing a base of experience in the op-
sult has been a multi-tiered portrait of reform in
the region, with three groups of countries at differ- eration of participatory political institutions and
ent levels of transformation. market economies, as well as previously tested
As chapter 8 will discuss, it is important for models for reform.
U.S. policymakers to consider a country’s prog- Another factor in the rapid pace of economic re-
ress toward reform, because the degree of success form in Poland and Hungary is the fact that their
in economic and political restructuring will affect economies were never fully “sovietized.” Polish
the appropriateness of U.S. policy. In particular, agriculture remained, for the most part, in private
assistance for those countries that have made the hands. Hungary developed a strong semiprivate
least progress toward reform will be most useful if service and small-scale manufacturing sector that
it emphasizes policy changes, while the more ad- has been an important factor in economic transi-
vanced countries can benefit more from develop- tion. Also, an underground economy thrived in
ment assistance. Similarly, trade and development both countries.
programs may be more effective and appropriate The close proximity of the Polish, Czech, and
in promoting U.S. goals in those countries that Hungarian lands to Western Europe also provided
have already made substantial progress in reform. 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 ethnical- sector is now the engine of Polish economic
ly homogeneous nature of these countries has growth. Although privatization of large-scale in-
bolstered efforts to break decisively with Commu- dustry is just beginning in earnest, almost all
nist-era institutions and policies (perceived as small-scale retail business and most medium-
having been forced upon the area from outside), sized enterprises have been privatized. Employ-
promoted social stability, and facilitated the ment in Poland’s non-agricultural private sector,
construction of representative political institu- which accounted for only 13 percent of the work
tions. 2 force in 1989, has expanded to 45 percent. And, in
1992, the expansion of private employment
| Poland (500,000 jobs) completely compensated for the
Poland launched the earliest, most radical, and to loss of state-sector jobs. Private employment now
date, the most successful reform program. Under constitutes almost 60 percent of the total Polish
“shock therapy,” the state drastically cut subsidies work force.5
to industry, placed strict controls on the budget, Nevertheless, the nature and speed of Poland’s
checked the inflationary growth of wages, and transition have produced political problems. Al-
raised interest rates. Backed by an International though the country appears to have turned the eco-
Monetary Fund-sponsored currency stabilization nomic comer, and significant numbers of Polish
fund, the government devalued the zloty and citizens have prospered under the new program,
introduced currency convertibility. Simulta- large portions of the population, especially senior
neously, Poland started the process of privatiza- citizens and the hundreds of thousands of workers
tion. Finally, prices were freed and laws on foreign still employed in unreformed sectors of the state
trade and investment were liberalized to encour- economy, have suffered and face uncertain fu-
age capital investment and export activity. tures.
The initial costs of the Polish program were During 1992 and 1993, dissatisfaction with the
quite high: industrial output declined initially by disproportionate benefits of economic reform,
24 percent, and unemployment, almost nonexist- and nostalgia for the social protections provided
ent in Communist times, shot up to 15.7 percent by the previous state-sponsored economy, fueled
by the end of 1993. However, inflation, which had resistance to the reform program in Poland’s polit-
reached 2,000 percent in late 1989, is currently ically fractured parliament In May 1993, Presi-
running at about 35 percent.3 After several years dent Lech Walesa dissolved parliament after the
of economic contraction, Poland’s gross domestic reformist government of Hannah Suchocka lost a
product (GDP) rose in 1992 by 1 percent, and in- no-confidence vote to Solidarity-led forces de-
dustrial production expanded by 4.2 percent-the manding pay and pension increases. In elections
first economic growth in any post-Communist in September 1993, a coalition of ex-Communist
country. In 1993, Polish GDP grew by 4 percent.4 and peasant parties came into power.
Even more important are the structural changes Although these post-Communist parties cam-
the Polish economy has experienced. The private paigned 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 entrepre-
neurs and increased spending to mitigate social
hardships. But a retreat on the core issues of eco-
nomic reform is unlikely because all parties know
that critical international financial support for Po-
land 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 poli-
cies of the previous government, his government
would continue the economic policies instituted
6
by its predecessors. In March 1994, the new co-
alition passed a fiscally conservative 1994 budget Vltava Rive< Prague, Czechoslovakia
that limits the deficit to 4.1 percent of the GDP.
its value against Western currencies, and the
Prognosis for Reform Czech banking system is the most highly devel-
Poland is well on the way to market reform. So oped in the region. Virtually all consumer service
much progress has already been made in restruc- enterprises have been privatized, mostly through
turing and stabilizing the economy that many ob- private sales and auctions.
servers feel that the country has passed the point of Due to a more cautious approach toward eco-
no return. The biggest threat to continued success nomic transformation, however, the Czech econo-
in economic transformation is political backslid- my has not experienced the expansion that Poland
ing in the legislature. But even this potential reac- has. Moreover, several political and economic
tion against reform would only delay economic shocks have hindered progress. First, the econo-
progress, not reverse the course of reform. my suffered a severe shock from the division of
Czechoslovakia into two countries.7 Further, a na-
| Czech Republic tional value-added tax, introduced in January
The Czech economy, which once was one of the 1993, had a greater-than-expected effect on the
leading industrial powers of Europe, has been inflation rate, which ran at 20 percent in 1993,
very responsive to change. The Czech Republic compared with 11 percent in 1992. GDP fell by 7
entered into a program of fiscal austerity and percent in 1992 but remained steady during 1993.
shock therapy and in some ways enjoys better eco- Industrial production fell by over 5 percent during
nomic conditions than Poland. In 1992 and 1993, 1993.8 And finally, despite levels of unemploy-
it had the lowest regional inflation rate. Its per ment that are among the lowest in Europe, econo-
capita indebtedness is much lower than that of Po- mists suspect that levels of real underemployment
land or Hungary. The country ran a $268 million and unemployment are higher.
trade surplus in 1993. Unemployment stood at The Czechs are counting on privatization as the
just 3.5 percent at the end of 1993. Monetary basis of economic transformation. Privatization is
policy has been tight, the koruna has maintained particularly important in the Czech Republic be-

6 RFEIRL Daily Report (Dec. 30, 1993).


7
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 sec- al and institutional change, as well as stabilizing
tor was virtually nonexistent during the the economy. Czech entrepreneurism has shown
Communist era. The Czechs have undertaken two new vibrancy in an energetic private economy.
ambitious and innovative waves of privatization, Like Poland, the country has laid a firm basis for
involving 1,500 state firms, based on the distribu- future growth.l0 Potential short-term setbacks in
tion of privatization vouchers to all Czech citi- the areas of privatization and finance should not
zens. By distributing vouchers to all adults, the threaten the success of long-term transformations
Czechs solved two problems. They created a capi- already well under way.
tal market where there had been very little liquid-
ity, and they gave each citizen a chance to | Hungary
participate in the privatization process. The Although Hungary was at the forefront of Central
Czechs’ voucher scheme was the first of its kind European economic reform during the Commu-
and is serving as a model for privatization in nist era, the country currently lags behind Poland
Russia. and the Czech Republic. Hungary’s problems are
Although privatization has proceeded more due partly to the high levels of foreign debt (at
slowly than planned, it has produced substantial $2,000 per person, the highest in the world) that it
results. Over 50 percent of the country’s 10 mil- inherited from the Communist era. The country
lion citizens have bought shares. By the end of has also suffered from the influx of 100,000 ref-
1993,60 percent of the country’s large enterprises ugees from the Yugoslav civil war and the disrup-
had been privatized. The Czech private sector ac- tion of trade ties caused by the trade embargo on
counted for almost half of 1993 GDP and 23 per- Yugoslavia.
cent of total employment.9 But Hungary’s economic problems are also
Yet there are questions about the privatization caused by the choices it has made with regard to
process and the depth of change in the Czech econ- reform. Instead of launching economic shock
omy. High-pitched speculation in vouchers and therapy, like the Poles and Czechs, Hungary pur-
unrealistic promises about returns on investment sued a deliberately more cautious strategy, hoping
funds may have created serious financial risks. If to minimize the social costs of change. Precisely
large investment funds are unable to fulfill their because there has been no economic “big bang” in
high-yield promises, the government may have to Hungary, the costs of reform have been strung out
step in to restore liquidity to capital markets or and even accentuated. Hungary is experiencing
bail out bankrupt funds. This would place severe many of the negative effects of economic reform
stress on the state budget and slow economic re- without many of its benefits.
covery. Economists are also concerned about high Despite a sizable private sector (estimated at 40
levels of inter-enterprise debt and the fact that one- percent of GDP) and the highest levels of foreign
third of all privatized enterprises are in de facto investment in the former East Bloc, the economy
bankruptcy. remains in recession. A privatization program has
been launched, but it is proceeding slowly, in part
Prognosis for Reform because Hungary has depended on foreign capital
Despite the tremendous political and economic to provide funds for the privatization process and
shocks of the past two years, the Czechs have has not developed the financial structures neces-
made substantial progress in introducing structur- sary 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 per- further inflame tensions within the country and
cent of the 1992 work force was employed in the with Hungary’s neighbors.
private sector.11 The country’s economic ills and political
There are signs, however, of stabilization and troubles reduced support for radical reform in the
the beginnings of economic growth. Hungarian parliament. Political maneuvering in preparation
GDP, which fell by an estimated 5 percent in 1992, for 1994 general elections and government dis-
may have leveled off in 1993.12 Industrial produc- putes with the independent media also impeded
tion increased by over 3 percent in 1993. 13 Hunga- efforts to push ahead more aggressively with re-
ry’s annual inflation rate remained steady at 23 structuring. One of the major issues of the 1994
percent in 1992 and 1993. Throughout 1993, un- Parliamentary election was the proper balance be-
employment hovered at about 13 percent.14 The tween the requirements of economic transforma-
government tried to remedy some of its problems tion and the need to provide social protections to
in 1992 with the passage of a strict bankruptcy the many people adversely affected by the re-
law. And in March 1994, the government an- forms.
nounced the Small Shareholders Program, a new In the first round of elections in May 1994, the
mass privatization program that will lend citizens HSP led with one third of the vote. The HDF came
about $1,000 each to buy shares in privatized state in third with only 12 percent. The HSP is likely to
enterprises. form a governing coalition when the elections are
The political situation is a greater cause of con- complete.
cern than the economy. During 1993, the govern-
ment coalition, led by the Hungarian Democratic Prognosis for Reform
Forum (HDF), came under increased pressure
Despite Hungary’s problems, the country’s
from both left and right. On the left, as in Poland,
emerging market economy and high engagement
thousands of pensioners and workers hurt by the with foreign investors place it firmly within the
economic decline demanded that the government vanguard of regional economic reform. Like both
spend more money on social protection measures.
Poland and the Czech Republic, Hungary is build-
This fueled renewed support for the Hungarian ing a sound legal and institutional infrastructure
Socialist Party (HSP), the successor to the Com-
for long-term economic growth.] 5 The victory of
munists, which, in alliance with trade unions, ad-
ex-communists at the polls may further compli-
vocated a social-democratic type program,
cate reform, but is unlikely to undermine progress
On the political right, an increasingly national- already made.
istic tone in Hungarian politics manifested itself
in exchanges of criticism with Slovakia and Ro-
mania over the status of Hungarian minorities liv- SLOW REFORMERS: COUNTRIES IN THE
ing in those countries. The emergence of Istvan SECOND TIER OF REFORM
Csurka, a right-wing politician pressing for poli- Kazakhstan and Russia occupy the next tier of re-
cies more favorable to “native Hungarians,” may form. 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 em- areas and much of Siberia-were often over-ex-
barked on programs of radical economic reform, ploited for one product such as oil and were turned
the course of change has not yet been decisively into economic dependencies, supported by subsi-
resolved in Almaty or Moscow. This indecisive- dies and material aid from the center.
ness over reform will limit U.S. policy options, When the Soviet Union broke up, this complex
making it more difficult to promote reform and en- system of economic inter-relations was tom apart,
ergy sector modernization simultaneously. leaving 15 separate countries with highly interde-
pendent economies based on economically irra-
| Historical and Political Background tional systems of pricing, distribution, and
Kazakhstan is a Central Asian country with no manufacture. Although Moscow is no longer the
legacy of prior independence. The second largest center of the Soviet empire, it is still by far the
republic of the FSU, Kazakhstan is an ethnically most important economic and political entity in
diverse country in which only 40 percent of the the FSU. While the Central European countries
population is native Kazakh, while 38 percent of may already be too far advanced economically
its citizens are ethnic Russians. The population is and too independent politically for events in Rus-
also differentiated geographically and occupa- sia to seriously threaten their stability, the nature
tionally, with Russians concentrated in the north- of Russian economic reform and the battles over
ern part of the country in industrial, scientific, and Russia’s future are of crucial importance to all the
administrative positions. Ethnic Kazakhs are con- other countries in the region. A successful, com-
centrated in the south and are more heavily repre- prehensive, and peaceful transition to a market
sented in agriculture, health care, and other lower economy and representative democracy in Russia
paying sectors of the economy. could greatly facilitate similar processes in all the
Under Soviet rule, Kazakhstan was industrial- remaining countries of the FSU. Conversely, the
ized (though not to the extent of the Slavic repub- failure of Russian economic reform or continued
lics), and its economy was closely integrated into “muddling along” could promote economic and
the Soviet system. Both Kazakhstan’s industry political instability, not only in Russia, but among
and agriculture are oriented toward and heavily all of its neighbors.
dependent upon the other republics of the FSU, es-
pecially Russia, for markets and for supplies of I Kazakhstan
raw materials and manufactured goods. However, Independence has come hard to Kazakhstan. The
Kazakhstan’s huge reserves of oil and minerals country faces two major sets of problems: an
make the country an attractive prospect for foreign economy still highly integrated into the FSU and
investment and economic development. suffering from the disintegration of inter-republic
Soviet Russia saw itself as the rightful inheritor economic ties, and the conflicting political inter-
of the empire built by the tsars and remained the ests of newly emergent Kazakh national forces
center of the Soviet multinational state. and the large contingent of ethnic Russian resi-
Russia was also the center of Soviet economic dents. The country’s president, Nursultan Nazar-
development. Although Moscow pursued eco- baev, has pursued a delicate economic and
nomic policies that made the republics highly de- political balancing act, seeking to introduce
pendent upon one another for supplies of raw economic reform and establish a multi-ethnic
materials and manufactured goods, Soviet eco- state while maintaining economic and political
nomic policies favored the European portion of stability.
the country, which was consistently better sup- The breakup of the Soviet Union and the eco-
plied with goods and which experienced higher nomic instability of Russia have had devastating
and more integrated forms of economic develop- effects on the Kazakhstani economy. Still highly
ment. Other regions-especially the non-Slavic 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 ers for arbitrariness, media harassment, and favor-
contracted as markets and sources of supply have itism toward ethnic Kazakh candidates.
dried up. In 1993, Kazakhstan’s GDP fell by 15 Nazarbaev has maintained what has been called
percent. 16 This decline, combined with rapidly es- a “mild authoritarianism,” partly in response to
calating energy prices and ruble instability, has the political tensions plaguing the country. With
contributed to a soaring inflation rate—about the advent of independence, tensions developed
1,500 percent in 1992 and about 30 percent per between newly emergent Kazakh nationalists and
month in 1993. ’7 ethnic Russians over political power and the so-
Progress toward reform has been slow. Most cioethnic character of the Kazakhstani state. One
prices have been freed, but subsidies remain for of the biggest issues of contention has been lan-
some items, especially food and energy products. guage. Ethnic Kazakhs have demanded that their
Substantial progress has been achieved in enact- language be recognized as the only official lan-
ing a legal framework for privatization and market guage, while Russians have advocated giving
relations, as well as in the conversion of small ser- both languages legal status. Nazarbaev has backed
vice and retail establishments to private owner- a compromise, making Kazakh the official
ship. But the privatization of medium- and tongue, but establishing Russian as the language
large-scale enterprises is only just beginning. And of “inter-ethnic communication. ” The conflict
although Kazakhstan has been a leader within the over language is symbolic of a larger tension with-
FSU in opening its economy to foreign invest- in Kazakhstani society: the extent to which ethnic
ment, sectoral development outside the oil and gas Russians will adapt to Kazakh ways, which in-
sector has been limited. cludes not just language, but schooling for their
The slowness of Nazarbaev’s reform strategy children, new interpretations of history, and as-
has been deliberate. He and his economic minis- serting Kazakhstan’s interests against those of
ters have criticized the effects of rapid economic Russia.
reform programs in Poland and Russia and have Although the emergence of Kazakh national-
given greater priority to slowing the growth of ism has raised concern in Russia and the West
wages and prices, increasing state industrial pro- about the possible rise of radical Islamic funda-
ductivity, and directing a slow, “controlled” pri- mentalism, Kazakhs are not like] y to take the fun-
vatization process. 1 8 damentalist path. Other ties, such as those of clan
The pace of democratization has also been or region, are strong and compete with Islam as a
slow. Although there is a multiplicity of parties of means of cultural identification among ethnic Ka-
all political orientations—possibly more than zakhs. A more serious nationalist danger may
100-only three parties have been permitted to come instead from Kazakhstan’s ex-Communists,
register officially. In early 1993 a constitution was who may join with Kazakh nationalists and coopt
enacted, guaranteeing basic rights, but political the nationalist agenda. The “partocrats,” intent on
and press freedoms have been restricted. Morover, restoring the old relations of power, may try to un-
the parliamentary elections of March 1994 were dermine Nazarbaev and the Western-oriented re-
criticized by West European and Russian observ- formers 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.SSeZ-
faire 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 large- term. As a result, international institutions such as
scale emigration of ethnic Russian specialists and the World Bank do not expect the Kazakhstani
managers from Kazakhstan, with catastrophic ef- economy to start growing substantially until the
fects on the economy. second half of the 1990s.
One other issue threatens Kazakhstan’s eco-
nomic prospects in general and the full develop- | Russia
ment of its oil export industry in particular.
Kazakhstan’s oil can be exported only through Politics of Reform
other countries. At present, the only practical Russia has not yet established either the popular
route is through Russia. However, Russia has ar- consensus or the vast legal and regulatory struc-
bitrarily restricted exports through its Transneft ture that are vital to successful economic trans-
pipeline system to one-third of Kazakhstan’s pres- formation. Instead, since the coup attempt of
ent export capacity. The Russian oil industry August 1991, Moscow has been in the throes of a
(which considers itself the heir of the Soviet-era complex battle about the country’s future. West-
industry) has also recently demanded a 30-percent erners have too often viewed Russian politics in
share in revenues from all oil-export ventures in simplistic and bipolar terms as a fight between
former Soviet republics. Russian restrictions and democratic, capitalist modernizers and Commu-
demands contributed to a recent decision by nist, nationalist reactionaries. Instead, Russia is
Chevron to curtail its ambitious development pro- experiencing a multifaceted struggle over ques-
gram for the Tengiz field. tions of a more fundamental nature: power, sover-
Alternative pipelines to the Black Sea via Iran eignty, property, and the nature of the future
and Turkey or Azerbaijan and Georgia have been socioeconomic order.
proposed, but both are polically problematic and The central arena in this struggle is economic
may be possible only in the long term. Moreover, reform, where principled disagreements also exist
Turkey will not permit the large increase in oil between political and social constituencies over
tanker traffic through the straits (two tankers per the nature and course of reform. These debates
hour) that would be required to develop oil ex- about the best course of reform are anchored firm-
ports fully.
Thus, surmounting Russian opposition to in-
creased Kazakhstani exports and controlling Rus-
sian economic demands will be vital to
Kazakhstani economic development. This is like-
ly to require sustained U.S. policy pressure.

Prognosis for Reform


Political and economic uncertainties, together
with Nazarbaev’s cautious approach toward mar-
ket reform, render it difficult to make firm predic-
tions about Kazakhstan’s prospects. Although the
current energy bonanza provides grounds for opti-
mism, oil development is extremely capital-inten-
sive and will have only a limited effect in the short Moscow, 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 state-sponsored social protection. Representa-


small and ethnically homogeneous states of Cen- tives of this group, led by Prime Minister Viktor
tral Europe, Russia is a gigantic country with a Chemomyrdin, appear to have replaced reformers
much larger, more complex, and more deeply in the Russian government in the winter of 1994.
troubled economy. As a result, Russia is less ame- The third group, the “irreconcilable opposi-
nable to the types of Western-sponsored aid and tion,” is a small but vocal collection of ultrana-
trade programs that have been instrumental in the tionalists and some ex-Communists who oppose
transformation of the economies of Central Eu- both market reform and democratization.
rope. Whereas multinational lending has had a Although Vladimir Zhirinovsky, the most
profound impact in Central Europe, Russia’s size well-known member of this group, enjoyed par-
makes its capital requirements much larger. More- liamentary electoral success in the December
over, success in Russia depends on the conversion 1993 elections, neither he nor the other parties that
of the immense defense sector to civilian produc- share his view point have articulated a specific
tion. Finally, Central European countries had a economic program.
history of market economic relations before and In addition to divisions over economic reform,
during Communism, but the legacy of the market Russia is also riven by disagreements over the
in Russia is much weaker. country’s future internal and external political
The dilemmas raised by Russia’s uniqueness course. This struggle has expressed itself in sever-
are reflected in a struggle between several differ- al ways. The power struggle between Boris Yelt-
ent and competing visions of economic reform, sin and Ruslan Khasbulatov, which culminated in
some more radical than others, but very few of the battle of October 4, 1993, was on one level a
which envision a return to the old system of personal political rivalry. At the same time it was
centralized state ownership and planning. Among an institutional struggle for power and political le-
a multiplicity of approaches to economic reform, gitimacy between the executive and legislative
three main blocs have emerged.20 The first bloc, branches of the Russian government. The struggle
centered around President Boris Yeltsin and offi- also reflected at least two different visions of Rus-
cials of the 1992 and 1993 Russian government, sia’s future geopolitical orientation. Advocates of
includes the liberal democratic reformers, who ad- one vision hope for a Russia more oriented toward
vocate a rapid and radical program of economic the West, with Western-style political and eco-
transformation based on the Polish model. nomic institutions, cooperating as a partner with
The second group, the centrist opposition, the United States and Europe in matters of foreign
includes a broad spectrum of Russians, some policy. Advocates of the other vision are Russian
affiliated with enterprise managers, others repre- nationalists who suspect the motives of Western
senting disadvantaged social groups, a portion of governments, want Russia to establish a powerful
whom identify themselves as Communists. These independent identity, see Russia’s foreign policy
Russians favor the transition to a market economy interests separate from those of the West, and wish
but advocate a more gradual approach to econom- to find a distinctly “Russian” course of govern-
ic change. They would prefer a transition in which mental and economic reform. These more funda-
the state maintains greater levels of support for mental issues have yet to be resolved. This
large industrial enterprises and managers receive struggle and its eventual resolution will have pro-
greater powers over the direction of industry. found effects on Russia’s openness to foreign as-
They also endorse a much more active program of sistance 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 employed workers, modernizing production, and
party in the December 1993 elections indicated changing their product mix to adapt to market
the extent to which questions of both Russia’s eco- conditions, Russian enterprises entered upon a
nomic and political future remain unresolved. massive spree of borrowing. Initially, without
Zhirinovsky’s strong electoral support was widely central bank credits, firms simply borrowed from
interpreted a sign of disenchantment with declin- one another, and the size of inter-enterprise debts
ing standards of living and with Russia’s reduced skyrocketed. Later, enterprise managers asserted
world stature. It served as a warning to radical re- their political power and forced the Russian Cen-
formers, as well as to moderates, of the need to tral Bank to issue massive new credits and to for-
find compromise solutions to avert catastrophe. give old debt.
Another component of the struggle over politi- The results of the liberalization of prices and
cal and economic reform is the battle over sover- the explosion of state and inter-enterprise credit
eignty and property between Moscow and were a hyperinflationary spiral and a huge devalu-
Russia’s ethnically and geographically autono- ation of the ruble. By the end of 1992, inflation
mous regions. The devolution of power from had reached 2,000 percent per year, and the ruble/
Moscow may be a healthy development if it resus- dollar exchange rate had soared from 100 to near
citates moribund local governments and opens the 1,000. Simultaneously, the steady contraction of
way for innovative reformers to take initiatives Russian production accelerated. During 1992,
from below. But demands for local autonomy, Russian economic output fell by about 20 percent.
sovereignty, and even independence, endanger the The spring of 1993 brought some hopeful
viability and integrity of the Russian state. Until signs. After a year of bickering over monetary
the interests of the central government are bal- policy, the Russian government came to an agree-
anced against those of the regions within a work- ment with the Central Bank to limit credits to state
able and commonly accepted constitutional enterprises. Inflation was reduced to a lower,
framework, attempts to promote democratization though still unacceptable, level. Despite a sudden
and economic stabilization will stagnate. rise in October 1993, inflation fell to 12 percent
per month by the end of the year. 21 Although the
Progress Toward Reform ruble/dollar exchange rate continued to climb, the
On January 1, 1992, under the direction of acting ruble moved closer to the dollar in purchasing
prime minister Yegor Gaidar, Russia entered into power parity, and average salaries more than
a rapid program of economic stabilization and re- doubled their hard-currency value.
form similar to Poland’s shock therapy. The first However, industrial production continued to
results of Russian reforms were quite promising. decline during 1993 and GDP fell by 12 percent.22
Despite huge price hikes for many staple items, a Industrial production in the first quarter of 1994
large assortment of previously unavailable goods was 25% below the same period in 1993. Simulta-
appeared for sale in state retail outlets and in a rap- neously, the payments arrears crisis worsened
idly expanding network of private establishments. considerably. By the winter of 1994, arrears to-
The initial inflationary effects of the price rises taled 32 trillion rubles, one half of which was
were mitigated by tight state monetary policies. owed to enterprises in the energy sector. More-
The effects of the rest of the economic program over, a January 1994 International Labor Orga-
were more negative. Instead of laying off under- nization (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 national product (GNP) and employs over 15 per-
higher than the official level of 1-2 percent. 23 Al- cent of the Russian labor force.26
though inflation fell to 10 percent per month in the However, the character of private sector devel-
beginning of 1994, Russia’s economic situation opment has been extremely problematic. Al-
remains highly uncertain.24 though many small and large Russian enterprises
Nevertheless, reformers can point to one area of have been formally “privatized,” ownership of
real success: Russia’s private sector. In mid-1992, shares has remained concentrated in state hands.
the Russian government announced a two-year Moreover, the types of new private enterprises
program to privatize state firms based on a Czech- that have developed under the market reforms
type voucher system. That fall, vouchers were dis- have been characterized as a type of “kiosk” econ-
tributed to all Russian adults. Russians can use the omy—small businesses importing Western goods
vouchers to purchase shares in privatizing enter- to be sold at a high markup. Relatively little has
prises directly, to buy shares in investment funds, been done to reform the manufacture of domestic
or to sell on the open market. Although the privati- goods and stimulate market-oriented production
zation process started slowly and the value of
at home.
vouchers fell by as much as 60 percent, they now
Moreover, in the absence of strong governmen-
exceed their nominal value (unadjusted for infla-
tal authority and freely functioning markets for
tion), and the pace of privatization has acceler-
capital and goods, criminal elements (commonly
ated. By the end of 1993, over two- thirds of
Russia’s small service enterprises had been privat- referred to as the Russian Mafia) have proliferated
ized through conversion to employee ownership and corruption by government officials assigned
or public sale. Of Russia’s 14,500 large state en- to supervise market relations has been rampant.
terprises, 11,000 had been converted into joint- The proliferation of organized criminal power is
stock companies, of which 7,000 were fully dangerous not only for the type of market that is
privatized.25 developing in Russia, but also for the negative
Russia’s new private sector has also undergone public perceptions of capitalism that are being
a huge expansion in the past year. The develop- created in the process.
ment of new private enterprise is even more im- Finally, high levels of inflation, political uncer-
portant than the privatization process because, as tainty, and ruble instability have led to enormous
experience in Central Europe has shown, the new levels of capital flight that dwarf the size of West-
private sector is the true engine of economic ern aid proposals.27 Until Russian capitalists can
growth. Although the size of the private sector is be persuaded to invest their capital at home, little
hard to measure, it is estimated that private enter- progress can be made in building a larger, more
prise constitutes about 20 percent of Russian gross 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 Unlike Ukraine, Turkmenistan and Uzbekistan


Despite the impressive strides that have been are Central Asian, Muslim countries. Turkmenis-
made in price reform and private-sector growth, tan emerged from the Soviet era as one of the poor-
the Russian economy is in a state of limbo. The est countries in the FSU. An overwhelmingly
central problem blocking progress in reform is agricultural country, Turkmenistan concentrated
Russia’s crisis of state authority—that is, the lack during Soviet times on the cultivation of cotton,
of a political consensus on issues of political pow- which occupied over half of all arable land. Soviet
er, property, institutional and regional sovereign- planners also created a cotton monoculture in Uz-
ty, and the nature of the future socioeconomic bekistan (cotton still employs 40 percent of Uzbe-
order. Unless Russia resolves this crisis and its kistan’s labor force), which is the third largest
government pursues consistent and coordinated producer of cotton in the world. Low levels of in-
monetary and fiscal policies, it will not achieve dustrial development in both countries, especially
the type of solid economic stabilization that is an Turkmenistan, have left them extremely depen-
absolute prerequisite to economic reform and dent upon economic and political ties to Moscow
growth. Until then, Russia will at best flounder or Azerbaijan is a country at war. Since the
muddle through reform. mid-1980s, Azerbaijan has been locked in a
struggle with neighboring Armenia over the status
FOOT-DRAGGERS: COUNTRIES IN THE of the predominantly Armenian area of Nagorno-
THIRD TIER OF REFORM Karabakh. After the breakup of the Soviet Union,
Despite the profound economic and political the conflict worsened considerably. Since May
1992, Armenians have achieved military control
changes occurring in the FSU, one group of coun-
tries has barely taken even the first steps down the over the territory and have sought to consolidate
road of economic reform. The reasons for this sub- their position by conquering Azeri areas border-
stantial lag are fundamentally political—none of ing on Karabakh. Despite international efforts to
these states has achieved a political and social mediate the conflict, cease-fires have not held, the
consensus about the need for market reform. parties have not yet been willing to agree to peace
terms, and Azerbaijan’s military losses have pro-
moted domestic political disarray.
| Historical and Political Background
Ukraine, Turkmenistan, Uzbekistan, and Azerbai-
jan differ in profound ways. But they share some | Ukraine
fundamental characteristics that promote irresolu- Since it attained statehood, Ukraine has been
tion about reform. plagued by a debilitating competition for political
Ukraine is a Slavic country in the European power and by an escalating process of economic
portion of the FSU. Unlike its neighbors in Cen- disintegration. The mixed nature of the Ukrainian
tral Europe, Ukraine has not had significant expe- economic and political record is symbolized by
rience in modern times as an independent, state. Leonid Kravchuk, the former head of the Ukraini-
For the first time in their history, Ukrainian citi- an Communist Party, who outmaneuvered his na-
zens can elect their own leaders, choose policies, tionalist rivals and won election to the Ukrainian
and decide a host of political, economic, and so- presidency in December 1991.
cial questions never before within their purview. Kravchuk’s victory was not just a personal
Ukraine has also had to resist what it perceives as triumph. It also represented the victory of an entire
undue Russian influence in its affairs while main- cadre of state apparatchiks behind him: bureau-
taining (or restoring) economic stability based on crats who had maneuvered to survive the transi-
existing ties to the FSU. Finally, Ukraine faces the tion from Communism to nationalism, more
difficulty of defining and asserting a national eth- interested in protecting their state positions than
nic identity in a multinational state. reforming the economy. The result of this phe-
144 I Fueling Reform: Energy Technologies for the Former East Bloc

neously, in both the capital and the provinces, cor-


ruption proliferated.
The increasing economic chaos caused a pre-
cipitous decline in production and stimulated hy-
perinflation. 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 per-
cent per month and 9,000 percent for the year as a
whole. 29
The economic crisis has been felt acutely in the
Podol district, Kiev Ukraine energy sector. The Ukrainian government has
been unable to pay hard currency prices for im-
nomenon, along with Ukraine’s preoccupation ports of natural gas from Russia and Turkmenis-
with nationality issues and the attention to tan. In the winter of 1994, Turkmenistan cut off
squabbles with Russia over the legacy of Soviet- gas supplies to Ukraine for nonpayment of $700
era property and weapons, has been the neglect of million in gas debt. Ukraine’s energy debt to Rus-
economic reform. Despite the efforts of prime sia is even higher: $900 million. However, since
minister Leonid Kuchma, who was forced to re- 90 percent of Russia’s gas exports to Western Eu-
sign in the summer of 1993, the Ukrainian parlia- rope travel through Ukraine, the Russians cannot
ment spent 1992 and 1993 debating competing simply shut off gas supplies to Ukraine. Instead,
reform proposals without implementing a system- Russia’s Gazprom has restricted gas supplies to
atic program. Ukraine in an effort to pressure payment, either in
Consequently, despite some monetary, fiscal, cash or in the form of energy-related assets.
and regulatory reforms, major elements of the Complicating these issues is the fact that Uk-
state economy remained in force (e.g., price con- raine is not ethnically homogeneous. Almost one-
trols and public ownership of most land and prop- quarter of the Ukrainian population is Russian.
erty), and the authority of Kiev to manage the The Russians are concentrated in coal-mining re-
process of economic change eroded substantially. gions in the east and in the Crimea in the south, an
Economic reform in the provinces was character- area that became part of Ukraine only in 1956. Al-
ized not by conversion to private ownership, re- though ethnic Russians in the past have generally
structuring, or modernization, but by a process of been supportive of Ukrainian independence, Rus-
“spontaneous” privatization whereby the majority sian miners struck in June 1993, demanding wage
of state enterprises were converted to the de facto increases, greater local autonomy, and a referen-
ownership of managers and workers through the dum on Kravchuk’s leadership and the perfor-
abuse of a very liberal law on leasing. Simulta- mance 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 Com-
merce, 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, FBIS-
USR-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 gas, mineral, and agricultural sectors—which
resignation, and to new elections in March and constitute 80 percent of the economy—will re-
April 1994. Thus, a resolution to Ukraine’s crisis main under state ownership and control.
is not likely for quite some time. As in Kazakhstan, the potential for an Islamic
fundamentalist movement is low. Turkmenistan is
Prognosis for Reform characterized by intense clan loyalties that inhibit
Ukraine is in the throes of a possibly catastrophic not only the spread of Islamic fundamentalism,
economic crisis. Unless a political consensus is but also the formation of a strong common Turk-
reached in Kiev over questions of political and men national identity.
economic policy, the economy will continue to
contract, and hyperinflation will spiral even fur- Prognosis for Reform
ther out of control. The political consequences of
In theory, its vast gas and oil wealth presents Turk-
such economic disintegration could be extremely
menistan with an excellent opportunity to over-
serious, including the assumption of power by an
come the economic distortions of the Soviet era,
authoritarian leader and/or secession efforts by
develop a diversified agricultural, industrial, and
non-Ukrainians.
commercial economy, and build the physical and
social infrastructure that the country so sorely
| Turkmenistan lacks. Energy revenues, however, may be squan-
Political and economic reform have not yet come dered through corruption and the operation of Ni-
to Turkmenistan. Instead, the country is domi- yazov’s self-aggrandizing political machine. The
nated by its president, Saparmurad Niyazov, an result may very well be the development of a
authoritarian ruler who has created a Stalin-like small, wealthy elite, loyal to the Niyazov political
cult of personality around himself and who has regime, in a country that retains high levels of
suppressed potential political opposition. Niya- poverty and underdevelopment.
zov has imposed official censorship, restricted
freedom of speech, and harshly repressed political
opposition. | Uzbekistan
Although Niyazov has negotiated potentially After Turkmenistan, Uzbekistan is the most polit-
very lucrative gas and oil extraction deals, the ically repressive state in Central Asia. Uzbekistan
country has remained one of the poorest in the is a good example of what can happen when the
FSU. Its 1991 GNP was less than 1 percent of that partocrats retain power in a post-Soviet country.
30
of the FSU, and poverty is endemic. Niyazov The country is headed by president Islam Kari-
has pursued economic reform and the introduction mov, Uzbekistan’s Soviet-era president, and the
of private property rights very slowly. There has Popular Democratic Party (PDP), the successor to
been some attempt at reducing the country’s de- the Uzbekistani Communist Party. Karimov has
pendence on cotton, but Niyazov does not envi- suppressed almost all other parties, jailed opposi-
sion a process of radical economic reform or tion activists, enforced press censorship, and
diversification. Rather, he has advocated a very stifled the development of democratic politics.
gradual process of change in which state-owned Citing the civil wars in Tajikistan and Afghani-
enterprises will co-exist with an emerging private stan, he justifies his repressive political policies
economy for quite some time. For example, in his by saying that only he and the PDP can ensure sta-
economic plan for the next 3 to 5 years, the oil, bility 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 propaga- and Islamic fundamentalist forces raises the possi-
tion of democratic values. bility of violent conflict in the future.
Since the breakup of the Soviet Union, eco-
nomic conditions in Uzbekistan have deteriorated | Azerbaijan
but have been moderated by state policies that Systematic economic reform has also not yet be-
maintain many of the characteristics of the Soviet- gun in Azerbaijan. Instead, the country’s attention
era economy. Although prices were liberalized in has been diverted to the military conflict with Ar-
January 1992, the prices for most basic items are menia. With tens of thousands of Azeri refugees
still regulated. Heavy subsidies for goods sold demanding retribution and a foreign power occu-
through the state retail sector and for staple foods pying 10 percent of the country, it is difficult to fo-
keep these products cheaper than those sold on the cus on imperatives for domestic economic
open market, thereby creating supply problems. restructuring and political reform.
Large state subsidies have also contributed to a However, Azerbaijan’s domestic political
substantial budget deficit, which constituted troubles are not rooted just in the conflict with Ar-
about 5 percent of GNP in 1993. 31 Despite some menia. Strategically located at the crossroads be-
diversification away from cotton, the country still tween Russia, Turkey, and Iran, Azerbaijan has
depends on imports of grains, cooking oil, and also been a target of the political, economic, and
other staple products from FSU countries. social ambitions of its neighbors. Although Azer-
Karimov has moved with deliberate slowness baijan has some economic ties with Iran, the Ira-
in the area of economic reform. His stated goal is nians have not been successful in their attempts to
to create “market socialism,” a combination of the spread Islamic fundamentalism in the Caucasus.
old and new orders. Accordingly, any type of Turkey gained commercial and political influence
shock therapy has been rejected. Privatization has in Azerbaijan during the short tenure of President
barely started and is destined to proceed very Abulfaz Elchibey, who attempted to reorient the
slowly. Industry and almost the entire retail sector country’s economy away from the FSU. But in
remain in state hands, and the private sector pro- June 1993, Elchibey was overthrown by the forces
duces less than 10 percent of GNP. of Colonel Suret Huseinov, in concert with former
Azerbaijan Communist Party leader Geidar Aliev.
Prognosis for Reform Elchibey lost power in large part due to his mili-
Like Turkmenistan, a rich energy endowment tary failures in Karabakh and a drastically worsen-
gives Uzbekistan excellent potential for economic ing economic situation. Huseinov and Aliev
recovery. But the entrenchment of partocrats in enjoyed the support of Moscow against Elchibey
power and their determination to retain many of and have reoriented government policy toward
the fundamentals of the old system bode poorly Russia and the rest of the FSU.
for Uzbekistan’s economic future. Energy reve- In light of the tumultuous domestic military
nues are much more likely to be squandered and political situation, economic reform has re-
through corruption and wasted on old, state-cen- ceived relatively little attention. Despite the pro-
tered economic structures, rather than used to liferation of small-scale capitalism and
modernize Uzbekistan and build a market econo- negotiations with foreign companies to develop
my. And continued political repression in the face the Caspian’s energy resources, there has been no
of rising opposition from democratic, nationalist, 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 prolifer-
ated. Despite a relatively low government budget
deficit and modest foreign trade surpluses, infla-
tion has hit rates of 1,500 percent, and the govern-
ment 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 Moscow skyline
able to maintain a semblance of economic stabil-
ity, supported by ad hoc deals with Western oil These states also face an even broader set of
companies and semilegal exports of raw materi- cultural problems in building societies based on
als. But until reform-minded leaders assume pow- new political and economic orders. To make the
er in Baku, the country is unlikely to enact the transition from state-directed economies to mar-
sweeping legal and structural changes needed to kets, they will have to overcome a broad lack of
convert to a market economy. U.S. oil companies understanding of market principles. After decades
could participate in the development and im- of Communist rule, at least some of the principles
provement of Azerbaijan’s oil production with of socialist economic relations have sunk strong
considerable mutual benefit. However, that coop- roots in the popular psyche or resonate with al-
eration is unlikely to be a major force for reform ready extant popular values of communalism and
until the political situation stabilizes. Further- preferences for state-directed economic relations.
more, Azerbaijan resents the U.S. prohibition on For example, if market relations are to work effec-
assistance imposed in response to the conflict over tively, people must learn the function of distribu-
Nagomo-Karabakh. tive prices and the harmful effect that subsidies
and price controls can have on the rational dis-
BUILDING NEW SOCIETIES- tribution of goods.
THE CULTURE OF REFORM If the goal is to promote a thoroughgoing ca-
Despite their differences, the countries of the for- pitalist system, the mentalities and characteristics
mer East Bloc share a similar set of problems in of the old system must also be eliminated. After
the transition from Communist authoritarianism decades of state economic planning and direction,
to market democracy. One such problem is pro- it will be difficult to adjust to the idea that the indi-
viding social protection during the transition peri- vidual, not the state, is most responsible for his or
od. These countries will need to transfer her own fate. Instead of a system where personal
traditional responsibilities for housing, medical contacts and access to resources are paramount,
care, and pensions from enterprises to the state, citizens must also build and become accustomed
while devising systems to deal with new prob- to a system where money, personal initiative, and
lems, such as unemployment and job retraining. merit determine success. Communist-era customs
This will be particularly difficult, because new ex- of lackadaisical work must be overcome, entre-
penditures must be justified in light of the pressur- preneurship must be nurtured, and firms-in retail
es of fighting inflation and the need to adhere to and other sectors—must become much more cus-
the monetary and fiscal requirements of the In- tomer oriented.
ternational Monetary Fund, the World Bank, and Unfortunately, this process is complicated by
other multilateral institutions. 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 Perhaps as serious is a more general mass disil-
and highlights its worst aspects. The appearance lusionment with politics and a growing political
of wide disparities in income and personal wealth apathy. This is compounded by a lack of experi-
in societies that previously were noted for eco- ence among the political leadership with demo-
nomic homogeneity has created feelings of unease cratic institutions.
and perceptions of injustice. The conspicuous Finally, the huge drop in living standards and
consumption of many of the area’s new capitalists the political chaos of the post-Communist era has
in the face of mass economic misery incites popu- led to a crisis of identity in many areas of the FSU,
lar anger. Finally, the rapid growth of violent, or- especially Russia. Before the decline of Commu-
ganized crime has produced deep anxiety about nist economies and the breakup of the Soviet
personal security and may further poison popular Union, Soviet people felt themselves to be citi-
attitudes toward capitalism. zens of an economic, political, and military super-
Cultural adjustment is also an important sub- power. With Russia and the other FSU countries
ject on the political level. After the initial euphoria now in an extremely weak position on the world
about the achievement of national independence, stage, with economies in collapse, with crime on
these new states must now deal with a fractious set the rise, and with citizens wearing hand-me-down
of new political issues. Independence has brought clothing and earning paltry incomes, nostalgia for
new conflicts between various ethnic groups and the old system has grown. The perception is that
the rise in some countries of new radical right- no matter how repressive or stagnant the old sys-
wing parties. In the countries understudy here, the tem was, it still provided basic levels of suste-
most serious national conflicts have occurred in nance, security, and national pride. Unless these
Azerbaijan. Nevertheless, although there have countries start achieving economic and political
been fewer disputes over national boundaries than progress soon, this nostalgia is bound to grow, and
might have been expected, questions over border the popular support or social consensus needed for
areas and disputes over land and ethnic minorities the transition to democratic politics and market
continue to smolder and threaten long-term re- economics will evaporate.
gional stability.
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 in-
dustrial countries can provide. However, there are significant ob-
stacles 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 en-
ergy 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 sec-
tion 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 Gum Department Store, Moscow.
@ Cen/ru/and Eastern Europe, OTA-E-562 (Washington, DC: U.S. Government Print-
ing Office, May 1993).
Zp]ease note that this chapter will address programs in all areas except nuclear Wwer. I 149
That subject is analyzed inch. 4.
150 I Fueling Reform: Energy Technologies for the Former East Bloc

Environmental regulations have been a major


factor in promoting energy facility modernization
in the west, but that has not been true in the former
Institutional barriers East Bloc. Many countries, particularly in the for-
Lack of comprehensive legal framework mer Soviet Union (FSU), lack regulations to en-
Multipliclty of governmental authorities sure environmental quality (despite economic
Weak enforcement of regulatory standards costs). But even in Central Europe, where there is
Lack of market information a highly developed regulatory framework for the
Lack of market and r’management training environment, enforcement is extremely weak.
Ambivalence about foreign investment Another important institutional impediment to
Bilateral trade restrictions (in West and East) energy-sector development is the lack of a system-
Economic barriers atic means of disseminating information to poten-
Lack of domestic capital tial users about the benefits and costs of improved
High levels of political and financial risk technologies, as well as how to obtain and use
inconsistent and punitive tax regimes them. Inadequate information for U.S. producers
Government energy-price subsidies about export markets and a lack of contacts in for-
Low emissions fines eign markets also discourages more aggressive
Lack of feasibility financing for U.S. small business export activity. Even when market information is
Technical barriers available, its high cost puts it out of reach.
Inadequate physical infrastructure Finally, unfamiliarity with basic Western busi-
Lack of trained personnel (in East and West) ness practices and concepts such as profit and
Differences in technical standards depreciation greatly complicates business negoti-
— ations. A widespread lack of training in free mar-
SOURCE U S Congress, Off Ice of Technology Assessment, 1994 ket economics and a lack of knowledge about the
rates of return needed to attract investment create
| Institutional Barriers unrealistic expectations among enterprise manag-
The policy and institutional climate remains the ers. Weak management skills and little experience
major inhibitor to technology adoption and diffu- in project evaluation or least-cost energy planning
sion in many countries of the region. The most se- also impede technology transfer.
rious institutional barrier to market reform and As noted in chapter 6, the countries of Central
modernization is the lack of a comprehensive le- Europe have made a great deal more progress ad-
gal and regulatory framework to govern energy dressing the above issues than have the FSU
sector development, to define the rights and re- states. One of the reasons for institutional inertia
sponsibilities of joint ventures, and to prevent re- in the FSU, especially in Russia, is a deep ambiva-
consideration of completed contracts. In addition lence toward foreign investment and ownership.
to this basic framework, most countries in the re- Continuing barriers to trade in both donor and re-
gion lack a well elaborated system of intellectual cipient countries also reduce the incentive for
property rights. Since recipient countries often do institutional reform in both Central Europe and
not have adequate patent protection, U.S. industry the FSU.
has been reluctant to transfer proprietary technol-
ogies. An absence of a clear system of title and | Economic Barriers
ownership over land also inhibits energy explora- The second set of barriers to diffusion of energy
tion and production. The multiplicity of govern- technology is economic in nature. A severe lack of
mental authorities, each of whom has a veto over domestic capital and foreign currency constrains
the decision of other parties, has further compli- the ability of former East Bloc states and enter-
cated the development of joint ventures. prises to purchase improved energy and environ-
Chapter 7 Assistance, Trade, and Investment Programs | 151

mental equipment. These constraints may be pean Union (EU) emissions standards that are
somewhat less severe for oil and gas because they much stricter than the U.S. standards. U.S.
are highly exportable commodities. However, technology, designed to meet U.S. conditions,
capital constraints are 1ikely to be acute for renew- may not correspond to the needs of the recipient
able, coal, electricity y, and environmental country. And the costs of adaptation may be too
technology. But even in the oil and gas sector, ad- high.
vanced Western technology is typically more ex- Integration of Western and local technologies
pensive than domestic technology, even when the may prove difficult. In some cases, improved
average life of equipment is taken into account. technology may not be as flexible as existing
Continuing high levels of political and eco- technology. Difficulties arise when enterprises at-
nomic instability in former East Bloc countries tempt to mix imported and local technologies.
translate into high levels of economic and foreign And the energy equipment supply industry in
currency risk, even in Central Europe. Commer- some countries is so large that Western technolo-
cial banks remain reluctant to loan on a conven- gies can only supplement rather than replace it.
tional basis. Finally, former East Bloc governments lack ad-
Government policy—in both East and at equate numbers of technical and business trained
home—also contributes to economic impedi- personnel. And in the United States, companies
ments to technology transfer in the former East suffer from a lack of U.S. personnel who are
Bloc. In the East, uncoordinated, inconsistent, un- knowledgeable about the countries and regions
certain, and frequently punitive tax regimes in- and proficient in local languages
crease the cost of doing business. Subsidized
energy prices reduce incentives to invest in more | Overview of U.S. and Multilateral
efficient or environmentally improved equip- Assistance Programs
ment, or to increase supplies. Low fines for emis- The United States supports a large number of pro-
sions violations provide little economic incentive grams designed to overcome these barriers by pro-
for the purchase and installation of environmental moting the mutual benefits of energy and
equipment in many countries. environmental technology cooperation and en-
In the United States, inadequate access for couraging the economic and institutional reforms
smaller suppliers to risk capital, or to financing for necessary for the diffusion of improved technolo-
feasibility studies and startup costs, greatly re- gy. Western energy and environmental assistance
stricts the ability of U.S. small business to take ad- began in 1989-90, with the extension of aid to Po-
vantage of newly opened markets in the former land, Hungary, and Czechoslovakia. Energy and
East Bloc. Other governments are believed to of- environmental assistance to the FSU began in
fer more generous export credits, thus putting 1992, and has grown rapidly (see box 7-1 ).
U.S. companies at a competitive disadvantage in Current bilateral development assistance pro-
these markets. grams, operated primarily by the U.S. Agency for
International Development (AID), the U.S. De-
| Technical Barriers partment of Energy (DOE), and the U.S. Environ-
The final set of barriers to trade and technology mental Protection Agency (EPA), encompass a
transfer is technical in nature. These barriers wide range of functions. These include technical
include an inadequate regional support infrastruc- assistance, training in market-related skills, provi-
ture for high-quality technology. Trained man- sion of market information, government policy
power, spare parts, and supplier systems may also advice, research and development (R&D), and
not be available locally. Differences in technical technical cooperation.
standards can block transfer of U.S. technology. Other bilateral programs, managed primarily
Many countries of the region are adopting Euro- 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 Emerg-
ing 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 new-
ly formed European Bank for Reconstruction and Development (EBRD) and $3 million for Romania. In Sep-
tember 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 multilat-
eral 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 pro-
grams 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 project lending programs. Much of the past and
Corporation (OPIC), and the U.S. Department of anticipated lending has been to the oil and gas in-
Commerce (DOC), provide backing to the U.S. dustry and the power sector. However, there are
private sector to encourage U.S. business to play a also active programs for coal and energy effi-
key role in the rehabilitation of the regional energy ciency.
sector. Bilateral and multilateral lending is designed to
As the largest shareholder in the multilateral provide the capital to overcome economic barriers
development banks (MDBs), the United States to technology transfer. Conditions attached to
also actively exercises influence in their large some lending programs, especially from the
Chapter 7 Assistance, Trade, and Investment Programs | 153

Europe and the Baltics, U.S. assistance has fo-


cused on diversifying sources of energy supply,
rehabilitating and modernizing the energy supply
infrastructure, improving end-use energy efficien-
cy, and controlling pollution. In the FSU, main-
Fiscal years 1990-94 taining and increasing oil and gas production has
Source funding ($ million) had clear initial priority.
While much U.S. energy assistance has envi-
World Bank ronmental components, particularly with regard
Central Europe 1,651 to air pollution and greenhouse gas emissions, the
FSU (Russia) 1,210
overall assistance effort has not been nearly as en-
Total 2,860
vironmentally oriented as was anticipated in its
European Union earliest phase. This is due, in part, to the recogni-
Central Europe (PHARE) 550 tion of other priorities, especially economic revi-
FSU (TACIS) 123 talization. 3
Total 673
EBRD
Central Europe 220 EVALUATION OF U.S. PROGRAMS
FSU (Russia) 250
Since most programs addressing energy and the
Total 470
environment in the former East Bloc are quite re-
United States cent in origin, it is not possible at this point to offer
Central Europe 151 detailed critiques. Nevertheless, even on the basis
FSU 93 of limited experience, it is possible to identify
Total 244
both particular strengths and incipient weak-
nesses in the collection of programs dealing with
* Does not Include bilateral trade-promotion programs
assistance to the energy sector. It is also possible
SOURCE U S Congress, Office of Technology Assessment, 1994
to identify the external constraints that limit the
effectiveness of U.S. and multilateral programs.
Before considering the strengths and weaknesses
MDBs, are intended to force countries to make the
of U.S. programs, it would be useful to review
institutional changes that are crucial to reform.
these constraints.
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 | Constraints on U.S. and Multilateral
Bank for Reconstruction and Development Programs
(EBRD), though smaller, also provides energy- U.S. programs have been developed and imple-
related development financing. European Union mented under difficult circumstances and under a
energy-related development programs provide al- variety of political, institutional, and financial
most three times the level of resources as U.S. bi- pressures. Considerable political pressure was put
lateral assistance programs. on agencies to disburse funds quickly to give vis-
U.S. government agencies have pursued differ- ible evidence of Western support for the new re-
ent energy-related development assistance poli- gimes following the end of the Cold War. All
cies in Central Europe and the FSU. In Central agencies have experienced difficulties in recruit-

3For ~xample, see: G(Jrdf~n Hughes, “Are the Costs of Cleaning Up Eastern Europe Exaggerated? Economic Reform and the Environment!’”
Oxjbrd Re\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 exper- Conditions in the recipient countries have also
tise. AID programs have been developed and not been conducive to rapid and efficient disburse-
carried out during its own reorganization, and ment. In several countries, especially in the FSU,
with staff cuts affecting personnel in programs for highly unstable political conditions have ham-
the region. The ongoing reorganization at AID is pered or prohibited program development. It is
designed to provide the agency with further flexi- difficult to plan specific energy improvements in
bility and streamlined contract procedures, but in the context of a drastic economic restructuring,
the meantime has hampered program develop- falling living standards, and institutional disarray.
ment. Continuing pressure on all agency budgets An important additional factor affecting the
has limited resources available to finance devel- success of U.S. and multilateral programs is the
opment and lending programs. difficulty of ensuring that countries adhere to the
A further extenuating circumstance is that political and economic conditionality attached to
many programs are lodged in institutions that assistance. To receive World Bank loans, for ex-
were designed for different types of operations. ample, countries are typically expected to raise
The World Bank and AID, for example, were de- energy prices and encourage market reform
signed for projects in developing countries whose throughout the energy sector. In practice, how-
experiences and needs differ considerably from ever, governments often resist the discipline of
those of the former East Bloc. In some cases, such price reform and the privatization of energy enter-
as the World Bank negative pledge waiver, agen- prises, and thus make it difficult to advance assist-
cies have been asked to abandon policies that they ance. This has been one of the principal factors
consider crucial for carrying out their worldwide holding up aid for Russian economic reform in
mission in order to provide assistance to the for- general, and for Russian energy sector assistance
mer East Bloc countries. in particular.
Eximbank is a striking example of an agency Reluctance to accede to conditionality can af-
being obliged to combine differing functions in fect demand for assistance as well. Several U.S.
carrying out programs for former East Bloc coun- agencies report a shortage of viable projects in the
tries. The primary mission of Eximbank is to sup- FSU countries, either because of lack of interest or
port U.S. exports. The bank is not a development unwillingness to accept conditions attached to fi-
assistance agency; but the Oil and Gas Framework nancial assistance. In several countries, notably in
Agreement for Russia, which is a major support to the Russian oil and gas sectors, there is both a
U.S. exports, is also a cornerstone of U.S. finan- marked ambivalence toward the type of assistance
cial assistance to the FSU countries. Eximbank the United States can offer, and a deep-seated sus-
therefore has had to balance the different political picion of foreign investment.
and economic pressures arising from the percep-
tion that it is an instrument of industrial, trade, and
development policy.4 In addition, the Eximbank | Strengths of U.S. Programs
Framework Agreement has encountered major or- The U.S. government and Congress moved with
ganizational and procedural problems that exemplary speed to develop energy assistance
delayed its final implementation for almost a year. 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 (Lex-
ington: 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 ex- | Weaknesses of U.S. Programs
pand the scope of old ones as new needs have aris- Despite the many achievements of the past years,
en. These programs appear to have been major weaknesses to U.S. assistance have
prosecuted with vigor and enthusiasm. emerged. One major set of weaknesses is related
OTA’s survey of the existing programs shows to the scale of the assistance effort and to problems
them to be comprehensive in coverage. Within in program design and implementation. The pro-
overall budget constraints, they address the main liferation of initiatives has caused problems.
barriers to reform previously discussed. Programs There are abundant reports from officials of for-
have been developed to help ease capital mer East Bloc countries of their being swamped
constraints for both energy supply and conserva- by visiting missions and the resulting technical as-
tion projects, to promote energy sector and ma- sessments. There is a further perception that the
croeconomic reform, and to provide a wide range assistance available is going largely to foreign
of technology and technical assistance. Particular- consultants rather than the recipient countries.5
ly strong efforts have been made to include the The large number of agencies offering broadly
U.S. private sector in these efforts. All in all, there similar services raises major problems of coor-
are no obvious major gaps in the coverage of U.S. dination and duplication.
programs, though their size, design, and imple- Coordination between the various donors, fair-
mentation are open to debate (see below and ly low during the first years of assistance, has con-
ch. 8). tinued to be a problem.6 There are several cases of
U.S. programs have shown considerable flexi- lack of donor coordination that seriously weaken
bility and responsiveness to changing conditions, the entire effort. For example, while the World
even over their short period of operation. There Bank supports an oil export tax as an efficient
was a clear shift in the early years of the assistance means of bridging the wide gap between domestic
effort from promising to provide energy and envi- and export oil prices, other government agencies,
ronmental technologies directly, to a strategy of more concerned with the promotion of foreign in-
building the policy and institutional capacity to vestment, strongly oppose it. There also continues
enable countries to absorb new technologies. Ef- to be lively competition among bilateral assist-
forts have also been made to respond to early criti- ance programs to influence technology choices in
cisms of the U.S. effort, some of which were cited former East Bloc countries. This can result in du-
in the previous OTA report. These included too plication of effort and a concentration on too nar-
many temporary consulting missions, lack of in- row a group of technologies.
country expertise, slow procurement, and confu- However, progress is being made in other areas.
sion over country needs due to a regional approach Currently, the World Bank, EBRD, AID, and the
to aid disbursement. The energy projects in Cen- EU have several joint energy projects, including a
tral Europe are now developed on a country-by- major power sector restructuring project in Po-
country basis. In the FSU, contract delays at AID land. Also, there is a more systematic data collec-
have apparently slowed project startups, but AID tion process under way to keep track of energy
has established in-country missions at an early
stage.

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 In- and to suggest improvements in programs that
ternational Energy Agency. support those our policies. These issues, especial-
Underpinning these weaknesses in imple- ly the need to define U.S. goals and priorities, are
mentation lies a more serious and fundamental elaborated in greater detail in the next chapter.
problem: a developing uncertainty over the best
means to achieve U.S. policy aims in the region, if SURVEY OF ENERGY AND
not the nature of those policy aims themselves. ENVIRONMENTAL PROGRAMS
The original program emphasis in the FSU— Energy and environmental programs fall into two
widely shared by all agencies and most Western broad categories: development assistance and pri-
industrial countries—was on oil production proj- vate sector support. In principle, the primary ob-
ects, mainly through private sector investments. jective of development assistance is direct
This emphasis was accompanied by MDB lending assistance to the recipient country. Trade and in-
programs designed to supplement and leverage vestment support, on the other hand, is primarily
private investment. Oil and gas received the most designed to help domestic industry. In practice,
attention because production in that sector could the distinction between the two is becoming in-
most quickly generate the extra foreign exchange creasingly blurred, for a number of reasons. First,
needed to underwrite the reconstruction of the en- benefits to U.S. industry can create a strong con-
tire economy. stituency for development assistance, especially
The assumptions behind this strategy are now important in times of budget stringency and reces-
in doubt. It is proving more difficult to achieve the sion. Second, export and investment promotion
anticipated production increases, partly because efforts are a natural concomitant to the recent em-
of the lack of enthusiasm in some host countries, phasis on privatization and the primacy of the pri-
notably Russia, for Western programs and the vate sector in technology transfer. Third, project
conditions that accompany them. There is also the finance is becoming increasingly complex, in-
belief in some international oil circles that govern- cluding both multilateral, bilateral, and private
ment support of an active MDB oil policy and ex- sector participants. Fourth, greater private sector
pansion of bilateral export credits undermines participation can screen ill-designed projects.
foreign investment by reducing the need for gov- On the other hand, critics complain that the
ernments and enterprises to deal directly with pri- merging of development assistance and export
vate Western companies on an equity-stake basis. promotion can compromise developmental goals
The rationale that underlies the distribution of and skew existing development programs in the
funds among the many countries of the region is direction of export promotion.
also not clear. The allocation of assistance within
the energy sector is open to question, particularly | U.S. Programs to Assist Former East
the emphasis on expanding supply, despite the im-
Bloc Development
mense potential for energy conservation. The re-
Assistance programs were designed first for Cen-
luctance of some host countries, especially
tral European countries and then the FSU. The two
Russia, to cooperate in key parts of the assistance
regions will be discussed separately because of the
program raises questions about the wisdom or fea-
sibility of the present approach. differences between the programs. Additional in-
formation is included in chapters 3 and 4. Current
This is an opportune moment to use this experi-
budget data are listed in chapter 8.
ence 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,
Chapter 7 Assistance, Trade, and Investment Programs | 157

7
Central Europe and the Baltics
U.S. energy and environmental assistance to Po-
land has centered around a group of projects dem-
onstrating U.S. know-how in Krakow. The
Skawina Retrofit project has installed advanced
U.S. clean-coal technology at a 550-MW (mega-
watt) 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, Air-
pol, a New Jersey-based firm, was awarded a
$7.6-million contract to install emission Controls
on two 50-MW boilers. 9 The powerplant subse-
quently bought another.
Polish power sector assistance has several ele-
ments. The Power Sector Restructuring, Privati- Combined Heat and Powerplant, Krakow, Poland
zation, and Management program provides
support for a multidonor power sector restructur-
program will address key regulatory and privati-
ing initiative developed by the World Bank and
zation issues. Building on energy audits undertak-
the Polish Ministry of Industry. AID contractors
en in 1991, AID is assisting in commercializing
are working on increasing the efficiency of power-
plants and transmission and distribution systems, low-cost efficiency technologies, developing lo-
privatization, and corporate management. A de- cal private energy service companies and joint
mand-side management and demonstration pro- ventures, and establishing training programs for
gram is under way, and a utility partnership promoting private investment in oil, gas, and coal.
between Commonwealth Edison Co. and the Pol- Energy efficiency is also a major element of
ish Power Grid is examining management issues. U.S. assistance in the Czech Republic and Slova-
In Hungary, the power sector and energy effi- kia. SEVEn, the energy efficiency center in
ciency are also the primary focus of U.S. assist- Prague, conducts outreach to the private sector.
ance. The New England Electric Co. and the Several towns in the Czech Republic, including
Hungarian Power Cos. Ltd partnership has fo- Cesky Krujlov, Plzen, and Ostrava, have ongoing
cused on improving management, financial sys- energy efficiency and pollution reduction demon-
tems, and consumer relations. A complementary stration 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 NIS Task Force


Power Co. and the Czech Power Co. (CEZ) have In January 1992, AID formed the Washington-
formed a partnership. AID contractors will pro- based New Independent States (NIS) Task Force,
vide additional technical assistance to CEZ and linked to AID field missions, which currently in-
support for privatization efforts. clude Moscow (Russia), Kiev (Ukraine, Belarus,
In Slovakia, a utility partnership has been and Moldova), Almaty (Kazakhstan, Turkmenis-
formed by Southern Electric International (Geor- tan, Kyrgyzstan, Tajikistan, and Uzbekistan), and
gia) and the Slovak Electric Power Company Yerevan (Armenia, Georgia and Azerbaijan). The
(SEP), focused on management, organization, and task force’s energy program has four stated strate-
finance. Follow-on power sector restructuring gic objectives: 1. energy pricing policy and insti-
measures are being defined by AID in cooperation tutional reform. 2. energy efficiency and
with SEP and the Ministry of Economy. In the oil performance improvements. 3. energy production
sector, a study of options for upgrading heavy oil and delivery system improvements. and 4. nuclear
processing has been undertaken at the Slovnaft re- power safety. 10
finery in Bratislava. Energy Pricing Policy and Institutional Re-
In the Baltic countries, AID is attempting to form. This component aims to introduce energy
stimulate the development of a domestic energy pricing reforms and sector restructuring and pri-
service industry. The first phase had focused on a vatization. Another key element is training and
series of energy efficiency audits. In the power exchanges between energy companies in the
sector, AID is assisting in pricing and model con- United States and the Former Soviet Union.
tracts for international electricity contracts. A util- In Russia, assistance included planning for pri-
ity partnership has been formed between Central vatizing state-owned energy producers, reforming
Vermont Public Service and Latvenergo (Latvia). the price and tariff structure, and introducing an
A partner is being sought for the Lithuanian appropriate regulatory framework in the energy
utility. sector. The Institute for International Education is
AID is also conducting regional efforts in Cen- providing technical assistance and training to de-
tral Europe and the Baltics. A major initiative is a velop a petroleum commodity exchange in Mos-
project to rationalize the refining and oil transport cow. Technical assistance has been given to
sector. This will include developing a database, Ukraine, Kazakhstan, and Armenia in drafting na-
identifying policy. legal, and institutional factors tional energy plans and formulating privatization
to improve competitiveness, and identifying a list strategies. DOE is heavily involved in drafting a
of potential capital projects. new oil and gas law, and implementing legislation
for Russia.
The Former Soviet Union As in Central Europe, AID has begun a pro-
As in Central Europe, U.S. energy and environ- gram of twinning and exchanges between U.S. en-
mental assistance to the FSU is undertaken by ergy companies and those in the FSU. This
AID, DOE, and EPA. AID has attempted to build program is discussed in chapter 4. 11 The Energy
in-country representation more rapidly than in Industry Partnership Program (EIPP) for the New-
Central Europe. ly 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 pe- Prime Minister Chemomyrdin were appointed to
troleum sectors. AID funding for the EIPP is $7.2 chair the commission, which met for the first time
million over three and a half years, with additional in September 1993. Agencies involved with the
funding from participating companies. commission include DOS (overall policy and in-
Energy Efficiency and Performance Im- ternational coordination), AID (funding coordina-
provement. This component has focused on im- tion), DOE and the Nuclear Regulatory
proving efficiency in electric power, refineries, Commission. Nuclear assistance is discussed in
industries, and residential buildings. Some fund- chapter 4.
ing was also directed to support the Moscow Ener- Much of DOE’s activity in the Russian energy
gy Efficiency Center. Three U.S. engineering and sector is focused around the Gore-Chernomyrdin
consulting firms assessed efficiency options in se- Commission. DOE has divided this program into
lected district heating systems in Armenia, Bela- three working groups. DOE’s commercial and
rus, Kazakhstan, Kyrgystan, Russia, and Ukraine legislative working group sets up energy-infra-
and identified appropriate instrumentation and structure demonstration projects to educate Rus-
equipment to improve efficiency. sians in business practices. Its largest effort so far
Energy Production and Delivery Systems has been a project to open 25 gas stations in the
Improvements. This component will improve Moscow area. This group has also promoted the
production from existing power facilities, devel- development of production-sharing agreements
op additional power generation capacit y from safe as an interim measure to facilitate U.S. involve-
sources, and promote demand-side efficiency in ment in oil and gas development. In the legislative
key parts of the energy sector. One of the long- area, DOE was heavily involved in drafting oil
term goals is to provide alternative energy sources and gas law. Finally, the commercial and legisla-
needed to decommission unsafe nuclear reactors. tive working group sends U.S. academic advisors
Partners in Economic Reform, a U.S. nongov- to the FSU to provide policy assistance.
ernmental organization consisting of the National An oil, gas, and coal development working
Coal Association and the AFL-CIO, is providing group has developed seven projects to promote
advice on the management and safety of coal technology transfer and joint research. Its main
mines in Russia, Ukraine, and Kazakhstan. In Ar- project so far has been an oil and gas technology
menia, AID contractors helped prepare a $57-mil- center located in the Russian city of Tiumen, the
lion loan from the EBRD to complete the Hrazdan capital of the West Siberian oil and gas region.
power generation facility. AID is also conducting This technology center is designed to link Western
feasibility studies in Russia on greater efficiency companies and technologies with Russian enter-
in gas transmission. prises.
DOE is proposing Oil and Gas Centers for the DOE’S energy efficiency working group is cur-
major oil- and gas-producing areas of Russia, pro- rently working on 24 projects. The largest project,
viding information about U.S. technology and financed by a one-time transfer of $125 million
services. Functions would include seminars and from the AID commodity import program (fiscal
training, matching of U.S. companies with Rus- year 1994 funds), facilitates purchases of U.S. en-
sian production associations, and technical assist- ergy-efficiency technologies. The working group
ance for economic, financial, and field analysis. is also conducting a study of energy use and alter-
native sources, with an emphasis on replacing the
Gore-Chernomyrdin Commission FSU’s most dangerous nuclear reactors.
President Clinton and President Yeltsin agreed at DOE’s total budget for FSU activities is only
the Vancouver summit meeting in May 1993 to es- $3 million (with a separate nuclear safety line of
tablish a joint commission on energy and space $73 million). Agency personnel note that the
cooperation. Vice President Gore and Russian 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 ects, and private sector contacts in a number of en-
routed (all money must pass through AID before ergy areas, including energy efficiency and
coming to DOE) adds a layer of bureaucracy to an renewable. A U.S.-Russian Joint Committee es-
already cumbersome system. Finally, DOE offi- tablished under the agreement meets annually.
cials would like to have more direct authority to DOE plans to pursue Fuel and Energy Agreements
negotiate energy-related agreements. These offi- with other FSU states, with an initial focus on Ka-
cials note that the United States is the only West- zakhstan, Ukraine, and Azerbaijan.
ern country in which the State Department (or its DOE also supports the U.S./Gazprom Working
equivalent), not the Department of Energy, takes Group, which brings together U.S. and Russian
the lead in negotiating energy-related agreements. gas industry officials to develop joint projects,
and an Oil and Gas Equipment Working Group
Environmental Assistance under the U.S.-Russia Business Development
Committee. There have been delays, however, in
AID and EPA are jointly undertaking a number of
organizing the International Science and Technol-
environmental projects. EPA is focusing its pro-
ogy Center headquartered in Moscow. The found-
grams on three areas of activity: strengthening the
ing parties, which included Canada and Sweden,
capacity of environmental institutions, focusing
pledged $70 million in fiscal year 1993, with a
resources on environmental “hot spots” and re-
gional environmental management, and demon- $25-million share from the United States. There is
also an agreement (signed in June 1992) to estab-
strating environmental and energy technologies.
lish a science and technology center in Kiev, Uk-
EPA participated in a joint mission with the World
raine, with a $10-million donation from the
Bank to plan with the Russian government two
United States, but friction over Ukraine’s nuclear
major Bank energy and environmental loans: the
arsenal has delayed the program.
Oil Rehabilitation Project and the forthcoming
Environmental Project. A key objective of the
joint mission was to leverage limited U.S. grant | Multilateral Programs to Assist Former
assistance with the larger World Bank projects. East Bloc Development
Much of the energy and environmental assistance
Bilateral Energy Agreements to the former East Bloc is channeled through mul-
and Working Groups tilateral initiatives, primarily the World Bank
Energy cooperation with Russia and other FSU Group and the EBRD. 12 The Central Asian Re-
countries has accelerated since 1992 but the im- publics of the FSU have applied for membership
mense potential for science and technology coop- in the Asian Development Bank (ADB).13 The
eration between the United States and Russia, as Global Environmental Facility (GEF) also pro-
well as other FSU states, has only begun to be vides multilateral financing. Assistance on policy
tapped. The United States and the Russian Federa- and research issues is provided by the Internation-
tion Framework Agreement on Scientific and al Energy Agency, the U.N. Economic Commis-
Technical Cooperation in the Field of Fuel and sion for Europe, and the European Energy Charter
Energy provides for data exchanges, joint proj- (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 tenta-
tively 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 coop-
eration in the energy field, and energy efficiency and environmental protection. The first two of these in-
include provisions to promote more sound legal frameworks for energy activities, access to energy re-
sources, 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 Eu-
rOfX3, 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 Central Europe


14
The World Bank is the most influential multilat- The Bank has been assessing problems of com-
eral organization affecting energy and the envi- mon regional concern through the Central and
ronment in the former East Bloc, lending almost Eastern Europe Network for Regional Energy
$3 billion for energy projects between 1989 and (CEENERGY) program, in coordination with the
1993. The policy framework for Bank energy European Union, United States, and the Interna-
lending in the region is laid out in the country eco- ational Energy Agency. 15 C E E N E R G Y seeks to fa-
nomic memoranda that typically precede lending, cilitate technical assistance and pre-investment
and in energy sector conditionality attached to It has supported
activities in high priority areas.
loans. Conditions include raising energy prices to studies of petroleum refining and transport, elec-
world market levels, restructuring and privatiza- trical power interconnection and trade, natural gas
tion of energy sector enterprises, and encouraging trade, energy efficiency in the context of environ-
foreign investment. The power sector and district mental impacts, and the impact of Soviet energy
heating have been the major focus of Bank energy exports on Central Europe.
lending in Central Europe, while oil and gas will World Bank energy and environmental projects
dominate in the FSU. in Central Europe are heavily concentrated in Po-

1 me World Bmk Group Consls[s of [he International Bank for Reconstruction and ~vetopment, the lntemational wveltJPmnt Ass{~ia-
tion, 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 The Power and Environmental Improvement
1990-1993 (most of which are for the energy sec- Project ($246 million toward a total of $557.5 mil-
tor), and several more in the preparation stages. lion) aims to reduce the environmental impact of
The policy framework for the energy lending was powerplants in Northern Bohemia, through in-
negotiated with the Polish government in 1990 creasing the efficiency of powerplants and the reli-
and 1991. Energy price increases, were supported ability of the CEZ transmission system. Flue gas
in a structural adjustment loan in 1991 ($300 mil- desulphurization equipment and particulate con-
lion) and also in the first energy loan the Energy trol (dust and ash) will be installed.
Resource Development Project approved in 1990 The Second Czech Power Project (about $200
(the World Bank loan is for $250, million with $60 million;) will improve system security and opera-
million in cofinancing from the European Invest- tional reliability and also assist in completing the
ment Bank, toward a total project cost of $648 restructuring of CEZ.
million). The project also sought to encourage There are two prospective projects in Slovakia.
fuel switching from coal, and development of a The Slovak Gas project ($150 million, with pro-
regulatory framework to support privatization and posed cofinancing with EBRD) would support a
joint venture arrangements. new international gas pipeline to increase domes-
The subsequent Heat Supply Restructuring and tic consumption and security of supply. The Slo-
Conservation Project approved in 1991 (the vak Power project would assist the Slovak
World Bank loan is for $340 million, with $50 Electric Power company in improving thermal ef-
million in cofinancing from the EBRD, toward a ficiency and reducing pollution at the Vojany
total project cost of $619 million) continues sec- power station through installation of circulating
tor-wide restructuring and introduces modern fluidized-bed boilers.
technologies into the district heating system. A In Hungary, the Bank is undertaking an energy/
Cogeneration Privatization Project (the tentative environment project ($1 00 million for a total cost
loan amount from the World Bank is $120 million of $213.2 million) to support diversification of en-
toward a total project cost estimated at $320 mil- ergy supply, energy conservation, and environ-
lion), will promote private investment and owner- mental protection. The project would include:
ship of major powerplants in Krakow and | construction of a gas-fired combined cycle co-
throughout the country. generation unit of 230 MWe (megawatts elec-
A Power Transmission Project will rehabilitate trical) and 240 MWt (megawatts thermal) at
and reinforce the existing electric power transmis- Dunamenti powerplant;
sion system, and develop the transmission system | upgrading of Hungary’s existing Energy Man-
to meet essential reliability requirements and in- agement System;
ternational standards. ■ assistance for environmental planning and
There are two prospective World Bank energy management and,
projects in Poland. The Coal Sector Restructuring ● training and institution building in the power

and Environment project, anticipated for Board sector.


approval in early 1995, will support coal sector re-
structuring,. The Power Privatization project aims
to promote independent power production and Former Soviet Union (FSU)
joint ventures between Polish powerplants and In Russia, priority elements of an initial energy
foreign investors. policy package consist of energy price reform and
The power sector is the major focus of the the development of a regulatory framework to
World Bank in the Czech Republic and Slovakia. 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 ap-
proved toward a $1-billion Oil Rehabilitation
Project aimed at reviving oil production in West-
ern Siberia. A natural gas project has also been
identified $300 million) that would assist in re-
ducing losses in gas distribution and enhance ex-
port 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 capabili-
ties and the financial viability of the participating
oil producer associations, and mobilize cofinanc-
ing. Three oil producer associations in Western
Siberia were chosen for the project: Kogalymnef-
tegas, Pumeftegas, and Varyeganneftegas. A key
element will be promotion of a policy framework Drilling Rig, West Siberia
that will increase foreign investment. The Bank
aims to stimulate levels of investment of between tion loan of about $150 million for the Uzen oil
$2 billion and $3 billion annually in Russia’s oil field.
and gas sector.
The project is intended to increase national oil The International Finance Corp.
output by 3 percent per year and bring in $1.5 bil- The International Finance Corp. (IFC) is the pri-
lion in annual oil revenue. The loan will support vate sector arm of the World Bank. The IFC typi-
repairs at 1,300 oil wells, drill 84 new wells in ex- cally makes loan and equity investments of no
isting fields, and replace 1,000 kilometers of pipe- more than 25 percent of project cost and has an up-
line. per limit of $100 million.
The Bank is also undertaking energy sector In Russia, the IFC is currently supporting two
technical assistance and preparing project lending oil and gas projects. A loan of $60 million has
in Ukraine and Moldova (power sector) and the been made to the Polar Lights Co., a joint venture
Central Asian Republics (primarily oil sector re- between Conoco and Arkhangelskgeologia in the
habilitation). In Kazakhstan, two projects are in Ardalin oil field in Northern Russia. About $11
preparation—a technical assistance loan of about million is being provided to a joint venture involv-
$20 million for fiscal year 1994 and a rehabilita- ing Canadian Fracmaster and two Russian entities
164 I Fueling Reform: Energy Technologies for the Former East Bloc

for increasing production at existing wells in Central Europe and the Baltics
Western Siberia.17 The EBRD began its energy lending in 1991, with
The IFC is also increasing its participation in a $50-million cofinancing of the World Bank’s
private power projects.18 A new infrastructure in- Heat Supply Restructuring and Conservation
vestment group was formed in 1992 to assist the project in Poland. In 1992, energy loans totaling
IFC in increasing its portfolio of power projects, $200 million to public sector operations focused
including a 400-kV (kilovolt) transmission line on supply rehabilitation, completion of projects
under consideration in Poland. under construction, and end-use efficiency im-
provement. The Bank has also increased technical
The European Bank for Reconstruction anti cooperation activities.20
Development (EBRD) Latvia, Lithuania, and Estonia were all recipi-
The European Bank for Reconstruction and De- ents of loans to support Energy Sector Emergency
velopment (EBRD), through both its public sector Investment for $37 million, $44 million, and $47
and merchant banking activities, has approved al- million, respectively. Each loan focused on reha-
most $800 million for the energy sector.19 Its larg- bilitation of energy supply facilities and end-use
er energy loans have for the most part been efficiency. On the merchant bank side of its opera-
cofinancing components of World Bank power tions, the EBRD has made several loans to energy
sector and oil sector rehabilitation projects, al- companies in Central Europe, including expan-
though some smaller loans have been made for en- sion of generator producing capacity.
ergy efficiency.
The Bank’s short-term priorities are as follows: Former Soviet Union
repairing and rehabilitating existing supply facili- As in Central Europe, EBRD lending for major
ties (e.g., oil and gas pipelines); completing exist- energy projects in the FSU has typically been cofi-
ing high-priority projects (e.g., transmission lines nanced with the World Bank and export credit
and power stations already under construction); agencies. The Bank is providing $250 million in
assisting countries to diversify sources of energy cofinancing for the World Bank Oil Rehabilitation
supply; and private sector projects that promote Project in Russia and has loaned the Armenian
diversification of supply and the injection of for- Ministry of Fuel and Energy $57 million to com-
eign capital (e.g., projects to bring existing oil and plete a powerplant. The Bank is also undertaking
gas fields on stream). The Bank will also assist feasibility studies for rehabilitation of gas pipe-
governments with emergency energy sector lines.
technical assistance in response to energy short- On the merchant banking side, the Board had
ages and hardships resulting from economic approved five private projects on oil and gas for a
restructuring. total of$188 million to Russia. Four of these proj-

lyln~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 Ca-
nadian Fracmaster project; $40 million for a
$300-million project by Chemogomeft in Tiumen
Province; and $90 million for Conoco’s Polyar-
noye Siyanie project in Archangels province,
with OPIC lending $50 million and Eximbank a
possible $60 million.

The Global Environment Facility


The Global Environment Facility 21 (GEF) cur-
rently has one energy project in Central Europe, a Pumping Station Samotlor Field, Nizhnevartovsk.
coal-to-gas conversion project in Poland cofi-
nanced with the World Bank. The GEF/World phurization equipment. The EU’s Technical As-
Bank contribution is $26 million toward a $52 sistance Programme to the Commonwealth of
million project. The project has several objec- Independent States (TACIS) was begun in De-
tives, including an investment component that cember 1990. Energy had an allocation of $132
will initially convert two coal-fired boilers in Kra- million in 1991 ($61 million for nuclear pro-
kow to gas-fired, and a technical component that grams) and $167 million in 1992 ($115 million is
will address institutional and energy efficiency is- for nuclear programs). Non-nuclear activities in-
sues. The project also has been allocated a portion clude oil, gas, and power sector projects, energy
of a $4.5-million cofinancing grant from Norway efficiency, and energy centers. The Directorate
to simulate joint implementation arrangements General for Energy’s (DG XVII) Thermie pro-
between Norway and Poland. Other prospective gram undertakes market assessments, trade
GEF projects include providing lines of credit for promotion events, and energy efficiency audits.
energy efficiency demonstration zones. Energy projects are also financed by the Euro-
pean Investment Bank (EIB), an autonomous or-
| European and Japanese Assistance ganization within the EU structure that funds
Programs capital investment projects. Energy and the envi-
The EU has a large and multifaceted program of ronment are a component of the “Europe Agree-
energy and environmental assistance with former ments,” signed with Poland, Hungary, the Czech
East Bloc countries. The “request driven” Republic, and the Slovak Republic that seek to
PHARE program engages in a diverse set of acti- provide the basis for the future integration of those
vities similar to the U.S. assistance program, in- countries into the EU.
cluding policy guidance, training, energy A number of European countries and Japan
efficiency audits, and installing flue-gas desul- 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 land, and the Netherlands is providing cofinanc-
vary widely in scope. Most offer small technical ing for technical assistance to the World Bank oil
assistance programs on a grant basis and access to rehabilitation project in Russia.
export credits. Priorities for the Western European
countries include transboundary pollution con- | U.S. Trade and Investment Programs
trol, power sector rehabilitation and transmission Western assistance for the former East Bloc was
connections between East and West, oil and gas complemented from the beginning by efforts to
pipelines, and, increasingly, access to the oil and stimulate trade and investment.
gas resources in the FSU. A large number of U.S. government agencies
Bilateral relations often reflect a mix of histori- are involved in energy and environmental export
cal ties, geographical proximity, and national in- assistance to former East Bloc countries. DOC,
terest. For example, Scandinavian environmental AID, DOE, OPIC, and the Trade and Develop-
assistance is concentrated in the countries that ment Agency (TDA) provide export and invest-
share the Baltic sea coastline and that also account ment promotion, such as market information,
for a large share of transboundary pollution. training, conferences, official visits, and in-coun-
Germany has focused its bilateral energy pro- try support for business. Eximbank, OPIC, TDA,
grams in Hungary and Russia. Austria’s energy and, to a lesser extent, AID and DOE provide fi-
assistance programs are focused on pollution and nancing for exports, projects, and investments.
power sector rehabilitation in the Czech Republic The proliferation of activities led to some con-
and Slovakia. fusion. Establishment of the Trade Promotion
Japan’s assistance activities have included in- Coordinating Committee (TPCC) should im-
dustrial energy efficiency audits in Hungary and prove coordination. The TPCC was initiated by
sending a survey team to Russia to establish the the Export Enhancement Act of 1992 (Public Law
basis for more extensive future contacts. Japan has No. 102-429). Chaired by the Secretary of Com-
announced a $1 .2-billion package of bilateral aid merce, it consists of all 19 federal agencies23 in-
for the FSU, a large part of which will be devoted volved in export promotion plus the National
to the construction of a facility for the disposal of Security Council and the National Economic
nuclear waste. Council. The purpose of the TPCC is to provide an
Like the United States, other bilateral donors export promotion strategy, coordinate and priori-
sometimes coordinate assistance with the World tize the government’s export promotion activities,
Bank and other multilateral lenders. The United and provide a central source of information.24
Kingdom for example, is participating with the
World Bank on power sector restructuring in Po-

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-BP-
ITA-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 Intern-
ational 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 Pri-
vate 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~ sub-
mitted 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 and environmental conferences and visits of offi-
growing demand for U.S. technologies and ser- cials. 27
vices in the power sector, in air pollution control, In-country support of business development is
and in energy efficiency. By far the greatest de- provided by a growing network of business cen-
mand for U.S. investment could be in the oil and ters that provide visiting company representatives
gas sector in the FSU. While the large oil compa- with services such as telephone and fax, tempo-
nies have operated extensively across the world, rary office space, market information, and assist-
many other U.S. energy companies and much of ance in making business contacts. The American
the environmental industry have not had a strong Business Center is open in Warsaw, Poland, and
international orientation. Awareness of the large the FSU American Business Center Program,
potential offered by a large and growing global funded by AID, plans twelve centers. The
market, a declining U.S. share of those markets, US&FCS also has offices throughout Central Eu-
and, in some cases, the concomitant maturation of rope and in the FSU and is planning a substantial
the U.S. market have increased industry interest in increase in personnel.
government involvement in supporting exports
The DOE-managed energy efficiency centers
and overseas investment.25
engage in business development, including U.S.
Information Programs liaison support with U.S. companies, and in de-
veloping the Automated Eastern Europe and
U.S. information about business opportunities in
Newly Independent States Information System.
Central Europe and the FSU is channeled through
The Czech and Slovak center, SEVEn, supports a
a variety of sources. DOC’s Eastern European
Business Information Center (EEBIC) and the series of energy efficiency business weeks featur-
Business Information Service for the Newly Inde- ing energy management and efficiency programs
pendent States (BISNIS) act as clearinghouses for and appliances.
trade and investment opportunities for U.S. busi- Other types of trade promotion activities in-
nesses. 26 DOC’s U.S. and Foreign commercial volve increasing U.S. commercial opportunities
Service (US&FCS) undertakes export promotion at the multilateral and regional development
activities in the region. Electric power technolo- banks. There is also support for firms seeking pro-
gies and oil and gas equipment are promoted as a curement opportunities at the banks. The DOC
“best prospect” for U.S. trade in several countries. Office of International Major Projects maintains a
International conferences, trade missions, and reference room of World Bank and EBRD (and
reverse trade missions can also be cost-effective other regional development banks) project docu-
means of promoting business. TDA and DOE ments, project pipelines, and provides procure-
have funded, and cofunded, a number of energy ment 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. Gov-
ernment 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 in-
formation 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 ener-
gy 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 region economically and demonstrating U.S. fi-
Several different U.S. government agencies, in- nancial commitment to its development.
cluding Eximbank, OPIC, TDA, and AID, pro- The Bank is directed to support “key indus-
vide pre-export financing for energy firms, which tries” that, among other things, export high value-
can lead to follow-on export or project opportuni- -added products, develop new capital goods
ties. U.S. firms have lobbied in recent years for an technologies, and support highly skilled jobs in
increase in government funding for feasibility the United States.** Energy capital goods exports,
studies. The TPCC has recommended that all U.S. particularly electric power and oil and gas, have
government funding for feasibility studies be been a large component of Eximbank’s lending in
centralized in the TDA. recent years. The Bank has also received congres-
TDA, the primary source of funding for feasi- sional mandates to reach targets in certain other
bility studies, has steadily increased its energy and energy and environmental sectors. A target for re-
environment activities in the former East Bloc. newable energy exports of 5 percent of total ener-
These studies have been undertaken by U.S. gy exports was set in 1990 and adhered to since
firms, including Westinghouse, Bechtel, Enron, then. 29 Under the Export Enhancement Act of
Fluor Daniel, Foster Wheeler, and Black & 1992, Eximbank was required to support the ex-
Veatch. Other project development funds include port of goods and services that have “beneficial ef-
the Capital Development Initiatives for energy fects on the environment or mitigate potential
and the environment, managed by AID. adverse environmental effects.”
Eximbank offers short-term and medium-term
Financing for Exports and Investment loans and guarantees in most of Central Europe
Eximbank and OPIC financing for the region has and the Baltics. By fiscal year 1992, the Bank had
grown significantly since 1989. Both agencies a total exposure of about $647 million in Poland,
face persistent demands to increase financing in $196 million in the Czech and Slovak Republics,
the region. Energy capital goods are a key strate-, and $1.7 million in Hungary. The Bank began
gic sector. lending to the then-Soviet Union in 1991. By fis-
cal year 1992, its exposure in Russia was $115.5
Eximbank Programs million .30
Eximbank programs are designed to support ex- But the poor quality and unreliability of the na-
ports that would not otherwise attract private sec- scent banking sector and the indebtedness of the
tor financing, by offering loans with longer term state sector in Russia makes sovereign borrowing
maturities, providing export credit insurance, and difficult. To promote capital goods exports, Exim-
countering export credit subsidies of foreign gov- bank has been seeking alternatives to sovereign
ernments. While not explicitly stated as such by lending by offering various types of “limited re-
the Bank, which is not a development lender, the course” financing, including project financing
credits to former East Bloc countries are integral and a large export credit line for oil and gas equip-
to U.S. foreign policy objectives of stabilizing the ment. 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 formation from all parties to the deal, notably in-
transactions that involve over $50 million in U.S. cluding a yield consultant report on the technical
content. It applies to new projects, not expansions, and economic feasibility of the transaction Anoth-
which can be structured as BOT (Build Operate er limitation of the agreement is that many oil and
Transfer), BOOT (Build Own Operate Transfer), gas equipment transactions are on a smaller scale
BOO (Build Own Operate), or variations. Project than the financing minimum of $25 million.
finance loans are looked at more favorably if they The offering of export credits can also
involve cofinancing with other ECAs and/or com- introduce a distorting effect into the recipient
mercial banks. The first project financing deal put country’s development path. Since export credits
together for the FSU was a $47-million joint ven- typically support heavy capital goods on attractive
ture between Anderman Smith and Chemogoneft, terms, or make accessible capital goods that
a private, Russian-owned oil and gas production would otherwise be unavailable, borrowers may
company. Exporters benefiting will include Halli- be biased toward capital-intensive imports. This
burton Company, National Oilwell, and National question has also been raised with respect to the
Engineering and Constructors.32 Russian need for imports of U.S. oil and gas
But the bulk of limited recourse financing will equipment, given the existence of a huge Russian
come under the U.S.-Russia Oil and Gas Frame- and Azerbaijani oil and gas equipment industry,
work Agreement signed in July 1993, estimated to which, while not as technologically sophisticated
provide financing for $1 billion of U.S. oil, gas, as that of the United States, nevertheless sup-
and petroleum equipment and services. The op- ported the extensive development of Soviet oil
eration of the agreement was delayed pending ne- and gas. At this point (spring 1994) it is too early
gotiations over the World Bank’s negative pledge to assess the likely success of the Eximbank
clause. This clause requires World Bank borrow- framework agreement (see ch. 8 for further dis-
ers to avoid further liens on any public assets al- cussion).
ready pledged for Bank loans and to allow the
Bank to claim priority over others in repayment of
debt. This clause has effectively precluded state OPIC Programs
oil enterprises in the FSU from pledging their as- OPIC’s financing for U.S. investors in former East
sets as security for foreign credit.33 The World Bloc countries, which includes political risk in-
Bank recently agreed to waive this pledge for surance, loans, and guarantees, is oversubscribed.
lending to Russia’s oil and gas sector. Political risk coverage, in particular, is a major re-
This waiver clears the way for Eximbank fi- quirement for many companies wanting to do
nancing, which will be secured from the hard- business in the region. Table 7-3 reviews OPIC
currency sales of the oil and gas produced under energy and environmental financing for the re-
the project. To qualify for a loan under the limita- gion.
tions set out by the World Bank as conditions for OPIC is increasingly active in the FSU oil and
the waiver, the oil and gas equipment must be gas sector, with financing for projects by Ander-
shown to provide incremental oil, that is, oil not man Smith, Conoco, and Texaco. Assistance in oil
available without the equipment purchase. Ap- and gas projects includes both political risk insur-
plications for financing under the agreement thus ance and loan guarantees. However, OPIC has
require a great deal of technical and financial in- 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 guaran- the financing of firms in the recipient countries
tees will probably be raised to $200 million (from and the joint ventures with U.S. firms, but will
the previous $50 million) in line with Trade also finance U.S. companies doing business in the
Promotion Coordinating Committee recommen- recipient countries.
dations.
OPIC has also supported a “Russia Country | European and Japanese Trade and
Fund,” which is expected to generate several Investment Programs
hundred million dollars of investment in the Rus- Most European countries and Japan have export
sian economy. 34 The fund will provide equity to a credit agencies (ECAs) and investment promotion
wide range of new businesses, expansions, and and financing programs against which U.S. pro-
privatizations, with particular emphasis on energy grams are often negatively compared.35 Indeed,
and environmental projects. export financing supports a much higher percent-
age of many of these countries’ exports than do
Enterprise Funds U.S. programs. European and Japanese govern-
Energy and environmental companies doing busi- ments are reported to be more aggressive in sup-
ness in Central Europe and the FSU may also be porting deals by their companies than is the
eligible for enterprise funds established by the United States. But the exposure of the European
U.S. government to foster overseas investment and Japanese programs in the former East Bloc
and private sector development. The funds are generally, and in the energy and environmental
converted to small and medium size funds Such sectors specifically, is difficult to monitor.
funds have been established in Poland (1990), The Japan Export-Import Bank is preparing a
Hungary (1990), the Czech and Slovak republics $1.5-billion line of credit for the FSU that would
(1991 ), and Russia ( 1993). The funds emphasize include financing for a refinery in Uzbekistan be-

JdManaged 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, Occa-
sional Paper 3 (Washington, DC: The World Bank, 1992).
Chapter 7 Assistance, Trade, and Investment Programs | 171

ing constructed by Marubeni Corpo and Chiyoda these companies’ access to public finance. U.S.
Corp. An EU political risk insurance fund for en- companies benefit from European and Japanese
ergy investors in the FSU has reportedly been export financing, but are required to reduce sharp-
started by Energy Private Investment Support, a ly the level of U.S.-made components. For exam-
private bank consortium with between $6 billion ple, a U.S. supplier to a petrochemical project in
and $12 billion in resources. 36 Also, the invest- the FSU reported having to reduce U.S. compo-
ment activities in the former East Bloc of Euro- nents to less than 5 percent when financing was
pean state-owned energy enterprises, such as sought at Italian and Japanese export credit agen-
Elf-Aquitaine (France) or Statoil (Norway), could cies. 37
be considered a form of export assistance, given

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
Policy
Options 8

T
he U.S. national interest would be served well if all coun-
tries in the former East Bloc become prosperous, demo-
cratic 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 dan-
gerous 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 sup-
porting 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 provid-
ing only a marginal increase in U.S. exports. This chapter reviews
the main goals guiding U.S. policy toward the region and sug-
gests 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 justi-
fication for U.S. assistance has been the “historic opportunity” to
ensure world peace and the security and prosperity of American
National Theater, Sofia.
citizens that has arisen from the collapse of Communism and the
end of the Cold War. Promoting political stability and economic
| 173
174 I Fueling Reform: Energy Technologies for the Former East Bloc

prosperity in the former East Bloc should lessen ploitable source of exports that can generate the
the risk of future conflict and dampen geopolitical hard currency so desperately needed to finance
competition. general political-economic reforms. Since ineffi-
cient and antiquated supply and consumption pat-
terns severely restrict the quantity of oil and gas
| Energy-specific Goals
available for export, modernization of energy
Reform and modernization of the energy sector is technologies and facilities is imperative.
a critical factor in the transition because of its Countries lacking large oil and gas reserves
great economic importance. As a component of must import supplies. Imported energy is very
overall American strategy in the former East Bloc, costly, especially as Russia moves to world prices
U.S. goals with energy-specific implications in- in its exports to other FSU republics. The bulk of
clude the following: Ukraine’s huge debt to Russia stems from oil and
● to promote market reform in the energy sector, gas imports. Many countries must resort to burn-
● to modernize energy sector facilities and ing high-pollution domestic coal, and several rely
technologies, on unsafe nuclear powerplants. The introduction
9 to advance U.S. energy-related business inter- of cleaner and more efficient energy technologies
ests, will enable these countries to spend less on im-
● to reduce energy-related pollution and threats to ported fuels and to reduce pollution.
the environment, and
● to augment world fuel supplies.
Advancing US. Energy-Related Business
Interests
Promoting Market Reform U.S. companies are competitive in many energy
Energy sector reform is a crucial component in the areas. Assisting them in former East Bloc markets
transformation of the countries of the former East will lead to increased U.S. exports and jobs. In
Bloc to market-oriented societies. It is unlikely particular, American oil and gas companies are
that energy production can be increased signifi- world leaders in exploration and production
cantly, and energy use rationalized, unless broad- technologies. The former East Bloc represents an
based policy changes are made. Successful excellent opportunity for U.S. firms to find new
marketization of the economies of the region de- reserves, increase business, and employ their ex-
pends most fundamentally on introducing com- cess capacity. Increased activity in the FSU could
prehensive programs of privatization, enacting boost U.S. employment in the oil and gas industry,
basic changes in legal structures, eliminating state which has shrunk by 400,000 jobs over the past 10
subsidies, freeing domestic prices, achieving cur- years.
rency convertibility, and establishing a favorable
climate for foreign investment. In particular, ener- Reducing Energy-Related Pollution and
gy price reform is essential to economic transition Threats to the Environment
and has been a key condition of loans from the
Pollution in the former East Bloc has caused great
multilateral development banks (MDBs) to Rus-
devastation in some regions, adversely affecting
sia and other former Soviet Union (FSU) repub-
public health and the economy. Some pollutants
lics.
have global implications. Carbon dioxide emis-
sions from the former East Bloc account for a dis-
Modernizing Facilities and Technologies proportionate share of worldwide greenhouse gas
Energy sector modernization is of special impor- emissions. Addressing energy-related environ-
tance for several reasons. The enormous fossil mental problems in the former East Bloc also of-
fuel reserves of several former East Bloc countries fers business opportunities and jobs to the United
represent the largest and most immediately ex- States.
Chapter 8 U.S. Goals and Policy Options | 175

Augmenting World Fuel Supplies requires a transition that balances economic needs
World-wide availability of fuels will benefit sig- with social costs.
nificantly from energy sector modernization and In Russia, this orientation--coupled with Rus-
Western investment. Oil and gas are plentiful now, sian 1eaders’ fear of appearing subservient to the
but supplies are likely to tighten over the next dec- West—has profound implications for the energy
ade, especially if Russia has to start importing oil. sector. Instead of importing Western equipment
Western technology can at least slow the decline and advisers, Russians have so far preferred to de-
of Russian oil production. Kazakhstan and Azer- velop their own oil and gas “majors.” They want
baijan have the potential for increased exports. to use the energy sector as an engine to modernize
Even greater potential can be gained from im- decrepit and outdated enterprises and to convert
proved efficiency of energy use, especially in the the former military-industrial economy to civilian
near-term. l Reducing energy waste is equivalent uses. In this context, it may make economic and
to increased production, and will make more ener- political sense for Russians to buy domestically
gy available for export from the region. Increased manufactured but inferior parts rather than import
world energy availability, whether obtained from Western equipment. Not only are first costs lower,
increased production or reduced consumption, but buying domestic parts maintains domestic
will mitigate future world market oil price in- employment and provides some basis for a slow
creases and diversify sources for energy imports. upgrade of manufacturing capacity.2
In effect, some former East Bloc governments
| ThePolitical Context of may find it a wise policy to “buy” social peace by
Energy Sector Reform maintaining state support for old and inefficient
industries with only gradual conversion to a mar-
As described in chapter 6, political reform and
ket economy. The cost—greater but more predict-
economic reform are closely intertwined. Success
able inflation and higher budget deficits-may be
of market-oriented economic reform depends on
justified for local reformers if it results ultimately
the creation of political systems that embody
in a peaceful transition to a more efficient market-
some type of popular consensus about the nature
based economic system. The energy sector will
and pace of reform and in which leaders have the
not be immune from this calculus. U.S. goals and
political will to carry out the painful process of re-
priorities should therefore be flexible enough to
structuring and reform. U.S. goals and priorities
take adequate account of local priorities in eco-
must take account of this relationship.
nomic reform, particularly in the energy sector.
It is important to recognize, however, that
Western priorities will not always coincide with
local preferences. What may seem to Westerners POLICY OPTIONS
the most economically rational course of action Policymakers have a variety of instruments to
might not be acceptable to local reformers. For support the goals discussed above. These tools
them, successful reform often means maintaining can be categorized under bilateral development
employment, renewing human and physical capi- assistance, export promotion, multilateral devel-
tal, and creating future opportunities as well as opment institutions, and investment promotion.
maximizing economic activity. This is not just a In addition, improved coordination of all these
question of political-cultural preferences, but a programs is desirable and may permit new, effec-
recognition that the maintenance of social peace tive 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 East Bloc energy sector are listed in table 8-3 and
detail in chapter seven discussed below. This section also describes how
these programs can be improved through redirec-
| Bilateral Development Assistance tion and/or increased funding.
Congress recognized the great need for help in the
former East Bloc and created a substantial devel- Policy Assistance
opment assistance program with major energy and Policy assistance guides governments in estab-
environmental components. The assistance pro- lishing democratic processes and in adapting to a
gram is having some success, particularly with en- market economy. Helping establish a new set of
ergy efficiency, but experience is limited. Most of economic ground rules that provide proper finan-
the elements have been well selected, and funda- cial and regulatory incentives for producers and
mental changes in direction appear unnecessary. consumers will provide a framework within
However, Congress could consider ways to im- which other problems (including investment in oil
prove the effectiveness of the overall assistance and gas production) may be resolved, either
program and its components. through the operation of the market or with the aid
The major purposes of the U.S. energy assist- of U.S. development assistance programs.
ance program are to promote economic reform The primary goal for the energy sector is price
and to modernize energy systems. Assistance can reform. The advantages of price reform are com-
play a significant role in promoting reform within pelling. Higher energy prices would provide pro-
the energy sector, if properly directed. U.S. gov- ducers with the necessary capital to develop new
ernment aid programs must be coordinated with energy supplies and would encourage efficient en-
advisory activities to promote internal price, regu- ergy use in all sectors of the economy. Reducing
latory, and other reforms. energy use would also have important environ-
U.S. resources are very limited compared with mental benefits since much pollution is energy-
the immense need for development projects to im- related. Reduced subsidies to the energy sector
prove energy supply and consumption. However, would help reduce budget deficits, a key require-
projects focused on specific areas (e.g., training, ment for improved fiscal management. Foreign
technical assistance, institution building) can exchange earnings would be augmented by in-
maximize the impact of U.S. government re- creased exports of oil and gas now consumed lo-
sources and fill precise needs that large multilater- cally.
al institutions such as the World Bank find Exportable forms of energy, including oil, gas,
difficult to address. and coal, should be priced at world levels for eco-
Most programs are funded by the U.S. Agency nomically rational decision making. The target for
for International Development (AID), sometimes electricity is to increase prices to a level that cov-
with the involvement of other agencies such as the ers the full costs of production and distribution
U.S. Department of Energy (DOE). AID’s pro- and provides a surplus for future system expan-
gram budgets for Central Europe and the FSU are sion. Current prices in the FSU are far below ei-
shown in tables 8-1 and 8-2. These tables include ther of these levels. For example, oil and gas
AID programs that are either specifically targeted prices in Russia are still less than half world prices
at the energy sector or that address general areas of because rapid inflation has diluted much of the
economic and systemic reform that are important impact of the frequent price increases of the past
for energy-sector development and that are high- three years.
lighted in this report. However, rapid energy price increases cause
Areas and programs that OTA’s analysis indi- considerable hardship, especially to residential
cates are exceptionally effective for meeting ur- consumers, because long-established patterns of
gent needs and satisfying U.S. goals in the former 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 sys-
temic 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 Privatization is a close companion to price re-
programs of price reforms as a condition of receiv- form. In all countries of the region, conversion of
ing MDB loans. High political dissatisfaction and behemoth state energy industries into a system of
accelerating inflation will make further progress more rationally structured, profitable, private en-
more difficult. terprises can serve as a model for economic transi-
Though correct energy pricing is a necessary tion in nonenergy sectors of the economy.
condition for energy sector reform, it is frequently Rationalization of enterprise management and
not sufficient, because institutional and market elimination of government subsidies and price
imperfections can weaken the signals provided by controls in the energy sector can also reduce the
higher prices. In the FSU, for example, many con- incentives driving the widespread corruption that
sumers, particularly large, energy-intensive, in- is undermining public confidence in economic re-
dustrial enterprises, along with some FSU form.
importing countries, do not pay their oil and gas Centrally planned economies rarely incorpo-
bills. In this case, the specified price is an adminis- rated regulation as it is practiced in the West, but
trative fiction that has no restraining impact on several forms will be needed as privatization pro-
consumption patterns. Effective energy pricing ceeds. Most obvious is environmental regulation
will require major policy changes and reforms to meet modem standards. Most former East Bloc
throughout all sectors. 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 5.7 22.0
Rule of law 9.5 25.5
Local governance 9.7 9.5
Privatization 125.3 115.0
Business development 14.2 75.0
N Ab 12.6
Banking sector reform and bankers training
Fiscal sector reform 13,2 15.5
Financial and monetary sector reform 13.4 10.7
Training and macroeconomic advice (Dept. of Treasury) NA 2.1
Market environment 2.2 14.4
Business and organizational training
Short- and Long-term training 2.7 91.5
US/NIS partnerships NA 5.0
Exchanges (USIA) 56.3 128.0
SABIT program (DOC) 2.0 2.0
CAST program (NAS) 2.0 2.0
Eurasia Foundation 8.0 12.0
Energy efficiency
Efficiency & performance improvement 22.4 35.0
Production and delivery systems 15.7 39.0
Special earmarks (Lab-to-lab, etc.) NA 33.0
Nuclear power
Nuclear power plant safety and regulation 45.2 85.0
Technical assistance
Russia Energy & Environment Commodity Import Program NA 125.0
Environment
Policy and institution building 3.4 21.9
Technology cooperation 5.7 36.5
Local NGO support 2.3 14.6
Trade and investment promotion
Transfer payments to DOC and TDA 23.2 8.5
Enterprise funds
Russian-American Enterprise Fund 20.0 120.0
Western NIS Enterprise Fund NA 45.0
Central Asian Enterprise Fund NA 30.0
Fund for large enterprises in Russia NA 100,0
EBRD Small Business Fund NA 15.0
Multi-Lateral Equity Fund NA 21.0

aThls table IS nof a comprehenswe hstmg of USAID FSU-related programs. Instead, It includes only those programs that are either specifically tar-
geted 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
b
NA=Not applicable.
SOURCE U S Congress, Off Ice of Technology Assessment, 1994
Chapter 8 U.S. Goals and Policy Options | 179

agency should allow for many visits in both direc-


tions and extensive training in skills needed for
operating a modem, market-oriented government.
Policy assistance
Price reform
Training in Market Activities and Skills
Privatization
Regulation As privatization has progressed, officials of for-
Training in market activities and skills mer East Bloc countries and Western observers
Energy efficiency have realized that new skills are needed. These in-
Demonstrations and assistance clude specific technological expertise and market
Efficiency centers and information economy skills that Westerners take for granted,
Nuclear safety and proliferation control such as accounting, planning, and financial man-
Environmental information and assistance agement. Developing these general market econo-
Specific technology transfer programs my skills is essential for putting the energy and
Utility Partnership Program environmental industries and their customers on a
Powerplant renovations rational and more efficient footing.
Clean-coal demonstrations and assistance Training programs to transfer technical and
Coal mine safety business-related skills will also help create an en-
Energy research and development vironment more conducive to reform and U.S. in-
vestment. Without the skills necessary to manage
SOURCE U S Congress, Office of Technology Assessment, 1994 financing, operations, and personnel within the
structures of a market economy, former East Bloc
but they are not enforced. Assistance is needed to firms will not be able to purchase and efficiently
achieve a workable regulatory code and to train make use of advanced technologies from the West.
regulators to administer and enforce the environ- The importance and effectiveness of this type of
mental laws, as discussed in chapter 5. training has been demonstrated in China by the
In addition, electric power must be regulated success of the American-sponsored Dalian Man-
appropriately. At present, rates in some countries agement School. The Department of Commerce
are held well below costs, but the opposite could (DOC) assisted the founding of that school.
occur once the utilities are privatized. Yet few for- Business, technical, and cultural training is
mer East Bloc governments have any experience possibly the most effective form of assistance at
with cost-based regulation, a role that is handled the moment. With highly educated work forces,
in the United States by the Federal Energy Regula- the societies of the former East Bloc have excel-
tory Commission and by state regulatory agen- lent prospects for successfully absorbing training
cies. U.S. expertise should become very important in Western-style management techniques and
as central planning is reduced. market-related skills. Education and training pro-
Policy assistance is not expensive. It generally grams in these countries have produced high rates
involves reciprocal visits and training. Govern- of success. For example, the U.S. director of a ma-
ment, industry, and academic personnel should be jor Russian-American oil production joint venture
involved. The main agencies coordinating the in Western Siberia reports that the company plans
work involving energy sector policy should be to turn its operations over completely to Russian
DOE, AID, the Environmental Protection Agency managers within just five years. In almost all other
(EPA), the Nuclear Regulatory Commission countries where he has worked, it has taken at least
(NRC), and the Department of State (DOS). An one generation to train local personnel to manage
additional appropriation of about $1 million per 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 ac- on efficiency provides a compelling demonstra-
tivities for U.S. government agencies, especially tion of free market advantages as well as substan-
AID and the Peace Corps, and can directly support tial, immediate economic benefits. Since
all five goals discussed in the previous section. improvements can be implemented quickly, effi-
Throughout the former East Bloc, these activities ciency programs can also provide very rapid re-
fill avoid that the private sector cannot adequately turns, improving the energy balance and
address. Finally, educational and training pro- enhancing Western credibility at a time of great
grams are inexpensive and have demonstrated skepticism about reform.
high cost-effectiveness. Increased efficiency is also vital to maintaining
It is important to ensure that these programs are and expanding export earnings. In Russia, oil and
well defined, tightly focused, and closely super- gas exports currently account for more than 80
vised. They can have substantial long-term impact percent of convertible currency earnings-money
if they are result-oriented (teaching appropriate that is critical to Russia’s economic transition.
and measurable skills) and targeted toward coun- However, production continues to fall and, given
tries or firms making significant progress in re- the normal time lag in bringing major projects on
form. Training can occur in the United States for line, is not expected to revive significantly for sev-
intensive sessions at universities and industrial fa- eral years. In the short- to medium-term, the
cilities. But for maximum effectiveness, the bulk amount of oil and gas available for export will
of the programs should involve sending U.S. therefore depend on the amount freed up by reduc-
trainers to the region to teach large groups and to ing waste. The World Bank has estimated that re-
train local residents to teach the skills themselves. forms in domestic pricing and taxation in Russia
Not only do such programs develop desperately could produce additional oil exports worth $11
needed expertise, they spread the use of Engl ish as billion in the first year alone,4 much more than is
the international language, a major advantage for likely to result from increased production.
Americans involved in international activities, As discussed in the OTA energy efficiency re-
and will create personal and institutional ties. port, options for helping achieve efficiency in-
The costs involved would depend on the extent clude: policy assistance, technical assistance
of the program. The need is almost unlimited. (including demonstrations), and other programs
However, a series of short courses for enterprise designed to provide information about opportuni-
managers could have significant near-term impact ties and incentives to save energy; and material as-
for several million dollars additional. AID or sistance to support the purchase of equipment. In
DOC could fund these programs. addition, improved U.S. government agency
coordination and increased attention by the MDBs
Energy Efficiency are important.
Energy efficiency has been discussed previous- AID has hired contractors to perform energy
ly, but it is so central to economic revitalization audits and recommend improvements. It also sup-
that it is worth revisiting. Minimizing costs by re- ports (through DOE) energy efficiency centers in
ducing labor, materials, energy, and capital needs Poland, the Czech Republic, Russia, and Bulgar-
is basic to a free market. Since energy is a major ia. In some cases, it has helped retrofit facilities
cost in these energy-intensive economies, a focus with energy-saving equipment. Retrofits that pro-

d~ 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.
Chapter 8 U.S. Goals and Policy Options | 181

vide tangible demonstrations of the feasibility and Assistance that focuses on physical improve-
benefits of energy efficiency measures are partic- ments rather than information would be expen-
ularly effective. All these activities could be in- sive. Billions of dollars are likely to be required to
creased. Expanding current energy efficiency upgrade safety to near Western levels or to replace
activities might require several million dollars. the riskiest plants. Western European countries
Greater assistance with the implementation of im- and Japan would share much of this burden.
provements would cost much more, maybe up to Proliferation control will involve two major
several tens of millions of dollars, but would yield areas: safeguarding the nuclear materials from
more tangible gains. dismantled weapons and reducing the chance that
An approach to coordinate the efforts of several expertise in weapons design and manufacture will
agencies to implement energy efficiency improve- become available to other countries or terrorist
ments is discussed below under Program Manage- groups. The former is the subject of an earlier
ment and Coordination. OTA reports and is beyond the scope of this report.
The latter is relevant to civilian nuclear power be-
Nuclear Safety and Proliferation Control cause a constructive way to employ nuclear weap-
As discussed in chapter 4, the risk of a major nu- ons experts is in analyzing and improving nuclear
clear disaster is significant. As the world’s leading reactor safety, or in nuclear power R&D. For ex-
manufacturer and operator of nuclear power- ample, U.S.-Russian collaboration on gas cooled
plants, the United States has significant experi- reactors could greatly speed progress and reduce
ence in helping reduce safety risks. In addition, design and testing costs.
U.S. safety analyses and procedures developed af- Assistance to Russia and Ukraine to establish
ter the accident at Three Mile Island are partially institutions for R&D has been offered. The Rus-
relevant to Soviet nuclear technology. sian center was initiated in December 1993 by
Considerable assistance is already being ex- presidential promulgation, but the Ukrainian Par-
tended in the nuclear safety area. For example, liament has not yet ratified the agreement. Pend-
NRC and DOE review and exchange information ing full operation, DOE could be encouraged to
on plant designs, operation, and regulation of FSU seek joint R&D projects and other stabilizing acti-
powerplants. The United States is also providing vities.
two training centers (in Russia and Ukraine)
equipped with reactor simulators. Environmental Information and Assistance
Nuclear safety cooperation has been valuable Major improvements will be required simply to
even at its present modest cost. An increase in reduce current pollution that is contributing to the
funding could substantially enhance the pro- heavy contamination of the last several decades,
gram’s efforts to improve practical impact by ex- as discussed in chapter 5. Environmental degrada-
panding efforts to improve safety equipment at tion has damaged human health and economic
nuclear stations. Much higher levels of funding productivity in former East Bloc countries. The
would be justified if U.S. concern over nuclear United States has pioneered pollution control
safety is very high. In this case, consideration measures and regulation, and has the world’s best
should be given to supporting the construction of technology in many areas. U.S. equipment and ex-
replacement power, since none of these countries pertise are particularly important for: preventing
can easily afford to build alternative plants or sup- environmental damage by oil and gas production
ply fuel for them. 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 (Washing-
ton, DC: U.S. Government Rinting OffIce, September 1993).
182 I Fueling Reform: Energy Technologies for the Former East Bloc

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 al-
most everywhere. If such help is profferred on a
wider scale, it will be important to select appropri-
ate 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 train-
ing, which is intrinsic to technology transfer. The
skills of engineers and workers must be upgraded
to manage modern equipment and systems. Al-
though 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) en-
Russian fusion test equipment. Fusion R&D has benefited ables U.S. utilities to transfer their expertise di-
from U.S. -Russian cooperation, rectly to their counterparts in the former East
Bloc. It pays expenses for travel and seminars.
reclamation; coal cleaning; and control of particu- The program also allows U.S. utilities to learn of
late, sulfur dioxide, and nitrogen oxides. new techniques and approaches. This program has
A variety of U.S. programs provide environ- been instrumental in helping Central European
mental information, technical assistance, and fi- utilities make the transition to market economies
nancial assistance. The latter addresses the major (as discussed inch. 4). Expansion of the program
problem—lack of investment funds—which is es- to the FSU is too recent to have seen such results.
pecially critical since few environmental projects So far, the contacts have led to at least one contract
are directly self-supporting. Several initiatives for the U.S. partner to implement some of its rec-
funded by AID, EPA, and DOE contribute to envi- ommendations.
ronmental projects, but generally on a relatively However, some U.S. partners are finding that
small scale. Since some activities lead to sales of the demands on their time, which are not covered
U.S. equipment, it is likely that increased finan- by the program, are getting too great to be justified
cial assistance would benefit U.S. enterprises. before their public utility commissions. Addition-
It is important to assure that environmental ex- al funding of several million dollars would permit
pertise and enforcement are in place before major an increased level of activity, such as more exten-
new energy facilities are constructed. Training, in- sive training. To some extent, AID has opened the
formation, and policy programs could be usefully door to greater funding of this program, but partic-
augmented for this purpose. ipants must bid competitively on specific proj-
Chapter 8 U.S. Goals and Policy Options | 183

ects, a cumbersome and uncertain process. demonstrations in other countries, especially if


Expanding the scope of the UPP would increase different types of coal are to be used. Technologies
the transfer of some very useful technology, at rel- such as fluidized-bed combustion will also need
atively nominal cost. demonstration to achieve significant market pen-
Powerplant renovations are necessary be- etration. Total costs of an expanded program
cause a large fraction of the generating capacity is would depend on the level of expansion. Tens of
old and dilapidated. Major retrofits involving new millions of dollars could easily be used between
combustion technology with modem operational demonstrations and export financing.
and emissions controls should result in greater ef- Coal mine safety has been sadly neglected in
ficiency and less pollution, as discussed in chapter the entire region, and miners have paid a heavy
4. As with clean-coal technology, discussed be- price, as noted in chapter 3. AID has supported as-
low, none of these countries can afford on their sistance through the United Mine Workers and the
own to do the work as rapidly as needed. Unlike National Coal Association to improve conditions.
investments for pollution control, powerplant ren- Partners are sharing their expertise in reducing ac-
ovation can be self-supporting, but few projects cidents. Equipment such as methane detectors (to
are likely to occur over the next several years with- prevent explosions) has also been delivered.
out assistance. This program is primarily a humanitarian ges-
Clean coal technologies (discussed in chs. 3 ture to a sector that has been badly exploited. And
and 4) will be essential because many of these although it has less potential to produce additional
countries have no choice but to continue heavy re- business for U.S. companies than other programs
liance on coal. The current demonstration project discussed here, the program will help a key sector
in Poland is now undergoing tests. This project operate more efficiently. Even an expanded pro-
has installed flue-gas desulfurization (FGD) and gram would entail only modest costs. Neverthe-
other modernizations on two small coal-fired boil- less, policy makers should closely scrutinize coal
ers. The total cost is about $12 million, about two- mine safety programs to ensure that they fulfill
thirds of which is funded by DOE. these humanitarian and efficiency related goals
Although the project is a small one, the poten- and not unwittingly prolong the operation of
tial for American business is huge. Assuming the mines that should more properly be closed.
tests prove out and such equipment is installed on
all boilers, the market in Poland alone could Energy Research and Development
amount to $3.6 billion.6 However, neither Poland R&D, discussed in chapters 3 and 4, can bring
nor any of the other coal-dependent countries can mutual benefits. Russia has considerable R&D
afford such an investment for cleaner air, no mat- expertise that can be constructively employed in
ter how great the indirect benefits (e.g., improved projects that produce results useful for the United
public health) may be. Foreign aid (including cost States. The Russian focus on pure science dove-
sharing) will greatly speed the adoption of such tails with the U.S. strength in applied engineering
equipment, much of which can be supplied by and commercialization. For example, Russia can
U.S. companies. contribute significantly to R&D programs on fly-
Continued demonstrations of other new wheels, turbines, high voltage transmission and
technologies will also open the door for major cogeneration.
U.S. exports and combat some very serious envi-
ronmental problems. FGD will require further

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 modi-
fied, 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 could consider lifting the hiring ceiling at AID if
exchange of R&D information and fruitful inter- necessary.
change of personnel. This area could attract sup- Another complaint (and not just about AID)
port from a range of donors—bilateral and has been about the number of consultants proffer-
multilateral, foundations, nongovernmental orga- ing inappropriate advice while offering no tangi-
nizations (NGOs), and some industries hoping to ble help, thus damaging American credibility.
stimulate future sales through the contacts devel- These visits can interfere with work without offer-
oped as well as with new products. ing compensating advantages. Focusing assist-
Some R&D institutions are already planned or ance on projects that will provide visible benefits
in existence; for example, a U.S.-Russian Joint to the recipients will improve impressions of U.S.
committee established under the U.S.-Russian involvement.
Federation Framework Agreement on Scientific More attention can be paid to widening the
and Technical cooperation in the Field of Fuel and benefits to U.S. business of development assist-
Energy, and an International Science and Techni- ance programs. AID’s missions are often in touch
cal Center headquartered in Moscow. Ways of with potential customers, and the contacts can
augmenting their programs, activities, and partici- produce information that leads to additional busi-
pants could be investigated. Ultimately, coopera- ness for U.S. companies. Thus, the net cost to this
tive R&D should be profitable, but startup costs country of the assistance program is less than the
could be significant. appropriated funds. However, U.S. firms some-
times find AID unresponsive and bureaucratic.
Problems in Program Execution Congressional initiatives may be necessary to
AID created its assistance programs for the former make business promotion an official function.
East Bloc in just a very few y