Political upheaval in the Soviet Union's East European satellites and the first steps toward a market economy herald changes for the oil and gas industries in the region.
From Poland on the Baltic Sea to Romania on the Black Sea, state oil importing organizations are facing tougher commercial attitudes from their major supplier, the Soviet Union.
Oil for industrial products barter deals and internal crude price formulas are disappearing in favor of international crude oil prices paid in hard currency.
In response, East European countries are turning to members of the Organization of Petroleum Exporting Countries and western producers for larger volumes of oil.
At the same time, international oil companies are eying the potential of eastern Europe, where the advent of market economies and the need to clean up the environment signal greater use of natural gas at the expense of locally mined coal.
In addition, the growth of automobile ownership in the new market economies will require updating of refining and marketing operations.
EAST GERMAN PACESETTER
East Germany, reunified economically with West Germany, is setting the pace for progress among former Soviet satellites.
Oil companies from West Germany are setting up joint ventures in gasoline retailing and hope to expand cooperation into refining.
In the gas industry, the West German pipeline network is being linked into the East German system.
Ruhrgas AG, the biggest West German gas company, and BEB Erdgas und Erdol GmbH, an established West German joint venture of the Royal Dutch/Shell Group and Exxon Corp., have acquired a 45% interest in the East German gas company VEB Verbundnetz Gas (VNG).
Economic reform is not taking place at an even pace throughout Eastern Europe.
With the aid of the World Bank and agreements with a number of western governments, Hungary and Poland have moved toward a market economy. In other states, the process is much slower.
A program to sell state assets to private investors is gathering momentum in Hungary and Poland involving refining/marketing and petrochemicals.
SOVIET IMPORTS
Poland, Czechoslovakia, Hungary, East Germany, Romania, and Bulgaria relied almost exclusively on imports from the Soviet Union to meet their oil and gas requirements. All are net importers of oil and gas.
A number of East European states also import crude from members of OPEC, some through barter deals covering industrial goods and oil field equipment but increasingly for hard currency.
In recent years, East European governments were forced to discourage use of oil in response to cutbacks in supplies of crude and products from the Soviet Union.
Beginning in 1991, the Soviets have told their former satellites, oil and gas shipments will carry world market price tags.
But Cambridge Energy Research Associates (CERA), Cambridge, Mass., questions whether the Soviets will be willing or able to maintain their current commitment to oil and gas exports to eastern Europe at favorable prices. The Soviets have begun to cut oil supplies to those countries and insist on hard currency payments.
"It seems likely that these countries will have to turn increasingly to the world market for incremental energy supplies," CERA said.
"This may add a new set of strains as these nations increase their reliance on oil and gas for economic growth and, most importantly, to help solve their very severe pollution problems.
"Overall, the disorder and uncertainty in the Soviet Union and eastern Europe is generating a persisting uneasiness and uncertainty in the world oil market and affecting the way various actors in the market behave."
GASOLINE MARKETING
One of the first effects of unification of the two Germanies has been an opportunity for West German gasoline marketers to expand into East Germany.
Units of British Petroleum, Agip, Aral, and DEA, formerly Deutsche Texaco, are involved in joint ventures with Minol, the East German state distribution company, to set up networks to sell gasoline and other products. Royal Dutch/Shell has chosen to operate in East Germany outside a joint venture.
DEA expects the number of gasoline outlets in East Germany to increase to 2,500-3,000 from about 1,200. Many of today's stations are very simple and will need to be rebuilt, while some of the larger, more modern stations are much closer to western standards.
DEA aims to win about 10% of the East German products market, which will include the first significant sales of light heating oils. Home heating at present is with lignite, gas, or electricity.
By the turn of the century DEA expects East Germany's products market to have grown from almost nothing to about 125,000 b/d.
DEA said Minol wanted joint ventures because it was short of capital and expertise. To a lesser extent, it wanted access to products like unleaded gasoline.
DEA also is discussing joint ventures in refining in East Germany, but those are not at the advanced stage of its talks with Minol on marketing.
Expansion of West Germany's oil industry into East Germany carries high risks, warns Wilhelm Bonse, a director of the West German company Veba Oel.
He estimates the cost of revamping East Germany's oil industry at $4.5-6.5 billion. Starting too early in eastern Europe may lead to "unpleasant financial results," while waiting until all terms are clear may result in losing the best opportunities to competitors, he says.
MARKETING ELSEWHERE
Western companies are also checking out marketing ventures in other East European states.
Royal Dutch/Shell has established a joint venture with the Interag group in Hungary. Its 47 outlets under the Shell banner account for 25% of the local market.
France's Total CFP has followed Shell into the Hungarian market. The market is dominated by the state company Afor, which has more than 400 gasoline service stations and is a major supplier of other products.
The company will be sold into the private sector. Ernst & Young, business and financial advisers, London, has signed a contract to evaluate the network in preparation for privatization Jan. 1, 1991.
DEA and Burmah Castrol plc, Swindon, England, have set up a joint venture to develop gasoline service stations in eastern Europe outside East Germany. The joint venture, DEA Castrol West tank GmbH, will concentrate its activities at first on building and operating service stations and marketing lubricants in Poland and Czechoslovakia.
The joint venture will supply gasoline under the DEA brand and Castrol's lubricants. The move aims to take advantage of an expected rise in demand for petroleum products in eastern Europe generated by increased car sales and tourism.
PRIVATIZATION
A number of East European countries plan to introduce private capital into state owned energy industries.
In Poland, management consultant Coopers & Lybrand Deloitte, funded by the World Bank, is advising the Ministry of Industry on reorganization of the country's gas, electricity, lignite, and district heating sectors.
The World Bank's natural gas development unit will pay for a study of restructuring of the gas industry, which is run entirely by Polish Oil & Gas Co. (POGC). It is involved in every aspect of the business from exploration, production, transmission, and distribution to equipment manufacture and installation of customer appliances.
Coopers & Lybrand, working closely with the Polish Academy of Mining and Metallurgy in Cracow, will assess POGC's affiliates throughout Poland, especially in the main gas producing areas of the west and south.
Tony Vicars-Miles, head of Royal Dutch/Shell's eastern Europe division, said the process of change in business started before the political upheavals at the end of last year.
Recent political developments made life more difficult because the central monopolies were losing their dominant roles with little to replace them.
ENERGY AND GROWTH
The International Energy Agency, Paris, cites energy efficiency as one of the key issues facing eastern European countries as they make the transition from centrally planned to market economies.
The agency said the economic development model that relied on massive investments to increase national energy production can no longer continue because of the huge amount of funds that will also be needed to modernize the economies.
Their form of economic growth, spurred by cheap oil and gas from the Soviet Union, is to be phased out.
The "closed circuit" barter system, in which Soviet hydrocarbons were traded for manufactured goods and agricultural products, led to highly wasteful use of energy with consequent disastrous effects on the environment.
In fact, opening of eastern Europe has revealed the region's extent of environmental depredation and the almost complete absence of moves toward energy conservation that started in the 1970s in the West and has continued into the 1980s.
GAFFNEY CLINE STUDY
Gaffney Cline Associates, Alton, Hampshire, England, undertakes an analysis of all aspects of the energy business in eastern Europe.
The study says as various domestic oil industries develop, it is possible market prices will start to reflect the movements in prevailing spot market prices in western Europe.
Refinery economics will be driven by demand for a particular oil product, which may result in increased supply of other refined products being sold at more competitive prices. On occasions this could make oil more economic than other forms of energy.
In the region's "highly inefficient" petrochemical industry, which generally uses outdated technology, GCA said the cost of feedstock and processing margins had played little part in determining the economics of plants. But they will become more important in determining whether plants remain in operation.
Gaffney Cline says ample supplies of natural gas from the Soviet Union and countries outside the former eastern bloc will ensure that gas provides stiff competition for coal and oil in all sectors with the possible exception of transportation.
Some East European countries manufacture town gas from coal-particularly lignite.
That produces high levels of pollution as well as a product with a heating value 50% less than natural gas.
The prospects for meeting future energy demand from indigenous resources do not look bright, says Gaffney Cline. Coal reserves are relatively large, but supply prospects for oil and gas will be a totally different proposition.
Oil demand has been constrained in favor of other fuels and production and import levels have shown only marginal increases. With an expanding economy the supply of lighter oil will be necessary, particularly in transportation.
Gaffney Cline says upgraded refining capacity is limited, and construction of more catalytic cracking units will be needed to enable eastern Europe to compete with refining in the West.
Future increases in oil demand will soon stretch refining capacity in Bulgaria, Czechoslovakia, Hungary, and Poland.
Crude processing capacity is likely to be further constrained if no further upgrading takes place.
GCA says the ability of the Soviets to export has reached its limit, and they are treading a fine line between demands of their East European dependents and the need for hard currency generated from oil exports to the West.
The price of Soviet oil to its neighbors has in the past been calculated on a 5 year rolling average crude price. But the volatility of crude markets during the past 5 years exposed the drawbacks of this system.
Payment by bilateral bartering, the hallmark of eastern bloc trade, could well have outlived its usefulness. More conventional petrocurrencies look more attractive, said Gaffney Cline.
An inefficient power generation system has made cuts in electricity part of the way of life in eastern Europe. Poor plant performance, inefficient transportation, miners strikes, and lack of foreign currency to buy oil have contributed to the situation.
The Chernobyl nuclear plant disaster of 1986 dampened the enthusiasm of east Europeans for nuclear power.
As a result, a number of projects have been shelved or canceled.
FRENCH WARNING
The countries of eastern Europe are about to experience the type of energy crisis that hit the western countries 15 years ago, warns a preliminary study of the area commissioned by French Industry Minister Roger Fauroux.
His study shows that trade and energy consumption in eastern Europe are carried out with no direct relationship to production costs and world prices.
The switch to market economies and the Soviet Union's announcement that in 1991 it will change to world market prices for oil and gas sales to its former satellites is a time bomb waiting to explode, the report says.
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