GULF CRISIS BUFFETS EASTERN EUROPE OIL SECTOR

The Persian Gulf crisis has compounded eastern Europe's problems with oil supplies stemming from the collapse of Comecon and sliding Soviet oil production.

A study of eastern Europe's oil sector by the International Energy Agency shows the loss of Iraqi crude in payment for Iraqi debts has had a widespread effect on those nations-most of them fledgling democracies.

The decline in Soviet crude and product deliveries and demands from the U.S.S.R. for payment for part of the imports in hard currency also has contributed to shortages and price increases more severe than any experienced in western Europe.

The shortfall in Soviet deliveries became apparent in early 1990. Eastern European countries had to look for new supplies principally in the Middle East. Oil contracts were signed with Iraq by Bulgaria, Hungary, and Poland. Iraq was already an established supplier to Yugoslavia and Romania.

The burden on eastern European hard currency reserves was to have been mitigated by Iraq meeting its debts for purchase of goods from those countries through possible barter deals.

In addition, plans by Kuwait Petroleum International to open offices in eastern Europe are now in limbo.

Further, tight supplies of crude are affecting eastern European refining operations, which normally account for 10-20% of those countries' hard currency earnings through the value added export of refined products. Refined products exports have plunged because of the overriding need to supply domestic requirements.

Meantime, Soviet plans to import 200,000 b/d of crude from the Middle East in payment for accumulated debts and to have Kuwait subsidize oil projects in parts of Siberia and the arctic have been shelved as a result of the crisis.

IEA analyzed crisis effects on the key countries in the former Soviet bloc.

BULGARIA

As a result of the crisis, Bulgaria has incurred losses of direct and indirect oil supplies from Iraq, suspension of Iraq's debt repayments, crude oil price rises, shortages of oil products, and loss of more than $160 million in construction and engineering business in Iraq.

IEA estimated Bulgarian oil consumption in 1990 at 240,000 b/d. Bulgaria imported 30,000 b/d from Iraq, Iran, and Libya with the remainder of its requirements to have come from the U.S.S.R.

To compensate for a 20% shortfall in Soviet deliveries, Bulgaria had to turn to world markets. Contacts have been established with Ecuador and Yemen possibly involving barter deals.

Bulgaria normally imports about 30,000 b/d of products, of which 28,000 b/d comes from the Soviet Union. Products are now in short supply, and from Oct. 15 gasoline has been rationed at 10 gal/month for private motorists. Taxis are also rationed.

Iraq currently owes Bulgaria $1.3 billion, and repayment should have been in the form of 36.5 million bbl of oil shipped during 4 years. Before international sanctions against Iraq and Kuwait were imposed after Iraq's blitzkrieg takeover of Kuwait, Bulgaria was to have received 18.25 million bbl of Iraqi crude from the Soviet Union under a tripartite arrangements.

Under a protocol with Iran, which starts in 1991, volume of trade between the two countries will be $500 million. Iran will export 20,000 b/d of crude in return for imports of Bulgarian machine tools and other goods.

IEA said because of debts that more than doubled since 1986 to an estimated $10 billion in 1989 and a decline in currency reserves, Bulgaria's slipping rating with lending institutions is making it difficult to raise foreign credits for oil imports.

CZECHOSLOVAKIA

The shortfall in Soviet crude deliveries to Czechoslovakia in October 1990 under existing fixed ruble prices was running at 50% of the 332,000 b/d contracted. Total Czech oil consumption in 1990 was estimated at 340,000 b/d.

Czechoslovakia imported 76,000 b/d of Soviet crude in September and 70,650 b/d in October at world prices in hard currency, and negotiations have been held for similar volumes in November and December.

Direct agreements have also been sought between the Czechs and local governments in the U.S.S.R. The Tyumen region agreed to supply 1,200 b/d in October, 6,000 b/d in November, and 2,800 b/d in December under a barter agreement.

The central Soviet authorities have agreed to supply 260,000 b/d of oil to Czechoslovakia in 1991, of which 150,000 b/d must be paid for in hard currency.

In addition, the Tyumen region's Meganetegas is expected to supply Czechoslovakia's Chempetrol with 100,000 b/d in 1991.

Imports from other countries are being sought. They totaled only 18,000 b/d in 1989. Czech President Vaclav Havel is known to have discussed oil imports from Venezuela under a barter agreement. Exploratory talks have also been held with Algeria, Tunisia, Mexico, Cameroon, Gabon, and Nigeria. The African oil would be imported via the trans-Mediterranean pipeline.

In October, Iran agreed to supply 31,740 b/d in the fourth quarter, and discussions for a long term agreement for at least 100,000 b/d are continuing. Italy and Austria announced in the fall they were willing to start immediate deliveries of gasoline and other products.

Plans are being drawn up for two spurs to the 465 mile trans-Alpine pipeline from Italy to Germany through Austria. A 155 mile, 200,000 b/d spur would tie Czechoslovakia's northwestern refineries into the trunkline. Talks on the project started in October in Munich.

A second, 37.2 mile line from Slovnaft refinery near Bratislava to the trunkline via Vienna will have a capacity of about 100,000 b/d and cost about $100 million. A letter of intent for the construction of this line was signed with Austria's OMV AG.

Products are in short supply because refineries are running at only 65% of capacity. Gasoline demand also increased by 15% in early 1990. In October rationing started on the basis of 6.6 gal at $3/gal. Any gasoline purchased above the quota attracted a 25% surcharge. These increases followed a 50% price rise earlier in the year.

From Nov. 1, the two tier system was replaced by $4/gal for all purchases of 91 octane gasoline and $4.5/gal for 96 octane.

IEA said Czechoslovakia was the best situated of the eastern European countries to obtain credit for oil imports. However, meeting the expected shortfall in oil supplies through world market purchases with oil at $30/bbl would wipe out 90% of the country's hard currency income.

The economics ministry estimated in October the crisis had cost Czechoslovakia $1.4 billion.

HUNGARY

Hungary imported 60% of its 166,000 b/d oil requirements in 1989, and 90% of those volumes came from the Soviet Union.

Last year Soviet supplies to Hungary were expected to reach 130,000 b/d, but IEA said it is now clear they will be less than 100,000 b/d.

Hungary remains interested in buying Soviet oil even at world prices, because the transportation cost is low, and Hungary's refineries were designed to run on Soviet crude. An agreement to purchase another 70,000 b/d at world prices with payments partly in hard currency and partly through barter is believed to have been signed.

In January 1990, Hungary imported 1.46 million bbl of oil from Iraq, which owes it $160 million. In September, state owned OKGT and Minesalinpex obtained government approval to buy 3.285 million bbl of crude and 270,000 bbl of gasoline on the open market, leading to purchases from Libya and Algeria.

The steep rise in spot oil and products prices slashed Hungary's buying power in late 1990. In October, the National Petroleum & Gas Industry Trust signed agreements with western oil companies to supply 3.65 million bbl of crude in October and November. The government also released 154,000 bbl of gasoline from stocks and purchased a similar volume from Romania to replace stocks.

Typically, about one fourth of Hungary's crude oil imports are refined for export. But because of the shortfall in Soviet deliveries and an increase in domestic consumption, exports averaged 85,000 b/d in January-February 1990 compared with 160,000 b/d average in 1989. The financial loss in a full year would be about $100 million.

In October, Hungary announced its crude stocks were exhausted and refineries could only process crude as it was delivered.

Kuwait had been negotiating a holding in 100 retail service stations in Hungary, which could have led to further cooperation. Hungarian exports to Kuwait increased 22% in value to $40 million in 1989, and there were talks about a 40,000 b/d supply contract with Kuwait.

Hungary's trade and industry ministry has drawn up an emergency plan to be implemented if Soviet supplies decline further. First restrictions on oil deliveries will be to power stations followed by the iron and steel industry, heavy chemicals, and the construction industry. Households and individual consumers will be the last to feel the effects of the program.

In October, gasoline prices were increased by 65% and diesel by 90%. However, to avoid civil disturbances, the government was forced a few days later to trim the rises to 35% for gasoline and 60% for diesel.

IEA said meeting expected shortfalls in oil supplies through purchases on world markets at a price of $30/bbl would wipe out 21% of Hungary's hard currency income. The country's gross convertible currency debt was $20.6 billion in 1989, but it so far has met repayment obligations.

POLAND

Oil meets only 13% of Poland's energy requirements, and 99% of this is imported.

Last year the Soviet Union was to deliver 255,000 b/d of oil, of which 231,000 b/d were at Comecon style prices and 24,000 b/d at world prices. However, the shortfall is likely to be 52,000 b/d.

Poland also is exploring the possibility of supply agreements with Soviet republics.

In 1990, Poland was expecting to import 5.5-7.3 million bbl of Iraqi crude in repayment for loans of $500 million. By August only a fifth of the volume had been received. The balance had to come from other sources, requiring an outlay of at least $115 million in hard currency.

Poland also imported 3.65 million bbl of Iranian crude under a barter agreement at a price of $33-35/bbl between October and yearend 1990. This year Poland will import 18.25-21.9 million bbl from Iran and has been told larger volumes will be available if early notice is given. Poland also began buying Norwegian crude in September.

The refining industry also is squeezed by problems with Soviet and Middle Eastern deliveries. Domestic demand fell after a 300% rise in product prices in early 1990. Nevertheless, Poland had to import 10 million bbl of gasoline from the former West Germany in the summer.

The Plock refinery near Warsaw lost all its Soviet supplies and received its first cargo of Iranian oil in October through the Pomorski pipeline from Gdansk. Poland now plans to upgrade its pipeline capacity.

IEA said until new agreements on debt rescheduling are in place, Poland is unlikely to obtain trade credits to import its oil requirements at world prices and in hard currency. Poland's central planning office estimated cost of complying with trade sanctions against Iraq and Kuwait at $2.9 billion.

ROMANIA

Romania's oil consumption in 1990 earlier was projected at 300,000-320,000 b/d. Domestic production provided 180,000 b/d. Less than one fourth of Romania's imports typically comes from the Soviet Union, but in first quarter 1990 Soviet deliveries were down about 80% from goal.

Romania's other main oil suppliers are traditionally Iran and to a lesser extent Libya and Iraq. In January 1990, Romania signed an agreement to buy 41 million bbl of crude from Iran, of which 14.6 million bbl was to be refined and reexported to Iran as products.

Iraq owes Romania $1.5 billion, which was to be repaid in oil.

More than 12.4 million bbl of crude were prevented from landing in Romania because of the embargo.

Negotiations are under way with the United Arab Emirates for 58.4 million bbl of crude to be refined in Romania for domestic and export markets.

About two thirds of crude oil processed in Romania's 640,000 b/d of refining capacity is imported. Throughput is down about 25% because of the shortfall in deliveries.

IEA said although Romania has very small foreign debt, concern over its political and economic stability will make borrowing to finance imports of crude oil difficult and expensive.

In the first half of 1990 Romania imported $600 million worth of oil and was expected to take delivery of a similar amount in the second half.

YUGOSLAVIA

Iraq accounted for about 30% of Yugoslavia's oil imports before the Persian Gulf crisis. The U.S.S.R. supplied 55%, and Libya and Iran provided most of the remainder.

Iraqi deliveries in 1990 earlier were expected to total 64,000 b/d at $17/bbl in exchange for $143 million in Yugoslav goods and services. About 9.5 million bbl were delivered before the crisis, and another $242 million in debt is still outstanding.

Replacement of the remaining 14.6 million bbl from world markets was estimated to cost $240 million at $26/bbl. Also in jeopardy is an Iraqi-Yugoslav long term $1 billion economic trade and cooperation accord.

Yugoslavia was expected to import at least 95,000 b/d of oil from Iran in second half 1990 in payment of outstanding debts. Talks are also going on with Angola for repayment of part of that country's debt in oil worth $60 million.

Yugoslavia agreed to take 2.9 million bbl of crude from Angola in 1990 from offshore fields in which Yugoslav companies have an interest.

Until the crisis, Yugoslav refineries benefited from shortfalls of Soviet crude and product deliveries to eastern Europe. Gasoline exports to Hungary and Poland were expanding and considerable revenues were expected from transporting oil through the Adria pipeline from Rijeka to Hungary and Czechoslovakia.

Yugoslav refinery throughput typically is about 560,000 b/d. By October 1990, three of the country's seven refineries had stopped production, and the rest had feedstock supply problems.

The IEA said the cost of Yugoslavia implementing sanctions against Iraq coupled with a rise in oil prices is estimated by the government at $1.35 billion between August and yearend 1990.

Repayment of loans totaling $1.66 billion for construction work completed and in progress in Iraq will fall due in 1991-92. New projects under contract with Iraq valued at more than $3 billion have been suspended.