E. EUROPE ENERGY FACES TRANSITION PROBLEMS

The energy industries in Czechoslovakia, Hungary, and Poland face difficult problems in the transition to a free market economy, a U.S. Senate staff report says.

Hop Pham-Thi, the energy committee's counsel for international energy issues, wrote the report, Energy Profiles of Czechoslovakia, Hungary, and Poland and their Emerging Free Market Economies.

The report said the energy sector in the eastern European countries faces big problems in environmental degradation and public health, obsolete-if not unsafe-equipment, and wasteful use of energy sources that has been encouraged by a highly subsidized price system and a trading system within the eastern bloc based on a desire for independence for the region as a whole.

Changes in eastern European countries' economic structures will be very difficult because of their dependence on Soviet oil and gas imports.

The countries face contradictory problems: They have the strong desire to reduce their economic links with the Soviet Union and build a competitive modern economy, integrated in the international economic system. But this desire is not compatible with their current energy consumption and heavy dependence on the Soviet Union for energy imports.

In the previous centrally planned economies, the structure of the energy sector was determined by political and administrative rather than commercial factors. Prices were set well below world market levels and played little part in allocating resources.

Eastern Europe is having increasingly difficult supply problems with the U.S.S.R, leading to growing requirements for imports from other sources, mainly for oil. Furthermore, the Soviet Union has demanded to be paid in hard currency from 1991 on.

The report said the countries suffered from poor energy management, have energy related environmental problems, lack new technologies, and face problems ensuring supply of spare parts and fuel.

CZECHOSLOVAKIA

The study notes Czechoslovakia's economy is characterized by a disproportionately high percentage of energy intensive heavy industry, and its per capita energy consumption is high. Coal and lignite provide 58.4% of primary energy consumption, while oil accounts for 20.9%, natural gas 11.9%, and nuclear power 8.8%.

The government hopes to expand nuclear power production to replace coal in power generation and to develop natural gas for home heating.

The report said energy conservation measures also should be one of Czechoslovakia's main goals, as well as rationalizing of its energy price structure so consumers pay the real value of energy resources.

Because the Soviet Union has declared it will guarantee deliveries of only 7.5 million metric tons to Czechoslovakia in 1991, instead of the anticipated supply of 13 million metric tons, Czechoslovakia is working on new accords for additional supplies directly with Russia, the Ukraine, and Uzbekistan and on a barter deal long term contract with Iran.

Czechoslovakia also is looking for other potential gas suppliers, such as Algeria, Norway, and Netherlands.

Although the dismantling of Czechoslovakia's centrally planned economy is less advanced than in Poland and Hungary, Czechoslovakia has taken affirmative steps toward privatization by adopting in 1990 major laws on joint stock companies and foreign participation.

An amendment allowing the repatriation of 100% of profits is expected to be introduced in 1991. Landmark legislation was recently adopted that transfers all nationalized industries to private investors."

HUNGARY

The paper said Hungary is the most advanced of eastern European countries in free market economic reforms.

Hungary has a more balanced energy mix in comparison with other eastern European countries and seems better placed to face the energy sector challenges. Its energy consumption is relatively diversified with coal and lignite representing 26.4%, oil 29.7%, natural gas 28.2%, and electricity 15.7%.

Still, about 50% of Hungary's energy is imported, and 95% of its annual energy imports come from the Soviet Union. Hungary imports 50% of its natural gas needs, 25% of its electricity, and 90% of its oil imports from the Soviet Union. It produces half of its natural gas needs, 25% of its oil, and 90% of its coal needs.

The study noted the country launched an energy conservation program in the 1970s based on planned standards and controls. Further progress in energy efficiency will depend greatly on structural changes of the industrial sector and modernization of the economy.

The Soviet Union may not be able to meet all Hungary's oil needs, supplies from the Organization of Petroleum Exporting Countries may be needed. Hungary has decided to end its state monopoly on oil imports and is looking to private oil and gasoline imports this year.

Hungary found sizeable natural gas reserves in the 1960s and promoted the rapid development of piped gas supply. There are problems in maintaining the current level of gas production, which is expected to drop by 2000. Major investments are needed, and it will be necessary to diversify the pipeline system and join the western European network.

The paper noted Hungary has the lowest energy intensity in eastern Europe because its industrial sector consumes only 36% of the energy mix.

Hungary is the most advanced of eastern European countries in its move toward privatization. It has ended its state monopoly on oil imports.

The OKGT (Hungarian oil and gas company) is being denationalized, and the electrical power industry will be restructured."

POLAND

The study points out that Poland is the largest country in eastern Europe and has abundant natural resources but a very heavy external debt.

Coal dominates Poland's energy mix. Coal accounted for 70% of Poland's primary energy consumption in 1986 and, together with lignite, fueled 90% of the country's power generation. Oil accounted for 13% of Poland's energy mix natural gas 7.6%.

The goal of the Polish energy policy is to reshape the country's energy balance by reducing dependence on coal and increasing oil and gas consumption. In the long term, Poland may reconsider the nuclear option.

In the early 1980s Poland embarked on an energy conservation program. The program's goals were only partly accomplished. The longer term solution for inefficient energy use will be for Poland to modernize its industry and implement market price reforms.

The study said Poland's dependence on coal is unlikely to shrink much before the turn of the century, but pollution control and western clean coal technology will have to be a priority.

Poland imports nearly 100% of its oil, with 93% coming from the Soviet Union. Imports of Soviet oil have declined since the early 1980s, and increased shortfalls in Soviet oil supplies occurred in 1990. In 1991 all of Poland's crude oil purchases will be negotiated at world market prices.

While Poland has virtually no oil production, western companies have shown interest in oil and gas exploration there (OGJ, July 22, p. 36).

Natural gas, Poland's second largest domestic energy resource, remains largely untapped due to a shortage of funds and lack of incentives for exploration and development. The World Bank has financed a major study intended to identify ways to develop Poland's natural gas resource base.

Expanding Poland's gas market will require large capital investments for development of a distribution infrastructure and significantly higher commodity prices for residential and commercial gas consumers. Poland's industrial sector is the only one that is paying gas prices in line with import costs.

The report said Poland's energy sector will be among the last industries to be privatized. First the state enterprises will be incorporated into stockholding companies, then they will be privatized.

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