Foreign Relations of the United States, 1969–1976, Volume XXXVI, Energy Crisis, 1969–1974

174. Memorandum From the President’s Special Consultant for Energy (DiBona) to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, March 19, 1973.

• SUBJECT
  • Soviet LNG

Attached is a point paper on the Soviet LNG project “North Star.” Also attached is a Memorandum for the Record of a discussion with Ex-Im Bank.²

For your information, Senator Jackson is opposed to the project. He questioned Nassikas, Chairman of Federal Power Commission, concerning the defense and economic aspects. Jackson has also focused on the issue of incremental pricing of gas imports. If the gas cannot be “rolled in” so that its price is averaged with domestic gas, the project would probably not fly. I’ve given a copy of Nassikas’ answers to your staff.

In my meetings on the Hill, this issue has come up repeatedly, and unfavorably. I have responded by stating:

With rising U.S. costs, the price could well be competitive. The project sponsors believe there will be a shortage of gas, even with deregulation, so they feel they will be able to sell it. The amount involved is a small fraction of total U.S. projected consumption (2% or 3%).

Attachment

SOVIET LNG PROJECTS

There are two major long-term projects to import Soviet LNG to the U.S. currently under consideration:

1. From the Urengoye gas field in Western Siberia to the East Coast of the U.S. (Project North Star).

2. From the Yakutsk gas field in Eastern Siberia to Japan and the West Coast of the U.S.

The North Star Project is further along, but is still at the stage of exploratory negotiations between the companies involved and the Soviet Union. There have been no field studies made to date. (The project is summarized in Tab A.)³

Details such as ship subsidies (possibly totaling $250 million for the 10 U.S. ships in the North Star project), Soviet equity participation, and financing are still wholly speculative.

The sponsors of North Star will probably require government loan guarantees of at least $4 billion from the Export-Import Bank or through some new agency. If EX–IM financing is required, there are no legal impediments which preclude consummation of the Soviet LNG project. EX–IM’s current legal limitations on the total loan and loan guarantee outstanding is $27.5 billion. The Soviet project could be accommodated by spreading the funding over five years. Although EX–IM does not utilize public funds, Congress does approve the annual business plan; this would provide a vehicle for congressional debate of the merits and politics of the project. The EX–IM staff currently is negative on the project, believing that extensive engineering studies should be performed prior to approval.

The question of deregulation of natural gas is directly related to the Soviet LNG project. An unfilled demand for natural gas under conditions less than economic equilibrium (equilibrium could be achieved in 1978 under deregulation) does not portend a need for additional supplies of gas or LNG per se. Rather, market forces will result in comparison of prices and their benefits for all alternative fuels. Estimates of representative city gate prices of alternative fuels are in Tab B,⁴ including supplemental gases and specifically including Soviet LNG.

If the consortium and the Soviets maintain a constant price of $1.25 to $1.40 throughout the life of the contract, eventually the Soviet LNG will be comparable and possibly lower cost than domestic alternatives. Assuming a base price in 1973 of $50/MCF for domestic gas and assuming that exploration and development will continue until the year 2000, but at inflated costs, prices in the future would increase as shown below. Transportation costs are held constant at $.25/MCF as it is improbable that major new pipelines would be built after 1980.

	At 3% Inflation	At 5% Inflation
1973	$0.75	$0.75
1990	1.08	1.40
2000	1.36	2.10

There are a number of distinct political risks with an overt policy of promoting the Soviet LNG projects. First, to date the press has focused on the comparative costs of $1.40 Soviet gas versus the average current domestic cost of $0.20 per MCF. Simple multiplication indicates that this apparent seven-fold increase will cost some of the American gas buyers $876 million per year for the North Star Project alone for apparently less secure fuel supplies plus a pro-rata share of a $250 million ship construction program.

The consortium must sell the gasified LNG to distribution companies and/or industrial sales. Unless new legislation is passed which removes approval of LNG imports from the Federal Power Commission, approval of future LNG projects, including the Soviet projects, will be subject to FPC approval. The FPC’s opinions on LNG projects to date have indicated a keen interest in minimizing costs. The El Paso/Algeria project, the only baseload project approved to date, involved prices of $.77 to $.83 per MCF. The FPC’s opinion allowed distribution companies to “roll in” the costs of higher priced supplemental fuels to the consumer, including LNG, but required that the pipelines incrementally price these supplemental fuels to the distribution companies. FPC approval of projects estimated at $1.25 to $1.50/MCF is considered by knowledgeable observers as highly questionable.

Representatives of Tenneco state that the consortium is prepared to proceed as soon as possible. They believe deregulation will probably be delayed on the Hill and that there will always be inadequate supplies of domestic natural gas. They plan to get long-term contracts from distributors and utilities as early as possible (during the period of uncertainty), believing that rolling in at the city gate will make the $1.25–$1.40 price acceptable. It is expected that the U.S. gasification facilities, as well as any additional pipelines will be added to the pipeline company’s rate base and thus provide for additional profits.

1. Source: National Archives, Nixon Presidential Materials, White House Central Files, Staff Member and Office Files, Energy Policy Office, Box 22, Charles J. DiBona Subject Files, Committee Memos. No classification marking. Printed from an uninitialed copy.
2. In the attached March 10 memorandum to DiBona, Schaefer informed him that Don Bostwick, Executive Vice President of the Ex-Im Bank, opposed the proposed LNG project “not so much because of the large size of the loan, but on the merits.” Furthermore, Bostwick “believed that the American companies were responsible for initiating the idea and his information is that, initially at least, the Russians did not like the project.” He also “strongly suggested” that an engineering feasibility study be a requirement prior to any endorsement of the project. Based on their conversation, Schaefer concluded: “Ex-Im has no requirements per se that could block consummation of the Soviet LNG project; however, Ex-Im financing will provide a vehicle for congressional debate of the merits and politics of the project.”
3. Attached but not printed at Tab A is “Summary of North Star,” itemizing the costs associated with the project.
4. Tab B is attached but not printed.