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The Economic and Political Implications of
Transit Pipelines: Lessons for the Future
Professor Paul StevensSenior Research Fellow (Energy)
Oil and Gas Pipelines Integrity and Maintenance Forum
Marcus Evans Conferences
Berlin 1st February 2008
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Presentation Outline
What is a transit pipeline?
Why are they increasingly important?
Why are they vulnerable?
Possible solutions to their vulnerability?
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What is a transit pipeline? The obvious definition
A pipeline which passes through another
“sovereign” territory to get to market
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What is a transit pipeline? Some typical examples
Long Term Success Cases Transmed – Algeria to Italy
Cross border pipel ines from the former Soviet Union
The SUMED oil pipeline –Red Sea to the Mediterranean
Long Term Failures
Iraqi export lines – Iraq via Syria and Turkey
IPSA – Iraq – Red Sea via Saudi Arabia
TAPLINE – Saudi Arabia to Lebanon and Syria Some Recent Pipeline Projects
Western Export Route - Baku to Supsa
Gazoduc Maghreb-Europe gas pipeline –Algeria to Spain
Brazil-Bolivian Gas Line
Baku-Tiblisi-Ceyhan –Azerbaijan to Mediterranean
Balkan Oil Transit Pipeline Projects –Russia to W. Europe
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What is a transit pipeline?
A less obvious definition has a legal dimension and makesthe issues clearer
A pipeline which has no overall effective legal
jurisdiction to cover its operations and its contractual
basis
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Why are they increasingly important?
Increasing cross-border trade
More reserves being foundaway from the main markets
Oil and gas reserves in the OECD 1986-2006
0
5
10
15
20
1986 1996 2006
T c m
0
20
40
60
80
100
120
140
B n b
GAS OECD GAS EU 25 OIL Bn/b
Global cross -border oil and gas t rade 1991-2006
0
20
40
60
80
100
1991 2001 2006 1991 2001 2006
P e r c e n t
non-traded gas
traded gasnon-traded-oil
traded oil
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Why are they increasingly important?
More reserves are in
“landlocked” territory
Non-OPEC reserves 1986-2006
0
50
100
150
200
250
300
350
1986 2006
B
n
b a
r r e l s
access to the sea
landlocked
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Why are they increasingly important?
All forecasts show greaterdemand for oil and gas
Security of supply has
become an increasingly
important issue, especially
for gas
IEA Forecast of global oi l and gas demand -
Reference Scenario
0
20
40
60
80
100
120
140
2006 2030
M
i l l i o n
b o e
/ d
Oil Demand
Gas demand
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Why are they vulnerable?
Physical vulnerability of all pipelines (?)
The obvious - Political vulnerability
Neighbours have historiesPipelines create political levers
But there is the less obvious - Economic vulnerability The obsolescing bargain and the transit fee
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Why are they vulnerable? Problems with the transit fee
What is a transit fee for? Compensate for impact of the pipeline? - BUT
Land cost already covered.
Environmental costs can be internalised.
Disruption to local communit ies usually dealt
with directly.
Reward for sacrificing sovereignty? -BUT
Debatable if sovereignty is infr inged
In any case very diff icult to value
Sharing in the benefits of the project…
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Why are they vulnerable?
How to measure the benefits and what is the contribution of
the transit country to the project?
Based on length of the transit pipe?Based upon the cost saving versus alternatives?
But if there is only one route, the contribution = any
supernormal (monopoly) profit from the project
And what happens when the valuation changes as oil
and gas prices fluctuate?
Without an objective basis, the transit fee is left to simplebargaining power which leads to the obsolescing bargain
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EXPLAINING THE “OBSOLESCING BARGAIN”
COUNTRY A
PRODUCER
COUNTRY B
TRANSIT
TRANSIT
AGREEMENT
NEGOTIATED
Green and blue arrows represent relativebargaining power
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EXPLAINING THE “OBSOLESCING BARGAIN”
COUNTRY A
PRODUCER
COUNTRY B
TRANSIT
TRANSIT
AGREEMENT
NEGOTIATED
PIPELINE BUILT
AND BEGINS TOOPERATE
Green and blue arrows represent relativebargaining power
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EXPLAINING THE “OBSOLESCING BARGAIN”
COUNTRY A
PRODUCER
COUNTRY B
TRANSIT
TRANSIT
AGREEMENT
NEGOTIATED
DEMANDS FOR
RENEGOTIATION
TO INCREASE
TRANSIT FEE
Green and blue arrows represent relativebargaining power
PIPELINE BUILT
AND BEGINS TOOPERATE
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Why are they vulnerable?
Because of large technical economies of scale,
pipelines tend to be natural monopolies thus in most
cases there should only be one
The operation of the “ bygones rule” allows very
strong squeezing of profits before the line closes
The value of the throughput (and hence the value of
the project) is extremely volatile as oil and gas prices
fluctuate
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POSSIBLE SOLUTIONS TO THEIR VULNERABILITY
WHAT HAS BEEN GOOD PRACTISE
RULES CLEARLY DEFINED AND ACCEPTED
PROJECTS DRIVEN BY COMMERCIAL CONSIDERATIONS
CREDIBLE THREATS TO AVOID THE OBSOLESCING BARGAIN
MECHANISMS TO CREATE A BALANCE OF INTERESTS
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WHAT HAS BEEN GOOD PRACTISE
RULES CLEARLY DEFINED AND ACCEPTED
STABLE LEGISLATION, INDEPENDENT PREDICTABLE REGULATION, NEUTRAL JUDICIARY, MINIMALGOVERNMENT INTERFERENCE
COMMONALITY OF JURISDICTION
GOVT TO GOVT TRANSPARENT AGREEMENTS
CONTRACTS HAVE FLEXIBILITY TO DEAL WITH FORESEEABLE CHANGES –USE OF OBJECTIVEPARAMETERS
UNREALISTIC TO HOLD PARTIES TO COMMITMENTS IF CHANGED CIRCUMSTANCES MAKE ITUNREASONABLE
RE-NEGOTIATION CLAUSES BUT PROBLEMS OF RELATIVE BARGAINING POWER
BUT STILL NEED THIRD PARTY OBJECTIVE CONFLICT RESOLUTION
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WHAT HAS BEEN GOOD PRACTISE
PROJECTS DRIVEN BY COMMERCIAL CONSIDERATIONS
COMMERCIAL DRIVERS ALLOWS RESOLUTION OF ISSUES AND PROBLEMS
POLITICAL DRIVERS HAVE TENDED TO LEAD TO PROBLEMS
ROLE OF THE MARKET IMPORTANT AND THE BEST WAY OF DEALING WITH UNCERTAINTIES
BUT PROBLEMS OF NATURAL MONOPOLY
BUT THE STATE DOES HAVE A CRUCIAL ROLE
SETTING THE RULES OF THE GAME
PROTECTING AGAINST MARKET FAILURE
HELPING TO OVERCOME CERTAIN OBSTACLES EG UNCERTAIN GAS DEMAND
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WHAT HAS BEEN GOOD PRACTISE CREDIBLE THREATS TO
AVOID OBSOLESCING BARGAIN
ALTERNATIVE ROUTES
REPUTATION AND THE ROLE OF GLOBALIZATION
LINK ENERGY ACCESS DOWNSTREAM TO TRANSIT
TRANSIT GOVERNMENT SUBJECTS ITSELF TO SANCTIONS
COLLATERAL TO INVESTOR OUTSIDE GOVT’S JURISDICTION
THIRD PARTY OBJECTIVE CONFLICT RESOLUTION
DEVELOP MUTUAL DEPENDENCE
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WHAT MORE CAN BE DONE
STRENGTHEN ACCEPTED INTERNATIONAL NORMS OVER INVESTMENT
FINANCE (INCLUDING IFI’S) MUST INSIST ON OBJECTIVE THIRD PARTY ARBITRATIONCLAUSES
STRENGTHEN INTERNATIONAL SOURCES OF OBJECTIVE THIRD PARTY ARBITRATION
ICC’S WTO
ENERGY CHARTER TREATY
GREATER TRANSPARENCY OF EXISTING AGREEMENTS
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