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A pipeline is like a marriage with kids

by Jerome a Paris Fri Dec 16th, 2005 at 07:20:28 AM EST

I have found 3 items of note on the topic of pipelines this morning and would like to expand on them a little bit.

New oil pipeline launched between Kazakhstan and China

US pressure likely to sink IPI pipeline plan (IJ News, behind sub wall)

Pakistan's legal adviser on power projects has told IJ News that US opposition to the much-touted Iran-Pakistan-India (IPI) pipeline project is likely to be the death of it - in the short-term at least.

Row on gas prices paid by Ukraine to Russia deepens

All point to the strategic importance of such essential infrastructure projects in today's world. A pipeline goes from one point to another, and links a producer and a consumer in a very tight embrace. It both enables the flow of oil or gas, but can also limit trade to a small number of destinations, or origins, for each party. Each of the 3 cases above illustrate this.

First, the Chinese pipeline, as this is the only piece of "hard" news. It is important to note that pipeline projects often make lots of headlines, many of which have only little relevance. A pipeline is announced when the "concept" of it is first published, then when in-principle agreements are signed (or announced), when contracts are signed (or announced), when financing arragnements are put in place, when construction starts, when it ends, when the pipeline is inaugurated, and when oil or gas actually flows. Before that last step, a pipeline is usually worthless. And there are cases of pipelines which are built and remain empty. So do not be impressed by announcements of gignatic projects and big amounts, a lot of it is just politicians trying to make grand gestures. A pipeline is usually built for 20 or 30 years, and contracts inevitable announce the value of all the hydrocarbons that will flow through it for that period, which always sounds impressive but means little.

Anyway, here we go:

President of Kazakhstan Nursultan Nazarbayev has launched a new oil pipeline to China.

Mr Nazarbayev put the $US806 million pipeline into service from the control centre of state-run KazTransOil in the Kazakh capital Astana.

The 1,000-kilometre pipeline, linking Atasu in central Kazakhstan to Alashanku in western China, will now start to fill with Kazakh oil from the central Kumkol field.

The route covers some of the world's most inhospitable territory, with extreme temperature ranges and earthquake-prone zones.

Deliveries are expected to start only in mid-2006, with an initial annual capacity of 10 million tonnes.

But the stretch of pipeline, jointly developed by the China National Petroleum Corporation (CNPC) and the Kazakh state energy company Kazmunaigaz, is a first milestone in a more ambitious project: to link Chinese consumers to the far bigger oil fields of the Caspian Sea.

Kazakhstan authorities say the extension should be complete by 2011, with capacity also doubled.

The total length would then be some 3,000 kilometres.

The Energy Information Agency has a note on Kazakhstan with a nice map (pdf):

It is the rightmost bit which has just been inaugurated, i.e. the part of the pipeline that will allow Kazakhstan to export oil by pipeline to China from the field in Kumkol, which are run by CNOOC, one of the Chinese oil companies.

This is a pipeline that creates a tight link between the two countries, because it cannot be used for much more than delivering oil from Kumkol to China. Kazakhstan has the possibility to move oil westwards from Kumkol (as is currently done), but it is dependent on Russia to do so, so for that country, it is another option. For China, it is a new source of oil made available.

But the most interesting thing about this pipeline is, as the map shows, that it is intended to link it to the Western network, which is currently used to move oil westwards (from Kendiyiak, where some fields are producing, to Atyrau and further). Once this is done, it will become possible to move oil eastwards from Atyrau to China. This may sound strange, but actually, the 3 biggest fields in Kazakhstan (Kashagan, Tengiz and Kurmangazy - go read the EIA note for more details) are just south of Atyrau, and they are expected to produce an estimated 2.3 mb/d (115 million tones per year, or more than Iraq currently) by 2015. They are run by Western companies, and a good part of that oil is expected to go West, but the availability of the pipeline will make the China option attractive to the producers, who will love to have more options to sell their oil (and thus not be dependent on one route, get a better price, and be able to produce more). As the export routes for these fields have not been finalised yet, having an option physically ready is a major asset, and will give China a good chance to capture some of the Caspian oil.

So, a smart strategic move on their side.

Now we move on to the Iran-Pakistan-India pipeline

from the IJ article

US law firm Hunton & Williams' head of project development, finance & leasing Tom West said: 'I do not think the Pakistan government will go ahead with the project as long as the US opposes it.'

American reluctance concerning the IPI idea has hardened into outright opposition since the election of the new Iranian president Mahmoud Ahmadinejad.

West said that Ahmadinejad's increasingly hard line on international politics has led the White House to lean on Pervez Musharraf's government in Pakistan to dissuade it from developing closer links to Iran - and the IPI pipeline is squarely in its sights.

Now, I have written before (sorry, I cannot dig up the links) that I do not think it is very likely that this pipeline will be built in the near future, as it is pretty much impossible to finance externally (but at least, contrary to the Turkmenistan-Afghanistan-Pakistan gas pipeline, it can make economic and strategic sense) and I don't see any of these 3 countries ponying up the money to build it. As this article makes clear, the countries cannot even agree on the most basic concepts:

Tehran, furthermore, is insisting on a "take-or-pay" agreement, in which India must pay for the agreed amount of gas even if it does not take delivery of it, Press Trust of India reported on 9 March. India reportedly prefers a "supply-or-pay" contract, in which Iran must deliver gas to the Indian border or pay for the contracted quantity. Tehran also rejected India's request for natural gas that is rich in petrochemicals, preferring instead to deliver "lean" gas that does not contain butane, ethane, or propane.

A "take or pay" arrangement is imperative for these projects, as it guarantees that it will be used: it is the buyer that takes the volume risk, by agreeing to pay for the availability of the pipeline whether it uses it to import gas or not. ALL pipeline projects are financed on such a basis. The fact that India won't commit to the concept tells me that the project won't happen for a while. (And as the quoted article makes clear, discussion have been ongoing since the early 90s and have gone nowhere so far)

In that context, US opposition is an additional obstacle, but not a significant one. Russia built its pipeline to Turkey under the Black Sea ("Blue Stream") despite active US lobbying and opposition, because the project made sense, and it found smart ways to finance it.

What is true is that such pipeline, should it be built, would create major economic and strategic ties between the 3 countries, and would overall be a good thing by increasing their co-dependency. But Iran has a history of missing out on such big opportunities - in the late 70S, it lost the "gas race" to Europe to the Soviet Union; in the late 90s, it lost the gas race to Turkey (to Russia, again) and the LNG race to Qatar. In each case, it is political factors (hostility to foreign involvement) that has killed projects. International pipelines, by definition, cannot happen without foreign involvement - you need to deal at least with the buyer...

This creates a nice transition as the third story is about the gas pipelines from Russia to Europe, which, when built went from the Soviet bloc to the West, but now go from Russia to Europe, via transit countries like Slovakia and Hungary (now part of the EU and thus of the "West") and Ukraine.

from the Times article

A SHOWDOWN between Russia and Ukraine that threatens supplies of fuel to Western Europe escalated yesterday when Gazprom, the utility giant, demanded that the former Soviet republic pay sharply higher prices for its gas.
The Russian company, which has given warning that European supplies could be threatened if Ukraine fails to agree a higher price by January 1, said that it was losing patience with the pace of talks as it called for a fourfold increase in what the country pays.

Gazprom is demanding tough commercial terms from former Soviet satellites that no longer pay tribute to the Kremlin. Ukraine is key because it is the main conduit for Gazprom's gas exports to the European Union.

Gazprom's head of exports, Alexander Medvedev, demanded that Ukraine pay a price equal to Gazprom's European customers, some $220-$230 per thousand cubic metres (MCM).

Ukraine, which is heavily dependent on the Russian company for gas, pays a heavily subsidised rate of only $50 per MCM. Previously, Gazprom had asked for a price of $160 per MCM but Mr Medvedev said that Gazprom was losing patience.


Gazprom supplies a quarter of Europe's gas, of which 80 per cent is shipped via Ukraine and the heightened tension provoked an anxious response in Brussels. "We hope they will reach an agreement," an EU energy spokesman said.

Gas is the main source of fuel for heating homes and generating power in Ukraine but its dependence on Gazprom has become a hot political issue since the Orange Revolution that brought the pro-Western President Yuschenko to power last year.

Gazprom continues to sell gas at cheap rates to Russian consumers but argues that it can no longer be expected to do the same in a foreign country. Moreover, cheap gas provides a subsidy to Ukrainian industry.


The Russian utility pays for transit through Ukraine's pipelines in kind, supplying the country with some 25 billion cubic metres per year in lieu of cash payment. However, Gazprom wants to move to a cash basis, paying a market tariff for transit in return for a market price for gas.

As the map above makes clear, most of the pipeline capacity from Russia to Europe goes through Ukraine, which gives that country a stranglehold on that trade. Thus Russian attempts to build new pipelines elsewhere (like the Yamal-Europe pipeline via Poland on the map, the Nord-Europe pipeline recently announced which it to go directly from Russia to Germany under the Baltic Sea, and the Blue Stream pipeline from Russia to Turkey). Russia's problem is that these new pipelines are being used to increase sales, and thus the dependency on the Ukrainian pipelines is as absolute as ever for them to fulfill their delivery commitments.

Thus Ukraine has never paid for the gas it needs to import from Russia, as it can simply tap the transit gas. That happened in 1992 and 1992, when Russia tries to cut them off and Ukraine reduced transit by the same volume. Since then, both countries have agreed to "swap" transit rights for free deliveries, which is actually a pretty cheap price for Russia to pay to protect exports which make 25% of its hard currency earnings, and, some years, the same proportion of its federal tax income.

Today's noise is an attempt to try to scare off the Europeans again into putting pressure on the Ukrainians to behave, but it stands exactly zero chance of success, because Russia will never cut its gas deliveries to the West. Its credibility as a supplier is too vital an asset for it to endanger it.

That situation shows the interesting thing about pipelines - they create lasting dependencies that force countries to talk and find peaceful agreements, because otherwise both get hurt economically. Pipelines are pretty much like kids in a marriage - they tie you for a long time, force you to talk - but in this case, they cannot even be hurt...

So, if I were the USA, I would actually support the Iran-Pakistan-India pipeline, it can only improve relations between these countries and force them to learn to talk to each other on a permanent basis.

"Now, I have written before (sorry, I cannot dig up the links) that I do not think it is very likely that this pipeline will be built in the near future, as it is pretty much impossible to finance externally and I don't see any of these 3 countries ponying up the money to build it."

Caspian Oil - A Sunday Special

Another masterpiece ...

"Treason doth never prosper: what's the reason?
For if it prosper, none dare call it treason."


'Sapere aude'

by Oui (Oui) on Fri Dec 16th, 2005 at 09:18:49 AM EST
Thanks Oui for the kind words. Actually, I have written more specifically about the IPI pipeline, in comments somewhere, and that's harder to dig up...

But that "Caspian" diary does provide some good background on the region...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Dec 16th, 2005 at 10:17:13 AM EST
[ Parent ]
Afghan Pipeline Plans Being "Dusted Off" ◊ by SusanHu
Tue Apr 12th, 2005 at 08:54:39 AM PST

In an INN World Report interview today about his book -- "The New Great Game: Blood and Oil in Central Asia" -- Lutz Kleveman said that the infamous Afghan pipeline plans are being "dusted off."

Then, I spotted this April 12 Al-Jazeera article: "Disputed Afghan pipeline reviewed." . . . More below . . .


I wroter a full diary to explain this in detail, which you can find here:

Please. Afghanistan was NOT about oil. Just a simple fact: the only conceivable pipe going through Afghanistan would be a gas pipeline, not an oil pipeline.

"Treason doth never prosper: what's the reason?
For if it prosper, none dare call it treason."

▼ ▼ ▼ MY DIARY

'Sapere aude'

by Oui (Oui) on Fri Dec 16th, 2005 at 10:45:34 AM EST
[ Parent ]
India is playing their US rapprochement card very well so far.

India is being courted by the US as a check on the rising  Chinese.

The Pentagon is conducting joint exercises like this very high profile top gun type one where the Indian Air Force shot down the USAF F-15s very unexpectedly.

Nuclear weapons technology is being offered.

On the other hand India chastises the new [Iran government about UN inspections

This editorial in the Hindustan Times is also interesting.

India is also dancing with China as in the case of this China and India caper in Syria of all places. http://www.business-standard.com/common/storypage.php?storyflag=y&leftnm=lmnu2&leftindx=2&am p;lselect=1&chklogin=N&autono=208658]

India has obviously a sophisticated foreign policy that matches their aerial dogfighting skills.

by Shockwave (shockwaveatinorbitdotcom) on Sat Dec 17th, 2005 at 06:56:06 PM EST

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