Cross-border gas-line projects face daunting challenges

Welding progresses on a segment of the Maghreb-Europe pipeline that began flowing Algerian gas into Spain in late 1996 (Photograph courtesy of Saipem S.p.A., Milan).

• Installing the Maghreb-Europe pipeline across the Strait of Gibraltar, one of the major subsea-engineering accomplishments of the decade, illustrates the major technical problems facing cross-border gas transmission projects (Photograph courtesy of Saipem S.p.A., Milan) [10,673 bytes].

Additionally, strained relationships among parties involved in both supply and delivery can further slow or even halt progress on a project.

In the cases of the Transmed (Algeria across Tunisia to Italy) and the Maghreb-Europe (Algeria across Morocco to Spain), the close working relationships of all parties involved helped resolve many issues and were key in the projects' eventual completion.

In 1996, gas moving across international boundaries reached 326.5 billion cu m (bcm), or 76% of the world's natural-gas trade (gas trade in the FSU excluded), representing an increase over 1995 on the order of 9%, according to an annual survey by Cedigaz.¹

To support anticipated continued demand growth, several new projects are now under consideration or set to begin; others have just been completed or should come on stream shortly.

A major participant in the international gas business, Algeria has been playing a leading role in gas exports over the past 30 years. In 1996, the country exported 41 bcm, of which 21 bcm were delivered by pipelines.

Projections for 2010 call for nearly doubling these volumes. To secure this growing share of supply, two major projects have started up recently (Fig. 1 [139,568 bytes]): expansion of the Trans-Mediterranean line to Italy and the Maghreb-Europe pipeline linking Algeria to Spain and Portugal via Morocco.

Here is an update on these two important pipelines in addition to a synthesis of Sonatrach's views on some of the major issues raised by the development of cross-border gas-transmission projects.

Transmed expansion

Under terms of the agreement concluded in 1977 between Italian state energy company ENI and Sonatrach, the natural-gas production facilities and the section of the pipeline located in Algeria are financed, owned, and operated by Sonatrach. The Italian section of the line is financed, owned, and operated by SNAM, the Italian gas-transmission subsidiary of ENI.

For the Sicily Channel section, a company owned by Sonatrach (50%) and SNAM (50%) was incorporated to build, finance, and operate the line.

In addition, Sonatrach and SNAM in 1977 signed a gas-sales contract which provided for the delivery of Algerian natural gas to Italy over 25 years with a plateau level of 12.4 billion cu m/year (bcmy).

Construction of the line in Tunisia was the object of an agreement between ENI and the Tunisian government.

To meet further demand for gas in Italy, SNAM and Sonatrach concluded in 1990 an amendment to the original gas-sales contract. It calls for 530 bcm of gas to be delivered to SNAM over a period ending in 2019 and reaching a plateau of 19.25 bcmy (Table 2 [11,330 bytes]).

Additionally, Italian state electricity company ENEL, which needs natural-gas feed for its power stations, has concluded with Sonatrach a gas-sales contract providing for the delivery of 4 bcmy over 20 years. This contract has recently been assigned to In Salah Gas, the new joint marketing company between Sonatrach and BP.

Requirements for delivery of this additional gas to Italy led in 1990 to plans to expand the existing pipeline. The new line runs in parallel to the old line and also has four sections (Table 1).

Existing capacity of the overall Transmed, including the new line, is 25 bcmy. Pipeline throughput could be increased to 30 bcmy later by addition of two compressor stations in Algeria and upgrading compressor horsepower in Tunisia and Italy.

Maghreb-Europe

Present capacity of the Maghreb-Europe pipeline system is 8 bcmy. It will reach 11 bcmy when a compressor station is added to the Algerian section of the pipeline. Planning for this station is ongoing.

Finally, system capacity could be further expanded to reach 18.5 bcmy with addition of four compressor stations in Algeria and three in Morocco. Expansion of the Spanish gas system, including the construction of a new segment connecting C?rdoba to the Pyrenees, would also be necessary to take gas to other European markets.

In 1992, Sonatrach concluded a gas-sales contract with Enag s providing for the delivery of Algerian natural gas to Spain over a period ending in 2020 and for a plateau of 6 bcmy.

Furthermore, Sonatrach concluded with the Portuguese gas-transmission company Transgas a long-term contract for sales of Algerian gas to Portugal over 25 years and for a plateau of 2.5 bcmy (Table 2).

Negotiations are under way with the Moroccan side for the conclusion of long-term contracts providing for deliveries to Morocco of Algerian natural gas.

The Maghreb-Europe pipeline was completed and began operations in November 1996. A volume of nearly 5 bcm will have been delivered to Enag s in Spain in 1997. These quantities will rise in stages to reach 6 bcmy by 2000. Portugal as well is expected to increase its imports to a plateau of 2.5 bcmy by 2000.

With respect to Morocco, Algerian gas deliveries are expected to reach 1 bcmy after 2000. Finally, the line opens prospects of exports to other countries like France and Germany.

The corporate structure and the contractual relationships of the Maghreb-Europe pipeline are very much similar to those of the Transmed.²

The challenges

International gas-transmission pipelines, characterized by extremely high capital costs and a broad range of complex and interrelated issues, require long lead-times for their implementations.

Because they are very capital intensive and inherently long-term, these projects must rely on very strong partnerships. Building these lines is not straightforward and the obstacles along the road leading to project start-up are numerous.

Many of the pipelines planned around the world still confront commercial, financial, and political issues which often lie outside the remit purview of project's promoters. The purpose here is to address some of the essential questions which often hinder the progress of these projects.

Algeria's gas resource

The gas base must also be dependable because continuity of supply is an essential issue not only for producers and consumers but also for financiers and other parties involved in the project. This issue takes on further significance when the gas resource is connected to the market outlet by means of a rigid physical link.

One element of success of the two Mediterranean crossings rests in the reliability of Algerian gas.

The important reserves of gas discovered at Hassi R'Mel in the early 1950s together with other reserves made available at Alrar, Rhourde Nouss, In-Salah, and other parts of the country, rank Algeria eighth in the world in proven reserves and seventh in marketed production.

But Algeria is not only well endowed with important reserves of gas:

• Most of the base is nonassociated gas. Hence, production potential is independent of the uncertainties usually attached to gas associated with oil extraction. A further important feature of the gas in Algeria is that most of its natural-gas fields contain wet gas.
• The gas-export infrastructure is large and flexible, allowing the country to deal with varying load profiles remarkably well, especially during unusual cold winter seasons when demand could be extremely high.
• The country enjoys a long experience in the development and operation of gas finds. It is also a relatively mature natural-gas market in terms of domestic consumption (11 bcm in 1996, excluding gas consumed at the production units), and the size and complexity of its infrastructure (more than 5,000 km of gas-transmission pipelines and 17,000 km of gas-distribution networks.)
• The position of Algerian gas reserves with respect to the growing market of southern Europe is particularly favorable. The distances are relatively short and the number of third countries crossed by the export pipelines is limited.
• Finally, the probability of finding new reserves is therefore extremely high and the country holds a good potential for new schemes.

Southern Europe market

The economics of a long distance (2,000-2,500 km), large diameter (40-48 in.) gas-transmission line depend on minimum pipeline throughput of 10-15 bcmy.

Economies of scale in a business characterized by extremely high capital costs require transportation of large volumes. On the other hand, building a very large gas line in anticipation of volume growth generally involves risk for the parties involved.

Maintaining economic viability requires minimum levels of off take guaranteed from the project's start.

The potential for gas growth in southern Europe has always been important.

Italy and Spain, two countries which lack large indigenous resources, each made a strategic decision to reduce dependence on oil imports and other energy sources that are detrimental to the environment. This approach paved the way for pipeline export of large quantities of Algerian natural gas.

Portugal, which had been until recently the only European Union country yet to consume natural gas, has also decided to reduce the country's heavy dependence on imported oil. It is estimated that natural gas will account 8-10% of Portugal's primary energy consumption by 2000.³

Assuming an average growth rate of 4%/yr, demand of natural gas in southern Europe should reach 180 bcmy in 2010, compared with nearly 100 bcm in 1995.

The Transmed and the Maghreb-Europe pipelines already enjoy a favorable position with respect to the expanding market of southern Europe. Their current export capacities could rapidly be expanded, mainly by adding compression, from the existing 35 bcmy to a maximum of 50 bcmy.

These pipelines are in a good position to meet part of the added gas needs of this region forecast for the rest of the decade and the early years of the next century.

Export routes

Routing is affected not only by technical and economic considerations, but also by strategic thinking, vested interests, political factors, and so forth. These elements affect the costs of the project and its timing, the mode of financing and ownership, the physical vulnerability of the line, and sometimes whether the line will even be constructed.

Examples are numerous of international pipeline projects which have been delayed or are still delayed because the parties involved do not agree on the pipeline route. Furthermore, there are and will continue to be cases in which political factors have forced selection of a longer route so that a province or a neighboring country could benefit from the crossing of the line.

Some export routes crossing politically unstable areas are alleged to be more risky than others. Facts, however, do not always bear out these allegations.

Some energy exporters have been remarkably consistent producers despite ongoing political uncertainty in their own countries. It depends on how political risk is perceived.

In many cases, the vulnerability of an export route to interruptions or closure depends less on the political stability of the countries crossed by the pipeline than on the benefits the line is having on their own economies.

The larger the part of the pipeline in the economies of the countries involved, the less vulnerable would be the line to political disruptions.

In 1995, the Transmed accounted for 33% of Italian gas imports and 52% of Algerian gas exports; more than 80% of the gas consumed in Tunisia in 1995 came via the Transmed.

Costs

Capital costs vary with the physical parameters of the line (length, pipe weight, diameter, installed compression) and fluctuate from one site to another.

Transportation costs are also critically important because they tend to represent for long-distance gas pipelines an important element of the cost of gas supply. They include technical costs and transit fees.

Technical costs involve a large part of capital expenditure: they vary with volume, cost of fuel, gearing, the method for setting up pipeline tariffs, and profits. When an international gas-pipeline project must cross more than one country on its way to final consumers, a transit fee is paid to the third countries crossed by the pipeline.

These fees are difficult to quantify because there are no specific methods or guidelines for determining them. They are paid to each country crossed by the pipeline and as such could represent a significant part of the total transmission cost of gas.

In the case of the Transmed and the Maghreb-Europe pipelines, only one transit country is crossed by each line. Transit fees paid to Tunisia and Morocco account not only for right-of-way but also for tax exemption in these countries during the construction and operation of the line.

Economic viability of long-distance international gas-pipeline schemes could be seriously affected by transit costs especially when several countries must be crossed by the line.

The combined effects of the low level of present energy prices and the high costs of transportation for long-distance gas pipeline schemes represent today a major limiting factor for the materialization of many planned projects around the world.

Financing

A pipeline moving gas from fields in southern Algeria to southern Europe and having a capacity of 10-15 bcmy would require today an investment of $3-4 billion. These large capital requirements exceed companies' own funding resources and must rely on external finance.

Moreover, the task of mobilizing funds for long-distance gas pipeline projects raises complex issues. Although addressing all these problems is beyond the present scope of this article, here are some of the key issues which often determine the financial options for these projects:

• Multicountry projects involve various players. The credit-worthiness of the countries crossed by the pipeline and the financial standings of the project's participants are at the heart of most considerations concerning project financing. In many instances, if not always, the outcome depends more on the countries and the sponsors involved than on the technical and financial soundness of the undertaking.
• The ownership structure of the project along the pipeline route is of fundamental importance because this issue not only determines the sharing of risks among interested parties but also how the financial package may be put together.
• A further point relates to the willingness of multilateral agencies to support the project. Financial involvement of these institutions can encourage the availability of funds from other sources.

Under today's conditions and because of the general reluctance to lend to the developing world, it is unclear how these large funds, essential for the successful implementation of these projects, may be put together.

Gas-development schemes

targeting regional markets which largely depend on gas imports contribute to enhance security of supply of these regions. Raising the capital to support these gas projects is therefore necessary not only for producers but also for consumers.

In this context, there is a pressing need for new regional insurance schemes and for further innovation and sophistication with regard to the financing of gas projects. There is also scope for a major involvement of multilateral banks in the financing of these projects.

The participation of the EIB in the funding of the various sections of the Maghreb-Europe pipeline, including those located outside the European Union, not only helped to cover a significant part of the project's capital requirements but also acted as a catalyst for mobilizing funds from other sources.

This factor played an important role in the timely and coordinated implementation of the project as a whole.

Partnerships

In the cases exemplified by the Transmed and the Maghreb-Europe pipelines, they are organized as an integral part of the gas-sales contracts, with the seller and the buyers of gas owning or controlling the sections of the lines located in their own countries.

The gas shipped through these lines is delivered to the buyers at the border of the seller's country and the two pipelines combine both transportation and merchant functions. In other arrangements, gas pipelines may be owned and operated through third parties independent of the buyer and the seller of gas.

Selection of an appropriate set up for an international gas-transportation link is influenced by several factors. The risks involved in the project, the regulatory environment in which the pipeline is realized, investment strategies of the parties concerned, funding considerations, and other factors play important roles in the final decision.

The partnerships formed usually consist of powerful players sharing common objectives and relying on each other for the capabilities they may lack. The joint participation of the buyer and the seller of gas in the ownership structure of the pipeline not only provides a framework for sharing project's risks but contributes to an efficient construction and operation of the line.

We found that these joint ventures, when managed efficiently, can reinforce communication and cooperation between the buyer and the seller of gas and help foster long-term relationships between them.

While the buyer and the seller of gas are usually the principal players, they are not the only parties involved. Governments, contractors, and financial institutions also play an indispensable role in the success of international gas pipeline schemes.

Technical issues

Onshore pipelines have been laid almost everywhere, across jungles, deserts, permafrost areas, crowded cities, and so forth. While the construction of these lines may be sometimes problematic, the difficulties encountered are rarely insurmountable.

The same cannot be said about offshore lines which confront from time to time major technical obstacles as a result of deep water and unfavorable sea-state conditions and sea-bottom morphology prevailing in the areas of concern.

Among the difficulties which prevented the Transmed and Maghreb-Europe pipelines from being realized earlier, that of laying large subsea trunklines at deep water, occupied a central place.

Crossing the Mediterranean required building submarine pipeline sections to a maximum water depth of 613 m in the Strait of Sicily and dealing with particularly swift currents especially across the Strait of Messina and the Strait of Gibraltar.

In the early seventies, when these two projects were under consideration, these challenges were far beyond the capabilities of existing equipment and technologies.

The initial step therefore consisted of determining the technical feasibility of these undertakings by carrying out a series of studies and investigations. This implied the development of appropriate techniques and the upgrading of laying and surveying equipment.

The research program conducted in deepwater laying for the implementation of the Transmed lasted several years in the 1970s. The program involved the joint participation of SNAM and Sonatrach which agreed to share risks equally for the crossing of the Sicilian channel.

The efforts made during those years contributed to the successful implementation not only of the Transmed but also of the most advanced offshore-pipeline systems laid since, including the Maghreb-Europe pipeline.

More than 15 years have passed since the original 2,500-km Transmed pipeline was laid. This line continues to hold the world record for the deepest gas offshore trunk line ever laid. But for how long?

Many gas-transportation projects are now under consideration to accompany the rapid growth in international gas trade. With the gas source becoming increasingly remote from the main consuming centers or the emerging gas markets, there has been recently a sudden interest for gas trunk lines implementation at very great water depths.

Laying large-diameter pipelines in very deep waters is therefore the new technical challenge facing the industry. The use of conventional vessels at these water depths is limited by the station-keeping ability of the mooring system and the excessive bending stress exerted on the suspended section of the pipeline during laying operation.

With current technology, the practical water-depth limit of the conventional S-lay technique (Fig. 2 [43,825 bytes]) could hardly exceed 1,000 m. In an effort to overcome these limits, J-laying (Fig. 3 [64,272 bytes]) is increasingly viewed as an alternative for extending pipeline capabilities in deep water.

This laying configuration has the advantage of reducing the tensioning requirements and consequently the size of the lay barge because pipe jointing is done vertically. But it has yet to solve the crucial question of productivity.

The J-laying procedure imposes pipe-joint assembly on board to take place in a single station rather than in a multistation configuration, as in S-lay. Production rates tend therefore to be lower for J-laying, although significant improvements are achieved by using preassembled multiple joints during laying operations.

Another important issue related to deep water concerns the use of heavy-wall pipe.

As depth increases, there must be a corresponding increase in thickness to prevent external collapse. This question has two important implications.

First, present pipemill capabilities to manufacture heavy-wall pipe may need to be upgraded to meet the new requirements. Secondly, more advanced automatic pipe-welding techniques will have to be developed to ensure good weldability and enhance productivity aboard the laying vessel.

None of these obstacles is in itself insurmountable. Finding appropriate solutions to the problems will depend in large part on the probability of success of some of the challenging projects being contemplated worldwide.

Their economic viability is essential to justify the development costs necessary to resolve these issues.

References

1. Natural gas in the world, 1997 survey, Cedigas, France.
2. Dufol, J.D., and Quintana, C. (Enag s). Legal and financial aspects of the Maghreb/Europe Pipeline, presented to the 19th World Gas Conference, Milan, June 2-23, 1994.
3. Garcez, Joao Pedro Almeida, "The European Maghreb Pipeline," presented to The Future of Natural Gas in the Mediterranean, Milan, Mar. 28-29, 1996.

"A pipeline bringing gas from fields in southern Algeria to southern Europe and having a capacity of 10-15 bcmy would require today an investment of $3-4 billion. These large capital requirements exceed companies' own funding resources and must rely on external finance."

The Author

Djamel Eddine Khene has since 1996 been an advisor to the general manager of Sonatrach, which he joined in 1971. He has held several positions, including engineering and construction manager (1976-1982) and head of Sonatrach's pipeline division (1982-1990). He carried out an assignment as a director in Mariconsult (Italy) from 1990 to 1996 where he supervised the expansion of the Transmed. Khene holds a BEng (1969; honors) in electrical and electronic engineering from the University of Sheffield U.K.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.