Pipeline politics and China

June 13, 2011
In preparing a presentation to the sales force of a large multinational company regarding the state of the global pipeline industry, the hosts requested that in addition to facts and figures describing the size and status of a number of large projects, some mention be made of the political obstacles each project faced.

Christopher E. Smith
Pipeline Editor

In preparing a presentation to the sales force of a large multinational company regarding the state of the global pipeline industry, the hosts requested that in addition to facts and figures describing the size and status of a number of large projects, some mention be made of the political obstacles each project faced.

It was heartening that they recognized politics' seeming primacy in determining the fates of large pipeline projects around the world. Perhaps less so was the subsequent task of disentangling each individual intrigue in an effort to find common threads.

Politics in the fore

Starting in North America, politics has stepped to the fore in determining the fate of TransCanada's Keystone XL oil sands crude system. Supporters of the project describe it as both a ready means of meeting US oil demand from a reliable and close-at-hand supplier and a source of much-needed jobs. But detractors doubt the long-term economic benefits and cite environmental concerns regarding Keystone XL's construction and operation.

Politics also have long been a part of efforts to build a trans-Alaskan natural gas pipeline. From passage of the 2005 Alaska Gasline Inducement Act, to efforts to negotiate terms outside of it, and from internal fiscal debates regarding the appropriate tax rates to maximize Alaskan revenue while still getting a pipeline built, to open wondering as to whether Alaskan gas should ultimately be exported as LNG instead of shipped south, hardly a move has occurred in the current iteration of Alaskan gas line discussion without politics being at least one of the guiding forces.

The European Union's efforts to diversify both the routing and sourcing of its gas supplies have been similarly entangled. The EU granted the Nabucco gas pipeline status of 'Project of European Interest' in February 2009, with the expectation that this would smooth the regulatory and financing processes of the project designed to bring non-Russian, Caspian gas to Europe. In May, however, Nabucco pushed back start of construction to 2013, with start-up sliding to 2017 from 2015, as securing both financing and gas supplies remained problematic.

State Oil Co. of Azerbaijan Republic (SOCAR) has so far only guaranteed Nabucco 10 billion cu m (bcm)/year of takeaway, less than one-third the line's 31 bcm/year capacity. Continuing sanctions have put the availability of Iranian supplies in limbo, while uncertainties regarding the future validity of contracts reached with the Kurdistan Regional Government in northern Iraq have done much the same to supplies from there.

Costs mounting

And all the while costs continue to mount, further pressuring the project's financing. This is particularly true for countries like Bulgaria and Romania, whose state energy companies, Bulgargaz and Transgaz, comprise two of Nabucco's six partners; the other four are Turkey's Botas, Hungary's MOL, Austria's OMV AG, and Germany's RWE AG.

South Stream, bringing Russian (and perhaps Kazakh) gas to Europe via subsea pipeline across the Black Sea to Bulgaria, is a competing alternative. But it doesn't diversify gas sourcing, and Russia's state-owned OAO Gazprom has voiced discomfort with European suggestions that it open shipping on the line to independent Russian producers.

And the 500-lb gorilla in the room through all of this is the specter of the seemingly never-ending expansion of demand in China and India. Poten & Partners sees a potential LNG supply gap in China of 10 million tonnes/year by 2020, as demand rises beyond currently contracted supplies. (OGJ Online, Dec. 10, 2010). China also plans to more than double its strategic petroleum reserve to roughly 500 million bbl in 2016 from less than 200 million bbl now, on top of any increase in actual demand (OGJ, Oct. 4, 2010, p. 114).

Caspian gas can just as easily move east as west. Russia and China continue to expand and formalize their energy cooperation. And plans are already in the works for pipelines from producing centers to both Canada's west coast and Alaska's south coast for export into the Pacific Basin.

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