The Bush School of Government and Public ServiceThe Bush School of Government and Public ServiceTexas A&M UniversityTexas A&M University

US-Ukraine Business CouncilUS-Ukraine Business Council

Pipeline Politics in Eurasia andPipeline Politics in Eurasia andIts Implications for International SecurityIts Implications for International Security

Washington WorkshopWashington WorkshopSeptember 3, 2009September 3, 2009

Pipeline 101Pipeline 101Alignment of InterestsAlignment of Interests

Edward C. ChowEdward C. ChowCenter for Strategic and International StudiesCenter for Strategic and International Studies

StakeholdersStakeholders Producing countriesProducing countries Producing companiesProducing companies Consuming countriesConsuming countries Consuming companiesConsuming companies Transit countriesTransit countries Transit companiesTransit companies Competitors with other routesCompetitors with other routes Other interested parties – e.g., USG, Other interested parties – e.g., USG,

lending institutions and construction lending institutions and construction contractorscontractors

Producers’ InterestsProducers’ InterestsGovernmentsGovernments Highest economic value for subsoil rightsHighest economic value for subsoil rights Dependable and diverse export routesDependable and diverse export routes Geopolitical balanceGeopolitical balance

CompaniesCompanies Highest comparative netback to the Highest comparative netback to the

wellhead for oil & gas productionwellhead for oil & gas production Lowest-cost, dependable and diversified Lowest-cost, dependable and diversified

transportationtransportation Financial exposure commensurate with Financial exposure commensurate with

commercial interestscommercial interests

Consumer’s InterestsConsumer’s Interests

GovernmentsGovernments Economic and dependable supplyEconomic and dependable supply Diversity of supplyDiversity of supply Geopolitical balanceGeopolitical balance

CompaniesCompanies Low-cost transportation of oil & gasLow-cost transportation of oil & gas Contract flexibility to ameliorate commodity Contract flexibility to ameliorate commodity

risksrisks Financial exposure commensurate with Financial exposure commensurate with

commercial interestscommercial interests

Nature of Long-Haul Transport ProjectsNature of Long-Haul Transport Projects((Equally true for pipelines, LNG, etc.)Equally true for pipelines, LNG, etc.)

High capital cost, low return and long High capital cost, low return and long payoutpayout

Long gestation periodLong gestation period Require well-defined government roleRequire well-defined government role Natural gas and crude oil are different in Natural gas and crude oil are different in

project implementation and impactproject implementation and impact Financing as distributor of project risks – Financing as distributor of project risks –

allocate risk/rewardallocate risk/reward Diversity costs big bucks (who pays?)Diversity costs big bucks (who pays?) Championed by largest stakeholder(s)Championed by largest stakeholder(s)

Traditional Value PropositionTraditional Value Proposition Governments provide political support and Governments provide political support and

regulatory frameworkregulatory framework Producing companies provide long-term Producing companies provide long-term

ship-or-pay volume guarantees sufficient ship-or-pay volume guarantees sufficient to amortize financingto amortize financing

Consuming companies provide long-term Consuming companies provide long-term take-or-pay volume guarantees sufficient take-or-pay volume guarantees sufficient to amortize financingto amortize financing

Credit-worthy shippers provide financial Credit-worthy shippers provide financial guarantees to lenders or cover cost of guarantees to lenders or cover cost of capitalcapital

Transportation of oil and gas is a cost Transportation of oil and gas is a cost center, not a profit center.center, not a profit center.

Transit InterestsTransit InterestsComplexities increase exponentially with Complexities increase exponentially with

number of transit countriesnumber of transit countriesTransit GovernmentsTransit Governments

• Highest transit feeHighest transit feeTransit CompaniesTransit Companies

• Highest tariffHighest tariffProject PromotersProject Promoters

• Bankable project with manageable Bankable project with manageable financial risks and adequate returnfinancial risks and adequate return

Transportation of oil & gas as a profit center, Transportation of oil & gas as a profit center, not a cost centernot a cost center

Who is the Commercial Champion?Who is the Commercial Champion? Key indicator of probability for successKey indicator of probability for success

In market economiesIn market economies:: Oil or gas producers who have volumes sufficient Oil or gas producers who have volumes sufficient

to be major shippers, sometimes with their major to be major shippers, sometimes with their major customers and offtakerscustomers and offtakers

Merchant pipelines exist only in North America:Merchant pipelines exist only in North America:• Deep and liquid market Deep and liquid market • Regulatory rules, including on capacity access Regulatory rules, including on capacity access

and tariff methodology are clear and provenand tariff methodology are clear and provenIn non-market economiesIn non-market economies:: Governments, parastatals or national champions Governments, parastatals or national champions

that set rules of the game and can direct oil and that set rules of the game and can direct oil and gas flows even by private companies. They gas flows even by private companies. They measure success differently, e.g., control is more measure success differently, e.g., control is more important than financial performance.important than financial performance.

Caspian PipelinesCaspian Pipelines

U.S. National InterestsU.S. National Interests Political and economic independence of Political and economic independence of

Central Asian and Caucasus countriesCentral Asian and Caucasus countries Incremental supplies of Caspian oil and Incremental supplies of Caspian oil and

gas for the world marketgas for the world market …… American commercial interestsAmerican commercial interests …… Oil and gas supply diversity for EuropeOil and gas supply diversity for Europe

Producing Country PrioritiesProducing Country Priorities

KazakhstanKazakhstan• Diversity of Diversity of oiloil supply routes supply routes

AzerbaijanAzerbaijan• State control over the pace of State control over the pace of natural natural

gasgas development developmentTurkmenistanTurkmenistan

• UpstreamUpstream investment for additional investment for additional production capacityproduction capacity

UzbekistanUzbekistan• Political control?Political control?

Producing Company PrioritiesProducing Company Priorities

OilOil Getting the stuff outGetting the stuff out

GasGas Sensible upstream investmentSensible upstream investment

Note conspicuous absence of diversity Note conspicuous absence of diversity of supply routes as a goal. Diversity of supply routes as a goal. Diversity comes only with increased volume.comes only with increased volume.

Consuming Country PrioritiesConsuming Country Priorities

Old EuropeOld Europe Extend political, economic, and Extend political, economic, and

commercial influence without commercial influence without jeopardizing more important jeopardizing more important relations with Russiarelations with Russia

New EuropeNew Europe Diversity of supply away from RussiaDiversity of supply away from Russia

EUEU Finding a roleFinding a role

Consuming Company PrioritiesConsuming Company Priorities

Old EuropeOld Europe• Maintain competitive advantage in Maintain competitive advantage in

closed home marketsclosed home markets• Claw upstream and midstreamClaw upstream and midstream• Maintain long-term relationships with Maintain long-term relationships with

Russian suppliers, while developing new Russian suppliers, while developing new ones in the Caspianones in the Caspian

New EuropeNew Europe• Maintain lucrative relations with RussiaMaintain lucrative relations with Russia• Win in regional industry consolidationWin in regional industry consolidation

Other InterestsOther InterestsTransit countriesTransit countries Political weightPolitical weight Extract economic rentExtract economic rent

Transit companiesTransit companies Make money on other people’s oil & gas and Make money on other people’s oil & gas and

creditcredit

Competing routesCompeting routes Block competition by offering better economic Block competition by offering better economic

terms or speed of executionterms or speed of execution

Russia is the home teamRussia is the home team

New Asian FactorNew Asian Factor

China seeks land routes to balance China seeks land routes to balance current reliance on maritime routes current reliance on maritime routes for oil and gas importsfor oil and gas imports

Opportunities for its oil companies to Opportunities for its oil companies to invest and oil service companies to invest and oil service companies to contract workcontract work

Japan, India, Korea variously seeking Japan, India, Korea variously seeking own roleown role

Current State of PlayCurrent State of Play

OilOil (mainly Kazakhstan)(mainly Kazakhstan) CPC expansion late but finally CPC expansion late but finally

proceedingproceeding Much delayed KashaganMuch delayed Kashagan Major increases in trans-Caspian oil Major increases in trans-Caspian oil

shipping depends on resolving issue shipping depends on resolving issue of controlof control

China extending oil pipeline to China extending oil pipeline to western Kazakhstanwestern Kazakhstan

Current State of PlayCurrent State of PlayGas Gas (mainly Azerbaijan and Turkmenistan)(mainly Azerbaijan and Turkmenistan) No new production, except for Karachaganak No new production, except for Karachaganak

in Kazakhstanin Kazakhstan Russia offering better price on existing route Russia offering better price on existing route

for Caspian gas, but becoming undependable for Caspian gas, but becoming undependable offtaker latelyofftaker lately

No investment decision yet in Azerbaijan for No investment decision yet in Azerbaijan for further gas developmentfurther gas development

No major upstream investment in No major upstream investment in Turkmenistan, except from China which is Turkmenistan, except from China which is building pipelinebuilding pipeline

Azeri-Turkmen relations warming, but major Azeri-Turkmen relations warming, but major issues still remainissues still remain

Transit Making NewsTransit Making News Nord StreamNord Stream South StreamSouth Stream NabuccoNabucco TGITGI Blue Stream IIBlue Stream II Yamal IIYamal II Odesa-Brody-PlockOdesa-Brody-Plock White StreamWhite Stream LNG for southeast EuropeLNG for southeast Europe Pipeline interconnections in EuropePipeline interconnections in EuropeSuccess depends on support from major Success depends on support from major

upstream and downstream stakeholders, upstream and downstream stakeholders, economic viability and project executioneconomic viability and project execution