Eurasian Energy Pipelines

The global economy is expanding but is expected to grow only by 3.3 percent according to the latest International Monetary Fund (IMF) forecast. The primary reason for this is the slowing down of China’s economic growth rate as it has been performing below expectations since the last quarter of 2012.
 
China’s latest monthly trade balance, however, indicates that imports increased by 14 percent and exports by 10 percent compared to last year, thus creating an unexpected deficit of $884 million. These figures demonstrate that domestic consumption is increasing and reducing its dependence on exports, all of which are positive signs for China. As trade is expanding so is the demand for energy imports for Beijing. This energy dependence is not unique to Asia; it is replicated in Europe as well.
 
The focus of attention concerning energy is its transportation, whether it is gas, oil or any other form of energy. In this respect all the energy importers as well as exporters are clear to see. The giant in terms of supplying energy to Eurasia is Russia. Other important exporters are Azerbaijan, Kazakhstan and Turkmenistan. Therefore, the Turkic world is blessed in terms of natural resources.
 
Overland, oil and gas are transported through pipelines, and some of the challenges these industries face include new regulations, legal implications and cost controls as well as key safety initiatives. These and more were gathered into four major categories that were addressed last month at the 8th Pipeline Technology Conference, which took place in Hannover and focused on uncertainty, standards, safety and the environment.
 
First, major worldwide investment in pipelines is predicted to be in excess of $200 billion over the next five years. Of this total, nearly half, i.e., more than $100 billion, will be spent on pipe construction services. A little more than a quarter will be spent on line pipes, i.e., more than $50 billion.
 
Impact of politics on gas
 
In terms of gas, more gas transport options for Europe and Asia are forecast. The next five years could witness many projects coming to life, done and dusted and ready to deliver. These include new supply routes, such as the West Nabucco and the Trans-Saharan Gas Pipeline for Europe, the TAPI (Turkmenistan-Afghanistan-Pakistan-India) and the Russia-South Korea option for Asia. Therefore, the sums and distances involved are equally quite significant, which draws attention to the greatest challenge facing investors: geopolitical uncertainty. Unstable regimes and unpredictable bilateral relations have a major detrimental impact on project planning and new construction. While decisions are taken with logic and interest at heart, the ugly head of corruption is never far away when multi-billion dollar projects are decided on.
 
Second, standardization is a particularly prickly problem, with experts asserting there are more than 18,000 standards. Quite simply, there is no competent international authority. In terms of transnational pipeline project planning, it is essential to intensify operational cooperation so as to ensure supply security, sustainability and competitiveness for the whole of the territories concerned –- which, in some cases, can be an entire continent. Furthermore, there is no jurisdiction for transnational pipelines, all of which create expensive delays during the process of approval.
 
Third, in terms of safety, it is acknowledged that the number of operational accidents has considerably decreased in the last decade, while current risks and safety concerns in technology focus on overconfidence in automation. Nevertheless, despite pipeline safety becoming less and less of an issue, operators still face difficulties convincing local communities to come to an agreement concerning pipeline projects.
 
An especially tough circle to square in this respect is the safety distances between pipelines and residential areas. It is not easy, to say the least, to find safe, new pipeline routes in densely populated areas in Europe. A good example of this was highlighted by a proposed pipeline project on the German-Dutch border. Local opposition centered on the safety distance. In Germany this is 300 meters, but only five meters in Holland. In the end the German government and regulatory bodies had to reassess the regulatory environment, ensuring legal security and predictability for companies to invest.
 
Energy source concerns
 
Fourth, the environment is one item that is always high on the agenda of locals. As local people vote, so it becomes an important issue for governments to address. Green energy generated from wind farms is one of many preferred options. Large quantities of electricity can indeed be produced through this method but suffer from storage capacity. One solution to storing green electricity can be synthetic natural gas, which is obtained from wind power through electrolysis and mechanization. It is certainly a method that needs closer attention.
 
Another potential energy source concerns methane hydrates, which are natural gas molecules that have been trapped in ice. Previously they were considered a hindrance to natural gas extraction, although thanks to new technologies they can now potentially alter the global energy balance and help improve the energy security of resource-poor countries. Japan has been the trendsetter in terms of methane hydrate research and testing and is expected to begin commercial production in five years’ time. In the coming months and years, perhaps more attention akin to that of shale gas will be focused on methane hydrates.
 
This topic brings the focus back to the gas pipeline industry, as it is this infrastructure for electricity and natural gas that is the most pressing issue. Furthermore, it is predicted that through innovative production technologies and newly discovered gas fields, natural gas will become the most important fossil fuel, growing its market share up to 50 percent in the next 60 years or so.
 
Such predictions are taken on board by all decision-makers in Eurasia, both exporters and importers alike. Russia, intent on exporting more oil and gas both east and west, has concentrated on getting the South Stream project off the ground. This was achieved with Gazprom beginning construction after having gained Turkey’s approval in December for the pipeline to cross its territorial waters. In January, Gazprom declared that the cost of the project would be close to $40 billion, due to upgrading Russia’s gas networks, with the actual laying of the pipeline expected to take place next year.
 
The EU has consistently been unhappy with the South Stream project due to one and only one factor: diversification. What displeases the EU is that South Stream does not diversify the supplies, only the routes. It is the rival, the Southern Gas Corridor, that is preferred in Brussels, as it proposes to directly link the whole EU market to the Middle East and Caspian Sea. The EU has not forgotten the 2006 and 2009 interruptions to gas supplies when Moscow and Kiev disagreed over the price of gas. The Southern Gas Corridor, therefore, becomes even more attractive as it would not only boost security of supply for the EU since it will diversify both routes and supply, but equally significantly, it will reduce the EU energy dependence on Russia.
 
Projects
 
Last November the Southern Gas Corridor attracted three giants of the sector, namely BP, Statoil and Total, who agreed to acquire a stake in TANAP -- the Trans-Anatolian Natural Gas Pipeline project. This was a notable development as TANAP is one of several pipeline projects that hope to create the corridor. The pipeline will be constructed this year and is expected to cost $20 billion. The State Oil Fund of Azerbaijan has declared it will partly fund construction so that it will be ready to transport gas from the Caspian Sea in 2017 or 2018.
 
The Trans-Caspian Gas pipeline is another project that has attracted the support of the EU and the United States as well as the Central Asian states -- although not of Russia. The central idea concerns the connection of Azerbaijan with Turkmenistan under the Caspian. These two countries agreed with the EU in September to continue negotiations on the project, with Brussels proposing to fund a large part of it. Turkish support has also been evident, indicating a desire to diversify its energy imports, thus improving its bargaining position vis-à-vis Russia over the price of gas.
 
It is Kazakhstan that has been the most active and forthright, making decisions concerning which direction to export. As China is increasing its energy imports, Kazakhstan seeks to meet as much of this demand as possible. In order to meet the increased demand, there has to be more supply. That will be available later this year when ExxonMobil and Royal Dutch Shell and others start production in the Kashagan oilfield, one of the largest in the world.
 
Having the resources, Kazakhstan has embarked on four strategies to meet its self-defined goal of exporting greater amounts of energy to China. The first concerns expanding already established pipelines. A good example of this effort was identified by Kairkeldy Kabyldin, the director general of KazTransOil, who stated that the capacity of the Kazakhstan-China oil pipeline is set to almost double by next year through an extension that is predicted to cost approximately $667 million.
 
The second strategy is to start building new pipelines. Kazakhstan already exports gas through the Central Asia-China Gas Pipeline but aims to add an extension to it by 2015, which would supply natural gas from the Karachaganak, Tengiz and Kashagan gas fields. Given the fact that Astana in effect is a rival to Moscow in terms of pipelines to China, it has pursued a policy of careful balancing. Russia has not been forgotten, through a projected $1.6 billion Kartaly-Astana gas pipeline (Kartaly is located in Russia, bordering northern Kazakhstan) envisioned to extend as far as Karaganda and Petropavlovsk. This would supply gas to the Kazakh capital and construct gas supply networks in northern and central Kazakhstan from the Karachaganak field in the country’s west, via Russia.
 
The third strategy employed by Astana concerns the Kazakhstan Caspian Transport System: to ship oil by tankers from the ports of Aktau and Kuryk to Baku, where they will be pumped into the Baku-Supsa and Baku-Tbilisi-Ceyhan pipelines. Additional pipelines from the newly discovered oilfields of Kashagan will be built to link it to Aktau. Therefore, the transfer of oil will not be restricted to overland pipelines.
 
The fourth strategy was again to build a pipeline -- but under the sea -- so as to directly connect to the Baku-Tbilisi-Ceyhan pipeline. While this underwater pipeline is technically feasible, the project has been put on hold due to firm objections by both Russia and Iran. Therefore, these four measures clearly demonstrate that the Kazakhs have been quite committed to trying to garner a larger slice of the energy cake that China is desperate to consume.
 
Interestingly, while China certainly has a huge appetite to devour energy, it is also prepared to pay for its delivery. The China Development Bank (CDB) has played an exemplary role in financing energy infrastructural projects and ought to be labeled the “engine of Eurasian energy integration.” It has provided loans so that the Kazakhstan-China oil and the Trans-Asia gas pipelines could be constructed so that Central Asia looked more to the east when considering exporting energy. Amazingly, its total foreign currency lending grew more than twelvefold in six years (2005-2011).
 
It was in 2009 when perhaps the CDB’s most memorable loans were extended: a $15 billion loan to Rosneft, the government-controlled oil giant, and a $10 billion loan to Transneft, the Russian state-owned company responsible for Russian national oil pipelines, which owns the largest oil pipeline system in the world. In return for such generosity, Russia agreed to supply China with oil for the next 20 years through a subsidiary pipeline from its Eastern Siberia-Pacific Ocean oil pipeline. Previously all Russian deliveries of oil to China had been by rail and a pipeline via Kazakhstan.
 
Chinese-Russian energy relations
 
While agreement has been reached over oil, gas remains a hindrance between the two countries. At first it may seem like an anomaly given the fact that Russia wants to diversify its markets and export to China, while China is desperate to import more and more, ideally through a cross-border natural gas pipeline. The sticking point relates to gas prices.
 
The Chinese have complained that the asking price of Gazprom is too high and refused to pay international rates. Gazprom, on the other hand, rightly wants to maximize profits and is unwilling to sell to China at a lower profit margin when compared to exporting to the EU. The Chinese difficulty essentially stems from the domestic price control system. CNPC, the state-owned, largest oil and gas producer and supplier in the country, is estimated to have suffered losses of up to $7 billion in natural gas imports last year due to price controls preventing it from passing the full costs of imports to its customers. Perhaps one solution to this could be a repetition of 2009 -- a generous loan to another Russian energy giant: Gazprom.
 
In the final analysis, in Eurasia, just as there are many difficult challenges facing both the technical and geopolitical dimensions of constructing and directing energy pipelines, so too are opportunities and high rewards beckoning major energy firms backed by their national governments.