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Economics and politics of cross-border oil pipelines—the case of the Caspian basin

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Abstract

The construction of cross-border pipelines requires large upfront investment and, because of transit through third countries, is subject to increased risk. We demonstrate that the decision to build cross-border pipelines in landlocked regions is influenced more by economics than by politics. Governments use transportation constraints to discriminate among foreign oil companies and to promote low-efficiency routes for political purposes. This paper describes strategies used by importers and oil majors to address this limitation, using the Caspian basin as a reference. Based on data obtained from oil professionals operating in the region, and professional journals, we highlight that, on average, transportation costs in the Caspian basin are up to six times higher than in the other oil-producing regions of the world.

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Notes

  1. See Yerasimos (1996), Roy (1997), Terzian (1999) and Ceragioli and Martellini (2003) with this approach.

  2. Quoted in Oil and Gas Kazakhstan.

  3. With the exception of Chad, the countries around the Caspian Sea are the only landlocked countries with substantial oil reserves in their subsoil. In the case of Chad it has been demonstrated that transport costs involving the Chad–Cameroon pipeline, account for a high share of overall production costs. Oil transportation costs in the Caspian Basin are even higher, approximately 50% greater than those in Chad.

  4. Respectively KazMunayGas (2002), SOCAR (1992), UzbekNefteGas (1999), TurkmenNefteGas (1997).

  5. The Russian Federal Property Agency owns 100% of voting shares (75% of charter capital). Transneft’s cargo turnover increased by 3% in 2005, oil deliveries increased by 1.1% and net profit grew by 27%. Oil exports to countries outside the CIS went up by 16.9 million tonnes to 213.2 million tonnes. Consolidated revenues totaled 191.3 billion rubles in 2005, according to preliminary figures. Net profit reached 55.7 billion.

  6. Transneft is a state-owned company: the Russian Government holds 75% and Interros and Sputnik 25%.

  7. Russia’s reluctance to allow Kazakhstan access to favorable destinations is mainly due to lobbying from Russian oil companies. Their main justification is that reducing or ending Kazakh exports would help Russian producers to boost exports, given the capacity constraints and the increasing expected production.

  8. Transneft strives to reconcile difficult economic and political considerations. In a mid to long-term perspective, due to the expected decline of West Siberian and Ural fields’ production, Caspian oil flows will be needed for the development of new Russian routes. The future economic viability of terminals such as Primorsk or Vitino are dependent on additional Caspian oil flows. It is therefore in Transneft’s commercial interest to accommodate requests from oil companies operating in the Caspian. However, political considerations may pull it in another direction.

  9. For details about fiscal regime and the recent introduction of economic rent tax for oil export, Ernst and Young (2004).

  10. KazTransOil and KazTransGaz respectively.

  11. TNG and Kazakhoil respectively.

  12. The company changed its name, from Hurricane, in 2003. It is the largest independent oil company operating in Kazakhstan. Chinese National Petroleum Company (CNPC) took over PetroKazakhstan in 2005.

  13. The company approximately produces 100,000 bpd in Kumkol region.

  14. The following figures regarding transport costs are extracted from different press articles and professional reviews dedicated to oil issues as well as several interviews of professionals in Kazakhstan.

  15. Transportation costs would have been equal to USD 8 per barrel.

  16. The cost of this project was estimated to 350 millions USD, whereas PetroKazakhstan wanted to build a shorter pipe to Dzhusaly rail terminal estimated to 60 millions de dollars.

  17. 7 million tons in 2002.

  18. Kazakh authorities granted to PetroKazakhstan with 1.2 million of tons through Makhatchakala–Novorossiysk.

  19. The Energy Minister had originally announced 442,000 tons, however, only 265,000 were granted.

  20. Transportation costs are USD 9.5 per barrel through this route. This pipeline is still being built.

  21. For example, in 1998 and 1999 TCO leased approximately 5,000 and 6,000 railcars, respectively, from various Russian and Kazakhstani companies to export via Ukrainian ports.

  22. Oil was loaded onto barges with a capacity of 6,000 tonnes in Aktau port and transported to Baku, where oil was filled onto railcars to Batumi port.

  23. T&D agreements are guarantees by producers to ship a specified level of throughput over a specific pipeline. Usually, if producers do not ship the specified volume, they must take equivalent payments to the carrier according to the terms of the agreement.

  24. Russian Federation, Kazakhstan and Sultanate of Oman.

  25. CPC shareholders are: Russian Federation (24%), Kazakhstan (19%), Sultanate of Oman (7%), Chevron (15%), LukArco (12.5%), Rosneft-Shell (7.5%), Mobil (7.5%), Agip (2%), British Gas (2%), Kazakhstan Pipeline Ventures (1.75%), Oryx (1.75%).

  26. From the existing major oilfield in the region (Tengiz in North Kazakhstan) to Novorossiysk, oil professionals estimate transportation costs between USD 3.5 and 4.5 per barrel. An additional USD 2 has to be added for delivery from Novorossiysk to Rotterdam. Total transportation cost averages approximately USD 6 per barrel.

  27. Transportation tariffs depend on many factors, such as customers, type of contracts, technical conditions, supply/demand trends and seasons of the year.

  28. See Stauffer (2000) for the concept of “pipe dreams”.

  29. The USD 3.6 billion pipeline will have a capacity of 1 million barrel per day and is expected to become operational in 2005.

  30. It was signed between Azerbaijan and foreign oil companies for the operation of Azeri–Chirag–Güneshli fields.

  31. Costs to build a pipeline along the Baku–Tabriz (Iran)–Ceyhan route would indeed have been less costly than the BTC.

  32. Consortium participations are the following: BP 34.76%, SOCAR 25%, Unocal 8.9%, Statoil 8.71%, TPAO (Turkey) 6.87%, ENI/Agip 5%, Total 5%, Itochu 3.4%, Amerada Hess 2.36%.

  33. This figure could increase if significant discoveries are made in the Russian or Kazakh sectors in the following years. Exploration hasn’t yet been completed here, and there is hope for discovery in both of these areas.

  34. Azerbaijan and Kazakhstan started to prepare the development of the ABTC route. On the Azeri side, the port capacity of Sangachal (Azerpetrol terminal) near Baku was upgraded and will have a capacity of 10 metric tons (MT) per year (200,000 bpd). On the Kazakh side, loading capacity at the Aktau port will be upgraded and the construction of a new terminal at Kuryk Bay will enhance capacity to 5 MT/year.

  35. Turkmenistan-Afghanistan-Pakistan.

  36. Kazakhstan-Turkmenistan-Iran.

  37. Capacity should be upgraded to 20 million ton per year in 2011.

  38. Swap agreements remain a marginal mode of exports. No more than 20,000 bpd is exported via Iran from Kazakhstan despite a 100,000 bpd 10-year agreement signed in May 1996, cf. Lee (2003).

  39. Transneft’s proposed route would be a little bit different. In July 2001, the Russian company announced that Russian oil could be exported along the route Omsk–Pavlodar–Chimkent–Chardzhou–Neka and Tehran.

  40. This law allows the US to apply sanctions against any company investing more than $20 million/year in the energy production of either nation.

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Authors and Affiliations

  1. Observatoire des Etudes Post-Soviétiques, 701-18th St. NW, Washington, DC, 20433, USA

    Gaël Raballand

  2. EBRD, Baku, Azerbaijan

    Ferhat Esen

Authors
  1. Gaël Raballand
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  2. Ferhat Esen
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Correspondence to Gaël Raballand.

Additional information

This paper does not reflect opinions and views of EBRD. The authors would wish to thank Yelena Kalyuzhnova, Richard Pomfret, Martin Raiser and Dana Ward. This article was written prior to Mr. Esen having joined the EBRD and contains no data or information which Mr. Esen may have been privy to during the course of his employment with the EBRD.

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Raballand, G., Esen, F. Economics and politics of cross-border oil pipelines—the case of the Caspian basin. AEJ 5, 133–146 (2007). https://doi.org/10.1007/s10308-006-0086-y

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