The
Economics
of
Political Pipelines
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Pipe-mania is a
fashionable, new exercise in Washington. It all but domi nates current
discussions of energy in the Caspian region. New pipelines of various types
and sizes figure prominently in U.S. diplomatic efforts in the area. Here we
propose a set of reality checks for these proposals. The tests are economic.
Discussion hitherto usually has addressed much more subtle considerations
—the aspirations of the local players, the conflicting interests of the
United States and Russia, or the complex geopolitical tradeoffs involved.
This article is more modest. We address here the elementary question of
whether new pipelines are in fact economical—are they pipelines or fantasy?
If the projects are economically or financially infeasible, then further
agonized analysis of national aspirations and interests is moot. Or, if the
projects are not economical, then reality forces serious discussion in a
different direction: Is there any party willing to subsidize uneconomical
pipelines in Central Asia? Several pipelines have become linchpins in the policies of the
Clinton administration towards Central Asia and the regional powers, Russia
and Iran. We shall show that all four of the pipelines that figure in U.S.
policy efforts are deeply flawed. The proposed Bayu-Cayhan oil line is not
worth financing without massive subsidies from some extra-regional power. The
trans-Caspian gas line is, in absolute terms, uneconomical. The proposed
trans-Afghan gas line, like the Baku-Ceyhan oil route, cannot be financed.
The fourth pipeline in the U.S. policy arsenal—a Turkmenistan-Turkey gas
line—is no more than a phantom—flawed, too, but in a different manner.
pipeline—is a link between Turkmenistan and Turkey administration and outside
The record is “zero for five:” out of five pipeline-based
political gambits the U.S. has failed five times. In every instance, the
political thrust was aborted because it butted against economic or financial
realities. One caveat is important—this economic analysis presumes that oil
prices will average below $20 per barrel for the next 10–15 years, which is
the critical period for testing the economics of pipelines. If one believes
that higher oil prices could prevail for any length of time, then the three
pipelines would be less infeasible. The conclusion that all remain uneconomical is less clear, but
is nonetheless most likely for the simple reason that higher oil or gas
prices would bolster the economics of competing projects as well, while the
disabilities of the Clinton administration’s projects would not be affected.
Distance is a critically limiting factor for a gas pipeline.
Even if all other considerations are favorable, it is much more costly to
move energy in the form of natural gas than the comparable amount in the form
of oil. The economic reach of gas is distinctly limited. It costs
approximately 50 cents per barrel to ship oil in a pipeline over 1000
kilometers, whereas the same energy in the form of gas would cost
$2.50–$4.00, a much greater distance penalty. Long-distance movement of gas by pipeline is a questionable
proposition from the start. The Russians built such long pipelines, both from
Central Asia and from the Yamal region in northern Russia, but Soviet
economic criteria for these were different—and have long been discredited.
They were willing to accept much lower rates of return on capital intensive
projects, like pipelines, than are today’s free-market entrepreneurs. Thus, a
gas pipeline stretching several thousand miles is likely to be
uneconomical—either the net value of the gas at the wellhead is to low to
permit production, or the delivered cost is too high to attract customers. Consequently, orphaned gas fields are common. For example, on
the Alaskan North Slope some 840 billion cubic meters—30 trillion cubic
feet—of gas have long been known. But that gas cannot be marketed because the
costs of shipping the gas to Japan or California are higher than the prices
in those markets. Similarly, large fields are known in Yakutia and in the
waters around the Yamal peninsula in Russia. There, too, distance dominates,
and the gas resources remain unmarketed.
Economies of scale are also critical. A pipeline must be large,
otherwise the unit costs of shipping escalate rapidly. But, the line must
also be full—the rate of “ramp-up”—the speed with which the capacity is
utilized—must be rapid. If the capacity of the line is not fully utilized
within a few years of completion the costs also are much higher.
Another vital question is whether there are smaller-scale,
incremental options that compete against the pipelines. The spectre of
“incrementalism” is real — the pipelines promoted by the U.S. administration
are “lumpy”—they must be built full-scale, or not at all. But, as we shall
tabulate below, each of the projects can potentially be undercut, if not
superseded entirely, by alternative pipeline routes. The competitors are cheaper and quicker to build—the spectre of
death by “a thousand cuts.”
The viability of a pipeline is inextricably linked to the costs
of producing the oil or gas that is earmarked to be shipped. If the
production costs are low, then the scheme can suffer higher pipeline charges
and still be profitable for all parties.
One idiosyncratic aspect of the Caspian gas projects is the
question of the creditworthiness of the prospective customers. This is an
additional element of risk because in none of the cases is the putative buyer
of the gas sufficiently creditworthy to issue a long-term, bankable,
take-or-pay contract.
Lastly, political risk, if perceived to be high, can condemn a
project. This is especially true for pipeline projects that are longer-lived
and are therefore exposed for longer periods to political convulsions.
Political risk elevates the feasibility threshold—a risky project must have
potential for much more profit to be attractive. That extra margin is needed in order to offset the
uncertainties. This risk is reflected in part as a higher threshold rate of
return. In Central Asia the political risk premia are very high, even for
relatively short-term investments less than 5 years. The risk premium for a
Caspian pipeline project, which is bereft of guarantees or subsidies and
which must therefore meet commercial standards, is of the order of 6 to 8
percent. This risk premium can almost double the minimum pipeline charge that
is acceptable to investors, and that extra financial burden can render the
project marginal or sub-marginal. There is little evidence from the Clinton
administration that it has weighed the financial and economic realities in
their efforts to promote the Energy Corridor and the several pipeline
projects involved.
accommodate both the additional volumes and the additional
tankers. Third, export via Ceyhan is cheaper because the port serves large
tankers, offering lower tanker rates than is possible with the much smaller
tankers that can traverse the Bosphorus. One fatal flaw to the Baku-Ceyhan project lies at the other
end—there is a “missing link.” The line does not connect to the large, future
volumes of oil from the Caspian. These, if any, are destined to come from the
Tengiz area or from the offshore Kashagan prospect now being explored. But
the Baku-Ceyhan line does indeed start at Baku. The major source of new oil,
however, is 800 kilometers across the Caspian Sea from Baku. Even if the Baku
line were built, there remains a comparable obstacle in how to to connect the
oil originating in the northeast arm of the Caspian with Baku. The “missing link” is indispensable. Without large volumes of
large enough from the remote northeast corner of the Caspian, there is no
credible prospect of oil large enough to fill the Baku-Ceyhan pipeline. If
Turkey were to close the Bosphorus, the Baku-Ceyhan line could provide an
outlet for local Azerbaijani production, but, again, the bypass pipeline via
the Ukraine could easily preempt even those relatively small volumes. In
short, the Baku-Ceyhan scheme is an “outlet without an inlet.” Unless other
major projects are simultaneously undertaken to span the gap between Baku and
the new oil sources, the line is in limbo. The pipeline fails another
critical-path test as well. Multiple options for incremental competition are
available. New volumes of oil from the trans-Caspian area can readily be
siphoned off by a set of competing schemes that enjoy the compelling
advantage that each can be commissioned and constructed incrementally. Any
one could be undertaken on short notice and expanded in small stages if and
when there is additional oil in search of market access. We discuss these in
turn.
Iran can play the spoiler at its discretion. It alone can kill
the Baku-Ceyhan project. Via Iran are two cheap and quick routes whereby oil from the
Caspian can be exported into world markets. The routes are indirect—oil is
exported by displacement. The device is simple and demonstrably feasible. In both cases
Caspian oil would be imported into the north of Iran and processed Iran in
its own refineries to meet domestic demand, whereupon comparable volumes of
Iranian oil would be delivered on behalf of the Caspian producers to buyers
who lift that “swap” oil at Kharg Island, Iran’s under-utilized export
terminal in the Gulf. The first “swap” route involves an existing but unused
gas pipeline that runs from Iranian Azerbaijan past Baku. This line could be
upgraded and reversed, and some 200,000–250,000 bpd could be pumped to
refineries in Tabriz and Teheran. The cost—excluding Iranian tolls—is less
than one dollar per barrel. The second possible Iranian connection entails the proposed
expansion of another existing route. Oil can be sent by tanker from
Kazakhstan, Turkmenistan, or the offshore loading platforms in Azerbaijan to
the port of Neka in Mazanderan. A small pipeline, just recently reversed, connects Neka with the
Teheran refinery. However, this route has functioned sporadically in recent years.
Iran complains that oil from Kazakh sources is of inconsistent
quality—paraffinic and sulphurous, while Kazakh firms hint darkly of U.S.
pressure not to use the route, even though it is cheaper,especially since
Iran reduced the charges. The Neka option is currently being pursued. International
tenders were issued for the expansion of this route to 330,000 bpd. The
status of the proposal at the time of writing is still obscure, and progress
is entangled in contract disputes within Iran. The economics are clear,
however—the all-in cost is less than $1 per barrel. Iran has priced the
traffic at a rate less than competing options while still ensuring a very
large profit margin. Iran holds high trump. Overall costs of swapping via Iran
confirm that the Iranians can be devastatingly competitive and still enjoy
large profits from either of the two routes, that in the northeast or that in
the northwest. Given their intrinsic logistic advantage, they could undercut
the Baku-Ceyhan line at will and still make money.
Competition comes also from the existing, small line that the
operating consortium in Azerbaijan—the Azerbaijan International Operating Company
(AIOC)— built from Baku to Supsa on the Black Sea. This option, too, is much
less expensive than any new line to Ceyhan. The right-of-way exists, and
capacity on this line can be expanded by adding pump horsepower and also by
looping the line downstream of the pumping stations. Since the expansion is
quick, it, too, could preempt volumes from the Baku project.
One competitor is already underway. A major line is close to
completion that will connect the Tengiz and Karachaganak fields in Kazakhstan
with the Russiancontrolled port of Novorossiysk on the Black Sea. This line
has been sized to be larger than near-term production from that corner of
Kazakhstan. Further, as with the AIOC line, it, too, could later be looped and
“horsepowered-up” to add still more capacity. Since this line is directly
connected to the source fields in Kazakhstan, its geographical advantage is
clear. The Caspian Pipeline Consortium (CPC) line is logistically less
desirable than the Baku-Cayhan line or the Iranian route because oil is
delivered into the Black Sea, rather than to a “blue water” port such as
Ceyhan or Kharg Island. But its direct connection to the prospective
suppliers in Kazakhstan is compelling.
Russia, also, is positioned to be a spoiler. A major threat to
the Baku-Ceyhan project is the ease with which Russia itself could siphon oil
away from any pos-sible Baku-Ceyhan project. Kazakhstan is already connected
into the grid of Russian oil pipelines still run by the state enterprise
Transneft. The lines are in place, and, indeed, Russia recently highlighted
the possibility of such diversion by increasing the quota of oil that Kazakhs
are allowed to export via Russia. Transneft’s rates are competitive since the route is used up to
the level of allowed capacity. One question is how much incremental capacity
is available in the piplines
Europe. There may be bottleneckes, and parts of the lines are known to have deteriorated. However, upgrades of such lines are usually low-cost when translated into the per-barrel charges per kilometer, especially when compared
Baku-Novorossiysk Theoretically, additional capacity could be available in the
pipeline from Baku through Daghestan to Novorossiysk. Transneft recently
completed a $150 million bypass on that line to divert it farther from possible
Chechen raids. This line shares comparable risks with the Baku-Ceyhan line
itself, and its role is viewed as precarious and marginal even though the
line does exist and has been used extensively in the past. The disabilities are not exhausted. Even if the above obstacles
were not insurmountable, the fact remains that the Baku-Ceyhan project is
most probably unfinancable, since commercial risk is high. Caspian oil
production is high-cost, compared to world standards, so much so that its
narrow profit margins available imperil its very development. This is
compounded by political risk, which looms large in any calculus, since the
pipeline from Baku is unusually exposed to interdiction. Within raiding range of the “Energy Corridor” are distressingly
many latent or active hostilities. These insurgencies and wars include: war
in Chechnya, unrest in Daghestan, insurrection in South Ossetia,
Azeri-Armenian conflict over Nagoro-Karabagh, battles between Abkhazia and
Georgia, and obscure dissension in Adzharia. Last, but not least, the pipeline traverses eastern Turkey where
the government has been conducting a murderous war against the local Kurdish
population. It is easy to blow up a pipeline—experience in Colombia,
Chechnya, and Yemen has proved to be painfully instructive. It is also easy
to repair such damage—provided that crews can gain safe access to the site.
This leg, too, is fraught with political hazard. The political risk adds significantly to the fee needed to
finance the pipeline—if the line were otherwise attractive. Given the gnawing
uncertainty as to potential supply, the additional costs of linking to
Kazakhstan, and the formidable political risks, it follows that the line
would be very difficult to construct— even if there were not the multiple, cheaper
options noted above. The spectre of such competition is sufficient to deliver
the coup de grace to the administration’s project for the Caucasian Energy
Corridor, unless it is believed that the United States could somehow
guarantee both commercial and political risk.
From landfall near Baku the gas line would have followed a route
similar to that of the Baku-Ceyhan oil pipeline into northeastern Turkey.
Thence, the line would cross Eastern Anatolia to Ankara. Administration
spokesmen claimed that the line would be extended into Europe, thereby
linking Central Asian energy with European consumers across the
U.S.-sponsored Caucasian Energy Corridor. A consortium of private sector firms—first GE Capital and the Bechtel
Corporation, later joined by the Shell group—established a small study and
preliminary design group. But no commercial participant invested any material
amount of capital, nor did any make any public commitment to do so. The
project was scaled at 30 billion cubic meters of gas per year, although
private sources indicated that any initial phase, if ever built, would be
much smaller—some 16 billion cubic meters per year. The source of gas does indeed exist. Shatlyk and Doulatabad, the
two large gas fields in southeastern Turkmenistan, had long been known and
had been exporting between them more than 50 billion cubic meters (1.5
trillion cubic feet) of gas per year to Russia and the Ukraine since the
early 1980s. Both fields could have sustained enough production to fill that
line to capacity for many years, so—in contrast to the case of the oil
pipeline—there is no doubt as to the existence of an adequate supply. In this
one respect, the TCGPL is less unattractive than its counterpart, the
Baku-Ceyhan project, where the prospect of filling the line was minute. The stumbling block in the case of the TCGPL is quite different;
this project is uneconomical, even though large volumes of Turkmen gas are
desperately in search of a paying market. Two considerations suffice to
render the project unattractive. First, the transportation cost for the gas
would be very high, compared to the market value of the gas when delivered.
2000 kilometers of new, large-diameter line would have to be constructed,
including a difficult submarine link beneath the Caspian Sea. Second, the
Turkish market is neither large enough to absorb such volumes, nor
creditworthy enough to permit conventional takeor- pay contract financing for
the pipeline itself. Detailed financial analysis of the TCGPL shows that a large
subsidy would be necessary to overcome the commercial obstacles. The pipeline
could not be filled. Official projections of gas demand in Turkey were
grossly inflated, but, even more important, Turkey is already committed to large
new supplies from both Iran and Russia. Gas from Turkmenistan could only
penetrate the Turkish market at a slow rate, over a period of 10–15 years.
This would leave the pipeline only fractionally utilized for years, which
dramatically erodes the economic foundations of the pipeline. Three other gas sources are positioned both strategically and
economically to squeeze the TCGPL out of the Turkish market, even if the
economics could otherwise have been propitious: the Blue Stream pipeline, the
Iran-Turkey line, and the Shah Deniz field.
Russia, together with ENI, an Italian state project, has started
a competing project, the Blue Stream pipeline. This will bring gas from
Russia and Kazakhstan to Turkey via a pipeline under the Black Sea. The sea
link is technically difficult, but both partners have compelling financial
interests in the project and are positioned to capture an important part of
the Turkish market. The route is shorter and the source gas is unusually
low-cost. The project developers are financing the pipeline on their own, as
has been done with the CPC pipeline. In both cases upstream profits warranted
the construction of supplier owned pipelines.
A second, major new gas pipeline is being constructed between
Iran and Turkey. Iran has completed its segments, which start from the South
Pars field in southern Iran and carry gas to industrial and commercial
customers throughout Iran. A large spur carries gas towards Tabriz and then
on to the Iran-Turkey border near Bazargan and Dogubayezit. Turkey, however,
is late in constructing the connecting links to Erzerum and then westwards to
Kayseri, Konya and Ankara. Turkish and Iranian sources aver that U.S.
pressure slowed down completion and that the United States blocked delivery
of large horsepower compressors for the project. Nonetheless, the line is expected to begin delivering gas early
in 2001. Its initial capacity suffices to meet additional Turkish demand for
several years, and the line has been designed to permit doubling throughput
when required. The costs of supply to the Turkish border are very low. First,
part of the pipeline costs are shared with larger volumes of gas delivered to
Iranian users, so the unit transportation costs are relatively low. Second,
the gas itself is unusually inexpensive. Because of valuable co-product
credits, the wellhead cost of the gas is very close to zero. Thus Iran is
well positioned to capture large profits from the project and still be able
to undercut the price of costlier competitors, such as the TCGPL, if it were
ever constructed.
Still a third source of gas jeopardizes the TCGPL. In the last
two years a large, “wet” gas field has been discovered in Azerbaijan itself.
That field, the Shah Deniz, lies nearly athwart the proposed route of the
TCGPL. Gas from the Shah Deniz field benefits from very large credits due to
the valuable co-products; indeed the liquids are valuable enough that the
field could be developed even if the gas were given away. Azerbaijani gas is more profitable than—and therefore
preempts—any gas from the eastern leg of a TCGPL. This would allow quicker
and cheaper Azerbaijani gas to flow to Turkey. It is very low cost and is < > kilometers closer to
Turkey than the gas to be transported along the TCGPL. Since Azerbaijan would
earn almost ten times as much per cubic meter of gas by selling its own
production to Turkey than would be possible simply transporting gas from
Turkmenistan, it follows that Azerbaijan’s gas would move first. Hence, the
administration’s scheme to move trans-Caspian gas through the Caucasian
corridor could be economical, if at all, only decades into the future once
more accessible options are exhausted. Yet the ultimate flaw in the trans-Caspian gas pipeline is its failure
to recognize that the Turkey market is a fiction. It is remarkable that U.S.
representatives spoke grandiosely about connecting the line onwards to
Europe. This is chimerical; the costs to Ankara were already unsupportably
high. Any further construction—if reflected in unsubsidized charges—would
have meant negative values at the wellhead back in Turkmenistan. Finally, a
face-saving ploy surfaced; it was claimed that if Azerbaijan sold its gas
directly to Turkey that this was really to be perceived as Phase One of the
TCGPL. Since a “Phase Two” is not realizable, the cosmetic language is
seriously misleading. Lastly, we note that the western leg of the TCGPL
shared all the same political risks as the Baku Ceyhan line except that it
would traverse a much smaller sector of Turkish Kurdistan. Thus, even if the
project were not commercially infeasible, the extra costs due to political
risks would have condemned it to failure in any case.
Further, ironically, the pro forma
economics of the trans-Afghan pipeline are
positive. The distance is relatively short, and the terrain is not
particularly difficult or challenging. Indeed, two private firms squabbled
over the rights to construct the line—Bridas, from Argentina, and UNOCAL, a
U.S. firm. More detailed financial analyses, in fact, indicate that gas from
existing fields in Turkmenistan could indeed be moved to Pakistan at a modest
profit to Turkmenistan and at a price consistent with the oil-parity formula
demanded by Pakistan. This project, however, comes a cropper for three reasons. First,
and obvious to potential investors, is the extraordinary risk in Afghanistan,
where a civil war still rages and the Taliban regime is ill-suited to command
any international financing. The pipeline also crosses part of Baluchistan,
where the local tribes have honed art extorting money for the protection of
roads to a fine art. Second, there are several competing projects that lurk in the
wings. Iran, looking more broadly to commercialize its very large gas
reserves in the South, has proposed a line along the Makran coast, across
Baluchistan, and connecting to the Pakistan grid near Multan or Sui. This
proposal is compellingly more attractive than the TAPL, much to the
discomfort of the Clinton administration, because no “third-party transit” is
involved. The producer delivers directly into the territory of the buyer. It
is not without risk. The line is exposed for 600–800 kilometers through
Pakistani Baluchistan where, once again, local rebellions have festered since
before independence. Nonetheless, this option is viewed as less risky than
that the Afghanistan one. Two submarine pipelines have been bruited. Both could bring gas
from the large North Dome field in Qatar to Pakistan; these proposals have
been carried to the stage of semi-detailed engineering study. They are deemed
to be technically feasible, and both would bypass Iran or Iranian waters, a
feature that Washington and Tel Aviv view as advantageous. Neither is moving
forward. Finally, another option is the modality that India has elected—liquefied
natural gas. Instead of building a pipeline, one can liquefy the gas in Qatar
or Abu Dhabi, replicating plants that already exist, and ship the gas in
cryogenic tankers to Pakistan. The economics of short-haul liquified natural
gas trading are favorable, especially since much of the capital is not
necessarily dedicated to a single customer, which is the case of the proposed
pipelines. These projects are mutually exclusive, in view of the limited
size of the Pakistani market for gas over the next years; one would suffice
to meet likely demand growth over the planning period of any project. This
constraint is reinforced by the fact that Pakistan’s credit rating is very
low, so that financing one long-term gas supply contract would be difficult,
let alone two or more. Of these, the trans-Afghan gas pipeline is the least
attractive for Pakistan, because it involves the most assets that could be
held hostage. None, though, are particularly compelling, for all of the
alternatives bear the high risks of dedicating large, lumpy, relatively
immobile capital-intensive projects to the Pakistani market.
The claim is cosmetic. There is no serviceable pipeline
connection between Turkmenistan, on one side of Iran, and Turkey, on the
other. There does indeed exist a small-diameter gas pipeline that is shown on
some maps. That pipeline, however, is not a transit line. Its use is local,
limited to supplying gas to customers along Iran’s Caspian littoral. Policy
and technical informants in Iran concur that there is no plan to expand that
line, nor any plan to build another. The paradox is explained as political expediency. The claim is
motivated by the need to protect Turkey from any spillover repercussions if
Turkey appeared to be flouting the U.S. sanctions. Parties hostile to Turkey,
such as the U.S. Armenian lobby, could argue that Turkey is now violating the
spirit, if not the substance, of U.S. sanctions against Iran, by committing
to buying billions of dollars of gas in the TCGPL. The ramifications could be
serious. If Turkey were challenged publicly on the matter, the delicate
triangular relationship between Turkey, Israel, and the United States could
be jeopardized. Covert diplomacy has failed—Turkey is proceeding with the
contract to buy large volumes of gas from Iran, regardless of U.S. pressures
and possible sanctions. It is expedient to find an explanation of the
contract that forestalls a diplomatic confrontation—hence the invocation of a
“phantom” pipeline. It is true that Iran does import small volumes of seasonal gas
from Turkmenistan for a power plant in the northeast. That transaction is
extrapolated to imply that the 10–20 billion cubic meters per year that Iran
will sell to Turkey is Turkmen gas. Since there is no link—i.e. since there
is no mechanism for physical displacement—the claim is without foundation.
The Baku-Ceyhan pipeline would be economically viable in a
perfect, Panglossian world. However, each of the four routes competing with
it is more attractive and either just as or less risky. Each competing route
benefits from incremental economics, involving less front-end capital and
thereby minimizing both commercial and political risk. Even if Turkey were to
throttle oil movements through the Bosphorus, the routes through Russia or
Iran are still easier and less costly. Furthermore, in the event of
restrictions on moving Caspian oil out of the Black Sea via the Bosphorus,
there still remains the option of shipping that oil via the Ukraine into
Europe. Thus even the spectre of partial closure of the Straits would not
rescue the economics of the Baku-Ceyhan project. The trans-Caspian gas line is condemned by its own economics:
the route is too long and the potential market, Turkey, has more competitive
options for importing gas. Even though large gas fields in Turkmenistan are
shut-in, that gas cannot be attractively delivered to Turkey, the one market
for that project. The trans-Afghan line, tragically, would be economical in an
ideal world and a benefit to all three parties. The route is short enough
that gas could be delivered to Pakistan at prices that could be reasonable to
both buyer and seller. The political risk of that project, however, is clear. Moreover,
insofar as Pakistan can afford to sign long-term gas contracts, there are
more economical alternatives that do not bear such an incubus of risk. The geopolitics of exporting oil or gas from the Caspian are
asymmetrical—Iran and Russia can both play the spoilers with respect to oil.
The possibility that both could open the valves to Caspian oil is
dispositive: a project such as the
Transit revenues to Iran or Russia could be large, but not
necessarily the deciding factors. Tolls and fees from an additional 1 million
bpd could aggregate as much as $1 billion per year for the two. But cash
profits are traded off against potentially more compelling geo-strategic
considerations: neither has an interest in enriching Azerbaijan, Kazakhstan,
or Turkmenistan. They would sacrifice the transit revenues by only
threatening to build alternative routes, but in fact they would not have to
do so. However, the advantages of holding their neighbors in thrall might
well be more attractive. The result is stalemate. Much or most of the oil and gas from
the Caspian basin may well remain orphaned for the foreseeable future. No
European government has indicated willingness to offer the political
guarantees or to assume any of the commercial risks of the three pipelines
promoted by the United States. The ability of the United States to offer such
guarantees is limited—since U.S. suppliers would furnish only a limited
fraction of total investment, Overseas Private Investment Corporation or Export-Import
Bank funding, even if otherwise available, is commensurately limited. Absent
such guarantees or insurance, however, the projects are not financable, and
without finance the lines cannot be built. There are three fantasies in Central Asia: the proposed
trans-Afghan oil and gas pipelines; the trans-Caspian gas pipeline from
Turkmenistan to Turkey; and the oil pipeline from Baku to Ceyhan. U.S.
prestige and diplomatic credibility were linked to each of these schemes. The
Clinton administration represented to the host governments and other regional
actors that the U.S. was in a position to promote such projects and—it
appears—the local players took such promises at face value. These projects tested both the competence and the credibility of
the United States, and all three have either already been aborted or are
tottering fatally. Failure should have been foreseen. Not one of the schemes
could be shown to be commercially viable. Each is either too expensive or too
risky, or both, when compared with alternatives which are on the table. The
United States was not able, or not willing, to provide the high subsidies
needed to offset that. The pipelines would require—or, rather, would have
required—guarantees not merely against political risks but also against commercial
risks, a double level of support that is all but impossible. The
administration’s reach had exceeded its grasp. U.S. firms could not have
supplied significant shares of the project equipment. Thus the usual form of
overseas subsidization via conventional export financing—the Export-Import
Bank or or the Overseas Private Investment Corporation—was not possible.
Similarly, U.S. influence in facilitating multilateral finance was not likely
to be effective, since other major governments showed no interest in the
projects or were opposed. The Italians even declared publicly that they
viewed the trans-Iranian route, which is anathema to Washington and Tel Aviv,
as the best outlet for new Caspian oil. These are not the only instances where U.S. efforts to pursue
pipeline politics have failed and backfired. Three more examples can be cited
that are important in the diplomatic arena, since our partners remember them.
The first is recent and involves our predicating policy on a non-existent
pipeline. It arose when Turkey signed an agreement with Iran to import large
volumes of gas—directly flouting U.S. sanctions. Turkey proceeded with the
project in spite of U.S. pressure, and gas will flow within the next year. Given Turkish intransigence, the administration needed a
cosmetic solution,because both the Armenian and Greek lobbies in the United
States were positioned to exploit Turkey’s disobedience for their own
purposes. But Turkey held two trump cards. First, U.S.access to the base at
Incirlik in southeastern Turkey is vital if the appearance of multilateral
sanctions against Iraq is to be maintained. Second, Turkey has embarked upon
extensive and elaborate cooperation with Israel. Both considerations are
weighed heavily in Washington, and the Turks indicated that both were in
jeopardy if the U.S. blocked the gas deal with Iran. The administration’s solution to the impasse was a virtual
pipeline. The State Department argued that the gas destined for Turkey was
not Iranian. Rather, it would be gas from Turkmenistan—even though the
pipeline into Turkey runs directly from Iran’s own gas fields in the
southwestern provinces. Thus, in this version, gas was being “swapped,” and
hence the project did not violate U.S. sanctions. Face was saved, and
opposition or retaliation by anti-Turkish lobbies was undercut. Unfortunately, there is no connection between
Turkmenistan and Turkey. A second fantasy which came to naught was the push 20 years ago
by earlier administrations for a gas pipeline from Alaska across Canada into the
northern continental United States. Termed the Alaska Natural Gas
Transportation System, this project would have created market access for the
large volumes of natural gas stranded on the North Slope. The orphaned gas is
real, but the prospects were not. This scheme foundered for reasons parallel
to those which crippled the several Caspian proposals. Firstly,commercial
backing was fragile. Shipping costs for that long distance were very
high—marginally acceptable if and only if oil prices remained in the range of
$30, the price which prevailed briefly after the oil shocks between 1978 and
1980. Secondly a competitor stepped in: the Canadians proposed to build the
“first leg” of the project, connecting gas fields in northwestern Alberta
with pipeline grid into the US. Their “leg” was built. It preempted much of
the market promised for Alaskan gas, and the linchpin of U.S. natural gas
policy disappeared into history. A third effort at pipeline diplomacy also led to debacle, this
time U.S. opposition to Russia’s mega-project in the late 1970s to build four
56-inch gas pipelines from Siberia towards the west, connecting into Europe.
The United States tried to stop the project, blocking sale of U.S.-designed
or U.S.-licensed compressors and sending teams to convince Europeans that
Russian gas was too risky. The United States was more concerned about
European energy security than the Europeans themselves. Administration
officials also lectured the Norwegians on the capacity and capabilities of Norway’s
fields, rather to the amazement of their much more competent Norwegian
counterparts. The Russians, however, counter-attacked in the early stage of
this pipeline war and prevailed. They leaked to the Europeans that the United
States was conducting sidebar discussions with Russia, offering to waive U.S.
opposition to the project if Russia agreed to increase the number of exit
visas for Soviet Jews. The discrepancy was embarrassing—on one side the US was arguing
in terms of Europe’s energy security and on the other side it was pursuing a
contrary policy tailored to domestic political concerns. The revelations of what was perceived as U.S. duplicity soured
the diplomatic environment, but the Russian scheme was destined to proceed in
any case. The prices were eminently reasonable—linked below the price of
alternate fuels—and the risk, as assessed by the European buyers, was deemed
to be minimal. The Russians had proven themselves over the preceding 20 years
to be difficult negotiators, but also to be reliable and trustworthy, once
the agonies of the negotiating process had been consummated. Pipeline politics have not been a strong suit for the U.S.
government. The score is zero for six. One lesson should be learned from
these failures: It is dangerous to predicate policies upon testable data,
when the counterparties are in a better position to test those data than the
United States is, and when the data are not supportable. Such positions—when
they are readily falsifiable—are dangerous and costly in the diplomatic
arena. U.S. counterparts may come to doubt Washington’s technical or
financial acumen. They may also be insulted, if they believe that their own
competence is impugned when they are rebutted with transparently defective
analysis. Diplomats argue that credibility is the foundation for negotiation
and agreement. Cases such as those dissected here only weaken the
administration. W A |
