Cross‐Border Oil and Gas Pipeline Risk and

Sustainable Mitigations

Thomas J. Dimitroff
Infrastructure Development Partnership, LLP

8 December 2014

An abbreviated version of this paper was published in the AIPN’s Journal of World Energy Law and Business
August 2014: https://academic.oup.com/jwelb/article/7/4/287/2755500/Cross‐border‐oil‐and‐gas‐
pipeline‐risk‐and. (Login required to access the online version).

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 Cross-Border Oil and Gas Pipeline Risk and
Sustainable Mitigations

Thomas J. Dimitroff *

I. Introduction

i. The increase in demand for oil and gas transport

Global demand for crude oil continues to increase, albeit at a slower pace than
demand for natural gas and notwithstanding the recent drop in oil price. 1
Moreover, the increase in demand for internationally traded crude oil within non-
OECD countries (in particular China, India and Middle Eastern countries) will rise
more rapidly through 2030. The overwhelming majority of internationally traded
crude oil is transported to markets by maritime tanker. 2 The quantity of crude oil
transported internationally by maritime tanker has climbed steadily from 1,550
million metric tons per year in 2000 to 1,856 million metric tons per year in 2012.3
Transportation of internationally traded crude oil by cross-border pipeline, on the
other hand, is less significant by volume, but cross-border oil pipelines fulfill
strategic roles. Positioned across key locations in Europe, Central Asia, Asia, Africa,
the Middle East and the Americas, cross-border oil pipelines represent an important
means of avoiding bottlenecks in deliveries of crude oil supplies to markets.

The demand for internationally traded gas is increasing more sharply than demand
for crude oil. Between 2000 and 2012, international trade in gas grew from
approximately 706 Bcm p.a. to 1,033 Bcm p.a. 4 Based upon available 2013 data,

* The author would like to thank Dr. Helga Graham, Troy Edwards, Gabriel Carter, Robert

Hunter, Peter Harrington, Bill Browning, Monica Mathews, Albert Bressand and Madeleine
Dimitroff for reading through the text and offering important suggestions and edits. In addition,
he would especially like to thank Winifred Andersen for her exacting and thorough research as
well as Dr. Georgina Birkmyre Fraser, Felix Grenfell-Bozek, James Hickmann, Perrine
Toledano, Clara Roorda and Senami Houndete (Vale Columbia Center for Sustainable
International Investment) for their assistance in researching components of this paper.
Furthermore, I am most grateful to ILF Consulting Engineers for preparing the maps included
in the various annexes to the paper.

1See slide 13 , http://www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-

Outlook/Energy_Outlook_2035_booklet.pdf Analysts at Citi and Ricardo have recently predicted that oil
demand will peak at 92 Mbpd; see
http://online.wsj.com/article/SB10001424127887324685104578386694201176684.html.

2 Of the World’s top 10 oil-producing countries (Saudi Arabia, Russia, US, China, Iran, UAE, Mexico,

Kuwait and Brazil) only Russia exports a significant (albeit still relatively modest) portion of its oil by
pipeline.

3 http://www.statista.com/statistics/29103/transport-volume-of-crude-oil-in-seaborne-trade/.

1
 327.9 Bcm p.a. of global gas production is being transported by LNG tanker with
the remaining 705.5 Bcm p.a. transported via cross-border gas pipelines. 5 This
upward trend in demand for gas will reach 3.7% p.a. by 2030 with LNG production
and transportation growing at 4.3% p.a. and cross-border gas pipeline transportation
growing at 3.0% p.a. 6

Growth rates in internationally traded oil and gas within particular regions are not
accounted for by mere reference to the overall global growth in the consumption of
conventional oil and gas. Instead, the dislocations between countries where oil and
gas are produced and where they are consumed need to be examined. While North
America (and the US in particular) is projected to become energy self-sufficient by
2030, 7 the EU and China will remain the largest energy importers, with China’s
growth in imports matching its projected economic growth. 8 Remaining lower-cost
conventional hydrocarbons reserves are concentrated in the Middle East, Africa and
the Former Soviet Union, and countries from these regions will remain the largest
exporters. To illustrate these dislocations, consider that, the Middle East has
aggregate proven reserves of crude oil greater than the reserves of all other regions
of the world combined. 9 On the other hand, the Asia-Pacific Region (the region with
the fastest growing demand for crude oil) has by far the smallest reserve base in the
world. 10 Such an imbalance between areas of production and areas of
demand/consumption will place increasing pressure on international transportation
of oil and gas including by cross-border pipelines. 11

4The January 2014 BP Energy Outlook 2035 notes that there is an increasing de-coupling from overall
global economic growth (see slide 16, http://www.bp.com/content/dam/bp/pdf/Energy-
economics/Energy-Outlook/Energy_Outlook_2035_booklet.pdf).

5 P 28, http://www.bp.com/content/dam/bp/pdf/statistical-
review/statistical_review_of_world_energy_2013.pdf.

6 See BP World Energy Outlook 2030, slide 53, http://www.bp.com/content/dam/bp/pdf/statistical-

review/BP_World_Energy_Outlook_booklet_2013.pdf.

7See BP World Energy Outlook 2030 http://www.bp.com/content/dam/bp/pdf/statistical-

review/BP_World_Energy_Outlook_booklet_2013.pdf, p 4. The US is set to shift from being a net
importer of gas to a net exporter by 2018 with exports reaching 10.6 Bcf/day by 2035. Australia is
projected to overtake Qatar as the largest LNG exporter by 2019 and the US is then projected to overtake
Qatar by 2030. In 2035, Australia will net the largest LNG exporter with 21% of global LNG trade. See
slide 63 in the 2014 BP Energy Outlook 2035, http://www.bp.com/content/dam/bp/pdf/Energy-
economics/Energy-Outlook/Energy_Outlook_2035_booklet.pdf.

8Indeed, in September 2013, China became the largest importer of oil in the world. See
http://www.ft.com/cms/s/0/75d94744-332b-11e3-bf1b-00144feab7de.html#axzz2hatcy5zT.
9Interestingly, South America (not the Middle East) has the largest reserves to production ratio in the
world.
10The Asia Pacific Region has less than 30% of the reserve base of Africa the next smallest crude oil
reserve base by region.

11Although the growth in maritime transportation capacity will likely outstrip new build cross-border

pipeline capacity by a ‘long shot’.

2
 ii. Security of supply considerations

In a ‘tight’ market, small disruptions in supplies of crude and refined oil products
(even the possibility of a supply disruption) have immediate impacts on global oil
prices. Over the last few years, political instability across the Middle East and North
Africa associated with the ‘Arab Spring’ and major terrorist attacks in Algeria,
Yemen and Nigeria and continued conflict within Libya, South Sudan and Iraq have
resulted in supply disruptions and helped to sustain high oil prices. With the large
increase in shale oil production in the US and the recent decision by Saudi Arabia to
maintain production levels, the price of crude oil has dropped by approximately 38%
during recent months. In an oversupply market, smaller disruptions will not
necessarily have an immediate impact on price.

By contrast, prices in internationally traded gas have tended to reflect more nuanced
regional dynamics as pricing has begun to move from oil indexation to hub pricing.
Nevertheless, political disputes such as the brief disruption in Russian gas supply to
Europe via the Ukraine in January 2009 had an immediate gas price and political
impact within Europe. 12 At the same time, the price of gas in North America during
the same period dropped precipitously from pre-2008 crisis levels. At first, the drop
in the price of North American natural gas was assumed to be a natural consequence
of the fall in overall demand for gas due to the financial crisis. However, it is now
abundantly clear that sustained low gas prices are unambiguously linked to the large
quantities of shale gas being produced in the US. 13 During this same period, gas
prices in Japan peaked at $19.40/MBTU in 2012 and remains at $17.77/MBTU
(November 2014). 14

In principle, the abundance of shale oil and gas in the US should reduce import
dependency, ensure security of supply and alleviate strains on balance of payments
associated in part with financing high-cost imported oil. 15 Indeed, US oil demand
peaked in 2005 at 20.8Mbpd. Shipments of oil from OPEC countries has dropped

12Europe is the largest importer of piped natural gas in the world importing more natural gas by cross-
border pipelines than all other regions of the world combined. However, the fastest growing demand
center for natural gas in the world is the Asia Pacific Region which imports almost three times more LNG
than all other regions of the world combined. See http://www.bp.com/content/dam/bp/pdf/statistical-
review/statistical_review_of_world_energy_2013.pdf..

13Note that the Henry Hub spot price for MIL/BTUs in October 2005 was $13.42 and had fallen to $3.83
as of June 2013. The price has remained below $5.32 since December 2008. See
http://www.eia.gov/dnav/ng/hist/rngwhhdm.htm.

14See
http://ycharts.com/indicators/japan_liquefied_natural_gas_import_price/chart/#/?securities=type:indic
ator,id:japan_liquefied_natural_gas_import_price,include:true,,&calcs=id:price,include:true,,&format=real
&recessions=false&zoom=5&startDate=&endDate=&chartView=.

15See
http://www.bp.com/content/dam/bp/pdf/statisticalreview/BP_World_Energy_Outlook_booklet_2013.
pdf.

3
 from 6.7Mbpd in 1977 to 3.9Mbpd and crude oil shipments from all sources
(including the Middle East) is down from 5,455 in 2004 to 2,987 through October
2013. 16 In addition, the highly competitive and highly liquid US market in oil and gas
and in oil and gas transportation and storage capacity, has for now galvanized the
attention of US investors apparently leaving most with little appetite to take on
emerging/frontier market risk.

In practice, however, the full exploitation and marketing of heavy oil sands in
Canada and shale oil and gas in the United States still face obstacles. 17 The following
obstacles are worth noting:

• The production of heavy oil from bitumen deposits in Alberta, Canada

remains deeply controversial notwithstanding the switch from strip mining
to the more environmentally-friendly steam activated gravity drainage
(SAGD) method 18;

• ‘Fracking’ is controversial, and the public remains concerned about adverse

environmental, social and climatic impacts;

• The development of unconventional oil and gas in North America is also

expensive. The production of heavy oil, shale oil and shale gas has much
higher production costs relative to conventional oil, making sustained oil and
gas prices a requirement for sustained investment and development in
unconventional oil and gas production. 19 The current position taken by
OPEC to maintain production and allow the price of oil to drop will test the
ability of smaller-scale producers in the US to maintain profitability; and

• The location of newer oil and gas fields in North America will require the
construction of new-build pipelines to deliver production to US downstream
facilities and markets. These new pipelines are controversial. For example,
the application for a construction permit for the proposed Keystone Pipeline
intended to take Canadian heavy oil from Alberta to refineries on the US
Gulf Coast has been pending for nearly five years due to a variety of
criticisms and protests. 20

16 See Lloyd’s List Bulletin 22 November 2013.

17 In addition, regulatory restrictions in the US prevent the export of crude oil and natural gas without a

license. Notwithstanding the surge in production in the US, it is unlikely that oil export licenses will be
secured. Nevertheless,, on the gas export side, a number of export licenses associated with the
implementation of LNG export facilities in the US are in the process of being secured.
18 Controversy now centers inter alia upon the energy-intensive nature of SAGD extraction and the

impacts this will have upon overall Co2 emissions.

19 In the event that current prices for crude oil continue to drop, it will be interesting to observe at what

price point US shale oil production becomes un-economic.

20 See http://www.reuters.com/article/2013/03/23/us-usa-keystone-senate-idUSBRE92L0YJ20130323.

4
 By contrast with the US, Europe and China will remain dependent upon imports
from lower-cost conventional oil and gas reserves in North Africa, the Middle East
and the former Soviet Union. Although projected growth in primary energy demand
within the EU will flatten, efforts to seek development and production of
unconventional energy will be insufficient to backfill and satisfy demand due to the
dwindling resource base. The degree to which efforts at energy savings and the
development of renewables will meaningfully contribute to satisfying demand for
primary energy will depend largely upon private sector innovation and government
policy choices. 21 China’s demand for conventional oil and gas is projected to grow
together with the sustained growth of its economy 22. The pragmatic reality is that the
rise in demand for primary energy will likely drive a significant rise in oil and gas
production (whether conventional or unconventional). 23

As of the time of this writing, the US Federal Authorities have still not issued a permit for the northern
section of the pipeline. A second environmental impact assessment has now been undertaken after
TransCanada rerouted the pipeline to avoid larger segments of ecologically sensitive parts of Nebraska and
the Ogallala Aquifer. See http://www.washingtonpost.com/business/economy/oil-to-begin-flowing-in-
southern-leg-of-keystone-pipeline/2014/01/21/ffe35abc-82bb-11e3-bbe5-6a2a3141e3a9_story.html.
Notwithstanding the fact that the US has the most liquid and well-established market for trade in
transportation capacity, the ban on the export of US produced crude oil, the diminishing conventional
reserves and the lack of appropriately positioned pipeline capacity required to deliver unconventional
production to domestic markets, in part, account for the consistent discount in the benchmark price for
West Texas Intermediate versus Brent. By contrast, the abundance of gas supplies and the low price for
US gas will drive the construction of LNG liquefaction and transportation facilities that will lead the US to
become a net exporter of natural gas. This will also lead to a degree of price convergence between the
Japanese and US natural gas prices. Ultimately, the degree to which North America’s unconventional oil
and gas reserves will be produced and consumed domestically or exported to Asia or both will depend
upon policy decisions taken in the US in the short to medium-term. See Jonathan P. Stern, ‘The pricing of
Internationally traded Gas,’ Chapter 1.
21For example, the consequence of the Fukushima disaster was to drive a sharp move away from nuclear
power generation in Japan with similar policy impacts in Germany and elsewhere.

22 An immensely important global development over the last decade is the speed with which China has
mobilized its state companies to identify and implement infrastructure developments, including cross-
border oil and gas pipelines, that are targeted to ensure security of energy supplies for main land China.
These developments include the Trans-Asia-China operational gas pipelines (Pipeline Case Study 18 in
Annex IV), the Kazakhstan-China Oil Pipeline (Pipeline Case Study 23 in Annex V), the GNPOC and
Petrodar Pipelines taking crude oil from the Republic of South Sudan through the Republic of the Sudan
to an export terminal on the Red Sea (Pipeline Case Studies 37 and 38 in Annex VIII) and the Myanmar to
China oil and gas pipelines (Pipeline Case Studies 45 and 46 in Annex X). In addition, China is actively
involved in additional planned pipeline developments out of Uganda (Pipeline Case Study 41 in Annex
VIII), Kenya (Pipeline Case Study 42 in Annex VIII), Tajikistan and Canada. Another significant
development is that the IEA estimates that the Middle East will be the second largest consumer of natural
gas by 2030. See World Energy Outlook 2013,
http://www.iea.org/textbase/nppdf/stud/13/weo2013.pdfhttp://www.iea.org/textbase/nppdf/stud/13
/weo2013.pdf at p 55.

23 For example, demand for oil is projected to exceed 110 mbpd by 2040. Assuming a 5% per year decline
rate in conventional oil supplies, approximately 55 mbpd of new production will be required simply to
maintain current demand rates. In order to meet the projected rise in demand, an additional 40 mbpd of
unconventional oil production will be required. . See World Energy Outlook 2013,
http://www.iea.org/textbase/nppdf/stud/13/weo2013.pdfhttp://www.iea.org/textbase/nppdf/stud/13

5
 Furthermore, efforts to diversify away from lower cost reserves will exacerbate the
existing supply/demand dislocations and risk. International oil and gas companies
are developing and producing reserves in new, more politically fluid and hostile
environments, such as Iraq, and in environmentally sensitive areas such as the Arctic,
the ultra-deep water Gulf of Mexico and Brazil. While this diversification may help
to secure further energy supplies, it will also increase technological complexity,
create longer lead times, escalate costs and pose risks to people, communities and
the environment.

The diversification of reserves and the resulting increased dislocation between

supply and demand will require the retrofitting of older cross-border oil and gas
pipelines and the development, construction and operation of new pipelines. The
investment required to enable new and to upgrade existing energy transportation and
storage infrastructure is vast. The gap between the need for investment in
infrastructure and pubic sector capability to deliver it is also vast. Within developed
markets, financial investors are able to step in to fill the gap, as they are satisfied to
match steady ‘utility returns’ to the long-term liabilities of large pension funds.
Within emerging and frontier markets, however, levels of political risk and other
project risk factors have deterred all but strategic investors and state-owned foreign
oil and gas companies from implementing cross-border oil and gas projects within
emerging and frontier markets.

This paper will examine 55 cross-border oil and gas pipeline developments and
operations in order to identify actual risk factors that have arisen. By assessing these
factors within an analytical framework, the paper attempts to correlate them to
specific risk mitigation tools that may be deployed in a manner that is sustainable. In
other words, the tools used to mitigate project risk need to be deployed in a manner
that protects the project’s commercial viability while concurrently minimizing
adverse impacts on people, communities and the environment. Moreover, the
efforts made to achieve this balance involve a continuous exercise. Given the
strategic role often fulfilled by cross-border pipelines, the deployment of effective
risk mitigating tools, the constant assessment of risk and the recalibration of
mitigating actions taken at a project level will contribute to broader strategic and
societal objectives including maintaining security of supply and minimizing
unanticipated spikes in commodity prices.

II. Maritime chokepoints, landlocked producing countries and

deficiencies in public international law

i. Overview

The majority of internationally traded natural gas is transported from production

source to consuming market via cross-border gas pipelines. However, the role of
LNG is significant, and growth in LNG transportation infrastructure is outpacing

/weo2013.pdf.

6
 new-build cross-border gas pipelines as noted above. 24 By contrast, the bulk of
internationally traded oil, is transported from production source to market via
maritime tankers, with significant amounts of crude oil also being transported by rail
and road. Regardless of the means of transporting oil and gas internationally,
governments will need to ensure that disruptions to supplies are avoided. 25 This
requires a willingness to better define and adhere to international principles of free
transit while balancing national strategic, political and economic interests and
concurrently ensuring that core standards relating to, inter alia, operational safety,
environment, security, social and human rights are maintained.

Multilateral treaties containing principles of public international law intended to

facilitate the free transit of crude oil and natural gas are more widely applicable in the
context of maritime shipping than in the context of land-based transit of goods
across state borders. Nevertheless, the international transit of oil and natural gas
faces significant constraints in both contexts. 26 Two of the most acute constraints
faced by shippers of internationally traded oil and gas involves passage through
maritime ‘chokepoints’ 27 and transit across the territory of coastal states for the
export of production from landlocked producing countries. Cross-border pipelines
especially resemble maritime chokepoints when they are developed to enable the
export of hydrocarbons from landlocked producing states. In these circumstances,
cross-border pipelines are the only means by which producing states can export (and
thus monetize) their hydrocarbons 28. The state and business interests that develop
and operate cross-border oil and gas pipelines become highly vulnerable to
economic and political leveraging and other forms of interference as a consequence.

24 The decision to move natural gas production to market by cross-border pipeline or LNG pipeline is

largely a function of cost and geography, but will also be increasingly driven by the degree to which the
price for internationally traded gas converges across regions.

25For example, Africa now supplies the United States with approximately 12% of its imported oil and
Nigeria is the 5th largest supplier of oil to the US. Given the ongoing instability in the Niger Delta, a key
mission of US AFRICOM is to ensure that Nigeria’s oil fields are secure. See Lauren Ploch, ‘Africa
Command: U.S. Strategic Interests and the Role of the U.S. Military in Africa’ Congressional Research
Service July 22, 2011. See http://www.fas.org/sgp/crs/natsec/RL34003.pdf.
26 While GATT Article V arguably applies to energy in transit including oil, oil products and natural gas,
this is not a certainty. On the one hand, oil and gas transported by international maritime tanker enjoys
liberal rights of navigation on the high seas and through state economic zones and territorial waters and
lower regulatory burdens than transportation through cross-border pipelines. See Glen Plant, ‘Trans-
Boundary Energy Projects and Maritime Transport Risk, in ‘Risk and Energy Infrastructure: Cross-Border
Dimensions,’ Thomas J. Dimitroff Global Law and Business (London) 2011 at p. 92..
27 A maritime ‘chokepoint’ is used in this paper to refer to a maritime straight or manmade canal through
which crude oil and LNG tankers are required to travel in order to reach export markets because there are
either no alternatives or the cost of shipping around a chokepoint is prohibitive.
28 As noted by Glen Plant, maritime chokepoints expose energy cargoes to high levels of risk due to the
fact that they are, ‘of strategic significance to energy cargo flows, impossible or expensive to avoid and
particularly vulnerable for physical, political or other reasons.’ See Glen Plant, ‘Trans-Boundary Energy
Projects and Maritime Transport Risk’ in ‘Risk and Energy Infrastructure: Cross-Border Dimensions,’
Thomas J. Dimitroff Global Law and Business (London) 2011 at p. 94.

7
 ii. Maritime Chokepoints

With over 90% of internationally traded goods transported by maritime vessels,

freedom of access to the High Seas (and to established shipping lanes) is vital to the
global economy. In order to ensure free access for maritime transport, international
naval power is coordinated among governments. 29 Notwithstanding these
international efforts, maritime vessels, including oil and LNG tankers, remain
vulnerable. Seven global ‘chokepoints’ present particular sources of risk to maritime
vessels. Two of these so-called chokepoints are man-made – the Panama and Suez
Canals – and all seven are essential to the international transit of goods including oil
and LNG. In general, the transit passage regime through international straits is well
developed and provides significant international law assurances that international
shipping will not face unreasonable restrictions by coastal states. In addition,
maritime shipping also faces far fewer regulatory restrictions than those faced by
pipeline companies during the development and construction of a cross-border
pipeline as well as during the operational life of the pipeline. The sources of risk to
maritime shipping through chokepoints relate less to deficiencies in international law
and more to threats from terrorism, retaliatory closures and piracy, as well as
navigational dangers and the dangers to the environment and surrounding
populations associated with a spill. 30

Roughly one half of globally traded crude oil passes through one of these
chokepoints each day. The range of risks they are exposed to are shown in the
following table:

TABLE 1 31
Global maritime chokepoints

Chokepoint Bpd of Oil Risk Mitigation

Shipped
Strait of Hormuz 17M • Threat of closure due to • ADCOP (operational)
possible action taken by Iran • Saudi Arabian Bypass Pipeline (pre-feasibility)
• Risk of terrorism
Straits of Malacca 15.2M • Vulnerability to piracy • Sino-Burmese Oil Pipeline (operational)
• Threat of closure due to
terrorism
Suez Canal 3.8 M • Narrow size of Suez Canal • Parallel Sumed Oil Pipeline built across Egypt
(300 metres) makes it (1977) to bypass the Suez Canal (operational)
vulnerable to terrorist attack • State security forces fortified by shore-based

29At the moment, US Naval power remains dominant globally. See

http://www.globalasia.org/V5N4_Winter_2010/James_R_Holmes_&_Toshi_Yoshihara.html

30 See Glen Plant ‘Trans-Boundary Energy Projects and Maritime Transport Risk’ in ‘Risk and Energy

Infrastructure: Cross-Border Dimensions,’ Thomas J Dimitroff, Global Law and Business (London) 2011
at p 94.

31 http://www.eia.gov/countries/regions-topics.cfm?fips=wotc&trk=p3.

8
 • Previous shutdowns due to weapons systems.
war 32
Strait of Bab el- 3.4M • Vulnerability to (Somali) • Coordinated international anti-piracy measures
Mandeb piracy and ship hijackings (both state and private sector)
• Risk of terrorism
Turkish Straits 2.9M • Threat of environmental and • BTC (operational oil pipeline)
safety incident due to tanker • Burgas-Alexandropolous (proposed/mothballed)
accident in the Bosphorus • Samsun-Ceyhan (proposed/mothballed)
with a population of 13.85M • Istanbul Canal (proposed and actively being
and a World Heritage Site considered)
• Demurrage due to difficult • Navigational shipping traffic and safety mitigations
weather conditions late
Autumn to early Spring
Danish Straits 3.0M • Shipping and navigational • Navigational shipping traffic and safety mitigations
danger
• Environmental devastation in
the event of an oil spill
Panama Canal 0.8M • Small size of Panama Canal • Trans-Panama Pipeline (parallel pipeline
makes it less useful/vital as commissioned 1982 and subsequently mothballed
an oil and LNG transit 1996)
point 33

iii. Cross-border crude oil pipelines and maritime chokepoints

Given the constraints and risks associated with the chokepoints referenced in Table
1 above, and given the fact that pipelines are generally a safer and more secure
means of transporting crude oil and gas, the construction of a bypass pipeline is a
logical means to mitigate these risks. 34 For example, the Turkish Straits is a relatively
narrow passage (0.7 kilometers at its narrowest point) linking the Black Sea to the
Mediterranean Sea. It passes through the City of Istanbul with a population of over
13.4 million inhabitants and sees very heavy maritime transit traffic including more
than 7 tankers per day carrying approximately 2.5 million barrels of oil.

In the case of the Turkish Straits, the Turkish Government has long struggled to
find a way to incentivize crude oil producers from the Russian Federation and
Central Asia to look at the possibility of constructing and utilizing a bypass pipeline
around the Turkish Straits. Between 1998 and 2002, the BP-led ACG consortium
evaluated oil export routes for its main export pipeline, and in August 2002 resolved
to build the 1,754-kilometer, 1 million Bpd Baku-Tbilisi-Ceyhan Oil Export Pipeline.
One of the main determinants in selecting this route was to avoid exacerbating

32 See ‘The Challenge of Blocking the Suez Canal,’ by Scott Stewart, Stratfor 5 September 2013.

33There is currently a Panama Canal expansion project underway that will double the capacity of bulk
carriers from 60,000 ton (Panamax) to 120,000 tons. The project is currently experiencing delays that will
extend completion to 2016 and potentially impacting LNG deliveries from the Gulf of Mexico to Asia.
See Stratfor Global Intelligence “Panama Canal Expansion: The Dangers of Long-Term Delays”
January 27, 2014.
34This is not to suggest that crude oil and gas pipelines are without serious incidents.

9
 tanker traffic through the Turkish Straits. 35 While the BTC pipeline is an operational
Turkish Straits bypass solution for South Caspian oil production (that is, production
from Azerbaijan, Turkmenistan and some from Kazakhstan), North Caspian
producers (primarily from Kazakhstan) are largely left to export their oil via the CPC
pipeline and Georgia by rail. 36 Both the CPC pipeline and the rail export routes
terminate at ports on the Black Sea (Novorossiysk and Batumi respectively) with
export volumes loaded onto tankers for onward shipment through the Turkish
Straits.

Two additional bypass pipeline development projects (Samsun-Ceyhan and Burgas-

Alexandropolous) 37 were advanced in order to divert North Caspian and Russian
production around the Turkish Straits. Ironically, it is the very international maritime
law principle of transit passage that has prevented coastal states such as Turkey from
being able fully to regulate shipping from an environmental, health and safety
perspective. 38 This presents a formidable commercial conundrum to Turkey in its
efforts to alleviate blockages through international maritime straits and minimize
health, safety and environmental risk. For shippers, the issue is straightforward: why
pay a pipeline tariff to bypass the Turkish Straits when the coastal state (Turkey) has
few viable means legally to regulate transit passage and passage through the Straits
may be accomplished free of charge? 39

State and commercial interests from the Russian Federation sponsored the Burgas-
Alexandropolous Pipeline and subsequently also entered the Turkish-sponsored
Samsun-Ceyhan bypass pipeline project. Since Transneft, the Russian Federation
state-owned oil transportation company, is able to divert Russian production
through pipelines terminating on the Baltic as well as the Far East (via the newly-
built ESPO Pipeline), it appears that the Turkish Straits bypass projects were
intended by Russian interests to target and assert further control over North Caspian
(Kazakhstan) production. Interestingly, both projects were recently mothballed and
it can safely be assumed that the significant leverage enjoyed by the Russian
Federation over North Caspian producers, as well as the very slow progress on
Kashagan due to technical issues and the lack of alignment between the upstream
IOCs and KMG, played a key part in this.

35Competing route alternatives evaluated at the time included the shorter Baku-Supsa route to the
Georgian Black Sea coast and the Baku-Novorossiysk route via Russian Federation territory.

36 See the Oil Pipeline Case Studies within Annexes II and V.

37See Pipeline Case Studies 25 and 26 in Annex V.

38For example the Convention Regarding the Straits, Montreux (July 20 1936), 173 League of Nations
Treaty Series 213.
39Theauthor was directly involved in undertaking various Turkish Straits ‘constraints analyses’ while
working for BP, plc as well as when advising private sector interests in connection with the Samsun
Ceyhan Pipeline. This included the preparation of a first draft intergovernmental agreement tabled
between the Russian Federation and the Republic of Turkey (Pipeline Case Study 25).

10
 The fact that a large percentage of Kazakhstan production is exported to the Black
Sea via the CPC (which traverses Russian territory and has significant Russian
ownership interests) further helps to explain this dynamic. Given Transneft’s ability
to divert Russian production away from the Turkish Straits, as noted above, the cost
of the commercial tariff for a bypass pipeline would largely be left to Kazakhstan
producers to pay. 40 This leaves the Turkish State with few options. 41 Given further
Turkey’s inability to force significant regulation, the unfortunate result is that both
bypass projects were recently mothballed. This means that producers, including
those from Russia, ship freely through the Straits, with the attendant risk that a
navigational safety or terrorist incident may immediately resolve this conundrum, at
a huge cost to the environment and surrounding communities including the City of
Istanbul.

Other examples of pipelines designed to bypass international maritime straits show

variations on the same commercial considerations. The ADCOP Pipeline,
constructed across the United Arab Emirates to bypass the Straits of Hormuz,
remains underutilized and is likely to struggle commercially. 42 The recently
commissioned Sino-Burmese oil (and parallel gas) pipeline, implemented and
majority-owned by CNPC, will take African and Arabian crude oil across Myanmar
and into Southwestern China and provides an excellent illustration of the importance
of commerciality. 43 Accordingly, the Sino-Burmese oil and gas pipelines avoid the
Straits of Malacca, a passage that is largely controlled by the US navy and through
which more than 80% of oil destined for Chinese markets transits, and shaves 1,200
kilometers off the distance involved in transporting Arabian and African crude oil to
remote Southwestern China. 44

40In addition, when considering Kazakhstan producers, it is important to understand that a large number
of US company interests are at stake including Chevron (actively producing from Tengiz Field) and
ExxonMobil and until 2013 ConcoPhillips which will have future production from the giant Kashagan
Field. For Turkey to attempt to aggressively regulate tanker traffic through the Turkish Straits, US (rather
than Russian) interests would be disproportionately impacted. In addition, the portions of the Montreux
Convention pertaining to naval movements through the Turkish Straits would be impacted by any move
made by Turkey to attempt regulate the maritime transit in excess of what is permitted.
41Unilateral regulation by the Turkish State is untenable as there is no basis in international law for Turkey
to prescribe and enforce regulations in the Turkish Straits unless such enforcement could be brought
within the Montreux Convention. Attempts to enforce regulations in practice may lead to ‘at sea’
incidents, diplomatic protests or even retaliatory measures by other states including the US. Such action
might also place at risk the current regime in the Turkish Straits bringing it into disrepute and potentially
jeopardizing the naval dimensions of the existing regime.

42 Examples include the ADCOP and the South Asia Gas Enterprise (SAGE) pipelines.
43The oil pipeline, with a capacity of 250,000 bpd, will extend approximately 771 kilometers before
terminating in Kunming, the capital of the Yunnan Province in China. The natural gas pipeline will have a
capacity of 12 bcma and extend further from Kunming to Guangxi in China spanning a total distance of
2,806 kilometers. Project Capex estimates for both pipelines (excluding the upstream and Chinese
refineries) are in the range of approximately US $2.5 billion.

44 However, as noted in the Sino-Burmese Pipelines, the viability of the recently commissioned pipelines

are currently being threatened by insufficient front-end community-based assessment involving adverse

11
 iv. Landlocked Countries

Cross-border oil and gas export pipelines often enable the transportation of crude oil
and natural gas from producing countries where the resource would otherwise be
‘stranded,’ consumed locally, or in the case of crude oil, would involve more
expensive transportation by road or rail to reach export markets. In other words,
cross-border export pipelines can sometimes be the only means by which larger-scale
internationally traded oil and gas may be transported from producing areas to
consumption markets. These geographical constraints frequently provide the
elements that enable underlying political dynamics to find their footing. They also
offer a useful illustration of the more acute cross-border risk issues that may arise. 45

A non-exhaustive list of significant landlocked oil-producing countries where cross-

border pipelines fulfill this essential role is set out in Table 2 below. 46 An ‘emerging
de facto country’ whose landlocked status is likely to present acute challenges to the
cross-border transit of oil is the Kurdish region of Iraq. Here enormous tension
already exists between Baghdad and Erbil centering on control over export and
revenue from the sale of oil and gas from Northern Iraq and ostensibly administered
by the Kurdish Regional Government. 47 In addition, South Sudan has faced acute
challenges to the stability of the country and the region due to its landlocked status.
Other countries that are emerging producers whose landlocked status is likely to
present significant challenges include Tajikistan, Uganda, Afghanistan, the
Democratic Republic of Congo and potentially Ethiopia. Finally, this issue is likely
to proliferate in several oil and gas rich regions around the world that contain states
where ethno-demographics spill across one or more political boundaries. As global
powers realign strategic priorities, economic, social, political and other factors in the
Middle East (e.g. Iraq), Africa (e.g., Libya, Nigeria) and parts of Eurasia (e.g., the
Ukraine) may force the emergence of new states or the reconfiguration of territorial
boundaries.

impacts on people and communities as well as a failure to account for the growing local demand for
energy (including electricity). With the gas production sources for this pipeline located in Myanmar waters,
the export of this gas to China (transiting through Myanmar territory) is a clear example of a project failing
to account for the legitimate needs of local communities.

45 A more detailed discussion of these dynamics us set forth in section III(c)(iv) of this paper.
46 There are a total of 44 landlocked states in the world and 10 either have significant oil and gas
production (4.37 % of the world’s total daily production of crude oil) or reserves waiting to come on
stream. Table 3 references emerging producing states that are landlocked and may face challenges
associated with development, negotiation, construction and operation of cross-border pipelines and other
infrastructure.

47See http://www.reuters.com/article/2014/01/30/iraq-kurdistan-pipeline-idUSL5N0L42VW20140130.

12
 TABLE 2
Landlocked producing states 48
Country Reserve Base Production Export Routes
(oil Bln
Bbls/gas
TCM)
Kazakhstan • 39.8 Bln Bbls • 1,757,000 • CPC oil pipeline (Russia) – operational
• 1.8 TCM Bpd • Uzen-Atarau-Samara oil export pipeline
• 33.6 (Russia) – operational
Bcma • KTCS oil export marine/pipeline via
Azerbaijan – in development
• Kazakhstan-China oil export pipeline –
operational
• Rail route via Azerbaijan and Georgia –
operational
Azerbaijan • 7 Bln Bbls • 1,037,000 • Baku-Supsa oil export pipeline (Georgia) –
• 1.3 TCM Bpd operational
• 15 Bcma • Rail route to Batumi (Georgia) – operational
• BTC oil export pipeline (Georgia/Turkey) –
operational
• SCP gas export pipeline (Georgia/Turkey) –
operational

Turkmen- • 0.6 Bln Bbls • 216,000 • Russian CAC gas pipeline – operational
istan • 8 TCM Bpd • Uzbekistan-Kazakhstan-China gas pipeline –
• 42.4 operational
Bcma • Iran-Turkey gas pipelines – operational
• Barge shipments of oil to Iran and via
Azerbaijan – partially suspended due to
sanctions
Kurdistan • 43.7 Bln Bbls • 250,000 • Kirkuk Fishkabur oil export pipeline
(Northern • 3.5 TCM Bpd (oil) interconnecting into the Kirkuk-Ceyhan
Iraq) 49 Kirkuk-Ceyhan – operational
• Trucking of oil – operational
• Future export of gas through gas export
pipeline via Turkey
Republic of • 6.6 Bln Bbls • 350,000 • Petrodar oil export pipeline – operational
South Bpd 50

48All data taken from the BP Statistical Review of World Energy 2013, see
http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statist
ical_energy_review_2011/STAGING/local_assets/pdf/statistical_review_of_world_energy_full_report_
2011.pdf. In addition, there are a number of gas-producing countries that are not land-locked but that
depend upon cross-border export pipelines to monetize their resource-base, e.g. Algeria and Libya.
49The KRG is not yet a sovereign state although it is presently implementing a physical crude oil export
pipeline system to Ceyhan, Turkey that is placing the KRG at odds with Baghdad and potentially en route
to sovereign independence.

13
 Sudan • GNPOC oil export pipeline – operational
Chad • 1.9 Bln Bbls • 122,000 • Chad-Cameroon oil export pipeline –
Bpd operational
Uzbekistan • 0.6 Bln Bbls • 87,000 • Gas export pipeline to China – operational
(oil) Bpd • Regional gas export pipelines
• 1.6 TCM • 59.1
Bcma

TABLE 3
Emerging landlocked producing states
Country Reserve Base Anticipated Production Export Routes
Uganda • 8 Bln STOIIP • 300,000 Bpd (projected • Kenya
plateau oil production) 51 • Tanzania
Tajikistan 52 • 8.5BL Bbls oil • Tajikistan-
• 112 TL cf of gas • 30-40 Bcm Kyrgyz Republic-
China (gas)
Afghanistan • 1.7 Bln Bbls • TBD • TBD
• 1.67 TCM
Democratic • 1.94 Bln Bbls • 280,000 Bpd • No fixed export
Republic of pipelines
Congo 53

v. Freedom of transit for landlocked producing countries

While the absence of principles of free transit is not the only state-to-state factor
that presents risk to cross-border oil and gas pipelines, there is a very strong
correlation between the efforts of landlocked producing countries to develop and
maintain uninterrupted operation of cross-border pipelines and serious international
disputes and supply disruptions. 54 For example, out of the seven examples of
landlocked producing states, five have been involved in major supply disruptions
and disputes involving neighbors. The correlation is stronger still when the
landlocked producing state involved in a dispute or supply disruption is one that has
emerged from the dissolution of a larger state such as the former Soviet Union or
the Sudan. One of the underlying reasons behind these disputes is the fact that the
dissolution of former producing and exporting states has left new landlocked
successor states dependent upon existing transportation infrastructure straddling

The Republic of South Sudan’s oil production was shut in for 15 months between January 2012 and
50

May 2013 with additional interruptions threatened.

51 See http://www.africanreview.com/energy-a-power/oil-a-gas/uganda-oil-production-ready.
52See http://www.ogj.com/articles/print/volume-111/issue-5/exploration---development/tajikistan-
pamir-pipedream-or-new.html.
53Technically, DRC is not a land-locked country as it does have export access via the Congo River.

54Additionally, transit and coastal states have also presented political obstacles to landlocked producing
states related to non-democratic despotic regimes (e.g. in the Republic of Sudan).

14
 new sovereign borders. Existing multilateral treaties and principles of international
law are simply not equipped to deal with this important source of risk.

a. Deficiencies in public international law

The 1965 United Nations Conference on Transit Trade of Landlocked Countries

(the ‘Convention on Landlocked Countries’) was intended to provide landlocked
state parties with non-discriminatory rights of transit across the territory of coastal
state parties. Article 125(1) of the 1982 United Nations Convention on the Law of
the Sea (UNCLOS) subsequently advanced the right of transit for landlocked states a
step further. However, Article 125(2) goes on to qualify this right by stating that,
‘[t]he terms and modalities for exercising freedom of transit shall be agreed between
the landlocked States and the transit States concerned through bilateral, sub-regional
or regional agreements.’ 55

Sub-articles 125(2) and 125(3) together ‘punt’ the right of landlocked states back into
the field of state sovereignty, enabling coastal states to choose (or not) to enter into
further bespoke agreements with landlocked states in respect of, inter alia, transit
rights. 56 Accordingly, in order to locate a substantive right of free transit, landlocked
states are left only with the 1965 United Nations Conference on Transit Trade of
Landlocked Countries (Conference on Landlocked Countries). Not surprisingly, four
of the eleven landlocked producing and emerging producer states are not currently
parties to the Conference on Landlocked Countries. Of the eleven landlocked
producing and emerging producer states, only three combinations of treaty parties
offer any tangible benefit to the participants. 57

55For a comprehensive analysis of the international transit regime for landlocked states see the 2006
World Bank study available at
https://openknowledge.worldbank.org/bitstream/handle/10986/7405/347710PAPER0Tr101OFFICIA
L0USE0ONLY1.pdf?sequence=1.

56Inaddition, UNCLOS is of no use to landlocked states with significant gas production but who do not
have an interest in accessing the sea, e.g. they have no commercial interest in LNG shipments (consider
Turkmenistan, Uzbekistan and potentially Tajikistan and Afghanistan).

57 First, Kazakhstan in theory benefits from the Convention by virtue of the fact that Georgia is also a
member and transits Kazakh crude oil by rail and via Turkey (also a member) albeit more indirectly via the
BTC Pipeline. Second, Azerbaijan benefits from Georgian membership in the Convention, as Azerbaijani
oil transits Georgian territory via rail to the Georgian Black Sea port of Batumi and via cross-border
pipeline (via the WER or ‘Baku-Supsa Crude Oil Pipeline’). In addition, Azerbaijan benefits significantly
from Turkey’s membership given the fact that Turkey hosts the 1 M bpd BTC Pipeline. Finally, Chad’s
membership in the Convention means Chad directly benefits from the Convention by virtue of the fact
that Cameroon is also a member state and the host transit state for Chad crude oil production via the
Chad-Cameroon Pipeline. This leaves Uganda, Ethiopia, Republic of South Sudan, Uzbekistan,
Afghanistan, Tajikistan, Turkmenistan and the Democratic Republic of Congo (all present and future
producers) without a single coastal state that is a member of the Convention. Ironically, while some of
these states (Afghanistan, Tajikistan, Uzbekistan, Kazakhstan, Uganda, Burundi and Rwanda) have
neighbors that are also members, all of those neighboring states are also landlocked and therefore present
no tangible benefit other than perhaps moral support.

15
 b. Freedom of transit and the ECT

The principle of freedom of transit is well established within the body of public
international law. In addition to the principle of freedom of transit for landlocked
states across coastal states as set forth in the Convention on Landlocked Countries
and the principle of ‘free access to the sea’ and the principle of ‘free and unrestricted
transit’ across the territory of coastal neighbors ‘on the basis of reciprocity’
(Principles I, III and IV) as set forth in UNCLOS, the following are just some of the
references to freedom of transit in other treaties and conventions:

• The ‘obligation of communication and transit’ of the Covenant of the

League of Nations (Article 23(e));

• rights of ‘transit passage’ are explicitly recognized in the United Nations

Convention on the Law of the Sea (Article 44);

• ‘passagedom of air transit’ under the Convention on International Civil

Aviation (Article 5);

• the principle of freedom of transit for goods in transit as set forth in

Article V of the General Agreement on Tariffs and Trade (GATT) 58; and

• the principle of freedom of transit for energy materials and products as

set forth in Article 7(1) of the Energy Charter Treaty (the ECT).

c. Possible criteria for us in assessing transit fees

Unfortunately, the ECT is neither universally applicable nor does it provide

sufficient guidance as to the circumstances and criteria by which transit fees may be
reasonably assessed. As a consequence of the fact that there is no universally
applicable principle of international free transit of oil and gas (including the principle
set forth in the ECT), many cross-border pipeline projects have faced significant
horizontal pre- and post-completion challenges, particularly in relation to the
appropriate assessment of transit fees.

Practical criteria may be put forward from a variety of sources to justify the
imposition of state charges or other forms of tradable benefits (although it is
debatable whether these should be referred to as transit fees). For example, fees or
charges could be imposed on the basis of the following criteria:

58 Article V of GATT is perhaps the most widely known reference to the principle although it is uncertain

as to whether GATT specifically applies to hydrocarbons.

16
 • As a payment for services rendered (for example, pipeline protection by state
security services);

• as payment for the pipeline right of way and other rights to state land (for
example, BTC Co and SCP Co received state land free of charge, whereas in
the TAP Greek HGA and Albanian HGA, TAP AG agreed to pay for the
easement, ownership and lease rights to state land);

• as remuneration for a variety of state guarantees representing contingent

liabilities of the state;

• as a means to ensure that the transit state receives revenues from shipments
of oil or gas through the pipeline from the start of operations rather than
from the date that the pipeline company starts to earn a profit; or

• as payment towards an insurance fund to address spills or other accidents

that may result in environmental or other damage and which the state will be
obliged to remedy on behalf of their population.

In 2006, the Energy Charter Secretariat Consultation Paper (the ECS Consultation
Paper) 59 referenced a number of practical examples of how transit fees have been
worked out and applied. However, many of these examples relate to charges for the
use of state-owned gas transportation infrastructure that resemble commercial tariffs
rather than state charges. 60

Following the coming into force of the ECT in 1998, member states recognized that
the mitigation of horizontal (state-to-state) and vertical (state-to-investor) risk posed
to the construction and operation of cross-border pipelines required more specificity
than what was embedded in the ECT alone. Accordingly, the Charter Conference
took two important steps. The first involved mandating a new round of
multinational negotiations to provide additional specificity on energy transit within a
separate Transit protocol.

While broad agreement was reached on the majority of key provisions in the text of
the Transit Protocol, disagreements between the Russian Federation and the EU
Commission in particular impeded finalization of the text. In addition to the Transit

59 Available at http://www.encharter.org/index.php?id=127#386.

60 For example, the Ukraine (North European Pipeline Project) assessed transit fees for the transit of gas
to Germany at $1.60 per mcm per 100 kms. Other examples include: Poland (Yamal I) where transit fees
of 150-230 million euros per year were assessed for the transit of Russian gas; Bulgaria agreed to pay
international prices for a portion of Russian gas supplied in exchange for Russia paying $1.67 per mcm for
the transit of its gas to Greece; and Moldova agreed to purchase Russian gas at $160 per mcm in exchange
for Gazprom paying a transit fee of $2.50 per mcm per 100 kms. See the ECS Consultation Paper.
However, the problem with all of the foregoing examples is that all involve Gazprom gas transiting
through state-owned and operated gas transportation infrastructure. Consequently, all of these examples
involve a conflation between the role of the state acting in its capacity as a commercial operator and the
state acting in its capacity as a state. Transit fees can only properly be asserted in the latter case, while the
former is in fact a form of commercial tariff.

17
 Protocol, the Energy Charter Secretariat also commenced a process for developing
Model Inter-Governmental and Host Government Agreements to support the
development, construction and operation of cross-border oil and gas pipelines. 61

d. Confusing transit fees with transportation tariffs

In state-to-state negotiations and public discussions about transit fees, there appears
to be confusion in discussions concerning payments involved in the transportation
of oil or gas through cross-border pipelines. 62 The confusion appears to center in
particular upon whether the payments relate to transportation tariffs or transit fees.
This distinction is of fundamental importance as the former is a commercial tariff
for a service rendered, while the latter is a charge assessed by a sovereign state. The
confusion featured in the recent dispute between the Republic of Sudan South and
the Republic of Sudan and many of the examples offered by the Republic of Sudan
clearly conflated the two. The alleged transit fees were in fact comprised of a
combination of a transportation tariff, processing fees, marine handling fees, a
transit fee and various taxes. 63

In addition, ownership of cross-border pipelines by IOCs and state-owned entities is

often conflated due to the transitional nature of ownership inherent in many cross-
border pipeline systems. 64 For example, cross-border pipelines that are implemented
under a Build, Own, Operate and Transfer (BOOT) concession or similar
arrangement with a host government counterparty will start out as wholly owned by
an IOC with ownership subsequently reverting to the state or a state-owned
company pursuant to the BOOT terms. 65 Reversion of ownership under a BOOT
structure may happen all at once, (for example, upon hitting a target return), or less
commonly, incrementally as the return on the investment with profit is recovered in
real time.

61 See http://www.encharter.org/index.php?id=38.
62 For example, in the state-to-state negotiations between the Republic of Sudan and the Republic of

South Sudan, a persistent conflation between transit fees and transportation tariffs impeded a sensible
settlement of the dispute between January 2012 and May 2013.
63 See Pipeline Case Studies 37 and 37 in Annex VIII.

64 The distinction between the principles of lex imperii, (i.e., the law of the state acting in its capacity as a

sovereign) and lex mercatoria, (i.e., the state acting in a commercial capacity) is relevant to clarifying the
confusion surrounding the appropriate role and appropriate application of transit fees. Unfortunately, the
foregoing principles are not principles of international law, they are principles of domestic law which are
applied differently across jurisdictions. The Commission of International Law applying the law of the
designated state to determine circumstances where a company may be considered as controlled by a state.
See http://www.fas.org/sgp/crs/natsec/RL34003.pdf.

65For example, BTC is essentially a BOOT in which the State Oil Company of the Azerbaijan Republic

will secure ownership of the BTC Pipeline after the IOCs have recovered the cost of their investments
together with a 12.5% IRR.

18
 The range of factors that can give rise to risk at the state-to-state level and
threatening the development, construction and subsequent operation of cross-
border oil and gas pipelines is wide-ranging. These factors can include sanctions,
embargoes and action or inaction that is ostensibly based upon a wide and creative
range of pretexts but which ultimately boil down to state sovereignty, politics,
economics and other strategic considerations. The absence of widely applicable and
clear principles of international law exacerbates the scope for state-to-state ‘political’
risk that threatens cross-border oil and gas pipelines. An important area where clear
international law guidance is lacking involves identifying the conditions and basis for
the appropriate assessment of transit fees.

Adequate informed, scholarly and public discussion on the foregoing inadequacies is

greatly impeded by the absence of publicly available information on transit fees
assessed in connection with cross-border pipelines. 66 Ultimately, the only pragmatic
solution to the deficiencies and inadequacies noted above is to resolve them within
the context of bespoke Intergovernmental Agreement pending further elaboration
and extension of existing multilateral arrangements.

66 Approximately 100 cross-border pipelines (both in development and operation) were researched to
produce this paper and, with very few exceptions, publicly available data that would enable an examination
of the basis for the assessment of transit fees was simply not available.

19
III Analytical framework for assessing risk to cross-border pipelines

i. Introduction to components of the analytical framework

Before examining the individual components of the analytical framework, it is

important to understand that the core objective underpinning the development of all
cross-border pipelines is the delivery of oil or gas produced in one country into
another for consumption or onward export. The size of the pipeline to be developed
is determined in the first instance by the scale of upstream resource (and in the case
of gas, the size of the resource and the downstream market) and concrete export
development plans associated with the upstream. Accordingly, with the exception of
pipelines built across the national boundaries of states that are members of an
integrated trading union (for example, NAFTA), states within a federal system (for
example, the US) or a trading, political and monetary union (for example, the
European Union), cross-border crude oil or gas pipelines are typically developed in
conjunction with the development of specific upstream field/block(s). 67 However,
once a cross-border pipeline is developed and is in operation, it may evolve to
provide a transportation service to upstream shippers not associated with the original
upstream development. 68 While this core objective may have an energy
strategy/security of supply component – this is especially the case for government-
sponsored cross-border pipeline projects – the objective will be fundamentally driven
by market need.

The range of risk factors that may challenge cross-border oil and gas pipelines may
often exceed the context of a particular project and involve broad geopolitical factors,
issues of state sovereignty or national security interests. 69 These same factors can also

67 Within the EU, there are a number of ‘interconnector’ gas pipelines that are designed to facilitate trade
in gas and are specifically ‘unbundled’ from upstream interests. While the EU (and to a greater extent, the
internal US market) represent highly sophisticated and competitive markets for trade in gas and in pipeline
transportation capacity (particularly in gas), the regulatory framework provided by the EU Directives is
simply not relevant for purposes of considering risk to cross-border oil and gas pipelines within a global
security of supply context. First, EU efforts to offer the competitiveness of its own internal gas markets
as a model that would encourage the Russian Federation to liberalize its gas supply arrangements with the
EU, has not been successful. This failure has been exacerbated by the willingness of individual member
states to circumvent Commission efforts by striking bilateral arrangements with the Russian Federation.
Consequently, issues associated with security of supply disruptions in respect of Russian gas (or other gas
supplied to the EU via pipelines traversing Russian Federation territory) has continued to vex the EU.
Second with the exception of Norway, EU member states are not large oil and gas producers/exporters.
Of the indigenous EU gas/oil production, very little is traded outside of the EU. Consequently, while a
multilateral regulated regime for gas transportation (as found within the EU) would be a significant state-
to-state de-risking tool if applicable for cross-border gas pipelines globally, such a vision remains utopian.
68Afteroil or gas pipelines have been constructed and have delivered the oil or gas for which the pipeline
was originally sized, additional oil or gas produced in the region proximate to the pipeline may use the
spare capacity in the pipeline. In the case of gas pipelines within downstream consuming markets, tradable
secondary and tertiary markets in spare capacity may develop.

69For example, the Iran-Pakistan-India Gas Pipeline development has been derailed not only by the
imposition of UN sanctions on Iran but also by the mistrust between Pakistan and India. This has
prompted India and Iran to also enter into discussions with Oman to consider developing the subsea

20
 inform the strategic choices of policy makers, the decisions of regulators as well as
those of pipeline developers in the implementation of a specific project. 70 Other non-
project related risk factors are macroeconomic and may include a sudden setback in
aggregate demand or output, fluctuations in economic activity, prices, interest rates,
exchange rates, the underlying price of steel or market volatility. 71 For example,
between July and December 2008 the price of West Texas Intermediate fell from
$145/bbl to under $38/bbl in turn driving Capex expenditure down 18% in 2009. 72
Any of these factors can escalate project cost, delay project implementation, or
indeed, ultimately render a project non-viable.

In order to begin to analyze the specific risk factors that may challenge cross-border
pipelines, this paper proposes an analytical framework. The components of the
framework are best understood by first drawing two broad distinctions. The first
distinction is between those risk factors that challenge pipelines in development and
those that challenge operational pipelines. The second distinction is between risk
factors that are ‘internal’ to the project development company and those that are
‘external.’ The former are, or should be, within the total control of the developer
while the latter involve factors or stakeholders that cannot be controlled. In the case
of government and commercial stakeholders, risk factors may be identified and
allocated. In the case of all other stakeholders and external actors, risk factors must
be identified, engaged, managed or mitigated. It is often useful to apply wider risk
management and mitigation strategies with government and commercial stakeholders
as bald reliance on legal agreements will ensure legal action, but not often ineffective
risk mitigation.

Project financiers often distinguish the development and operational phases in the
lifecycle of a pipeline as ‘pre-completion’ and ‘post-completion’ respectively. The
pre-completion phases of a pipeline may be further subdivided into feasibility, front-
end engineering, detailed design and construction phases. As a project moves from
the initial feasibility phase to the front-end engineering and design phase, it leaves a
unique point in time when decisions taken by developers/project investors can have
maximum influence on the overall project at the lowest cost. It is also at this point in
time (that is, prior to financing and construction commitments), that potential
adverse impacts on people, communities and the environment should be taken into
account and factored into further project refinements.

SAGE gas pipeline. This would enable Iran to deliver gas to India without traversing the territory of
Pakistan. On the other hand, the Arab Ashkelon Pipeline remains completely suspended following the
steady deterioration of Egyptian-Israeli relations.

70Consider the efforts that the US made to ensure that Central Asian hydrocarbons flowed East to West,
the Russian Federations efforts to construct gas pipeline infrastructure to avoid traversing the Ukraine.
Consider also the response of the US Administration to the Keystone Pipeline Projects.

See Kevin Gardner, “Macro-Risks After the Panic of 2008” in “Risk and Energy Infrastructure: Cross-
71

Border Dimensions,” Thomas J Dimitroff Global Law and Business (London) 2011 at p. 17.
72 http://www.investorideas.com/Research/PDFs/CAPEX_PR.pdf

21
 On the other hand, the operational phase of a pipeline commences at that point in
time when the pipeline in question begins to generate income. Any vulnerability to
the stability of cash-flows, whether due to a change in taxation or regulation, or an
interruption to the service, whether due to political interference or terrorist action,
will be devastating to pipeline owners and potentially to governments concerned
about security of supply. Moreover, the sooner the intervening event occurs after
completion, the less likely the owner(s) will have had sufficient time to recover sunk
costs and for the asset to have generated the anticipated rate of return.

The second distinction between ‘internal’ and external sources of risk is more
complex. Risk factors that challenge the delivery of a pipeline pre-completion are
most effectively managed and mitigated the sooner they are identified. The
identification and management of risk factors should therefore constitute a core
component of any company’s overall enterprise risk management system. The
application of that system to a particular project will inform and structure the project
management process. Appropriate application of the risk management system will
involve rigorous adherence to policies, standards and procedures including
appropriate base line and impact assessments, systems associated with process safety,
construction and operational standards and internal assurance and auditing systems. 73
Accordingly, most ‘technical’ sources of risk to the delivery and subsequent operation
of a pipeline are in fact found within the internal dimension.

With few exceptions, external sources of risk to pipelines (both pre and post-
completion) are very rarely altogether outside of the control and/or influence of the
pipeline developer. In this sense, most risk factors are all ultimately rooted within the
internal dimension. Nevertheless, it is important to distinguish the various risk
factors that fall into the external dimension as they have important and distinct
bearings upon risk allocation and risk management and risk mitigation. Accordingly,
this paper will focus upon seven risk factors that all fall within the external dimension
of risk and may manifest both pre and post-completion 74:

• The absence of international principles on freedom of transit

• Non-viability of the commercial fundamentals underpinning a pipeline
• The absence of political alignment between or among the transit states
hosting a planned or operational pipeline
• A security incident or threat thereof
• A failure to implement adequate health, safety and environmental,
standards and/or an environmental, health, safety incident
• Actions that create adverse human rights impacts
• Community protests or other actions against the company facility,
assets or personnel

Among the seven external risk factors, two (the absence of transit principles and

73 In reference to a particular project, the company will also apply the broader enterprise risk management

system to preparation and implementation of a specific project management process.

74 Technical risk factors falling within the internal dimension of risk will not be examined in this paper.

22
commercial factors) involve horizontal relationships between and among
stakeholders and the remaining five involve vertical relationships between the project
company and the host state and third parties. Within the vertical relationships, the
perspective on each risk factor may be top-down (e.g. a government-generated risk
factor imposed by the state to the investor) or a ‘bottom-up’ perspective (e.g. by a
adversely impacted community to the investor). In addition, the first three risk
factors are all capable of being allocated through legal agreements whether those
agreements involve only states, states and the pipeline company or the pipeline
company and other commercial counterparties. The remaining risk factors cannot be
allocated by legal agreement. Finally, all of the risk factors involve constant
monitoring and management regardless of whether they are capable of being
allocated or not.

In order to better identify and understand sources of risk to cross-border pipelines, as

well as how and whether the various sources of risk may be allocated, an analytical
framework is proposed. The following Table presents the main components of the
analytical framework.

Table 4
Components of analytical framework

Dimension of Risk Stakeholder Perspective Capable of being Allocated

Internal Pipeline company Internal No
(Not Applicable)
External Commercial Horizontal Yes
(Commercial) counterparty
External (political) State-to-state Horizontal Yes
(State-to-state)
External (political) State-to-investor Vertical (‘top- Yes
down’)
External State-to-state and Horizontal and Yes
(political/capacity) State-to-investor Vertical
External (non- Local community, Vertical (‘bottom- No
political/non- impacted individual- up’)
commercial to-investor
External (hostile Not a stakeholder Vertical (‘bottom- No
third party) up’)
Project lifecycle
• Pre-completion All Horizontal and Dependent on Stakeholder
Vertical (as noted above)
• Post-completion All Horizontal and Dependent on Stakeholder
Vertical (as noted above)

ii. The horizontal external dimension of risk between

commercial stakeholders

The commercial arrangements that support a cross-border oil or gas pipeline project
involve two principal agreement types: the owners’ agreement and the transportation
agreement. As pipelines are frequently owned and developed by multiple parties, or
at least by an owner(s) that use a special purpose vehicle that is distinct from other
entities in the value chain, an incorporated joint venture vehicle is common.
Accordingly, a shareholders’ agreement will therefore define the fundamental
business structure, the overarching governance and ownership remuneration
structure. The transportation agreement, on the other hand, will define the structure

23
 of service to be offered to shippers, the respective allocation of risk between shipper
and pipeline and the tariff to be paid in exchange for this service. Fundamentally, the
transportation agreement will seek to allocate the following two commercial risk
factors between shipper or transporter:

• The risk that gas/oil is available for shipping but there is no functioning
pipeline capacity available for transport (a risk to the shipper); and

• the risk that a pipeline is built and functioning, but there is no oil/gas
available to ship or no money available to pay for the service (a risk to
the transporter).

Both of the above-referenced risks can manifest pre- and post-pipeline completion.
The fundamental tools used for allocating these risks are set forth in the
transportation agreement and relate to the nature of the commitments provided (e.g.
ship or pay, take or pay or ship and pay) and the tariff charged.

iii. The horizontal external dimension of pre and post-

completion risk between states

The distinctive feature of a cross-border oil or gas pipeline is the intimate

involvement of two or more sovereign states in ‘hosting’ the pipeline. This
involvement occurs within a much broader context that often includes inter alia
strategic, military, political, trade and other macroeconomic considerations.
Accordingly, political risk (that is, risk posed to a cross-border pipeline development
by government action or inaction) is of particular concern as this external dimension
of risk is not capable of being controlled. Political risk can threaten cross-border
pipelines during both pre- and post-completion stages across two axes: the
‘horizontal’ state-to-state axis and the ‘vertical’ state-to-international oil and gas
company axis. 75

Horizontal political risk may display at the very early pre-completion feasibility study
phase in a cross-border pipeline development. A ‘transit state’ across whose territory
a landlocked producing state seeks permission to access rights to land for purposes of
transit, interconnection or transportation capacity may attempt to leverage the more
vulnerable position of the landlocked state and its operating international oil and gas
companies. In such circumstances, concessions can include disadvantageous
interconnection or transit transportation terms. An example of this involves
Turkmenistan’s efforts to export natural gas to the EU via the Russian gas pipeline
system. 76 Similarly, transit states may attempt to block or disadvantage the efforts of
cross-border pipeline developers that they see as competing with the interests of their

75Indeed, the results of the assessment of 55 pipeline case studies reveals political risk factors as the single
dominant source of risk with the most severe risk consequences (see Section IV below).
76SeePipeline Case Study 17 in Annex IV. During the early 2000s, Turkmen gas was purchased at
discounted price and used to supply the Russian domestic markets freeing Russian gas to be sold in the
EU and enabling Gasprom to capture a healthy arbitrage.

24
 own ‘national champions’.

A non-exhaustive list of examples of horizontal state-to-state pre- and post-

completion risk include:

• The interrupting, impeding or curtailing of the free flow of oil or gas through
a cross-border pipeline;

• the refusal to support or facilitate (on a state-to-state basis) the completion

of a pipeline project and associated project activities;

• the refusal to allow interconnection with existing facilities or subjecting such

interconnection to unreasonable terms and conditions;

• unpredictable, unreasonable or opaque assessments of transit fees;

• the failure to allocate the fiscal revenues/burdens of the pipeline project

among the transit states such that the pipeline company suffers the effects of
double taxation;

• the failure to harmonize the technical and environmental standards

applicable to the project resulting in delays and additional costs;

• the failure of an established Inter-Governmental commission among the

transit states to meet on a regular basis to agree workable rules and
procedures on the:

o import and export of equipment;

o free movement of personnel during construction;

o coordination of the state security services; and

o cross-border verification of the volumes shipped through agreed

metering procedures.

While pre-completion political risk is easily identified and categorized, the underlying
motivations are of interest for the purpose of seeking effective risk management. For
example, notwithstanding the fact that BTC Co and SCP Co had negotiated
comprehensive Intergovernmental Agreements and Host Government Agreements
with the Georgian government, and BTC Co had secured debt financing from two
multilateral and seven bilateral Exim banks, the newly elected President of Georgia,
Mikheil Saakashvili, suspended the construction permit on both pipelines in August
2004. 77 The pretext for this action was the perceived security risks associated with

77This action placed an integrated $22 billion in upstream and midstream investment on hold, threatened
delays in the repayment of loans to banks, delayed oil and gas revenues to Azerbaijan and to the oil and

25
 terrorist action targeting the pipeline which ran within 14 kilometers of Georgia’s
national Borjomi Park. 78

The capability to mitigate pre and post-completion risk and to maintain security of oil
and gas supplies are goals that do not naturally flow from the self-interests of oil and
gas companies or the financiers that lend to them. Effective and sustainable
mitigation must involve the engagement of sovereign states and locally affected
people and communities. The identification of (and engagement in) the dynamics and
drivers that inform the balance of interests established and re-established between
wide-ranging stakeholders is vital to effective risk mitigation. The countries through
which oil and gas pipelines are constructed and operate exist in a transport value
chain where interests and benefits are often unequal. The revenues that the export of
oil yields to a producing country will dwarf the fiscal revenues that a neighboring
country can reasonably expect from the transit of oil or gas. 79

However, this calculus may change in circumstances where a producing country is

landlocked or where a country is not itself a producing country but does have direct
access to international waters and hence to export markets, for example, the Republic
of Turkey in respect of both Azerbaijani and Iraqi oil. As noted above, it also matters
whether the countries in a transportation chain (whether individually or collectively)
are successor states across which oil and gas infrastructure has already been
constructed. Indeed, when we examine the long list of examples where these risks
have manifested, many are either successor states or landlocked states or both.

Understanding key features of each state within a state-to-state transit chain

configuration is key to understanding horizontal state-to-state risk and potential
mitigations. These key features include the following:

• Cross-border pipelines transport strategic and valuable commodities which

the states in the transit chain will have an interest in possessing / sharing;

• cross-border producer pipelines (particularly in circumstances where the

transit country does not benefit from off-take) set up an inherent tension
between the interests of the upstream producing country and transit
countries;

gas companies and added costs and expenses associated with demobilization and remobilization of
personnel and equipment.

78 The outcome for the Georgian Government was a large-scale collection of grants and related payments

in cash and in kind that in effect re-set the terms of the original deal struck with the late Georgian
President Eduard Schevernadze.

79 Consider for example the position of Georgia that hosts all of the operational crude oil and natural gas
cross-border pipelines carrying Azerbaijan production to international markets. Azerbaijan, SOCAR and
BP (as operator) had the foresight to anticipate the potential instability of the relationship with Georgia
that might be caused by vast wealth accumulation in Azerbaijan. Accordingly, gas supplies in kind together
with tax and transit revenues have enabled Georgia to benefit substantially from Azerbaijan’s hydrocarbon
wealth.

26
 • pursuit of national interests by states – in particular whether the state’s
territory is used for:

o producing and exporting crude oil or gas directly to the markets of

other states (for example, a non-exhaustive list would include UAE,
Oman, Saudi Arabia, Kuwait, Indonesia, Venezuela, Qatar);

o producing and concurrently transiting production from another

state; 80

o transiting the production of another state; 81 or

o transiting the production of other states and re-exporting. 82

By analyzing the state-to-state configurations within the context of this analytical

framework, the following initial observations can be made. First, many successor
states with previously integacrated oil and gas production and export infrastructure
feature prominently in transit state and political disputes. 83 In other words, these
states have become transit states by default and did not exist as separate sovereign
states at the time that the pipelines were first constructed. Second, landlocked
producer / transit states also feature prominently in transit complications / disputes
(e.g, Turkmenistan). 84 Third, transit states that have little or no production but have
international export terminals are less likely to be leveraged by other states in the

The common FSU pedigree to these examples as well as the large number of landlocked states for
80

whom multiple export options are critically important is noteworthy.

81 In other words a transiting country without its own production or export point.
82 Turkey is a hub, re-export market and transit state for Russian (via the Blue Stream and FSU-vintage
gas export trunk lines), Azeri (via the SCP and Botas gas pipelines), Iranian (via the Iranian-Turkey gas
pipeline), Turkmen (via the Turkmen-Iranian-Turkey gas pipeline), Nigerian LNG and potentially Iraq and
E Mediterranean gas. Turkey is also a transit and re-exporting state for Azerbaijani, Kazakh and Turkmen
oil via the BTC pipeline. Cameroon is a transit and export state for Chadian oil via the Chad-Cameroon oil
export pipeline.

83The Russian Federation has had numerous recurring disputes with other FSU states. Consider also the
Republic of Sudan and the Republic of South Sudan.

84 Kazakhstan was long delayed in its efforts to secure expansion of the CPC oil pipeline via Russia (see
Pipeline Case Study 21 in Annex V). Turkmenistan has long been impeded in its attempts to secure
appropriate transit terms for its gas via Russia. Turkmen efforts to develop alternative export pipelines via
Iran and across the Caspian via Azerbaijan have proved unsuccessful due to ongoing international
sanctions against Iran and the needs of Azerbaijan first to secure an export market for its own gas. In
addition, Turkmenistan’s effort to develop an export option across the Caspian Sea and via the Southern
Gas Corridor has been greatly impeded by the sustained objections of the Russian Federation due to
Caspian Sea delimitation and environmental issues. See Pipeline Case Study 16 in Annex III. The
Republic of South Sudan is a landlocked state with a single export alternative for its oil production via the
territory of the Republic of Sudan and it continues to be highly vulnerable to threats and interruptions by
the Republic of Sudan (see Pipeline Case Studies 37 and 38 in Annex VIII). Although, since the outbreak
of conflict within South Sudan, the most likely current threat to production and export lies within its own
boundaries.

27
 transit chain (e.g. Turkey). 85 Fourth, ‘transit-only’ states (that is, states that have little
production of their own and through which producing states transit but within
which they do not market or rely upon export from a port terminal (e.g. Georgia) are
viewed as the most vulnerable to leveraging (pre-completion) and prone to attempt
to renegotiate (post-completion). 86 Fifth, producer states may wish to assess fees on
production from other countries in order to impede the transit of that state’s
production or to extract additional rent (Republic of Sudan). 87 Finally, where
producer states engage in the market through their wholly state-owned companies,
they may collect additional rent by transiting the production of other states. For
example, the Russian Federation’s Gazprom and Transneft state monopoly pipelines
are able to extract rent for the state in the guise of ‘tariffs’ and other ‘commercial
charges’).

iv. Vertical state-to-investor pre- and post-completion (‘top-

down’) political risk

Vertical (top-down) pre and post-completion political risk in a cross-border pipeline

project is in most instances similar to political risk exposure faced by an
infrastructure project constructed and operated entirely within a single jurisdiction.
An indicative list of pre-completion political risk includes the following events:

• A failure by the host government to provide the support of the national and,
where applicable, local authorities in support of the project;

• a failure by the host government to timely issue required licenses, permits

and authorizations for the construction and operation of the pipeline;

85 Turkey enjoys a strong and balanced relationship with the Russian Federation, Azerbaijan and Iran
although it functions as a transit country for oil and/or gas production from these countries. In addition
to becoming a major economic power, Turkey has used its geography to position itself as a major energy
transit country hosting oil pipelines from Azerbaijan and Iraq. Turkey also hosts gas pipelines from the
Russian Federation, Azerbaijan, Turkmenistan and Iran. Finally, it is worth noting that a significant
amount of daily crude oil production (in excess of 2M bpd) transits through the Turkish Straits.
Cameroon is a transit and export state for oil produced in Chad (see Chad Cameroon Case Study 39 in the
Pipeline Case Studies Table, Annex 1). Morocco and Tunisia are transit and consuming states for Algerian
gas destined for European markets.

86For example, gas deliveries as provided by Shah Deniz and SOCAR (the State Oil Company of the
Azerbaijan Republic) to Georgia in exchange for transit rights. As a consequence of these various forms of
government take, Georgia is able to receive a significant percentage of its total revenues from SOCAR.
Accordingly, in the event that problems emerge, they are more likely to occur as a result of Georgia’s
shifting domestic political landscape (from Mikheil Sakashvili to Bidzina Ivanishvili and the associated
shifts in Georgia’s strategic alliances between NATO and the Russian Federation) rather than issues
associated with adequate government take.

87The Republic of Sudan does not assess a transit fee on the oil allocated to the foreign oil company
producers in the Republic of South Sudan and shipped north through the GNPOC and Petrodar Pipeline;
rather, it is only oil allocated to the Republic of South Sudan that attracts transit fees and hence elevated
tariffs (see the Republic of South Sudan Case Studies 34 – 38 in the Pipeline Case Studies Table, Annex 1).
The Russian Federation has long used Turkmen gas purchased at a discount to supply its domestic
markets freeing Russian gas to be sold in the EU at higher prices (see Turkmenistan Case Study 17 in the
Pipeline Case Studies Table, Annex 1).

28
 • a failure by the state to provide rights to acquire state-owned land or to assist
the pipeline developer to acquire rights to non-state owned land and where
negotiations have failed by granting to the developer the right of eminent
domain or expropriating the land on behalf of the developer;

• a failure to provide appropriate investment protection measures; and

• denial of neutral international arbitration.

Vertical pre- and post-completion political risk may emerge from the perceived
inadequacy of the arrangements between the project developer/operator and a
transit country (or countries) in the transportation chain as circumstances change
over time. As noted above, when the effects of the construction investment
including a surge of local content, payments for land rights, community investment
and temporary employment, diminish, only fiscal revenues remain. Producing
governments and their operators accumulate wealth, neighboring transit companies
may perceive the fiscal revenues generated through mere taxation of the pipeline
company profits as inadequate. This is exacerbated by the fact that transportation
revenues in a pipeline tend to remain reasonably stable over time and are rarely
linked to underlying commodity prices. 88

Post-completion political risk may also include interruption, curtailment or stoppage

by government action taken under the pretext of regulation or non-payment of taxes
or other assessed fees. Government action may be thinly disguised by the ownership
and or operation of oil and gas pipelines by the state-owned companies that
implement de facto state policy under the guise of commercial arrangements. Recent
examples include the Russia-Ukraine disputes (2006 and 2009) and the stoppage of
upstream production by the Republic of South Sudan in order to avoid payment of
extortionate transit fees assessed by the Republic of Sudan on the shipment of the
Republic of South Sudan’s allocated oil through the Republic of the Sudan
pipelines. 89 Particularly egregious examples of interruption, curtailment and full
stoppage to pipeline transit include the Kirkuk-Ceyhan Crude Oil Export Pipeline 90
and the Egypt-Israel-Jordan Gas Pipeline. 91

In addition, cross-border oil and gas pipelines are vulnerable to post-completion

political risk including risk of physical disruption and outright stoppage due to

88This is an example of the principle of the obsolescing bargain that has been referenced by Professor
Paul Stevens in discussing cross-border pipelines. See
http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf

89 See Pipeline Case Studies 37 and 38 in Annex VIII.

90 See Pipeline Case Study 27 in Annex VI.

91 See Pipeline Case Study 29 in Annex VI.

29
 sabotage, armed conflict or an imbalance of interests among commercial, state and
local stakeholders.

Accordingly, an indicative list of post-completion risk consequences includes the

following:

• changes in the fiscal framework which render or jeopardize the project

economics by elevating the tariff (thereby making the project more expensive
to shippers) or forcing the pipeline to pay a higher government take (thereby
eroding the return on the project investment);

• changes in the legal and regulatory framework that render the application of
the framework uncertain and unpredictable over the life of the project; and

• interruptions, curtailments or outright stoppage of the operation of the

pipeline due to a government order or a physical security breach.

The following tables (Tables 5 and 6 below) summarize a range of ‘Horizontal’ and
‘Vertical’ pre- and post-completion political risk, their potential impact on a pipeline
project or operation together with recommended mitigations.

TABLE 5
Indicative ‘Horizontal’ state-to-state
pre- and post-completion political risk

HORIZONTAL STATE-TO-STATE RISK TO PROJECT

Risk Element Completion Project Impact Mitigations
Status
• State-to-state • Pre- • Difficult to progress • Political lobbying
political support completion beyond feasibility study • Document in Inter-
phase Governmental MOU or
Intergovernmental Agreement
(IGA)
• Interconnection • Pre- • Difficult to progress • In the absence of international
rights completion beyond feasibility study treaty obligation, political
phase lobbying is only mitigation
• Re-routes may be • Document in IGA
impossible
• Project delays
• Failure to agree • Pre- • Risk that project will be • Appeal to double tax treaties in
state-to-state completion subject to double taxation place
income cost • Reference to OECD Transfer
allocation Pricing Guidelines
• Encourage states to negotiate
advance pricing agreements
• Document mechanisms for
allocating of income and costs
within IGA
• Imposition of • Pre- • Erodes project economics • Appeal to ECT, GATT as
Transit fees completion • Manageable provided examples where transit fees are
certain and predictable not applicable
application • State practice
• Document in IGA
• Misaligned legal, • Pre- and • Potentially creates delays • Align standards within an IGA or

30
 technical, post- in aligning governments other state-to-state commitment
environmental completion
standards
• International • Pre- and • Project stopped • Appeal to home government to
sanctions Post- prevail upon the sanctioned
completion country to comply
• Erratic imposition • Post- • Erodes project economics • Lobby government
of transit fees and completion • Elevates tariff and/or • Appeal to other governments in
income and cost erodes return transportation chain
allocation in • Appeal to other governments to
assessing taxes enforce IGA terms (where
applicable)

• Armed conflict • Pre- and • Project Interruption, • Evaluate security measures that
• Sabotage Post- stoppage or delay may be taken to resume, sustain
completion operations
• State-to-state commitments to
provide security in IGA

TABLE 6
Indicative ‘Vertical’ state-to-state
pre- and post-completion political risk

VERTICAL STATE-TO-INVESTOR RISK TO PROJECT

Risk Element Completion Project Impact Mitigations
Status
• Lack of project- • Pre- and post- • Creates cloud of • Evaluate applicable multilateral
specific support completion uncertainty over protections (for example, ECT,
from national risk investment in and ICSID)
authorities financing of project • Applicable Bilateral Investment
Treaties
• Project Investor to agree a Host
Government Agreement (HGA)
• Failure to issue or • Pre- • Delay to project • Rigorous compliance with permit
timely provide completion completion application requirements
permits • Agree an HGA
• Failure to secure • Pre- • Delay to project • Comply with local law
rights to state land completion completion requirements
• Failure to identify • Re-routes may be • Seek agreement directly with
users of state land required state in respect of rights to state
• Allegations of human land
rights abuses • Ensure impacts to private users
of state land are identified/
compensated/mitigated in
accordance with global standards
(for example, IFC Performance
Requirements)
• Agree an HGA
• Failure to identify • Pre- • Delay to project • Comply with local law
and secure rights to completion • Re-routes may be requirements
non-state land required • Ensure impacts to private users
• Failure to identify and owners of non-state land are
owners and users of identified/
non-state land compensated/mitigated in
accordance with global standards
(for example, IFC Performance
Requirements)
• Seek for the state to use its

31
 powers of compulsory
acquisition when negotiations fail
in accordance with IFC
Performance Requirements
• Agree within HGA
• Failure to engage • Pre- • Delay to project • Rigorous adherence to local law
and issue relevant completion • Interruption, stoppage and IFC Performance
permits after to project Requirements
conduct of • Notwithstanding full • Agree appropriate protections
Environmental and compliance by the within HGA
Social Impact project company with
Assessments in applicable regulatory
compliance with and permitting
local law and IFC requirements,
requirements o a severe delay in
project
implementation
o the delay constitutes
indirect
expropriation
• Changes in law • Pre- and post- • Delay to project • Change of law protection within
(regulatory terms) completion • Escalation of project HGA (note: excluding health,
costs safety, environment and other
• Erodes project laws with human rights impacts)
economics (elevating
tariff and/or eroding
return)
• Changes in • Pre- and post- • Elevates tariff and/or • Change of law protection within
applicable tax and completion erodes return HGA (note: excluding health,
other fiscal terms • May constitute indirect safety, environment and other
expropriation laws with human rights impacts)
• Direct, creeping, • Pre- and post- • Enhanced delays to and • Applicable multilateral
indirect completion potential stoppage of protections (for example, ECT,
expropriation project ICSID)
• Loss of project • Applicable Bilateral Investment
investment Treaties
• Agree appropriate protections
within HGA
• Failure to access • Pre- and post- • Erodes value of • Applicable multilateral
neutral international completions investment conventions (for example, ECT,
arbitration • Introduces levels of risk ICSID, New York Convention
• Failure of courts to that may render the on Recognition and Enforcement
subsequently Project un-financeable of Foreign Arbitral Awards)
enforce foreign • HGA agreement to international
arbitral award arbitration

v. ‘Vertical’ community-to-investor (bottom-up) pre- and

post-completion risk

Bottom-up community-to-investor risk is another ‘vertical’ perspective on the

external dimension of risk that involves key stakeholders but is not strictly speaking a
risk that is capable of being ‘controlled.’ This perspective on risk is reflexive, that is,
it involves risk posed to projects as a result of the adverse impacts that the projects
themselves have on people, communities and the environment. Bottom-up risk can
be understood and mitigated through appropriate due diligence, engaging with
adversely impacted people and communities and ensuring that adverse impacts are

32
 remedied. 92 Where project developers do invest additional upfront time and resource
this source of risk may be reduced. 93

The Guiding Principles on Business and Human Rights 94 have been unanimously
endorsed by the UN Human Rights Council and define a new corporate
‘responsibility’ to respect human rights. This new responsibility asks companies to
take measures to ensure that the consequences of their actions (including the
implementation and operation of projects such as cross-border pipelines) do not
infringe internationally recognized human rights as set forth in the Universal
Declaration on Human Rights.

The responsibility to respect human rights does not give rise to a new legal
obligation under international law. However, some OECD countries are already
placing legally binding obligations upon companies to examine their impacts in this
area. For example, in September 2013, the British Secretary of State for Foreign and
Commonwealth Affairs presented to Parliament an action plan for Implementing of
the Guiding Principles on Business and Human Rights (CM 8695). The action plan
underscored the Directors’ Duties as set forth in Section 172 of the UK’s
Companies Act 2006. 95 As a result of amendments to the Directors’ Duties, the
directors on UK company boards are now required to take account of the impact
that their decisions have on affected stakeholders including ‘local communities’. 96
Finally, international oil and gas companies have started to note the importance of
adjusting their governance standards to take account of stakeholder impacts
including human rights. 97

92The rigorous application of and adherence to international standards on land acquisition and the
conduct of environmental and social impact assessments (e.g. the IFC Performance Requirements) are
clearly the most specific guide on addressing adverse environmental and local stakeholder impacts.
However, emphasis will be placed here on the application of the UN Guiding Principles on Business and
Human Rights as the Principles address adverse impacts on people and communities more
comprehensively.
93See the United Nations (UN) ‘Guiding Principles on Business and Human Rights: Implementing the
United Nations ‘Protect, Respect and Remedy’ Framework’ available at
http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf.
94 See the Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect,

Respect and Remedy’ Framework, A/HRC/17/31, par. 6 (March 21, 2011). The Guiding Principles
implement the ‘Protect, Respect, and Remedy Framework’ developed by Prof. John Ruggie, Special
Representative of the UN Secretary General on Business and Human Rights.
95 See

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/236901/BHR_Action
_Plan_-_final_online_version_1_.pdf.
96172 Duty to promote the success of the company 1) A director of a company must act in the way he
considers, in good faith, would be most likely to promote the success of the company for the benefit of its
members as a whole, and in doing so have regard (amongst other matters) to … (d) the impact of the
company’s operations on the community and the environment…

97The number of oil and gas business enterprises with publicly available human rights policies (88% of oil
and gas service providers in the FT 500 and 61% of oil and gas producers in the FT 500).

33
 Examples where project impacts have led to bottom-up risk with potentially negative
consequences pre-completion include the BTC Project. In May 2003, eight months
before closing on the BTC project financing, Amnesty International published a
damning report on the BTC Pipeline, ‘BTC: Human rights on the line. 98‘ Amnesty
alleged that the project’s Host Government Agreements could place the host
governments, Turkey in particular, in breach of their international human rights
obligations (the European Convention on Human Rights in particular). The specific
allegation was that the stability guarantees in the HGA would have a ‘chilling effect’
on Turkey’s willingness to enforce its human rights obligations in relation to the
BTC Pipeline.

Amnesty called for the Host Government Agreements to be amended – an action

that would have seriously risked unwinding agreements that had already been ratified
by the Parliaments of the three concerned states and delaying the financing of the
project ($2.6 billion in loans had been predicated in part on the HGAs). BP, as
operator of BTC, engaged with Amnesty International for a period of five months to
align on an instrument (a deed poll under English Law), that would legally and
irrevocably stop BTC Co from asserting its rights under the HGA in circumstances
where that would place Turkey in breach of its human rights obligations. 99 The
solution was elegant in that it avoided re-opening the HGAs while concurrently
addressing Amnesty’s principal allegation. The BTC Human Rights Undertaking also
represented one of the first documented instances in which a multinational company
entered into a legally binding international human rights instrument. 100

Identifying sources of post-completion bottom-up risk is complex, and the business,

government and local community interface is a good illustration of what may give
rise to the complexity. For example, in the Niger Delta adverse human rights and
environmental impacts, corruption, unequal distribution of rents and inadequate
public services, have clearly occurred but the root cause of these incidents is less
clear-cut. High profile cases, such as those involving Shell Petroleum Development
Company of Nigeria, demonstrate why oil and gas companies should be
concerned. 101 In June 2009 Shell agreed a $15.5m (£9.7m) out-of-court settlement in
a case to be heard in the US. Shell was accused of complicity in human rights abuses
in Nigeria, including the death of Ken Saro-Wiwa, the leader of MOSOP, and eight
others, who were hanged in 1995 by Nigeria's then military rulers. In addition, in
April 2011 Shell accepted liability under the Oil Pipelines Act for the double rupture

98 http://www.amnesty.org.uk/uploads/documents/doc_14538.pdf.

99The author led the negotiation of the BTC Human Rights Undertaking on behalf of BP and is intimately
familiar with the dynamics and details of this negotiation.

100 See Pipeline Case Study 6 in Annex II.

101SPDCN owns and operates approximately 6,000 kms of pipeline and flow-lines located in the Nigerian
Delta. SPDCN is in turn owned (30%) and operated by the Shell Petroleum Development Company of
Nigeria and owned 55% by the Nigerian National Petroleum Corporation (NNPC), 10% by EPNL and
5% by AGIP. Together the joint venture partners to SPDCN are capable of producing in excess of 1
million barrels of oil per day.

34
 of the Bodo–Bonny trans-Niger pipeline in Ogoniland that impacted a community
of 69,000 in 2008.

However, to suggest that bottom-up risk to oil operations in complex environments

like the Niger Delta is properly mitigated and managed solely through a business and
human rights lens would be misleading. For example, credible connections are being
made between oil theft (estimated at approximately 100,000 Bpd), violent conflict,
organized crime, drugs trafficking, terrorism and piracy in the Niger Delta.
Accordingly, without the cooperation of the Nigerian Government and the
international community (that is, ‘vertical’ and ‘horizontal’ risk mitigation efforts
involving states), the efforts of IOCs alone would be insufficient to limit adverse
impacts on people, communities and the environment as well as the reflexive
impacts on their own operations. 102 Indeed, a Shell-led consortium has recently
announced that it has put up for sale four producing oil license blocks in Nigeria
together with the associated Nembe Creek Trunk Line. Analysts have speculated
that the move by the Shell consortium is ‘the latest move by IOCs to reduce their
onshore Nigeria commitments in the face of security concerns.’ 103

vi. Hostile third-party risk

The protection of key infrastructure is a national priority for all countries around the
world. For example, in the US, Homeland Security and other Federal agencies are
mandated to prioritize and ensure the protection of strategic infrastructure
(including oil and gas pipelines, refineries and related facilities) from external threats
by hostile third parties. 104 However, many developing countries around the world
simply lack the capacity to provide adequate protection and rely upon private sector
operators and security providers to assist in protecting pipeline projects in their
development and operational phases. Assistance can range from the provision of
equipment and training to manpower deployment.

Hostile third parties constitute a vitally important category of external risk,

constituting the second largest risk factor and risk consequences with the greatest
impact (post-completion). They may have significant interface with key stakeholders,
including governments (either host governments or hostile governments), local
communities and the project company (and other commercial stakeholders).
However, hostile third parties relinquish their claim to be stakeholders when they

See ‘Nigeria’s Criminal Crude: International Options to Combat the Export of Stolen Oil’ (September
102

2013) by Chatham House, available at http://www.chathamhouse.org/publications/papers/view/194254.

103 See ‘Shell Group Puts Nigerian Oil Blocks Up for Sale,’ Financial Times p. 24 10 October 2013.

104See for example, http://www.whitehouse.gov/the-press-office/2013/02/12/presidential-policy-

directive-critical-infrastructure-security-and-resil.

35
 move from peacefully communicating their opposition to acting in aggressive,
hostile and destructive ways. 105 Hostile third parties may include the armies of
belligerent countries, enemy combatants, militias, insurgents, separatists, terrorists,
thieves or vandals. The risk of death, injury, or kidnapping of personnel and
destruction, loss or damage to the facilities or the interruption, stoppage or
curtailment of pipeline development or operations are among the consequences
associated with this source of risk.

An example of an operational cross-border pipeline that has experienced loss or

interruption as a result of hostile third-party intervention is the Kirkuk–Ceyhan
Pipeline (KCP), which was completed in 1977 and designed to take 1.6 million Bpd
of crude oil from Kirkuk, Iraq to the Turkish Mediterranean coast at Ceyhan,
Turkey. Its operation was suspended for six years between 1990 and 1996 due to the
UN’s sanctions against Iraq. In addition the KCP has also suffered from regional
insecurity. As a result of repeated acts of sabotage, the KCP was mostly closed from
the 2003 US-led invasion until 2007 when security improved. Unfortunately, the
security situation once again worsened and there have been a series of attacks in
recent years, some of which are attributed to the Kurdistan Workers’ Party (PKK),
causing disruption to pipeline operations. The level of PKK activity has increased as
Syrian Kurds have taken advantage of the civil war in Syria to secure Kurd-inhabited
territory in the north east of Syria.

Erbil has now successfully retrofitted a newly built pipeline, originally intended to
transport gas from Kurdistan to Turkey, to transport oil instead. Unlike the original
Kirkuk–Ceyhan Pipeline that ran within Iraq, the newly built pipeline runs entirely
within Kurdish territory. The pipeline interconnects with the KCP at Fishkhabur
and proceeds across the Iraqi-Turkish border and into the Botas-operated ITP. The
oil will eventually be transported across Turkey to the Mediterranean terminal of
Ceyhan. In the run-up to Iraqi elections (Spring 2014), the rhetoric around this
newly built pipeline has intensified and the current constitutional arrangements (and
the associated fiscal allocations to the regions) are coming under pressure from all
sides 106

Other examples of operational cross-border pipelines where the actions of hostile

third parties have had a direct adverse impact on cross-border operations include the
following:

• Sabotage and terrorist attacks on the Arab Gas Pipeline in 2012, including
the Araba–Ashkelon sections and the El Rehab–Homs–Tripoli sections led
to Egypt’s decision to suspend operations and deliveries of gas; 107

For purposes of this discussion, a stakeholder is a person, community or organization that has a
105

constructive interest in a cross-border pipeline development or operation.

106See http://www.reuters.com/article/2014/01/30/iraq-kurdistan-pipeline-idUSL5N0L42VW20140130
http://www.reuters.com/article/2014/01/30/iraq-kurdistan-pipeline-idUSL5N0L42VW20140130

107 See Pipeline Case Study 29 in Annex VI.

36
 • suspected sabotage of the Central Asia–Center Gas Pipeline System 108
involving mysterious explosions in the midst of a gas pricing dispute
between the Russian Federation and Turkmenistan halted all shipments of
Turkmen gas for a period of nine months during 2009;

• terrorist attacks on the Transmed Gas Pipeline from Algeria to Italy in 1997
severed the pipeline and halted supplies for five days; 109

• shipments of gas through the Greenstream Gas Pipeline from Libya to Italy
were altogether suspended between 2011–12 during the conflict in Libya; 110

• shipments of oil through the Petrodar and GNPOC Oil Pipelines from
South Sudan to the Sudan were altogether suspended (January 2012 to May
2013) ostensibly due to a dispute over transit fees but this occurred during a
period of increased hostilities and armed conflict between the two
countries 111;

• security incidents including murder, violence and vandalism in the Niger

Delta led to delays (pre-completion) and a complete system shut-down
during operations (August 2012) which resulted in losses estimated at
between $500,000 and $600,000/day; 112 and

• frequent sabotage of oil and gas pipelines in Yemen has cost the
Government in excess of $1 billion in lost revenues in 2012. 113

With regard to risk to cross-border pipeline from a bottom-up perspective of the

local community or hostile third-party action, it is useful to consider these sources of

A cross-border natural gas pipeline system designed to take natural gas produced in Turkmenistan to
108

markets in the Russian Federation and the European Union. See Pipeline Case Study 17 in Annex IV.

109 See Pipeline Case Study 35 in Annex VII.

110 See Pipeline Case Study 36 in Annex VII. Libya remains unstable and tribal militias have blocked oil

terminals since July 2013 resulting in reduction in exports from 1 million bpt to 110,000 bpd. See
http://www.bbc.co.uk/news/business-25612254. Recent initiatives appear to hold out some hope that
the blockade will be lifted. See Stratfor, ‘Libya Makes Tentative Steps Toward Restarting Oil Production’
April 7, 2014.

111See Pipeline Case Studies 37 and 38 in Annex VIII. Regrettably, internal conflict broke out on 15
December 2013 between factions within the Republic of South Sudan’s ruling SPLM Party which also
resulted in supply disruptions and curtailments.

For other examples of serious security incidents exacerbated by serious local stakeholder
112

mismanagement consider Pipeline Case Studies 45 and 46 in Annex X.

113 See
file:///Users/thomasdimitroff/Desktop/Blast%20strikes%20KNOC%20pipeline%20in%20Yemen%20-
Upstreamonline.com.webarchive.

37
 risk both individually (and together) as there is a considerable degree of ‘cross-
infection. Noteworthy examples have occurred in Algeria, Libya and the Niger
Delta. Accordingly, Table 7 below presents an indicative list of bottom-up local
community and hostile third party risk elements and possible mitigations.

The perspective on, and dimension of, hostile third party risk is bottom-up and
external. The ability of governments (host and home), pipeline companies, and their
security providers to anticipate and respond to this source of risk is complex and this
complexity may result in an increased vulnerability to hostile third party action. The
pipeline company owners and operators are frequently IOCs (even NOCs) from
third countries. Governments will treat their own intelligence sources, analyses and
protective measures as secret, restricting how this intelligence is shared with IOCs
and the IOCs’ home governments, and thus potentially impeding protection and
response capability. EPC contractors and pipelines operators may also inadvertently
contribute to or exacerbate security risk by cooperation with or supporting local
public security forces which may be credibly implicated in committing abuses against
the local populations.

TABLE 7
Indicative ‘vertical’ (bottom-up) local community and hostile third-party pre- and
post-completion political risk

‘VERTICAL’ BOTTOM-UP LOCAL COMMUNITY AND HOSTILE THIRD PARTY RISK TO

PROJECT
Risk Element Completion Project Impact Mitigations
Status
• Community protest • Pre- and • Delay to project • Adherence to local law
against pipeline post- completion / • Agreement on appropriate security
company or project completion interruption to protocol between state and private
activities operation security to manage
• Compliance with applicable law and
the implementation of the Guiding
Principles on Business and Human
Rights, Voluntary Principles on
Security and Human Rights, related
security standards, for example,
International Code of Conduct for
Private Security Providers and ANSI
/ ASIS PSC.1-2012 and Performance
Standards prescribed by the IFC and
the EBRD 114
• Appropriate utilization of community
CSR and other ‘soft’ forms of
engagement

• Inability to secure • Pre- • Delay to project • Compliance with applicable law

rights to land completion completion / • Implementation of the Guiding
(community action) interruption to Principles on Business and Human
operation Rights and related guidelines and

114See discussion infra on the Voluntary Principles on Security and Human Rights and related security
standards.

38
 • Potential violation of Performance Standards prescribed by
human rights the IFC and the EBRD
(particularly sensitive
in relation to
indigenous peoples
and other vulnerable
groups)
• Labor action / • Pre- and • Delay in project • Compliance with applicable law
strike post- • Interruption in • Implementation of the Guiding
completion operations Principles on Business and Human
• Potential violations of Rights
human rights • Agreement on appropriate security
protocol between state and private
security to manage strike actions and
labor unrest
• Disregard of safety, • Pre- and • Potential violations of • Compliance with applicable law
operational, post- human rights • Implementation of international
technical, or other completion • Delay in project technical standards
standards and • Interruption of • Implementation of internal
practices leading to operations governance standards relating to
safety incident operational and process safety

• Sabotage, terrorism • Pre- and • Delay in project • Security audit

or other acts of post- implementation • Engagement of appropriate private
political violence completion • Death or injury to security
personnel • Coordination of private security and
• Damage to facilities or public security providers (ideally
assets through negotiated security protocol)
• Interruption or • Implementation of the Voluntary
permanent cessation Principles on Security and Human
of operations Rights and related security standards,
for example, International Code of
Conduct for Private Security
Providers and ANSI / ASIS PSC.1-
2012
• Vandalism or theft • Pre- • Delay in project • Security audit
completion implementation • Coordination of private and public
• Damage to facilities or security providers (ideally through a
assets negotiated security protocol)
• Interruption of
operation
• Kidnap and ransom • Pre- and • Delay in project • Security audit
of key personnel post- implementation • Coordination of private security and
completion • Death or injury to public security providers
personnel • Implementation of the Voluntary
Principles on Security and Human
Rights and related security standards,
for example, International Code of
Conduct for Private Security
Providers and ANSI / ASIS PSC.1-
2012

39
IV. The sources and consequences of risk assessed against case studies

i. The results of the analysis

In order to establish a tangible basis for evaluating sources and consequences of risk
to actual cross-border pipelines (in development and operation), 55 cross-border
pipeline case studies have been examined. The results of that analysis are presented in
two tables contained within Annex 1 to the paper. The first Table (A) lists pipelines
in development and identifies sources of risk and consequences within each. The
second Table (B) lists pipelines in operation and also identifies sources of risk and
their consequences. The summary results of Tables A and B in Annex 1 are
presented below in Table 8 and Figures 1 and 2 below.

TABLE 8
Sources and consequences of risk 115

Sources of Risk Pipelines in Total Pipelines in Total

Development Operation
Absence of applicable multilateral treaty or international 0 3 0 3 5 0 0 5
principles on freedom of transit
Commercial (uneconomic or compromised economics) 5 4 0 9 1 2 1 4
Political (sanctions, embargoes, protests, failure otherwise to 10 5 3 18 8 3 1 12
provide support)
Security (sabotage, terrorism, conflict, vandalism) 4 7 0 11 7 2 1 10
Environmental or safety concerns/incidents 1 2 5 8 2 0 2
Human rights abuses 1 4 5 0 0 0 0
Community protests (labor, land rights, benefits, negative 6 1 7 0 0 0 0
impacts on the environment)

Source of risk resulted in stoppage or cessation

Source of risk resulted in significant delay or interruption
Source of risk resulted in moderate delay or interruption

115 While technical risk is a critically important source of risk that can lead to serious consequences such as

schedule delays and cost-overruns (‘pre-completion’) and operational, environmental and safety issues
(‘post-completion’), technical sources of risk are not included in Table 8.

40
 Fig. 1 Pipelines in Development
11% 5%

15% No transit
8%
Commercial
Political
Security
13%
Environmental/safety
Human rights
30%
Community protests
18%

Fig. 2 Pipelines in Operation

6%
15%

No transit
Commercial
30% 12% Political
Security
Environmental/safety
Human rights
Community protests

37%

i. Qualifications to the analysis

A number of factors may distort the conclusions presented including the following:

• the 55 pipeline case studies examined in this paper do not a constitute a

complete list of all cross-border oil and gas pipelines ever developed or
put into operation. Sources of risk that may have led to some cross-
border pipelines not being constructed (likely due to political or
commercial factors) or others having been stopped altogether (likely
due to political or security) may not be fully reflected within the 55
pipeline case studies examined thereby distorting the results. However,
the group of pipeline case studies assembled is comprehensive and
representative of the major cross-border oil and gas pipelines within
emerging markets globally;

• the absence of clear principles of international law (a fact often

41
 exploited within a political context) can only be identified as a direct
source of risk in cases of transit disputes and may mask the very
significant impediment this fact poses to landlocked and especially
landlocked successor states in their efforts to develop cross-border
pipelines;

• the cross-border pipeline case studies do not take into account the
measures that developers and operators may have already taken to
mitigate and manage internal and external sources of risk as further
elaborated below. For example, as noted above, a very large number of
cross-border pipelines are supported by intergovernmental agreements
that mitigate horizontal state-to-state risk;

• notwithstanding significant political sponsorship by states, there are a

large number of cross-border pipelines in development that have not
advanced (or have been abandoned altogether) because they were
simply not commercial; and

• there is a complex interrelationship which is in part masked by the

categorical distinctions made between sources of risk. This includes the
interrelationships that exist between and among physical (state and
private sector) security, the failure to consult with project-impacted
people and communities, the failure to redress adverse impacts on
people, communities and the environment and internal dimensions of
risk that tend to differ as between NOCs and IOCs.

Notwithstanding the foregoing qualifications, several instructive conclusions can be

drawn from the data analysis (Figures 1 and 2) and from the table (Table 8):

• Political factors constitute the largest source of risk to pipelines in

development (pre-completion) and operational (post-completion)
pipelines.

• Security factors constitute the second largest source of risk pre-

completion and post-completion;

• After political and security factors, commercial factors constitute the

next most significant source (pre and post-completion) followed by
environmental factors pre-completion (environmental factors do not
feature prominently in operational pipelines)

• Generally speaking, state-sponsored pipelines have been implemented

more quickly and have run into fewer pre-completion risk factors than
private sector pipelines or pipelines that have relied upon sources of

42
 international finance. 116

• Finally, it is important to stress that all successor states that are

landlocked and producing have encountered political sources of risk
(post-completion) and all emerging landlocked producers will likely
encounter sources of risk arising from political factors and the absence
of clear principles of international law. Within the context of the 52
pipeline case studies examined in this paper, it is significant to note that
13 involve landlocked producing/emerging producer states. 117

116 The fact that a pipeline may have been implemented more quickly is no assurance against post-
completion sources of risk. For example, a number of the state-sponsored pipelines have run into serious
post-completion risk, e.g., see the Sino-Burmese Pipeline Case Studies 45 and 46 of Annex X. See also the
GNPOC and Petrodar Pipelines (Case Studies 38 and 37).

117 See section III c (iv) below.

43
 IV. Sustainable mitigations

i. General

Maintaining day-to-day security of oil and gas supplies transported by maritime

tanker and cross-border pipeline will depend, in part, upon international efforts to
coordinate naval, military and domestic security and to uphold principles of free
transit. It will also depend upon sustained and coordinated state-to-company, state-
to-community and company-to-community efforts. Given the long operational life
of cross-border oil and gas pipelines (40–50 years), sustainable mitigations are
required to ensure that they are able to run smoothly throughout.

Based upon the findings from the case studies, it is clear that for cross-border
pipeline projects in development, the three most important upfront objectives are to
ensure that:

• the project is viable commercially;

• the host states are aligned (amongst each other) in supporting the project:
and

• each host state is prepared to ensure that the domestic legal regime is fit-for-
purpose to provide the appropriate state-to-investor assurances required to
support and enable the project.

However, for projects in development as well as pipelines in operation, it is vitally

important to ensure that the company’s ‘internal’ risk dimension is appropriately
controlled in order to ensure the effective management of the ‘external dimension’
of risk.

Accordingly, this section will examine a set of proposed measures that pipeline
developers and operators may consider in managing and mitigating the external
dimension of risk on a sustainable basis. Specifically, sources of risk associated with
governments, commercial parties, locally impacted people and communities and
hostile third parties are considered. 118 Note that there is a broad range of external
sources of risk that are not referenced in this section. For example, risk that arises
from natural disasters, markets, commodity price or other types of financial risk is
excluded. These sources of external risk cannot be managed although the
consequence can be allocated via insurance, hedging and other forms of financial
instruments. In addition, this section will neither focus on the management of
technical risk (nor the issues associated with the broader management of the
internal dimension of risk more generally)119 nor will it focus on the very important

118Reference is made to Table 5 above to identify the dimensions of risk, stakeholders and risk allocation.
119For an overview of how a project management system may be applied to manage internal project risk
see, William E. Brownin and Yashar Latifov, ‘Holistic Project Management and Risk’ in “Risk and Energy
Infrastructure: Cross-Border Dimensions, Thomas J. Dimitroff, Global Law and Business, (London) 2011,
p 229.

44
 topic of environmental and social impact assessments and management strategies. 120
Instead, this section will examine the sustainable management of those external
sources of risk that are capable of being allocated through legal agreements and
‘bottom-up’ sources of external risk that are not capable of being allocated but
which may be nevertheless sustainably managed and mitigated.

Specifically, external sources of state-to-state (‘horizontal’), state-to-investor

(‘vertical’) and commercial (‘horizontal’) risk are capable of being appropriately
allocated, as the parties in question are capable of structuring, negotiating and
entering into a legally binding instrument allocating the risk in question. While
external commercial and government stakeholders can be engaged in negotiation and
enter into contracts, it is neither standard practice nor applicable law in most
jurisdictions for pipeline companies to secure the signed consent of impacted people
and local communities as a condition of overall project implementation. 121 Given
this fact, the responsibility for adverse project impacts is best discharged, not via a
legally binding instrument, but by pipeline companies and their contractors
undertaking a due diligence processes and engaging with the adversely impacted
communities. Accordingly, this section will also stress the important
interrelationship between the management of the internal dimension of risk and the
management of ‘bottom-up’ sources of external risk arising in the context of adverse
impacts on people and local communities as well as project impacts caused by the
actions of hostile third parties.

ii. Sustainable risk mitigation and external commercial and

governmental risk

The most effective means of sustainably managing governmental ‘horizontal’ and

‘vertical’ (top-down) risk and commercial (‘horizontal’) risk is by structuring and
negotiating agreements that allocate risk to the party best placed to manage and
mitigate it.

a. Government risk and state-level agreements (general)

The state-to-state and state-to-investor risk to which an upstream producer, pipeline

developer, EPC Contractor or operating company is exposed is different in nature to
commercial risk. The relationship that sovereign states have with respect to each
other or with respect to parties when regulating the conduct of commercial activities
within their jurisdictions is different from a commercial relationship. The exercise of

See David Blatchford and Martin Lednor, ‘A Strategic Approach to Environmental and Social Impact
120

Assessments’ in “Risk and Energy Infrastructure: Cross-Border Dimensions,” Thomas J. Dimitroff,

Global Law and Business, (London) 2011, p 239.

121Nevertheless, many jurisdictions do require community consultations in the context of: (i)
environmental and social impact assessments and subsequent implementation management; and (ii) in the
context of acquisition of rights to land. However, in the context of acquisition of rights to land, it is
typically individual agreements that are typically signed rather than agreements on behalf of communities.

45
 sovereign power derives from authority vested by international and municipal
(constitutional) law. Accordingly, contractual instruments are inadequate to mitigate
‘horizontal’ and ‘vertical’ pre- and post-completion government risk. Rather, these
perspectives on and dimensions of risk may be mitigated only by instruments having
force at the same level as international law and the legislative regimes of the host
governments.

The available body of multilateral treaties and principles of international law are
inadequate to provide cross-border pipelines in development and operation with
adequate protection against state-to-state sources of risk. Similarly, the individual
host government jurisdictions may present formidable sources of legal, fiscal and
regulatory (vertical state-to-investor) risk. While host governments are best placed
to manage and mitigate these sources of risk, the pipeline company is by definition
subject to the jurisdiction of each sovereign host state within which it develops,
constructs and operates the pipeline. Without a means to address the differential
position (sovereign and commercial party), it would not be possible to allocate
government-sourced risk and many cross-border pipelines would simply not be
viable as investments. The following is an indicative list of inter-governmental and
host government agreements that may be considered: 122

• An Intergovernmental Agreement (IGA) between the host governments

across which a cross-border pipeline is constructed and operated supported
by a framework of multilateral and bilateral trade, double taxation and
investment agreements;

• Host Government Agreements (HGA) between the pipeline company and

each of the host governments (where appropriate); and

• other project agreements entered into by the pipeline company and each of
the host governments targeted at defining goods or services to be provided
(usually by a host government entity) or eliminating or elaborating more
specific forms of government risk as set forth in the Host Government
Agreement.

Accordingly, pipeline developers have proposed and utilized two forms of bespoke
instruments (Intergovernmental Agreements and Host Government Agreements) to
overcome ‘horizontal’ and ‘vertical’ pre- and post-completion dimensions of risk
respectively.

b. Intergovernmental Agreements (IGAs)

Aside from the ECT (which applies across most of the countries spread across

122Pipeline developers and their legal advisors should be aware of the Addendum to the “Report of the
Special Representative of the Secretary General on the issue of human rights and transnational
corporations and other business enterprises” entitled, “Principles for responsible contracting: integrating
the management of human rights into state-investor contract negotiations: guidance for negotiators” dated
25 May 2011, A/HRC/17/31/Add.3.

46
 Eurasia), there presently is no applicable multilateral agreement designed to support
and facilitate the rights and obligations of states and investors involved in cross-
border pipelines. A bespoke intergovernmental agreement is advisable in almost all
circumstances - except perhaps within the context of projects between or among EU
member states.

The following is an indicative list of provisions which developers may encourage

states to include within a project-specific IGA:

• A state-to-state guarantee of the freedom to transit hydrocarbons;

• a state-to-state guarantee that the rights and obligations of upstream and

downstream states (as the case may be) will be respected;

• a state-to-state guarantee that investors will enjoy international standards of

investment protection consistent with the World Bank Guidelines on the
Treatment of Foreign Direct Investment;

• a state-to-state commitment to ensure that the profits of the pipeline

company are not subject to double taxation;

• a state-to-state commitment to ensure that the tax regime applicable to the

project will not expose investors, financiers and commercial counterparties
to unreasonable charges;

• a state-to-state commitment to ensure that international health, safety,

social, labor, human rights and environmental standards are applied in the
implementation and operation of the project and that the foregoing
standards will be implemented in a harmonized manner to avoid
inconsistencies and inefficiencies; 123

• subject to compliance with national security and international health, safety,

social, labor, human rights and environmental standards, a state-to-state
guarantee that rights will be conferred on investors, commercial contractors
and shippers;

• subject to the implementation of applicable international human rights

standards, in particular the Voluntary Principles on Security and Human
Rights, state-to-state coordination (including coordination with private
sector security and operators) in the provision of public security to protect
personnel and assets associated with a pipeline; and

• a state-to-state commitment to ensure that the human rights of persons

123It is worth noting that most bilateral investment treaties lack references to human rights implications.
See for example, ‘Lawless World: America and the Making and Breaking of Global Rules’ (ISBN 0-670-
03452-5), Philippe Sands Viking London, October 2005.

47
 impacted by the project will be protected, that all commercial parties
involved in the implementation of the project will respect human rights, and
that adequate grievance mechanisms are made available.

It is difficult to identify a cross-border oil or gas pipeline project in development or

operational (and that was developed as a cross-border project) 124 that is not
supported by a project-specific IGA, and this can be explained by the importance of
these projects to global and regional security of supply. Not all IGAs are equal in
the degree to which they provide adequate mitigation against pre- and post-
completion risk. IGAs that are implemented to support forward-looking cross-
border pipeline projects will need to take account of emerging business and human
rights standards. However, states may be reluctant to include these references within
bespoke IGAs as they may regard themselves as already bound by existing
multilateral arrangements to which they are a party. 125

c. Host Government Agreements (HGAs)

As this paper has demonstrated, ‘vertical’ state-to-investor risk may also present
formidable obstacles to the mobilization of investment and financing for a project.
The host government’s own track record in its application of the rule of law in
connection with the protection of people, local communities and the environment
needs to be carefully considered. Moreover, deficiencies in the application of the rule
of law by host governments are often a good indicator of the degree to which
government pre- and post-completion risk will become a critical factor for the
project. Finally, adversely impacted people and local communities will present risk to
a project in circumstances where they have not been adequately consulted, where
impacts are not otherwise properly accounted for or where a grievance mechanism
offering a means to seek and receive meaningful redress is not provided.

A full assessment of the applicable legal, regulatory and fiscal environment within
each host government jurisdiction will need to be undertaken by the project
developer and its advisors at a very early stage in the project’s development. This
assessment is best undertaken during the feasibility study or pre-front end
engineering and design (pre-FEED) stage of a project. The core objective of the
assessment is to gain an understanding of all pre- and post-completion risk that a
project may face in developing, financing, constructing and operating a cross-border
pipeline through the host government jurisdictions. Where gaps or concrete
obstacles to a project development are found in the existing legislation and
regulatory framework, these gaps and obstacles should be addressed in the
formulation of the proposed HGA.

124 Obviously, pipelines that were developed before the dissolution of the Former Soviet Union or before

the succession of the Republic of South Sudan from the Republic of the Sudan do not benefit from
intergovernmental agreements, and it is rare that one has been successfully agreed after the fact.

For an in depth assessment of the use of bespoke intergovernmental agreements to support cross-
125

border oil and gas pipelines see, “Intergovernmental Agreements” by Katie Baehl, R Coleson Bruce and
George F Goolsby in “Risk and Energy Infrastructure: Cross-Border Dimensions,” Thomas J. Dimitroff
(Global Law and Business, London 2011) at p 73.

48
While a project-specific IGA is generally recommended for cross-border oil and gas
pipelines (especially those being implemented outside of the context of an integrated
economic, political and monetary union like the EU), the use of HGAs requires a
judgment call that will need to be made on the basis of the foregoing assessment.
Moreover, it is not always necessary to put into place an HGA between the pipeline
company and each host government within a transit chain. For example, the Shah
Deniz Phase I project and the associated SCP gas pipeline designed to deliver
Azerbaijan gas across Georgia and into the Turkish markets is supported by an IGA
between Azerbaijan and Georgia and HGAs between SCP Co and each of
Azerbaijan and Georgian, but not by an HGA with Turkey. Similarly, the Trans-
Adriatic Pipeline is supported by an IGA among Greece, Albania and Italy and
HGAs between TAP AG and each of Greece and Albania, but not Italy.

The following is a list of key HGA principles may provide a useful guide to project
investors:

• Notwithstanding the exceptions noted above, as a general rule, project

developers should consider whether each state that is party to the IGA
should also enter into an HGA;

• If an HGA is deemed beneficial, the basic concepts stated at a higher-level in

the IGA should be elaborated in the HGAs and the other project level
agreements that are entered into by the project company and the host
government pursuant to the IGA and the HGA;

• Project developers should consider the following questions in elaborating the

HGA:

o Will contractual obligations between the state and project investor

relating to that portion of the project which is within the territory of
the respective signatory state be created?;

o Will the project investor also seek that the HGA (or key parts
thereof) is adopted with the force of law to ensure that fiscal terms
are stabilized over the loan / investment repayment period or to fill /
amend specific laws that present pre- and post-completion obstacles
to the project?;

o Will the project investor create rights and obligations, including a

reasonably predictable and sustainable fiscal and regulatory regime
for the investment over time, while also preserving the sovereign
rights of the State to make and enforce laws for the protection of its
territory and its citizens consistent with international and treaty
obligations concerning the environment, health, safety, human rights,
security and similar values?;

o Will the HGA be prepared to support direct investment in each host

country by the project investors and other project participants and
therefore address in considerable detail the substantive rights that
such project investors and project participants (including shippers)

49
 will require to implement the project?; and

o Should the HGA also take account of the specific circumstances of

the Project and the particular national and regional environment, in
particular, the national laws and regulations in place?

• In addition, project developers should further consider whether the HGA

provides that project investors make, inter alia, the following commitments:

o To take account of the circumstances of the Project and the

particular national and regional context, in particular, the national
laws and regulations in place;

o to implement the project in accordance with applicable local and

international law in respect of environmental protection, safety,
health, social impact, labor and human rights requirements;

o to pay applicable taxes, customs duties and other fees (as may be
adjusted by the HGA);

o to submit all documentation as required by law to obtain various

licenses, permits, etc.;

o to maintain insurance (whether third-party or self-insurance) in

agreed amounts commensurate with the risk presented by the
project; and

o to fulfill abandonment obligations to be agreed prior to the expiry of

the project.

• Finally, the host government may be asked to make, inter alia, the following
general commitments in the HGA:

o to co-operate fully in support of the project’s activities;

o to consult with project investors on measures that would render

cross-border activities more effective, efficient and coordinated, for
example, customs, transport, metering and measuring;

o to ensure satisfaction of its own obligations as well the obligations of

its local authorities;

o to ensure that the fiscal (tax and import and export) regime
applicable to the project is stabilized through appropriate enactment
and/or change of law provisions;

o to take promptly all reasonable measures to enact laws and / or issue

orders, decrees, rules, authorizations, permissions, etc. required to
implement the project and to consult with the project investors in
the process of elaborating and implementing the foregoing;

50
o to disclose fully all applicable legal and regulatory requirements and
upon reasonable satisfaction of such requirements, to promptly issue
all regulatory permits, licenses, etc. necessary to undertake the
project’s activities;

o to ensure that project investors enjoy any and all rights granted under
the project agreements including the right to internationally
recognized investor protection;

o to grant to project investors rights to state land and to facilitate their

obtaining rights to non-state land for the project including the
expropriation of private land rights in circumstances where the
project investor is unable to negotiate acquisition and provided the
investor provides fair compensation;

o upon reasonable satisfaction of applicable legal and regulatory

requirements, including any applicable international standards as may
be agreed, to promptly grant to project investors rights to construct
and to operate the pipeline and related facilities on land over which
real property rights have been obtained as well as on the seabed and
under waters over which the state exercises its jurisdiction;

o to permit the free movement of personnel / property required for

project activities, subject to applicable immigration, customs and
criminal laws;

o to permit the free employment of persons to conduct project

activities;

o to make reasonable and lawful endeavors to assist the project

participants to obtain all rights, authorization, approvals and facilities
required for the timely implementation of the project;

o to ensure the safety and security of the project’s assets, personnel,

rights and activities within its territory;

o in respect of importing and exporting foreign currency, to permit the

opening of local and foreign currency bank accounts, converting of
local and foreign currency, and paying abroad of allowances and
other benefits to foreign workers;

o to pay monetary compensation for any loss or damage caused by a

breach of the foregoing commitments including changes of law
having adverse impacts on the project; and

o to submit to international arbitration in the event of a dispute arising

in respect of the foregoing rights and obligations, to waive defenses
of sovereign immunity and to recognize the enforcement of arbitral
awards that may be made.

51
 d. Commercial and finance agreements

The most effective means of allocating and managing commercial risk within an oil
or gas pipeline is by structuring and negotiating a standard set of agreements. In
addition to the shareholders and transportation agreements noted in Section III ii
above, the following agreements are generally considered central to effectively
allocate core pre and post-completion commercial risk factors:

• an EPC or other supply and construction contracts entered into by the

pipeline company and the contractors allocating the pre and post-completion
construction risk as between the EPC contractor and the pipeline company;

• the operation or management agreement (if the operator or manager of the

pipeline is different from the pipeline ownership company) entered into by
the operator or manager and the pipeline company and allocating specific
aspects of the physical operations post-completion risk as between the
operator and the pipeline company; and

• a collection of loan agreements (if the project is to be externally project

financed) between the pipeline company and the lenders, and associated
documents, and the completion guarantees from the shareholders and the
lenders to the pipeline company defining the loan amount, loan tenor, the
interest to be charged, the conditions that need to be fulfilled, the
consequences of failure and the various pledges and assignments to lenders
as security for the repayment of the loan.

The allocation and mitigation of external commercial and government risk are
inextricably linked to each other. The foregoing commercial agreements will contain
important assumptions about the allocation of government risk. For example,
without pre and post-completion assurances on inter alia permitting and taxation
from the host states, a pipeline company may not be prepared to accept (within the
transportation agreement) the allocation of pre-completion risk associated with
permitting delays nor would the shipper be prepared to except changes in the tariff
resulting from changes in the tax rate applicable to the pipeline company. Similarly,
the EPC contractor may not be prepared to deliver pipeline construction on a lump
sum basis without comprehensive host government assurances.

Figure 3 below presents a simplified contracting structure that places the

government and commercial agreements within an integrated context. Obviously,
additional layers of complexity may be added to the figure by including project
agreements between the Pipeline Company and each of Producing Country A and
Transit Country B. Similarly, additional complexity may be layered onto the
commercial structure by adding a pipeline company shareholders agreement or a
management or operations and maintenance agreement.

52
 Fig. 3

iii. Sustainable mitigation and management of external government

risk arising from a lack of government capacity

Host governments, like companies, also present sources of risk to pipeline projects
in development and to operational pipelines that are ‘internal’ to the host
government and relate specifically to governance and capacity issues. While these
sources of risk are viewed as internal to the host government they may also
constitute external sources of risk when viewed from the perspective of the project
company. 126 Moreover, notwithstanding the measures that pipeline companies may
take to properly mitigate and manage government risk through the development of
an IGA and HGAs, the host government may simply lack the training or resource
capacity to follow through and implement the commitments set forth in the
agreements (or the requirements otherwise set forth its own legal and regulatory
framework). In such circumstances, the project company may have successfully
allocated the risk yet still face the pragmatic reality of adverse project consequences
including delays and cost overruns. Moreover, once a commitment to invest in a
particular pipeline has been made, the adverse political consequences of arbitrating
with a government will far outweigh the benefits involved with the legal
enforcement of rights. This is especially the case where the government is not
acting in bad faith but simply lacks institutional, financial and human capacity.

Unfortunately, companies developing cross-border pipeline projects will find

themselves in a ‘conflicted’ position if they seek to mitigate this risk by attempting
to directly fund or provide other means of support to host government institutions
that are charged with regulating their activities. Consequently, project development
companies have had to find creative ways to work through third party governments,
international institutions and non-governmental organizations to implement

126 It is important to remember that the corollary of a company’s internal risk may be an adversely

impacted local stakeholder’s external risk.

53
capacity-building measures to mitigate the very concrete sources of external risk
presented.

The following is an indicative list of measure that project development companies

have previously taken to address risk associated with insufficient host government
capacity:

• With respect to the BTC and the parallel SCP Pipeline negotiations, the
World Bank funded a team of international advisors to support the
Government of the Republic of Georgia in its negotiations with the
Azerbaijan Republic and the Republic of Turkey on the IGAs and with BTC
Co and SCP Co in respect of the respective HGA negotiations for the
parallel projects;

• Given the institutional and human capacity limitations present in the West
Papua Province of Indonesia, and the environmental sensitivities and adverse
social impacts associated with moving a village of indigenous peoples in
order to develop a large-scale LNG export facility, BP formed and funded
the Tangguh Independent Advisory Panel (‘TIAP’) to ensure that the
company was implementing the project in accordance with international
environmental, social and human rights standards;

• During the negotiations of the Trans-Adriatic Pipeline, AG’s HGA with the
Republic of Albania, the Governments of Norway and Switzerland funded
external experts to support the Government’s negotiating team;

• Numerous other examples may be provided to illustrate efforts that have

been made through bilateral and multilateral donor organizations to develop
capacity in the areas of administration, land registration and land cadaster
development and the establishment of appropriate grievance mechanisms (a
corporate responsibility to respect human rights under the Guiding
Principles).

In addition, pipeline companies should also consider the following:

• Maintaining active and supportive dialogue with international institutions and

NGOs implementing capacity building programs;

• Being an active and responsible participant in policy dialogue with

government and civil society stakeholders; and

• Being a vocal advocate for transparency and anti-corruption measures within

government and industry for example active support of EITI
implementation

Suffice to say that the sustainable mitigation of risk to cross-border oil and gas
pipelines in emerging and frontier markets requires stakeholders (including not only
project development and operating pipeline companies but also civil society
organizations) to take proper account of host government capacity both at the
national and regional levels.

54
 • Encouraging and advocating for donor-led capacity building and support
programs to the relevant government agencies

iv. Mitigating and managing internal risk and external

stakeholder and hostile third party risk

The mitigation and management of bottom-up external risk comprises a number of

risk factors that manifest both pre- and post-completion and include security,
community protests, human rights abuses and environmental factors. In order to
sustainably manage and mitigate all bottom-up risk factors, it is critically important
that the pipeline company reviews and rigorously implements an internal risk
management system that inter alia incorporates international standards and
procedures on the conduct of environmental and social impact assessments
including appropriate community consultations, local content policies, measures to
mitigate against local corruption and local employment. 127

For the purposes of this paper, emphasis is placed upon the important and
common elements that link the management of internal risk and external risk in
respect of local communities and hostile third parties. In order to draw an effective
and operational linkage, the last two sections of this paper will examine the key
components of the UN Guiding Principles on Business and Human Rights and the
Voluntary Principles on Security and Human Rights.

a. The UN Guiding Principles on Business and

Human Rights

There are three fundamental steps that the Guiding Principles on Business and
Human Rights ask pipeline companies (whether state-owned or private) to
undertake in order to discharge their responsibility with respect to human rights:

• Pipeline companies 128 are expected to adopt a policy demonstrating that

human rights are respected. Pipeline companies that are in fact incorporated
joint ventures should consider adopting their own policy or that of the
shareholder designated as the ‘operator’;

• pipeline companies are expected to undertake a human rights due diligence

process; and

127 For an excellent recent reference on best practice on external stakeholder management see Jane

Nelson’s report on ExxonMobil PNG LNG is a really good source http://www.hks.harvard.edu/m-

rcbg/CSRI/research/publications/PNGLNGreport.pdf.

128 Guiding Principle (4) specifically expects that businesses that are owned and/or controlled by states

have a public international law duty to take additional steps to ensure that human rights are protected.

55
 • pipeline companies are expected to ensure that there are processes in place
that will enable the remediation of adverse impacts.

The Guiding Principles on Business and Human Rights set forth expectations that
businesses (including pipeline companies) will discharge their responsibility to
respect human rights wherever they operate. Moreover, pipeline companies are
expected to avoid and mitigate their adverse impacts. The operational requirements
of the Guiding Principles on Business and Human Rights are summarized in Table 9
below.

TABLE 9 129
Operational requirements of the Guiding Principles on
Business and Human Rights

Responsibility Pipeline Company Action Expected to Comply GP

Policy • Adopt a pipeline company policy commitment to respect human rights at 16
the highest levels and publicize the commitment
• Reflect and embed the commitment in operational principles throughout
the organization
Due Diligence • Conduct impact assessments that focus on adverse impacts to human 17–22
rights and not simply impacts to the organization (for example, delay and
cost impacts)
• Integrate the findings across relevant functions within the organization
• Track the effectiveness of response by the pipeline company to the
findings
• Transparently communicate findings while protecting commercially
confidential information and rights of privacy
Remediation • Address adverse impacts through legitimate processes 29–31
• Establish or participate in operational grievance mechanisms to identify
and resolve claims of adverse impact
• Grievance mechanisms should be open to multi-stakeholder participation
Context • The GPs should be applied even where domestic law of jurisdiction 23–24
where pipeline company is operating is silent, not enforced or is in
tension with international requirements
• Where domestic law is in conflict, the pipeline company should seek
ways to honor the GPs
• Issues of complicity in gross human rights violations should be treated by
a pipeline company as a compliance issue
• The pipeline company should prioritize its response to human rights
impacts

Benefitting from the analysis done in ‘BP’s Alignment with the United Nations Guiding Principles on
129

Business and Human Rights—A Gap Analysis’ (2011) by the author of this paper together with John F.
Sherman, III and David G.N. Vermijs.

56
 b. Mitigating risk presented by hostile third parties: the
Voluntary Principles on Security and Human Rights

Like host governments and locally impacted people and communities (both vitally
important external stakeholders), hostile third parties constitute an important
category of external risk. 130 There are important areas of potential cross-fertilization
between and among risk sources that may develop in circumstances where pipeline
company activities have adverse impacts on human rights (people, communities and
the environment) and those adversely impacted are neither consulted nor are the
adverse impacts meaningfully redressed. Accordingly, this section of the paper will
focus on sustainable risk-mitigating measures that may be taken to reduce sources of
risk associated with this cross-fertilization. These mitigating measures are offered,
recognizing that physical security threats can and will occur regardless, and that these
measures are, therefore, not offered as a replacement for, but as an addition to the
vitally important role professional physical security measures often perform.

Accordingly, the measures that a project investor or operating company should take
into account to minimize their security risk from hostile third parties are inextricably
linked to the requirements of the Guiding Principles on Business and Human Rights.
Indeed, the Guiding Principles on Business and Human Right specifically recognize
the additional measures that need to be taken by states and companies operating in
conflict-prone areas. 131 A set of principles (the Voluntary Principles on Security and
Human Rights) was agreed in 2000 following an initiative between representatives of
extractive sector companies, governments and NGOs. 132 The Voluntary Principles
are intended to ‘provide guidance to companies in maintaining the safety and
security of their operations within an operating framework that encourages respect
for human rights.’ Other important standards that take account of the relationship
between security and human rights include the Code of Conduct for Private Security
Providers 133 and the ANSI Standards PSC–1 (2012). 134

The Voluntary Principles on Security and Human Rights are a more narrowly
targeted set of principles offered only as guidance to extractive companies seeking to
better align the provision of security in their operations to internationally recognized
principles of human rights. In other words, the Voluntary Principles elaborate with
greater specificity and thus help to ‘operationalize’ the requirements set forth in the
Guiding Principles in the area of security and human rights.

130 However, hostile third parties relinquish their claim to be legitimate stakeholders when they engage in

hostile actions against the project, its assets and personnel.

131See GP 7 ‘Supporting Business Respect for Human Rights in Conflict-Affected Areas and GPs 12 and
23.

132 See http://www.voluntaryprinciples.org/what-are-the-voluntary-principles/.

133 See www.icoc-psp.org/.

134 See https://www.asisonline.org/News/Press-Room/Press-Releases/2013/Pages/East.aspx.

57
The key operational recommendations set forth in the Voluntary Principles are
correlated to the corresponding principle in the Guiding Principles and are
summarized in Table 10 below.

TABLE 10
Voluntary Principles on Security and Human Rights and corresponding
Guiding Principles on Business and Human Rights

VPs Section Principle Guideline GPs

Risk • Sourcing of information 15,
Assessment o Credible sources (local, national and home governments), security 17,18
firms, other companies and civil society
o Information sharing subject to confidentiality
• Security risks rooted in political, economic, civil or social factors
• Potential for violence
• Human rights records of public security, paramilitaries, local and
national law enforcement and private security
• Host government record on rule of law compliance including
prosecution and judiciary
• Understanding the nature and root causes of local conflict
• Risks associated with transferring lethal and non-lethal equipment to
public and private security providers
Interaction: • Regular consultations: company, host government and local 15 -17,
Companies communities about security arrangements and publication of those 19–
and Public arrangements subject to safety and security concerns 21, 23,
Security • Company communication of policies on ethical conduct to public
security together with expectation that security is provided consistent
with policies
• Type and number of public security personnel deployed should be
commensurate with the threat
• Equipment imports to comply with all applicable laws
• Companies to influence:
o deterring deployment of public security credibly implicated in
human rights abuses and
o public security to use force only when necessary, proportionate to
threat and consistent with state duty to protect the human rights
• Where force is used, incident reports should be made and medical
aide provided
• Regular structured meetings among company, public security, home
and host governments and civil society to discuss security and human
rights
• In all meetings with host governments, companies should encourage
public security that promotes observance of international law
enforcement principles and companies should support human rights
training for relevant state institutions
• Companies should record any credible allegation of a human rights
abuse and urge investigation where appropriate and press for proper
resolution
• Any company equipment transferred should be monitored to ensure
proper use
Interaction: • Private security deployed should observe all applicable laws and 15 –
Companies policies of company (including the Voluntary Principles) and should 17,
and Private maintain high levels of technical and professional proficiency – 19–
Security especially in the use of firearms 21, 23
• Private security should have policies on the appropriate use of force,
and practices should be capable of being monitored by third parties

58
• All allegations of human rights abuse by private security to be
recorded and credible allegations forwarded to relevant law
enforcement
• Private security should only provide defensive and preventative
measures
• Companies should undertake thorough background checks and
ensure that private security should not employ persons credibly
implicated in human rights abuses, use force only when necessary and
proportionate to threat and not violate rights of individuals in
discharging responsibilities
• Where physical force used, a proper investigation should be
conducted and referred to local authorities where required
• Private security should maintain the confidentiality of information
obtained
• Companies should embed the principles in contractual provisions
• Companies should regularly consult with private security and monitor
compliance with the VPs and where appropriate, private security
providers should be sourced from the local population
• Companies should consult with other companies, home and host
governments and civil society regarding experiences with local
security

59
V. Conclusion

Growth in demand for crude oil and natural gas coupled with increasing dislocations
between the sources of supply and demand make oil and gas transportation critically
important to global security of supplies. While the majority of internationally traded
gas is shipped by pipeline, the majority of internationally traded crude oil is shipped
by maritime tanker and in both cases, cross-border pipelines fulfill strategic roles.
This is the case particularly for gas pipelines into the European Union although oil
pipelines from landlocked producing countries such as South Sudan, Chad and, in
the near future, Uganda and Tajikistan will present the only viable means for the
delivery of oil and gas.

New-build cross-border oil and gas pipelines will be required in the future to link
new production sources to new demand centers (non-OECD) and to address
emerging political realities. For example, the Russia-Ukraine tensions in respect of
gas transit have prompted the Russian Federation to construct the Bluestream and
Nordstream Pipelines. Broader tensions between the Russian Federation and the
west have prompted a reorientation eastward with the construction of the ESPO as
well as the recent $400 Bln, 30 year, 38 bcm gas deal signed with China.

This paper has examined sources of risk to cross-border pipelines and locating these
sources in actual cross-border oil and gas pipelines in development and operation.
Seven main sources of risk were identified:

• Absence of applicable multilateral treaty or international principles on freedom

of transit
• Commercial (uneconomic or compromised economics)
• Political (sanctions, embargoes, protests, failure otherwise to provide support)
• Security (sabotage, terrorism, conflict, vandalism)
• Environmental or safety concerns/incidents
• Human rights abuses
• Community protests

These sources of risk have been assessed by reference to an Analytical Framework

that has distinguished dimensions of risk, stakeholders and perspectives on risk.
Within dimensions of risk, ‘external’ and ‘internal’ dimensions were distinguished
and within the context of external risk, further subdivided into risk sources that are
capable of being managed and allocated. For external stakeholders with whom risk
may be allocated, various legal agreements and other instruments have been
identified and outlined. For stakeholders with whom the risk may not be allocated,
distinct but overlapping measures are recommended and these measures should be
incorporated within the systems and standards that manage the pipeline company’s
overall enterprise risk management. For hostile third parties, the single biggest
source of post-completion risk, physical security measures taken by public security,
coordinated with private sector security and delivered in accordance with the
Voluntary Principles on Security and Human Rights and other international security
standards are indispensible. For sources of risk arising from adverse impacts upon
people, communities and the environment, pipeline companies are encouraged to

60
implement the Guiding Principles. Both of the latter two sources of risk have
important roots in human rights issues and need to be managed accordingly.

Ultimately, external risk cannot be controlled – only managed and mitigated within
internal systems and practices that can be controlled. Disruptions to global security
of supply can and will occur. Nevertheless, the frequency and consequence of these
disruptions can be minimized. Adverse impacts that businesses have on people,
communities and the environment are an inevitable consequence of economic
growth and the thirst for energy that enables that growth. These adverse impacts
must be minimized regardless of whether they have a concomitant disruptive impact
on global supplies. Nevertheless, there is a strong correlation between respect for
human rights, care for the environment and the conduct of sustainable business
including the safe and secure development, construction and operation of cross-
border oil and gas pipelines.

61
 ANNEX I.
GAS AND OIL EXPORT PIPELINES OF THE RUSSIAN FEDERATION

1. Introduction

With the break-up of the Former Soviet Union, the Russian Federation was left with an
enormous oil and gas resource base and network of oil and gas pipelines. According to
the 2013 edition of the BP Statistical Review of World Energy, the Russian Federation
has 93 Bln bls of proven oil reserves, produces 10.788 Mbpd (12.9 per cent of total
global output and second only to Saudi Arabia), consumes 3.313 Mbpd and exports the
balance. For the moment, this makes the Russian Federation the second largest producer
and exporter of crude oil in the world. 1 Similarly, the Russian Federation holds
enormous proven gas reserves of 31.3 TCM, producing 604.8 Bcma and supplying in
excess of 30 per cent of Europe’s total gas supplies. 2 Approximately 30 per cent of the
Russian Federation GDP and more then 50 per cent of the Federal budget is generated
by the export of oil and gas. 3 Consequently, the Russian Federation policy has been to
maintain strict control over upstream production via restrictive controls on the export of
subsurface data and taxation on the export and sale of crude oil production. In addition,
all crude oil and natural gas are exported from the Russian Federation through the
Transneft and Gazprom pipeline systems.

Immediately prior to the conflict between the Russian Federation and Ukraine that
erupted in 2014, a consideration of Russian Federation policy on its oil and gas resource
base would have converged on two core questions:

• Does Russian Federation policy restrict foreign investment that would otherwise
boost upstream production?

• Has the Russian Federation over-invested in oil and gas pipeline export capacity
in order to assert control over its near abroad and to protect its position in
within the EU downstream gas markets?

In the wake of the conflict with Ukraine, the subsequent sanctions placed upon the
Russian Federation by the US, the EU, Japan and others combined with a precipitous
drop in the price of oil in Q 3-4 2014, further questions arise and are referenced in
Section 3 below.

2. Cross-border Russian gas pipelines

Russia currently exports most of its gas via an enormous network of cross-border gas
pipelines that was constructed prior to the break-up of the Former Soviet Union. A very
large percentage of Russian Federation gas production is exported to the EU; of this, a
large percentage transits the Ukraine (see Pipeline 4 in Table a) below). The
relationship between the two countries has been fraught, with Russia cutting off gas
supplies several times in the 1990s. In addition to the obvious ethno-demographic,
historical and political factors that have polarized the Russian population in the East and
the predominant Ukrainian and pro-western population, problems in respect of gas
transit and sales between the two countries have previously centered upon the following
factors:

1
 • Export to Ukraine of large amounts of gas for domestic use at prices that were
unlikely to cover the cost of delivery;

• The Ukraine’s accumulation of large debts to Russia owed for domestic gas
consumption;

• Ukrainian theft of gas from the transit system; and

• Russian pressure on the Ukraine to exchange equity in the transit network and
storage facilities for gas debts. 4

From a EU security of supply perspective, two incidents of significance occurred during

the winters of 2006 and 2009. In the second incident (January 2009), the parties failed to
negotiate a price for the supply of Russian gas to the Ukraine and a tariff for the transit
of Russian gas to Europe through the Ukrainian Gas Transmission System before the
previous agreements expired on 31 December 2008. Russia and the Ukraine ultimately
ended the dispute on 12 January 2009 with an agreement that saw Ukraine move from
paying a less subsidized rate for its gas in 2009 to the market rate in 2010. Russia also
agreed to pay a discounted transit fee in 2009 before moving to the market rate from
2010. 5

In anticipation of the foregoing, Gazprom laid plans for building new pipelines that
would bypass the Ukraine and reduce the risk of disputes that have spilled over in the
past disrupting Russian gas supplies to Europe:

• Nord Stream operational gas pipeline (Pipeline 1 in Table a) below);

• South Stream gas pipeline development (Pipeline 2 in Table a) below);

• Blue Stream operational gas pipeline (Pipeline 3 in Table a) below).

Ultimately the three pipelines together could render the Ukraine’s gas transit system
largely redundant and Ukraine would lose an important source of revenue. 6 However,
this may come at a high price to Gazprom as it will largely divert existing production
into the new pipelines rather than bring on stream new production requiring additional
transportation capacity. It is anticipated that this will have a corrosive impact on the
netback value of Gazprom’s gas. In any event, and in light of the existing EU sanctions
and policy statements emerging from Brussels and other European capitals, the prospect
for South Stream to be successfully implemented appear dim at the moment.

3. Recent developments

Four sets of very recent developments now appear set to alter the dynamics of Russian
efforts to maintain access to European markets for Russian gas and re-define its
engagement with its near-abroad and China.

• Ukraine financial difficulties and gas price negotiations

2
First, the Ukraine has been in financial difficulty. At the end of 2013, credit talks
between Kiev and the International Monetary Fund stalled and the Ukraine faced a
financial gap and possible default. In addition the Ukraine had a $17Bn gas debt to be
paid to Russia in 2014. 7 With a view towards further entrenching its trade relations with
the European Union through its EU Association Agreement, the Ukraine asked for
financial assistance from the European Union. When the EU rejected this request, the
Ukraine on 21 November 2013, suspended its trade association discussions with the
EU. 8 The Russian Federation stepped in to offer a discount on the price of its gas to the
Ukraine. In addition, the Russian Federation agreed to buy $15Bn in Ukraine debt. 9 The
price of gas in the deal must be reconfirmed each quarter, allowing Russia to maintain
leverage over Ukraine, and its decision regarding possible future association with the
EU. 10

Until 2013, Ukraine had been trying to reduce the price it pays for Russian gas. Under
the then existing ten-year deal it would pay $416 per thousand cubic meters in the first
quarter of 2013, but it had been hoping for a rate of no more than $250. Russia had
declared that it would only entertain this price if Gazprom were allowed a stake in the
Ukrainian gas pipeline network, which would ensure gas transit to Europe. 11 Among the
biggest obstacles in gas talks had been Kiev’s refusal to hand over to Gazprom control
of transit pipelines that transport the bulk of Russian gas exports across the Ukraine to
Europe. As of 31 October 2014, it appears that an arrangement for the supply of gas at
$378 per thousand cubic meters. 12

• Russia its near abroad and geopolitics

The second development relates to the deeper interests that Moscow has with respect to
preventing the Ukraine, and other FSU member states such as Georgia, from drifting
outside its sphere of influence. 13 So far this has led to violent conflict, confrontation
with the West and the imposition of international sanctions. Clearly, the Ukraine lacks
the military capability to stand up to Moscow on its own. While the West appears
determined to support Ukraine through the use of sanctions against the Russian
Federation, NATO is unlikely to lend much practical support (witness NATO inaction
in Georgia in 2008). Perhaps Russia and the West have an eye on larger geopolitical
developments in Syria and Iraq and their respective alignments across the Middle East
and Africa.

• Russia’s pivot towards the east

The third development relates to the Russian Federation’s ‘pivot to the East’ involving a
monumental $400 Bln gas sales and pipeline transportation deal with China. 14 In fact,
this ‘pivot’ was signaled five months earlier by the Russian Federation’s Energy Ministry
in a document stating that one of Russia's goals was to diversify its exports, with the
share of oil (and oil products) exported to Asia targeted to double by 2035. 15 Russia
now aims to send 32% of crude, and 31% of gas produced to the region by 2035. 16
Notwithstanding the published statement, the Russian federation also maintains "[that
energy markets in Europe and the CIS will remain key markets for Russian energy
production, but export volumes after 2015 will fall, and by the end of the period will be
95% of 2010 levels." 17

• The 2014 drop in the price of oil

3
Fourth, the combination of sanctions and a precipitous drop in the price of oil (the price
of Brent has so far dropped more than 38% since June 2014) will have a punishing
impact on the Russian macro-economy. The end game that emerges from this
confrontation is not entirely clear at the moment but does unfortunately holds forth a
significant risk for the global for regional and geopolitical and global macroeconomic
stability.

3. Maritime exports

In addition to its enormous oil production and exports and its export of piped gas
(particularly to Europe), the Russian Federation is also looking to become a significant
global LNG supplier to Asian markets. Existing Russian Federation LNG production
and export is centered in Sahkalin II and is already significant. In addition, Novotec and
Total’s Yamal LNG development in the Russian Arctic is anticipated to produced 18.3
BCM 18 and the earlier-stage Pechora LNG development will also be capable of
producing in excess of 3.5 BCM and both projects will be targeting Asian markets.
Maritime exports of LNG from the Russian Federation in 2012 were as follows:

Source Destination Bcm

Russian Federation China 0.5
Japan 11.3
South Korea 19 3.0

MAP 1
RUSSIAN FEDERATION GAS PIPELINES

1 4

4
ANNEX I. TABLE a) –GAS PIPELINES OF THE RUSSIAN FEDERATION

Pipeline Country Parameters Ownership Strategic Risk Sources

Configuration Commercial Purpose and
Consequences
I. Russian Federation (Gas and Oil)
1. Nord • Russia • 55 Bcm (2 • State sector • Response • Erosion of
Stream (producer) pipes – 27.5 • OAO to the Gazprom’s gas
(operational • Germany Bcm Gazprom Russia– netback values as
gas pipeline) (consumer) each) 20 (51 per cent) Ukraine pipelines are not
• 1,224 kms 21 • Wintershall gas crisis shipping gas from
• CAPEX: Holding (2006) new fields 24
$12.5 Bln 22 (15.5 per • Direct link • Assessment of
cent) between project impact on
• E.ON Russia and environment 25
Rurhgas AG main • Runs counter to
(15.5 per European EU diversity of
cent) consuming supply objective 26
• N.V. markets
Netherlands avoiding
Gasunie (9 Ukraine
per cent) transit
• GDF Suez
S.A. (9 per
cent) 23
2. South • Russia • 63 Bcm 27 • State sector • Response • Erosion of
Stream (producer) • 2,446 kms • Offshore31 to the Gazprom’s gas
(gas pipeline • Austria, (900 kms • Gazprom Russia– netback values as
development) Bulgaria, offshore) 28 (50 per cent) Ukraine proposed pipeline
Croatia, • 2,250 m • ENI (20 per gas crisis is not shipping gas
Greece, deep 29 cent) (2006) from new fields 33
Hungary, • Expected • Wintershall • Direct link • Assessment of
Serbia and to reach full Holding (15 between project impact on
Slovenia capacity by per cent) Russia and environment 34
(transit / 2018– main • Runs counter to
• EDF (15 per
consumers) 2019 30 European EU diversity of
cent)
• Estimated consuming supply objective 35
• Onshore32 markets
CAPEX: • Gazprom
€15.5 Bln avoiding
(50 per cent) Ukraine
• State transit
companies
in each
transit
jurisdictio
n (50 per
cent)
3. Blue • Russia • 16 Bcm 36 • State sector • First new- • Erosion of
Stream (producer) • 1,213 kms 37 • Offshore 40 build gas Gazprom’s gas
(operational • Turkey • Completed pipeline netback values as
• Gazprom
gas pipeline) (transit / 4Q 2005 38 designed pipelines are not
consumer) (50 per to bypass shipping gas
• CAPEX:
$3.4 Bln 39 cent) Ukraine from new fields 42
• ENI (50 per transit • Potential
bottleneck environmental
cent)
impact 43
• Onshore 41

• Gazprom
(100 per

5
 Pipeline Country Parameters Ownership Strategic Risk Sources
Configuration Commercial Purpose and
Consequences
cent)
4. Russia– • Successor • 288 Bcm • Russian • Developed • Transit fees 46
Ukraine state (FSU) capacity 44 government during the • Gas sales /
(operational • Russia • 178.5 Bcm state- FSU as pricing dispute
gas pipeline) (producer) average controlled one of the • Supply
• Ukraine annual • Existing main gas disruptions
(transit) output 45 FSU supply raising broader
• EU (transit / infrastructur routes for European
consumer) e FSU gas security of supply
• Russian into concerns and a
Federation European policy shift to
(Gazprom) markets diversify access
• Ukraine to gas shipped
(Naftogaz from sources
Ukrainy) that do not
traverse the
Russian
Federation 47

4. Cross-border Russian oil pipelines

Oil produced in the Russian Federation is exported via maritime tanker and cross-border
pipeline. The two main oil export terminals are as follows: 48

• Baltic Sea Russian Federation pipeline and port terminal constructed in 2000
(70.1M tons/year in 2010); and
• Black Sea via Novorussysk (46.7M tons/year in 2010).

The two principal cross-border pipelines are:

• The Druzhba Oil Pipeline constructed in 1964 and taking 55.7M tons/year of oil
via branches to the following markets:

o Germany (via Poland);

o The Czech Republic (via Slovakia and Ukraine);

o Hungary (via the Ukraine); and

o Odessa, Ukraine (Black Sea port terminus for Odessa–Brody Pipeline).

Due to infrastructure bottlenecks that the Russian Federation was experiencing in the
late 1990s and early 2000s, efforts were made to increase export capacity by adding the
Baltic Sea terminal, and to pursue export capacity to the Far East by constructing the
ESPO pipeline:

• The East Siberia–Pacific Ocean Oil Pipeline (Pipeline 5 in Table b) below):

o Phase I to China; and

6
o Phase II to the Russian export terminal at Kozimo on the Pacific Ocean.

MAP 2
RUSSIAN FEDERATION ESPO PIPELINE

7
 ANNEX I. TABLE b) – THE EAST SIBERIAN OIL PIPELINE (ESPO)

Pipeline Country Parameters Owners Strategic Risk Sources

Configuration hip Purpose and
Commer Consequences
cial
5. East • Russia • 1,600,000 49Bpd • State • ESPO • Disputes between
Siberia– (producer) • 600,000 Bpd sector diversifies Transneft and
Pacific • China (2013) 50 • Transnef Russian outlets CNPC over oil
Ocean Oil (consumer) 1,000,000 Bpd t and bolsters deliveries and
Pipeline • Other key (2016) 51 (operato Russia’s pricing 56
(ESPO) recipients of 1,600,000 Bpd r) position as an
(operation Russian oil (2025) 52 • CNPC important oil
al oil from ESPO: • 4,857 kms 53 (constru supplier to
pipeline) Japan, China, cted and Asian countries
• CAPEX: stage 1
USA, South $12.27 Bln 54 operates • Additional oil
Korea, • ESPO – 2 spur will be
Singapore, the ($10.6 Bln) 55 from the exported via
Philippines, Russia- the new
Thailand and China pipeline
Malaysia border allowing Russia
to to promote the
Daqing, new ESPO oil
China) brand
• Russian oil
offers Asian
clients more
secure supply
than Middle
Eastern oil
• Accelerates
development
of East
Siberian oil and
infrastructure
in the Russian
Far East

1http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.p

df
2 However, of total Russian Federation oil and gas exports, 76% of its exported natural gas production

and 84% of its exported oil production is sold into Europe. See Stratfor, “Russia’s East Asian Pivot” 10
December 2013.
3http://www.academia.edu/1534976/The_Role_of_Oil_and_Gas_in_Discourses_on_Russias_Developm

ent_to_2020
4http://www.academia.edu/1534976/The_Role_of_Oil_and_Gas_in_Discourses_on_Russias_Developm

ent_to_2020
5http://news.bbc.co.uk/1/hi/world/europe/7240462.stm

6http://blogs.ft.com/beyond-brics/2012/12/20/russiaukraine-gas-talks-kiev-

cornered/#axzz2K8qyFXVc.
7 http://www.bbc.co.uk/news/world-europe-25411118
8 http://www.bloomberg.com/news/2013-11-25/putin-beats-europe-in-battle-for-ukraine.html

8
9 “The Geo-Political Realities Behind the Russian-Ukraine Gas Deal” Stratfor 17 December 2013.
10 http://uk.reuters.com/article/2014/01/09/ukraine-russia-gas-idUKL6N0KJ0YP20140109
11http://www.reuters.com/article/2012/01/13/ukraine-russia-gas-pipelines-idUSL6E8CD21N20120113

However, the November 2013 decision taken by the Ukrainian government to suspend entrench its
economic relations with the Russian Federation instead of the EU suggests that the trade arrangements
with the EU suggests that the dispute with Russia is over and that Ukraine’s energy prices will lower.
12 http://www.forbes.com/sites/paulroderickgregory/2014/10/31/a-bad-gas-deal-for-ukraine-as-europe-

looks-after-its-own-interests/
13 http://www.bbc.co.uk/news/world-europe-25411118
14 http://www.bloomberg.com/news/2014-11-10/russia-china-add-to-400-billion-gas-deal-with-

accord.html
15 http://uk.reuters.com/article/2014/01/24/russia-oil-asia-idUKL5N0KY0JW20140124
16 http://www.platts.com/latest-news/natural-gas/moscow/russian-draft-energy-strategy-sees-23-of-exports-
26649363
17 http://www.platts.com/latest-news/natural-gas/moscow/russian-draft-energy-strategy-sees-23-of-exports-

26649363
18 http://total.com/en/energies-expertise/oil-gas/exploration-production/projects-
achievements/lng/yamal-lng
19BP Statistical Review of World Energy 2013, p. 28

http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.pd
f.
20http://www.nord-stream.com
21http://www.nord-stream.com
22 http://www.bloomberg.com/news/2011-09-06/nord-stream-gas-pipeline-to-cost-8-8-billion-euros-

sechin-says.html
23http://www.dnv.com/industry/oil_gas/publications/updates/pipeline_update/2012/01_2012/Nord_St

ream_the_worlds_longest_offshore_pipeline.asp
24 http://www.gazprom.com/about/production/projects/pipelines/nord-stream/
25http://www.gazprom.com/about/production/projects/pipelines/nord-stream/
26http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=ht

tp%3A%2F%2Fwww.fas.org%2Fsgp%2Fcrs%2Frow%
2FR42405.pdf&ei=MJqyUe_5JcPfiAK734HABA&usg=AFQjCNEMUZ3a4W8jT75sJDd6dnKR1uBPNw
&bvm=bv.47534661,d.cGE at p5.
27http://www.south-stream.info/en/pipeline/
28http://www.south-stream.info/en/pipeline/
29http://www.south-stream.info/en/pipeline/
30http://www.south-stream.info/en/press/faq/
31http://www.gazpromexport.ru/en/projects/6/
32 http://www.gazprom.com/about/production/projects/pipelines/south-stream/
33 http://www.gazprom.com/about/production/projects/pipelines/south-stream/
34http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEUQFjAD&url=h

ttp%3A%2F%2Fwww.south-stream.info%2Ffileadmin%2Ff%2Fpress%2Fpresentations%2F25.05.2011-
brussels.pdf&ei=FKGyUe_1JojjiwKN5IG4BA&usg=AFQjCNG8dDstMIs-
8CDuipBFp5vunsv9wg&bvm=bv.47534661,d.cGEat p 10.
35http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=ht

tp%3A%2F%2Fwww.fas.org%2Fsgp%2Fcrs%2Frow%2FR42405.pdf&ei=MJqyUe_5JcPfiAK734HABA
&usg=AFQjCNEMUZ3a4W8jT75sJDd6dnKR1uBPNw&bvm=bv.47534661,d.cGE
36 http://www.gazprom.com/about/production/projects/pipelines/blue-stream/
37 http://www.gazprom.com/about/production/projects/pipelines/blue-stream/
38 http://www.gazprom.com/about/production/projects/pipelines/blue-stream/
39 http://www.offshore-technology.com/projects/blue_stream/
40 http://www.subsea.org/projects/listdetails.asp?ProjectID=9
41 http://www.gazprom.com/about/production/projects/pipelines/blue-stream/
42 http://www.gazprom.com/about/production/projects/pipelines/blue-stream/
43 http://www.gazprom.com/about/production/projects/pipelines/blue-stream/
44 http://www.energydelta.org/mainmenu/energy-knowledge/country-gas-profiles/ukraine#reference-

dbsource_49

9
45 http://www.energydelta.org/mainmenu/energy-knowledge/country-gas-profiles/ukraine#reference-
dbsource_
46http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDYQFjAB&url=h

ttp%3A%2F%2Fwww.iccgov.org%2FFilePagineStatiche%2FFiles%2FPublications%2FReflections%2F02
_reflection_february_2012.pdf&ei=CaiyUZ2_NubgigLC_4HABw&usg=AFQjCNF2_RWzeVqGQcKtn7
LPKMifZO7zXw&bvm=bv.47534661,d.cGE at p 3.
47 http://www.bloomberg.com/news/2011-09-22/russian-gas-dispute-with-ukraine-threatens-new-cutoff-

to-europe.html
48 See Adnan Vatansever ‘Russia’s Oil Exports: Economic Reforms Versus Strategic Gains’, p7

http://carnegieendowment.org/files/russia_oil_exports.pdf
49 http://www.washingtoninstitute.org/policy-analysis/view/russian-oil-sales-to-china-may-impact-iran
50 http://www.washingtoninstitute.org/policy-analysis/view/russian-oil-sales-to-china-may-impact-iran
51 Page 16

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDgQFjAC&url=htt
p%3A%2F%2Fwww.esi.nus.edu.sg%2Fdocs%2Fbulletin%2Fespo_slides_10dec12v2.pdf&ei=SXUKUviJ
GcaZiALy1ICABg&usg=AFQjCNHiCKuQr6pZ4FuxCgDl2iZ_n-TeEg&bvm=bv.50500085,d.cGE
52 http://www.washingtoninstitute.org/policy-analysis/view/russian-oil-sales-to-china-may-impact-iran
53http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CC8QFjAB&url=ht

tp% 3A%2F%2Fcsis.org%2Ffiles%2Fpublication%2F1003qchina_russia.pdf&ei=NamyUauIN-
S7iwKYtIDIBA&usg=AFQjCNH97z4MFW6wypTFXq11SXL8fWg98A&bvm=bv.47534661,d.cGE at p
1.
54 http://uk.reuters.com/article/2007/12/27/transneft-pipeline-idUKL2759710220071227
55 http://www.osw.waw.pl/en/publikacje/eastweek/2013-01-09/completion-espo-oil-pipeline-connects-

siberia-to-pacific-ocean
56 http://www.atimes.com/atimes/Central_Asia/ME05Ag01.html

10
 ANNEX II.
CASPIAN EXPORT (AZERBAIJAN) GAS AND OIL EXPORT PIPELINES

1. Introduction

After the disintegration of the Former Soviet Union, Azerbaijan had a difficult birth as a
newly independent nation immersed, as it was, in war with the Republic of Armenia
(1989–94). At the time of the ceasefire there were more than a half million refugees
from Nagorno-Karabakh living near the capital, Baku. In 1994, the state oil and gas
company SOCAR (organized just two years earlier in 1992) signed a PSA on a series of
oil fields discovered during the Soviet era (Azeri–Chirag–Guneshli or ACG Fields) 1 with
eleven IOCs from five different countries including the UK, the US and the Russian
Federation. The so-called ‘contract of the century’ enabled Azerbaijan’s first President,
Heydar Aliyev, to draw broad international support for the development and
monetization of Azeri oil.

Azerbaijan has a sizeable oil and gas resource base and opened its doors to foreign
investment signing six offshore and nine onshore PSAs with various international oil
and gas companies. 2 Azerbaijan has an oil reserve base of 7 Bln Bbls and daily oil
production of 877,000 Bpd. 3 Azerbaijan also has a gas reserve base of just under 1 TCM
and current annual production of 16.2 Bcm.

2. Crude oil export pipelines

As a landlocked state, Azerbaijan needed quickly to establish operational oil export

routes (including pipelines) to monetize its oil resource base. Two pipeline routes were
quickly identified and arrangements made including an Inter-Governmental Agreement
with the Russian Federation and Inter-Governmental and Host Government
Agreements with the Republic of Georgia for the refurbishment and use of each of the
following Soviet vintage oil pipelines:

• The ‘NER’ or Northern Early Oil Export Route to Novorossiysk (Pipeline 8 in

the table below); and

• The ‘WER’ or Western Early Oil Export Route to the terminal of Supsa,
Georgia (Pipeline 7 in the table below).

A key obstacle associated with the WER and the NER routes is the fact that both load
oil tankers on the Black Sea requiring onward export by marine tanker through the
environmentally sensitive Turkish Straits. Due to much pressure from the Turkish and
US governments the main export pipeline for Azerbaijan was, therefore, routed through
Georgia and on to the Turkish Mediterranean port terminal of Ceyhan in the Bay of
Iskenderum where the Kirkuk–Ceyhan terminal unloading Iraqi crude is also located.
The Inter-Governmental Agreement for the 1 Mbpd Baku–Tbilisi–Ceyhan Crude Oil
Export Pipeline (Pipeline 6 in the table below) was signed with aplomb at the
Organization of Security and Cooperation in Europe Summit in Istanbul on 18
November 1999. Host Government Agreements were signed between BTC Co and
each of the governments of Azerbaijan, Georgia and Turkey together with a Lump Sum
Turnkey Agreement for Construction of the BTC Pipeline in Turkey and a Treasury
Guarantee. All of the documents were ratified by the respective parliaments in 2000. The
international oil companies and SOCAR signed the commercial agreements to fund 120

1
per cent of the construction budget associated with BTC in August 2002 and BTC was
commissioned in June 2006 following one of the most complex project financings ever
undertaken.

3. Gas export pipeline

In 1998, the BP-operated Shah Deniz Consortium discovered an enormous gas deposit
southeast of the Absheron Peninsula in the Azerbaijan sector of the Caspian Sea. The
development of the Shah Deniz Field, the South Caucuses (SCP) Pipeline (Pipeline 9 in
the table below) and the gas sales arrangements to Turkey were all accelerated to
coincide with the development and construction of the BTC Pipeline. The Shah Deniz
full field development and SCP Pipeline were accelerated in order to capture synergy
savings yielded by concurrent construction. In addition, the prospect of gas deliveries to
Georgia and Turkey functioned as a form of risk mitigation for both the BTC and the
SCP pipelines.

4. Summary observations on Azerbaijan oil and gas export pipelines

While AGG /BTC and Shah Deniz I /SCP were successfully commissioned, neither
project has fulfilled expectations. The ACG Field has never delivered 1Mbpd and has
consistently underperformed. The deliveries of Shah Deniz Phase I gas to Azerbaijan,
Georgia and Turkey have not yielded robust revenues. With no further significant oil
discoveries, the additional proven gas reserves from ACG ‘Deep,’ Absheron and Umid,
Azerbaijan now appear to hold forth the prospect that Azerbaijan is in fact more of a
gas than an oil province.

A final investment decision on Shah Deniz Phase II was taken on 17 December 2013.
However, with integrated upstream and midstream costs for the Southern Gas Corridor
escalating dramatically (currently estimated to exceed $45 -$50Bln) and with Europe
mired in low growth (and falling gas demand), questions about the commercial viability
of Shah Deniz Phase II are being quietly considered. The prospects for shipments of
Iraqi, Turkmen and potentially resumed Iranian gas production via Turkey present
formidable and additional challenges to Shah Deniz. To anticipate these potential
developments, Azerbaijan is rumored to be aligning its positions upstream (in the
‘Russian sector’ of the Caspian Sea) and downstream within the newly emerging Eastern
and Western Balkan markets in Europe (see further discussion of this in Annex III.
below). Nevertheless, the recent Russia- Ukraine crisis should galvanize appropriate
political (and potentially funding) support to ensure that the Southern Gas Corridor is
properly realized and that Azerbaijan’s participation as ‘first-mover’ is appropriately
rewarded.

Finally, and notwithstanding the fact that ACG and Shah Deniz may not have delivered
the value once predicted, they have nevertheless transformed the Azerbaijan economy.
Just how many of Azerbaijan’s petrodollars have been diverted to procure military
armaments is a subject of debate. Suffice to say that the balance of power that enabled
the ‘Nagorno-Karabakh’ conflict with Armenia to remain frozen since the break-up of
the Former Soviet Union may be in danger of unbalancing. How this frozen conflict is
ultimately resolved will have an important bearing upon the viability of Azerbaijan and
the EU’s Southern Gas Corridor (see further discussion in Annex III below).

2
 MAP 3
CASPIAN (AZERBAIJANI) OIL AND GAS PIPELINES

10
9
6

Country Parameters Ownership Strategic Risk Sources and

Pipeline Configuration Commercial Purpose Consequences
6. BTC • Successor states • 1 mbpd 4 • Private sector • Landlocked • Security (avoids
(operational (FSU) • 1,768 kms 5 • BP (30.1%) producer Armenia, Nagorno
oil pipeline) • Azerbaijan • 2,830-m • AzBTC • USG Karabach) 11
(landlocked elevations 6 (25.00%) strategic • Threatened by
producer) • 8 pump • Chevron interest to Russian/Georgian
• Georgia (transit) stations 7 (8.90%) develop conflict 2008 12
Turkey (powerful • CAPEX: $3.6 • Statoil (8.71%) east-west • Environmental
transit/port) bln 8 oil transit sensitivity 13
• TPAO (6.53%)
avoiding • Communities 14
• Constructed • ENI (5.00%) Russia and
in same • Total (5.00%) • Human rights 15
Iran
construction • Itochu (3.40%) • Archeology during
• Bypasses
corridor as • INPEX construction 16
Turkish
SCP 9 (2.50%) Straits
• ConocoPhillips bottleneck
(2.50%) Trans-
Hess (2.36%) 10 Caspian
shipments:
Turkmenista
n and
Kazakhstan
oil volumes

3
7. Baku- • Successor • 145,000 • Private sector • Landlocked producer • Security (avoids
Supsa states (FSU) bpd 17 • Owner/operator: • Early oil export route Armenia, Nagorno
(operation • Azerbaijan • 829 Azerbaijan for ACG oil production Karabach) 22
al oil (landlocked kms 18 International • First FSU oil/gas export • Threatened by
pipeine) producer) • CAPEX: Operating Company pipeline that avoided Russian/Georgian
• Georgia $600 (AIOC) 20 Russian Federation conflict 2008 23
(transit/port) mln 19 • BP territory • Archeology during
• Onward • SOCAR • Used in part by Exxon construction 24
shipment on • Chevron to evacuate its volumes
Black Sea and • Inpex (Exxon does not ship its
via Turkish • Statoil ACG oil through BTC)
Straits
• Exxon
• TPAO
• Itochu
• Hess 21
8. NER • Successor • 100,000 • State and private • Landlocked producer • Pipeline recently
(operation states (FSU) bpd 25 sectors • Early oil export route decommissioned,
al oil • Azerbaijan • 1,330 • Russian for ACG oil production but discussions are
pipeline; (landlocked kms 26 owner/operator:Tran • Refurbished FSU oil underway regarding
recently producer) sneft 27 pipeline possible reverse
decommis • Russian • Azerbaijan flow to enable
• Provided export
ioned) Federation owner/operator:SOC Russian oil exports
optionality, security and
(producer) AR 28 competition, pending via BTC 29
• Onward larger-scale BTC
shipment on pipeline
Black Sea and
via Turkish
Straits
9. SCP • Successor • 8.8 bcm • Private sector • Landlocked producer • Commerciality 34
Phase I states (FSU) (expanda • Physical operator: BP • Development of the • Security 35
(operation • Azerbaijan ble to 20 (25.5%) giant Shah Deniz gas • Environment
al gas (landlocked bcm) 30 • Commercial field and associated SCP
pipeline) producer) • 42-inch operator: Statoil gas pipeline developed
• Georgia diameter (25.5%) concurrently with BTC
(transit state 31
• Azerbaijan SCP Ltd. to provide risk
with transit • 691 kms (10%) mitigation for BTC and
payment) (443 kms • LUKoil (10%) open a wedge into
• Inter- in Turkish market with a
• NICO (10%)
connection to Azerbaija view towards opening
• Total (10%) pathway to EU markets
Turkey n, 250
kms in • TPAO (9%) • Strategic large-scale
(consuming
and on-sale) Georgia) • The Ministry of transport corridor that
32 Industry and Energy takes Caucuses and
of the Azerbaijan Central Asian oil and gas
Republic 33 west
10. SCPX • Successor • Possibilit • Private sector • Opens the Southern Gas • Complexity (6-7
(gas states (FSU) y of • Physical operator: BP Corridor enabling the transit states)
pipeline • EU markets looped (25.5%) EU to diversify its gas • Commerciality of
developm are a key target line • Commercial supply away from the project
ent) for Shah (Azerbaij operator: Statoil Russian Federation • Alignment with
Deniz Phase II an) (25.5%) • Enables gateway for IOCs
gas • Possibilit • Azerbaijan SCP Ltd. additional Azerbaijan o IOC payment
• Potential y of (10%) gas and Turkmen and for over-sized
bridge for looped/a • LUKoil (10%) Iraqi gas to enter line to
Turkmen gas dditional European markets 4accommodate
• NICO (10%)
• Anchor gas compress other Azeri gas
ion • Total (10%)
and transit line • SOCAR extension
(Georgia) • TPAO (9%)
 for EU’s • The Ministry of of IOC PSA
Southern Gas Industry and Energy
Corridor of the Azerbaijan
Republic 36

1The fields extend into offshore territory that remains disputed with the Republic of Turkmenistan. The
Kaypaz Field (Azerbaijan) also referred to as the Serdar Field (Turkmenistan) remains to be drilled and
developed pending resolution of the offshore dispute and the overall delimitation of the Caspian Sea by
the five littoral Caspian States.
2http://new.socar.az/socar/en/company/about-socar/discover-socar
3See BP Statistical Review of World Energy at pp 6 and 8.
4 http://www.bp.com/sectiongenericarticle.do?categoryId=9006669&contentId=7015093
5 http://www.bp.com/sectiongenericarticle.do?categoryId=9006669&contentId=7015093
6 p218

http://books.google.com/books?id=EZS27CT98F0C&pg=PA218&lpg=PA218&dq=btc+pipeline+2,83
0+meter+elevations&source=bl&ots=q94dQxkkhb&sig=l9oKF3Px4KMzzNS1FollkUGO0_w&hl=en&
sa=X&ei=-
q6yUci7MaqfiQKznIE4&ved=0CDAQ6AEwAQ#v=onepage&q=btc%20pipeline%202%2C830%20met
er%20elevations&f=false
7 http://www.bp.com/sectiongenericarticle.do?categoryId=9006669&contentId=7015093
8 http://www.neurope.eu/article/price-tag-btc-pipeline-may-reach-4-bln-euro
9 http://www.bp.com/sectiongenericarticle.do?categoryId=9006670&contentId=7015095
10 http://www.bp.com/genericarticle.do?categoryId=9029616&contentId=7064362
11 http://www.iags.org/n1104041.htm. See also

http://www.guardian.co.uk/world/2003/dec/01/georgia.oil
12 http://www.ogj.com/articles/2008/08/fire-damaged-btc-oil-line-could-have-5-week-shutdown.html
13 http://www.guardian.co.uk/business/2005/jun/15/oil.politics. See also,

http://www.bakuceyhan.org.uk/about.htm
14 http://iwpr.net/report-news/georgia-pipeline-protesters-demand-compensation
15 http://www.hrw.org/legacy/english/docs/2006/01/18/azerba12226.htm. See also,

http://variety.com/review/VE1117927708/?categoryid=31&cs=1&p=0
16 http://agt.si.edu/
17 http://www.today.az/news/business/44358.html
18 http://www.bp.com/sectiongenericarticle.do?categoryId=9006672&contentId=7015099
19 http://asbarez.com/35445/georgia-says-supsa-pipeline-would-be-ready/
20 http://www.bp.com/sectiongenericarticle.do?categoryId=9006672&contentId=7015099
21 Page 9

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCwQFjAA&url=htt
p%3A%2F%2Fwww.amec.com%2Fdocuments%2Finvestors%2Fevents%2Foil-and-gas-investor-
event%2Fmena-and-
azerbaijan.pdf&ei=WRwMUuDXAcOFiAKFmICwCg&usg=AFQjCNGcWfrt50pdUTIrkd-
QTe2oHLcEtw&bvm=bv.50768961,d.cGE
22 http://www.iags.org/n1104041.htm See also

http://www.guardian.co.uk/world/2003/dec/01/georgia.oil
23 http://www.ogj.com/articles/2008/08/fire-damaged-btc-oil-line-could-have-5-week-shutdown.html
24 http://museum.ge/?lang_id=ENGGEO&sec_id=165
25 Page 19

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CEYQFjAF&url=htt
p%3A%2F%2Fwww.silkroadstudies.org%2Fnew%2Finside%2Fpublications%2FBTC.pdf&ei=UBi0UbC
kBojniALZuoGADw&usg=AFQjCNHoGtSvc4LJwYC6D-xyfLd4xGU-gA&bvm=bv.47534661,d.cGE
26 http://www.reuters.com/article/2013/05/14/russia-oil-azerbaijan-idUSL6N0DV3QC20130514
27 http://en.trend.az/capital/energy/1128666.html
28 http://en.trend.az/capital/energy/1128666.html
29 http://www.stratfor.com/sample/analysis/russia-and-azerbaijan-outline-energy-cooperation
30 http://www.upstreamonline.com/live/article1128141.ece
31 http://www.bp.com/sectiongenericarticle.do?categoryId=9006670&contentId=7015095

5
32 http://www.bp.com/sectiongenericarticle.do?categoryId=9006670&contentId=7015095
33 http://www.bp.com/genericarticle.do?categoryId=9006615&contentId=7026800
34 Author was directly involved in the negotiations.
35 Page 17

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDcQFjAC&url=htt
p%3A%2F%2Fwww.bp.com%2Fliveassets%2Fbp_internet%2Fbp_caspian%2Fbp_caspian_en%2FSTA
GING%2Flocal_assets%2Fdownloads_pdfs%2Ff%2FFH_VP_Assessment_Azerbaijan_2006_Final.pdf&
36 http://www.bp.com/genericarticle.do?categoryId=9006615&contentId=7026800

6
 AIPN Paper
19 February 2014

ANNEX III.
THE SOUTHERN GAS CORRIDOR

1. East–West Central Asian Oil and Gas (US Policy)

With the break-up of the Former Soviet Union, the US government pursued a policy to
support the independent viability of the new Central Asian and Caucusus states.
Enabling these newly independent and landlocked states to export their oil and gas
production without traversing the territory of the Russian Federation or placing more oil
and gas resource in Iran and the Persian Gulf was regarded as critical. In addition to the
BTC crude oil pipeline (and the associated Kazakhstan Trans-Caspian System pipeline –
Pipeline 24 in this Annex), the Trans-Caspian Gas Pipeline (TCP) constituted a third
prong of US Caspian oil and gas export development policy. TCP was strongly
supported commercially by the ownership participation of Bechtel and GE Capital.

Unfortunately, with the discovery of the Shah Deniz Field in 1998, the core ‘driver’
behind the east–west transportation of Caspian gas shifted from Turkmenistan to
Azerbaijan. Nevertheless, the SCP Pipeline in fact linked three of the four original TCP
Project (Pipeline 16 in this Annex) countries– Azerbaijan, Georgia and Turkey. Shah
Deniz now provided a strong commercial driver to fulfill the USG strategic objective of
developing a large-scale solution to the problem of transporting Caspian gas to
European markets.

2. The Southern Gas Corridor (EU Policy)

Following the disruptions in gas supply in 2006 and 2009, the EU Commission became a
strong (albeit late) supporter of USG’s east–west policy objective. The EU sought
security of gas supplies by further diversifying sources away from the Russian Federation
(currently supplying 36 per cent of the EU’s total gas imports) and towards the Caspian
and Middle East.

As referenced above in Annex I., the response of the Russian Federation to the
Ukrainian dispute was characteristically pragmatic. The Russian Federation formed Nord
Stream AG and constructed two parallel subsea pipelines with a combined capacity of 55
Bcma and Capex of 7.1 Bln euros. The purpose of Nord Stream is directly to connect
Russian gas to the EU bypassing Ukraine. In contrast, aside from a few small-scale
grants, the EU has offered little in the way of funding support for any of the component
projects comprising the Southern Gas Corridor (see next section below for a list of
projects). This is particularly surprising given the escalating Capex estimates for
delivering the Southern Gas Corridor projects and the uncertainties associated with
forward gas pricing in Europe.

In June 2013 the TAP project was selected by Shah Deniz Phase II as the pipeline that
will carry its gas into the European markets. Subsequently, on 17 December 2013, the
Shah Deniz Phase II announced that they had taken the final investment decision (FID)
for the Stage 2 development of the Shah Deniz gas field in the Caspian Sea, offshore
Azerbaijan. This decision triggered plans to expand the South Caucasus Pipeline through
Azerbaijan and Georgia, to construct the Trans Anatolian Gas Pipeline (TANAP) across
Turkey and to construct the Trans Adriatic Pipeline (TAP) across Greece, Albania and
into Italy. 1 Interestingly, Total and Statoil elected not to invest in TANAP. Indeed,

1
 AIPN Paper
19 February 2014
Total subsequently sold its interests in Shah Deniz and TAP and Statoil announced first
announced its intent to reduce its overall shareholding in the SGC projects (from 25%
to 15% in the Shah Deniz Field). In October 2014, Statoil ultimately sold its entire stake
in Shah Deniz although it retains a 20% interest in TAP.

The TAP shareholders confirmed on 17 December 2013 that they had passed the
‘Resolution to Construct’ on the development and construction of the Trans Adriatic
Pipeline project. 2 As of the time of writing this paper, the large majority of the Capex
spend for TANAP will be fronted by SOCAR and the Azerbaijan State Oil Fund
(SOFAZ) and SOCAR will also participate in all of the other components of the SGC
Project. With ‘Azerbaijan, Inc.’ now apparently underwriting a significant portion of the
total SGC Capex, and Turkey emerging as the overall likely beneficiary of this effort, it
will be interesting to watch how the SGC corridor projects proceed over the coming 5-
10 years. Nevertheless, the recent Russian-Ukraine crisis may add new impetus to the
Southern Gas Corridor and a resolution to the funding challenges apparently facing
Azerbaijan may yet be found.

3. Risk to the Southern Gas Corridor

The Southern Gas Corridor is in fact a collection of separate projects that all require
careful coordination and alignment.’ These projects include the following:

• the Shah Deniz Phase II upstream;

• the expansion / looping of the SCP Pipeline;

• the construction of the TANAP Pipeline; and

• the construction of the TAP Pipeline.

The foregoing Southern Gas Corridor projects will have numerous stakeholders
including six transit governments, numerous gas buyers, at least four transportation and
pipeline companies and their shareholders (ten at the moment) and international
financing institutions (as some of the segments are likely to be project financed). Given
the strong need for alignment and coordination, combined with the need for 16 Bcma to
come on stream in the 2020–22 timeframe, there is very little room for delays.

Unfortunately, actual and potential misalignments have already emerged on, inter alia, the
following:

• as referenced above, the needs of the Shah Deniz Consortium for transportation
capacity in SCP to accommodate Phase II volumes differ from the needs of the
Azerbaijan Republic to provide transportation capacity for additional Azerbaijani
reserves. Although the costs of the SCP Pipeline are likely to be recoverable
under the Shah Deniz PSA, the additional cost for a new-build looped or parallel
pipeline in Azerbaijan and Georgia and the new-build TANAP Pipeline will need
to be fronted. With the exception of BP, the IOCs have stepped back from
funding the Capex for TANAP leaving a disproportionate funding burden on
the shoulders of SOCAR; 3

2
 AIPN Paper
19 February 2014
• in addition, the scope for schedule delays resulting from a new-build looped or
parallel pipeline is much greater than for a simple SCP expansion. In the event
that a new-build pipeline is constructed across the territory of Georgia as well as
the Azerbaijan Republic, historical precedent suggests possible complications
associated with re-opening the environmental conditions under the HGA in
Georgia);

• while there is an IGA covering state-to-state commitments between Azerbaijan

and Georgia, Azerbaijan and Turkey and an IGA commitment among the
downstream TAP Host States (Italy, Albania and Greece), Azerbaijan (which has
greater gas interests than Shah Deniz alone), does not currently have a direct
state-to-state commitment with the downstream Host States and in particular
Italy – its main destination market 4; and

• finally, the implementation of the large-scale TANAP Pipeline across Turkey will
enable Turkey to play a vital role in linking gas from the Middle East, Caspian
and the East Med into Europe (see below) benefitting Turkey and the EU and
paid for by Azerbaijan – a dynamic that suggests that there may be much more
negotiating before the SGC is finally implemented.

Accordingly, issues associated with the alignment of IOCs and SOCAR, escalating
Capex, the timing and coordination of multiple project delivery schedules, a sluggish
European economy, a proliferation of shale gas production, uncertain future gas prices
in the EU and the looming issue of the final resolution of Nagorno-Karabakh all present
significant sources of risk to the delivery of and sustained operation of the multiple
projects that together form the Southern Gas Corridor.

4. Opportunities for the Southern Gas Corridor

Assuming that the foregoing sources of risk are successfully managed, the Southern Gas
Corridor will offer a large-scale set of alternatives for pipeline supplies of gas to the EU.
These include gas from Turkmenistan, Northern Iraq, Israel, Cyprus and eventually Iran
(once it complies with international requirements). The Southern Gas Corridor will also
give rise to alternative supplies of gas for Bulgaria via the IGB Pipeline (see Pipeline 15
in the table to this Annex) and to various republics of the Former SFR Yugoslavia via
the IAP Pipeline (see Pipeline 14 in the table to this Annex).

3
 AIPN Paper
19 February 2014

MAP 4
SOUTHERN GAS CORRIDOR

12

14 15

13
16
11

ANNEX III. TABLE – SOUTHERN GAS CORRIDOR PIPELINES

Pipeline Country Parameters Ownership Strategic Risk Sources and

Configuration Commerci Purpose Consequences
al
B. Southern Gas Corridor
11. TANAP • Turkey (transit state • 16 bcm • State • SOCAR-led • Stakeholder alignment
(gas pipeline 10 bcm Shah Deniz (expand sector initiative between SOCAR and IOC
development) gas and off-taker for able in • Project designed to shareholders/shippers and
10 bcm) stages to company: ensure that alignment with Turkish
• Linking SCP to 23 bcm, TANAP Shah Deniz state 7
Europe 31 bcm • SOCAR gas is properly • Complexity of aligning
• Potential backbone and • BOTAS leveraged to Shah Deniz Phase II, SCP
for additional ultimately enable delivery expansion and downstream
• TPAO 6
Middle Eastern gas 60 bcm) 5 of larger European pipelines
• BP volumes of
(Iraq) • Scale of project may
Azerbaijan gas threaten commerciality
(in addition to
Shah Deniz
gas) to Europe
12. Nabucco • No producer state • 10 bcm • State and • Strategic EU- • Nabucco not selected
West (gas in chain (expanda private led project to selected by Shah Deniz
pipeline • Bulgaria ble to 23 sectors diversify Consortium to ship Phase
development) (transit/consumer) bcm) 8 • Bulgarian supply away II gas 13

4
 AIPN Paper
19 February 2014
Pipeline Country Parameters Ownership Strategic Risk Sources and
Configuration Commerci Purpose Consequences
al
• Romania • 48-inch Energy from the • State shareholding 14
(transit/consumer diameter 9 Holding Russian • High CAPEX relative to
• Hungary • 1,329 • Botas Federation the amount of available gas
(transit/consumer) kms 10 • FGSZ to ship 15
• Austria (transit/ • CAPEX: (MOL • Azerbaijan strategic choice
consumer) $10.4 subsidiary) to enable larger-scale
bln 11 • OMV pipeline development to
• Transgaz carry all Azerbaijan
(Romania) volumes
12 • IOCs do not want to pay
for larger-scale pipeline
with smaller-scale Shah
Deniz gas volumes 16
13. TAP (gas • No producer state • 10 bcm • Private • Tailor-made • Dependent upon Southern
pipeline in chain (expand sector project scaled European economies
development) • Greece able to 20 • BP (20%) to deliver Shah (weak)
(transit/consumer) bcm) 17 • SOCAR Deniz gas into • Potential community-based
• Albania • 800 kms (20%) Italian markets issues, e.g. landing point in
(transit/consumer) (478 kms • Statoil • Expandable to Italy and in Greece and
• Italy (principal in (20%) 20 bcm to Albania
consumer) Greece, • Fluxys enable
204 kms (19%) subsequent
in phases of
• Enagas
Albania, Azerbaijan gas
(16%)
105 kms development
offshore, • Axpo
4 kms in (5%) 20
Italy) 18
• CAPEX:
€1.6 bln 19

14. IAP (gas • Albanian and • 5 bcm 21 • State • Enables • Entirely dependent upon:
pipeline successor states • 516 sector Western • TAP
development) (FSRY) kms 22 • Plinacro Balkan • Transit gas volumes
• Albania (Croatia) 23 countries to be supplied into Albania
(transit/consumer) supplied by (other Azeri/non-
• Montenegro non-Russian Shah Deniz gas
(transit/consumer) gas supplied 24
• Bosnia and • Furthers EU
Herzegovina diversification
(transt/consumer) of supply and
• Croatia (anchor EU accession
consumer) objectives in
Western
Balkans
15. IGB (gas • Greece • 3-5 bcm 25 • State and • IGB will • Political
pipeline (transit/consumer) • 168.5 private enable supply • Commercial
development) • Bulgaria kms (140 sectors: optionality
(transit/consumer) kms in • IGI into Eastern
Bulgaria, Poseidon Balkans
28.5 kms (50% - regardless of
in 25% decisions on
Greece) 26 DEPA and TAP,
• CAPEX: 25%) Nabucco or
Total Edison South Stream
project • Bulgarian (Azerbaijan or
Russian gas

5
 AIPN Paper
19 February 2014
Pipeline Country Parameters Ownership Strategic Risk Sources and
Configuration Commerci Purpose Consequences
al
cost: Energy supplies)
€128.2 Holding (5
mln, total 0%) 28
EEPR
activities
cost:
€118
mln 27

16. TCP (gas • Successor states • Concept • No current • TCP would • Russian Federation
pipeline (FSU) only partners enable environmental objections
development) • Turkmenistan Turkmenistan to constructing and
(landlocked to further operating subsea in the
producer) break the Caspian 29
• Azerbaijan Russian export • Azerbaijan commercial
(landlocked monopoly competitor
producer targeting • EU objective • Turkmenistan policy
same markets as to bring restricting IOC investment
Turkmenistan) Caspian gas to in onshore Turkmenistan
• Georgia (transit) the EU gas fields creates little
• Turkey commercial incentive
(transit/consumer) (although CNPC
• EU (consumer) investment in Trans-Asia-
China operational gas
pipelines instructive) 30
• In the event that UN
Sanctions against Iran are
removed, any Turkmen gas
that does flow to the EU
will likely do so via the
existing Turkmenistan-Iran
Pipelines Pipeline 19 in
Annex IV

1 http://www.bp.com/en/global/corporate/press/press-releases/shah-deniz-final-investment-decision-paves-way.html
2 http://en.trend.az/capital/energy/2222467.html
3 http://www.ft.com/cms/s/0/2d2e749a-666d-11e3-8675-00144feabdc0.html#axzz2u2qnaZ3r
4 As Italy is currently Azerbaijan’s main destination market for its gas, the inability of the Azerbaijan state
to call upon Italy (and the other transit and downstream markets in Greece and Albania) through a direct
intergovernmental commitment would appear to present a significant gap in Azerbaijan’s ability to
effectively mitigate an important pre and post-completion state-to-state risk.
5http://www.jamestown.org/programs/edm/single/?tx_ttnews[tt_news]=39545&tx_ttnews[backPid]=27

&cHash=2e9f386bf569ef7ea670cde5a5c3784c#.UbLIlZzNlhI
6 http://www.tanap.com/en/the-energy-of-the-future-is-ready.aspx
7 http://www.turkishpress.com/news.asp?id=384246
8 http://www.nabucco-pipeline.com/portal/page/portal/en/Home/the_project
9 http://www.nabucco-pipeline.com/portal/page/portal/en/pipeline/overview
10 http://www.nabucco-pipeline.com/portal/page/portal/en/pipeline/overview
11 http://www.france24.com/en/20090127-eu-backs-nabucco-pipeline-get-off-russian-gas-energy
12 http://www.nabucco-pipeline.com/portal/page/portal/en/company_main/shareholders_link
13 http://www.naturalgaseurope.com/nabucco-failure-impact-on-cee-gas-supply
14 http://www.globalgastransport.info/archive.php?id=732
15 http://www.france24.com/en/20090127-eu-backs-nabucco-pipeline-get-off-russian-gas-energy

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 AIPN Paper
19 February 2014

16 Page 3
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDkQFjAC&url=htt
p%3A%2F%2Fwww.gmfus.org%2Fgalleries%2Fct_publication_attachments%2FTA_NabuccoPipeline_B
arysch.pdf&ei=EOK0Ubu2C8G7igKCm4DoDA&usg=AFQjCNFKhUwi6YbGmuO6uNgxHphce4F8cg
&bvm=bv.47534661,d.cGE
17 http://www.trans-adriatic-pipeline.com/tap-project/concept/
18 http://www.trans-adriatic-pipeline.com/tap-project/concept/
19 http://www.nytimes.com/2011/01/27/business/global/27energy.html
20 http://www.trans-adriatic-pipeline.com/about-us/shareholders/
21http://www.energycommunity.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Investme

nts/Gas/IAP
22 http://www.trans-adriatic-pipeline.com/al/news/news/detail-view/article/194/
23 http://www.trans-adriatic-pipeline.com/news/news/detail-view/article/50/
24 http://www.wbif-ipf.eu/?p=1435

http://pipelinesinternational.com/news/mouc_signed_for_tap-iap_interconnection/062839/
25 http://www.mee.government.bg/en/themes/gas-interconnection-greece-bulgaria-igb-910-347.html
26 http://www.mee.government.bg/en/themes/gas-interconnection-greece-bulgaria-igb-910-347.html
27http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CCwQFjA

A&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fec.europa.eu%2Fenergy%2Feepr%2Fprojects%2Ffiles%2Fgas-
interconnections-and-reverse-flow%2Fgreece-
bulgariaigb_en.pdf&ei=7ue0UfObF7GvigKs5YHYCw&usg=AFQjCNGV11gVNzYa9D0dkvEi1p5sXRx
cRw&bvm=bv.47534661,d.cGE
28 http://www.mee.government.bg/en/themes/gas-interconnection-greece-bulgaria-igb-910-347.html
29 http://en.rian.ru/russia/20070125/59687576.html

http://www.eurasianet.org/departments/insight/articles/eav032806.shtml
30 http://www.gpo.gov/fdsys/pkg/CPRT-112SPRT77221/html/CPRT-112SPRT77221.htm

7
 ANNEX IV.
TURKMENNATURAL GAS PIPELINES

1. Introduction

The Republic of Turkmenistan is among the more rigorously independent of the

republics to emerge from the Former Soviet Union (FSU). While holding large-scale
hydrocarbon reserves, particularly natural gas (17.5 TCM of gas – making it the 5th
largest in reserves) and 600M Bbls of oil, Turkmenistan’s ability to monetize this reserve
base via export to hard currency markets has been consistently constrained by geography,
regional geopolitics, available transport infrastructure and its own restrictive policies on
direct foreign investment into its onshore hydrocarbon base. Turkmenistan’s natural gas
exports peaked in 1989 at 75.7 Bcma and fell sharply thereafter with the break-up of the
FSU. A long period ensued in which Gazprom effectively bought the majority of
Turkmenistan’s export gas at below market-prices in order to supply the domestic
Russian Federation population with ‘cheap’ Turkmen gas while concurrently exporting
its own production to the EU (capturing a substantial gas price arbitrage) and delaying
much needed investment in its own upstream. In its struggle to break the stranglehold
the Russian Federation has long held on Turkmenistan’s gas export options,
Turkmenistan pursued a policy to diversify its export options. In 2013, Turkmenistan
produced 62.3 BCM of which 24.4 BCM was consumed domestically with the balance
exported to the following countries: China (24.2 BCM), the Russian Federation (9.9
BCM), Iran (4.7 BCM) and other FSU countries (1.1 BCM).

2. Challenges to the export of Turkmenistan’s oil and gas resource base

Turkmenistan faces a number of formidable challenges to the development and full

monetization of its hydrocarbon resources:

• aside from Turkmenistan’s Caspian shoreline, the country is landlocked forcing it

to transit across the territory of at least one or more neighboring countries in
order to access international markets;

• Turkmenistan’s neighbors compete in the production and export of hydrocarbon

resources (particularly gas);

• all oil and gas transportation and associated infrastructure developed before the
break-up of the FSU was routed through / towards the Russia Federation;

• the Russian Federation has developed a strategic engagement with its ‘near
abroad,’ that is, the countries of the FSU, that fosters dependency and the ability
of the Russian Federation to exert leverage;

• the Azerbaijan Republic is the one FSU country that has successfully developed
large-scale oil and gas transportation infrastructure that does not traverse the
territory of the Russian Federation; however, Azerbaijan is also an emerging
large-scale gas province and is prioritizing the development of gas export
capacity to accommodate its own gas production;

1
 • some of Turkmenistan’s prime oil and gas deposits are located in disputed areas
of the Caspian Sea (for example, the Kapaz or Sardar Oil Field as it is referred to
in Turkmenistan), and without an agreement between Turkmenistan and the
states involved in the disputes, these fields may remain undeveloped;

• Turkmenistan’s southern neighbors present significant diplomatic and security

challenges:

o the Islamic Republic of Iran is currently subject to large-scale

international sanctions due to its support for international terrorism, its
position on Israel and its pursuit of nuclear weapons technology 1;

o the Islamic Republic of Afghanistan presents enormous security

challenges as it has suffered a Soviet invasion (1979), two recent civil
wars (1989–92) and (1992–6), rule by the Taliban (1996–2001), the
operation of terrorist organizations (the Haqqani Network and Al-
Qaeda) and the ongoing war against the Taliban insurgency (2001–
present).

3. Turkmenistan’s gas pipelines (operational and in development)

In an effort to break the virtual monopoly that the Russian Federation had on the transit
and sale of Turkmen gas, the country has since pursued a strategy of gas export
diversification. Turkmenistan currently has operational gas pipeline export capacity into
the territory of the Russian Federation (see Pipeline 17 in the table to this Annex),
directly to the Islamic Republic of Iran (see Pipeline 19 in the table to this Annex) and
to China via the territory of the Republics of Uzbekistan and Kazakhstan (see Pipeline
18 in the table to this Annex). It is important to note that the strategic priorities of
Turkmenistan appear to be changing with China now receiving the majority of
Turkmenistan’s exported gas (with Turkmen gas exports to China anticipated to grow to
75 BCM). While Turkmenistan continues to pursue pipeline projects to India via
Afghanistan and Pakistan (the TAPI Project – see Pipeline 20 in the table to this
Annex) and to the EU via a Trans-Caspian Pipeline (the TCP Project – see Pipeline 16
in the table to Annex III), neither project has robust support from investors due to the
fact that Turkmenistan excludes foreign investors from owning interests in its onshore
gas fields. Each of the TAPI and TCP Projects is summarized briefly below. With the
prospect of Iranian sanctions easing, the opportunity for a TCP to be successfully
developed diminishes dramatically. Indeed, to the extent that Turkmen gas reaches the
EU, it will likely be via the existing pipelines transiting Iran and interconnecting in
Turkey with the existing BOTAS system and potentially via TANAP. 2

2
 MAP 5
TURKMEN NATURAL GAS PIPELINES

17

19

20

MAP 6
TRANS-ASIA–CHINA GAS PIPELINE

18

3
 ANNEX IV. TABLE– TURKMEN NATURAL GAS PIPELINES

Pipeline Country Parameters Ownership Strategic Risk

Configuration Commercial Purpose Sources
and
Consequen
ces
C. Turkmenistan
17. Central • Successor states • Current • State • FSU • Export
Asia Center (FSU) combined controlled System curtailment
Gas Pipeline • Turkmenistan capacity of 44 • FSU built s with
System (landlocked Bcm (ultimate infrastructu between sharp
(operational producer) capacity of 80 re 1960 and drop-off in
gas pipeline) 3 • Kazakhstan Bcm) 4 • Gazprom 1988 8 exports
(transit / • 4 parallel • Türkmenga • Built to after
producer) pipelines 5 z gather gas break-up
• Russia (transit / • 5,000 kms 6 from of FSU
• Uzbekneft
producer) • Dauletbad and egaz Turkmenist • Export
Shatlyk onshore • KazMunay an and dependenc
gas fields 7 Uzbekistan y Russia
Gas
and has
transport it historically
to Russia secured
via below
Kazakhstan market
Turkmen
gas prices,
supplied its
domestic
needs and
supplied
European
contracts
with
Russian
gas
capturing a
healthy
arbitrage
and
deferring
upstream
investment
• Security
concerns,
for
example, 9
April, 2009
explosion
on CAC
System
shutting
exports for
9 months 9

18. Trans- • Successor states • All information • State • Significant • Aggressive

Asia–China (FSU) on Technical sector move for project
(operational • Turkmenistan Parameters • CNPC Central execution
gas (landlocked below 11 • Türkmeng Asia and (for
pipelines) 10 producer) • 4 Pipelines total az China, example,

4
 Pipeline Country Parameters Ownership Strategic Risk
Configuration Commercial Purpose Sources
and
Consequen
ces
• Uzbekistan capacity 80 • Uzbekneft regionally Line A
(landlocked Bcm egaz and completed
transit / • Line A 42’ • KazMunay geopolitical in 18
producer) (completed Gas 12 ly months) 13
• Kazakhstan 2009) • China • Significant
(landlocked • Line B 42’ securing ESIA
transit / (completed large-scale questions
producer) 2010) supplies remaining
• China (consumer) • Line C 48’(to from • Risk
be completed proximate mitigation
2015) Central dependent
• Line D Asian upon
(unspecified) producers leverage
and China is
• Line A + B 30
constructin able to
Bcm Line C 25
g large- exert over
Bcm, Line D 25
scale cross- Central
Bcm
border Asia given
• 1,810.5 kms pipelines to investment
(510.5 kms in delivergas and export
Uzbekistan, into China dependenc
1,300 kms in
• Central y
Kazakhstan)
Asian
• CAPEX: $6.7 states
Bln diversifying
markets
away from
Russia and
the EU
19. • Turkmenistan • Combined 20 • State • Turkmen • US-led
Turkmenista (landlocked Bcm capacity sector objectives internation
n to Iran (two producer) (7–8 Bcm • Turkmen are to al
opera- • Iran (transit / estimated) 14 gaz transit gas sanctions
tional gas producer) • DSK (182 • National via Iran against
pipelines) kms 15, 12 Iranian Oil and Turkey Iran
• Korpeje– Bcm 16, 48’ 17, Company into the • Turkmen
Kurtkuyi completed EU and Iranian
(KK) 2010) markets, to disputes
• Dauletabad • KK (200 diversify over gas
–Sarakhs– kms 18, 8 exports prices 21
Khangiran Bcm 19, away from
(DSK) completed Russia and
1997 20) to become
a regional
hub for gas
exports
• Iranian
objectives
are to
alleviate
supply
shortages
in the
north of
the country

5
 Pipeline Country Parameters Ownership Strategic Risk
Configuration Commercial Purpose Sources
and
Consequen
ces
and to use
Turkmen
transit gas
to secure
export
links into
the EU

20. TAPI • Turkmenistan TAPI Technical • US • Further • Access by

(gas pipeline (landlocked Parameters: 22 governme export Turkmenis
project producer) • 3.2 Bcf/d nt and diversificati tan to
development) • Afghanistan • 1,680 kms/56’ private on for onshore
(landlocked • CAPEX: $7.6 sector Turkmenist upstream
transit) Bln • ISGS PVT an would
• Pakistan (transit / • Supply source: Ltd. • Acute gas provide
consumer) South Yolotan • SSGC supply- commercia
• India (consumer) and Osman gas (51 per demand l
fields cent) gap incentive 23
• SNGPL opening in • Formidabl
(49 per Pakistan e security
cent) markets challenges
(Pakistan that may be across
utilities) filled by Afghanista
Turkmen n
gas
• US
counter-
weight to
Iranian gas
supplies
into
Pakistan
24

1Recent diplomatic overtures opened by the new Iranian Rouhani towards the US administration hold out
hopes for a thaw in relations and the eventual winding back of international sanctions.
2 Although maintaining a ‘TCP Project’ may be useful to Turkmenistan in future efforts to negotiate

adequate transit terms with Iran.

3 http://www.gazprom.com/about/production/projects/pipelines/central-asia/
4http://www.gazprom.com/about/production/projects/pipelines/central-asia/
5 http://www.gazprom.com/about/production/projects/pipelines/central-asia/
6 http://www.gazprom.com/about/production/projects/pipelines/central-asia/
7 http://minerals.usgs.gov/minerals/pubs/country/2007/myb3-2007-tx.pdf
8 http://www.gazprom.com/about/production/projects/pipelines/central-asia/
9http://www.rferl.org/content/Pipeline_Explosion_Stokes_Tensions_Between_Turkmenistan_Russia/16

08633.html
10 http://www.iploca.com/platform/content/element/14392/4AndreasKohler.pdf

6
11 http://www.iploca.com/platform/content/element/14392/4AndreasKohler.pdf See also,
http://www.cnpc.com.cn/en/aboutcnpc/ourbusinesses/naturalgaspipelines/Central_Asia－
China_Gas_Pipeline_2.htm?COLLCC=1784669773&COLLCC=4188508896&
12 http://www.kmg.kz/en/manufacturing/gas/infrastructure/
13 http://www.iploca.com/platform/content/element/14392/4AndreasKohler.pdf
14http://www.jamestown.org/programs/edm/single/?tx_ttnews[tt_news]=35892&cHash=bb18283541#.
UbN0LJzNlhI
15http://www.jamestown.org/programs/edm/single/?tx_ttnews[tt_news]=35892&cHash=bb18283541#.

UbYC1pzNlhI
16http://www.jamestown.org/programs/edm/single/?tx_ttnews[tt_news]=35892&cHash=bb18283541#.

UbYC1pzNlhI
17 http://www.namnewsnetwork.org/v3/read.php?id=MTcwODg2
18 http://www.payvand.com/news/10/jan/1056.html
19http://www.jamestown.org/programs/edm/single/?tx_ttnews[tt_news]=35892&cHash=bb18283541#.

UbYC1pzNlhI
20 http://www.payvand.com/news/10/jan/1056.html
21 http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?lng=en&id=88710
22 http://www.ogj.com/articles/2014/01/tapi-pipeline-framework-being-prepared-on-fast-track-

basis.html
23 http://archives.mees.com/issues/1448/articles/49553

7
 ANNEX V.
KAZAKH OIL EXPORT PIPELINES AND
TURKISH STRAITS BYPASS PIPELINES

1. Introduction

The Republic of Kazakhstan, holds over 30 Bln Bbls of proven reserves of oil, making it
the largest oil resource base in the Former Soviet Union outside the Russian Federation
(Kazakhstan also holds a gas reserve base of 1.5 TCM). As an entirely landlocked
country and sharing a long northern border with the Russian Federation, Kazakhstan’s
export options are constrained. Nevertheless it is currently managing to produce 1.785
Mbpd of oil and to export a large quantity of this via multiple export pipelines, rail and
Caspian tankers through the Russian Federation, Azerbaijan, Iran and China.

2. Major risks and constraints to Kazakh oil exports

The majority of Kazakhstan’s oil is exported through the territory of the Russian
Federation via three pipelines: the CPC Pipeline (see Pipeline 21 in the table to this
Annex) and the Uzen Pipeline (see Pipeline 22 in the table to this Annex), and the
Makhachkala-Tikhoretsk-Novorossiysk Pipeline (as this latter route is smaller scale and
shares the same terminus with CPC, it is not separately referenced in the table). All three
pipelines deliver oil to a terminal on the Black Sea at Novorussiysk in Russia. These
volumes of oil require loading onto maritime tankers for onward shipment through the
Turkish Straits. Unfortunately the total amount of oil that may be safely shipped on a
daily basis is limited due to Turkey’s concerns about oil tanker passage through the
environmentally sensitive Turkish Straits. Since the Russian Federation has means to
diversify its own exports away from the Black Sea (by transporting its oil to terminals in
the Baltic and the Far East), the limitations associated with transiting the Turkish Straits
falls disproportionally on the owners of oil produced in Kazakhstan.

As a consequence, in anticipation of the giant Kashagan oil field coming on stream, two
Turkish Straits bypass pipeline projects were concurrently pursued (the Burgas–
Alexandroupoli and the Samsun–Ceyhan Pipelines–see Pipelines 25 and 26 in the table
to this Annex). Interestingly, Transneft and Rossneft were majority investors in Burgas–
Alexandroupoli and both companies were negotiating shareholdings in the Samsun–
Ceyhan Project at the time that the two projects were mothballed.

1. Kazakhstan’s forward oil export options

With Kazakhstan’s mega oil field (Kashagan) mired in technical and governance-related
problems, full field development has been delayed.[1] As a consequence, both bypass
pipelines have recently been mothballed. In anticipation of Kashagan being brought on
stream, Kazakhstan will need to consider develop additional export options as the
challenge of on-shipment through the Turkish Straits will once again become
acute. Clearly, without some way of bypassing the Turkish Straits, additional export to
Western markets will be constrained. As early as 2002, the US, Kazakh and Azerbaijan
governments were laying plans for additional Kazakh production to be exported via
BTC. Indeed, four of the IOCs present in Kazakhstan (Conoco, ENI, Total and Inpex)
had taken a position in BTC specifically for this purpose. Subsequently, the Kazakh
Government (through KMG) and the Azerbaijani government (through SOCAR) took

1
initial steps towards jointly developing the KTCS System (see Pipeline 24 in the table
tothis Annex). These steps included signing a short-form IGA to support the
development of the KTCS System. When operational, KTCS will enable Kazakhstan to
ship approximately 500,000 Bpd to the inlet flange to the BTC Pipeline for onward
shipment to Ceyhan and in this way bypass the Turkish Straits. In addition, KMG and
CNPC have commissioned the Kazakhstan–China Pipeline (see Pipeline 23 in the table
to this Annex), and there is discussion of further expanding the capacity of this
pipleine.[2]

Oil market dynamics have changed significantly since the time that the US Government
announced its Caspian Basin Policy in 1997. While it was geopolitics that drove the US
to champion the west to east transportation of oil and gas from the newly emerging
former Soviet Republics, it may well be economics that reverses this. Demand growth
for oil has peaked in the US in 2005 and plateaued across the OECD since (indeed
demand growth for oil is declining in the EU). In contrast, demand growth for oil in
China is growing. It may make much greater economic sense for Kazakhstan to expand
its export pipelines east rather than west. Such a policy would also be less likely to draw
the wrath of the Russian Federation given broader dynamics as discussed in Annex I).

MAP 7
KAZAKHSTAN OIL EXPORT PIPELINES AND
TURKISH STRAITS BYPASS PIPELINES

22

23
21

25 24

26

2
 ANNEX V. TABLE – KAZAKH OIL EXPORT PIPELINES AND
TURKISH STRAITS BYPASS PIPELINES

Pipeline Country Parameters Ownership Strategic Risk

Configurati Commercial Purpose Sources
on and
Consequen
ces
D. Kazakhstan
21. CPC • Successor • CPC Phase I • State and private • For • Shipping
(operatio states (FSU) • 700,000 sectors Kazakhsta constraints
nal oil • Kazakhstan Bpd 1 • Russian n, CPC through the
pipeline) (landlocked • Commis- Federation (24 per enables Turkish
producer) • sioned cent) delivery of Straits 7
• Russia (transit 2001 2 • KazMunayGas (19 Kazakh • Additional
/ producer) per cent) production demurrage
• Over 1,500
• Delivery to • Chevron Caspian to global costs
kms 3
terminal at Pipeline markets associated
Novorussysk Consortium • For Russia, with
• CPC Phase
(Black Sea) Company (15 per CPC shipping
II
for onward cent) maintains constraints
• 1,400,000 leverage leading to
shipment Bpd • Lukaro B.V. (12.5
through the per cent) over possible
capacity 4
Kazakh oil shut-in of
Turkish • Mobil Caspian
• CAPEX: shipments Kazakhstan
Straits Pipeline Company
$5.4 Bln 5
production
bottleneck (7.5 per cent)
• Completio • Seasonal
n expected • Rosneft-Shell
and weather
2015 6 Caspian Ventures
factors
Ltd. (7.5 per cent)
constrain
• CPC Company (7 the number
per cent) of tankers
• BG Overseas that can
Holding Ltd. (2 pass
per cent) through the
• Eni International Turkish
(N.A.) N.V. S.ar.l. Straits 8
(2 per cent) • Environme
• Kazakhstan ntal and
Pipeline Ventures safety
LLC (1.75 per issues 9
cent)
• Oryx Caspian
Pipeline LLC
(1.75 per cent)
22. Uzen- • Kazakhstan • Largely • State controlled • Oil • Broader
Atyrau- (landlocked existing • Kazakhstan pipeline relationship
Samara producer) pipeline branch joint-stock primarily of energy
(operatio • Russian from USSR company transports export
nal oil Federation • 1,500 kms 10 ‘KazTransOil’ 13 oil dependency
pipeline) (transit / • 1,000 mms • Russian produced of
producer) with 40 Federation branch from fields Kazakhstan
Mt/y open joint-stock in the to the
capacity company Atyrau and Russian
(Uzen- ‘PrivolzhskNeftep Mangistau Federation
Atyrau) 11 rovod’ of regions of 15

• 700 mms ‘TransNeft’ JSC Kazakhsta • Shipping

with 17 (in Russian n constraints

3
 Pipeline Country Parameters Ownership Strategic Risk
Configurati Commercial Purpose Sources
on and
Consequen
ces
Mt/y Federation) 14 through the
capacity Turkish
(Atyrau- Straits
Samara) 12 • Additional
demurrage
costs
associated
with
shipping
constraints
leading to
possible
shut-in of
Kazakhstan
production
• Seasonal
and weather
factors
constrain
the number
of tankers
that can
pass
through the
Turkish
Straits 16
• Environme
ntal and
safety
issues 17
23. • Kazakhstan • Operational • State controlled • Enables • Aggressive
Kazakhst (landlocked in 2005 18 • CNPC 21 greater project
an–China producer) • 2,558 kms 19 • KazMunayGas 22 diversity of execution
Oil • Russian with 20 export for (similar to
Pipeline Federation Mt/y Kazakhsta Turkmenist
(operatio (producer) capacity n an–China
nal oil • China (from • Enables gas
pipeline) (consumer) Atyrau, security of pipeline)
Kazakhstant supply for • Risk
o China mitigation
Alashankou, from dependent
China) 20 countries upon
• Interconnect that are leverage
ion from direct China is
Western neighbors, able to
Siberia enabling a exert over
greater Central
degree of Asia given
risk investment
mitigation and export
and dependency
manageme
nt for
China
• Discussion

4
 Pipeline Country Parameters Ownership Strategic Risk
Configurati Commercial Purpose Sources
on and
Consequen
ces
s are
underway
to double
the
capacity of
the
pipeline
and the
export of
crude oil to
China
24. KTCS • Kazakhstan • Onshore • State and private • To enable • Kazakhstan
(oil barge (landlocked pipeline sectors Kazakhsta upstream
and producer) from • KMG (50 per n to costs
pipeline • Azerbaijan Atarau- cent) diversify • KMG
developm (landlocked Kuryk • SOCAR (50 per oil exports alignment
ent) producer) • Onshore cent) away from with IOCs
• Georgia storage and Russia and • Transit fees
(transit) terminal in the
• Turkey Kuryk Turkish
(transit / • 4 60,000 dwt Straits
port) tankers • To enable
shuttling SOCAR /
between BTC to
Kuryk and utilize
Sangachal, spare
Azerbaijan 23 capacity in
• Onward BTC
shipment of
Kazakh oil
through
BTC
25. • Bulgaria • 700,000 Bpd • State sector • Turkish • Commercial
Burgas- (transit) initially • Trans-Balkan Straits viability:
Alexandro • Greece (ultimate Pipeline BV bypass why should
upoli (oil (transit) capacity of (Dutch SPV) pipeline oil shippers
bypass over 1 • Russian shares(51 designed to pay a tariff
pipeline Mbpd) 24 per cent) alleviate to use a
developm • 280 kms 25 seasonal pipeline
• Pipeline
ent; • CAPEX: $1- bottlenecks when they
Consortium
project 1.3 Bln 26 • Primarily a can ship
‘Burgas–
suspende Kazakhsta through the
• Bulgarian Alexandroupoli’
d) n oil Turkish
government Ltd.;
pulled out in export Straits for
• Bulgarian shares
December problem as free?
(24.5 per cent)
2011, and no Russia can • Environme
• Joint stock
work is diversify its ntal
company ‘Project
being done 27 exports sensitivities
Company Oil
and 28 east and noted with
Pipeline Burgas–
west to route and
Alexandroupoli–
avoid terminal 30
BG’ AD
shipping
• Greek shares(24.5 oil through
per cent) Turkish
• ‘Helpe–Thraki Straits

5
 Pipeline Country Parameters Ownership Strategic Risk
Configurati Commercial Purpose Sources
on and
Consequen
ces
A.E.’ (23.5 per • Consequen
cent); Hellenic tly, Russian
Republic (1 per Federation
cent) 29 lead on
Burgas–
Alexandro
upoli may
be seen as
tied to
overarchin
g Russian
Federation
strategy to
exert
leverage
over
Kazakhsta
n oil
export
26. • Turkey • 1,500,000 • State and private • Turkish • Why should
Samsun– (transit) Bpd 31 sectors Straits oil shippers
Ceyhan • 555 kms 32 • Calik Enerji bypass pay a tariff
(oil • Estimated • ENI pipeline to use a
bypass CAPEX: designed to pipeline
• Rosneft
pipeline $5–6 Bln 33 alleviate when they
developm • Transneft 34
seasonal can ship
ent; bottlenecks through the
project is • Alleviate Turkish
dormant) legitimate Straits for
environme free?
ntal and • Montreux
social risks, Convention
particularly constraints
in and on Turkish
around the government
Bosphorus ’s ability to
• Russian police
Federation shipping
lead on through the
Burgas- Turkish
Alexandro Straits 35
upoli may • Political
be seen as bypass
tied to pipeline tied
overarchin to Russian-
g Russian Turkish
Federation Caspian
strategy to energy
exert interests
leverage
over
Kazakhsta
n oil
export

6
1http://www.cpc.ru/en/about/pages/default.aspx
2 http://www.eia.gov/countries/cab.cfm?fips=KZ
3 http://www.cpc.ru/EN/about/Pages/default.aspx
4http://www.chevron.com/chevron/pressreleases/article/06302011_caspianpipelineconsortiummarksthe

groundbreakingforits54billionexpansion.news
5 http://www.cpc.ru/EN/about/Pages/default.aspx
6 http://www.cpc.ru/EN/about/Pages/default.aspx
7 http://www.balkanalysis.com/energy-sector/2011/11/15/reducing-energy-transit-through-the-turkish-

straits-solutions-postponed/
8 http://www.balkanalysis.com/energy-sector/2011/11/15/reducing-energy-transit-through-the-turkish-

straits-solutions-postponed/
9http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CEUQFjAF&url=htt

p%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fthe-economics-of-pipeline-routes-the-
conundrum-of-oil-exports-from-the-caspian-
basin&ei=bYazUfScLMmcigKUmYHYBA&usg=AFQjCNHlUC9FLLyaM7zB8cYlu6xQQxeGDg&bvm
=bv.47534661,d.cGE at Page 10.
10 http://www.iot.kiev.ua/index.php?option=com_content&view=article&id=79&Itemid=82&lang=en
11 http://www.iot.kiev.ua/index.php?option=com_content&view=article&id=79&Itemid=82&lang=en
12 http://www.iot.kiev.ua/index.php?option=com_content&view=article&id=79&Itemid=82&lang=en
13 http://www.iot.kiev.ua/index.php?option=com_content&view=article&id=79&Itemid=82&lang=en
14 http://www.iot.kiev.ua/index.php?option=com_content&view=article&id=79&Itemid=82&lang=en
15http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&cad=rja&ved=0CGAQFjA

H&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fwww.dundee.ac.uk%2Fcepmlp%2Fjournal%2Fhtml%2FVol17%2FVol17_8.p
df&ei=nlMNUtruKen6iwKk_oCACA&usg=AFQjCNEQ7Y9GKJBcjovT19zqt2q_YtTkEw&bvm=bv.50
768961,d.cGE at Page 2Page 2.
16 http://www.balkanalysis.com/energy-sector/2011/11/15/reducing-energy-transit-through-the-turkish-

straits-solutions-postponed/
17 http://www.gasandoil.com/news/2004/07/ntc42923
18http://www.energyglobal.com/news/pipelines/articles/Kazakhstan_to_China_oil_pipeline_could_start

_operating_at_its_full_capacity_by_2014.aspx#.Ug1ZGD92GKJ
19 http://cpp.cnpc.com.cn/gdj/en/yjjs/gj_3.shtml?COLLCC=4188508896&COLLCC=362890334&
20 http://www.chinadaily.com.cn/china/2013-04/07/content_16379084.htm
21 http://www.cnpc.com.cn/en/cnpcworldwide/kazakhstan/?COLLCC=4188508896&
22 http://www.cnpc.com.cn/en/cnpcworldwide/kazakhstan/?COLLCC=4188508896&
23 http://www.ogj.com/articles/print/volume-107/issue-4/transportation/new-caspian-oil-production-

will-bypass-russian-transport.html
24 https://www.google.com/search?q=Bourgas-Alexandropolis&ie=utf-8&oe=utf-

8&aq=t&rls=org.mozilla:en-GB:official&client=firefox-a
25 https://www.google.com/search?q=Bourgas-Alexandropolis&ie=utf-8&oe=utf-

8&aq=t&rls=org.mozilla:en-GB:official&client=firefox-a
26 https://www.google.com/search?q=Bourgas-Alexandropolis&ie=utf-8&oe=utf-

8&aq=t&rls=org.mozilla:en-GB:official&client=firefox-a
27 http://www.thenationalherald.com/article/48778
28 http://www.defencegreece.com/index.php/2011/12/bulgaria-pulls-out-of-burgas-alexandroupoli-

pipeline/
29 http://www.tbpipeline.com/faq
30 http://balkansproject.ips-dc.org/?p=1152

http://www.tmbulgaria.com/en/articles/Pomorie-residents-protest-against-Bourgas-Alexandroupolis-
project/1527/index.htmlhttp://www.novinite.com/view_news.php?id=117048
31 http://www.novinite.com/view_news.php?id=106604
32 http://www.novinite.com/view_news.php?id=106604
33 http://www.hydrocarbons-technology.com/projects/trans-anatolian-natural-gas-pipeline/
34 http://www.hydrocarbons-technology.com/projects/trans-anatolian-natural-gas-pipeline/
35 http://www.thewashingtonreview.org/articles/turco-russian-energy-relations-interdependence-and-

prospects-for-energy-security.html

7
 ANNEX VI.
MIDDLE EASTERN OIL AND GAS PIPELINES

1. Introduction

Notwithstanding the advent of shale oil, shale gas and the prospect for additional
sources of unconventional oil and gas to be added to the market, the Middle East
remains a vitally important oil and gas-producing region. As a region, the Middle East
has the largest concentration of oil and gas reserves (808.5 Bn Bbls of oil and 80 TCM
of gas). Indeed, the region’s oil reserves are larger than those of all other regions
combined and they are capable of being produced at a relatively low cost. The strength
of this position is currently being asserted forcefully by Saudi Arabia’s decision on 27
November 2014, to maintain production levels and to allow the cost of oil to fall. This
will force pain on oil dependent economies (including Iran) and high cost
unconventional producers in the US. However, the sectarian, tribal, religious, historical
and geopolitical divisions that run through the Middle East have also turned the region’s
greatest strength into a weakness.

For example, Iran, the country with the single biggest reserve base of natural gas (33.6
BCM 1 ) currently exports only 8.4 BCM through pipelines connecting from
Turkmenistan to Turkey 2 and has no LNG export capability. Interestingly, the recent
OPEC decision coincided with the failure of the G5 +1 negotiations with Iran to deliver
a deal. Nevertheless, the prospect of deal with Iran in the medium term remains good
and UN sanctions may ultimately be dropped. With this development, there is a
significant opportunity for Iran (the country with the world’s single largest reserves of
conventional gas) to begin exporting material quantities of its gas production via pipeline
and potentially LNG. On the demand side, the OECD estimates that Saudi Arabia may
soon represent a market with fast growing demand for gas entailing the prospect of
significant gas exports to Saudi Arabia. Ironically, the largest potential regional suppliers
(Iran and Israel) also sit at opposite poles of various religious, historical, post-colonial /
sectarian divide.

As most Middle Eastern oil and gas production is concentrated in the Persian Gulf
region, there is less need for cross-border oil and gas pipelines. Nevertheless, there are a
number of operational cross-border pipelines (and pipelines in development) that have
been pursued for various strategic purposes. For example, the concentration of sizeable
oil reserves in ‘Southern Iraq’ will exceed the maximum capacity that can be developed
to export Iraqi crude via the Persian Gulf. Consequently, additional pipeline capacity is
needed including the Kirkuk–Ceyhan Pipeline (also referred to as the Iraq-Turkey
Pipeline or “ITP”- Pipeline 27) and the Iraq-Jordan Pipeline development (Pipeline
28). In the North of Iraq, the Kurdish Regional Government has developed a cross-
border pipeline to deliver oil from its territory to global markets via the ITP segment
located on the territory of the Republic of Turkey. Interestingly, while rich in oil, many
parts of the Middle East and South Asia have growing needs for gas and power. Gas
reserves in Egypt and Qatar have provided the base load for regional pipelines
(Pipelines 29 and 32 respectively). A very dangerous supply-demand gas and power
gap is developing in Pakistan and the most logical solution would be to deliver supplies
from neighboring Pakistan via the IPI Pipeline (Pipeline 30) 3. As referenced above, the
IOCs that own recently discovered gas reserves in the East Mediterranean are also
considering gas export options (including a gas pipeline development from the offshore
Israel Leviathan Field to Jordan. Finally, as a means of bypassing the Straits of Hormuz,

1
the UAE has developed the ADCOP Pipeline (Pipeline 31). The foregoing pipelines
and pipelines in development will be considered briefly below.

2. Iraqi oil and gas exports

a. Oil export pipelines out of Northern Iraq

With 143Bln Bbls of proven oil reserves, Iraq ranks fourth in the world and the revenues
generated by its petroleum industry make up 95 percent of the Iraqi budget. 4 The semi-
autonomous region of Iraqi Kurdistan in the north of the country is reputed to hold
43.7 BL Bbls of oil and 3.5 TCM of gas reserves. The Iraqi Kurds have sought self-rule
from Baghdad for decades and have claimed that the city of Kirkuk and the surrounding
oil fields (holding approximately one third of Iraq's reserves) were part of Kurdistan
during four centuries of Ottoman rule ending with World War 1. 5 Since overthrowing
Saddam Hussein, Baghdad and the Kurdistan Regional Government (KRG), based in
Erbil, have been unable to agree on power sharing, particularly in respect of rights over
natural resources. Recent disagreements have centered on revenue sharing, territorial
disputes and a new draft Oil Law. 6 These disagreements became more acute in 2009
after Erbil signed a series of contracts with IOCs claiming constitutional powers granted
to it in the 2005 constitution. 7 These events have given rise to considerable tension
between Erbil and Baghdad as there is no national oil law to govern the distribution of
oil revenues. 8

Since 2009 Baghdad has refused to recognize the validity of the production sharing
contracts signed by the KRG with international oil and gas companies. Baghdad
maintains that it alone has the right to enter into exploration and production
arrangements with foreign oil companies and to export oil from Iraq. 9 This has left
companies operating in Kurdistan (such as Genel Energy) with one of two options for
selling their production. They are able to sell their production at a discount either within
the Kurdish or Turkish markets with the latter requiring payment of large and inefficient
transportation costs to truck production via Turkey. 10 However, under an agreement
reached in 2011, oil produced in Kurdistan was once again allowed to access the
Kirkuk–Ceyhan Pipeline (KCP Pipeline) for export. 11 The pipeline has a nameplate
capacity of 1.5 million bpd maximum throughput never exceeded 900 kbpd in 1999 12
and it has since only been partly used. 13 Baghdad sold the oil and paid 50 per cent of the
revenues to the developers in order to reimburse development costs. 14 The Kurds
suspended exports of 100,000 Bpd in 2012 due to Baghdad’s failure to repay operating
costs to producing companies.

A deal was subsequently struck in August 2012 to restart export. However, the deal
broke down due to a lack of payment to the producing companies by Baghdad which in
turn claimed that the Kurds were pumping less than the pledged 200,000 Bpd. 15 Kurdish
oil flows came to a halt in December 2012 due to a payment dispute with Baghdad,
which remains unresolved. 16 As a result of these disagreements, KRG has since sought
to develop its own independent export routes for oil and gas. The KFK Pipeline has
involved the retrofitting of a newly built gas pipeline to carry KRG produced oil 17 While
the interconnection point for the KFK and the KCP pipelines is on Iraqi territory, the
KRG has stated that Baghdad will not control the exports, which will be independently
monitored by KRG. Hawrami has also claimed that KRG will own the segment of the
pipeline on KRG territory. 18 The pipeline began test flows of oil in January 2014 and is
now reputed to be flowing approximately 250,000 bpd. Notwithstanding the threat of

2
legal action against Ankara and the blacklisting of companies involved in the Kurdish-
Turkey projects without permission from Baghdad, 19 recent developments appear to
have changed the equation. These include inter alia the assertion de facto control over Iraqi
territory by ISIS (including the Kirkuk and Mosul oil fields), and the retaking of the
Kirkuk oil fields by the KRG Peshmerga, the opportunity for cooperation between Erbil
and Baghdad has increased markedly.

b. Oil export pipelines out of Southern Iraq

The majority of Iraq’s oil production is exported using maritime tankers loaded via the
internal Basarah pipeline and Iraq’s single point mooring located on the Persian Gulf.
However, the Iraq Ministry of Oil is actively seeking to diversify the country’s export
options due to the logistical constraints at its Gulf location (currently constrained at
around 5 Mbpd) as well as from the standpoint of general security concerns. However,
plans to refurbish and expand the KCP (Pipeline 27 in this Annex VI) to 2.25 Mbpd
and to develop a further 1 Mbpd cross-border oil export pipeline from Basrah to Aqaba,
Jordon on the Red Sea (Pipeline 28 in this Annex VI) are now on indefinite hold.

3. Gas export pipelines out of Iran

In addition to the export pipelines Iran already has in place connecting its own gas
production (as well as that from Turkmenistan) to Turkey, Iran, Pakistan and India have
long been struggling to develop the Iran-Pakistan-India Pipeline 20 and a further pipeline
project from Iran to India via Oman are reinvigorated. 21 Notwithstanding the acute
needs referenced above, these pipeline developments remain on hold due to the existing
UN sanctions on Iran, these pipelines remain on hold. Interestingly, notwithstanding
sanctions, China remains Iran’s largest crude and oil products trading partner. 22

4. The Arab Gas Pipeline

Another contentious cross-border Middle Eastern pipeline is the Arab Gas Pipeline
which was built to transport Egyptian gas production to neighboring countries. In 2005
the Egyptian Mediterranean Gas Company reached an agreement with the Israeli
Electrical Company to sell 1.7 Bcm of gas annually for a period of over 20 years. The
deal was struck in the context of the 1979 Israeli–Egyptian peace treaty but had been
long delayed due to poor relations between the two countries and the Palestinian–Israeli
violence in 2000. However, following the death of Yasser Arafat in 2004 and a
Palestinian–Israeli cease-fire in February 2005, the agreement between the Egyptian
Mediterranean Gas Company and the Israeli Electrical Company was finally reached. In
essence, the agreement was political and the Egyptian state media made very little
reference to it. Indeed, the country lost $9M daily due to price reductions granted to the
Israelis. The Arab Gas Pipeline was commissioned in 2008.

The Arab Gas Pipeline gave rise to controversy from the outset. In April 2009 the
Egyptian Appellate Court overturned a ruling made by a lower Administrative Court to
ban the export of Egyptian gas to Israel. Following the uprisings of the Arab Spring
these issues were exacerbated. Gas deliveries to Israel were interrupted for a total of 225
days in 2011 and 66 days during the first three months of 2012, and ceased after an
explosion on 5 March 2012.

3
On 22 April 2012 the head of the Egyptian Natural Gas Holding Company unilaterally
abrogated the contract to ship natural gas to Israel. Following a bombing of the pipeline
in July 2012, the fifteenth since the start of the Egyptian revolution, the Egyptian
Natural Gas Company said it had no plans to repair the pipeline to Israel.

Since the cancellation of the deal Israel has faced a gas shortage, as Egypt had supplied
Israel with about 40 per cent of its energy needs. In 2013 BP began to supply Israel with
LNG. Israel is currently working to bring its own natural gas reserves to market in order
to reduce dependency on imported oil and gas. Israel's offshore Tamar field contains 9
TCF of gas and is scheduled to begin production later this year. Another larger offshore
gas field (Leviathan) contains 16 TCF of gas and is slated to commence production
within the next 6–7 years. These two fields will eventually meet all of Israel's domestic
gas needs and turn the country into a gas exporter. However, a viable gas export
solution remains to be found (see below).

5. East Mediterranean gas development and future export

Recent gas discoveries in the East Mediterranean present large-scale opportunities and
challenges for Israel 23 and Cyprus. 24 Multiple risk factors face the developers of these
gas fields starting with disputes over field delimitation (Israel and Lebanon) as well as
sovereignty (Cyprus and Turkey). The situation is further complicated when production
and export options are added to the equation. One possible option that avoids much of
the current turmoil in Syria and Egypt involves a subsea pipeline from Israeli territorial
waters to Turkey for interconnection into TANAP and onward export to the EU.
However, one of the main license holders (Noble Energy, Inc.) owns large participating
interests in both Israel and Cyprus and it is difficult to imagine either a combined
solution enabling Nobel to export Cypriot and Israeli gas via distinct LNG export
solutions given considerations of commercial inefficiency. On the other hand, pipeline
options to Egypt for liquefaction and export by LNG tanker is also a complex solution
given the security situation, the current state of relations with Egypt and the recent
diversions of export gas to the domestic market. 25 Finally, efforts to develop a gas
pipeline export solution to Jordan have also recently run into political and regulatory
complications. Nevertheless, this resource base also presents enormous opportunities
for the countries in question if an effective and sustainable set of risk mitigations can be
found. 26

6. Maritime exports 27

Maritime exports from the Middle East in 2012 were as follows:

Source Destination Bcm
Oman China 0.1
Japan 5.4
South Korea 5.7
Qatar US 1.0
Canada 1.0
Mexico 1.7
Argentina 0.1
Brazil 1.1
Other South and Central America 0.2
Belgium 4.5

4
 France 1.8
Italy 5.8
Spain 4.3
Turkey 1.2
UK 13.3
Other Europe and Eurasia 0.2
China 6.8
India 16.1
Japan 21.3
South Korea 14.2
Taiwan 7.9
Thailand 0.3
UAE Middle East 0.1
Japan 7.5
Yemen US 0.6
Mexico 0.4
Chile 0.3
China 0.8
India 0.6
Japan 0.4
South Korea 3.6
Thailand 0.5

MAP 8
MIDDLE EAST OIL AND GAS PIPELINES

27

29
28 30

32

31

5
 ANNEX VI. TABLE –MIDDLE EASTERN OIL AND GAS PIPELINES

Pipeline Countr Parameters Ownership Strategic Risk Sources

y Commercial Purpose and
Config Consequences
uration
III. Middle East
27. • Iraq • Two parallel • State sector • The pipeline • Security including
Kirkuk– (producer) pipelines with • KCP (JV Co) was numerous
Ceyhan • Turkey combined capacity • BOTAS (Turkey) commissioned instances of
(“ITP” (transit / of 1.6 Mbpd 28 in 1976 under sabotage that have
• North Oil Company
operatio port) • Only one of two the Sadam consistently
(Iraq)
nal oil currently operating Husein regime reduced oil
export at (300,000 Bpd) to provide shipments 31
pipeline) capacity 29 export for the • UN embargoes 32
• 960 kms 30 giant Kirkik oil • Oil sharing
field arrangements
• Pipeline between KRG
suspended by and Baghdad
UN 1990–6 (constitutional
• Semi- dispute) resulting
autonomous in suspension of
Kurdish exports 33
Regional
Government
of Iraq is now
unable to
agree on oil
sharing with
Baghdad
• KRG has
developed its
own oil export
pipeline
referred to
herein as the
KF Pipeline

28. Iraq– • Iraq • Two phase • State sector • Iraq needs to • Baghdad’s
Jordan (producer) pipeline • Iraqi Ministry of create decisions to
(oil and • Jordan • Phase I: 1 Mbpd Oil additional oil implement the
parallel (transit / • Phase II: 1.25 and gas Iraq–Jordan
gas consumer) Mbpd 34 transport export pipeline
pipeline infrastructure will likely
• 1,680 kms (680
develop commensurate embolden KRG in
kms in Iraq, 1,000
ment) with its its efforts to
in Jordan) 35
production pursue an
• $18 Bln 36
• In order to alternative KRG–
avoid placing Turkey pipeline
additional • Regional security
volumes on (including within
the Arabian Iraq and current
Sea (and conflict in Syria) 37
Straits of
Hormuz),
diversifying
export
through
Jordan makes

6
 Pipeline Countr Parameters Ownership Strategic Risk Sources
y Commercial Purpose and
Config Consequences
uration
strategic sense
• Jordan is in
need of access
to secure
supplies of oil
and gas to
fulfill domestic
requirements
29.Arab • Egypt • 10.3 Bcm 38 • State and private • Egyptian • Security,
Gas (producer) • 1,200 kms (total) 39 sectors government sabotage,
Pipeline • Israel: Arish- • CAPEX: $1.2 Bln • Arish-Ashkelon desire to interruptions
(operatio Ashkelon (total) 40 section: East monetize gas and threats 56
nal) section Mediterranean Gas • Utilizes • Rebel artillery
• Arish-Ashkelon
(consumer) section Company, infrastructure shelling in
• Jordon: • 9 Bcm 41 (2 (Mediterranean to create October 2013
Arish-Aqaba Bcm Gas Pipeline interdependen hit the Syrian
section(cons contracted Ltd.) 53 cies among portion of the
umer) ) • Aqaba-El Rehab neighbors and pipeline, which
• Syria: El section: EGAS, thereby foster feeds a power
• 90 kms 42
Rehab- ENPPI, peaceful station causing
• CAPEX: relations blackouts in
Homs- PETROGET
$469 through Damascus. 57
Tripoli GASCO 54
mln 43 commerce
sections • El Rehab-Homs • Egypt has
• Arish-Aqaba unilaterally
• (consumer) sections:Syrian
section abrogated its
Petroleum
• 10.3 Bcm 44 1.1 Company and supply contract
Bcm 45 Stroytransgaz to Israel 58
• 36-inch (Gazprom) 55
diameter 46
• 266 kms 47
• CAPEX: $220
mln 48
• Aqaba-El Rehab
• 1.1 Bcm
• 390 kms 49
• CAPEX:
$300mln 50
• El Rehab-Homs
sections
• 900 Mcm 51
• 319 kms 52
• CAPEX: $300
mln

30. Iran- • Iran • 40 Bcm 59 • State sector • Pakistan is • US-led

Pakista (producer) • 2,775 kms 60 • National Iranian experiencing international
n- • Pakistan • CAPEX: $7.5 Oil Company acute supply- sanctions
Pipelin (transit / Bln 61 • Sui Northern Gas demand gas against Iran 63
e (gas consumer) Pipelines Ltd. shortages with
pipelin domestic
• Sui Southern Gas
e reserves (for
Company
develop example, Sui
ment • Gazprom 62
gas) depleting
and new
upstream

7
 Pipeline Countr Parameters Ownership Strategic Risk Sources
y Commercial Purpose and
Config Consequences
uration
investment
limited
• Iran is keen to
monetize its
oil and gas
resource base
given
international
sanctions

31. • United • 1.8 Mbpd capacity • State and private • The Straits of • Commercial
ADCOP Arab 1.5 64 sectors Hormuz viability of
(operatio Emirates • Currently shipping • International presently carry charging a tariff
nal oil (producer) 1.5 Mbpd 65 Petroleum 20 per cent of for oil that may
pipeline) • Bypassing • 48-inch diameter 66 Investment globally traded be shipped for
the Straits • 380 kms 370 67 Corporation 69 oil and 35 per free through the
of Hormuz cent of daily Straits of
• CAPEX:
seaborne Hormuz
$3.29Bln 68
shipments of
oil
• ADCOP ends
UAE’s full
dependence
on shipment
through the
Straits of
Hormuz
• ADCOP
carries 75 per
cent of UAE’s
production
and 10 per
cent of daily
volumes
transported
through the
Straits of
Hormuz
• Export
delivery for
Habshan oil
fields located
in the interior
of the Emirate
of Abu Dhabi

32. • Qatar • 30 Bcma 70 • Financed by state • Security of gas • Security 77

Dolphin (producer) • Storage, and private supplies to
(operatio • UAE processing and sectors; state- UAE and
nal gas (transit / export facilities in driven Oman
pipeline) consumer) Qatar 71 • Mubadalh (51 per • Supply-

8
Pipeline Countr Parameters Ownership Strategic Risk Sources
y Commercial Purpose and
Config Consequences
uration
• Oman • 48’364 kms subsea cent) demand gap
(consumer) export pipeline 72 • Total (24.5 per widening in
• Onshore export cent) UAE due to
pipeline and • Occidental economic
distribution Petroleum (24.5 growth,
system 73 per cent) 75 population
• CAPEX: $10 Bln 74 growth and
energy
inefficiency 76

1http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.p

df.
2 See Pipeline 19 in Annex IV.
33There is also an emerging need for gas in Oman that could be assisted by a cross-border (subsea)

pipeline currently being discussed on a state-to-state basis with Iran. This pipeline is gaining increasing
interest as the prospects for sustainable gas supplies to Oman are otherwise dependent upon production
of ‘tight gas’ from BP’s Block 61 and other regional supply sources.
4http://english.alarabiya.net/articles/2012/12/25/257057.html
5http://www.upi.com/Business_News/Energy-Resources/2013/01/24/Baghdad-oil-disputes-with-

Kurds-deepen/UPI-72181359048252/
6http://ikjnews.com/?p=1632
7http://www.al-monitor.com/pulse/originals/2013/01/kurdish-autonomy-oil.html#ixzz2K2FpwNxh
8http://uk.reuters.com/article/2012/03/26/iraq-oil-krg-idUKL6E8EQ65020120326
9http://uk.reuters.com/article/2012/03/26/iraq-oil-krg-idUKL6E8EQ65020120326
10http://www.nytimes.com/2012/11/15/business/global/delicate-balancing-act-for-western-oil-firms-in-

iraq.html?_r=0
11http://www.nytimes.com/2012/11/15/business/global/delicate-balancing-act-for-western-oil-firms-in-

iraq.html?_r=0
12 Deducted from yearly transportation figures as published on http://www.botas.gov.tr/index.asp.
13 http://uk.reuters.com/article/2013/10/31/uk-iraq-kurdistan-oil-idUKBRE99U0PB20131031
14http://english.alarabiya.net/articles/2012/12/25/257057.html
15http://english.alarabiya.net/articles/2012/12/25/257057.html
16 http://www.ihs.com/products/global-insight/industry-economic-report.aspx?ID=1065984856
17 http://www.businessweek.com/articles/2013-11-14/2014-outlook-kurdistans-oil-ambitions
18 http://uk.reuters.com/article/2013/10/31/uk-iraq-kurdistan-oil-idUKBRE99U0PB20131031
19 http://uk.reuters.com/article/2014/01/17/uk-iraq-oil-kurdistan-idUKBREA0G0WA20140117
20 See Pipeline 30 in this Annex VI.
21 http://www.upi.com/Business_News/Energy-Resources/2013/12/17/Iran-proposes-deep-water-gas-

pipeline-for-India/UPI-23291387279723/.
22 http://www.eia.gov/countries/cab.cfm?fips=IR
23 Israeli reserves are estimated by the US IEA go be 34 TCF See

http://www.eia.gov/todayinenergy/detail.cfm?id=12611
24 Cypriot reserves are estimated by the US IEA to be 7 TCF. See

http://www.eia.gov/todayinenergy/detail.cfm?id=12611
25 http://madamasr.com/content/bgs-force-majeure-highlights-egypts-energy-troubles
26 http://www.ibtimes.co.uk/jerusalem-tensions-could-derail-jordan-israel-gas-deal-1476010
27BP Statistical Review of World Energy 2013,

http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.pd
f.
28 http://www.reuters.com/article/2012/04/05/us-turkey-pipeline-blast-idUSBRE83407820120405

9
29 http://www.upstreamonline.com/live/article1140765.ece
30 http://www.reuters.com/article/2010/09/03/us-iraq-oil-ceyhan-factbox-idUSTRE6823C720100903
31 http://www.upstreamonline.com/live/article1181623.ece See also,

http://usatoday30.usatoday.com/news/world/iraq/2003-06-22-iraq-oil_x.htm
32http://books.google.com/books?id=W0nRAfF5o94C&pg=PA151&lpg=PA151&dq=Kirkuk-

Ceyhan+UN+embargoes&source=bl&ots=P1pwYvXQoM&sig=V5vwcdCTnAPr_ya0vDzM6487tbM&h
l=en&sa=X&ei=JpKzUeyHNYv4ywGtvYHQBw&ved=0CC0Q6AEwAA#v=onepage&q=Kirkuk-
Ceyhan%20UN%20embargoes&f=false at Page 151.
33 http://www.aina.org/news/20130511174359.htm
34 http://online.wsj.com/article/SB10001424127887324662404578332253495395968.html
35 http://online.wsj.com/article/SB10001424127887324662404578332253495395968.html
36 http://oilprice.com/Geopolitics/Middle-East/Iraq-Jordanian-18-billion-pipeline-Reality-or-

Fantasy.html
37 http://www.upi.com/Business_News/Energy-Resources/2013/04/11/Jordan-scrambles-to-secure-

energy-resources/UPI-85591365709682/
38 http://www.ekemeuroenergy.org/en/index.php?option=com_content&view=article&id=119:iraqs-

alternative-routes-for-reaching-the-european-gas-market&catid=47:middle-east-a-the-gulf-&Itemid=74
39 http://www.ekemeuroenergy.org/en/index.php?option=com_content&view=article&id=119:iraqs-

alternative-routes-for-reaching-the-european-gas-market&catid=47:middle-east-a-the-gulf-&Itemid=74
40 http://www.ekemeuroenergy.org/en/index.php?option=com_content&view=article&id=119:iraqs-

alternative-routes-for-reaching-the-european-gas-market&catid=47:middle-east-a-the-gulf-&Itemid=74
41http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&ved=0CE8QFjA

G&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fwww.feem.it%2Fuserfiles%2Fattach%2F2013215105594NDL2013-
012.pdf&ei=ORW2UefsNuWciQKs9IH4DA&usg=AFQjCNH2UYuKGWFR7V2SKUJIJ6GHqj1SDg at
Page 5
42http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&ved=0CE8QFjA

G&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fwww.feem.it%2Fuserfiles%2Fattach%2F2013215105594NDL2013-
012.pdf&ei=ORW2UefsNuWciQKs9IH4DA&usg=AFQjCNH2UYuKGWFR7V2SKUJIJ6GHqj1SDg at
Page 5.
43 http://prospectjournal.org/2012/01/24/egypt-israel-and-the-arish-ashkelon-pipeline-controversy/
44 http://www.barnesandnoble.com/w/oil-and-gas-pipelines-in-turkey-books-llc/1025026047
45http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&ved=0CC8QFjA

B&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fwww.elster-
instromet.com%2Fen%2Fdownload_magazines%2FProfiles_2007_01_ArabGas.pdf&ei=UB22Ueu4Be_o
iwKP3ICwBA&usg=AFQjCNH2BLlfyAN7B26O30CNyeXFeh8erg&bvm=bv.47534661,d.cGE
46 http://www.ekemeuroenergy.org/en/index.php?option=com_content&view=article&id=119:iraqs-

alternative-routes-for-reaching-the-european-gas-market&catid=47:middle-east-a-the-gulf-&Itemid=74
47 http://www.barnesandnoble.com/w/oil-and-gas-pipelines-in-turkey-books-llc/1025026047
48 http://www.barnesandnoble.com/w/oil-and-gas-pipelines-in-turkey-books-llc/1025026047
49 http://www.barnesandnoble.com/w/oil-and-gas-pipelines-in-turkey-books-llc/1025026047
50 http://www.barnesandnoble.com/w/oil-and-gas-pipelines-in-turkey-books-llc/1025026047
51 http://www.downstreamtoday.com/news/article.aspx?a_id=8761
52 http://www.barnesandnoble.com/w/oil-and-gas-pipelines-in-turkey-books-llc/1025026047
53 http://prospectjournal.org/2012/01/24/egypt-israel-and-the-arish-ashkelon-pipeline-controversy/
54 http://www.ekemeuroenergy.org/en/index.php?option=com_content&view=article&id=119:iraqs-

alternative-routes-for-reaching-the-european-gas-market&catid=47:middle-east-a-the-gulf-&Itemid=74

56http://www.forbes.com/sites/christopherhelman/2011/02/05/egypt-pipeline-explosion-cuts-gas-

supply-to-israel/
57 http://www.reuters.com/article/2013/10/23/syria-crisis-blackout-

idUSL5N0ID49S20131023?utm_source=Sailthru&utm_medium=email&utm_term=%2AMideast%20Dai
ly%20Brief%2010-24-13%20through%2010-29-13&utm_campaign=Mideast%20Daily%20Brief%2010-
24-2013
58 http://www.timesofisrael.com/egypt-reportedly-cancels-gas-supply-deal-with-israel/
59 http://www.oilandgaseurasia.com/news/iran-pakistan-gas-pipe-launched-could-trigger-us-sanctions
60 Page 4

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEAQFjAD&url=htt

10
p%3A%2F%2Fipripak.org%2Ffactfiles%2Fff124.pdf&ei=4CG2UcL0NLDxiQLJwYCwBA&usg=AFQjC
NGOvoHaNja6mkzRS3wnYrhmbySslA&bvm=bv.47534661,d.cGE
61 http://ca.ibtimes.com/articles/441675/20130303/iran-pakistan-gaspipeline-project-canada.htm
62 http://www.global-research.info/blogs/global-gas-blog/7856945-iran-pakistan-natural-gas-pipeline-

project-peace-pipeline
63 http://www.oilandgaseurasia.com/news/iran-pakistan-gas-pipe-launched-could-trigger-us-sanctions

See also http://www.voanews.com/content/us-considers-sanctions-against-pakistan-for-iran-

pipeline/1633012.html
64 http://www.nytimes.com/2012/01/12/world/middleeast/pipeline-avoids-strait-of-

hormuz.html?pagewanted=all
65http://www.thefreelibrary.com/UAE%26%238200%3Bdelays+oil+pipeline+to+bypass+Hormuz+to+

June.-a0277210153
66 http://www.ipic.ae/en/projects/desc.aspx?proj_id=7
67 http://www.nytimes.com/2012/01/12/world/middleeast/pipeline-avoids-strait-of-

hormuz.html?pagewanted=all
68 http://www.nytimes.com/2012/01/12/world/middleeast/pipeline-avoids-strait-of-

hormuz.html?pagewanted=all
69 http://www.ipic.ae/en/projects/desc.aspx?proj_id=7
70http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CCoQFjA

A&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fwww.dmgmeconferencesonline.com%2Fgasforum2012%2Fpresentations%2FI
eda%2520Gomes.pdf&ei=d1sNUsewH-
HjiAKC0YHIDA&usg=AFQjCNGIQwfeXgepaXPCoo6oNpxtl2b8hQ&bvm=bv.50768961,d.cGE at
Page 26.
71 http://www.gulfoilandgas.com/webpro1/MAIN/Mainnews.asp?id=5258
72 http://www.dolphinenergy.com/ebrochures/corporate-brochure/en/files/assets/basic-

html/page5.html
73 http://www.dolphinenergy.com/ebrochures/corporate-brochure/en/files/assets/basic-

html/page5.html
74 http://www.albawaba.com/business/agreement-imminent-over-10-billion-dolphin-gas-pipeline
75 http://www.dolphinenergy.com/ebrochures/corporate-brochure/en/files/assets/basic-

html/page14.html
76http://www.thenational.ae/business/industry-insights/energy/dolphin-energy-works-with-qatar-on-gas-

expansion

11
 ANNEX VII.
NORTH AFRICAN OIL AND GAS PIPELINES

1. Algerian pipelines

With 4.5 TCM of gas reserves and 81.5 Bcm of gas produced each year, Algeria is the
largest producer of natural gas in Africa. In 2012 it exported 34.5Bcm of gas by pipeline
and 15.3 Bcm by LNG. Algeria is also the second largest oil producer in Africa (next to
Nigeria) with 1.18Mbpd of production. 1 However, Algeria’s production of crude oil and
natural gas has been stagnant recently due to delays in new infrastructure projects. In
addition, recent licensing rounds have generated little interest from foreign investors
given the terms imposed by the government. Consequently, the Algerian parliament has
recently ratified amendments to the existing oil and gas law which will introduce fiscal
incentives in order to attract IOCs to undertake new projects – particularly offshore
exploration and large-scale onshore shale gas opportunities.

In addition, attacks by terrorists in January 2013 at the BP-operated In Amenas Gas

Processing and Gathering Facility, which left 40 people dead has reignited security
concerns in respect of North Africa’s oil and gas infrastructure. With Algeria supplying
large volumes of gas to Europe, concerns about possible disruptions to supply have
escalated 2 Algerian gas is supplied to Spain via the Maghreb and Algeria–Medgaz
Pipelines (Pipelines 33 and 34 in the table to this Annex) and to Italy via the Transmed
Pipeline (Pipeline 35 in the table to this Annex).

2. Libyan oil and gas

a. General

With 48 Bln Bbls, Libya has the eighth largest proven reserves of oil in the world. Prior
to February 2011 Libya was producing 1.659Mbpd of crude oil; however, due to the
unrest associated with regime change, oil production in 2011 dipped to an average of
479,000 Bpd before rebounding to 1.509Mbpd in 2012. The majority of the 2011 Libyan
oil that was produced was used for domestic consumption. Libya is a much more
modest global gas player with 1.5 TCM of gas reserves and annual production of 12.2
Bcma. However, Libya remains unstable and tribal militias have blockaded oil terminals
from July 2013 until recently, resulting in reduction in exports from more than 1 million
bpd in July to 110 000. 3 In November 2013 the rebel groups declared independence. 4
The militias have also sought to form their own oil company. 5 Tribal and ethnic fighting
in southern Libya, where large oil fields lie, also led Tripoli to declare a state of
emergency in January 2014. 6 In 2012 oil production almost reached its prewar rate of
1.6 million barrels a day before the last half year of troubles. 7 Nevertheless, the tribal
leadership forcing nearly a one-year blockade of oil shipments appears to be near
resolution 8 and production is expected to increase to 1 million barrels.

b. The Greenstream Gas Pipeline

The majority of Libyan natural gas production (6.5 Bmc in 2012) is sold to Italy through
the Greenstream Pipeline (Pipeline 36 in the table to this Annex). However the flow of
gas through Greenstream was almost entirely shut-in for sustained periods in 2011.

1
3. Maritime exports 9

Maritime exports of oil from North Africa in 2012 were as follows:

Source Destination Bpd

North Africa US 341,000
Canada 149,000
South and Central America 88,000
Europe 1,577,000
Australasia 26,000
China 221,000
India 89,000
Japan 18,000
Singapore 8,000
Other Asia Pacific 68,000

Maritime exports of LNG from Algeria in 2012 were as follows:

Source Destination Bcm

Algeria France 4.8
Italy 1.0
Spain 3.6
Turkey 4.1
United Kingdom 0.1
Other Europe and Eurasia 0.8
China 0.1
India 0.6
Japan 0.2

Maritime exports of LNG from Egypt in 2012 10were as follows:

Source Destination Bcm

Egypt US 0.1
Argentina 0.1
Chile 0.3
France 0.9
Italy 0.2
Spain 0.7
Turkey 0.5
United Kingdom <0.05
Other Europe 0.2
Middle East 0.2
China 0.4
India 0.8
Japan 1.4
South Korea 0.8
Taiwan 0.3

2
3. Key sources of risk

From Egypt to Tunisia, Libya and Algeria, North Africa is likely to remain politically
unstable for the foreseeable future. This situation is exacerbated by continued instability
among inter alia the following countries: Mali, Central African Republic, South Sudan,
Somalia, Yemen, Syria, Iraq and Afghanistan and the presence of trans-national terrorist
organizations spanning Africa, the Middle East and South Asia. This will have an
impact on oil and gas production and transportation as demonstrated by the supply
disruptions in Libya following the demise of the Gaddafi regime and by the deadly
terrorist incident at the In Amenas facility in Algeria in January 2013.

MAP 9
NORTH AFRICAN GAS PIPELINES

35

34

33 35

36

ANNEX VII.TABLE – NORTH AFRICAN GAS PIPELINES

Pipeline Country Parameters Ownership Strategic Risk Sources

Configurati Commerci Purpose and
on al Consequences
IV. North Africa
33. Maghreb– • Algeria • 12 Bcm 11 • State sector • Algeria’s • Pipeline
Europa (producer) • 1,620 kms 12 • Sonatrach monetizati development
(operational • Morocco • Commissione • Kingdom on of delayed for
gas pipeline) (transit / d November of natural gas more than 20

3
 Pipeline Country Parameters Ownership Strategic Risk Sources
Configurati Commerci Purpose and
on al Consequences
consumer) 1996 13 Morocco resource years due to
• Spain • CAPEX: $2.2 • Enagás • Gas dispute in the
(transit / Bln 14 • Transgas 16 supplies for Western
consumer) • Hassi R’mel Iberian Sahara
• Portugal Field 15 Peninsula impeding
(consumer) routes from
Algeria across
Morocco en
route to
Spain 17
• Notwithstandi
ng security
risks in
Algeria, gas
flows through
the Maghreb
pipeline have
not been
interrupted
34. • Algeria • 24-inch • State and • Algeria’s • Ultra deep
AlgeriaMedg (producer) diameter 18 private monetizati water pipeline
az • Spain • 210 kms 19 sectors on of that faced
(operational (consumer) • 8 Bcm 20 • Sonatrach natural gas technical
gas pipeline) • CEPSA resource challenges 25
• Comissioned
2010 21 • Iberdrola • Gas
• CAPEX:€ • Endesa supplies for
900 mln 22 Spain
• GDF
• Hassi R’mel Suez 24
Field 23
35. Transmed • Algeria • 30.2 Bcm 26 • State and • Monetizati • Security
(operational (producer) • 2,475 kms 27 private on of • Terrorism
gas pipeline) • Tunisia sectors Algeria’s (attack in 1997
(transit / • Algerian gas supply severed the
consumer) section: • Italian pipeline and
• Italy operated security halted supplies
(consumer) by and EU for 5 days) 28
Sonatrach diversity of
• Tunisian supply
section:
owned by
Sotugat,
operated
by Sergaz
• Channel
of Sicily:
operated
by TMPC
(Eni,
Sonatrach
joint
venture)
• Italian
section:
operated
by Snam
Rete Gas

4
 Pipeline Country Parameters Ownership Strategic Risk Sources
Configurati Commerci Purpose and
on al Consequences
(Eni
subsidary)
36. • Libya • 11 Bcm 29 • State and • Libya’s • Security: internal
Greenstream (producer) • 32-inch private monetizati conflict in Libya
(operational • Italy diameter 30 sectors on of 2011–12 36
gas pipeline) (consumer) • 520 kms 31 • Owner: natural gas
• 1,127 m Agip Gas resources
depth across BV (Eni, • Italian /
Mediterranea National EU
n 32 Oil diversity of
• Commission Corporatio supply
ed October n of Libya
2004 33 joint
venture) 35
• CAPEX $6.6
Bln 34

1http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.p

df

2http://www.eia.gov/countries/cab.cfm?fips=AG
3 http://www.bbc.co.uk/news/business-25612254
4 http://www.upi.com/Business_News/Energy-Resources/2014/01/21/Libyan-oil-production-up-2-
percent/UPI-50951390309219/
5 http://www.nytimes.com/2014/01/09/world/africa/libya-warns-oil-tankers-against-dealing-with-

militias.html?_r=0
6 http://www.ft.com/cms/s/0/0c672536-8102-11e3-b3d5-00144feab7de.html#axzz2r9ltKzub
7 http://www.nytimes.com/2014/01/09/world/africa/libya-warns-oil-tankers-against-dealing-with-

militias.html?_r=0
8 See Stratfor ‘Libya Makes Tentative Steps Toward Restarting Oil Production’ April 7, 2014.
9BP Statistical Review of World Energy 2013, p. 18.
http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.pd
f
10BP Statistical Review of World Energy 2013, p. 28.

http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.pd
f
11 Page 302

http://books.google.com/books?id=OilpWj_t4uMC&pg=PA302&lpg=PA302&dq=Maghreb-
Europe+pipeline+12+BCM&source=bl&ots=wUoXopRTuK&sig=_9JetvhXZpzCXziI2zzypo21sl0&hl=
en&sa=X&ei=a362UZOOJIa0iwKo44C4Cg&ved=0CDUQ6AEwAg#v=onepage&q=Maghreb-
Europe%20pipeline%2012%20BCM&f=false
12 Page 86

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&ved=0CFMQFjAG&url=htt
p%3A%2F%2Fsiteresources.worldbank.org%2FINTOGMC%2FResources%2Fcrossborderoilandgaspipe
lines.pdf&ei=sX62UaXwOK7siwKr54CACw&usg=AFQjCNG2EhgHHM2mIuhMHDA1cx_b4NSaRg&
bvm=bv.47534661,d.cGE
13 Page 87

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p%3A%2F%2Fsiteresources.worldbank.org%2FINTOGMC%2FResources%2Fcrossborderoilandgaspipe
lines.pdf&ei=sX62UaXwOK7siwKr54CACw&usg=AFQjCNG2EhgHHM2mIuhMHDA1cx_b4NSaRg&
bvm=bv.47534661,d.cGE
14 Page 86

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5
p%3A%2F%2Fsiteresources.worldbank.org%2FINTOGMC%2FResources%2Fcrossborderoilandgaspipe
lines.pdf&ei=sX62UaXwOK7siwKr54CACw&usg=AFQjCNG2EhgHHM2mIuhMHDA1cx_b4NSaRg&
bvm=bv.47534661,d.cGE
15 Page 86

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p%3A%2F%2Fsiteresources.worldbank.org%2FINTOGMC%2FResources%2Fcrossborderoilandgaspipe
lines.pdf&ei=sX62UaXwOK7siwKr54CACw&usg=AFQjCNG2EhgHHM2mIuhMHDA1cx_b4NSaRg&
bvm=bv.47534661,d.cGE
16 Page 86

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p%3A%2F%2Fsiteresources.worldbank.org%2FINTOGMC%2FResources%2Fcrossborderoilandgaspipe
lines.pdf&ei=sX62UaXwOK7siwKr54CACw&usg=AFQjCNG2EhgHHM2mIuhMHDA1cx_b4NSaRg&
bvm=bv.47534661,d.cGE
17 Page 9

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p%3A%2F%2Fmaghrebcenter.files.wordpress.com%2F2011%2F07%2Fmaghrebcenter-journal-
mundy_algeria-
wsahara.pdf&ei=z8mzUeLFHq6WjAKEnYDoAQ&usg=AFQjCNH3wKv5_bf2vO3hSrZ334WuaylxEg
&bvm=bv.47534661,d.cGE
18 http://www.medgaz.com/medgaz/pages/datos_significativos-eng.htm
19 http://www.medgaz.com/medgaz/pages/datos_significativos-eng.htm
20 http://www.medgaz.com/medgaz/pages/datos_significativos-eng.htm
21 http://www.medgaz.com/medgaz/pages/fases_calendario-eng.htm
22 http://www.medgaz.com/medgaz/pages/datos_significativos-eng.htm
23 http://www.medgaz.com/medgaz/pages/faqs-eng.htm
24 http://www.downstreamtoday.com/news/article.aspx?a_id=9212
25http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEgQFjAD&url=ht

tp%3A%2F%2Fwww.medgaz.com%2Fmedgaz%2Fdoc%2Fpresentacion-
eng.pdf&ei=7sqzUe3bNaf1iwKW8YGwDA&usg=AFQjCNF6_L3XLeaaHnEtMDM3IbcPHma3yA&bv
m=bv.47534661,d.cGE
26 http://www.hydrocarbons-technology.com/projects/trans-med-pipeline/
27 http://www.hydrocarbons-technology.com/projects/trans-med-pipeline/
28 Page 45 https://www.google.com/search?q=Transmed+security+risk&ie=utf-8&oe=utf-

8&aq=t&rls=org.mozilla:en-GB:official&client=firefox-a#client=firefox-a&hs=iZp&rls=org.mozilla:en-
GB:official&q=Transmed+pipeline+security+risk&spell=1&sa=X&ei=YcuzUcD-
NsbiiAKo8IDQAw&ved=0CCgQvwUoAA&bav=on.2,or.r_qf.&bvm=bv.47534661,d.cGE&fp=c1b6e45
6c878ea67&biw=1366&bih=597
29http://books.google.com/books?id=X4yaHMZV6bQC&pg=PA40&lpg=PA40&dq=Greenstream+pip

eline+11+bcm&source=bl&ots=P3dllLw3KW&sig=lOZMl-
tr1PVuNh_QTubEkxHZ9W0&hl=en&sa=X&ei=AIS2UebCEeWdiAL23IGgAQ&ved=0CDYQ6AEwA
g#v=onepage&q=Greenstream%20pipeline%2011%20bcm&f=false at Page 40.
30 http://www.greenstreambv.com/en/pages/home.shtml
31 http://www.greenstreambv.com/en/pages/home.shtml
32 http://www.greenstreambv.com/en/pages/home.shtml
33 http://www.eia.gov/countries/cab.cfm?fips=LY
34http://books.google.com/books?id=fqnlNP0h29MC&pg=PA61&lpg=PA61&dq=Greenstream+pipeli

ne+$6.6+bln&source=bl&ots=y5_BtOnKz1&sig=O5hEUPlq57jVf2h9Ex59nX52dcc&hl=en&sa=X&ei
=7YS2UbrMGqmFiAKz34HIBg&ved=0CDMQ6AEwAQ#v=onepage&q=Greenstream%20pipeline%2
0%246.6%20bln&f=false at Page 61.
35 http://maltastar.com/dart/20130210-when-maltese-greed-killed-gas-pipeline
36 http://www.eia.gov/countries/cab.cfm?fips=LY

6
 ANNEX VIII.
EAST AFRICAN OIL EXPORT PIPELINES

1. Introduction

The Republic of the Sudan and the newly established Republic of South Sudan have
both been producing and exporting oil since the early 2000s. However, the majority of
the proven recoverable reserves (3.5 Bn Bbls) remaining are now located in the Republic
of South Sudan. 1 Two operational oil export pipelines (the GNPOC and the Petrodar
Pipelines –Pipelines 37 and 38 in the table to this Annex) were constructed and have
been delivering oil produced from fields located primarily in the Republic of South
Sudan through the North to a refinery near Khartoum and to an export terminal on the
Red Sea at Port Sudan. The on-going conflict between the two countries has stifled
large-scale investment in additional exploration and development activities and both
export pipelines were shut-in from January 2012 through May 2013 due to a dispute
over transit fees (see discussion below). The recent and tragic internal (albeit regionally
supported) conflict within South Sudan will now ‘chill’ investor interest for some time to
come. While South Sudanese oil is flowing at the time of writing this paper, the threat of
further shut-ins an/or damage to facilities remain. In any event, the Addis Agreements
signed with the Republic of Sudan in September 2012 will expire in December 2016.
Without a credible export alternative, Juba will have no bargaining leverage to negotiate
the current fees + tariffs down from the existing $26/bbl.

On the other hand, oil and gas investment, exploration and development activities have
proliferated in other countries in East Africa. Discoveries of significant reserves of gas
in Tanzania and Mozambique suggest that large-scale development of offshore gas fields
linked to LNG export facilities (targeted principally at Asian markets) will take place. In
addition, IOCs (including Tullow, Total and CNOOC) have multiple large-scale
discoveries along the Eastern Shores of Lake Albert in Uganda and field development
plans are in place (recoverable reserves now stand at 1.4 Bn Bbls). Ugandan government
rhetoric has focused upon investment in refining capacity for domestic and regional
export. However, the government appears to have been persuaded that the scale of the
resource base is sufficient to warrant a cross-border oil pipeline (Pipelines 41 and 42 in
the table to this Annex). Perhaps of greater significance is the fact that IOCs are unlikely
to continue to invest in the de-risking and production of significant volumes of oil if
there is no prospect of the oil reaching export markets. At the time of writing, Total,
Tullow and CNOOC are reported to be conducting pre-FEED analyses on export
routes to the Indian Ocean on the Kenyan coast. Tullow and Africa Oil have also
reported significant discoveries of oil near Lake Turkana in Kenya (estimates place
probable and possible reserves at around 600M Bbls). Tullow and other IOCs are also
undertaking additional exploration activities in Ethiopia and Somaliland.

2. Oil export from the Republic of South Sudan

In January 2012 South Sudan shut down its oil production of 350,000 Bpd in response
to Khartoum’s seizure of South Sudanese oil that it claimed was compensation for
unpaid transit fees. 2 South Sudan's oil minister Stephen Dhieu Dau told Reuters news
agency that, ‘oil production will restart when we have a comprehensive agreement and
all the deals are signed’. 3 Anne Itto, Deputy Secretary of South Sudan's ruling party, the
SPLM, said that production would not be resumed until the Republic of the Sudan
reduced its demand of $36 per barrel and agreed more reasonable terms. 4

1
The dispute posed a threat to regional security as the two sides came close to war. The
Republic of the Sudan's President Omar al-Bashir declared during the crisis that war was
now likely. 5 The situation became particularly dangerous in April when South Sudanese
troops briefly occupied the disputed oil-rich border area of Heglig. 6 The Sudanese also
launched an aerial bombardment of South Sudan’s border. 7 In response to the violence,
the UN Security Council threatened to impose sanctions and unanimously backed a
resolution calling on Khartoum and Juba to resume negotiations on disputed issues
within two weeks. 8

The shut down has had damaging consequences for both sides. In February 2012, South
Sudan was forced to introduce austerity measures as a result of the loss of revenues from
oil. The Council of Ministers approved an initial set of austerity measures. These
included the reduction of non-salary spending by an average of 50 per cent and a
reduction to block transfers (unconditional monthly grants) to states. 9 Furthermore,
inflation soared to more than 80 per cent in May and the government reneged on its
promise of free university education. 10 In their June 2012 budget, the government cut
spending further, reducing monthly spending by almost a half. 11 The exchange rate for
the South Sudanese pound tripled against the dollar on the black market, greatly
increasing the cost of living. 12

While the two sides eventually negotiated an agreement in September 2012, the
agreement was not implemented until March 2013. The threat of a further shutdown
and a possible return to hostilities still looms.

In order to break Khartoum’s monopoly on South Sudanese oil, Juba announced that it
would develop a new pipeline that will not traverse the territory of Sudan. In March
2013, Juba commissioned an independent feasibility study to evaluate two export
options for its oil: the South Sudan–Ethiopia–Djibouti Pipeline (Pipeline 39 in the table
to this Annex) and the South Sudan–Kenya Pipeline (Pipelines 40 and 42 in the table
to this Annex).

3. The current state of play

The government in Juba has been slow to consolidate a strategic approach to its
petroleum sector and progress on alternative oil export projects has been delayed.
Indeed, in July 2013, South Sudan’s President Salva Kiir Mayardit dismissed the entire
Cabinet of Ministers including the Vice President and the Chairman of the country’s
ruling party, the SPLM. Unfortunately, the foregoing circumstances have now been
eclipsed by South Sudan’s own internal crisis. On the December 15th, a dispute amongst
the South Sudanese presidential guard descended into violence sparking a series of
events that turned a political rivalry between former Vice President Dr. Riek Machar
Teny and President Salva Kiir into multiple rebellions nationwide and civil war leaving
tens of thousands dead and more than 1 million people displaced. 13 Since the onset of
this internal crisis, oil production has dropped together with the oil price. 14 Rebels have
declared that they are specifically aiming to gain control of the oil fields. 15 On the other
hand, the importance of the continued flow of South Sudanese oil has led powers
including China to continue to press for negotiations, as well as players with an interest
in regional stability such as Kenya. 16

2
Meanwhile, the oil discoveries announced by Tullow and Africa Oil in the North of
Kenya suggest that there may be sufficient reserves to warrant a Kenya-only oil export
pipeline. Likely forward developments will involve Ugandan producers (including
Tullow) seeking to convince the respective Ugandan and Kenyan host governments to
enter into appropriate intergovernmental arrangements to support a cross-border oil
pipeline capable of interconnecting with a Kenyan oil pipeline. However, the falling oil
price (and the vulnerability of the smaller players currently invested in Kenya to the
falling oil price), the inability of the regional governments and the IOCs to reach a
sensible forward solution, and the continued instability in the region, raise serious
questions about the speed with which forward development of new-build the East
Africa export pipelines will proceed. Ultimately, speedy progress on developments will
likely be a function of the willingness of local governments to implement a ‘Chinese
solution’ or whether a Western involvement is deemed beneficial.

4. Maritime exports

Maritime exports of crude oil from Eastern and Southern Africa in 2012 17
were as follows:

Source Destination Bpd

Eastern and Southern Africa US 1,000
South and Central America 8,000
Europe 1,000
China 59,000
India 4,000
Japan 12,000
Singapore 12,000
Other Asia Pacific 2,000

However, as referenced above, once offshore gas developments in Tanzania and

Mozambique are producing and the LNG facilities operational, the maritime export of
LNG will be added to the foregoing table.

3
 MAP 10
EAST AFRICA OIL PIPELINES

37

38
37 39

42
42

41 40

ANNEX VIII. TABLE –EAST AFRICAN OIL EXPORT PIPELINES

Pipeline Country Parameters Ownership Strategic Risk Sources

Configuration Commercial Purpose and
Consequences
V. East Africa
37. GNPOC • Republic of • 450,000 • State sector • Constructed • Political risk
(operational South Sudan Bpd • Greater at great resulting from
oil pipeline) (landlocked (maximum Nile speed by succession of
producer) capacity) 18 Petroleum Chinese Republic of
• Republic of • 1,590 Operating when Sudan South Sudan 26
the Sudan kms 19 Company was unified • Transit fees
(transit / • 28-inch (transport • Enabled imposed by
producer / diameter 20 company) country to Republic of
refining / • CAPEX: • SUDAPET supply the Sudan to
port) $1.2 Bln 21 (5 per cent) indigenous recapture lost
• El Obeid • ONGC (25 refineries revenues 27
Refinery 22 per cent) and • Pipeline shut-
• Petronas monetize oil in for a period
• Khartoum
(30 per base 16 months 28
Refinery 23
cent) • Provided • Conflict /
• Port
• CNPC (40 China with security risks
Sudan 24
per cent) 25 access to with
crude oil infrastructure
off-take damage 29
• Alleged
human rights

4
 Pipeline Country Parameters Ownership Strategic Risk Sources
Configuration Commercial Purpose and
Consequences
abuses 30
38. Petrodar • Republic of • 500,000 • State sector • Constructed • Political risk
(operational South Sudan Bpd 31 • Petrodar at great resulting from
oil pipeline) (landlocked • 1,370 (transport speed by succession of
producer) kms 32 company) Chinese Republic of
• Republic of • CAPEX: • CNPC (41 when Sudan South Sudan
the Sudan $1.2 per cent) was unified • Transit fees
(transit / Bln 33 • Petronas • Enabled imposed by
producer / (40 per country to Republic of
refining / cent) supply the Sudan to
port) • SUDAPET indigenous recapture lost
(8 per cent) refineries revenues 35
and • Pipeline shut-
• Sinopec (6
monetize oil in for a period
per cent)
base 16 months 36
• Tri-Ocean
• Provided • Conflict /
(5 per
China with security risks 37
cent) 34
access to • Alleged
crude oil human rights
off-take abuses 38

39. SSED • Ethiopia • Possible • State and • Enables the • Upstream

(development (landlocked concepts private Republic of investment
al oil transit) • 100,000; sectors South Sudan and
pipeline) • Djibouti 200,000; • Pipeline to establish commitments
(transit / port) and ownership oil export • South Sudan
400,000 TBD terms free of and Ethiopia
Bpd past are landlocked
scenarios engagements and present
with the formidable
Republic of logistical and
the Sudan construct-
• September ability
2012 challenges
negotiated • Environmenta
settlement l challenges
between the including
Republic of pipeline
South Sudan crossings over
and the the Nile and
Republic of the Sud (one
the Sudan of the world’s
set the basis largest
for resolving swamps)
the tariff / • Physical
transit security
dispute that • Community
shut in oil and tribal /
exports for ethnic
16 months; interests
however,
settlement
has a 3.5-
year term
• Ethiopia and
Djibouti
have signed

5
 an
intergovern
mental
MOU with
RSS to set
terms for
cross-border
oil
infrastructur
e
40. SSK • Kenya (transit • Possible • State and • Enables the • Upstream
(development / producer / concepts private Republic of investment
al oil port) • 100,000; sectors South Sudan and
pipeline) 200,000; • Pipeline to establish commitments
and ownership oil export • South Sudan
• 400,000 TBD terms free of and Ethiopia
Bpd past are landlocked
scenarios engagements and present
with the formidable
Republic of logistical and
the Sudan construct-
• September ability
2012 challenges
negotiated • Environmenta
settlement l challenges
between the including
Republic of pipeline
South Sudan crossings over
and the the Nile and
Republic of the Sud (one
the Sudan of the world’s
set the basis largest
for resolving swamps)
the tariff / • Physical
transit security
dispute that • Community
shut in oil and tribal /
exports for ethnic
16 months; interests
however,
settlement
has a 3.5-
year term
• Kenya has
signed an
intergovern
mental
MOU with
RSS to set
terms for
cross-border
oil
infrastructur
e
• Possible
throughput
commitment
s from
Kenyan and
Ugandan oil
producers

6
 could
potentially
reduce
CAPEX
contribution
s and tariffs
to South
Sudanese oil
exporters
41. Uganda • Uganda • Concept • State and • Government • Negotiating
(oil pipeline (landlocked private policy has appropriate
concept) producer) sectors been cross-border
• Kenya (transit • Pipeline targeted at terms with
/ producer) ownership putting Kenya in an
TBD domestic Inter-
refining Governmental
capacity on Agreement 39
stream • Legal,
• Recent regulatory and
larger-scale fiscal risks 40
oil • Environmenta
discoveries l and social
demonstrate risks 41
the need for • Security risks
Uganda to (especially on
develop an the Kenyan
export coast) 42
solution
• Synergies in
reduced
CAPEX and
tariffs may
be achieved
by
interconnecti
ng a
Ugandan
export
solution to
the
LAPSSET
corridor
being
developed in
Kenya
42. LAPSSET • Kenya (transit • CAPEX: • State and • Part of the • Proximity of
(Lamu Port – and producer $23 Bln 43 private Kenyan Lamu to
South Sudan- state, • Oil sectors government’ Somalian
Ethiopia infrastructure pipelines s ‘Vision border raises
Transportatio / sponsor) (South 2030’ potential
n Corridor) • South Sudan Sudan and • Fosters security
(development (producer) Ethiopia) 44 regional concerns 46
al oil • Ethiopia • Rail, road integration • Environmenta
pipeline) (producer) and port 45 • Strategic l and social
project that risks given
enables proximity of
Kenya to pipeline route
leverage its to wetlands,
geographical national parks
position to and
enable goods indigenous

7
 (including peoples 47
oil) from • Logistics and
landlocked construct-
states (South ability issues 48
Sudan, • Governmental
Ethiopia and , legal /
Uganda) to regulatory and
transit fiscal risks that
Kenyan require
territory and alignment
on to global
markets

1 There are also large prospective blocks that will remain unexplored until the existing conflict settles and
inward investment can be attracted into South Sudan.
2http://www.bbc.co.uk/news/world-africa-17098350
3http://www.bbc.co.uk/news/world-africa-19122861
4http://www.voanews.com/content/south-sudan-oil-shutdown-chokes-economy/1352237.html
5http://www.bbc.co.uk/news/world-africa-17098350
6http://www.bbc.co.uk/news/world-africa-19122861
7http://www.bbc.co.uk/news/world-africa-17826316
8http://www.bbc.co.uk/news/world-africa-17926846
9http://www.southsudannewsagency.com/news/press-releases/south-sudan-approves-austerity-

measures-in-response-to-loss-of-oil-revenue
10http://www.bbc.co.uk/news/world-africa-18550314
11http://www.guardian.co.uk/global-development/2012/jul/09/south-sudan-economic-disaster-

independence
12http://www.voanews.com/content/south-sudan-oil-shutdown-chokes-economy/1352237.html
13 http://www.reuters.com/article/2014/01/01/us-southsudan-unrest-idUSBRE9BT0A920140101
14 http://www.bloomberg.com/news/2014-01-16/south-sudan-finds-friend-in-old-enemy-sudan-as-
rebellion-rages.html
15 http://www.independent.co.uk/news/business/analysis-and-features/oil-saviour-or-curse-for-south-

sudan-9075890.html
16 http://www.washingtonpost.com/world/africa/with-oil-at-stake-the-war-in-south-sudan-matters-to-

its-customers/2014/01/20/dcca9432-7d25-11e3-97d3-b9925ce2c57b_story.html
17BP Statistical Review of World Energy 2013, p. 18.
http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.pd
f
18 http://www.gnpoc.com/newsDetail.asp?newsId=N1823&plink=&glink=
19 http://www.gasandoil.com/news/2006/02/cna60956
20 http://news.sudanvisiondaily.com/details.html?rsnpid=198007
21 http://www.mepc.org/journal/middle-east-policy-archives/energy-politics-and-south-sudan-

referendum-anatomy-resource-curse?print
22 http://news.sudanvisiondaily.com/details.html?rsnpid=198007
23 http://news.sudanvisiondaily.com/details.html?rsnpid=198007
24 http://news.sudanvisiondaily.com/details.html?rsnpid=198007
25 http://www.gurtong.net/Business/Oil/tabid/252/Default.aspx
26 http://www.gurtong.net/ECM/Editorial/tabid/124/ctl/ArticleView/mid/519/articleId/7456/Sudan-

South-Sudan-Set-To-Finalise-A-Comprehensive-Agreement.aspx
27 http://www.eia.gov/cabs/Sudan/Full.html
28http://www.vancouversun.com/business/South%20Sudan%20criticizes%20Sudan%20president%20thr

eatening%20shut%20down/8444921/story.html
29 http://www.bloomberg.com/news/2013-03-27/south-sudan-may-take-until-2014-to-reach-pre-

shutdown-oil-output.html
30 http://www.ipsnews.net/2011/10/sudan-china-could-oil-the-peace-process/
31 http://news.sudanvisiondaily.com/details.html?rsnpid=198007

8
32http://articles.chicagotribune.com/2012-04-06/news/sns-rt-sudan-southoil-factboxl6e8f60yv-
20120406_1_abyei-cnpc-oil-output/2

33 http://www.mepc.org/journal/middle-east-policy-archives/energy-politics-and-south-sudan-
referendum-anatomy-resource-curse?print
34http://www.cnpc.com.cn/resource/english/images1/pdf/CNPC%20in%20Sudan%202009%20Report

/CNPC%20in%20Sudan.pdf?COLLCC=4188508896& at Page 6.
35 http://www.eia.gov/cabs/Sudan/Full.html See also,

http://www.gurtong.net/ECM/Editorial/tabid/124/ctl/ArticleView/mid/519/articleId/7456/Sudan-
South-Sudan-Set-To-Finalise-A-Comprehensive-Agreement.aspx
36http://www.vancouversun.com/business/South%20Sudan%20criticizes%20Sudan%20president%20thr

eatening%20shut%20down/8444921/story.html
37 http://www.bloomberg.com/news/2013-03-27/south-sudan-may-take-until-2014-to-reach-pre-

shutdown-oil-output.html
38 http://www.ipsnews.net/2011/10/sudan-china-could-oil-the-peace-process/
39http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDIQFjAC&url=ht

tp%3A%2F%2Fwww.openbriefing.org%2Fdocs%2FAlternative-South-Sudan-oil-
pipelines.pdf&ei=GdWzUZGEPYeCjAKo6oGYDw&usg=AFQjCNHUUNZOGxjA1fj4cF6zhgJEJON
wsA&bvm=bv.47534661,d.cGE at Page 1.
40http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDIQFjAC&url=ht

tp%3A%2F%2Fwww.openbriefing.org%2Fdocs%2FAlternative-South-Sudan-oil-
pipelines.pdf&ei=GdWzUZGEPYeCjAKo6oGYDw&usg=AFQjCNHUUNZOGxjA1fj4cF6zhgJEJON
wsA&bvm=bv.47534661,d.cGE at Page 6.
41http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDIQFjAC&url=ht

tp%3A%2F%2Fwww.openbriefing.org%2Fdocs%2FAlternative-South-Sudan-oil-
pipelines.pdf&ei=GdWzUZGEPYeCjAKo6oGYDw&usg=AFQjCNHUUNZOGxjA1fj4cF6zhgJEJON
wsA&bvm=bv.47534661,d.cGE at Page 8.
42http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDIQFjAC&url=ht

tp%3A%2F%2Fwww.openbriefing.org%2Fdocs%2FAlternative-South-Sudan-oil-
pipelines.pdf&ei=GdWzUZGEPYeCjAKo6oGYDw&usg=AFQjCNHUUNZOGxjA1fj4cF6zhgJEJON
wsA&bvm=bv.47534661,d.cGE at Page 6.
43 http://www.nation.co.ke/News/-/1056/1206042/-/item/0/-/iaco3v/-/index.html
44 http://www.vision2030.go.ke/index.php/pillars/project/macro_enablers/181
45 http://www.vision2030.go.ke/index.php/pillars/project/macro_enablers/181
46 http://www.nation.co.ke/News/politics/Uhuru--Ethiopian-premier-hold-talks-on-regional-affairs/-

/1064/1757124/-/13rwxxaz/-/index.html
47 http://www.change.org/petitions/petition-to-suspend-plans-for-the-proposed-lamu-port

http://www.savelamu.org/
http://www.sudantribune.com/spip.php?article46053
48 http://sabahionline.com/en_GB/articles/hoa/articles/features/2012/03/02/feature-02

9
 ANNEX IX.
WEST AFRICAN OIL AND GAS PIPELINES

1. Chad–Cameroon Crude Oil Pipeline (Pipeline 43 in Table a) to this Annex)

Large oil reserves were discovered in southern Chad in the 1970s. 1 Between 1973 and
1975, oil was discovered in varying amounts in the Doba, Doseo, and Lake Chad basins,
leading to the creation of a multinational consortium comprising Conoco (12.5 per cent
and operator), Royal Dutch / Shell (37.5 per cent), Exxon (25 per cent), and Chevron
(25 per cent). 2 However, due to the fact that it is landlocked, Chad was unable to
monetise its oil reserves without a large-scale cross-border oil export pipeline.
Unfortunately, due to a protracted civil war in the 1950s (which was re-ignited in 1981), 3
Chad’s political and fiscal system was weak 4and oil prices too low to support large-scale
investment. 5 Stability finally returned in the 1990s as Idriss Déby seized power in a
coup. 6 Déby was confirmed as president in Chad’s first election in 1996. 7

Discussions took place between the World Bank, the Chad and Cameroon governments
and a consortium led by ExxonMobil concerning an export pipeline. Following the
adoption by the Chadian parliament of a new Petroleum Revenue Management Law, a
decision to finance the pipeline project was reached in 2000. 8 One of the World Bank’s
conditions for supporting the financing of the project was a law on revenue transparency.
Elements of the financing agreement required that Chad's 12.5percentage share of
revenues from oil production would flow through a London-based Citibank escrow
account (that is, an account monitored by an independent body). 9 Chad’s oil would
transit across Cameroon to an offshore oil export terminal. Chad would secure revenues
from tax and royalties from the IOCs and the sale of its own oil. Cameroon would
benefit from a transit fee from the pipeline as well as income tax and dividends from the
pipeline operator. 10

Due to challenging conditions, the project is considered a pioneering effort by the IFC
and the World Bank to demonstrate that large-scale extractive projects (when designed
to ensure transparency and effective environmental and social mitigation) could
significantly improve prospects for sustainable long-term development. 11

The project has not been free of problems. The Chadian government received a
$25M‘bonus’ from the oil consortium (ExxonMobil, Chevron and Petronas). Déby
promised to spend the money in a transparent manner, but in late November 2000
admitted that he had used $4.5M to buy weapons. 12 When oil revenues later came on
stream in far greater amounts due to a surge in oil price, the government of Chad
unsuccessfully pressed the World Bank in 2005 to modify the 1999 Law. Chad
unilaterally amended the law – eliminating in particular the ‘Future Generations Fund.’
The Bank responded by suspending disbursements on all Bank operations and freezing
government withdrawals from the escrow account. 13 In response, Chad threatened to
stop oil production. 14 After resumption of the dialogue, a new agreement was reached in
July 2006, by which the government promised to allocate to the priority sectors 70
percent of all budgetary resources (a much greater amount than the earlier 85 percent of
direct oil revenue only), and the Bank removed the hold on the escrow account and
resumed disbursements. 15

1
On the other hand, Cameroon’s involvement was mainly for the purpose of helping to
achieve program objectives –poverty reduction and governance improvement in Chad–
through the best possible use of the oil revenue. Nevertheless, significant gains accrued
to Cameroon as well. Cameroon’s objective was to augment the financial resources
available for development and pro-poor expenditure. The program’s objectives were
achieved, although to a lesser degree than aimed for because of lower production of oil.
The gains to Cameroon the country included the revenue to the government from the
pipeline transit fees as well as the income taxes and dividends from the pipeline
operator. 16 The recent international economic and financial crisis, coupled with a decline
in oil production, has triggered a sharp reduction in Chad’s oil revenues. In addition, oil
reserves are depleting and production is down from 177,000Bpd in 2005 to 120,000 Bpd
in 2010, even taking into account new fields under development. 17

MAP 11
CHAD–CAMEROON OIL PIPELINE

43

ANNEX IX. TABLE a) – THE CHAD-CAMEROON OIL PIPELINE

Pipelin Country Paramet Ownership Strategic Risk Sources and

e Configuration ers Commercial Purpose Consequences
VI. West Africa
43. • Chad • 1,070 • Private sector • Oil discovered • Pioneering efforts
Chad– (landlocked kms 18 • Operator: in landlocked by World Bank to
Camero producer) • CAPEX ExxonMobil Chad in the ensure money
on • Cameroon : $3.7 (40 per cent) 1970s but would be
(operati (transit / Bln 19 • Petronas production was deployed to fight
onal oil port) Malaysia (35 delayed due to poverty;

2
Pipelin Country Paramet Ownership Strategic Risk Sources and
e Configuration ers Commercial Purpose Consequences
pipeline per cent) long-standing • However, Chadian
) • Chevron (25 civil war government
per cent) • In the 1990s the unilaterally
• Government country amended the law
s of Chad stabilized providing for the
and • Chad would Future
Cameroon (3 gain royalties, Generations Fund
per cent dividends and • World Bank
combined) 20 taxes threatened to stop
• Cameroon disbursements,
would benefit and Chad
from a transit threatened to stop
fee, taxes and production 21
dividends

2. The West Africa Gas Pipeline (Pipeline 44 in Table b)to this Annex)

The Economic Community of West African States (ECOWAS) put forward the idea for
a West Africa Gas Pipeline (WAGP) in 1982 as a way to promote regional integration
and economic development. 22 The World Bank undertook a feasibility study in 1990 and
in 1995 the Heads of States of four host governments– Nigeria, Benin, Togo and
Ghana–signed an agreement. Subsequently, the four governments signed a
memorandum of understanding with a consortium led by Chevron23 and construction of
the pipeline began in August 2005. 24

Due to regional instability, including violence in the Niger Delta, 25 construction

problems and a prolonged dispute with contractors, the operation of the pipeline was
delayed until 2008. 26 Following construction delays, the pipeline costs had risen to $1
Bln, from an original estimate of$600M. 27Post-completion, the pipeline was beset by a
series of disruptions. Flows on the line were interrupted for about a year in 2009 due to
vandalism in Nigeria. 28 In the first half of 2011, gas flows were curtailed 29 and
disrupted. 30 The pipeline also had problems maintaining the Right of Way, and frequent
use of the pipeline corridor as an access road by local residents threatened the stability of
the pipeline. 31

In August 2012 the WAGP system was shut down and gas deliveries to its onshore
stations terminated by its operator after a loss of pressure was experienced around Lome
in Togo. 32 Operations were shut down after a facility was damaged when Togolese naval
authorities exchanged fire with a suspect vessel. 33In October 2012 WAGPCo announced
that it would not achieve its profit projections for 2012 because of the vandalism of
pipelines in Lome, which resulted in the company declaring force majeure on its gas
operation. Damage to the Lome segment of the pipeline is estimated by WAGPCo to be
costing around $500,000 to $600,000 per day. 34 This shut down consequently affected
electricity generation, supply and distribution services in Ghana, leading to load shedding
in parts of the country. 35 In December 2012 the Ghanaian government declared that its
electricity generation had declined by 200 megawatts since the incident and had forced it
to rely on more expensive and less efficient crude oil for generating electricity. 36 While
Ghana now has the ability to produce (and to potentially export via reverse flow through
the WAGP Pipeline), associated gas from its Jubilee Field, it has so far been unable to

3
agree appropriate terms with the existing producers. Consequently, not only are
additional gas flows into Ghana impeded, the oil producers are also having to place
limits on oil production pending a solution for the associated gas.

3. Maritime exports

Maritime exports of crude oil from West Africa in 2012 were as follows:

Source Destination Bpd

West Africa (Nigeria, US 861,000
Angola and Ghana)
Canada 84,000
South and Central America 192,000
Europe 1,313,000
Australasia 119,000
China 1,033,000
India 548,000
Japan 98,000
Singapore 2,000
Other Asia Pacific 315,000
37

Maritime exports of gas from West Africa in 2012 were as follows:

Source Destination Bcm

Equatorial Guinea Chile 0.4
Other Europe 0.1
Japan 3.8
South Korea 0.5
Taiwan 0.2
Nigeria Mexico 1.1
Brazil 0.5
Other Central and South America 0.1
France 2.7
Spain 5.4
Turkey 1.5
Other Europe 2.0
Middle East 0.8
China 0.4
India 2.1
Japan 6.5
South Korea 2.5
Taiwan 1.6
Thailand 0.1

4
 MAP 12
WEST AFRICA GAS PIPELINE

ANNEX IX. TABLE b) –THE WEST AFRICA GAS PIPELINE

Pipeline Country Parameter Ownership Strategic Risk Sources

Configuratio s Commercial Purpose and
n Consequences
VI. West Africa
44. West • Nigeria • 4.6Bcm 38 • Private sector • The • Security
Africa (producer) • 678 kms 39 • WAGPCo company's • Delays pre-
(operatio • Benin • CAPEX: • Chevron West main completion due
nal gas (transit / $614 mln 40 African Gas mandate is to instability
pipeline) consumer) Pipeline Ltd. to transport including
• Togo (transit (36.7 per cent) natural gas murder,
/ consumer) • Nigerian from violence and
• Ghana National Nigeria to vandalism in
(emerging Petroleum customers in Niger Delta 42
producer / Corporation Benin, Togo • Community
consumer) (25 per cent) and Ghana disruptions on
• Shell Overseas • Conceived Right of Way 43
Holdings Ltd. by • Interruptions to
(18 per cent) Economic flows post-
Community completion due
• Takoradi
of West to vandalism 44
Power
African • System shut
Company Ltd.
States to down (August
(16.3 per cent)
promote 2012) 45
• Societe regional
Togolaise de • Vandalism has
integration
Gaz (2 per caused losses
cent) estimated at

5
Pipeline Country Parameter Ownership Strategic Risk Sources
Configuratio s Commercial Purpose and
n Consequences
• Societe $500,000 to
BenGaz S.A. $600,000/day 46
(2 per cent) 41

1http://www.eib.org/infocentre/press/news/all/chad-cameroon-oil-pipeline.htm
2http://www.beg.utexas.edu/energyecon/new-era/case_studies/Chad_Cameroon_Pipeline.pdf
3http://www.beg.utexas.edu/energyecon/new-era/case_studies/Chad_Cameroon_Pipeline.pdf
4http://www.bbc.co.uk/news/world-africa-13164686
5http://www.geosint.com/index.php?option=com_content&view=article&id=99&Itemid=96&73f7ce3fc

219677a35dbd9862b113a68=275e6a8ffa9963e81a1afbcf42bbeea2
6http://www.cfr.org/energy/chads-oil-troubles/p10532
7http://www.bbc.co.uk/news/world-africa-13164686
8http://www.geosint.com/index.php?option=com_content&view=article&id=99&Itemid=96&73f7ce3fc

219677a35dbd9862b113a68=275e6a8ffa9963e81a1afbcf42bbeea2
9http://www.cfr.org/energy/chads-oil-troubles/p10532
10http://siteresources.worldbank.org/INTOED/Resources/ChadCamReport.pdf
11http://www1.ifc.org/wps/wcm/connect/region__ext_content/regions/sub-

saharan+africa/investments/chadcameroon
12http://www.brettonwoodsproject.org/art-15314
13http://siteresources.worldbank.org/INTOED/Resources/ChadCamReport.pdf
14http://news.bbc.co.uk/2/hi/africa/4913142.stm
15http://siteresources.worldbank.org/INTOED/Resources/ChadCamReport.pdf
16http://siteresources.worldbank.org/INTOED/Resources/ChadCamReport.pdf
17http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/CHADEXTN/0,,m

enuPK:349885~pagePK:141132~piPK:141107~theSitePK:349862,00.html
18http://www1.ifc.org/wps/wcm/connect/6f271e00487e8e09844ced51e3a7223f/ChadCamProjectOvervi

ew.pdf?MOD=AJPERES
19 http://www.columbia.edu/itc/sipa/martin/chad-cam/overview.html
20 http://www.columbia.edu/itc/sipa/martin/chad-cam/overview.html
21 http://www.ipsnews.net/2006/01/finance-chad-dilutes-oil-for-development-pledge/
22http://allafrica.com/stories/201108021473.html
23http://www.thefreelibrary.com/Major+projects+in+Africa%3A+the+West+African+Gas+Project,+ta

king+gas...-a091658829
24http://www.beg.utexas.edu/energyecon/abuja_07_workshop/History%20and%20Tech%20of%20WA

GP%20(Ehigiator).pdf
25http://www.upstreamonline.com/live/article152945.ece
26http://oilandgasexpos.com/news/115-nigeria-concern-mounts-over-west-africa-gas-pipeline-

project.html
27http://www.energyglobal.com/news/pipelines/articles/Cost_for_West_African_Gas_Pipeline_soars.as

px
28http://www.reuters.com/article/2011/06/27/ozabs-ghana-gas-supply-idAFJOE75Q0GZ20110627
29http://www.arabnews.com/node/382106
30http://nationalmirroronline.net/index.php/business/energy/50466.html
31http://allafrica.com/stories/201108021473.html
32http://allafrica.com/stories/201208290468.html
33http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=251712
34http://www.oilreviewafrica.com/gas/gas/unrepaired-wapco-pipeline-may-cause-losses-worth-us-2-4-

billion
35http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=251712
36http://www.ghanabusinessnews.com/2012/12/22/ghana-wants-speedy-repair-of-west-africa-gas-

pipeline/

6
37BP Statistical Review of World Energy 2013, p. 28.
http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.pd
f
38 Page 360

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CEEQFjAF&url=htt
p%3A%2F%2Fwww.worldenergyoutlook.org%2Fmedia%2Fweowebsite%2Fenergydevelopment%2FWE
O2008Chapter15.pdf&ei=8I22UdXRAs_higKg74HABw&usg=AFQjCNFVQHl6qlKE7uvl2_7rDvJX_4
ZkUA&bvm=bv.47534661,d.cGE
39 Page 360

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CEEQFjAF&url=htt
p%3A%2F%2Fwww.worldenergyoutlook.org%2Fmedia%2Fweowebsite%2Fenergydevelopment%2FWE
O2008Chapter15.pdf&ei=8I22UdXRAs_higKg74HABw&usg=AFQjCNFVQHl6qlKE7uvl2_7rDvJX_4
ZkUA&bvm=bv.47534661,d.cGE
40 Page 10

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDUQFjAC&url=htt
p%3A%2F%2Fwww.unctadxi.org%2FSections%2FDITC%2FFinance_Energy%2Fdocs%2F11thAfrican
%2F11thAfrican_Debo%2520k%27mba%2520Barandao.ppt&ei=pY62UZPRCeHtigLgp4CgBA&usg=A
FQjCNFNNQ5OCLFXdcjVhe5V8l2U8IJC7g&bvm=bv.47534661,d.cGE
41 http://www.wagpco.com/index.php?option=com_content&view=article&id=46&Itemid=78&lang=en
42 http://www.gasstrategies.com/publications/gas-matters-today/74559
43 http://business.highbeam.com/3548/article-1G1-125154378/protest-mounts-against-west-african-gas-

pipeline-project
44 http://www.arabnews.com/node/382106
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46 http://www.africanglobe.net/business/west-african-gas-pipeline-misses-target-due-vandalism/

7
 ANNEX X.
SINO–BURMESE OIL AND GAS PIPELINES

1. Introduction

Myanmar provides an illustration of emerging sources of risk to cross-border oil and gas
pipelines that are rooted in global supply-demand dislocations and the mismanagement
of internal and external dimensions of risk. With total reserves of natural gas at only 7.8
TCF, Myanmar is not an obvious choice as a gas supplier to China. Indeed, Myanmar is
already supplying 8.5 Bcm each year to Thailand via the Total-operated Yadana Pipeline
(Pipeline 47 in the table to this Annex).

2. The Sino–Myanmar Pipelines (Pipelines 45 and 46 in the table to this Annex)

In an effort to provide oil and gas supplies into its western provinces (and to provide a
means to avoid shipping oil by maritime tanker through the Straits of Malacca), China
has supported the construction and operation of the two parallel Sino–Myanmar
Pipelines. Unfortunately, domestic political opposition and security concerns currently
pose significant sources of risk to these two pipelines. China’s original stakeholder
engagement strategy for Myanmar appeared to focus upon working with an
internationally isolated regime and the offer of cash incentives. However, this strategy
may now backfire due to recent changes in Myanmar’s domestic politics. 1 Grievances
appear to center upon the fact that a large percentage of the local population in
Myanmar does not have access to energy (for example, 26 per cent of the population
does not have access to electricity) and blackouts are frequent. In addition, local guerrilla
activity has recently targeted the pipelines. The history of pipeline development in
Myanmar has been particularly difficult with multiple allegations of human rights abuses
including forced labor and murders and this will feed negatively into the emerging
economic and political dynamics.

1
 MAP 13
SINO–BURMESE OIL AND GAS PIPELINES

45

46

47

ANNEX X. TABLE – SINO-BURMESE OIL AND GAS PIPELINES

Pipeline Country Parameters Ownership Strategic Risk Sources

Configuration Commercia Purpose and
l Consequences
VII. Myanmar
45. Bay of • Myanmar • 12 Bcm 2 • State sector • Gas supplies • Security
Bengal– (producer) • Supplied • CNPC into China threats
Sino– • China from gas • Myanma Oil • Opportunity including
Burmese (consumer) fields A-1 and Gas for China to clashes
(operational and A-3 Enterprise 5 play a role in between the
gas Shwe oil and • BOOT Myanmar’s military and
pipeline) gas fields domestic separatist
model with
operated by ownership reforms fighters 6
Daewoo being • The • Village
International transferred pipelines protests in
Corp.,Myan to the present a response to
ma Oil and Government fourth way allegations of
Gas after 30 years for oil and land seizures
Enterprise, natural gas and inadequate
India's Oil to enter compensation 7
and Natural China, after
Gas ocean
Corporation, shipping, the
GAIL, and Sino–

2
 Pipeline Country Parameters Ownership Strategic Risk Sources
Configuration Commercia Purpose and
l Consequences
Korea Gas Kazakhstan
Corporation. pipelines
3 and the
• CAPEX: Sino–
$1.04 Bln 4 Russian
crude oil
pipeline
46. Bay of • Arabian and • 22 Mt/y or • State sector • Will cut • Security
Bengal– African oil 425,000 Bpd 8 • CNPC distance for threats
Sino– sources • 771 kms 9 • Myanma Oil African and including
Burmese • Myanmar • CAPEX: $1.5 and Gas Arabian oil clashes
(oil pipeline (transit) Bln 10 Enterprise 11 shipments to between the
operational) • China China by military and
• BOOT
(consumer) model with 1,200 kms separatist
ownership • Provides fighters 12
being China with • Village
transferred bypass to protests in
to the Straits of response to
Government Malacca in allegations of
after 30 years the event land seizures
they are and inadequate
blocked due compensation
to piracy, 13

terrorism or • Conflicts
conflict between
Burmese and
Chinese oil
pipeline
workers ended
with buildings
set on fire in
Rakhine
State 14
47. Yadana • Myanmar • 525 • Private sector • Regional gas • Allegations of
Oil Pipeline (producer) MMcf/d 15 • Operator: supply human rights
• Thailand • 409 kms 16 Total S.A. pipeline abuses (forced
(consumer) • Construction (31.2 per • Feedstock labor) 20
completed in cent) for power • Allegations
1998 17 • Chevron generation that Unocal
• CAPEX: Corporation facilities and Total were
$1.2 Bln 18 (28.3 per complicit in
cent) human rights
• PTT Public abuses 21
Company
Ltd. (25.5 per
cent)
• Myanma Oil
and Gas
Enterprise
(15 per
cent) 19

3
1 See Stratfor, ‘The Uncertain Future of the Sino-Myanmar Pipeline‘August 2, 2013
http://www.stratfor.com/sample/analysis/uncertain-future-sino-myanmar-pipeline
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4 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7TZ0v82ODSA
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14 http://www.irrawaddy.org/burma/burmese-arrested-dispute-chinese-pipeline-workers.html
1/31/14
15 http://burma.total.com/myanmar-en/total-in-myanmar/yadana-project/description-of-the-yadana-

project-200162.html
16 http://burma.total.com/myanmar-en/total-in-myanmar/yadana-project-200159.html
17 http://burma.total.com/myanmar-en/total-in-myanmar/yadana-project/description-of-the-yadana-

project-200162.html
18 http://www.ens-newswire.com/ens/dec2004/2004-12-17-02.asp
19 http://burma.total.com/myanmar-en/total-in-myanmar/yadana-project/description-of-the-yadana-

project-200162.html
20 http://www.scu.edu/ethics/practicing/focusareas/business/Unocal-in-Burma.html
21http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDkQFjAC&url=ht

tp%3A%2F%2Fwww.wcl.american.edu%2Fhrbrief%2F13%2Funocal.pdf&ei=Pu-zUf6mHM-
UigLw5oDoBQ&usg=AFQjCNFOjB7nPwsHXHMWtTyDo-_y124Rjw&bvm=bv.47534661,d.cGE See
also http://www.earthrights.org/campaigns/yadana-pipeline

4
 ANNEX XI.
SOUTH AMERICAN CROSS-BORDER GAS PIPELINES

1. General

South America has some of the largest deposits of oil in the world, with 328.4 Bln Bbls
of proven oil reserves, concentrated mainly in Venezuela, Brazil and Colombia.
However, as a producer and exporter of oil, South America (particularly Venezuela)
continues to under-perform. As a region, South American oil producers export
approximately 3.815M bpd to markets primarily in the US, EU, China and India. This
dynamic may change going forward as demand for oil in the Asia-Pacific region escalates
and domestic policies on investment (particularly in the Venezuelan petroleum sector)
change. Due to the geographical location of its various oil deposits, there is little need
for cross-border oil export pipelines in South America. In contrast to its oil reserves,
South America, with 7.6 TCM of natural gas, has smaller gas reserves than any other
region in the world. However, this ranking would change markedly when the large scale
estimated Argentinian shale gas deposits are added (707 Tcf). The ‘southern cone’ of
South America (encompassing Argentina, Bolivia, Brazil, Chile and Paraguay) has a well-
developed network of cross-border gas trunk and distribution pipelines.

2. Cross-border gas pipelines

The countries within the ‘Southern Cone’ of South America (Argentina, Bolivia, Brazil,
Chile and Uruguay began developing cross-border pipelines in the early 1970s. However,
macro-economic stability including debt defaults, pricing disputes and other political
factors have long plagued the regional international trade of gas.

3. Maritime Exports

Maritime exports of gas from South America in 2012 were as follows:

Source Destination Bcm

Peru Mexico 1.2
Spain 2.6
Japan 1.1
Thailand 0.4
Brazil Argentina 0.4
Japan 0.1

1
 MAP 14
SOUTH AMERICAN CROSS-BORDER GAS PIPELINES

48
49

50 51

ANNEX XI. TABLE – SOUTH AMERICAN CROSS-BORDER GAS

PIPELINES

Pipeline Country Paramete Ownership Strategic Risk Sources

Configurat rs Commercial Purpose and
ion Consequences
VIII. South America
48. Bolivia– • Bolivia • 2.2 Bcm 1 • State and • Bolivia keen • Supply
Argentina (producer) • 24-inch private to monetize disruptions and
(YABOG) • Argentina diameter 2 sectors its gas pricing
(operational (consumer) • 441 kms 3 • Operator: resource base fluctuations 6
gas pipeline) Transredes 5 • Argentina, • Macroeconomic
• Completi
on 1972 4 unlike Brazil, instability in
had a Bolivia in the
developed 1980s 7
natural gas • Pricing
market but disputes with

2
 Pipeline Country Paramete Ownership Strategic Risk Sources
Configurat rs Commercial Purpose and
ion Consequences
was Argentina 8
experiencing • Defaults on
shortages debts to
Argentina 9
• Domestic
resentment in
Bolivia to sale of
its natural gas 10
• Argentinian
discoveries
frustrate
contract 11
49. Bolivia– • Bolivia • 11 Bcm 12 • State sector • Bolivia keen • Bolivian
Brazil (producer) • 3,150 • Gas to monetize macroeconomic
GASBOL • Brazil kms 13 TransBolivia its gas instability 18
(operational (consumer) • CAPEX: no S.A. resource base • Government
gas pipeline) $2.15 • Transportad • Bolivian gas control of fuel
Bln 14 ora Brasileira exports to prices in Brazil
• 8 Gasoduto Argentina • Gas supply risk
Mcm/d, Bolivia- were (borne by
expandab Brazil S.A. 17 becoming Petrobas) 19
le to 16 untenable due • Market / pricing
Mcm/d to discoveries risk in Brazil 20
over the in Argentina; • City-gate price
course of Bolivia for Bolivian gas
the first 8 needed an set at 85 per
years 15 alternative cent of local
• Full market to (fuel oil) price
capacity sustain its for the first
of 30 export fiveyears of
Mcm/d earnings pipeline
(2004) 16 • Brazil, at the operation 21
cusp of • Political and
economic regulatory risks
development, in Brazil 22
keen to
• Bolivian supply
develop its
risks 23
industrial base
and requires
gas to fuel
power
generation
• Brazil also
keen to
extend its
regional
influence
• Strong
growth in
energy
demand
forecasted for
Brazil
• Gas allowed
Brazil to
diversify
energy supply

3
 Pipeline Country Paramete Ownership Strategic Risk Sources
Configurat rs Commercial Purpose and
ion Consequences
and
environmenta
lly friendly
fuel
50. • Argentina • 3.3 Bcm 24 • Private • Chilean • Gas to gas
Argentina– (producer) • Projected sector interest in competition
Chile • Chile to reach • NOVA cheaper, with Transgas
GasAndes (consumer) 686 Corporation cleaner energy project 30
(operational MMcf/d • Gasco • Contribute to • Considerable PR
gas pipeline) by 2016 25 cleaning difficulties
• Gener
• 463 • Compania heavily related to
kms 26 General de polluted air in environmental
• Pipeline Combustible Santiago and social issues
commissi s • Argentina in Chile 31
oned in • Techint seeking to • Chilean lack of
1997 27 CompaniaTe promote experience with
• CAPEX: cnica export / gas pipelines 32
$350 Internacional monetization
mln 28 29 of gas
production
51. • Argentina • 20 • State and • Argentina’s
Argentina– (producer) Mcm/d 33 private monetization
Uruguay– • Uruguay • 215 sectors of gas
Parana (consumer) kms 34 • Operator: resource
Uraguana • Brazil BG • Satisfaction of
(operational (consumer) • Energy of regional gas
gas pipeline) Argentina demands in
• ANCAP Uruguay and
(Uruguayan southern
state Brazil
company) 35

1 Page 13 https://www.google.com/search?q=Bolivia-Argentina+yabog+pipeline&ie=utf-8&oe=utf-
8&aq=t&rls=org.mozilla:en-
GB:official&client=firefoxa#bav=on.2,or.r_qf.&fp=12ab9d69296e4f4f&q=Bolivia-
Argentina+yabog+pipeline+bcm+capacity&rls=org.mozilla:en-GB%3Aofficial
2 Page 59 South American Gas: Daring to Tap the Bounty http://library.umac.mo/ebooks/b13623874.pdf
3 Page 59 South American Gas: Daring to Tap the Bounty http://library.umac.mo/ebooks/b13623874.pdf
4 Page 4

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p%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-southern-
cone&ei=ivGzUeWEFOTWigLQn4C4DQ&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=b
v.47534661,d.cGE
5 Page 59 South American Gas: Daring to Tap the Bounty http://library.umac.mo/ebooks/b13623874.pdf
6 Page 7

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p%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-southern-
cone&ei=ivGzUeWEFOTWigLQn4C4DQ&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=b
v.47534661,d.cGE
7 Page

6http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDMQFjAB&url=h
ttp%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-southern-

4
cone&ei=ivGzUeWEFOTWigLQn4C4DQ&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=b
v.47534661,d.cGE
8 Page 7

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDMQFjAB&url=htt
p%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-southern-
cone&ei=ivGzUeWEFOTWigLQn4C4DQ&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=b
v.47534661,d.cGE
9 Page 7
10 Page 4

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDMQFjAB&url=htt
p%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-southern-
cone&ei=ivGzUeWEFOTWigLQn4C4DQ&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=b
v.47534661,d.cGE
11

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CCwQFjAA
&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fsiteresources.worldbank.org%2FINTOGMC%2FResources%2Fcrossborderoilan
dgaspipelines.pdf&ei=9sQTUvayDcGmigLX0YCYDw&usg=AFQjCNG2EhgHHM2mIuhMHDA1cx_b
4NSaRg&bvm=bv.50952593,d.cGE
12 Page 262

http://books.google.com/books?id=zeIRJAF5QtsC&pg=PA262&lpg=PA262&dq=Bolivia%E2%80%93
Brazil+pipeline+11+bcm&source=bl&ots=Eu1RA7xNU_&sig=G1ZLiyLm4WJ7QRtXSpjuL6y51E0&hl
=en&sa=X&ei=f_azUefAKYv8iQKZhoH4DQ&ved=0CDUQ6AEwAg#v=onepage&q=Bolivia%E2%
80%93Brazil%20pipeline%2011%20bcm&f=false
13 Page 1

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDMQFjAB&url=htt
p%3A%2F%2Fwww.beg.utexas.edu%2Fenergyecon%2Fnew-
era%2Fcase_studies%2FBolivia_to_Brazil_Pipeline.pdf&ei=f_WzUYKLL4SZjAK-
6IHYDQ&usg=AFQjCNEYNxFZ3O4xcvKDlaaRE8nPAGoztQ&bvm=bv.47534661,d.cGE
14 http://www.ipsnews.net/2003/09/energy-south-america-brazils-new-gas-finds-could-modify-

integration/
15http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
16 Page 117

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17

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CD0QFjAD&url=htt
p%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-southern-
cone&ei=55q2UbfbBOTWigLQn4C4DQ&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=bv.
47534661,d.cGE
18 Page 6

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDMQFjAB&url=htt
p%3A%2F%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-southern-
cone&ei=ivGzUeWEFOTWigLQn4C4DQ&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=b
v.47534661,d.cGE
19http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
20http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
21http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
22http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
2323http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
24 http://www.energydelta.org/mainmenu/energy-knowledge/country-gas-

profiles/chileKDiwL3gIGgBQ&usg=AFQjCNG7rPycIe94akKf1yIIoc9Wd6Zoww&bvm=bv.47534661,d
.cGE
25 Page 129

http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
26 http://www.energydelta.org/mainmenu/energy-knowledge/country-gas-profiles/chile
27 http://www.eia.gov/countries/cab.cfm?fips=AR
28 Page 129

http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf

5
29 Page 13
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=13&cad=rja&ved=0CDYQFjA
COAo&url=https%3A%2F%2F2.zoppoz.workers.dev%3A443%2Fhttp%2Fwww.bakerinstitute.org%2Fpublications%2Fnatural-gas-pipelines-in-the-
southern-cone&ei=JZy2UfLeDuL-
iwKG14CICg&usg=AFQjCNGlJW5BILslZuR0clSLSu3nIYKjbA&bvm=bv.47534661,d.cGE
30 Page 9

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CC8QFjAB&url=http
%3A%2F%2Felibrary.worldbank.org%2Fdeliver%2F2315.pdf%3FitemId%3D%2Fcontent%2Fworkingp
aper%2F10.1596%2F1813-9450-2315%26mimeType%3Dpdf&ei=TPezUZ7YL-
v4igKthIDYCQ&usg=AFQjCNGDTOvn-GkiqLKsPG1PFNqrdCukpA&bvm=bv.47534661,d.cGE
31http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
32http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf
33 http://www.bg-group.com/MediaCentre/PressArchive/1998/Pages/pr-051.aspx
34 http://www.bg-group.com/MediaCentre/PressArchive/1999/Pages/pr-073.aspx
35 http://www.bg-group.com/MediaCentre/PressArchive/1998/Pages/pr-051.aspx

6
 ANNEX XII.
NORTH AMERICAN OIL AND GAS PIPELINES

1. Introduction

North America has an abundance of primarily unconventional oil and gas reserves, that
is, reserves of heavy oil and oil and gas that can only be commercially extracted using
hydro-fracking technology. On this measure, North America has the third largest
reserves in the world by region with 220.2 Bln Bbls and the US in particular is projected
to become energy self-sufficient within the next 10–20 years. Moreover, North America
has seen $138.6Bln invested in interstate gas pipelines and $49.2Bln in interstate oil
pipelines in 2011. 1 However, with the price of oil plummeting during 3 and 4Q 2014,
the test of whether smaller-scale producers within the US market can sustain production
will likely lead to consolidations in 2015. In contrast to other large-scale global
producers including Russia, Venezuela, marginal producers and the Gulf countries, the
US macro-economy will in general benefit from the lower oil prices.

2. The Keystone Pipeline

The US currently imports 83.8Bcma of gas from Canada via cross-border gas pipelines.
The US also imports approximately 2.9 Mbpd of crude oil from Canada some of which
is transported via four cross-border oil pipelines. A new and controversial cross-border
crude oil pipeline development is the 3,460 km Keystone XL Pipeline System. 2 The
Keystone Pipeline will transport 590,000 Bpd 3 of Canadian heavy oil produced in
Alberta to the US. 4 Subsequent phases of the pipeline development will take more than
800,000 Bpd of crude oil from Alberta, Canada, and the Bakken shale formation in
Montana to facilities near Steele City, Nebraska, for delivery to the Gulf Coast region of
Texas and Louisiana. 5 The movement of this heavy oil into the US markets will further
underpin US security of supply and energy self-sufficiency objectives. However, the
development and construction permit for the Keystone Pipeline has been pending for
nearly five years due to a variety of criticisms and protests. 6 The Obama Administration
was expected to approve the pipeline development by 2011; however, protests organised
by activist groups which included famous climate scientists and celebrities, elevated
awareness of the project nationally. 7

In early 2012, the Obama Administration rejected the proposed route via Nebraska,
forcing the submission to be revised. 8 Opposition to the Nebraska route has centred on
potential adverse impacts to sensitive grasslands and aquifers. 9 When President Obama
made climate change a priority for his second term bid, approval of the permit was
further impeded. 10 A US State Department Report released in March 2013 11 raised no
serious environmental issues in respect of the pipeline. 12 The report also predicted that
the Canadian federal government and Alberta provincial government, together with their
oil industry partners, would continue to develop the oil sands even if the Keystone XL
pipeline was not built. 13 However, civil society groups have continued to attack the
project for its potential impact on climate change at a time when climate change needs
to be addressed by fostering alternative energy sources. 14 Other environmental concerns
include the fact that the pipeline would run across rivers, streams and prime habitat for
at least 20 endangered species. 15 Activists also raise concerns about the danger of oil
spills. TransCanada's existing Keystone I pipeline has reportedly leaked 14 times since it

1
went into operation in June 2010, including one spill of 24,000 gallons. The State
Department's environmental reviews have pointed out that spills from Keystone XL are
likely to occur, estimating that there could be as many as 100 spills over the course of
the pipeline's lifespan. 16 While the newly elected Senate and subsequently the House
have approved the Keystone XL Pipeline, it may yet be defeated by a Presidential veto.
In the meantime, TransCanada announced on 2 August 2013 that it would move
forward with its 4,400 km Energy East Pipeline Project that will have capacity to send
1.1Mbpd of oil extracted from Alberta to St John, New Brunswick for refining in
Eastern Canada. 17

3. Other US–Canada cross-border oil pipelines

Canada produces 3,245M bpd of crude oil (2,469M bbls from Alberta, 471M bbls from
Saskatchewan, 50M bbls from Manitoba and 40M bbls from British Columbia and
smaller scale production from other Provinces). 18 Six larger-scale operational cross-
border crude oil pipelines taking 2,94M bpd of Canadian production into US refineries
organized into five refinery regions described as Petroleum Administration for Defense
Districts and securing US supplies of refined products.

4. US–Mexico cross-border pipelines

The recent market dynamics associated with US shale gas and shale oil production,
together with forward plans for the marketing of Canadian heavy oil and gas, have
placed US–Mexican cross-border oil and gas pipelines in a new light. Mexico currently
imports 16.6 Bcm of gas from the US. While there is spare pipeline export capacity
through existing pipelines on the US side of the border, bottlenecks exist on the
Mexican side of the border. Consequently, developers are looking to build cross-border
gas pipelines providing 4.2 Bcf/d of additional export capacity. The large estimates for
Mexican shale oil and shale gas as well as the recent moves in Mexico to amend the
Constitution to allow foreign participation in the upstream including within Mexican
shallow and deep water Guld of Mexico hold forth the opportunity for additional cross-
border gas pipeline capacity and significant cross-border gas trading opportunities.

5. US crude oil export controls

As a result of US federal laws, it is illegal to export crude oil from the US without a
license. The principle laws are: 19 the Mineral Leasing Act of 1920, 20 the Energy Policy
and Conservation Act of 1975, 21 and the Export Administration Act of 1979. 22 The
consequence of this legislation has been to force many western and mid-western
producers to sell their production to Gulf coast refiners as there is insufficient pipeline
capacity to enable this production to be efficiently delivered elsewhere. In turn, this has
led to a consistent differential in the price of WTI versus the price of other benchmark
crude oils.

2
 MAP 15
THE KEYSTONE PIPELINE

52

3
 ANNEX XII. TABLE – THEKEYSTONE PIPELINE

Pipeline Country Parameters Ownership Strategic Risk Sources

Configuration Commercial Purpose and
Consequences
VIII. North America
52. Keystone • Canada • 830,000 • Private • Security of • Environmental
Pipeline (Alberta: Bpd 23 sector supply for / climate
(developmental producer) • 1,897 kms • Owner: the change
oil pipeline) • USA (extension TransCanad continenta protests
(producer – of the a (sole l US • Aboriginal
Bakken shale 3,460-km owner since • Canadian rights /
refiner -Steele pipeline August oil sands, human rights
City, which 2009) 26 if not concerns 27
Nebraska – carries refined by • Permitting
Gulf Coast 590,000 the US, delays 28
Texas and Bpd from will be • Operational
Louisiana – Alberta to exported safety
consumer) the US) 24 to China concerns and
• CAPEX: risk of spills 29
$5.3
Bln 25

2http://www.transcanada.com/100.html
3http://www.transcanada.com/100.html
4http://www.downstreamtoday.com/news/article.aspx?a_id=11336&AspxAutoDetectCookieSupport=1
5http://www.ogfj.com/articles/2013/03/state-department-report-says-keystone-xl-pipeline-would-have-

lit.html
6http://www.reuters.com/article/2013/03/23/us-usa-keystone-senate-idUSBRE92L0YJ20130323
7http://www.guardian.co.uk/environment/2013/feb/17/keystone-xl-pipeline-protest-dc
8http://www.guardian.co.uk/environment/2013/feb/17/keystone-xl-pipeline-protest-dc
9http://www.nytimes.com/2013/03/11/opinion/when-to-say-no-to-the-keystone-

xl.html?ref=keystonepipeline
10http://www.guardian.co.uk/environment/2013/feb/17/keystone-xl-pipeline-protest-dc
11http://www.nytimes.com/2013/03/02/us/us-report-sees-no-environmental-bar-to-keystone-

pipeline.html?ref=keystonepipeline&_r=0
12http://www.ogfj.com/articles/2013/03/state-department-report-says-keystone-xl-pipeline-would-have-

lit.html
13http://www.nytimes.com/2013/03/11/opinion/when-to-say-no-to-the-keystone-

xl.html?ref=keystonepipeline
14http://www.guardian.co.uk/environment/2013/mar/02/keystone-xl-pipeline-report-activists-scientists
15http://www.huffingtonpost.com/kieran-suckling/obama-keystone-pipeline_b_2924969.html
16http://www.huffingtonpost.com/kieran-suckling/obama-keystone-pipeline_b_2924969.html
17http://www.transcanada.com/6246.html
18http://www.capp.ca/canadaIndustry/oil/Pages/PipelineMap.aspx
19http://www.cfr.org/oil/case-allowing-us-crude-oil-exports/p31005
20http://www.blm.gov/pgdata/etc/medialib/blm/ut/vernal_fo/lands___minerals.Par.6287.File.dat/Mine

ralLeasingAct1920.pdf
21http://www.house.gov/legcoun/Comps/EPCA.pdf
22http://uscode.house.gov/statutes/1979/1979-096-0072.pdf

4
23 http://keystone-xl.com/about/the-project/
24 http://keystone-xl.com/about/the-project/
25 http://keystone-xl.com/about/the-project/
26 http://www.pipelineandgasjournal.com/transcanada-becomes-sole-owner-keystone-pipeline-system
27 http://wagingnonviolence.org/feature/indigenous-resistance-grows-strong-in-keystone-xl-battle/. See

also http://www.ammsa.com/publications/alberta-sweetgrass/first-nations-claim-victory-keystone-xl-
pipeline-approval-delay
28 http://www.reuters.com/article/2013/04/26/us-transcanada-results-idUSBRE93P0NX20130426
29 http://www.huffingtonpost.com/2012/10/18/transcanada-keystone-pipeline-shut-

down_n_1982478.html. See also,

http://www.pbs.org/newshour/bb/environment/jan-june13/oilspill_04-03.html