The Economics Of Transit Oil & Gas Pipelines

THE ECONOMICS OF TRANSIT OIL & GAS PIPELINES

Dr. Ekpen J. Omonbude EMC – Energy Market Consultants (UK) Ltd. NAEE/IAEE Inaugural Conference ABUJA April, 2008

Outline

 Relevance of Transit Pipelines  Transit Pipeline Economics: Technical Factors, Infrastructure Requirements  Transit Pipeline Economics: Economic Factors  Transit Pipeline Economics: Implications  Transit Pipeline Economics: Possible Solutions

Relevance of Transit Pipeline Economics Mainly landlocked Reserves 2006

2005

2001

1991

Growth in Cross-border Gas Trade 1981

0

100

Source: BP/Cedigaz

200

300

400

500

bcm Pipeline

LNG

600

700

800

Relevance of Transit Pipeline Economics

$/MMBTU

$/BBLOE Cost of Alternative Transportation Methods

$4.00

$3.00

Two 4 MMT LNG Trains

56” Onshore Gas pipeline (3,100)

$20.00

$2.00 $10.00

$1.00

Onshore Crude Line

Crude Oil Tanker

$0.00 0

2000

4000

6000

Miles

Relevance of Transit Pipeline Economics

 Different Players, differing interests  Lack of an overarching legal regime  Academic & Industrial analysis

 Problem of rent sharing

Potential for Dispute

Relevance of Transit Pipeline Economics

The Rent Question Economic Rent

Transit Pipeline

Exporter

Transit Country

Importer

Transit Pipeline Economics: Technical Factors

Infrastructure Requirements  Cost plays vital role across value chain  Achieving economic balance between capital costs & assoc. costs of pumping/compression vs. annual operating costs

 Load factor: inverse relationship with unit transport cost Average daily throughput over a year Max throughput on any day in same year

X 100 1

Transit Pipeline Economics: Technical Factors

Infrastructure Requirements  Pipeline Sizing  Confidence that additional volumes will appear + confidence in load factor levels  Relevant fiscal regime features  Investor Strategy  Policy stand-point of relevant authorities

 Other technical factors  Entry specs of pipeline system  Cost of reducing quality (drag reducing agent impact)

Transit Pipeline Economics: Economic Factors  Pipelines as Natural Monopolies  Huge technical economies of scale imply high capital costs + low operating costs  Preferable for 1 pipeline between 2 points than 2 or more of same capacity

 Economics of Transit  Regulatory aspects  Types & sizes of markets involved  Rent sharing  Political & diplomatic relations

Transit Pipeline Economics: Implications  The Transit Fee  Differing views on definition  2 key issues in determining rent  Value of project  Cost of project

 Role of transit country  It is primarily a bargaining problem  How can shifts in bargaining powers to a crossborder pipeline be managed with positive impact on potential disputes & security of supply?

Transit Pipeline Economics: Possible Solution

Motive behind the Pipelines

Off-taking by transit country

Strategic Investment/ FDI

Contribution to the economy from transit fee

Complementing Pipelines

The Bargaining Outcome

Alternative Pipeline Route

Political/Diplomatic Relations

Domestic Market Relevance

Participation in Cost Sharing

International Institutions

Strategic Alliances

THANK YOU!

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