These analyses (which are absurd to anyone with a basic knowledge of the oil&gas industry) completely ignore the dynamics of what it takes to actually get a pipeline deal done, and what it means for relations between the parties involved. Therefore they fail to understand the significance (or lack thereof) of announcements by energy companies or governments and wrongly interpret the geopolitical implications of both pipelines, and announcements of pipelines.

There are regularly stories in the media or in the blogosphere about various pipeline projects that are announced with much publicity, and are seen to have major strategic consequences, or conversely about projects that are more discreet but are seen as the "real" justification for various military or diplomatic acts. For instance, the announcement last month of an agreement between Russia and several central Asian republics about a new pipeline was widely interpreted as a major move against European energy security . Similarly, the war in Afghanistan has often been blamed on a long mooted Turkmenistan-Afghanistan-Pakistan pipeline .

In order to understand pipelines, it's easiest to cut the task into smaller pieces, and see how these are required to be put in place and fit together.

But even before that, one fundamental question to ask whenever an article or anyone talks about a pipeline is: oil, or gas? The two are completely separate businesses, and are totally independent one from the other, but they are very often mixed up by uninformed commentators. An article that includes a map that does not separate and identify the two networks, or that talks blithely about pipelines between two countries without identifying what resource is actually transported can safely be ignored as fundamentally clueless. Beyond that first step, a cursory look at what is to be linked by any pipeline can allow to further eliminate many stories. For instance, the article linked above about the Afghanistan pipeline talks throughout about oil, when the pipeline that was discussed for a while was a gas pipeline - for the simple reason that Afghanistan's neighbor, Turkmenistan, has gas but little oil, and any oil pipeline would need to come from even further afar and involve more countries.







From now on, I will only be discussing gas pipelines. The logic is mostly similar for oil, if a bit simpler (I'll comment on the differences where relevant). With this point clarified let us address the components of a pipeline:

A supply of gas

A supplier of gas

A market for gas

A purchaser of gas

An entity operating the pipeline

Government authorisations for pipelines crossing their territory -for each country

A price for gas transport

An entity (or more) building the pipeline

An entity (or more) paying the pipeline

The fundamental point is that all of the relevant components and parties need to be present at the exact same time for the project to exist. And by "being present", I mean "irrevocably making binding commitments, representing large sums of money." And it is a surprisingly difficult job to bring all the parties to the table in that way at the right moment - which is why fewer pipelines than one would expect are built, and why few entities are actually able to pull it off. And, as we will see, being able to pay for the pipeline is not quite enough.

A pipeline concept will usually come to life via 3 circumstances: (i) when a large supply of gas needs to be brought to the market, (ii) when a large enough market/customer not or insufficiently supplied needs gas, and (iii) when a large supply of gas and a large market are close enough that it might be worth linking them. But that's just a concept. At that point, economics have not been examined, and parties even less. The concept may be floated by analysts, examined by energy companies, pushed by entrepreneurs, or developed by politicians on any territory potentially involved. This may already lead to punchy announcements by either of these. What is important to understand is that at this point, the pipeline has no existence and no prospects yet. What happens at this stage is a PR drive to try to give reality to the project and get serious players interested. It may also be part of a campaign to favor one potential project over another, as companies and countries jockey to try to get their hands on potentially juicy assets - and also scare off competitors and alternatives.

If the concept looks potentially attractive (basic economics look okay, the resource base is sufficient, there exists a need for transport capacity), more detailed studies will get funded to look a bit more closely at the engineering side and get a better handle of potential costs. These studies will, again lead to further (often triumphant) announcements before and after the study, and fancy-sounding but, at this point, worthless, "memorandums of understanding" or similarly fluffy agreements will be signed in front of the media. At this point, the pipeline is still nowhere near existing, and has not been subject to any kind of investment decision.

Let's take a look again at the criteria for attractiveness:

The resource base

Enough gas must be available from the production area to fill up the pipeline. Filling it up means using up the capacity for at least 20 years. A 10 bcm/y (billion cubic meters per year - 10 bcm/y is almost equal to 1 mmcfd - one million cubic feet per day) pipeline will thus require a resource of at least 200 bcm (or 7 Tcf - trillion cubic feet) that needs to be transported.

This is not a trivial issue: many gas fields are called "stranded reserves" because they are not big enough (or too far away) to justify economically the construction of a pipeline to bring them to market.

Enough gas must be available from the production area to fill up the pipeline. Filling it up means using up the capacity for at least 20 years. A 10 bcm/y (billion cubic meters per year - 10 bcm/y is almost equal to 1 mmcfd - one million cubic feet per day) pipeline will thus require a resource of at least 200 bcm (or 7 Tcf - trillion cubic feet) that needs to be transported. This is not a trivial issue: many gas fields are called "stranded reserves" because they are not big enough (or too far away) to justify economically the construction of a pipeline to bring them to market.

The need for transport capacity

The gas resource must not have any other existing or obviously cheaper transport alternatives to be brought to market. Any project where the gas is already using some other route, or could use another route, is unlikely to happen. For instance, all the gas pipeline projects from Central Asia (including the recently announced Russian one) make no sense because a pipeline already exists and is not full - the mere existence of that available capacity is enough to undercut any alternative project and kill it.A slightly more interesting situation happens when there is a real need for transportation capacity, but there are competing projects. In that case, it is not necessarily the most economic that will happen, but that (amongst those that are economically viable) which first fulfills the condition stated above - bringing all the necessary parties together. As the parties include the governments where the gas production takes place, and of the transit countries, it is necessary to convince these to come on board. That's where the PR/announcement wars will take place to try to make one project appear inevitable and align the necessary support of all the third parties behind it. For so long as no firm investment commitment has been made, no project is actually inevitable, however strongly it may appear to have support.

The gas resource must not have any other existing or obviously cheaper transport alternatives to be brought to market. Any project where the gas is already using some other route, or could use another route, is unlikely to happen. For instance, all the gas pipeline projects from Central Asia (including the recently announced Russian one) make no sense because a pipeline already exists and is not full - the mere existence of that available capacity is enough to undercut any alternative project and kill it.A slightly more interesting situation happens when there is a real need for transportation capacity, but there are competing projects. In that case, it is not necessarily the most economic that will happen, but that (amongst those that are economically viable) which first fulfills the condition stated above - bringing all the necessary parties together. As the parties include the governments where the gas production takes place, and of the transit countries, it is necessary to convince these to come on board. That's where the PR/announcement wars will take place to try to make one project appear inevitable and align the necessary support of all the third parties behind it. For so long as no firm investment commitment has been made, no project is actually inevitable, however strongly it may appear to have support.

Basic economics look acceptable

This will come from a combination of the price of gas (production costs plus taxes) and the distance it needs to be transported, compared to the expected price on the destination market - which itself depends on whether the pipeline connects to a liquid market/network, to a single client or to other transport facilities (LNG terminal, more pipeline transit) which impose additional costs before the gas is actually sold. A very rough estimate is that it costs 1-2$ to transport a tcm (thousand cubic meters) over 100 km (approximately - it costs 5-10c to transport a MBTU over 100 miles). The way these estimates are usually done is to start form the point of sale, deduct all transport and other costs to bring the gas there, and identify the "netback" that market provides at the point of production, i.e. the net amount that would end up in the producers's pocket.







After the basic economic "smell test" has been run, the more detailed studies will give potential players a better grasp of the potential cost of the pipeline, and of the volumes of transit gas required to cover that cost in an economically sensible way. Such a study will usually have been paid for by one or more potential parties along the gas chain (a gas producer, a contractor, a government, a buyer), andmade available in more or less detail to possible partners. What's needed at that point is an entity able to drive the project to fruition. Such an entity has to have a direct interest in getting the project done (any of the above can play that role), but it needs something more, which is a lot rarer, and which explains why so many pipeline projects don't become reality: that entity needs to be able to credibly convince others that the project will happen and thus that they can actually make their own commitment to it in the certainty that it's not one-sided. In other words, that entity needs to be an acceptable counterparty to all the other participants to the project - all those listed above.

That argument is enough to kill the notion that "China has billions of dollars, it can pay to build a pipeline (from Turkmenistan or elsewhere)". Money is not enough. China cannot credibly convince the Turkmens that it will pay for the gas even if Kazakhstan blocks transit for some reason. It cannot credibly promise to the Kazakhs that it will pay the transit fees even if gas is not delivered. Because the amount at stake is not just the cost of the pipeline, it's potentially the value of gas sales over 20 years. And, more importantly, the Chinese themselves cannot trust the Turkmens to deliver the gas even if they have built the pipeline.

So, in practice, the leader the project is either a company or an entity that controls most of the chain (say, Gazprom, which has the gas, the technical know how, the financial means and the ability to get approval for pipelines inside Russia), or a company that both has a stake in the pipeline and the track record to lead such projects - i.e. an oil major or, in a few cases, very large gas buyers like the aluminium smelting companies. Absent these, a project is highly unlikely to ever happen.

But let's see in more detail what the various commitments mean, who needs them, and how they can be credibly provided. Let's take the items listed above in the same order: