International Forecaster Weekly

The Pipes That Bind

How pipelines will determine economics and geopolitics in the next decade...  Confused? Overwhelmed? Dizzy? Don't worry, you should be. In fact, if any of this makes sense to you you might want to consider becoming a consultant, because there are plenty of politicians, foreign policy analysts, geopolitical commentators and others whose radar these stories don't even appear on.

James Corbett | June 21, 2014

The Ukraine-Russia gas debt squabble became even more interesting this week as Gazprom cut off the gas to its neighbor on Monday on the heels of Kiev's failure to pay up $2 billion in back payments on past deliveries, just one month after Moscow announced it was taking EU to the WTO for arbitration over Europe's refusal to approve Russia's imperiled South Stream pipeline project to route its European exports around Ukraine and just days before a suspected terrorist explosion on a major Ukrainian pipeline mirroring Right Sector's threats to terrorize pipelines earlier this year.


Meanwhile, Enbridge has won approval for an oil pipeline from Alberta's tar sands to the coast of B.C. which will enable them to ship and sell directly into the increasingly lucrative Asian market, even as the Senate energy committee in the US voted to remove the White House from the decision making process on the Keystone XL Pipeline. Not to be overlooked is the Kurdish Regional Government's first delivery from its own independent pipeline, much to the chagrin of Iraq's central government, and Gothamist has uncovered a pipeline project running straight through US government parkland that no one seems to know about.

Confused? Overwhelmed? Dizzy? Don't worry, you should be. In fact, if any of this makes sense to you you might want to consider becoming a consultant, because there are plenty of politicians, foreign policy analysts, geopolitical commentators and others whose radar these stories don't even appear on (even though they should). As anyone who has tried to follow pipeline politics in recent years knows, staying up to date with any given project can be a full-time job these days, let alone keeping up with developments across the board.

This is partly due to the nature of the pipelines themselves. Vast, unwieldly, hulking pieces of infrastructure, oil and gas pipelines are typically steel tubes as much as 60 inches in diameter, with the longest pipes stretching out thousands of miles and spanning entire continents. The pipeline industry exploded in the middle of last decade, nearly doubling in the two year period from 2006 to 2008 alone when it grew from $23 billion to $39 billion. As might be expected, modern pipelines are technological marvels, impressive feats of engineering including lines that run along the ocean floor, laid down in intricate processes that admit for no margins of error. They require cutting edge technology to manufacture and maintain, and need to be protected from corrosion, abrasion, wax buildup (from the paraffin wax in crude oil), and, increasingly, terrorism. The diplomatic and political negotiations that are required to bring about international pipelines are no less impressive in their scope, involving multi-lateral deals for multi-decade partnerships that can range into the hundreds of billions of dollars over the lifetime of the contract.

And yet, for all of that, pipelines are often overlooked in economic circles as well as political circles. They are often treated as just another part of the energy infrastructure and lumped into lists with rail, shipping, and other transport costs. They are often dismissed as merely ways of moving material from A to B. As pipeline observers know, however, and as the headlines are just now beginning to discover, pipelines are entire stories in themselves. They are the focal points where international alliances are forged and rivalries created, the nexus points for government, high finance, and energy giants, and they are pieces of infrastructure that can hardwire relations between countries into place...and be blown apart just as quickly. So perhaps it's worth our time to familiarize ourselves with some of the big pipeline stories of the moment, just so we have an idea what's happening in the vast, neglected world of pipelines and how it might shape economic and geopolitical realities in the coming decades.

We should start in Eastern Europe, where all eyes are on Ukraine. As everyone not living under a rock knows by now, relations between Moscow and Kiev are at a nadir, and one of the forums where this rivalry is playing out most clearly is in the natural gas arena. When Yanukovych's government fell in February, he took Russian-Ukrainian relations with him, including agreements for Russian gas deliveries through the extensive Russo-Ukrainian pipeline network that transits the country and feeds Eastern Europe. As a result, Moscow presented the coup government in Kiev with a $4.5 billion tab for back payments and insisted that the country must pay as it goes rather than continuing on credit. Russian government-controlled Gazprom is now also demanding the standard European rate of $385 per thousand cubic meters rather than the $268 discount it was paying as a former Soviet republic. To top it off, the first $2 billion payment on that $4.5 billion tab was due last Monday, and the already cash-deprived Ukrainian government, which disputes the size of the bill, couldn't (or wouldn't) pay up. And so it was on Monday that Russia cut off deliveries to Ukraine.

At the moment this is not an insurmountable obstacle for either Ukraine or Europe (which receives one-fifth of its gas via pipelines transiting Ukraine). It's just about summer time in Europe and gas demand has reached its annual low. Come August, though, as both Ukraine and Europe start stocking up for the winter months, any lingering disputes will take on a heightened significance.

No sooner had we had the chance to digest this turn in the story then another sharp twist arrived. On Tuesday there was an explosion on the 4500 km Urengoy-Pomary-Uzhgorod transit pipeline, aka the Trans-Siberian Pipeline that crosses from the Urengoy gas field in Siberia to Uzhgorod in Western Ukraine and then on to Europe. The blast produced no injuries and did not interrupt gas flows, but Interior Minister Arsen Avakov came out the next day to confirm that Kiev was acting on reports that the explosion had been caused by a bomb and suspects pro-Russian separatists looking “to undermine Ukraine's reputation as a reliable transit partner.” As others are pointing out, however, the head of Ukraine's ultra nationalist “Right Sector” movement, Dmitry Yarosh, actually threatened to commit sabotage on Russian pipelines transiting Ukraine “in order to deprive Russia of its financing source.” More likely such an attack would be perpetrated to turn the pressure up on Europe to take more aggressive action in “defending” Ukraine by sending in supplies, financing, and other aid, or even outright military intervention.

Whatever the case, the message is clear: pipelines are soft targets for terrorists and sitting ducks as far as critical infrastructure goes. The idea of securing 4500 km of pipeline is (excuse the pun) a pipe dream, and everyone knows it. Whoever stands to gain from disrupting the gas flow to Europe has the upper hand and everyone knows it.

Luckily for Gazprom (which still wants to sell its gas to Europe) and Europe (which still needs Gazprom's gas), there are ways around the problems in Ukraine. Quite literally. South Stream is a proposed pipeline to transport Russian gas across the Black Sea and into Bulgaria before transiting on to Greece, Italy, Austria and other European nations. As an alternative route that bypasses Ukraine altogether, it's looking more and more attractive to the nations involved. Scheduled to come online in 2018 it has been estimated that it will cost as much as 30 billion Euros to construct. It's a staggering figure, and has led some (like Alan Riley of London's City University) to conclude that it is a political project for Moscow, not an economic one. The implication of such an idea is itself fascinating: that the power that comes with owning the energy infrastructure between countries (not to mention supplying the energy itself) is worth more than the mere cost of the energy. It brings with it the power to shut off the gas, a potent threat and one that Russia has already made good in previous disputes with Ukraine.

Naturally this makes Brussels very nervous and they have thrown the weight of the European Commission behind fighting the construction of South Stream. One of these is the sudden imposition of a new set of regulations called the EU Third Energy Package which bars gas suppliers from owning pipelines in the region. This has brought talks between Russia and some of its as-yet-unsecured pipeline transit partners like Austria, Bulgaria and Hungary to a screeching halt. As a counter-measure, Russia is now taking the EU to the WTO, looking for an arbitration of the dispute in their favor. Ever the optimist, Russian Foreign Minister Sergei Lavrov says that the halting of construction on the pipeline was only “temporary” because in the end there's no other way to supply Southeastern Europe with the gas it needs. So far there's no indication when (or if) the WTO is likely to rule on the matter.

As fascinating as all of those fireworks are, an equally important story is playing itself out right now that may determine the future of the middle east. This story is happening in Iraq, and it actually has nothing to do with ISIS and the terrorist insurgency (or does it?). The Kurdish Regional Government, the official government of the autonomous Kurdish region in Iraq's north, constructed its own oil pipeline independent of the existing Iraqi federal pipeline network, that runs from Iraqi Kurdistan down to the Turkish port of Ceyhan on the Mediterranean. Baghdad is not happy about this, as can be imagined, and has used the threat of denying access to the country's lucrative southern oilfields to keep traders and refineries from buying the Kurdish oil. Italy has warned traders against importing the Kurdish oil, and many have complied. The first tanker full of Kurdish crude was loaded at Ceyhan in May and was sent on a wild goose chase, first heading for the US and then anchoring in Morocco after authorities refused to let it discharge. But as of Friday morning, the tanker was anchored in a new location and may be ready to unload its first shipment on a potential buyer: Israel. Israel is an ideal buyer for the Kurds, since they have no contract for Iraqi oil and thus nothing to lose by raising Baghdad's ire. The deal works well for Israel since it helps to achieve one of their long-standing policy goals for the region: strengthen Kurdish independence and thus further factionalize the region so that no group can dominate over Israel. The KRG pipeline is modest at this point, delivering only 120,000 barrels per day, but the Kurdish natural resource minister is expecting that to increase to the pipes' capacity of 400,000 barrels per day by the end of the year.

Also the Keystone pipeline...


Meanwhile in North America, controversy continues to rage about seemingly every major pipeline that comes along. The Keystone controversy will be familiar to most Americans and Canadians by now. The pipeline is proposed to transport 800,000 barrels per day of Canadian tar sands oil from Alberta down to the refineries on the Gulf Coast. It is viciously opposed by environmental groups that view tar sands oil as especially dirty because of the methods used to extract it and the pipeline has become a political football issue. In the latest development, the leader of the Senate energy committee forced a vote on a bill that cuts President Obama out of the decision making process on Keystone altogether. The White House has been a key sticking point for the pipeline's proponents, having delayed progress on the project for the past five years. This legislation would allow Congress to ignore the president altogether, eliminating the need for presidential approval on the project. It passed 12-10 on the bipartisan committee vote, but Senate Majority Leader Harry Reid is unlikely to allow the full Senate to vote on the measure, meaning it's likely dead in the water.

On the flip side of the coin, a different oil sands pipeline project just got approval from the Canadian government. This time it's a pipeline from the tar sands to the coast of British Columbia, where the oil could be sold and shipped to the increasingly important Asian market. The 500,000 barrel a day pipeline is called Northern Gateway and is being built by Enbridge, but is likewise fiercely opposed by environmental and aboriginal groups. Even with the governmental approval, Enbridge will have to comply with about 100 conditions imposed by government regulators. This will greatly slow progress on the line's construction, which is now expected to take at least four years. Its proponents argue that it is a key part of Canada's long-term diversification strategy for finding other markets for its energy other than the US, and cannot be looked on as a happy development by Washington.

Yet another pipeline making news this week is one that no one seemed to know about. has a story about the “Rockaway Lateral Project,” a fracked gas pipeline running from the Marcellus Shale down into Brooklyn. The project is controversial (are you sensing a trend here?) because it would run straight through the Gateway National Recreation Area, a taxpayer-funded parkland. The legislation allowing the construction was passed just a month after Hurricane Sandy, when the area was in shambles and far too distracted to even notice the pipeline plan. Gothamist points to the safety issues of the pipeline's construction company and the fact that certain sections of the pipeline have been reclassified from transmission pipeline to distribution pipeline to avoid government oversight and regulation in an attempt to make Rockaway into the next Keystone controversy.

These are just a smattering of the stories in the pipeline world right now. They all have different backgrounds and contexts, different takeaway points and things that we can learn from them, and they are all happening largely out of sight in isolated, unnoticed stories in the back of the newspaper. But as Russia increasingly looks to find Asian buyers for its gas and starts to turn away from Europe, as China starts to devour more and more resources in its quest to feed its still-growing industry, as fledgling nations like Iraqi Kurdistan look to boost their coffers and strengthen their international ties by finding buyers for their oil, as terrorism along pipelines starts to enter the public consciousness, one thing is certain: these pipelines are going to have a significant impact in shaping geopolitical and economic relations between nations in the 21st century. The question is, will you be informed about these issues and able to understand new developments in the light of this knowledge, or will you be like those politicians, foreign policy analysts and geopolitical commentators who can't quite understand what's happening or why?

Weekly Market Wrap Up with Hannah Bernard