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

0 100 200 300 400 500 600 700 800

bcm
Source: BP/Cedigaz
Pipeline LNG
 Relevance of Transit Pipeline Economics

$/MMBTU
$/BBLOE
Cost of Alternative
$4.00
Transportation Methods

$3.00 Two 4 MMT LNG $20.00

56” Onshore Gas Trains
pipeline (3,100)

$2.00

$10.00

$1.00 Onshore Crude Crude Oil Tanker

Line

$0.00
Miles
0 2000 4000 6000
 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 X 100

Max throughput on any day in same year 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 cross-
border pipeline be managed with positive
impact on potential disputes & security of
supply?
Transit Pipeline Economics: Possible Solution

Motive behind the

Pipelines

Strategic
Off-taking by transit Investment/ FDI
country

Contribution to the
economy from transit fee
Complementing
Pipelines
The
Alternative Pipeline Bargaining
Route Outcome
International
Institutions
Political/Diplomatic
Relations

Domestic Market
Relevance
Strategic Alliances

Participation in Cost
Sharing
 THANK YOU!

e.omonbude@fgenergymc.com