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Comment: What is in the pipeline?

by Guest on Aug 21, 2017

Colin Chapman, president, Euro Petroleum Consultants.
Colin Chapman, president, Euro Petroleum Consultants.
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Before delving into details relating to pipeline transport infrastructure development and perspectives, we shall give a brief overview of the current oil and gas markets to recap the most important factors that might influence the development of major pipeline projects.

The first one is obvious – increasing cost of services is a challenge for the oil and gas business in general. It cuts across the value chain starting from production to processing and transportation. It results not only in higher prices of end-products and feed for other industries, but also in lower profits for service providers and impacts the feasibility of many projects (for example, long-distance marine shipping or capital-intensive pipeline systems).

Supply-demand balance

Growth in the oil and gas sector is relatively limited this year – some countries had a small surge in the extraction of oil and gas, whilst others had to significantly cut down on production levels, thus revising sales strategies and putting on hold a number of major construction and expansion projects, including pipeline projects.

A slight increase in prices shed a ray of light for operators, fuelling their hopes for economic revival and an end to the crisis. But, as we discussed in our previous columns, these price levels are here to stay for the foreseeable future. Therefore, we are not expecting any ground-breaking news from the upstream side of the business in most regions.

However, in the downstream sector, we have seen considerable new capacity additions. Current year will be the period with the largest net refining capacity addition in the Asian region. Operators need to coordinate the upgrade and expansion of required infrastructure, including transportation networks, to handle such increases. Also, with the uplifting of refining margins, companies providing logistics services will try to benefit from this situation as well by increasing their tariffs.

Liquefied natural gas

If we look at the liquefied natural gas (LNG) industry, we can see a large expansion over the next 3-5 years with over 60 strategic large-scale projects in various stages of planning or implementation. Among the drivers for future LNG industry development are decarbonisation of the shipping and transportation sectors, and increased regasification and pipeline infrastructure.

Since LNG demand growth will come mainly from Asian countries and Australia (which are at large distances away from the centres of production), extra transport facilities and infrastructure will be needed to meet these market demands.

Areas which are quite active with respect to pipeline development are Central Asia and Russia, where several updates on major pipeline projects have been announced recently. Some of the most important include the start of the construction phase of the Gazprom TurkStream gas pipeline project in the Black Sea near the Russian coast, the offshore part of which will cross 900 kilometres of sea.

This will serve as yet another route for Russian gas to Southeast Europe and Turkey, connecting with the existing pipeline and ending at the Greek border. The construction is expected to take two years before completion. The estimated cost exceeds US$15 billion, with the capacity being about 63 billion cubic metres (bcm) per annum.

Network of pipelines

The expansion of the Tengiz Field in Kazakhstan might be subject to a transportation dilemma. At the moment, oil produced from this field is primarily routed through Russia via the Caspian Sea; alternatives are Baku-Tbilisi-Ceyhan or southern Iranian route, which are cheaper. The operator needs to choose the most suitable option in the near future.

Another promising field expansion – the Shah Deniz gas field in Azerbaijan operated by BP worth over US$28 billion – will add 500 kilometres of subsea pipelines. This is part of an extensive network of pipelines, including the South Caucasus, Trans Anatolian and Trans Adriatic pipelines.

Since Russia and Azerbaijan are two of the most active players in this region for the oil and gas transportation market, naturally they continue cooperation in this area. SOCAR and Transneft signed a new agreement a year ago to transport 1.3 million tons of oil monthly from the Caspian Sea via the Baku-Novorossiysk pipeline. Transneft also plays a vital part in the Caspian Pipeline Consortium (CPC) that links the Tengiz Field with Russia’s Black Sea coast.

Power of Siberia

Speaking of partnerships, it is impossible not to mention ‘Power of Siberia’ – the Russia-China pipeline – a joint venture of Gazprom and China National Petroleum Company (CNPC) that will feed China’s thriving economy with gas from western Siberian fields for approximately 30 years (38 bcm per annum) and is scheduled to commence in 2019, if  sufficient funding is secured.

Another active Russian project is Nord Stream 2. The reason for this pipeline to be constructed is the growing demand in Germany and other European countries. This direct pipeline from Russia will deliver 55 bcm per annum of LNG. The first pipes for this projects arrived in October last year. This April, Nord Stream 2 AG submitted a permit application for the construction of a new pipeline system to the Danish Energy Agency with a focus on the environmental safety of the project.

In 2019, the company will apply for a separate permit for the operation of the pipelines on the Danish continental shelf (the undersea part is longer than 1,200 kilometres) and in the same year Europipe GmbH in waiting to receive its first gas deliveries. Also in April, Austrian OMV agreed to provide long-term financing to secure 30 percent of its share of project costs of the pipeline – the overall costs are estimated to be over US$11 billion.

In conclusion, pipeline projects are a huge investment and it is important not only to look at the economics before going ahead with construction, but also to understand the changing markets and study fully the geopolitical issues, which may impact future operations.

About authors: Colin Chapman is president and Ekaterina Kalinenko is project director of Euro Petroleum Consultants (EPC). EPC is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. EPC also organises leading conferences, including OpEx MENA 2018 – Operational Excellence in Oil, Gas & Petrochemicals – which will take place in Bahrain during 26-27 March 2018. For further details please visit www.opex.biz


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