CROSS-BORDER OIL AND GAS PIPELINES: THE INTERSECTION OF POLITICS, GEOGRAPHY, AND ENERGY MARKETS by Miyeon Oh A dissertation submitted to Johns Hopkins University in conformity with the requirements for the degree of Doctor of Philosophy Baltimore, Maryland November, 2015 © 2015 Miyeon Oh All Rights Reserved ABSTRACT The emerging trend of cross-border oil and gas pipelines in Eurasia has immense geopolitical and energy market implications. With the changing landscape of global energy markets, both key consuming and producing states have strategic reasons to forge new transit routes and diversify supply lines with new overland (or undersea) pipelines. This dissertation examines what brings countries into binding cross-border oil and gas pipeline deals and why some proposed pipeline projects materialize quickly while others do not. It aims to provide a more systematic explanation of how politics and energy markets are interconnected in the choice of supply routes and of how political and economic factors play out interactively in decisions regarding cross-border pipeline projects.
The dissertation employs statistical analysis and case studies to advance the hypothesis that, in addition to market considerations, the successful launch of a cross- border pipeline project and the speed of the deal depend on geopolitical factors, political alignment between host country governments, and pipeline ownership structure. The statistical analysis tests this argument through the dataset I constructed of all existing and proposed cross-border oil and gas pipelines in the world. The dissertation then examines four case studies: (1) the completed Eastern-Siberia Pacific Ocean (ESPO) oil pipeline from Russia to China; (2) the planned Altai and Power of Siberia pipelines, designed to bring gas from Russia to China; (3) the completed Baku-Tbilisi-Ceyhan (BTC) pipeline carrying Caspian oil to West from Azerbaijan via Georgia and Turkey; and (4) the planned Southern Gas Corridor (SGC) pipelines, designed to bring Caspian gas to Europe from Azerbaijan via Georgia, Turkey, Greece, Albania, and Italy. The dissertation finds that geopolitical factors profoundly shape energy relations and affect the likelihood ii of successful pipeline deals and their speed regardless of the degree of economic incentives involved in the project.
Second, the degree of political alignment between host countries and the ownership structure of pipelines likely determine the success of cross- border pipeline deals. Third, the political-economic arrangements among host countries affect the likelihood of successful pipeline deals and their speed more significantly in the field of natural gas than in oil. Dissertation Committee Members: Dr. (Johns Hopkins University, SAIS) – primary reader Dr.
Andrew Cheon, Ph. (Johns Hopkins University, SAIS) – secondary reader Dr. (Johns Hopkins University, SAIS) –committee chairman Dr. Charles Ebinger, Ph.
Keun-Wook Paik, Ph. (Oxford Institute for Energy Studies) iii ACKNOWLEDGEMENTS I am extremely grateful and fortunate to have been guided my committee members – Charles F. Lampton, Charles Ebinger, Keun-Wook Paik, and Andrew Cheon. I have learned tremendously from their comments, suggestions, and insights throughout every stage of my dissertation project.
I would like to express my sincere gratitude to Charles Doran who gave me the opportunity of a lifetime to serve as his doctoral student. I am deeply indebted to him for his unparalleled dedication to advising and mentorship. He provides me with great wisdom and insight every time I interact with him. Without exaggeration, this dissertation would have not been possible without his guidance.
I am very thankful to David for his clear and incisive feedback. He helped me to refine my case studies involving multiple countries and their convoluted political and economic factors shaping energy-related policies. I am also truly grateful to Charles Ebinger for his immeasurable amount of support and mentorship throughout my time at the Brookings Institution as pre-doctoral research fellow. I am always deeply impressed by his extensive areas of expertise on energy and learned enormously from his experience and wisdom.
I am greatly appreciative of Keun-Wook’s rich knowledge of Sino-Russian energy relations and his extensive research experience regarding the energy sectors of China and Russia. I benefited hugely from his incredibly detailed comments and explanations. I am thankful to Andrew for his enthusiasm, friendship, and intellectual rigor. I am excited to work together with him on various research projects as my career develops.
I also wish to thank many scholars – Chung-In Moon, Chaibong Hahm, Minjung Kim, and Kijung Kim – who influenced my career development and encouraged me to pursue a iv doctoral study. I also thank Kent E. Calder for sharing his experience and insight, and enjoyed working with him on our Korea-Turkey-U. trilateral cooperation project supported by the Korea Foundation.
I am very much indebted to Sukhee Han for his endless support, encouragement, and advice throughout my entire academic and professional career. I would also like to express my gratitude to many scholars who took time to share their experience and wisdom to help refine and develop my dissertation project. In particular, I would like to extend my deep appreciation to Tatiana Mitrova, Richard Morningstar, Martin Indyk, Bruce Jones, Richard Bush, Erica Downs, Fiona Hill, Kenneth Lieberthal, Jonathan Pollack, Jonathan Elkind, Michael Ratner, Julia Nanay, Jan Kalicki, and Jae- Seung Lee. Starr Lee and Jae Ku deserve special thanks for being always willing to listen to me, and their wonderful personalities made an otherwise stressful experience an enjoyable one.
Most of all, I thank my family for providing me with unconditional love, support, and encouragement to finish my doctorate. Earning my Ph. would have not been possible without the help of my husband, Sung Namkung, who always has my back anytime I encounter adversity. My parents, Joohwan Chung and Seong-Jun Oh, and my brother, Jinsuk Oh, are the sources of my passion and vision, and they always inspired me to dream big.
I dedicate my dissertation to my family, with love. v TABLE OF CONTENTS Abstract……………………………………………………………………………………ii Acknowledgements……………………………………………………………………….iv List of Abbreviations……………………………………………………………………viii List of Tables…………………………………………………………………………….xi List of Figures……………………………………………………………………………xii List of Maps…………………………………………………………………………….xiii Chapter One: Introduction……….1 Chapter Two: Literature Review and Theoretical Framework….26 Chapter Three: Statistical Analysis……………….65 Chapter Four: Sino-Russian Energy Relations and Cross-Border Oil Pipeline Development…………………………………………………………………………….81 Chapter Five: Sino-Russian Energy Relations and Cross-Border Gas Pipeline Development………………………………………………………………………….134 Chapter Six: Caspian Oil to the West – The Baku-Tbilisi-Ceyhan (BTC) Oil Pipeline Development……………………………………………………………………………192 Chapter Seven: Caspian Gas to Europe – The Southern Gas Corridor Development….224 Chapter Eight: Conclusion……….298 Bibliography……………………………………………………………………………300 vi Curriculum Vitae……………………………………………………………………….326 vii LIST OF ABBREVIATIONS ACG Azeri-Chirag-Gunashli AIOC Azerbaijan International Operating Company BCM Billion Cubic Meter BTC Baku-Tbilisi-Ceyhan BTE Baku-Tbilisi-Erzerum BP British Petroleum BPD Barrels Per Day CDB China Development Bank CIS Commonwealth of Independent States CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation DESFA Greek Natural Gas System Operator DOE Department of Energy EBRD European Bank of Reconstruction and Development ECT Energy Charter Treaty ESPO Eastern-Siberia Pacific Ocean FDI Foreign Direct Investment FID Final Investment Decision viii HGA Host-Country Government Agreement IEA International Energy Agency IFC International Finance Corporation IGA Intergovernmental Agreement IOC International Oil Company ITGI Interconnector Turkey–Greece–Italy JV Joint Venture LNG Liquefied Natural Gas MEP Main Export Pipeline MOU Memorandum of Understanding NATO North Atlantic Treaty Organization NDRC National Development and Reform Commission NOC National Oil Company OPEC Organization of the Petroleum Exporting Countries OSCE Organization for Security and Cooperation in Europe POS Power of Siberia PSA Product Sharing Agreement RFE Russian Far East SCO Shanghai Cooperation Organization ix SCP South Caucasus Pipeline SD Shah-Deniz SDPC State Development Planning Commission SEEP South East Europe Pipeline SETC State Economic and Trade Commission SGC Southern Gas Corridor Sinopec China Petrochemical Corporation SOCAR State Oil Company of Azerbaijan Republic SOE State Owned Enterprise TANAP Trans Anatolian Pipeline TAP Trans Adriatic Pipeline TCGP Trans-Caspian Gas Pipeline TEP Third Energy Package TPAO Turkish Petroleum Corporation WTO World Trade Organization x LIST OF TABLES Table 1. Case Selection and Summary………………………………………………. Empirical Analysis of Pipeline Deal Speed………………………………….
Russia and China’s Share of Central Asian Countries’ Total Trade (2000- 2012)……………………………………………………………………………………146 Table 4. Current Status of Chinese Participation in the Russian Oil and Gas Upstream Sector…………………………………………………………………………………. Summary of Sino-Russian Oil and Gas Pipelines……………………………. Development of the BTC Oil Pipeline……………………………………….
Prospective Southern Gas Corridor Pipelines…………………………………270 Table 8. Summary Statistics……………………………………………………………298 Table 9.299 xi LIST OF FIGURES Figure 1. Case Selection: Political-Economic Matrix……………………………………13 Figure 2. Deal Speed: History of Sino-Russian Oil and Gas Pipelines and Caspian Oil and Gas Pipelines to Europe………………………………………………………………….
Pipeline Decision-Making Process: From Proposal To Success………………51 Figure 4. China’s Crude Oil Imports by Source (2014)………………………………. Sino-Russian Oil and Gas Pipeline Deals and the Impact of Geopolitics and External Crisis…………………………………………………………………………. Sources of EU Gas (2013)……………………………………………………234 Figure 7.
Share of Russian Gas in European Demand………………………………….234 xii LIST OF MAPS Map 1. Eastern Siberia Pacific Ocean (ESPO) Oil Pipeline……………………………109 Map 2. Power of Siberia (POS) Gas Pipeline…………………………………………. Altai Gas Pipeline………………………………………………………………169 Map 5.
The Yamal Peninsula and the Bovanenkovo field……………………………. Baku-Tbilisi-Ceyhan (BTC) Oil Pipeline………………………………………199 Map 7. The Nabucco Pipeline…………………………………………………………. The South Stream Pipeline…………………………………………………….
The Southern Gas Corridor (SGC) Pipeline Project……………………………246 Map 10. The Turkish Stream Gas Pipeline…………………………………………….268 xiii CHAPTER ONE INTRODUCTION 1 WHY STUDY CROSS-BORDER OIL AND GAS PIPELINES IN EURASIA? The landscape of global energy markets and geopolitics is changing. The locus of global energy demand has shifted from Western industrial countries to developing countries in Asia, mainly due to economic growth in China and India 1, and stagnation in European economies. Along with the accelerated declines in existing low-cost reserves, the rise in oil and gas production from non-OPEC countries will likely change the rules of the game in global energy supply markets in coming decades.
The breakup of the former Soviet Union has not only released enormous new potential reserves of oil and gas in landlocked Central Asia, but has also opened the potential for scaled-up oil and gas production in the Russian Far East. In addition, the U. shale gas revolution and the development of East African natural gas will likely change the global energy supply equation significantly in the long term. The plunge in crude prices since the summer of 2014, on the other hand, has prompted major energy firms’ to defer new oil and gas projects around the globe in order to protect investors’ dividends, which is affecting the global energy supply markets in the short-term.
2 With all of these combined factors, the transformation of the global energy supply- demand structure is powerfully influencing regional energy market dynamics and geopolitical relationships. At the nexus of these changing dynamics is a growing 1 The International Energy Agency (IEA) forecasts that in the two decades leading up to 2030, China and India combined are likely to account for more than 50 percent of total world energy demand growth, 60 percent of world oil demand growth, 20 percent of world natural gas demand growth, and 85 percent of world coal growth. World Energy Outlook 2013. 2 The world’s big energy groups have shelved $200bn of spending on new projects due to low oil prices.
Christopher Adams, “Oil groups have shelved $200bn in new projects as low prices bite,” Financial Times, July 26, 2015. 2 competition to develop a number of major Asian and Eurasian 3 pipelines to transport oil and gas across the region. 4 With the boom in Asia’s demand for oil and natural gas, access to and control over future oil and gas supplies, as well as control of oil and gas transportation links and transit infrastructure, has become a major priority for both consuming and producing countries in Eurasia. Both Eurasian key producers and consumers have strategic reasons to forge new transit routes and diversify supply lines with new overland and undersea pipelines.
Three main factors are driving the emerging trend of cross-border pipeline networks in Eurasia. First, in order to meet Asia’s rising energy demand in coming decades, an increasing share of Asia’s oil and liquefied natural gas (LNG) supplies must transit the Indian Ocean, Malacca Strait, and the South China Sea, to bring energy resources from the Middle East and Africa. This has raised new concerns for regional power over the growing risk of major maritime supply disruptions.