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by John Tiratsoo,
Editor, Pipes & Pipelines
  List of Columns on this page:

Russia incurs $3-billion losses due to oil-export price manipulation


'War' prompts Beijing to accelerate energy plans…


Who will run Caspian natural gas through Afghanistan?


Why join an organization?

Russia incurs $3-billion losses due to oil-export price manipulation

CROWN RESOURCES, a Swiss based international commodity trader, working with Arthur Andersen, has carried out an in-depth study into the structure of Russian crude oil supply and demand on the German market. The trader commissioned the study following an investigation of abuse by a small number of its own crude-oil traders, which is now the subject of a continuing trial under UK jurisdiction.
On the basis of the investigation, Crown Resources maintains that the existing system of Russian crude oil supplies to the eastern German market makes it possible for refineries and intermediaries in the region to gain profit by forcing down the purchase price of crude oil supplied through the Druzhba (Friendship) pipeline. The price of Druzhba supplied crude oil has been on average $2 lower per barrel than the price of similar crude oil supplied to Germany from Russia or other European countries by sea.
Crown Resources' conclusion is that the lower price results from intermediary companies and end consumers of Russian crude oil operating cartel restrictions.
German buyers require that Russian crude oil supplies via the pipeline should be exclusively through intermediary companies working for them, the so-called 'coordinators', who effectively dictate monopolistic and low prices to Russian suppliers. Under such a 'co ordination agreement' between buyers and the coordinators, Russian companies effectively have to deal with the only buyer possible, which is a violation of the principles of the market economy and market pricing. This arrangement dates from the time of Comecon economic co operation in mutual supplies of raw materials. After the collapse of Comecon, the Russian authorities hoped for a natural development of relationships to fit the new market environment. Hence, nobody bothered to destroy the older system, which enabled its operation and prosperity under the new conditions of Russian democratic independence.
According to Crown Resources' calculations, Russia has lost at least $3 billion since 1990 due to this market manipulation.
Crown Resources is convinced that the system of price manipulation associated with Russian crude oil sales is not limited to the eastern German region, and is widely used in other markets as well. The company suggests that existing mechanism is, in fact, a system of hidden subsidies by Russian producers to the refining industries of Germany, Poland, Czech Republic, Slovakia, and Hungary.
Crown Resources has now developed a project entitled 'Transformation of global trading in natural resources' to ensure openness and transparency of crude export, and establish an optimal method for preventing price manipulation, and has agreed to start work immediately with the Russian Federation's Ministry of Fuel and Energy to implement it. The key element of the new project is the development of a structure consisting of a managing company and an independent electronic trader, operating on the basis of a regulated minimum crude oil sale price which is to be determined by the government, in conformity with the market. The structure will include participants in the international oil market, information network agencies, and the government of the Russian Federation, represented by a nominated government owned company.
A substantial interest by the Russian government in the structure is a necessity for the regulation of the minimum sale price set within the electronic trading area. With the support and involvement of the Russian authorities, this structure can replace the current system of coordinators who are seen as creating 'shadow' conditions in the market.
Crown Resources has agreed with the Ministry of Fuel and Energy of the Russian Federation to start the project immediately. Intensive consultations on the progress of the project are being held with the Ministry. The Russian authorities believe that the market mechanisms, when introduced, will naturally eliminate the system of distorted pricing for Russian crude oil and increase the profits of Russian crude oil exporters delivering via the Druzhba pipeline, and other routes.
The current situation creates the potential for the government of the Russian Federation to be compensated for the incurred losses on the basis of the European Union's and Germany's anti cartel legislation. Ali Rodriguez, OPEC Secretary General, has said that the project should be submitted for consideration by the OPEC Economic Commission Board and, during the latest meeting between Mr Rodriguez, and Igor Usufov, the Russian Minister of Oil and Energy, the parties confirmed their mutual interest in developing co operation between Russia and OPEC.


'War' prompts Beijing to accelerate energy plans…

WITH THE US led war against Afghanistan stretching into its sixth week, and the vexing uncertainty that is gripping the Middle East and Central Asia, China is facing new fears about its oil security. Senior Chinese oil officials recently said that the terror attacks, as well as the continuing retaliatory strikes against Afghanistan, have accelerated China's plans for the establishment of a strategic oil reserve. Plans to build the 4,000-km pipeline to carry gas from the western region of Xinjiang eastward, and the shipment of oil from Kazakhstan, have gained new significance as the prospect of prolonged war weighs on the region. Reducing China's dependence on the Middle East as an energy supplier, and on the United States, whose military can control the tanker routes across the Indian Ocean and the South China Sea, is seen now more than ever as vital for China's long term oil security.
"America is indeed a victim of the 11 September attacks, but in the post war reality, Washington would come to strengthen its control of the Middle East oil reserves," Ye Zicheng, from the International Relations Institute of Beijing University, said. "In fact," he added, "as early as 1997, the Foreign Affairs Committee of the American Senate identified the region as one of "great interest" to the US."

China's oil security faces great challenges because of the country's growing demand for oil, and a widening gap between domestic oil production and demand. The country today imports about 30% of the oil it consumes, two thirds of which comes from the Middle East. With economic growth seen holding steady at around 7%, the country's need for oil will only rise. China's oil demand is expected to reach 390 million tons by 2020, with domestic production estimated at around 180 million tons.
"More than half of our oil demand will depend on imports by then," cautioned Wang Zhongming, an official from the State Economic and Trade Commission. Last year, China imported 70 million tons of oil, up from 36 million tons in 1999, despite the roaring oil prices in the international market.
Speaking at a recent two day international oil forum in Beijing, Wang called for the quick establishment of a strategic oil reserve and the introduction of a national law to guarantee the country's oil security. "We must quickly form regulations in such fields as Sino foreign cooperation in land and offshore oil exploration, oil and gas pipeline protection, and the state oil stockpile to pave [the] way for the law," he said.

China had previously announced plans to develop a strategic oil stockpile of 6 million tons by 2005. In late October, experts said Beijing should increase the oil reserves to 18 million tons, and start stockpiling as early as next year to benefit from the low international prices.
With the prospect of war continuing well into the winter, China is now looking with fresh eyes at gas pipeline projects, which previously had more political than real economic benefit. Beijing has announced plans to build the 'west east' pipeline linking the natural gas fields in the Tarim basin in Xianjiang with Shanghai. The official rationale is that the project will bring employment and jump start China's poverty stricken far west, long troubled by separatist movements. But despite having the support of Premier Zhu Rongji, who advocates the expanded use of natural gas to help reduce China's heavy pollution, the west east pipeline faces daunting challenges. For example, 11 ministries will be involved in its management, and the trunk line alone will traverse 12 provinces and pass by 50 cities.

The pipeline will cost nearly $15 billion to build. Apart from the staggering price tag, foreign firms bidding for the project are concerned about the lack of gas markets along the pipeline route from Urumqi to Shanghai. After six months of bidding, only three of the initial group of 19 investors remain in the pipeline negotiations.

However, daunting as the project may seem, the continued war in Afghanistan has added new impetus to the need for energy diversification. "The project will allow us not to be too dependent on any single source of oil imports. It will help us strike a balance between Middle East imports and domestic exploration," says one Chinese energy analyst.
Experts see the pipeline as the first part of a much larger grid that will link gasfields in Central Asia and China with Japan. Central Asian states such as Kazakhstan and Turkmenistan hold some of the largest untapped gas resources in the world. China's reserves in western fields supplying the west east trunk line are expected to last for a little more than 20 years. Eyeing the future when China's domestic resources run out, Beijing is discussing plans with the Kazakh government to build a pipeline from gasfields on the Caspian Sea to Xinjiang and further east to markets in Japan and South Korea.

While in the past most of these projects were regarded largely as part of China's 'investment diplomacy', aimed at gaining a strategic influence in Central Asia, nowadays they seem more economically viable. "If the war drags on and the USA uses it to establish a military foothold in the region, China's long term energy strategy would be affected," said the Chinese analyst. "Such a scenario could change the shape of global energy politics in the future."


…and the Great Game (2): who will run Caspian natural gas through Afghanistan?

A GIANT carrot hangs over the talks among the Afghan factions trying to form a post Taliban government, according to the Christian Science Monitor, (CSM) and its not just the prospect of receiving $billions in US aid after the war. Rather, it's the prospect of the next government in Kabul gaining riches by the construction of a pipeline across Afghanistan that will transport natural gas from the Caspian Sea region to world markets.

Until 11 September, much of the US diplomacy in Central Asia was focused on how to build a pipeline from the Caspian that couldn't be controlled by either Russia or Iran. Given the geography, and Russia's influence in various post Soviet states, that is a difficult quest.
As late as 1998, two years after the Taliban took over, the US company Unocal was negotiating with that radical Islamic regime about a pipeline that would run through Afghanistan and down to Karachi in Pakistan. Some Taliban officials are even reported to have visited the US to discuss the matter.
Also in that year, then oil industry executive and now Vice President Dick Cheney was captivated by the Caspian's potential. "I can't think of a time when we've had a region emerge as suddenly to become as strategically significant as the Caspian," he told a large group of oil industry executives in Washington.

With that kind of background, the Bush administration needs to bend over backwards, and not try to shape the postwar Afghan government. Otherwise, the conspiracy minded in the Middle East and elsewhere will see the hand of "Big Oil" at work in creating a puppet government in Kabul.
The CSM continues: "No one can doubt the US motives in attacking the Taliban and the Al Qaeda network in Afghanistan. As the military mission begins to blend with the political goal of reconstructing a new Afghanistan, the US will need to step back and let the United Nations or US allies take up the task. Ensuring oil supplies for the US may have been a driving motive for the Gulf War in 1991. It doesn't need to be one for the Afghanistan war in 2001"


Why join an organization?

Many readers of this may be members of the UK-based Pipeline Industries Guild. Probably well over half are members of one or other (or a number) of the major engineering institutions, such as the Institution of Civil Engineers, the Chartered Institution of Water and Environmental Management, and so on. Others, or even the same ones, will also be members of the UKSTT (or another country?s Society for Trenchless Technology), the Pipe Jacking Association, the Pigging Products and Services Association, IPLOCA, the Institution of Water Officers, or another of many similar organizations in the UK and worldwide. The business of joining industry-based groups is booming.

  • Why do so many of us bother to join so many organizations?
  • Why do so many organizations exist with apparently very similar purposes, let alone titles?

In one sense, the answers to these questions are similar and simple: to provide opportunities for individuals to network with their peer group and, ultimately, to obtain self-aggrandisement and promotion in their chosen career. As people are undoubtedly gregarious, they may also obtain comfort and security from aligning themselves with others in their industry sector, putting aside the fact that the ?others? may be competitors.

On another level, the answers to these questions are more challenging, particularly to the organizations themselves.

People become members and pay their subscriptions in order to receive either a service, or an acknowledgment of status, or both. Traditionally, a number of the major UK-based engineering institutions have monitored their professions (from their Victoria or Great George Street addresses in London), and sought to uphold standards of those practicing civil, mechanical, electrical, or structural engineering. To younger members, this role has often been seen as conservative and demonstrative of an unwillingness to accept change of any type - whether within the institution itself, or within the discipline it represents.

However, membership of an engineering institution continues to be a sought-after proof of achievement and status, particularly relevant to younger engineers in the highly-competitive international job market.

After the initial hurdle of professional membership has been overcome, it is a regrettable fact that the importance of the institution in the eyes of the majority of its members begins to fade, provided they keep their annual subscriptions up-to-date. Whilst acknowledging the institutions? importance in maintaining high standards within the professional disciplines they represent, members find that the institutions? roles as forward-thinking standard-bearers and lobbyists on behalf of the engineering professions are often well concealed.

The plethora of secondary organizations and associations has grown up partly as a consequence of this, and partly to satisfy the equivalent needs of those to whom professional membership is not available. The Pipeline Industries Guild is a typical association of this type, having among its members a wide range of companies and individuals, all of whom have as a common bond their involvement in construction and operation of pipelines of all types.

When asked, the majority of members will give as their main reason for joining the Guild (or the many other similar organizations) the ability to ?network? and to maintain informal contacts with clients, suppliers, and others in their industry. This, however, provides the paradox which is at the heart of the organization?s future success: how can this ability to network be quantified, and how can it be related to membership charges and benefits?

While the reputation of a well-run and influential association should precede it, it is nevertheless necessary for some tangible benefits to be supplied to the membership in order to maintain their interest, to justify their membership fees, and to keep the association alive in the minds of the membership. Such benefits are often in the form of publications; in the Pipeline Industries Guild?s case, members receive copies of this journal, a regular and less-formal newsletter, and the annual yearbook, renamed this year as the Pipeline Industry Directory. The Guild should also be able to provide its members with the less-tangible, though arguably more-beneficial, advantages of influencing industry regulators, promoting pipelines within government organizations worldwide, and providing a single source of information for problem solving. Within the Guild, these issues are kept constantly under review; doubtless similar organizations follow the same philosophies.

The Pipeline Industries Guild is an association with general interests across the whole industry. An alternative organization is characterized by the Pigging Products & Services Association (PPSA), whose members? interests focus directly on issues dealing with pipeline pigging. In common with the Guild, the PPSA also has various tiers of membership, the two most populated being individual and corporate. Also in common with the Guild, the PPSA publishes a regular newsletter (Pigging Industry News). Another of the benefits the Association provides to its members and others is its technical advisory service: not only can problems to do with pigging be solved, and advice on which procedure to use offered, but project managers can have rapid access to all the suppliers of services or products, thus avoiding the costs of a considerable amounts of research and information-gathering when tenders are being prepared.

The PPSA has also recently negotiated a special rate for its individual members to use the web-based pigging reference source at http://www.pigsource.com. This site provides a unique and rapid reference to over 400 conference papers and two pigging-industry textbooks, and provides an invaluable source of information to anyone with a pigging problem. Individual PPSA members obtain use of the site at no extra cost; non-members have to pay a fee for an annual password, in common with many similar web sites.

As can be seen, the PPSA works hard to maintain the interests of its membership, and to justify their support. Associations such as this will only prosper and survive by continuously reviewing their structure and what they provide. It is very easy for any of us as individuals not to be bothered to renew a membership when the form arrives each January; every association has to be prepared regularly to earn its membership.

So, why join an industry organization? Career advancement and successful business links are probably the two main reasons, followed by simplified access to industry information and associated benefits. Pipes & Pipelines International is a strong supporter of the aims and intentions of both the associations mentioned above, and encourages readers to investigate both further. Comprehensive information on both is available on their web sites (at www. pipeguild.co.uk, and www. piggingasssnppsa.com), as well as by phone; both are headquartered in the UK, the PIG at (+44) 020 7235 7938, and the PPSA at (+44) 01235 760597.

 

The complete guide to international gas pipelines

This is the latest product from Energy Intelligence Research?s Washington, US,-based research division. The 500+ page book, based on work originally undertaken for the Japan National Oil Co, summarizes 55 cross-border gas pipelines either in operation or proposed throughout the world, together with around 60 inter-state gas pipelines in the US and Canada. Where possible, data is provided on the pipeline?s technical specifications, ownership and operator details, the market environment in which it operates, the local, regional, and geopolitical constraints it faces, and the current status of the line.

It is a virtually impossible task to gather completely-comprehensive technical data on all the worlds? gas (or oil) pipelines, let alone comprehensive data on some of the other categories EIR has bravely embarked on supplying. Nevertheless, this publications provides an invaluable single and unique source for such data as is available, which EIR?s researchers have summarized in a relatively user-friendly fashion. The Guide is therefore highly-recommended to all involved with cross-border pipeline projects and planning. As well as tabular data, there are comprehensive articles (?case studies?) on the majority of the pipelines and projects included in the Guide, which give an interesting insight into the difficulties often associated with pipelines of this nature.

The Complete guide to international gas pipelines is available from EIR in Washington, DC, US, tel: (+1) 202 662 0700; further details can be found at http://www.energyintel.com.

 


Global Pipeline Monthly: the oil and gas pipeline industry's premier source of up-to-date news and technical information, provided by Pipeline World in association with Alexander's Gas & Oil Connections.
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