Lost in the pipeline: transparency and the “transit curse”

Bloggers in the world of energy came to accept some time ago that our topic matter, while it might get us hot under the collar, is going to be hard to sell to the wider world as a sexy topic. But judging by the ridicule of my colleagues at the prospect of writing a blog on the least sexy of unsexy oil topics – transit fees – it seems this is the real anorak of the sector. But shouldn’t we care more about transit fees? Why demand less of them than of other revenue streams when, for countries that find themselves in one of the world’s energy “corridors” rather than sitting on the resources themselves, they can be a decisive factor in their future prosperity.

The lukewarm reaction to the subject is likely due to the fact that the sums of money we are talking about are not as headline-grabbing as the figures in big-money production sharing contracts in Kurdistan or Libya. Perhaps this is why the architects of the new East-West gas corridor had to come up with such romantic names as “Nabucco” for their pipelines, or the plain comic relief of the SEEP (South East European) pipeline.

But making my way through James Marriott and Mika Minio-Paluello’s recently released The Oil Road  has brought home the significance these sums can have for countries such as Georgia, Turkey (or Syria a few years down the line), the success of which make or break their development prospects. The conflict-generating potential of these structures is also plain to see, the most famous case being the 2009 Russia-Ukraine stand off over transit fees that threatened to leave much of Europe in darkness. More recently the world’s newest state of South Sudan put nation-building on hold and came to the brink of war with Sudan to the north as a result of an unresolved feud over transit fees. And it was a spat over gas transit, rather than bitterness over possible Turkish-Armenian rapprochement, that really strained the relationship between “brother nations” Turkey and Azerbaijan. This is no pocket money.

While smaller in scale, such revenues may be key to the political economy of a small state such as Georgia, a focus of the book, which can claim few natural resources of its own. But the question to ask is this – what exactly does a country like Georgia get out of this pipeline? A neat target for Russian jets in the summer of 2008, certainly. Cosier relations with gas-hungry Western European economies, also. But a net benefit?

According to Revenue Watch Institute, in Georgia transit arrangements result in over US $50 million per year for the Georgian government. This might seem like a drop in the ocean compared to the nearly $19 billion that neighbouring Azerbaijan rakes in from its oil sector, but is no small change in a country where total GDP is less than a quarter of that of it’s eastern neighbour.

In turn Turkey, a country traversed by a growing web of pipelines bringing oil and gas from Russia, the Caspian basin and northern Iraq, sees 420 million barrels of oil and 20 billion cubic metres of gas cross its territory each day. But when Revenue Watch researchers looked for figures from BOTAS, the state owned pipeline company, they found that the bulk of information on transit tariffs, taxes, fees and revenues was not publicly available online and the only useful information was discovered through press leaks. The investigators were ultimately unable to find how much of this revenue enters the state budget.

But as Marriot and Minio-Paluello point out, the Georgian government’s energy strategy means more than simply calculating cash flowing in and out from transit fees. The net financial benefit to the state has to outweigh not only less quantifiable costs such as social and environmental impacts (well documented by environmental pressure groups), but also the very real costs needed to secure the 44m-wide corridor through which the Baku-Tbilisi-Ceyhan (BTC) and South Caucasus pipelines run. Under Host Government Agreements drawn up by Baker Botts lawyers, referred to in the book simply as ‘The Agreements’, each government that hosts the pipeline is responsible for defending the pipeline with its own military forces. An expense that must have an impact on the balance books. But given the weakness of the Georgian government’s negotiating position in 1998 faced with 40,000 hours of work by a team of corporate lawyers, no one would back a lucrative outcome for Georgia.

The strategic location of the Southern Corridor pipelines also reveals how hard-nosed commercial considerations can clash with political agendas. Georgian President Saakashvili, who named a main Tbilisi thoroughfare after George W. Bush, made no secret of his desire to distance the country from former ruler Russia and cosy up to allies in the West, and the BTC pipeline itself has been described as the most politicised piece of infrastructure ever built. Proposed transit lines everywhere are made not only with commercial motivations, choosing the most straightforward route possible, but as deep political statements. If BP had been looking for the most financially lucrative solution to export options from its operations in the Caspian, it may have looked towards Iran if the option hadn’t been deemed so politically poisonous to its UK and US backers.

One particular complications of transnational pipeline projects is the way they straddle multiple jurisdictions, creating niggles that have to be ironed out by project lawyers, leading to the ‘wildcat lawyering’ noted in the Oil Road, whereby stand-alone agreements were drawn up for countries on the BTC route that override existing and future domestic law and effectively create a right of freedom of movement for petroleum itself.

So can we speak of transit countries displaying their own brand of “transit curse”? Let’s look at some of the commonly cited symptom of the more familiar “resource curse”. While the scale of the revenue streams involved means that Dutch Disease and the ensuing loss of export competitiveness is not such a significant factor, we certainly see opportunities for misuse of funds linked to transit arrangements (former Ukrainian Prime Minister Yulia Tymoshenko sits in jail over alleged abuse of power when signing gas supply and transit agreements with Putin). We also undoubtedly see a prominent role for pipelines in generating conflict – not only in the case of Sudan’s transit war, but as prime targets for militant groups from Colombia and Peru, to Iraq, Yemen and Nigeria, among others.

Galib Efendiev of Revenue Watch very much sees the response to this in folding transit fees into the requirements of member countries under the Extractive Industries Transparency Initiative. The EITI has indeed done some recent soul-searching on the scope its mechanism, with pilot programmes on regional level implementation being explored in countries such as Peru. But until the intiative tightens up the reporting standards on the streams already covered, the question must be asked whether it needs over-burdening with extra reporting responsibilities at this stage.

Beyond questions of transparency and access to information, Chatham House’s Paul Stevens suggests ‘progressive transit terms’ as the most realistic solution to the conflicts generated by pipelines. He suggests that, just as progressive fiscal terms have become the norm in upstream oil and gas, allowing the take for producer countries to increase profitability in line with oil prices, transit fees too should be linked to the price of the oil and gas passing through a territory.

EITI or no EITI, gas is an increasingly important component of the energy mix and energy resources located close to the great centres of consumption are depleting. So inevitably pipelines such as those along the Southern Corridor route are becoming the protagonists of global energy politics. Perhaps it’s time we took a closer look.

Category: Azerbaijan, Blogs, BP, EITI · Tags:

Leave A Comment