Central Asia is quickly emerging as a global center of hydrocarbon production, but the ambitious transnational pipelines built to access this oil and natural gas wealth may become obsolete sooner than anticipated.
Since at least the 17th century, the Caspian basin supplied hydrocarbons of one form or another to markets in Europe, the Middle East and Central Asia. Naphtha, kerosene, mazout, petroleum, and now natural gas have all brought international interest and wealth to the otherwise economically underdeveloped region. Local entrepreneurs and foreign investors have made - and lost - fortunes as political, economic and technological changes either emanated from, or swept over, the region.
Today, Azerbaijan, Turkmenistan, Kazakhstan, and Uzbekistan produce substantial amounts of oil and natural gas, and stand to become major hydrocarbon exporters to a global market of increasing demand. This is true for both emerging economies like China and India, as well as energy-intensive developed countries in Europe. The challenge facing modern multi-national corporations and national petrol companies is the same - how to dispose of the region's resource wealth profitably. The best answer to date is to transport these gaseous and liquefied goods to the markets of greatest demand, China and Europe, via long-distance transnational pipelines.
Because of the potential profits involved, control over these pipelines by national and corporate interests has become an issue of considerable competition and contestation. Routes that circumvent the traditional monopoly of Russian transport, such as Nabucco, TAPI and the Central Asia-China pipeline are especially appealing to those seeking to reduce Russian influence on energy supply, including China and much of Europe. As a result, the overwhelming debate in Central Asian oil and gas production rests not on the choice of transnational pipelines as a method of transport, nor on the European and Chinese destinations of these lines, but only on which particular connect-the-dot route they will take, and who therefore gets a share of the profits.
This debate, and the pursuit of securing one route over another, is immediately important, and will continue to dominate the Eurasian hydrocarbon sector. However, it is worth considering the underlying assumptions upon which such endeavors rest, and the striking possibility that transnational pipelines to Europe and China will be rendered obsolete by factors outside the control of Eurasian petroleum producers in the near future.
Long-distance transnational oil and gas pipelines are difficult to plan for political reasons, and technically very expensive to build. Nabucco, for example, will be one-and-a-half times as long as the Amu Darya, the longest river in Central Asia, and is expected to cost between $11 and $20 billion to complete. It will draw from Iraqi, Azeri, and likely Turkmen gas sources, and travel through half a dozen other countries before reaching its terminal in Austria. (map of various proposed & existing pipelines in Eurasia circa 2003)
Even ignoring the political costs, the division of profits, continuing maintenance, and other obvious expenses, such projects will take many years – indeed, decades, to pay off
Even at the July 2011 European price of $10.04 per MMBtu, Nabucco's final 2020 flow of 31 billion cubic meters of natural gas would produce an annual gross profit of approximately $11.04 billion. That is a lot of money, but once divided up, covering production costs, the sliver left for pipeline investors means that Nabucco, under the best of circumstances, will not be 'paid off' until well beyond 2030, and perhaps not until 2040. It’s clear, then, that long-distance transnational pipelines only make sense (and cents!) if the price and demand for gas remain the same or higher than they are today in the terminal markets of Europe and China.
However, according to the World Bank, European Natural Gas prices are actually expected to decline over the next decade, down to $8.4/MMBtu by 2020 (link). And what about demand? Will the increasing trend over the past decade continue, or is it possible that demand will actually flatten out, or even begin a long-term decline of its own?
This is important to consider not because it is possible, but because it is exactly what China and Germany, a European economic leader, are predicting will happen.
More than that, both are taking radical action now to ensure exactly this outcome.
Recognizing the negative impact that burning hydrocarbons has on global climate change, as well as the Achilles heel arrangement of non-carbon producers relying on carbon-intensive infrastructure, China and Germany both have plans to improve energy efficiency and increasingly rely on renewable energy sources to replace fossil fuels.
In China, the future of natural gas is promising, though not astronomical.
According to a study released by the Lawrence Berkley National Lab, (PDF) natural gas will grow from 3% to 7% of China’s overall energy mix, while total energy use doubles from 2005 to 2030. However, after that point, both total energy demand, and the share held by natural gas, is expected to remain constant or decline by 2050. China itself is enjoying a small domestic gas boom since 2003, but most projections see this peaking by 2020, with almost 99% of natural gas demand supplied by imports thereafter.
In Europe, Germany’s renewable energy transition plans portend a very different future.
According to Dr. Felix Christian Matthes, a climate and energy expert with Germany's Öko Institute, even as Germany radically phases out Nuclear power, the share that will be made up with coal, gas, or other hydrocarbon sources will not increase dramatically. In fact, even the most conservative scenarios see natural gas use cut in half, while more ambitious goals call for the virtual elimination of hydrocarbon use by 2050. (PDF)
Germany is a low-carbon leader in the European community.
If it is successful, other countries – both in Europe and beyond – will follow its example. In the span of the next 20 to 50 years, the once-flush European hydrocarbon market is could virtually dry up.
And China, not to be outdone, is going to avoid the addiction of hydrocarbon lock-in altogether.
The drive to build long-distance transnational gas pipelines in a decarbonizing century is reminiscent of French Minister of War André Maginot’s massive underground fortifications built along the border with Germany in the 1930s. Based on the WWI experience of trench warfare, the Maginot Line cost an astounding 3 billion francs (approx 1.1 billion Euro) when completed in 1939. On May 10, 1940, the Germans rendered it obsolete using new technologies of aviation and motorized artillery.
Today, the Maginot Line serves as lesson on the failure of long-term planning to account for innovation.
With the rise of next-generation renewable technologies like super-efficient photovoltaics and offshore wind power, and widespread efforts at increased energy efficiency, Eurasian pipelines are likely to be ‘bypassed’ just like Maginot’s folly. Whether this takes place by 2030 should be hotly debated. That it will happen in the next 50-60 years is hard to deny.
The Maginot Line is perhaps not the best metaphor for folly, since it did serve to deter invasion through Alsace/Lorraine and if the Allied French and British forces had placed the bulk of their forces in France there was a good chance they could have blunted the German advance.
ReplyDeleteInstead, the BEF and some French forces were lured into defending Belgium, which allowed for the Ardennes gap in their line which was exploited by the Germans to cut them off.
If the Allies had left Belgium on its own then we would remember the Maginot Line as the keystone in the wall that stopped the blitzkrieg.
You can't blame the Maginot line for its misuse any more than you can blame Renault for making tanks that were similarly improperly deployed by the French Army.
Of course, Maginot Revisionism aside, you make a strong point about the imminent obsolescence of these pipeline pipedreams.
Actually WMR, while I appreciate the added context on the topic of Maginot - that it was not an inherently bad technology or policy instrument, only that it was not properly utilized - I think this makes it an even more apt metaphor.
ReplyDeleteI will admit that if there are no major policy or technological changes over the next 20-40 years, the most likely outcome of energy consumption patterns will vindicate the construction of transnational natural gas pipeline networks.
However, my point is that the pipelines themselves, both because of their inflexibility and high start up costs, are not well-suited to deal with dramatic geopolitical, or global energy demand/supply changes.
Had the Germans mounted a frontal, infantry assualt on the Maginot, it probably would have held them off quite well. So of course they did not do that, and were able to exploit its weaknesses (against air power and flanking maneuver).
I would therefore not "blame" the pipelines for being misused, but rather the pipe-builders for failing to take into account the very real possibility that their scenarios were overly optimistic, or blatantly disregarded real potential changes in the global energy market.