Energy Sector

Regional Energy Indicators:
Electricity Generation (TWh) 440.7
Electricity Consumption (TWh) 411.3

Energy Consumption per Capita (kgoe/cap) 1786
Energy Import Dependence (%) 61%
CO2 Emissions per Capita (kg CO2/cap) 5231
Note: kgoe – kg oil equivalent

The Hidden Benefits of Southeast European Pipeline Projects

By Vlad Popovici

South Eastern Europe could become in the near future a very important energy transit region. Various oil and gas pipeline projects have been aggressively promoted during the last several years in the region. Beyond energy flows and transit fees, these major infrastructure projects could offer other significant economic benefits for the countries in the region.

One of the major strategic objectives of the European Union in the energy sector is to increase the long-term security of energy supply for its member countries.

However, the domestic production of oil and gas in the European Union is declining and, as a consequence, the EU dependence on energy imports is still increasing – according to the 2010 edition of the EU energy and transport in figures (PDF) statistical pocketbook, the EU was in 2007 importing 53.1% of its primary energy sources, compared to 44.5% back in 1990.

One of the few ways to increase the long-term security of supply in the context of increasing import dependency is to diversify import sources. New energy infrastructure linking the hydrocarbon-rich exporting regions to the European markets thus has to be built – pipelines, LNG and oil terminals. This is very good news for South Eastern Europe, as it could soon become a very important energy transit corridor.

Competing Pipeline Projects

Several oil and gas pipeline projects that would transit South Eastern Europe have been aggressively promoted during the last decade. Projects like Nabucco or South Stream are commonly mentioned in the media these days, but the list of regional pipeline projects is longer.

It includes other oil pipeline projects, such as the Burgas-Alexandroupolis (or Trans-Balkan) project, Burgas-Vlore (or AMBO) project and (though some consider it defunct) the Pan-European Oil Pipeline (or PEOP) from Constanţa to Trieste.

As for gas pipelines, we have the Trans-Adriatic Pipeline (or, TAP), Bulgaria-Greece Interconnector, the White Stream project (or, the Ionian-Adriatic Pipeline project).

Because all of these projects have the same potential oil and gas suppliers (the Caspian and Middle East regions) and user markets (primarily European Union member states, though some of the oil and gas would certainly be used in the transit countries as well), it is clear that not all of them will be built at the same time, as that would create an over-capacity situation.

Therefore, though all the promoters publicly state that their project is complementary to the other planned pipelines, the reality is one of fierce competition among them – to contract guaranteed long-term supply and demand, to get financing for the project, to negotiate transit rights and political and/or financial support from the transit countries and, most importantly, to be the first to put their own new pipeline in service.

Perhaps the best example of such chronic and politicized competition is that between the Nabucco and South Stream projects. To better understand the stakes involved in this game, one must first examine what the main benefits of a major pipeline project would be.

Direct Benefits for Transit Countries

The direct benefits of a pipeline project are more obvious – the exporters gain long-term customers and revenue from the oil and gas flows, the consumers get a long-term guaranteed supply (pipelines are usually designed for 25-35 years of service, but are often used for much longer than that), while the pipeline operators gain revenue from the transportation fees.

The direct benefits for transit countries are also easy to grasp. They have access to new flows of oil and gas on their territory that they can use; this could increase the availability of these resources in regions that had previously no access to them.

The pipeline operators are going to pay transit fees to the transit countries for the right to use their territory for transit. Transit countries can also gain a profit and dividends if they are involved – through state-owned or private companies – in the pipeline operating company.

To give just one example, around 450 km of the Nabucco gas pipeline will transit Romanian territory. The Romanian government plans to use the pipeline as a backbone for distributing gas to regions that do not yet have access to gas, and to diversify its imports, since they currently come exclusively from Russia.

Transgaz, the Romanian national gas transmission company, owns 16.67% of the pipeline operating company Nabucco and estimates that its annual revenue from transportation fees will reach 120 million EUR for the first 25 years of pipeline service. There are no estimates yet regarding the transit fees that will be charged by the Romanian government.

Indirect Benefits for Transit Countries

The indirect benefits of a pipeline project are the benefits derived from the construction and maintenance of the pipeline. The largest pipeline construction cost categories are represented by materials – pipe, protective coatings, compressors, etc – and labor, each of the two representing around 30-35% of the total construction cost.

Since most of the pipeline length will lie in the transit countries in South Eastern Europe, this represents a major business opportunity for these countries’ industrial sector: increased production for existing large-diameter pipe mills or even investing in new pipe mills; new protective coating plants in the region; increased revenue for local gas pipeline construction and operating equipment manufacturers; more revenue for local pipeline construction companies.

The second largest benefit opportunity is the maintenance of the pipeline – usually, the annual maintenance costs of a pipeline are around 3-5% of its construction costs, which creates new repeat business opportunities for local pipeline maintenance companies and pipeline maintenance equipment manufacturers in the transit countries.

To appreciate the true scale of business opportunity created by a real project, we can look again at the 450-km long Romanian portion of the planned Nabucco pipeline. The construction of the Romanian segment is conservatively estimated to cost 1.1-1.3 billion EUR, with the required 300,000 tonnes of 1,420 mm steel pipe alone costing between 200 and 300 million EUR. Compressor stations would cost another 150 million EUR. Protective coatings for the steel pipe would cost 6-10 million EUR.

Finally, Transgaz estimates that the construction of the Romanian segment would create 600 permanent and 7,000 temporary jobs in the country. Maintenance of the Romanian segment would cost annually between 30 and 65 million EUR. All these costs represent potential revenues for local companies.

Similar calculations can be developed for all the planned projects and transit countries in South Eastern Europe. No one doubts that the indirect benefits represent a huge business opportunity, one that is most of the times hidden behind the direct benefits of the projects.

The good news is that the transit countries in South Eastern Europe could get the lion’s share of these indirect benefits, as most of the pipeline routes transit their territory and they can negotiate local content clauses for the construction and maintenance of the pipeline.

The bad news, however, is that the majority of Southeast European countries are not currently able to maximize these indirect benefits because they either have no industrial capabilities to actively build the pipelines transiting their territory, or because their internal pipeline industry has been decimated after decades of slow business.

In the Nabucco example above, Romania risks losing most of the pipeline project’s indirect benefits. For example, Romanian pipe mills cannot manufacture 300,000 tonnes of 1,420 mm pipes in the required 2-3 years without significant investments; there are no large capacity protective coating plants in the country; the pipeline construction and operating industry has been virtually dismantled; and the local pipeline construction companies would hardly have the combined capacity to build the Romanian segment of the pipeline.

Companies in South Eastern Europe still have time to position themselves for the upcoming major pipeline projects that will transit their countries by upgrading existing or creating new capacity and finding reliable partners outside the region that can complement their capabilities.

Their task would be made easier if the local governments would provide not only political and financial support to the pipeline projects, but also a project-by-project industrial strategy aimed at increasing the local content during the construction and maintenance of the planned pipelines.

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