INTERNATIONAL FOCUS

• Amoco, General Electric and Bechtel plan to build a 750-mile gas pipeline connecting Turkmenistan to Turkey's gas network. The line will compete with the DNV-Gasprom Black Sea pipeline. [88,655 bytes]

New transnational entity evolving

The recent cooperative moves by Saudi Arabia, Mexico, Venezuela and Norway form the seed of a new entity that could assume the "swing producer" role formerly filled by Saudia Arabia alone. Beyond that, it could evolve into a transnational allocation system for all international crude oil exporters and create a more stable market. This entity would have to include the major world producers with enough combined market share to influence the market.

Stable oil prices will not return any time soon without the creation of a new transnational crude oil allocation system. From the 1930s through the early 1970s, Texas oil production dominated world oil markets. Stable oil prices and smoothly expanding oil markets were maintained by the Texas Railroad Commission's bid and allocation system.

In the early 1970s, that market dominance and control passed to the Organization of Petroleum Exporting Countries (OPEC). By comparison, OPEC has not been quite as good a steward of the world crude oil market. The OPEC states are sovereign entities dependent on crude oil sales to fund their governments. The bickering and infighting between them will continue until they either recognize their common interests or broaden their individual economies to lessen dependence on crude oil sales.

OPEC discipline and oil dependence

OPEC's recent agreement to throttle-back crude production includes the following production cuts: 725,000 b/d from Saudi Arabia; 525,000 b/d from Venezuela; 305,000 b/d from Iran; 225,000 b/d from Kuwait; 225,000 b/d from Nigeria; 225,000 b/d from UAE; 130,000 b/d from Libya; 105,000 b/d from Indonesia; 80,000 b/d from Algeria; and 60,000 b/d from Qatar. The remaining cuts of the 3.1 million b/d total reduction are "promised" from other OPEC and non-OPEC members. The reductions began July 1, 1998.

If they were so disposed, OPEC could ensure stable prices and smooth demand growth that would grow cash flow for all members. This requires mutual trust and action for the greater good of all, something that has rarely happened in OPEC's history. Still, the announcement initially firmed crude oil markets and offered hope for higher, more stable, oil prices.

Whether discipline will be better than in the past is anyone's guess, but most pundits are negative. The only discipline that appears to be effective is the economic pain of severely constrained cash flow into member state's economies.

OPEC continues to rely primarily on natural resource sales (crude oil) to fuel their economies rather than developing other businesses and income sources: trade, manufacturing, services, etc. The price they pay for limited economic development is a lack of flexibility and downside price risk. When greed or need pushes excess crude into the commodity markets, the consumer is the only winner.

Caspian gas pipeline planned

A new card has been played in the continuing Caspian pipeline game. Amoco, General Electric, and Bechtel plan to build a 750-mile gas pipeline across the Caspian Sea. The new line will connect Turkmenbashi, Turkmenistan on the east shore, with Baku, Azerbaijan on the west. Total cost for the line is US$2.4 billion. From Baku, the line will extend across Azerbaijan and Georgia to Erzurum, Turkey, where it will join the Turkish network. Initial volumes are planned for 350 bcf/yr with expansion potential to 1,225 bcf/yr.

This pipeline is the first major linking of Turmenistan gas reserves to markets in the west. The project preempts earlier plans to extend pipelines south from Kazakhstan to carry gas north into the Russian system and is a major response to Iran's earlier pipeline south from Turkmenistan into northern Iran. From Turkey, the gas can reach all European markets. Turkmenistan's gas will compete with Russian reserves from the north and Algerian reserves from the west. It may find its home in both Turkey and southern Europe.

This project significantly shifts the market balance toward Europe's markets with Turkey as the energy corridor. Secondary routes are possible over land north around the Black Sea from Georgia. It puts in jeopardy the DNV-Gasprom plan for a deepwater pipeline north-south from Russia to Turkey. The deepwater project is a technical challenge due to both its depth and the corrosive sulfide environment at the Black Sea mudline.

Once Amoco establishes and secures the land route, it could serve as a path for a future oil line as well. This has major implications for the movement of oil from the southern Caspian basin. As first-movers Amoco and partners have taken a significant risk and will reap a significant advantage once the line becomes reality.

Why this pipeline?

Turkmenistan has suffered a gas production decline of over 80% over the last 10 years, according to the BP Staistical Review of World Energy 1998. In 1987 the country was the third largest gas supplier providing 4.6% of the world's production. In 1997 that percentage dropped to 0.7% of world production.

This precipitous decline was caused by tariff disputes with Gazprom. The disputes resulted in Gazprom denying Turkmenistan access to the Russian pipeline system, effectively cutting off Turkmenistan's gas sales. The Turkmens responded by finding new outlets: first to Iran and now west to Turkey and the wider European market. Gazprom's actions may be the hubris that finally opens the Caspian basin fully to western markets.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.