Scottish Professor Discusses History of Arab Pipelines

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SCOTTISH PROFESSOR DISCUSSES HISTORY OF ARAB PIPELINES

On June 15, Paul Stevens, professor of petroleum policy and economics at the Center for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, Scotland, discussed the history of the Arab transit pipelines and its implications for the prospective Trans Caspian pipeline routes at the Middle East Institute.

In recent years, he said, there has been a renewal of interest in transit oil and gas pipelines due to the necessity of transporting hydrocarbons from the landlocked Caspian region. However, he pointed out, the discussion over the prospective pipelines bringing Caspian oil to world markets suffers from two serious failures: "It either ignores the poor performance of transit pipelines in the past or, where problems are analyzed, the concentration is exclusively on politics."

Professor Stevens said he started analyzing problems associated with transit pipelines as early as 1980, immediately after Iraq's invasion of Iran, which caused considerable concern over oil supplies.

He studied the operating history of IPC (Iraq Petroleum Company) routes via Syria and Lebanon and via Turkey; IPSA (Iraq Pipeline Trans Saudi Arabia) via Saudi Arabia; the Tapline (Trans-Arabian Pipeline Company) from Saudi Arabia through Jordan, Lebanon, and Syria; and the later Transmed gas pipeline from Algeria via Tunisia to Italy.

Professor Stevens said that the first result of his study was, as he expected, that the operating record of most of the TransArab pipelines was very poor. ICP, IPSA and Tapline pipelines either had frequently been closed due to disputes over transition fees or off-takes amounts, or had been operating at very low capacity. The only exception was the later Transmed gas pipeline, which was inaugurated in May 1983 and had an exemplary operating history, even in view of the political turmoil in Algeria.

His second finding was that, surprisingly, the poor operating results had little to do with Arab politics. Most of the problems, in fact, proved to be economic rather than political.

Briefly explaining pipeline economics, Stevens said that there are two major rules of profitability:

The first rule is that "big is beautiful." One big pipeline carrying a certain volume is far more efficient than two pipelines carrying the same volume. From this purely economic point of view, Stevens said, "the theory of multiple routes is good for politicians but not for accountants."

The second rule is that "full is beautiful." Once a pipeline is built it needs to operate in its full capacity. In this respect, again, two half-full pipelines are bad news compared to one full pipeline carrying the same volume.

Another nuance on pipeline economics, according to Stevens, is that pipelines can lose huge amounts of money and still keep pumping. This is what economists call the "bygones rule," resulting from the fixed costs associated with securing rights of way and building the pipeline and pumping stations. It means that, even if the pipeline operates at a loss, it is still better to continue the loss-making operation, providing that variable costs are covered and some contributions to fixed costs are made. …