Paying Hefty Price for Being Transit Nation

Jenik Radon
Esq. Adjunct Professor, Columbia University, School of International and Public Affairs
Energy is an integral part of human being. Energy in the form of oil and gas is carried through the means of pipelines from producing nation to its destination ultimately the market. Transit nations from where pipelines are passing have to bear the burnt of environment pollution, challenges the residents who are dislocated from their places to make way for the construction of these pipelines. The author says that the cost transit nations pay is much more than they earn from laying off of these cross-border pipelines.

Pipelines are the roadways of the oil and gas industries. Pipelines deliver needed and wanted energy from producing areas, including from places not commonly heard of, whether from the fields of Hassi R'mel or Kirkuk, to industry, to homes and, simply put, to the market, both domestic (national) and international markets. But, internationally, until Russia, in a 2005-06 headline grabbing fight with Ukraine over transit fees and increased gas prices, stopped sending gas through pipelines in the Ukraine to the nations of Europe, no one really paid much attention to pipelines or transit nations , let alone their concerns or what it meant to be a transit nation. The continued operation of pipelines, even across borders, was taken for granted , as given, and potential international political problems and social challenges were until then ignored.

As is illustrated, for example, by the freedom of transit principle set forth in, and the other provisions of, the Energy Charter Treaty, adopted in 1994, crossborder or transit pipelines are there to transport an uninterrupted flow of energy in order to satisfy the needs and demands of consumers for energy, as well as that of the producers of energy. No one can argue with the fundamentals of the principle of freedom of transit. However, the Treaty also calls for cost-based transit tariff pricing. The conclusion from that is clear: transit tariffs, the fees charged by nations through which a pipeline crosses, are not to be guided by the free market principle of profit-making, not withstanding, among other things, that transit nations will bear the cost of, and the stress caused by, the dislocation of residents whose property has to be used for the construction of a pipeline, the damage from any environmental pollution, and the challenges of other risks, such as security, in order to make possible the transport of oil and gas or energy from producing nations to consuming nations.

Energy ignites the imagination as well the emotions, especially economic and political emotions. The reason is simple. Energy is a necessary good. Energy , as we so well know, literally lights up our homes, makes it possible for students to read at school and at home, and drives our factories. Energy powers such megacities as New York, London and Tokyo, which are so vibrant at night and therefore brightly so lit that they can be seen from space. The world simply cannot do without energy; and since we cannot do without it, we demand it and we expect its flow to be uninterrupted.

Moreover, international energy companies (IOCs) are the darlings of Wall Street and the finance world with Exxon/Mobil, Shell and other IOCs composing six to seven of the top 10 firms in the world by revenue and also by profits. They are clearly handsomely rewarded for producing energy and bringing it to market from literally around the world. Energy rich nations, such as Norway, Saudi Arabia and Qatar, which have direct access to the energy consuming markets of Europe and the rest of the world, have achieved high GNPs per capita and continue to save their substantial earnings from the sale of oil and gas in sovereign wealth funds, which will provide financial support for future generations. But other resource rich, and comparably well endowed, nations, such as Russia, Azerbaijan, Algeria and Iraq, seeking to achieve similar economic success, are dependent, at least in part, on pipelines, mostly gas pipelines, that have to cross the transit nations of Ukraine, Georgia, Morocco and Turkey, respectively, in order to bring their oil and gas to the world markets. This requires the negotiation of complex inter-government agreements between producing nations and transit nations, as well as host government agreements between energy companies and transit nations, to establish the transit fees to be paid to them as well as the other terms of transit.

But in the course of such negotiation, an age-old truism is too readily forgotten by the producing nations, namely that one is only as strong as the weakest link, which, in this context, potentially means the transit nation.

The logical consequence or implication of that saying is that nations which voluntarily open their borders for the construction and operation of transit pipelines need to benefit and be compensated for their contribution. In market terms, these nations need to make a profit as they provide the use of a valuable asset.

In real estate lingo, transit nations in fact have three very valuable assets: location, location and location. They serve as the indispensible link in the supply chain between energy rich nations, especially those that are effectively land-locked, and the world's energy market. But surprisingly, the critical location of transit nations has not translated into significant economic rewards or benefits for them.

In the case of the BTC (Baku-Tbilisi-Ceyhan) oil pipeline, for example, Georgia receives on average a maximum of $62 million per annum for the transit rights. The South Caucasus gas pipeline, also known as the Baku-Tbilisi-Erzurum Pipeline, pays Georgia 5% of the shipped volume. For having the Maghreb-Europe Gas Pipeline cross its territory from Algeria to Spain, Morocco receives a 7% transit fee which is paid in gas. But if significant fees are not the reward for the transit nations, what is?

Energy pipelines it is said, especially by the international (consuming) community, serve and benefit the common good, as the pipelines are the enablers for the supply of power and light, albeit to the consuming nations, and therefore serve as motors of and for the economy, albeit again their economy. This is certainly true at a general level.

Still, when pipelines stretch across borders, a number of questions need to be addressed, and answered, as it is not obvious that the common good is universal, a good shared by all: what constitutes the common good; what is the cost of achieving the common good; who bears the cost of such achievement; who bears the cost of maintaining this achievement; and who, in fact, actually benefit from these pipelines and who does not. The list of questions goes on. Reasonable people can reasonably differ on the answers, but reasonable people cannot, and should not, avoid asking these questions. And they need answers which are openly discussed and debated.

Even in the United States, which does not historically view itself as a transit nation, people are now asking those questions in respect of the prospective and controversial Keystone XL pipeline project which is to designed to bring tar sand oil from Alberta, Canada to refineries in Houston, Texas. The Keystone project, given the controversy that surrounds it, still awaits US government approval for the pipeline to cross the US - Canadian border.

Some Texans, for example, are asking whether a one -time, one - off, payment for the taking/use of their property for the Keystone pipeline is adequate compensation, especially taking into the consideration the fact that the pipeline will remain a permanent obstruction or fixture on their property and pose a permanent environmental threat as pipelines are known to fracture and therefore spill. Is a one-time payment, as distinguished from a share of future profits from the project, adequate compensation for their sacrifice? Some are also questioning, and going to court to support their questioning, whether the power of eminent domain, which is traditionally associated with the taking of property for a generally and traditionally accepted public purpose, such as a school, a hospital or police station, should be used to further or support profitmaking economic or commercial activities such as the Keystone pipeline project.

The pipe line will be owned by TransCanada Corporation, which has $48 billion dollars in assets and is registered on the Toronto and New York stock exchanges. Privately owned refineries in Houston will refine and market the shipped or transported oil. In other words, is a profit-making activity, even if it brings employment for some, a public purpose? Lawsuits questioning whether such a pipeline should be considered a common carrier, such as a telephone line, and have the statutory support of eminent domain, have been filed in the state of Texas.

If the power of eminent domain is not available, directly or indirectly, to a company to secure necessary rights of way for the construction of a pipeline, it is argued that private property owners could effectively thwart the pipeline's construction and thereby, among other things, hinder the achievement of energy security for the US, notwithstanding that the oil, as noted below is to be sold in the open market, which includes, but is not limited to, the United States. Such owners could simply refuse to make their land available for the pipeline, irrespective of the amount of compensation offered. This could theoretically make the construction of the pipeline impossible, and, in any event, more expensive and certainly delay or extend the time necessary for construction.

Many others are asking whether the risk of environmental contamination or pollution from an accidental oil spill, or a negligent one, is worth any compensation, not to mention the intense controversy concerning the potential environmental impact of the development of the Canadian tar sand oil fields themselves, which is not even within the jurisdiction of the United States to determine. Others have raised the issue of whether permitting the export of the refined tar sands oil from Houston refineries is in the US national interest since permitting such export will not improve US energy security.

In short, the overriding question that is being asked is whether it is in the national interest of the US to be simply a transit nation for Canadian tar sands oil, ironically without even charging transit fees? The specific question is what benefits are there in fact for the US and also for its citizens who are directly impacted by the construction of the pipeline?

Interestingly, the questions being raised by civil society in the US are in essence the same that every transit nation must address in considering a transit pipeline. What are the benefits for the nation, as well as for the people impacted by a transit pipeline, and what are the costs, which, after construction, invariably could be environmental costs, especially if there is ever a spill or explosion? In the case of Georgia, the BTC pipeline is constructed through a number of ear thquake faults and skir ts the Borjomi fresh water basin of Georgia. The threat of environmental damage is therefore ever present.

In addition to environmental damage, there are other potential costs for transit nations. People normally have to be relocated to permit pipeline construction with the consequence that their lives will have to be disrupted in order to achieve what has been politically declared a greater national good. What is fair and adequate compensation for people who have to be relocated or otherwise impacted, which question is exacerbated when the transported natural resource is not even a domestic resource?

Moreover, the energy pipelines in many parts of the world have become a magnet for terrorist action. This is true, for example, in the case of the Iraq-Turkish pipelines. Also when a pipeline from Iraq to Turkey is bombed, Turkey must endure negative press from around the world questioning its security practices. The cost of security, of protecting, these pipelines, must therefore be taken into account and factored in, not to mention the cost in manpower and of lost and disrupted lives.

The reward for Turkey in having such pipelines has clearly been political. Turkey is achieving its strategic vision by becoming an important energy hub for Europe, which may yet be Turkey's ticket to EU membership, assuming, of course, that Turkey still wants membership. Also Turkey has benefited commercially and economically from those pipelines, as well as the prospective pipelines from Kurdistan region of Iraq, as Turkey has successes in securing energy for its industries and developing a refinery industry.

The general assessment, by applying a cost-benefit approach, is that Turkey benefits politically and economically from being a pipeline transit nation. But such success has only been achieved as a result of a well thought out strategy, over time and though perseverance. And such success was never assured and has not come without cost.

It is important to realize, acknowledge and respect the fact that a transit nation bears costs, and often considerable costs, by accommodating the construction and the operation of a transit pipeline within its borders. Another nation, the producing nation, will earn the preponderance of the profits in the development of its oil and/or gas fields. If the transit nation as a whole, and its citizens who are impacted by the pipeline, do not adequately, and one can even say handsomely, benefit, the transit nation will potentially be a weak link in the energy supply chain.

One can only speculate if Georgia had received pipeline transit fees in amounts that could significantly support the cost of government operations and contribute to powering its economy, would Georgia have been incentivised to focus more on diplomacy in settling its disagreements with Russia and thereby avoid the devastating 2008 war. Although Nigeria is not a pipeline transit nation, it does stand as an example of the principle that national energy extraction and development, as well as the construction and maintenance of the ancillary pipelines, require societal acceptance, a social license, to operate.

In other words, a society, including especially the impacted communities, must benefit from the sacrifices they are asked to make for a greater public or common good. They must also feel they have "ownership," in the philosophical sense, of the projects that impact them. The concept of ownership of course needs clear articulation, even more so in the case, where the overwhelming benefits of a project, such as a transit pipeline, are outside of one's own country.

Transit nations can only successfully function as such if they, and their citizens, become better off for, benefit by, being a transit nation. Transit nations should not be viewed as merely a means to an end, the closing of a link in the energy supply chain. Transit nations, and their citizens, should be recognized for their sacrifices, respected for their contribution, and both acknowledged and accepted as integral partners in the energy supply chain. A sustainable deal, which in the case of a pipeline needs to last a lifetime, requires such benefit as well as such respect.