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Extracting Transparency

David L. Goldwyn

The construction of energy infrastructure in the developing world, from oil pipelines to power plants, is a lightning rod for international and domestic criticism. Critics fear that governments will steal natural resource wealth, disregard the environmental impact of pipelines or other extraction methods, destabilize neighbors with their new wealth, or stir domestic unrest over allocation of resource revenues.1 Although these problems are indeed real and recurrent, the true fault lies with bad governments and bad governance, not with the infrastructure itself. Nevertheless, the need to create wealth in the developing world and to deliver energy to the two billion people who lack access to electric power is greater than ever. Public policy should, therefore, be aimed at encouraging or obliging nations rich in non-renewable resources to commit to transparency in public finance.2 This would include publishing the sources and amounts of government revenue, disbursement, and borrowing practices.3

In this issue, our authors examine the impact of energy infrastructure on political stability. Aude Delescluse looks at the landmark Chad-Cameroon pipeline to assess whether the World Bank-monitored framework for channeling Chad's oil revenues into economic development can be a model for other nations. Toufiq Siddiqi examines the potential for new oil and gas pipelines across South Asia to forge integration in a region historically beset by deep distrust between neighbors. Fiona Hill looks to the Caspian region and the new oil and gas pipelines from Baku, Azerbaijan to Ceyhan, Turkey to assess whether new infrastructure built by Western companies will be a springboard for the development of these nations or a magnet for internal rivalry over the allocation of hydrocarbon revenues. Edward Chow examines Russia's rapid rise as an oil power and the evolving tensions between the government's monopoly on transportation infrastructure and the desire of Russian and international companies to ensure they can export the oil they produce.

In each case, new energy infrastructure is viewed as a potential financial cure for nations that need revenue to alleviate poverty. Yet, in each case, distrust of national governments or deep disagreements among the governed both challenge the ability of private actors to build and operate the infrastructure in question, and create potential for new wealth to become a source of conflict in itself. For any civil society to have informed views about the costs and benefits of energy infrastructure, and the wealth it can create, governments must be transparent about the wealth that can be obtained and how it will be spent. For this reason, this article addresses this fundamental concept of transparency.

David L. Goldwyn is President of Goldwyn International Strategies, LLC. He was Assistant Secretary of Energy for International Affairs in the second Clinton Administration.

Russian Pipelines:
Back to the Future?

Edward C. Chow

In Soviet mythology, the health of the country's economy, national power, and influence in the world are directly linked to the performance of its oil and gas industry. It is ironic, then, that peak oil and gas production in the U.S.S.R. was reached in the late 1980s just as economic collapse brought political disintegration. At the time, the Soviet Union was the biggest oil producer in the world, generating 12 million barrels per day, 11 million in Russia alone. Peak consumption at this time was over 8 million barrels per day in the Soviet Union and 5 million barrels per day in Russia. Considerable volumes of crude oil and petroleum products were exported by the Soviet Union, first to other countries in the Eastern Bloc, and then approximately 3 million barrels per day to those outside of the Comecon.1 Oil and gas were part of the important barter trade in the Communist block and provided economic leverage for Russia in maintaining cohesion of the sphere. Moreover, they served as principal sources of hard currency and geopolitical assets in the Soviet Union's relationship with the outside world.

Given the remote location of many Russian production fields, pipelines have always played a critical role in transporting oil and gas. The construction of a vast system of pipelines was often cited as a crowning achievement of the Soviet oil and gas industry. They were designed to move production primarily within the Soviet Union and Eastern Europe and secondarily for export to the West.

Today's Russia inherited from the U.S.S.R. 46,000 km of these crude oil pipelines, 15,000 km of petroleum product pipelines, and 152,000 km of natural gas pipelines, almost all of which are still owned and controlled by the state. By contrast, the United States, with only 55 percent of Russia's land mass, has over four times more oil pipelines and two times more natural gas pipelines, almost none of which are owned or controlled by the government.2

The Russian oil industry privatized and modernized throughout the mid-1990s. A more competitive cost structure after the ruble collapse of 1998, improved property rights protection leading to greater reinvestment, and the introduction of Western technology and business practice allowed Russian oil production to recover from a low of 6 million barrels per day to nearly 8 million barrels per day. This is still far below the level achieved in the peak production year of 1988. Nevertheless, domestic oil consumption has dropped to only about 2? million barrels per day with lower economic activity and better energy efficiency. As a result, much more oil is being exported today, and Russia has become the second largest oil exporter in the world after Saudi Arabia.3

Russian oil production is forecast to maintain this rapid growth while domestic consumption is expected to be relatively flat in spite of better economic performance. The existing pipeline system was, however, designed to move oil to now diminished domestic markets and less desirable markets in Eastern Europe. Thus, Russia is desperately in need of new export facilities-large-diameter pipelines and deep-water marine terminals-to transport increasing volumes of oil to higher-value world markets in the large ocean-going tankers favored in international trade.

Edward C. Chow is Visiting Scholar at the Carnegie Endowment for International Peace.

Chad-Cameroon:
A Model Pipeline?

Aude Delescluse

In early October, Chad joined the club of oil-exporting countries as a result of a unique agreement between its government, a consortium of oil companies, and the World Bank. This partnership, known as the Chad-Cameroon Petroleum Development and Pipeline Project, could change the destiny of Chad and its 7.5 million inhabitants. The project has generated debate regarding whether it could serve as a model for future projects: if successful, not only would it significantly reduce poverty in Chad, it could also encourage other mineral-rich developing countries, multinationals, and aid agencies to emulate it. Moreover, this unique pipeline could overcome the so-called "oil curse" that oil-exporting countries have traditionally suffered by ensuring that petroleum revenues are channeled towards national development. Perhaps due to the importance this project plays in an economy with few natural resource alternatives to oil, Chad has embarked on a path with the World Bank to minimize the risk to private investors. The country also committed to an ambitious program of reforms, including a broad-based consultative process to feed into project design, an oil revenue management plan, capacity building and structural reforms, and the creation of external controls. Nevertheless, the initiative is not without its challenges. Indeed, guaranteeing that oversight mechanisms and good governance standards are realized and enforced, as well as ensuring that political stability is maintained in a country with a history of political volatility are essential to the project's success. The future holds promise for the people of Chad and their government if, in partnership with the foreign entities, they prove able to reap the benefits of this lucrative opportunity. The lessons learned as a result may inform, and herald the onset of, a new generation of development projects.

Aude Delescluse works for the Agence Francaise de Developpement in Lebanon. Previously, she was an energy consultant for the World Bank.


Pipelines in the Caspian:
Catalyst or Cure-all?

Fiona Hill

With questions over future prospects for Iraqi oil-the world's second largest reserves after Saudi Arabia-at the forefront of attention, along with widespread instability in the Middle East, the Caspian Basin and its oil and natural gas resources are back on the agenda. The Caspian, along with Russia, West Africa, and Canada, where new discoveries in the tar sands have been made, are the great new potential sources of world energy. These regions are increasingly vital to addressing the need for new energy suppliers and bypassing OPEC members and Persian Gulf states. Although these regions pose significant difficulties in terms of production and export possibilities and would not necessarily be competitive with the Persian Gulf under a low oil price regime, current high crude oil prices combined with the fact that Iraq's production potential will not be restored any time soon make them major commercial contenders.

In the Caspian Basin, the difficulty has never been one of supply-the region contains 17 to 33 billion barrels of proven oil reserves and around 232 trillion cubic feet of natural gas.1 It has always been one of overcoming the fact that the Caspian is a landlocked sea and of transporting energy resources to world markets. With the collapse of the Soviet Union, the region's limited energy pipeline infrastructure extended only across Russia. The new independent states of the Caucasus and Central Asia were locked into a single set of transportation options to the Black Sea and Europe. Oil and gas exports from Azerbaijan, Kazakhstan, and Turkmenistan required building new pipelines. The Caspian region therefore became a focal point in the 1990s, when the first international oil contracts were signed. Because of the sheer size of Caspian energy reserves, and the evident importance of export revenues for the future development of faltering regional economies, Caspian governments transformed pipelines from merely transportation projects into means to achieve political and social objectives. In public debates about Caspian pipelines at both regional and international levels, the commercial interests of companies investing in the actual energy production were sidelined and often seemed strangely secondary or marginal to other considerations.

The Baku-Tbilisi-Ceyhan pipeline project (BTC) provides the best example of this transformation.

Fiona Hill is Senior Fellow in the Foreign Policy Studies program at the Brookings Institution.

India and Pakistan:
Pipe Dream or Pipeline of Peace?

Toufiq A. Siddiqi

In spite of steady economic progress and accelerating rate of growth in India and Pakistan in recent years, their per capita income is still less than a tenth of that in the developed world.1 Continued economic growth is the key to eliminating poverty and maintaining stability on the Subcontinent. This growth, however, is dependent on access to affordable and reliable energy sources that are not available domestically. Many have begun to look to a natural gas pipeline from the rich fields of the Persian Gulf and Central Asia to the Subcontinent as a potential solution.

Even though the economic benefits provided by a pipeline are clear, there are immense political obstacles to such a project. A pipeline from Central Asia would have to pass through politically unstable Afghanistan, as well as Pakistan, whereas one from Iran or the Emirates would have to pass through most of Iran and Pakistan before reaching India, whose leaders fear that the pipeline would give economic leverage to Pakistan in any future political crisis. Others believe that a pipeline could serve as an important confidence-building measure and facilitate the improvement of relations between the two countries-a veritable "pipeline of peace." This article argues that measures could be taken to largely depoliticize the pipeline, and enable it to be built for the economic benefit of India, Pakistan, and the rest of the region. It could then serve as a building block of peace between these two hostile neighbors.

Toufiq A. Siddiqi is President of Global Environment and Energy in the 21st Century, Adjunct Senior Fellow at the East-West Center, and affiliate graduate faculty member at the University of Hawaii. He has been Regional Advisor for Energy at the United Nations ESCAP, Senior Fellow at the East-West Center, and Associate Professor at Indiana University, Bloomington.