William E Browning, Thomas J Dimitroff

4. Nine key areas of risk

Over the last few years, there has been an increasing awareness that sovereign states
(through wholly state-owned entities), as opposed to the private sector, control the
overwhelming majority of oil and gas reserves. Accordingly, we see a strong trend for
states to take the lead in the development, construction and operation of future
trans-boundary pipeline developments. Nevertheless, we believe that the private
sector will retain a key role in the majority of these projects by contributing
investment, unparalleled access to downstream marketing and distribution, project
management, technology and knowledge of how to implement complex
and sustainable projects outside home jurisdictions. In any event, regardless of
whether state or private-sector investors take the lead on future projects, the array
of risks posed to these new developments will grow. Moreover, these increasing
risks will not discriminate between the public and private sectors. Therefore,
regardless of mitigation techniques, nine fundamental areas of risk in any
transborder pipeline will remain and each will be examined below through the lens
of BakuTbilisiCeyhan.

4.1 Commercial
BakuTbilisiCeyhan is an excellent example of a commercially viable midstream
development supported by a world-class upstream resource, creating a compelling
private-sector investment opportunity. As a basic premise, pipeline developments
must be robust commercially both on a standalone basis (ie, as revenue-generating
businesses in their own right) and as a tool implemented to monetise the resource
base underpinning the project.17 We have seen a tendency on the part of states
occasionally to promote projects that may have arguable local and regional benefits,
but that simply cannot achieve success given the dearth of supply or the existence of
competing, established pipeline or other export possibilities.18 Pipelines of any
significant scale will likely have a monopolistic feature that will be the bedrock of
their success; therefore, in regions that host alternative transportation and transit
possibilities, the likely success of large-scale greenfield pipeline developments that
lack a clear revenue steam whether through a dedicated supply source or take-or-pay
or ship-or-pay commitments from creditable shippers is questionable.19
In terms of other key commercial issues, the structuring of business models for
transboundary pipelines is tending to move away from the purely private-sector
producer pipeline model. Increasingly, investor/developers will be required to

17 Note that while BakuTbilisiCeyhan is an example of a pipeline which is underpinned by a particular

supply source (the AzeriChiragGuneshli oil field in the Azerbaijan sector of the Caspian Sea), there are
numerous examples of commercial pipelines that are not necessarily tied to a single field or supply
source for example, the planned Burgas-Alexandropolous oil pipeline (which will bypass the Turkish
Straits). In this regard, note that the commercial viability of an oil or gas pipeline can be underpinned
by take-or-pay or ship-or-pay commitments from creditworthy shippers (rather than a multiple-field
commitment as in the case of BTC).
18 For example, consider the OdessaBrody oil pipeline and the associated Samartia Consortium.
19 For example, producer pipelines are particularly suspect in the context of the European Unions
competition directives and regulations, which appear to provide for few exceptions that would exempt
a producer pipeline from the strictures of third-party access and tariff regulation. See Directive
2003/55/EC of the European Parliament and Council of June 26 2003 concerning common rules for the
internal market in natural gas.

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