History of Government Involvement
Most major pipelines have some dimension of government control. First and foremost, the permanent use of land for a pipeline requires state approval. The potential of market failure also traditionally requires government intervention. And in many cases, there is simply a legacy of government involvement. Oil and gas pipelines historically were seen, and often still are, as projects of national strategic importance. As such, their construction and operation often have been undertaken by state-owned companies. Several consequences follow:
- There are questions of what a government should ask in return for ceding sovereignty over a pipeline route, and what the rights and obligations of the government should be in such situations. Invariably, regulations relating to pipelines exist in the legislative armory available to government. These range from health, safety, and environment (HSE) regulation to access regulation affecting the profitability and returns associated with the pipeline. Key issues are the roles to be played, the division of work between government and the private investor with regard to the sharing of risk and rent, and avoidance of the obsolescing bargain.
- There may be fundamental differences of interest between the public and private players involved. A private investor seeks to earn interest or profit commensurate with the risks and the alternative investments available. A government, in contrast, must protect the well-being of its citizens, improve economic prosperity, maintain public order, guard sovereignty, and return a maximum of revenues to the state budget.
- The lack of separation between the political and commercial roles of a sovereign government can make the government vulnerable in its commercial role to noncommercial considerations. This can potentially introduce distortions to the economy and reduce economic efficiency. A pipeline is simply a means of moving valuable oil or gas from one point to another. Its value is therefore intimately tied up with the value of what is being moved. In addition, pipeline control can have serious implications for competition at both ends of the line. It is not uncommon for a vertically integrated pipeline owner to try to restrict access to the line by potential third party users to limit competition among producers and consumers. It is no coincidence that Standard Oil, which came to dominate the US oil industry in the 19-th century, began as a pipeline company that gradually gained control of the oilfields upstream and the refineries downstream. The consequences inherent in this situation include the following:
- There is profit associated with the operation of a pipeline as a normal commercial transaction, and the project must earn this profit to be viable. However, the presence of profit is complicated because the gas and (especially) oil projects of which the pipeline may be an integral part also attract rent. This rent must be shared between the interested parties, but there is no obvious, objective way to divide rent. Pipelines are highly vulnerable. If any part of the pipeline is unable to operate, in the absence of an immediate alternative means of transportation all the rent is postponed. Interruptions to operations not only threaten the return on the pipeline but also may jeopardize the return (profit and rent) on investments at both ends.
- The rent to be shared is likely to be volatile, depending on the rate of throughput of the line but more obviously on the vagaries of pricing of the oil or gas being transported.
- The competitive implications of pipeline control present the potential for market failure and hence government intervention.