Pipelines and Transit Fees

Overview
Pipeline companies do not usually own the products they are transporting. Pipeline companies are simply intermediaries that move the product from the producers and shippers to the marketplace. Oil exporting countries pay pipeline companies for transporting their product from oil fields to refineries, manufacturers, and distribution centers. For the usage of pipelines running through various countries, transit fees must be paid.

Transit Fee Negotiations
Transit fees are usually decided by the countries that oil pipelines cross, and are thus an important source of revenue for the ‘host’ government. For example, a country like Turkey which serves as a gateway for Caspian oil into Europe, has a huge strategic importance. Turkey is positioned as a hub for energy transit and is in a strong negotiating position to extract higher transit fees. The Southern Corridor runs through Turkey en route to continental Europe and is a vital transport route for energy. According to SOCAR, transit fees are intended to cover capital expenditure, operating expenditure and ‘a reasonable profit’.

As of August 2012, there were reports that after months of political wrangling and border tensions, the two Sudans reached an agreement on transit fees. The highly divisive issue almost saw the two countries slide back into civil war. After pressure from the US Secretary of State Hilary Clinton, South Sudan, according to the NY Times agreed to increase the rate paid to Sudan which controls the export pipelines. The majority of the oil in the now divided country lies in South Sudan. Failure to reach an agreement over how much was to be paid in transit fees in January 2012 saw South Sudan shut down production, hitting both economies hard.

Future Importance of Transit Pipelines
According to a Chatham House publication, in future, global oil and gas markets will need more transit pipelines if expectations of future demand are to be met. Reserves close to traditional markets are being depleted. As oil and gas consumption continues to grow, especially in the emerging-markets, previously untapped sources of oil and gas will be required. Much of this oil is likely to come from the Caspian region which is landlocked. Transit pipelines will be necessary to meet increases in demand.

Potential for Conflict
For any transit pipeline agreement there is no overarching governing, and so no obvious mechanism for its implementation. Thus 'sovereign' states can simply ignore what is after all only a piece of paper', although such unilateral action is not without consequences. There is also no objective or fair of negotiating transit fees. Often, it depends on the relative bargaining power in the negotiation process between the transit government and the pipeline company.

Sudan and South Sudan
"Main article: Pipelines and Transit Fees in Sudan and South Sudan"

Arab Republic of Egypt
"Main article: Transit fees in Egypt"