For decades now, underinvestment in Russian gas infrastructure has reduced its reliability and operational efficiency. In addition to an increased risk of accidents, the repairs, maintenance, upgrades and replacements resulting from this physical deterioration are a major cost element.

 

For Gazprom, the largest extractor of natural gas in the world, the implications aren’t pretty. It is unlikely that Gazprom has the financial wherewithal to simultaneously invest in new projects, refurbish existing infrastructure and expand overseas in countries like Nigeria and Bolivia.

For instance, on June 22, a gas leak from a large-diameter, high-pressure gas pipeline in Moscow caused the closure of Ostashkovskoe highway, resulting in 10-mile traffic jams and the need to reconfigure gas flow via bypass lines. This was a lucky outcome, as just weeks earlier another major gas leak resulted in an explosion and a fire that threw 600-foot flames up in the air for hours, seriously injuring four people, scorching cars and buildings, and cutting phone service. A cursory listing of other “big booms” on main gas pipelines in Russia and other Eurasian countries includes:

Furthermore, this list could easily be expanded. While such accidents might appear commonplace, even inevitable, there are precautions to keep in mind:

  • Russian sources indicate that the average wear and tear of gas transportation facilities in Russia exceeds 50% of their design life. During recent years, construction of new facilities has slowed down. Over the last decade, Gazprom has spent on average only 29% of the amount required to update or replace obsolete pipes, compressor stations and other facilities, focusing mostly on large diameter (1020-1420mm) lines.
  • Insulation is deteriorating, and corrosion is a major problem. On branch lines, the design life of insulation is 15 years, and older main line systems have insulation of similar quality, compelling Gazprom to adopt a highly unrealistic program of replacing insulation on all the main lines by 2010. In 2000, there were 0.21 major failures per 1000km of large diameter main gas lines in Russia, but when increased corrosion on aging lines is taken into account, the expected frequency is 0.6 failures per 1000km per year. This contrasts with Gazprom’s reports that the rate has stabilized over the past three years at an annual level of 0.11 to 0.13 failures per 1000km.
  • The reasons for failures in the main gas lines in Russia are radically different from those in the U.S. and Europe. In Russia, stress-induced corrosion cracking and poor pipe welding at the factory prevail (62 and 22 percent respectively, or nearly 85% of total failures), while in the U.S. and Europe, the main reason for failure is external impact (damage by digging, landslides, etc.).

Gazprom itself lists among the main risks affecting its operations (gas exploration, production, and transportation activities) the “adverse effects of various factors including equipment damage or failure, possible problems in technological processes, as well as decrease in production volumes below the expected production and efficiency levels.” The company increased pipe monitoring and inspection, but it has yet to introduce a comprehensive pipeline integrity management system similar to the ones routinely used in the U.S. and EU.

Another Russian source puts the cost of refurbishing main gas lines at $25-28 million per kilometer and the capital expenditure needed just to prevent Russia’s pipeline system (both gas and oil) from further deterioration at $7.5 billion annually. To reduce system wear and tear by 50%, at least $120 billion will have to be invested over the next 10 years. Yet, in 2008, Gazprom spent just 35.8 billion Rubles (about $1.4 billion) on the reconstruction and technical refurbishment of its gas transportation system – only 20% of the amount required to stop further deterioration and about eight times smaller than the amount needed for actual improvement.

Luckily, the economic downturn has resulted in reduced demand for gas on Gazprom’s markets, which means that an aging, poorly maintained infrastructure can cope – for the time being. Once demand perks up, new fields will need to be developed quickly at the same time as replacements and upgrades in infrastructure.

But Gazprom’s budgets are already strained; the policies that discourage investment in Russia’s upstream and midstream gas sectors do not help either. There will likely be more booming gas in Eurasia – literally. An increase in the cost of gas supply in Eurasia, due to decades of mismanagement and underinvestment, should also be expected. And, most importantly, the likelihood of a quick fix is slim: when policies above the ground are skewed, it is difficult to improve infrastructure under the ground. For Europe and the transatlantic community, all this further reinforces the need for diversification of the gas supply by source and by route.

Boyko Nitzov is Dinu Patriciu Fellow for Transatlantic Energy Security and Director of the Eurasia Energy Center at the Atlantic Council of the United States. Miklos Panyi and Emin Mamedyarov, interns with the Eurasia Energy Center, contributed to this article.

Energy & Environment