This semester I attended a couple of lectures given by Dr. Andrei Vavilov, an expert in the Russian natural gas industry. A major theme has been that due to contracting problems, a classic hold-up scenario, and the inability of politicians to negotiate, a bunch of unnecessary natural gas pipelines are being built. Mainly these pipelines are designed to put as few national borders as possible between Russian natural gas fields and the lucrative Western European market. Natural gas pipelines cost about 8 billion dollars per 1000 km. This is a huge waste of resources.

There are three current projects that fit this bill:

Nord-Stream: ~20 billion dollars
South-Stream: ~25-30 billion dollars
Nabucco Pipeline: ~15-20 billion dollars

The Nord-Stream project is set to be completed in 2012, and the South Stream project by 2015. The Nabucco Pipeline may or may not be built, but if it goes ahead it is planned to be operational by 2017.

Taking the upper bounds on the prices, we get 70 billion dollars. To put that in perspective, if it was divided evenly among all American, it would be 233 dollars a head. 70 billion dollars is enough to pay for a year of the war in Afghanistan.

The building of these excess pipelines is deadweight loss, and reflects pretty poorly on the governments involved in the negotiations. It is surprising more people haven't heard about this.

2 Responses to “Digging holes and filling them in, big time”

  1. Konstantin says:

    Yeah, after attending the seminar, I felt outraged. Partially I was outraged because of my ignorance. I have heard many times about these pipelines, but never asked myself about the true reasons of why they are being built. I guess most Russians and Ukrainians never ask themselves this question too.

  2. Petek says:

    Germans are obsessed with this topic in particular. It is said that Nabucco was providing another excuse for the Turkish military to patrol minority areas. Don't see why it would be different for the other streams, in reverse. For North and South, it allows Russia to continue to have major presence in EU regions. Great employment for the defense industry. Where's the loss?