CHOOSING THE FUTURE OF GAS PIPELINES IN SOUTH ASIA: IPI OR TAPI: American Chronicle

Safdar Jafri
April 23, 2008

The upcoming gas-related meetings in Islamabad and Delhi (starting 23rd April 2008) will be crucial for the future of gas delivery to Pakistan and India. The outcome of these meetings will determine the future course of economics, politics, inter-state relationships, economic cooperation and security status of the region as a whole. The stakes are high not just for India and Pakistan, the two roaring but short of energy economies of South Asia but also the economies of the Middle East and Central Asia while indirectly affecting the economies of China, Russia and the US. The first notion of building regional gas pipelines emerged with the proposal of IPI (Iran, Pakistan & India pipeline) in late 1990s. As it involved, India and Pakistan, experts also named it the 'Peace Pipeline' believing that economic interdepenence that this pipeline will create between the two will also ensure a peacful co-existence for the two rival states. However, several years which according to newly emerging proposal by Pakistan may turn into an IPC (Iran, Pakistan & China) pipeline, in case India pulls out of the deal and TAPI (Turkemenistan, Afghanistan, Pakistan & India pipeline). All these pipelines and the political and economical considerations of the states involved create a complex scenario that must be understood to both capture the whole scene as well as make a calculated guess as to which of these projects is more likely to materialize.The IPI project was conceptualized in 1989 when both India and Iran enjoyed relatively better terms with a democratic set up in Pakistan. The proposed project involves a gas pipeline from Assalouyeh in southern Iran through Baluchistan and Sindh provinces of Pakistan to India. The deal however received several set backs over wide ranging issues including the gas price and security of the pipeline from Pakistan. India and Pakistan finally agreed in February 2007 to pay Iran $4.93 per million British thermal units ($4.67/GJ) but some details relating to price ajustment remained open to further negotiation. The more than 1700 miles of pipeline would send 3.2 billion cubi feet per day of Iranian gas to Pakistan and 2.1 billion cubic feet per day to India by 2011. The project is presently expected to cost in the region of 7-8 billion dollars. Originally, Pakistan was to get a totla of 2.1 BCFD and India 3.2 BCFD, making a total gas supply of 5.3 BCFD. However, if India pulls out of the deal, then the pipeline's length would come down to 1600 kms and the gas volume to Pakistan would increase to 3.2 BCFD. The pipeline would initially transport 60 million cubi meters per day of gas, which would be equally shared between India and Pakistan. Since mid-2007 however India has been reluctant to participate in the meetings, which critics allege has been primarily due to the US pressure on India for not becoming a part of the deal to punish and isolate Iran over its nuclear enrichment and political hostilities with the US; the US has instead offered India a civil nuclear deal as a compensatory olive branch. Indian officials however argued that the real reason behind their foot dragging has been their concern for security of the pipeline through Pakistan and its restive province of Baluchistan as well as Iran's insistence that a clause for the revision of gas price every three years be incorporated into the agreement, which both India and Pakistan disagreed with.However, Pakistan's recent declarations that if India is not interested in the project, then they would consider bringing China in and converting it into a IPC (Iran, Pakistan & China) project has sent shockwaves to the Indian government. China has welcomed this proposal but has sought feasibility report, provided India fails to show further interest in the deal. A similar feasibility study carried out in 2005 concluded that such pipeline that would pass through the Karakoram Highway via Gilgit in Northern Pakistan, about 15,000 feet/4500 meter high, would be both a costly and technically challenging project. However, should India drop out of the project, then China would seriously look into making this proposal a reality. China has the necessary expertise, resources and of course, substantial economic interest in having such a gas pipeline entering its roaring and thus, gas-hungry economy. China has also enjoyed excellent relations with both Pakistan and Iran and is currently engaged in a number of development and energy related projects in the two countries. This indeed has caused concern in New Delhi and apparently India is joining the meeting being held in Islamabad on 23rd April with a revised sense of urgency, despite the US pressure. India's demand for gas has been sent soaring in the past few years and is estimated to be around 280 mcmd while domestic production is only around 190 mcmd. Pakistan's situation with regard to gas supply is relatively better as it is meeting more than 50% of its gas requirements from domestic supplies. China will certainly be watching the proceedings of these meetings quite closely. When the three sides, India, Pakistan and Iran, meet on 23rd April 2008 to discuss the pipeline further, they will not only be discussing the issue of signing of the Gas Sales Purchase Agreement (GSPA) which is likly to be signed when Iranian President Mahmoud Ahmadinejad visits Pakistan on 28th April 2008 but there will also be key outstanding issues to be ironed out. These key issues are:
1. Transit Fee: Paksitan is claiming a transit fee of $0.49 per million British thermal nit (mBtu) while India has offered $0.15 mBtu for providing both the right of way and the security of the pipeline. The gap between the demanded fee and the offer is too large to expect an easy arrival on a mutually acceptable transit fee. 2. Gas Price Revision: Iran is adamant that since gas prices are likely to fluctuate and most probably rise in the future, a clause must be incorporated in the agreement that the gas price must be revised every three years. Both India and Pakistan have opposed this proposal. However, it seems that it will be relatively easy to reach a common ground on this point.However, the above two are only the economic considerations connected to this project. There are also political considerations that are equally significant. US is strongly opposed to the IPI project and has instead insisted that both Pakistan and India pursue the TAPI project instead. Indeed, the objective is to isolate Iran and deny it any economic expansion in the region. This is no small consideration for the sort of influence that the US exerts in both Pakistan and India. While it is offering a lucrative civil nuclear deal to India, to Pakistan it continues to offer substantial amount of economic assistance. This brings us to the second project, namely TAPI. TAPI pipeline is planned to start from Daulatabad gasfield in Turkmenistan and end in India via Afghanistan and Pakistan. The project can complete in 2011-12 and will include a 56-inch diameter pipeline with at least 30 billion cubic meters of gas a year. The pipeline will b 2000 kilometers long and will pass through Multan in Pakistan. The project is expected to cost in the region of 6-7 billion dollars and is expected to carry 2 billion cubic feet of gas per day (20 billion cubic meters per year). India alone would be recieving half of the total gas transferred through this proposed pipeline. Although the parties involved, particularly India, did not seem very impressed with the project initially, a number of developments and studies have changed the mindset. These developments and studies indicate that not only TAPI is politically a more viable project, particularly the fact that the US is opposed to IPI and supports TAPI, it is also economically comparable with IPI project. Furthermore, the ADB(Asian Development Bank), which is actively engaged in a number of development programs in both India and Pakistan, has expressed its interest in financing the TAPI project. It has not shown the same interest in the IPI project.Nonetheless, the project is not without is obscales and concerns. Some of the major obstacles of TAPI are: 1. The pipeline passes through Afghanistan where the security situation is far from satisfactory. However, some experts believe that the windfall transit fees that the Afghanis would receive from the implementation of this project will engage their interest in form of jobs and progress and therefore, sabotaging and vandalism is less likely to happen. 2. Although Turkmenistan claims that it has gas reserves of more than 25 trillion cubic feet (708 billion cubic meters), these claims have not been verified and confirmed by any independent sources as yet. It is anticipated that when Turkmenistan will join the meetings in the last week of April 2008, it will come up with independent studies in this regard, confirming the actual size of the gas reserves.An overall review of the situation and the options available in gas pipelines, it seems that far less talked about TAPI project would take lead as compared to IPI that carries greater political price for both India and Pakistan as it involves Iran. Although Iran has insisted in the past, and rightly so, that its gas supplies has ample demand elsewhere, should India and Pakistan decide to call it quits on the project, it is also obvious that Iran is very eager on the project. This eagerness is clear from the recent visits by Iranian officials to Pakistan and the upcoming visit by the Iranian President Mahmoud Ahmadinejad to both Pakistan and India. It certainly wants to break from the pressure that the US is exerting on the regional powers such as Pakistan and India and its eagerness to see this project implemented successfully is a way to show its resisting power. In other words, Iran sees the IPI as both a source of valuable foreign exchange as well as scoring political points against the US and other Western powers that have been working hard to isolate this energy-rich state of the Middle East over its nuclear enrichment policy. However, both Pakistan and India may not show the same level of passion for the IPI project for the reasons illustrated above. They can both have the required levels of gas supplies through the TAPI project and yet reap the benefits of keeping the US happy by not implementing the IPI project. It will therefore be an uphill task for Iran to persuade Pakistan and particularly India to stick to IPI instead of TAPI. This can happen if Pakistan continues to drum the proposal of turning IPI into an IPC project which will keep India engaged in the IPI.The next few days will reveal the winner between the two equally viable gas pipeline projects or at least give a vague idea of what course the future of gas related policies will take in the region.

Original Link: http://www.americanchronicle.com/articles/59469