Gas without borders

Despite American displeasure, with big stakes involved, India and Pakistan should stand firm on the Iran gas pipeline

RK Batra Delhi

The Iran-Pakistan-India (IPI) gas pipeline was first mooted in 1989 by Dr RK Pachauri, Director Gen-eral of TERI in India, and Dr AS Ardekani of Iran in 1989. Iran has the second largest gas reserves in the world. It made sense to supply gas to India which was then gas deficit and still is. The main problem was that Pakistan would be a transit country and relations between India and Pakistan seemed to go up and down with the tide. The main worry was that Pakistan could interfere and stop the flow of gas to India, thus holding India hostage. This was notwithstanding the fact that the Indus Water Treaty between the two countries has operated smoothly, to the extent that in the public domain there is hardly any discussion on it. It was the rocky relationship between the two countries, basically on Kashmir, that stymied any progress for the next 15 years.  

Matters took a positive turn after Pakistan discovered that it would soon be running short of gas arising from extensive development of its natural gas market and limited domestic resources. There was a revival of interest, including the first detailed assessment of the project by the Anglo-Australian company BHP Billiton in 2003. As conceived by BHP Billiton (see map), a 44 inch pipeline has to be laid from Assaluyah on the Iranian coast, from where gas from the South Pars field would be pumped 1,115 km across Iranian territory to the Pakistan border and a further 760 km through Pakistan to the Indian border. At a distance 70 km short of the Indian border, the pipeline would link up with Pakistan's own gas network, the Sui Northern Gas Pipeline Ltd (SNGPL) as well as its southern counterpart before entering India. Within India, a further 900 km would be required to connect with the north Indian market. It was anticipated that at its full capacity Pakistan would use about 60 Million Metric Standard Cubic Meter per Day (MMSCMD) and India 90 MMSCMD. The total cost of the project was estimated at $4 billion.   

Arising from the above developments, India's security concerns abated as Pakistan now had a stake in the smooth operation of the pipeline. India's formal commitment to the project was made by Prime Minister Manmohan Singh in September 2004. Despite the unrest in Baluchistan, where Pakistan's own gas lines from the Sui gasfield were regularly blown up by insurgents, it was felt that the project could go forward, provided certain mea-sures were taken to physically protect the pipeline and, if breached, to repair it quickly and at short notice. India has had its own crude oil pipelines blown up in Assam from time to time, and though inconvenient, the situation has been manageable.

Since 2004, while discussions on a bilateral or trilateral basis between the three countries made some progress, there have been road-blocks and changes in the base numbers and costs. First BHP Billiton revised the cost to around $7 billion because of increase in steel prices and diameter of the pipeline. Then it was rumored that Pakistan was demanding a transit fee as high as $700 million though this was subsequently denied. Meanwhile, a contract that India had entered into for supply of LNG from Iran got unstuck because Iran claimed that it has not been given the final seal of approval by the Supreme Economic Council.

The fact that gas prices had gone up substantially in the international market does not appear to be a mere coincidence. This brings into question the sanctity of contracts concluded with Iran, especially as the pipeline contract, despite any commercial agreement between corporate parties, will again need to be approved by the Supreme Economic Council.  

In India, two LNG terminals have been set up and gas is flowing smoothly through these terminals to consumers, thereby making up a part of the large gas deficit that India is facing. Also, new and large discoveries have been made on the east coast in the KG Basin, with promise of on-land deliveries by mid-2008. In the case of Pakistan, there are no such alleviating options and expensive fuel oil continues to be used for generating power, which could be substituted by gas.

What has been surprising is that during the whole of this period there were no discussions on the price of gas, something that should have been the first item on the agenda, well before discussions on the modalities of delivery. This has benefited Iran because the price of gas at the Indian border is now projected at around $5/ One Billion British Thermal Unit (MMBtu) against an earlier expectation of around $2/MMBtu, excluding transit and transportation fees payable to Pakistan. This latter charge arises out of the fact that normally transnational pipelines have one owner/operator but Iran has proposed that each country build its own section of the pipeline. This is not a satisfactory arrangement in terms of operation of the entire network, obtaining international finance and gaining the confidence of customers in terms of reliability of supply. 

Besides, there has been a change on the Iranian side. It has laid a pipeline IGAT-7 for domestic use from Assaluyah to Iranshahr, which will be extended 100 km to the Pakistan border to meet Pakistan and India's requirement. The spare capacity of this pipeline is 60 MMSCMD and the availability stands reduced to 30 MMSCMD for each country. 

In the case of India this is one-third of what was originally planned, which, perhaps, is just as well, as India now has other sources of gas. From an energy security angle, this reduces the dependence on Iranian supplies. Once a gas grid is built within the country this will assure customers of alternative supply options. Strangely, through all these developments, the cost of the pipeline continues to be touted at $7 billion despite its length in Iran having been reduced by about 1,000 km. 

Then there is the issue of gas demand/supply balance for India as projected by the working group for formulation of the 11th Five Year Plan for 2011/12 (see box). The demand numbers have been drawn up based on broad parameters of economic growth and conversion of all naphtha-based fertilizer plants to gas. The high demand for gas in the power sector (despite questions of 'affordability') could well be overstated as anticipated gas prices have not been taken into account.

On the supply side a lot will depend on the extent to which the KG Basin discoveries by Reliance and other companies can be brought onshore and marketed through pipelines. If these numbers are assumed to be realistic, the new LNG plants that are proposed and existing gas plants after expansion could supply as much as 83 MMSCMD leaving just six MMSCMD by the pipeline from Iran, which may be commissioned only after 2011/12. It is vital that these broad numbers are subject to a reality check and scenarios be drawn up for demand at various price levels not only for natural gas but also competing fuels.

In constructing the pipeline, Iran's contribution will be restricted to extending the IGAT-7 pipeline by just 100 km. Pakistan will carry the biggest risk as the capacity of its section of the pipeline will need to meet India's as well as its own requirement, that is, 60 MMSCMD. In the framework agreement that is to be drawn up between the three countries in June 2007, Pakistan will be well within its rights to ask India for a 'take or pay' clause. India could also have a problem unless 'take or pay' contracts are entered into with Indian consumers by the importing entity. Otherwise, we might find ourselves in a situation where we have the IPI pipeline but very little demand, against a supply of 30 MMSCMD. 

Finally, there is the American view of not favouring the IPI pipeline while making the impractical suggestion that nuclear energy can meet all our needs. Much will depend on how firm both India and Pakistan stand on this issue. For whatever reason, in the event the pipeline does not come through (which will be a pity), Iran will use the gas allocated to the pipeline for enhanced recovery of oil from its ageing oilfields, while India would pursue the KG Basin projects and the setting up of LNG terminals more vigorously. It is Pakistan which stands to lose the most, as it has had no major gas finds in the recent past and has not yet started work on an LNG terminal.  

The writer is Distinguished Fellow at TERI. The views expressed are his own