TAPI – Still a Distant Dream

While India’s participation in the Iran-Pakistan-India (IPI) gas pipeline project has all but been written off, the focus is now on the negotiations on the alternate Turkmenistan-Afghanistan-Pakistan-India (TAPI) project, which envisages delivery of some 90 million metric cubic metres per day (mmcmd) of gas from Turkmenistan to South Asia. Representatives of the four participating countries met for the eighth round of the Ministerial-level Steering Committee of TAPI in New Delhi on April 28, 2011, where it was agreed that the Gas Sales Purchase Agreement (GSPA) between the four countries would be finalized and signed by the end of July. Simultaneously, the Technical Working Group (TWG), comprising representatives from the four countries, also met to discuss the various provisions of the GSPA and to try and resolve “outstanding issues” with regard to the same by the end of June. The TWG also finalized the Terms of Reference of the Transaction Advisor, who would facilitate the formation of the consortium – comprising technically competent and financially capable international companies – for the execution of the project.

Although a lot of optimism had been generated about the project among the TAPI project partners as well as its designated lead developer – the Asian Development Bank (ADB), one cannot but help wonder whether this project too will meet the same fate as the IPI project, given the numerous problems associated with its successful completion.

First, as in the case of the IPI project, the route of the pipeline remains controversial. The nearly 1,700 km pipeline will originate from Turkmenistan’s Daulatabad gas field, and transit some 730 km through Herat, Helmand and Kandahar in Afghanistan, to Quetta and Multan in Pakistan, and on to Fazilka in India. Given the continuing insurgency in Afghanistan, concerns over the security of the pipeline through that country remain, and will continue to persist. While the presence of NATO troops in Afghanistan may succeed in securing the route, how long can they be expected to remain in Afghanistan, and what will happen once they do withdraw? Now, with the assassination of Osama bin Laden, a withdrawal from Afghanistan by US troops can be expected, given that the mission in Afghanistan was to defeat al-Qaeda and, with bin Laden’s death, the mission can be said to be complete.

Neither is the 800 km section of the pipeline in Pakistan any more secure. Part of the line will pass through Balochistan, where the insurgency has intensified. The fact that domestic pipelines through Balochistan are being blown up every other day, affecting supplies throughout the province, it is unlikely that an international project will be spared by the insurgents. Moreover, international sponsors and financiers would be unwilling to finance a project whose security is questionable.

Thirdly, doubts persist over the sustainability of gas supplies from Turkmenistan. Given that Turkmenistan has signed agreements with both Iran and China to increase existing supplies to these markets, and is also the largest supplier of natural gas to Russia’s Gazprom, questions have arisen whether it will be able to meet its commitments for TAPI. Though Turkmenistan claims that its gas export potential has increased following the discovery of the giant South Yolotan field, which holds 212 trillion cubic feet of recoverable gas, approximately equal to 90 per cent of the US’ proven reserves, its TAPI partners have demanded third party certification of its claimed reserves. As per the agreement, Turkmenistan will supply 90 mmcmd of gas for TAPI, with 38 mmcmd each going to Pakistan and India and the rest to Afghanistan.

Moreover, Turkmenistan’s gas sector suffers from several constraints, including lack of financial resources and technical capability to develop new projects. The country also lacks adequate pipeline network infrastructure to deliver gas to its markets, and continues to be dependent on Russia’s network for exports to the West. As a result, according to some experts, it is unlikely that it will be able to increase its export volumes substantially over the next 10 years.

Finally, differences over the pricing of the gas as well as transit fees have arisen between India and Turkmenistan. The recent inter-ministerial meeting apparently ended in a stalemate, with India expressing its unwillingness to pay the price proposed by Turkmenistan, as it would be higher than the price of liquefied natural gas (LNG). According to reports, India is willing to pay about USD 12.67 per million metric British Thermal Units (mmBTU) of gas, while Turkmenistan is asking for around USD 14-15 per mmBTU. If India can import LNG more cheaply than the Turkmen gas, it would prefer to opt for the former.

Despite these problems, if the pipeline does succeed in being constructed, it will be due to the US’ uncompromising support for the project. While Washington’s raison d’etre is that it will help stabilise Afghanistan as well as assist the country in its development, not least by allowing it to earn around USD 300 million per annum in transit fees, it would also allow the Central Asian countries to find an alternate market in the east and thereby lessen their dependence on Russia as well as feed the energy-starved South Asian nations. However, the US’ main objective is to ensure that the IPI project is effectively killed, thus denying Tehran much-needed revenues for its nuclear programme that will accrue from selling gas to an expanding South Asian market. This is not the first time that the US has pushed through a pipeline project which had appeared unfeasible both from political and business perspectives. In 2005, despite substantial opposition by business and political circles in both the US and the Caspian states, the hugely expensive and logistically challenging BTC pipeline from Baku in Azerbaijan to Ceyhan in Turkey, transiting a fractious Georgia, was built by a 11-member consortium led by BP under pressure from the US government. The reason: Washington was seeking to provide a route that would not only circumvent transiting through Russian territory and break Moscow’s stranglehold over the European gas market, but would also assist in diminishing Russia’s strategic hold over the Caspian region. To overcome the reluctance of business in underwriting such a costly project and whose economic viability was questionable, the US government made financing from government agencies, such as the Overseas Private Investment Corporation (OPIC) and the US Export-Import Development Bank, available.

However, like in the case of the IPI, most experts are sceptical about TAPI becoming a reality, given the myriad constraints and political problems that exist among the partners. While India continues to be wary about the security of the pipeline traversing through Pakistan, it will have a hard time selling gas from this project, particularly when it has access to more cost-effective alternatives, be it from the IPI project, LNG imports or from its own recent gas finds. If the project does see the light of day, it will be due to the huge US support for the project as well as its own larger political and strategic considerations.