Will opposition from Washington block a 1,600-mile gas pipeline connecting Iran, Pakistan, and India?
26 December 2005: Fortune
By Sonya Fatah
IF A PIPELINE IS EVER BUILT connecting Iran’s gas fields with India, it will have to run through the inhospitable desert terrain of Baluchistan. The news seeping out of Pakistan’s western province is rarely good: bombings of government properties, honor killings, al Qaeda hideouts. So it’s not surprising to hear Jamil Bugti, son of the leader of Baluchistan’s Bugti tribe and a critic of Pakistan’s government, rail against plans to build a pipeline through his homeland. “Baluchi nationalists,” he says, “have already said that there can be no guarantees for security.”
Baluchi nationalists are just one obstacle the proposed 1,600-mile, $7 billion pipeline will have to overcome. Others include the objections of the U.S., the cost of Iranian gas, the financing of the project, and the long-standing friction between India and Pakistan.
But there has never been a better time to launch such a project. India and Pakistan are both energy hungry and have galloping GDP growth rates in excess of 8% that are fueling unprecedented demand. Natural gas has been discovered in both countries, but the huge demand requires diversification of the variety and source of supplies. “India is producing substantially less than half the demand,” says Mani Shankar Aiyar, India’s Petroleum Minister and one of the chief architects of the pipeline plan. “Even if we assume a doubling [in domestic supply] in the course of 20 years, we’d still have less.”
Iran has a ready solution–it sits on the second-largest gas reserves in the world. And natural gas is a natural answer. The proposed pipeline would pump 5.6 billion cubic feet of gas a day by 2015, to be shared by India and Pakistan in a two-to-one ratio.
Since the Burma Oil Co. discovered the Sui fields in Baluchistan in the 1950s, Pakistan has developed a solid natural gas infrastructure, with more than 5,000 miles of mainline distribution systems. By contrast, India’s gas pipeline network is limited. But that hasn’t dampened the enthusiasm of India’s Petroleum Minister. “We are at the crossroads of the world’s largest gas reserves,” says Aiyar, who has jumped into the role of peace ambassador and energy-security visionary.
The vision for the pipeline is not a new one. Preliminary discussions began in 1995, when the United Nations Development Program hosted a conference in Singapore to discuss energy-security concerns in South Asia. The event was organized by Shirin Tahir-Kheli (now a special assistant to President George Bush) and Toufiq Siddiqi, siblings who were raised in both India and Pakistan. The two had begun the Balusa Group, a think tank set up to discuss potential areas of India-Pakistan collaboration. Among the participants at the Singapore conference was Aiyar, who, pointing to cooperation between Germany and France, advocated a similar atmosphere of cooperation between India and Pakistan to promote a joint pipeline.
A group of South Asia futurists who believe the region is facing a serious energy crisis have long shared this vision. But despite the Singapore meeting, attempts to turn it into reality have been undermined by political tensions that have persisted between India and Pakistan since the 1947 partition.
Pakistani, Indian, and Iranian petroleum officials say the pipeline is still on track. India has hired financial consultants Ernst & Young, and initial proposals regarding project structure and a transnational agreement are with government officials in Iran and Pakistan. Contractual agreements were supposed to have been finalized by the end of this year, and Aiyar had insisted the pipeline would be ready for construction soon after. But a meeting to approve the tripartite agreement scheduled for Dec. 31 has been postponed to January because of delays in Iran-Pakistan talks and the impact of the Oct. 8 earthquake in Kashmir.
U.S. opposition to doing business with Iran is also a factor. Pakistan, the weaker of the two states, has long been vulnerable to pressure from Washington. India points to its long-standing relationship with Iran, and its politicians have been making bold statements claiming that the U.S. cannot dictate Indian foreign relations. Still, the on-the-ground reality seems shakier. Take Indian Prime Minister Manmohan Singh’s comments following his visit in July to the U.S. Singh, known for rah-rahing the pipeline project at home, suddenly changed his tune and commented on the difficulty of financing the pipeline. Earlier in the year, while on an official visit to India, Secretary of State Condoleezza Rice made it clear that the U.S. did not encourage or appreciate economic partnerships with Iran.
But the biggest hurdle may be the pipeline’s economic viability. It’s not the cost of the pipeline that worries analysts but the cost of what’s called landed gas–the amount India and Pakistan will pay when the price of gas and transit fees have been added. Analysts believe that for the project to be economical, the cost of delivered gas must be below $3 per 1,000 cubic feet. Less than a year ago the price of Iranian gas was about $1.20, and transportation and transit fees added $1.40. Since then global gas prices have risen sharply. “They’re talking now of a price close to $2 at the Pakistan border,” says Usman Aminuddin, a former Pakistani Petroleum Minister. “By the time it reaches India, the cost will be close to $4. Unless they agree on the price of gas with Iran, all this is a waste of time.”
None of that matters if the U.S. and the European Union come down hard on Iran for its nuclear program and impose sanctions. That ratchets up the risk factors associated with any pipeline investment. Indeed, Singh told the Washington Post during his July visit that he didn’t know if any international consortium of bankers would underwrite the project. Indian and Pakistani officials have dismissed U.S. interference, but skeptics say there is more bark than bite in their comments. “They are saying all the right things tactically but will not act on them strategically,” says Rahul Roy-Chaudhury, a research fellow at the International Institute for Strategic Studies in London.
Few question the inherent benefits of a steady stream of competitively priced regional gas. But there seem to be too many obstacles in the way at the moment. Unless U.S. authorities are convinced that the pipeline is needed regardless of the Iran factor, unless Iran offers a competitive price for its reserves, unless Baluchi resistance can be overcome, the pipeline will remain a pipe dream. Some believe the U.S. will come around. “They will recognize that India’s energy situation is really bad, and they wouldn’t want us to be tying ourselves into an energy crisis from which it will be difficult to retract,” says Leena Srivastava, executive director of the Tata Energy Resource Institute, an independent think tank in India that focuses on energy and environment issues. But Pakistan’s Aminuddin takes a somewhat darker view. “Unless you jointly pursue this with the Americans,” he says, “the pipeline is not going to happen.”
“We are at the crossroads of the world’s largest gas reserves.”
The U.S. does not want India to deal with Iran.
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