TAPI AND IP: Life Lines for our Economy

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By

Air Commodore (R) Khalid Iqbal TI(M)[1]

Peace may be broadly defined as absence of violence and it is achieved by eliminating the causes leading to violent behaviour. One of the ways to achieve it is to create interdependencies with immediate and distant neighbours. Economic interdependencies bind the neighbours through critical interests in such a manner that interstate violence becomes a non-option or, at least, an option of the last resort. Cost benefit analysis prevents an inclination towards violence and reinforces the mindset towards peace.

Multi-state mega projects contribute towards peace when they follow usual corporate norms and ethics; however when mixed with stated and unstated objectives of furthering controversial politico-strategic ends, such projects accentuate ongoing tensions and even create new ones as well. Trans-border sharing of energy resources also falls in such category of double edged ventures.

The concept of energy security does not have a uniform meaning due to the complexities arising out of regional intricacies and global market dynamics. World Bank defines energy security as ‘the sustainable production and use of energy at reasonable costs to ensure a certain quality of life’. Similarly, Deese defines it ‘as a condition whereby a nation perceives a high probability that it will have adequate energy supplies at affordable prices’. Flow of energy across the states’ boundaries does not per se guarantee regional peace unless it is supported by an enabling environment in the overall context of comprehensive security of the states sharing such resources. However, if managed in a prudent way, it does become a contributory factor and an enabling tool for achieving and sustaining regional peace.

In politico-diplomatic terms, peace is achieved by eliminating and or mitigating the causes of conflicts to bring the possibility of an armed conflict to zero. One could start the process from either way that is: begin with creating interdependencies and proceed to zero conflict state, or follow the reverse path. Calm at politico-strategic level creates additional space for economic development and soft power projection and vice versa.

Globalization and enhancement of technological capacities have impacted the concept of sovereignty by bringing down the walls of inviolable borders. Mobility and communications enable all people and nations to interact with each other freely and share resources on mutually beneficial terms. Isolationism is no longer an option. Every nation has to learn to live within the comity of nations, with a host of factors impacting them collectively and individually. Peace at home and peace abroad are a necessity, indeed both are mutually harmonizing. These days sovereignty is circumscribed by the ratio of bilateral dependencies and interdependencies; and it functions within the constraints of a wholesome conglomerate of multilateral regimes.

Materialization of TAPI & IPI can lead to regional integration, bring prosperity, and change the destiny of this region as a whole. If prudence prevails, interstate flow of energy could cement the bonds of friendship and boost economic cooperation. With India’s withdrawal from the IPI project, at least for the time being, the focus is now on negotiations over TAPI and IP projects. However, considered opinion has it that after consolidating the gains of Agreement 123, India would disregard American pressure and rejoin the project.

Though there has been a great deal of optimism generated over the project among the TAPI partners as well as its lead developer, the Asian Development Bank, numerous hurdles still continue to haunt. To start with route security is an issue. Pipeline will transit some 730 kilometres through Herat, Helmand and Kandahar in Afghanistan which is an insurgency infested area. Likewise, there are also concerns about the 800-kilometre section of the pipeline via Pakistan, part of which would pass through Baluchistan, where the law and order situation is not satisfactory.

For security reasons, Asian Development Bank had proposed alternative TAPI routes in Afghanistan. One alternative is through Taskepri in Turkmenistan to Shebarghan and then through Balakh, Mazar-i-Sharif, Samangan, Kabul and Jalalabad in Afghanistan, and Peshawar, Nowshera, Islamabad and Lahore in Pakistan to India. Another alternative is a route through Serhetabat, Shindand, Delaram, Kandahar, Quetta, Lora Lai, Dera Ghazi Khan and Multan. It is encouraging that governments of Afghanistan and Pakistan are committee toward providing full protection to the pipeline; however, it would be better to select the most secure routes. Beside traditional measures, security should be strengthened through community participation.

Yet, another uncertainty is about sustainability of gas supplies from Turkmenistan. Turkmenistan has already signed agreements with Iran and China to increase existing supplies to these markets; a similar understanding has also been reached with Gazprom, the Russian gas giant. Therefore questions have arisen over whether it will be able to meet its commitments for TAPI. In addition, Turkmenistan’s gas sector suffers from several constraints, including lack of financial resources and the technical capability to develop new projects. 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 (equal to about 90 percent of US proven reserves). However, TAPI partners have demanded third party certification of these claims. Moreover, Turkmenistan 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. Some experts are of the view that it is unlikely that it will be able to increase its export volumes substantially over the next 10 years.

Moreover, differences over the pricing of the gas as well as transit fees did persist. India had been expressing its unwillingness to pay higher than the price of liquefied natural gas (LNG). The issue of gas price and transit fee had prevented the launch of the project. The issue has finally been solved raising hopes in regards to the the commencement of the project. The four countries have recently signed the transit fee deal for the $7.6 billion TAPI project. According to the terms of the agreement the deal has set 49. 5 cents per MMBTU as transit fee for the gas to be pumped from the Turkmenistan gas fields to the rest of the countries. Afghanistan and Pakistan would not only get the required gas but also the transit fees for the length of the pipeline using their respective territories. This TAPI related agreement would improve Pakistan’s bargaining position vis-à-vis Iran in negotiating the terms and conditions for the proposed Iran-Pakistan (IP) gas pipeline project. Moreover, Pakistan would also be able to diversify its supply sources.

The TAPI agreement commits the four nations in providing government support, including security for the pipeline. In this regard, Afghanistan is going to deploy a force of 7,000 soldiers to ensure security of the pipeline on its territory. American bases in Afghanistan are expected to play a role in securing the TAPI pipeline venture. Indeed TAPI provides a reason for the Americans to maintain a potent military presence in Afghanistan, though for other strategic reasons.

TAPI has also been facing opposition from Russia and Iran because both these states consider the project against their national and economic interests. While Washington’s declaratory stance is that TAPI will help stabilise Afghanistan as well as assist the country in its development, by allowing it to earn around $300 million per annum in transit fees, it would also allow Central Asian countries to find an alternative market and thereby lessen their dependence on Russia. However, the overriding American objective to promote TAPI is to ensure that the IPI project is effectively killed, thus denying Tehran much-needed revenues.

The TAPI Gas Pipeline Project has received tremendous positive response from multinational and financial institutions. Three road shows were held between September 11 and 20, 2012, in Singapore, New York City and London. The road shows were coordinated by Asian Development Bank (ADB) and attended by representatives from Turkmenistan, Afghanistan, Pakistan and India. The Pakistan delegation was represented by Mr Mobin Saulat, Managing Director Inter State Gas System (ISGS) and a team comprising technical, commercial and legal experts from ISGS.

Pakistan’s side during the interaction with the road show invitees updated them on the recently launched new Petroleum Policy 2012. The salient features of the Petroleum Policy, such as improved and more incentivized pricing mechanism, were described. The companies expressed interest in the policy. The New York road shows were attended by the world’s leading concerns such as Chevron and Exxon Mobile and prominent financial institutions: CITI Group and US EXIM. All the participants expressed keen interest in the project. During the London Road Show, TAPI parties met with British Petroleum, Shell, British Gas and Morgan Stanley. In view of the project’s size and complexities, the parties agreed that it is necessary to attract and select a consortium which could attract financing, manage construction, and operate the pipeline reliably.

In the context of IP, foreign Minister Hina Rabbani Khar met with her Iranian counterpart Dr Ali Akbar Salehi on the sidelines of the 67th UN General Assembly Session in New York. The two Foreign Ministers emphasized the need for expeditious completion of the mega projects particularly the IP gas pipeline project. Pakistan is desperately seeking funds for the pipeline and is in a critical situation since its long-trusted friend China has also backed out due to the US opposition. Russia had been keenly pushing for increasing its energy footprint in the region because of economic and strategic goals. However, Russia is not pleased with Pakistan’s less than keen response to Russian interest in the Iran-Pakistan gas pipeline project. Russia’s deputy minister for energy and representatives of leading energy giant Gazprom, attended the Pak-Russia Inter-Governmental Commission on September 10, 2012. At the meeting, Gazprom representatives gave a presentation on the pipeline. However, no firm commitments were given to the Russian delegation which wanted to get the project without bidding. Pakistanis contended that exemption from bidding would violate the rules of the Public Procurement Regulatory Authority. But the Russians weren’t convinced.

The Iranian President Mahmoud Ahmadinejad, during his visit to Islamabad for the D-8 Summit on November 22, 2012, pledged $500 million financing for the $1.5 billion IP gas pipeline project, while seeking commitment from Pakistan that it will not back out and complete the project within the scheduled timeframe. Pakistan assured the Iranian president that the funds will be utilised for construction of the gas pipeline in Pakistan and the project will be completed in time. Pakistan has decided to avail this financing to acquire engineering and construction materials to lay its portion of the pipeline, which will be carried out in a joint venture with Iranian companies and local gas utilities including Sui Northern Gas Pipelines (SNGPL) and Sui Southern Gas Company (SSGC). In addition to Iranian financing, Pakistan seeks to avail the buyer’s credit facility to pay for the import of building materials. The government will also raise Rs 30 billion during the current financial year through the ‘Gas Infrastructure Development Cess’ (GIDC) – a tax levied on domestic gas consumers. Iran and Pakistan have agreed to adjust a $500 million loan with the price of gas to fund the construction of Pakistan’s portion of the Iran-Pakistan (IP) gas pipeline. The move is likely to increase the price of gas from Iran. Adviser to the Prime Minister on Petroleum and Natural Resources Dr Asim Hussain, while addressing a press conference on December 04, 2012, said: “Pakistan and Iran have signed an initial deal of $500 million for financing of the IP gas pipeline project. The Iranian side would adjust the loan amount in gas price; therefore, it will not be a burden on the government. This amount would be adjusted in gas price,” The agreement says that $250 million will be provided by Iran on a government to government basis, while the remaining $250 million will be wired by Iranian commercial banks. Pakistan will import 750 million cubic feet gas per day (mmcfd) extendable to one billion cubic feet gas per day. The Baluchistan government wants 250 mmcfd for the Gwadar Port, therefore Pakistan may obtain more gas from Iran if needed. Hussain further said that the contract of laying the pipeline would also be awarded to an Iranian company.

Great Game Factor

The tussle over IPI and TAPI is not a mere economic battle but has far-reaching geopolitical dimensions. The US and its allies want Pakistan to abdicate IPI and pursue TAPI alone. India has already done so. Now China and Russia are supporting Pakistan to withstand US pressure for giving up the IP gas pipeline project. TAPI’s viability is doubtful as the pipeline will pass through Taliban-controlled regions and Pakistan’s troubled border regions. The cost as compared to IPI is also higher. Turkmenistan originally estimated total project cost at $3.3 b. It was later raised it to $ 7.6 b.  Other estimates are as high as $10 b. Iran, China and Russia have serious apprehensions about TAPI because the main financial control over Turkmenistan gas reserves is with Western giant companies. Russia and Iran are the largest producers of natural gas in the world and the TAPI project would squeeze the South Asian market for their own gas supply projects.

This isn’t the first time that the United States has pushed through a pipeline project that had appeared unfeasible both from political and business perspectives.

For example, in 2005, despite substantial opposition from within the business and political circles in both the United States and the Caspian states, a hugely expensive and logistically challenging BTC pipeline from Baku in Azerbaijan to Ceyhan in Turkey, transiting a fractious Georgia, was built by an 11-member consortium led by British Petroleum, under pressure from the US government. To overcome the reluctance of the business community in underwriting such a costly and economically unviable project, the US government made finances available from government agencies, such as the ‘Overseas Private Investment Corporation’ (OPIC) and the ‘US Export-Import Development Bank’. The objective America was seeking at that time was to provide a route that would circumvent Russian territory and break Moscow’s stranglehold over the European gas market, and would also assist in diminishing Russia’s strategic hold over the Caspian region. Furthermore, in 2005, Secretary of State, Rice went to India to scuttle India’s finalizing of technical and commercial contracts for a $4.5 billion IPI gas pipeline, in return for Agreement 123. The news is pouring in that once again OPIC and US Export-Import Bank have offered to finance the TAPI project. The ADB has become a transaction adviser for the project and would raise funds by forming a consortium of leading lenders. The US is also supporting Pakistan in liquefied natural gas (LNG) import and OPIC has offered funds for this project as well.

After India’s pull out of Iran-Pakistan gas pipeline project (IPI), both China and Russia have shown interest in the IP project—Russian Gazprom and China National Petroleum Corporation had promised to help building the 780-kilometre IP pipeline. It is worrisome for the US and its allies that China and Russia are emerging as supporters of IP pipeline project. It would substantially dilute the sanctions regime that America is erecting around Iran. Gazprom already controls European energy markets. Russia’s current goal is to dissuade any of the Central Asian gas reserves from reaching European or North American markets. However, as of now Chinese and Russian support for the project has fizzled out.

The IPI and TAPI are symbols of the New Great Game—the main goal of which is gaining control of oil and gas reserves in this region. The hidden stakes in the war against terrorism are interesting. It is not a mere coincidence that the map of terrorist sanctuaries and targets in the Middle East and Central Asia, by and large overlap the location of world’s principal energy reserves. On December 15, 2001, in an article headlined: “As the War Shifts Alliances, Oil Deals Follow”, the New York Times reported that during a visit in early December to this region, the then Secretary of State Colin Powell estimated that $200 billion could flow into this region during the next 5 to 10 years.

Pricing

On November 13, 2011, Pakistan and Turkmenistan initiated the Gas Sales and Purchase Agreement (GSPA), which is likely to kick-start the multi-nation project by 2016. The two countries signed a total of five MoUs. Imported gas price which is likely to be around 70-80 percent of the oil price, may not be as low as initially anticipated. This gas could only be used for power generation. With oil price fluctuations, gas prices would follow suit, adding an additional factor of uncertainty to Pakistan’s economy. During the steering committee meeting on May 23, 2012, Pakistan and Turkmenistan signed GSPA for supply of 1.3 billion cubic feet of gas per day (bcfd). Pakistan will pay 70% of Brent crude price to Turkmenistan for gas supply, which will be $10.28 per million British thermal units (mmbtu), if calculated at the rate of $ 100 per barrel. Gas price will be reviewed every five years. The price Pakistan has agreed to pay to Iran is 78% of crude price. GAIL (India) has also signed GSPA after agreeing to a transit fee of 49.5 cent per mmbtu. Pakistan is suffering because of overpriced power purchase arrangements reached with the IPPs during the nineties. Despite the generation capacity, we cannot have electricity because it is not affordable: domestic consumers cannot afford it at that price, and industry no longer remains competitive if it buys electricity at IPP rates. Let’s hope that Pakistan does not create another circular debt issue in the gas sector as well.

Situation in Baluchistan

Fears have been expressed that the turmoil in Baluchistan will threaten the security of the pipelines. The pipelines will begin functioning in another 2-3 years. This period should be used to address the Baluchistan problem to find a political solution that redresses the grievances of the province’s citizens. Thanks to proactive intervention by the Supreme Court of Pakistan, it appears that the worst is behind us and the law and order conditions would soon begin to improve and would normalise after the general elections of 2013.

International Implications

International implications of the Iran-Pakistan pipeline accord also have great significance. Iran and Pakistan have kept the door open for New Delhi that can still join the arrangement at some point. Pakistan has also displayed a measure of independence vis-à-vis America in regard to the Iran–Pakistan Peace Pipeline

It is worthwhile to consider energy security in the context of international and regional relations. TAPI and IPI will bring together two rivals: India and Pakistan. India’s real concern is about providing political leverage to Pakistan through the TAPI/IPI whereby Pakistan will be able to hold the supply hostage to resolve contentious issues, especially Kashmir.

However, drawing an analogy with France and Germany in cross-border energy projects, the doctrine of ‘integrative bargaining’ could moderate political tension. Integrative bargaining binds countries in a common project whereby, without prejudice to political and social interests and differences, such projects enjoy long-term commitment.

While at a declaratory level, India may be eager for an underwater pipeline from Iran, however, the cost of the project and the dangers inherent in skirting Pakistani territory makes this preposition unfeasible. A pipeline via Pakistani territory is the only option for India to secure provision of its energy needs from Iran.

The primary energy security concern for India and Pakistan is to ensure sufficient energy to support economic growth and prevent accentuating energy shortfalls that would trigger social and political turbulence. Energy deficit of both countries will keep widening if new resources are not exploited to meet growing needs.

Rights and responsibilities of Transit Countries

Traditionally, a singular concern has been the reason for disruption of energy supply by transit states. The transit state may theoretically sabotage the pipeline at any time, holding supply as a bargaining chip for renegotiation or greater and cheaper off-take. For example; in pipeline projects like the IPC and Tapline, Syria and Turkey did pose problems to Iraq. Although states keen on attracting foreign investment and development projects will generally not risk such misadventures.

The concept of “freedom of transit” was first introduced in the ‘Barcelona Convention and Statute on Freedom of Transit 1921’ addressing petroleum movement through waterways and railways. This became the foundation stone for Article V of GATT and Article 7 of the ‘Energy Charter Treaty’ (ECT). The Convention states that all member-states shall facilitate trade and transit without distinction on the basis of nationality. Moreover, even-handed tariffs shall be applied to facilitate international traffic. However, the scope of this Convention does not extend to pipelines. The GATT is a key multilateral agreement on transit which, though does not secure enforceable transit rights, ensures freedom of transit once the right has been granted.

Pakistan and India are signatories to the GATT and the World Trade Organisation (WTO), whereas Iran has an observer status at the WTO. If the IPI pipeline project matures to include India at a later stage, Pakistan will take on the role of the transit country between Iran and India. The sending and the receiving states would rely upon freedom of transit to ensure supply.

The Economic Charter Treaty came into force in 1994, based on integrating European and Russian energy sectors to create a world energy market. Pakistan and Iran both have observer status at the ECT.  Its Article 7 does not grant a transit right to states; it imposes obligations to be applicable when a right of transit has been given. Para 10 forbids states to disrupt or obstruct supply of energy products in transit even when in dispute.

Currently, the pattern of a commercial project for the IP might be more feasible. As and when India joins in, the project would become a transit project. A more plausible commercial arrangement would be where Pakistan could purchase gas from Iran and then sell the requisite amounts to India. Thereby Iran would be free from any financial risk and India would be sold gas by Pakistan.  Iran proposed, in October 2008, that any reduction in supply from Pakistan to India would result in a proportionate reduction of supply to Pakistan as well. In lieu, Pakistan wants a MFN status clause in the GSPA with Iran, whereby any favourable terms afforded by Iran to another country shall have to be applicable to Pakistan as well.

It has also been suggested that India could sell electricity to Pakistan as collateral for gas supply, whereby disruption on by one would mean disruption by the other as well. Hence, both countries would be locked in energy-related agreements.

Acquisition of Land

Land has to be reclaimed by the governments in order to facilitate construction and development projects for economic progress. In Pakistan, there are various means by which land can be provided. First, a right of user or easement could be granted over a piece of land for laying the pipeline after notifying the landowner and paying him due compensation. Besides leasing the land, landowners could enter into joint ventures; whereby the parties could share profits accrued from the transit fees and off-take from the pipeline. The last option to acquire land is through compulsory acquisition under the ‘Land Acquisition Act 1894’ and Articles 172 and 173 of the Constitution of Pakistan 1973. Although unclaimed land belongs to the state, privately-owned land could be acquired from owners through substitution or compensation. The task then is to identify the best solution to acquire land, keeping in mind the concerns of sabotage, supply disruption, and state responsibility.

In the Baku-Tbilisi-Ceyhan pipeline (BTC), governments acquired land in lieu of compensation and leased the land to the consortium. Whatever pattern is followed, the affectees must be satisfied in terms of compensation, and as far as possible should become perpetual stakeholders, so that they have an abiding interest in the safety/security of the infrastructure. An offset amount may be pre-decided for socioeconomic uplift of the areas through which the pipeline is to pass. This amount should be payable to the local administration annually, this process could be woven into security related benchmarks.

Dispute Resolution Mechanism

With respect to international dispute settlement, diplomatic means are most commonly used. There is an array of dispute settlement mechanisms available to choose from. Diplomatic dispute resolution is based on mutual co-operation and consensus which might be difficult for the TAPI/IPI countries.

The energy sector has directed most of its dispute settlement towards arbitration from as early as 1929, when the Anglo-Iranian Company entered in to an arbitration agreement with the Government of Iran. Such arbitration agreements underwent further improvement in the 1954 in the form of the ‘Iran Consortium Agreement’, whereby disputes would automatically be routed to arbitration, on the appointment of an arbitrator by the President of the IMF if the dispute was regarding the rate-of-exchange. The agreement also provided for conciliation and expert committees for other general disputes.

Likewise, the ECT, as a specialist instrument, provides a comprehensive dispute settlement mechanism. The ECT methodically divides state-state arbitrations and investor-state arbitrations.

Pakistan is a signatory of the New York Convention 1958 and has ratified it through the ‘Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance 2007’; hence it will be bound by the outcome of international arbitration. With respect to international investment disputes, Pakistan has signed and ratified the ‘International Convention on the Settlement of Investment Disputes (ICSID) between States and Nationals of other States 1966’, whereby the ICSID arbitral awards will be capable of being registered and the High Courts will have the power to enforce them or hear proceedings with respect to them.

In the BTC project, British Petroleum has been provided legal protection by Turkey which has reduced access to justice for its citizens. In Pakistan, OGRA has the power to arbitrate between investors, civilians, and the concessionaires by applying Pakistani law. National treatment is guaranteed to foreign investors under Foreign ‘Private Investment (Promotion and Protection) Act 1976’.

Bangladesh a new Entrant

Bangladesh has decided to join TAPI gas pipeline project. Bangladesh has approached Turkmenistan, expressing its intent to import gas through the TAPI pipeline. In response, Turkmenistan has asked Bangladesh to hold negotiations with Pakistan, Afghanistan and India. This development came about in a meeting of the steering committee on gas import held in Turkmenistan on May 23, 2012. If the preposition finally gets through then India would also become a transit state. Perhaps, at a later stage, Bangladesh may even join the IPI project.

Conclusion

IPI and TAPI gas pipeline projects are likely to bring huge benefits to all five participating countries. The interests of all six countries converge. As TAPI/IPI present a win-win setting for all, therefore ways and means should be found to materialize these two projects. TAPI and IPI projects can rightfully be termed as peace pipelines. With the US’s interest and money coming into TAPI, it is expected that work on this project may commence earlier and it may also be completed at a faster pace. With this and the IP pipeline, prospects of meeting Pakistan’s energy shortfall in 3-5 years timeframe appear promising. Hopefully, India and Bangladesh would also join the IP project in due course.


The Author is a consultant (Policy and Strategic Response) for Islamabad Policy Research Institute (IPRI).  He is a former Assistant Chief of Air Staff, Pakistan Air Force.