The pipeline is no longer a pipedream

Indian and Iranian moves reduce Pakistan’s relevance to the project

Sanjaya Baru

Ever since the idea of a Iran-India oil and gas pipeline idea was mooted the project has been hostage to India-Pakistan bilateral relations because the pipeline would have to come through Pakistani territory. The latest round of talks between Iranian and Indian foreign ministry officials, this week in New Delhi, has helped reduce Pakistan’s relevance for the project. After dragging its feet on the idea of an underwater offshore pipeline Iran has moved closer to conceding its technical and financial feasibility. India and Iran have agreed to commission a feasibility report for an underwater pipeline.

Iran has also shifted its stance from insisting on a trilateral agreement involving Pakistan to agreeing to a bilateral agreement with India, taking upon itself the responsibility of entering into a parallel bilateral agreement with Pakistan if the land route is to be taken up. The ball is now squarely in Pakistan’s court. If it wants to be a party to this project and would like to earn the rentals from a land-based pipeline, varyingly estimated at between $200 million to $1bn per year, it will be welcomed to give the required assurances of security so that India can agree to a land-based pipeline.

If Pakistani assurances and guarantees are not convincing, India will go ahead with the underwater pipeline. The extra cost of the underwater pipeline is matched by the payment India would make to Pakistan for a land-based pipeline and the insurance cost of a more risky route. Iran and India have agreed to sanction feasibility studies for both the underwater and land-based pipelines. Preliminary studies show that from India’s point of view there isn’t much difference between the two if all the direct and indirect costs are factored into both projects.

It is not yet clear, however, if the government is as yet ready to talk to Pakistan about the project. While the agenda for the Vajpayee-Musharraf talks next month has not yet been drawn up, the government is still not clear whether the matter will be discussed. It would depend very much on what kind of assurances Pakistan is willing to give pertaining to the security of such a pipeline.

Indeed, this is linked to the larger question of credible assurances by Pakistan to India on the entire issue of its support for anti-India terrorism. Unless General Pervez Musharraf carries conviction on his government’s sincerity to stop aiding and abetting anti-India terrorist activity and the support to the “Jehadi” forces in Pakistan and Afghanistan, and their cross-border activity in Kashmir, the Indian government is not going to take the former’s assurances on the safety and security of the oil pipeline very seriously.

For its part, Pakistan is keen on pursuing the land-based pipeline proposal. As Pakistan sees it, progress on such a project will enhance its international credibility as a destination for foreign investment. If India is willing to put its money in an oil pipeline coming through Pakistan then what objection can other foreign investors have to investing in Pakistan? India’s green signal for a land-based pipeline will increase Pakistan’s rating with foreign investors and its debtors. It will also help alter Pakistan’s image as a land infested by gun-toting “Jehadis” ready to bomb out any property belonging to infidels.

Pakistan’s interest in the land-based pipeline is reflected both in recent media reports from Pakistan on how this project could come up for discussion at the Vajpayee-Musharraf summit, and in more definitive pronouncements by Pakistan’s energy policy experts.

At a seminar in New Delhi a few months back, Mr Hilal Raza, director-general, Hydrocarbon Development Institute of Pakistan, declared, “Given the relations between India and Pakistan, energy cooperation and trade seems one of the biggest confidence-building measures for peace between the two countries...Pakistan is willing to meet the legitimate concerns of India about the security of energy supplies from a trans-boundary pipeline, but these have to be brought out clearly in order to be resolved.”

Mr Raza’s paper, entitled “Potential and Prospects of Trade and Cooperation in Oil and Gas Sector Between India and Pakistan”, states that studies conducted to examine the techno-economic options of importing natural gas by India and Pakistan, individually or jointly, show that for optimal techno-economic benefits, India and Pakistan should move jointly on the project.

Indian officials do not agree with this assertion. While the land-based pipeline is certainly cheaper than the underwater pipeline, the economics of the two options alters considerably when security elements are factored in. Thus, while Pakistan undoubtedly stands to gain from a land-based route, for India both options have their merits and India may prefer an Iran-India bilateral deal, with a few multinationals making some money from the deal, to a trilateral venture involving Pakistan.

Mr Raza cites a UNDP study to state that “the tariff cost of the pipeline project could be reduced by about 26 percent by having a joint pipeline for India and Pakistan as compared to having separate pipelines. Recent gas discoveries in Pakistan have made it possible for Pakistan to conveniently meet its gas demand for the next four to five years but it is anticipated that Pakistan would be needing imported gas by 2006-07. Even if the gas pipeline was designed to meet the Indian demand only, the benefits to Pakistan would be substantial in terms of transit fee, etc.”

Indeed, it is that “etc” which in the immediate future can matter far more to Pakistan than the transit fees. It would include the improved investment rating and credit-worthiness of Pakistan. Little wonder that Mr Raza adds, “One of our major priorities should be to remove such mistrusts (in India) and provide comfort to each party if we are looking at a prosperous economic future for South Asia and a win-win situation both for India and Pakistan. It should be realised that a project of this magnitude will have its inbuilt guarantees of security and will certainly provide for the mechanisms to handle such concerns.”

With Iran and India moving ahead bilaterally, it is up to Pakistan to take the required initiatives on the political front if it wants to get into the game and derive the economic benefits of the pipeline project.