A pipeline to wrap around my neck

The fact on the ground is that India and China are growing fast and this growth consumes resources at a furious pace?capital, minerals and, in particular, energy. The ability for these two economies to sustain this pace of growth and lift their people to significantly higher levels of income is contingent on being able to secure dependable access to energy resources. It does not matter whether the pace of growth continues at this level or is lower by two percentage points over the next 20-30 years?the numbers for burgeoning energy demand will, at best, be shifted five years forward or backward. Incremental demand from China has accounted for one-third of the increase in world demand for oil over the past several years and has been a major factor behind the sharp increase in world oil prices.

In 2002, the share of China in world demand for oil was 6.4%, which went to 8.5% in 2005, and contributed one-third of the total increment to world demand in this period. By contrast, the impact of India in raising world demand was more modest. This was partly a consequence of a historical policy bias to increase the share of natural gas, wherever possible, and second, the maintenance over a very long time of a reasonable taxation regime on automotive fuels (unlike China), which has encouraged efficiency in usage. The bias towards natural gas was a consequence of the fact that the prospects of new oil discovery in India are weaker than that of natural gas discovery and that this was also true of the world at large.

The Expert Committee of the Planning Commission, chaired by Kirit Parikh, estimates that our demand for natural gas will rise from the present level of little under 1 trillion cubic feet (TCF) to 8 TCF by 2031/32?that is, 25 years from now. While some of it will be met from higher levels of domestic natural gas production?both in shallow and in deep waters?and some will come from coal bed methanation (CBM), there is still a substantial amount which we will need to import. Further, to the extent that we can increase the assured supply of imported natural gas, it will help in potentially reducing the dependence on imported crude oil?a product that is going to become increasingly scarce and expensive.

There are many neighbouring countries that have natural gas reserves well in excess of their own domestic requirements. They extend from South-East Asia, through Myanmar and Bangladesh, to countries of the Persian Gulf to Central Asia and the vast Siberian deposits. There are two basic ways to transport this gas: pipelines and as liquefied natural gas (LNG) in tankers. Pipelines are laid on-shore, though over shorter distances underwater pipelines (much more expensive) do offer an option.

Which one is cheaper? There are two issues involved here. First, the pure technical costs, which assumes there are no geo-political realities. Second, the costs that come associated with the security of the mode of supply, i.e. the geo-political stuff. On a pure technical basis, for distances of up to 2,500 km, a high pressure large diameter onshore pipeline has clear cost advantages, while for distances beyond 6,000 km, the LNG route wins hands down. For distances of between 2,500 and 6,000 km, where both options exist, the comparative cost economics are not significantly different.

The prime consideration for transportation across such intermediate distances is the degree of physical security. Onshore pipelines run over the territory of different people. Poten-tially, all it takes is a small armed band to halt the flow of gas or otherwise disrupt the pipeline?for example, by blowing up a small section. Assuming that the small band of saboteurs are not the sovereign power in that patch of land, flow can be restored once the problem is fixed. In the interim?days or months?nothing will flow through the pipeline. As a result, at the consumption end of the pipeline the using industries?petrochemical, fertiliser and power plants?will have to shut down.

This is why for onshore natural gas (and, for that matter, crude oil) pipelines, security considerations make or break the economics of supply. Now take the Iran-Pakistan-India natural gas pipeline on which much opinion has been periodically aired. First, the distance involved is such that the case falls into the indeterminate (2,500-6,000 km) range of roughly comparable relative costs on pure technical grounds, given that it is clearly possible to move the gas as LNG. Second, the proposed gas pipeline is to pass first through Iran, then through the eastern parts of that country, where Teheran?s writ runs very lightly, then through the western edges of Pakistan, where Islamabad?s writ is not too strong and finally through Pakistan.

The number of situations where there can be official, quasi-official (i.e. deniable) and non-official interference on the pipeline is myriad?and the cost will be entirely upon us. Some argue that Pakistan, on account of the wheeling revenues involved, and Iran on account of the sale proceeds, will have an incentive to ensure the security of the pipeline. The recent history of both countries does not indicate any evidence that commercial interests consistently outweigh short-term political objectives, even eminently irresponsible ones.

Such a pipeline will, however, make us vulnerable to whoever wishes to use the security (or, rather, the insecurity) of the pipeline as leverage. Given that there is no technical case based on relative costs for the pipeline, vis-a-vis moving gas from Iran (or any other Middle East source) as LNG, the pipeline idea should have been a clear non-starter. That this has not been the case is unfortunate testimony to a lack of professionalism, which we can ill afford in our quest for energy security.

?The writer is economic advisor to Icra