Pipe dream: India, Pak agree to disagree on transit, transport fees

Written by Anupama Airy | New Delhi, May 6 | Updated: May 8 2008, 04:39am hrs
Despite Indias tough talking with Pakistan at the recent bilateral meet over the $7-billion-plus Iran-Pakistan-India (IPI) gas pipeline project, no consensus has emerged over the two main issues concerning the transit fee and transportation fee. The gas pipeline has to transit Pakistan before it reaches India. Pakistans position on the issue of transit fee is that it should be linked to the price of gas and should vary between 5-10% of the price of gas. India feels that the fee should be an absolute number and not linked to the price of gas.

However, the petroleum ministry is of the view that the transit fee being sought by Islamabad is completely unjustified as 70% of the pipeline through Pakistan would be used in transporting gas for both the countries. Therefore, Pakistan is not a purely transit country.

We have told Pakistan that the transit fee should follow the energy charter treaty (ECT) principles i.e non-discriminatory, transparent and cost reflective and should not be based on a percentage value of the gas. It was also mentioned by the Indian side (at the recent bilateral meet in Islamabad during April 16 to 17) that transit fee should be a nominal one considering value brought into the project by Indian participation. However, the Pakistan side disagreed with our position and maintained their earlier stand that the transit fee should be based on relevant international practices, a senior petroleum ministry official told FE.

On the issue of transportation tariff, both India and Pakistan had agreed in earlier meetings that this tariff shall be based upon cost of service to be achieved through international competitive bidding.

While in the June 2007 discussions between India and Pakistan, the cost estimates of transportation tariff that were indicated were 59 cents per mmbtu, Pakistan is now demanding the tariff to be $1.17 on the basis of revised estimates. This, officials said will be further revised after the preparation of the detailed feasibility report (DFR), followed y tender enquiry and award of bid. Officials said Pakistan has justified this escalation due to change in factors especially steel price and other inputs over a period of time.

To this, we suggested to Pakistan that the cost assumptions be worked out along with suitable provisions for price escalation and tariff be frozen as this would enable determination of the price of gas at Indian border. It was also mentioned that participation by Indian company in the pipeline project would help in optimizing the project cost and timely execution, said the official.

However, this justification did not satisfy the Pakistan side, which feels that the determination of a transportation tariff based on price escalation clauses will add substantial risk for the potential investors in its pipeline company besides creating financial difficulties. Although India has tried to counter this fear by stating that all financial closures are based on estimates with suitable contingencies provided for escalations and this should not deter private investors from participating in projects.

However, Pakistan has refused to buy this argument and both the issues on transit fee and transportation tariff continue to remain unsettled despite several meetings between the two sides.

Even with Iran, India is not happy with the price revision clause proposed by Tehran in the gas sales and purchase agreement (GSPA). Iranian President Mahmoud Ahmadinejad was in New Delhi last week on a brief visit and conveyed that Iran and Pakistan were all set to shortly initial the GSPA. However, officials said that India has conveyed its stand to the visiting Iranian minister that it was in no hurry to take a decision on the issue as the delivery of the gas was still an issue. Besides the transit fee and transportation tariff issue, the high price of the gas being sought by Iran has also delayed a decision by the Indian government on the project. The political heads of the three countries are now expected to meet shortly to hold further discussions on the IPI pipeline.

Interestingly sources said that while Pakistan is maintaining that most of the issues related to the project stand resolved with Iran and that it will very shortly execute a gas sales and purchase agreement along with a inter-governmental framework declaration with Iran, foreign experts feel that Pakistan's ongoing tensions with its province Baluchistan (from where the pipeline will pass) posses serious security and financial concerns over the successful implementation of the project. Foreign lenders have already been expressing their concerns over funding such a project.