When US President George W. Bush was in India this month, he caused a flurry of commentary, especially in the Indian media, by appearing to lift long-standing American objections to the construction of a natural gas pipeline from Iran through Pakistan for India gas imports. “Our beef with Iran is not the pipeline,” he said in Islamabad. “Our beef with Iran is the fact that they want to develop a nuclear weapon. … We understand that you [Pakistan] need to get natural gas, and that is fine.”

Yet as recently as mid-January, the United States had reiterated once more its opposition to an Iran-Pakistan-India pipeline. A week later, US Energy Secretary Samuel Bodman was in Islamabad to offer clarifications. The US continued to have “serious reservations” about the project. “Other pipeline projects are very good and we are ready to help.”

India gas imports and the IPI pipeline project

If this were not clear enough, a White House National Security Council spokesman added: “As we stated before, the US government does not support the Iran-Pakistan-India [IPI] pipeline. We have repeatedly expressed concerns about international participation in energy projects with Iran.” The genie was back in the bottle. Or was it?

A project for India gas imports from Iran was first discussed in 1993, when relations with Pakistan were much worse and an undersea pipeline was proposed. This, however, turned out to be much too exorbitant, so Pakistan was eventually brought into play. Islamabad lifted its reticence to let Iranian gas cross its territory to India in early 2000, a few weeks after US president Bill Clinton, visiting India, met there with the Ambani family.

The Ambanis run Reliance Industries, a likely buyer of gas from Iran that has built an enormous petrochemical complex in Gujarat state near India’s border with Pakistan.

Bodman’s trip occurred coincidentally only a few days before the first trilateral meeting on the pipeline among the Iranian, Pakistani and Indian sides. Taking place in Tehran, it was supposed to prepare for a trilateral ministerial meeting set for April. Until relatively recently, all contacts had been bilateral, either between Iran and India or between Iran and Pakistan.

Last year, however, saw more than a half-dozen India-Pakistan meetings about the pipeline project. Meanwhile, construction costs for the pipeline itself, estimated at almost US$5 billion near the beginning of the decade, have now risen to over $7 billion.

Iran insists that India sign a “take-or-pay” contract, meaning that India would be obliged to pay for gas whether the gas was actually imported and consumed. India has coyly suggested a “supply-or-pay” arrangement in which Iran is contractually obligated to deliver gas at the Indian border with Pakistan, or else pay for the quantity not delivered.

Further complicating the situation, the gas would be of poor quality. India gas imports prefer gas rich in such petrochemicals as butane, propane and ethane; but Tehran has rejected the idea. (This is one of several reasons why the level of Iranian gas exports to Turkey remain relatively low: Tehran insists on selling low-quality gas at high prices.)

Also, the sides are still far apart on the price. A year ago, erstwhile Indian petroleum minister, Mani Shankar Aiyar, stated that Iran wanted India to pay LNG (liquefied natural gas) rates for regular natural gas. LNG is more expensive because of the cost of liquefaction and subsequent regasification processes. According to Aiyar, the total including transportation and transit fees would be 50% higher than Indian industry was generally willing to pay. Aiyar suggested, moreover, that discounts from the correctly calculated price would be proper for large-quantity purchases.

Pakistani and Bangladeshi roles in India gas imports

The pricing of natural gas domestically within Pakistan is likewise an issue. The Pakistani government heavily subsidizes that price, and any attempt to raise it would surely provoke unrest. Yet if the pipeline were built, Pakistan, for its part, would reap an estimated $700 million or more per year in transit fees and also get to use the gas domestically.

Yet Pakistan is prospecting for natural gas on its own territory and seeks the right not to consume contracted quantities of Iranian gas if it does not need it. Thus Bodman’s trip to Islamabad was specifically intended to help provide American technical assistance for prospecting natural gas on Pakistani territory, and so decreasing its need for imports, especially from Iran.

The recent agreement whereby the US will help India build nuclear power plants is likewise designed in part to provide groundwork for satisfying India’s growing energy demand by means other than Iranian natural gas. In the end, it is far from certain that India need rely on Iran. Recent finds (since 2002) include 57 billion cubic meters (bcm) by Cairn Energy offshore of Andhra Pradesh, 400 bcm by Reliance also offshore of Andhra Pradesh, and 28 bcm by Reliance offshore of Orissa.

Bangladesh was an option for India gas imports, but Bangladesh did not want to export until domestic supply questions were clarified and reserve figures better calculated. In 2004, Unocal, the lead on the Bangladesh project, lost interest after years of delay. A pipeline from Myanmar across Bangladesh to the Indian state of West Bengal remains a possibility. Shell has contracted to receive LNG supplies from Oman at its terminal in Gujurat.

The TAPI pipeline project and India gas imports

As a result of current conjuncture, the Turkmenistan-Afghanistan-Pakistan (TAPI when India is added) pipeline has been getting a second look. Originally conceived in the mid-1990s, this project was shelved during the Taliban’s years in power in Kabul. However, the Russian-Ukrainian gas conflict at the beginning of this year finally brought home to President Saparmurat Niyazov Turkmenbashi the danger of Turkmenistan’s near-exclusive dependence on Russian pipelines for exports.

Although pipeline security in Afghanistan remains at present problematic, recent attacks on energy infrastructure in Pakistani Balochistan (an energy-rich region but one still poor and disfavored by the present government) raise equally the question of the security of an IPI pipeline. An interesting variant of the TAP(I) project sees it extended beyond Pakistan into India.

India gas imports: The electricity distribution problem

India’s natural gas consumption in 2003 was 27.4 bcm, projected to rise to almost 40 bcm by 2010 and over 50 bcm in 2015. However, the growth of demand for natural gas in India is dependent on the domestic power generation industry, which at present is about two-thirds fed by coal, but is projected to be one of the biggest consumers of natural gas.

The Electricity Act of 2003 foresees unbundling and eventually privatizing the assets of India’s state electricity boards into generation, transmission and distribution companies. Yet the Turkish experience is a noteworthy caution. In the late 1990s, Turkey planned huge increases in natural gas imports during the present decade, while legislating a similar dismantlement of state-owned and state-run electricity enterprises.

Turkey went so far as to amend its constitution so that power industry companies were no longer required to be state-owned. However, the process of unbundling and privatization has flagged. As a result, the government in Ankara recently revised significantly downward its projected gas import needs for the remainder of the decade. One should therefore be cautious about projections in the growth of India gas imports requirements, and hence about whether a pipeline from Iran would be necessary or cost-effective, especially given other potential suppliers.

The US knows that it cannot veto single-handedly the construction of a natural gas pipeline from Iran to India via Pakistan, but it continues to discourage the attempt. In fact, external factors have made such a pipeline impractical until now. In the future, other India gas imports options as well as Pakistan’s increased prospecting, and resource development on the territories of the two states and developments in their electricity sectors, may make dependence on Iran unnecessary.

[This article was first published in Asia Times Online, 28 May 2006.