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Sat 30 Sep 2006 08:00 PM

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Will Iran’s pipe-dream be reality?

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The Iran-Pakistan-India (IPI) pipeline until now, seemed to be the perfect recipe for a disaster.

Gas from Iran, via Pakistan to India would definitely shake-up even the most seasoned diplomat.

Nuclear-armed India and Pakistan have a border dispute, a perpetually tense relationship, have fought three wars and eyeballed each over their fence for the past 50 years.

The proposed US $7.4 billion IPI pipeline would be a boon to both countries, if the plan were to ever leave the drawing board.

The pipeline from Iran, would be a huge boost for energy starved India, which currently produces only half of the natural gas it needs.

The country’s energy demands are expected to double within the next 15 years.

Indian Prime Minister Manmohan Singh has said that after food, India’s chief concern is energy.

The pipeline would also financially benefit to Pakistan, which it would cross on route from Iran, earning the Pakistani government millions of dollars in transit fees.

But the IPI pipeline, apart from earning Washington’s disapproval over using Iran as a source for gas, will cross hostile parts of Pakistan.

The recent killing of Balochi tribal leader Nawab Akbar Bugti by Pakistani troops last month has further raised questions about the pipeline’s safety, as it will pass through Balochistan.

Safety is not the only issue that has threatened the future of this pipeline—price differences between Iran and India has even made some analysts write-off this plan completely.

Despite the signing of a memorandum of understanding with Iran as early as in 1993 for a $4 billion (now $7.4 billion) 2,720 km long pipeline from Iran’s South Pars field with 760 km passing through Balochistan, the deal has still not be executed resulting in cost escalation by 75%.

But, the recently concluded tri-partite talks between the three nations involved in the venture, have given a glimmer of hope.

The countries have decided to hire an international consultant to sort out the pricing.

Given a price-gap of over 60% between the offers of Iran and India, the consultant will have a tough job formulating a pricing mechanism agreeable to both parties.

Against Iran’s demand of about $7.2 per million British thermal units (mBtu), India is willing to pay $4.25.

Iran currently is asking a high price for its gas, which is indexed to the Brent oil price.

Such indexation should normally help stabilise cash flows, however, given the region’s volatility, Iran’s proposed present indexing seems unsuitable.

Pricing of gas has always been disputed not only by Iran, but by other gas majors like Russia and Qatar as well.

Earlier this year, the world saw a freezing Ukraine, owing to Russia cutting off supplies over a price dispute.

For India, a high price for natural gas will impact government finances through a larger subsidy burden.

Gas is primarily used in fertiliser production and power generation, both dependent on state subsidies.

Market-based pricing may help gradual withdrawal of subsidy for these sectors, but this will require political will.

However, Indian oil minister Murali Deora seems very hopeful of the project and also other deals with Iran.

“We have been informed that a final decision on the issue would be taken by the Iranian President Mahmoud Ahmadinejad and the Majlis.”

He said that other agreements will go ahead too.

“We are sure Iran will honour its agreement to provide five million tonnes of liquefied natural gas to India from 2009-10 for 25 years,” Deora said at the conclusion of his visit to Vienna and the UK, last month.

In Vienna, he attended the 3rd Opec International Seminar.

The minister said, “Pakistan is also very keen that the Iran-Pakistan-India pipeline project goes through.”

The proposed pipeline is expected to transport 90 million standard cubic metres of gas every day from Iran’s South Pars fields to India from 2009-10 onwards while Pakistan would receive 60 million standard cubic meters.

“There are a lot of hurdles but we hope to make things work.

We need the gas from Iran to meet energy needs of India and we are committed to make the project happen,” Deora said.

Pakistan seems a little more desperate than India to see the deal through.

Since gas is crucial for the development of its troubled North-West region, as the pipeline will facilitate construction jobs in the poverty stricken area, Pakistan has decided to go ahead even if the deadlock over pricing persists.

Its stake in the project is at three levels. Gas constitutes 50% of Pakistan’s energy mix and its fields are fast depleting.

It is expected to import gas from 2010. It hopes to earn annually $500 million in transit charges.

The deal will also help reduce the political and economic cost of disturbed relations with India.

It will be prudent India to go-ahead with the deal as early as possible, as gas prices won’t have international indices at least in the near future.

The reason for this is international trade in gas is highly regionalised and hence does not permit any international price reference.

There are three reasons for the gas trade to remain regional.

First, the share of gas in total energy demand is still not significant as oil—only 22% against over 50% for oil.

Gas reserves are highly localised, three countries —Russia, Iran and Qatar—account for 56% of total reserves.

Last, most gas markets are still regulated.

Though natural gas is hailed as the fuel of the 21st century, it is still miles away from being traded as efficiently as oil.

But energy demand and security are larger problems for India and Pakistan, than trying to arrive at an international price for the deal.

Also a recent twist to the IPI project is a proposal from Russia’s Gazprom, suggesting an alternative route for the pipeline and offering to be the lead manager of the project.

A quick deal is in the interests of India and Pakistan, to prevent such suggestions from delaying work further.

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