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Iran’s gas diplomacy
India faces a major challenge
by Bhaskar Balakrishnan

Iran and Pakistan signed an agreement on March 17 in Istanbul to launch the construction of the $3.2 billion Iran-Pakistan (IP) onshore gas pipeline project, which includes a provision for India's possible participation at a later date.

Iran will deliver 750 million cubic feet per day (mmscf/d) of gas to Pakistan for the next 25 years under a controversial gas purchase agreement signed in Istanbul in May 2009 by the newly formed Inter-State Gas System (ISGS). The accord gives Iran great leverage and sets the price at $7 per million Btu (mBtu, at crude prices of $50), going up to $13 per mBtu (at crude price $100), making it far more expensive than the gas available from Pakistan’s domestic sources. The 900-km 42-inch diameter gas pipeline is planned to become operational by 2015 and run from the Assaliyeh Gas Field in southern Iran to Pakistan.

The pipeline was initially planned to also run up to India, but due to concerns about the security of the project and deteriorating political relations India withdrew from the project in 2009. Pakistan and Iran have sought China’s participation but without success so far. China has decided not to participate due to questionable economic feasibility and technical reliability, as the pipeline will run through high mountains with complex terrain, giving rise to concerns of operational safety and maintenance requirements. China has indicated its preference for buying gas directly from Iran. It has also been tying up gas pipeline arrangements with Central Asia.

The project raises several major issues — an intractable and bitter political conflict in Balochistan through which the pipeline passes, US concerns, high pricing and the threat posed by religious militants. People of Balochistan will not get commensurate benefits. Unless these issues are resolved, the pipeline will remain just a pipedream.

India would like to access Iran’s large gas reserves in a secure and stable manner. Iran would like to have countries like India and China as long-term customers and to get a certain amount of political leverage with India vis-a-vis US efforts to isolate it. However, since the pipeline through Pakistan, the lowest-cost option, will not assure the security of supply, other alternatives have to be explored.

India’s reaction to this development has been reported as the NSC’s advice to the Petroleum Ministry, suggesting a mixed land/sea pipeline, running undersea between points in Iran and India, thereby avoiding crossing Pakistan territory. This advice is flawed and poses formidable political, environmental and technical problems. These problems can be gauged by a look at the Nord Stream pipeline project for the supply of gas from Russia to Germany via a combined onshore and offshore pipeline, due to be completed in 2011.

The political problem arises from the fact that transit through Pakistan’s EEZ requires its consent. This was the case with the Nord Stream project which involved consent of Finland, Denmark and Sweden. Given Pakistan’s attitude, the proposed undersea pipeline will have to avoid Pakistan’s EEZ as well, and possibly the “natural prolongation of its continental shelf” over which it might have economic rights under the Law of the Sea Convention.

The technical problems arise from the depth of the water through which the pipeline will pass. The Nord Stream project has the longest undersea gas pipeline today, some 1200 km, with two legs of a 48-inch-diameter capacity, 27.5 billion cu metres per year each; and an operating pressure of 220 bars. Construction of the undersea portion of the pipeline is to start only in 2010, and the technical problems that occur will need to be assessed. The high pressure and wall thickness of 38 mm are needed to withstand water pressure, which increases at the rate of 1 bar per 10 metres depth. Pipelines require compressor stations to raise gas pressure at several points, and these cannot be built for the undersea stretch.

The environmental concerns arise from the fact that the seabed needs to be stabilised for laying the pipeline by digging trenches. This would have environmental impact. The pipeline has to withstand possible seismic events in the seabed as well as severe monsoon weather in the region. Chemicals used for pipeline maintenance should not damage marine life. The Nord Stream project has been objected to by environmental groups on these counts.

A consortium (SAGE) has done a preliminary study for a commercial project for deepwater pipelines that will cross the Arabian Sea to the south of the territorial waters and EEZs of all third-party countries and will mainly follow a route, reaching a depth of 3500m, linking India to the Gulf gas resources. Some estimates put the transit cost for gas at around $1.8 per mmBTU, which is probably too optimistic. These studies need to be clarified further.

Transporting LNG as an alternative has many advantages. Firstly, India has already invested in LNG terminals and tankers for the transportation of gas from Qatar. This infrastructure can be scaled up to handle gas from Iran as well. The infrastructure built by Iran can be used for gas supplies to many other countries. The LNG system is competitive when transport distances exceed about 1200 km. The system is flexible and does not tie India down to one supplier, a useful option since Iran is known to be a difficult business partner, prone to bringing in political linkages and facing US-led sanctions. Nor does LNG tie Iran down to one buyer, but offers it export markets in Japan, South Korea and China.

The LNG system can accommodate future large gas resources that may be discovered in other parts of the world, including in the Bay of Bengal, regarded as very promising for gas. The gas can be landed at points along the Indian coastline, where energy demand is greatest, or where facilities exist for movement to internal consuming areas. The system can accommodate gas supplies from countries such as Myanmar, avoiding transit problems. Thus, for both the exporting and importing country, gas movement by LNG offers many advantages; the technology if proven and time-tested and may be less expensive than deep-sea pipelines.

On this basis, India should plan to step up its LNG facilities and seek long-term arrangements with all major LNG-exporting countries to secure its supplies as well as encourage countries such as Iran to go this way.

The writer is a former Ambassador and has participated in India-Iran gas pipeline talks.