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Saturday, 13 July 2013

TAPI: Time for the Big Push

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by Gulshan Sachdeva (07/10/2013 issue of the CACI Analyst)

Despite many positive developments in the last few years, the future of the ambitious TAPI gas pipeline project is still in doubt. All four partner countries are making serious preparations for the project. However, the uncertainty surrounding post-2014 Afghanistan has dampened the motivation among major energy companies to act as lead consortium partners of the project. In these circumstances, multilateral agencies like the Asian Development Bank may have to play a crucial role in salvaging the project. Likewise, if the U.S. administration is serious about its support for TAPI, it should put its full diplomatic and financial weight behind it.

BACKGROUND: In the last fifteen years, there has been much discussion on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline. Earlier, analysts highlighted many uncertainties concerning the project. These included gas reserves in Turkmenistan; the security situation in Afghanistan; and strained relations between India and Pakistan. Despite all these challenges, all parties have seriously considered the proposal. In the last couple of years, the project has been up for discussion at almost every major international meeting concerning Afghanistan. This has been one of the main items on the agenda at every Regional Cooperation Conference on Afghanistan (RECCA). 

As per the latest reports, the proposed 1,700 km pipeline will run from the South Yolotan Osman fields in Turkmenistan to Afghanistan, from there it will be constructed alongside the highway running from Herat to Kandahar, and then via Quetta and Multan in Pakistan. The final destination will be to Fazilka in Indian Punjab. The project can transport up to 30 billion cubic meters of natural gas annually from Turkmenistan to South Asian countries. The agreement signed by the involved countries envisage the delivery of 90 million cubic meters per day (mmcmd) of gas from Turkmenistan to participating countries with 38 mmcmd each going to Pakistan and India and 14 mmcmd for Afghanistan.

India was formally invited to join the project in 2006, and was earlier participating in the talks as an observer along with the ADB, Turkmenistan, Afghanistan and Pakistan. The ADB has acted as the TAPI Secretariat since 2003. In the last ten years, it has also played a useful role in coordinating and facilitating the TAPI negotiation process, mainly through its small Technical Assistance (TA) projects costing a few million dollars.

Initially when concerns were raised about gas reserves, the Turkmen government in 2006 informed the members that an independent firm, De Golyer & McNaughton, had confirmed reserves of over 2.3 trillion cubic meters (TCM) of gas at Dauletabad field. With major discoveries at South Yolotan (located in the southeastern Murgab Basin north of the Dauletabad field), however, many of these concerns subsided. Although instability in Afghanistan has been one of the main obstacles for the project, international attention to Afghanistan has conversely kept the project alive through all these years.

IMPLICATIONS: In the last few years, all four countries involved in the project have already signed most agreements required for its commencement. These include: an Inter-Governmental Agreement (IGA), a Gas Pipeline Framework Agreement (GPFA), a Gas Sales and Purchase agreement, and a broad agreement on transit fees. Early last year, India and Pakistan agreed on the principle of a “Uniform Transit Fee,” basically meaning that Pakistan will accept whatever transit fee India and Afghanistan agree upon. The Indian government later approved a payment of 50 cents per million metric British thermal units as the transit fee to Pakistan and Afghanistan.

To accelerate the project, the parties have formed a ministerial level Steering Committee and Technical Working Group. In February this year, the Indian government approved the formation of the Special Purpose Vehicle (SPV) for the TAPI project and permitted the Gas Authority of India Ltd (GAIL) to join the SPV. With an initial US$ 20 million contribution, the Dubai-based SPV, TAPI Ltd, would take up the feasibility study and design work as well as search for a consortium lead. All four countries have agreed to the concept and Indian GAIL has made initial investments of US$ 5 million in TAPI Ltd.

In recent months, even Bangladesh has shown an interest in joining the project. Knowing the history of the project, the significance of these developments cannot be underestimated. It means that the ground work for the project is ready. It is now time to commit serious finances for it.

According to an earlier pre-feasibility study by Penspen, the estimated cost of the project is about US$ 7.6 billion. Recent reports quote figures around US$ 9-12 billion. According to the ADB, the estimated design and construction period for the project is about four years. Since this is a large and complex project, all partners consider it necessary to attract a major energy company to lead the consortium, which will facilitate investment, manage construction and operate the pipeline.

To attract potential project partners, three road shows coordinated by the ADB and attended by representatives of all four participating countries were organized in Singapore, New York and London in September-October 2012. Several companies and financial institutions attended the Singapore road show, including Petronas, Temasek and State Bank of India. In New York, many leading firms such as Chevron and Exxon Mobile, CITI Group and US Exim participated. Among others, British Petroleum, Shell, British Gas and Morgan Stanley attended the London road show. While all these companies have shown a keen interest in the project, none is currently willing to commit resources due to the uncertain situation in Afghanistan.

Although U.S. administration is pushing for the project, the U.S. Energy Information Administration feels that “the likelihood of such a pipeline coming online in the next few years is very slim due to the logistical and security challenges.” It is also reported that many oil majors may become interested in the project if they are allowed a stake in the upstream fields in Turkmenistan. Turkmenistan has earlier offered a Chinese company such a stake for the Turkmenistan-China gas pipeline. The Turkmen government now says that its new law does not allow stakes in gas fields. After failing to find a lead partner, there were reports that the participating countries were ready to sign a transaction advisory agreement with the ADB to raise funds for the project, yet these limited efforts may not be enough to save it.

At this point, all four participating countries in the TAPI project are keen to see it implemented. Both Pakistan’s Nawaz Sharif and India’s Manmohan Singh are eager to show some positive movement in bilateral relations. Along with other items, TAPI was one of the main items on the agenda when the influential India-Pakistan Business Council met in Islamabad recently. During the meeting, TAPI was termed a “historic step among the member countries.” If the project does not go through, Turkmenistan’s government will move further towards China and possibly Russia. It will be a major setback for Afghanistan’s current administration. The energy starved Pakistan will look for alternative energy ties with China and Iran. For India, it will be a sign of further U.S. disengagement from Afghanistan and Central Asia. Some Indian public sector companies like the Oil and Natural Gas Commission (ONGC) are already exploring the possibilities of bringing Russian hydrocarbons to India. There are reports that the ADB is already pulling out of another big energy project in Central Asia, the South Asia Transmission & Trade Project (CASA-1000). The ADB was supposed to sponsor 40 percent of this US$ 966 million project. These reports are not very encouraging for TAPI either.

CONCLUSIONS: The strategic significance of the project is great. If implemented, the TAPI gas pipeline can become a “game changer” in regional geopolitics and regional economic integration. It has the potential to smoothen the “Decade of Transformation” for Afghanistan. The time has come to commit serious finances for the project. In the absence of any major energy company coming forward, international financial organizations like the ADB should take a serious look at the project and commit finances for TAPI. Another dose of small TA projects will not be enough. If the U.S. administration is serious about the project, it also needs to put its full diplomatic and financial weight behind it. Otherwise discussions on the TAPI gas pipeline will be limited to academic and diplomatic conferences for another decade.

AUTHOR’S BIO: Gulshan Sachdeva is Professor at the School of International Studies, Jawaharlal Nehru University, New Delhi. He also headed ADB and The Asia Foundation projects on regional cooperation at the Afghanistan Ministry of Foreign Affairs in Kabul (2006-10). He has been a Visiting Professor at the University of Antwerp, University of Trento and Corvinus University of Budapest.

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