Foreign Correspondence

[Amaunet]

Has India’s LNG deal upstaged the overland pipeline?

Even as India and Pakistan were trying to smoothen differences on an overland oil and gas pipeline from Iran, New Delhi has gone ahead and cut a $40 billion deal with Iran over the next 25 years on LNG (liquefied natural gas). Is this the end of the Pakistan pipeline issue?

On the surface it does look like it. When Prime Minister Shaukat Aziz was in India in November last year, the Indians linked the overland pipeline with Pakistan granting them MFN status. Mr Aziz dismissed the linkage and noted that Pakistan needed the pipeline for its own domestic consumption and would go ahead with it regardless of India. However, he said that India must inform Pakistan of its decision because that would determine the technical parameters of the pipeline.

Now India has made clear that it will play hardball on the issue. There are reasons for it. The normalisation process aside, India is not prepared to let Pakistan go one-up on it. When its security experts rejected the overland pipeline option in the late nineties, it began work on LNG. By now, it has already spent a major chunk of the upfront cost of carrying the LNG and de-compressing it. Also, the deal just signed gives India 20 percent stake in upstream participation in the Yadavaran and Pars fields. Moreover, in the current deal, the price has been worked out over the entire period until 2036. This could help offset the cost of fluctuating prices that would attend an overland pipeline. Similarly, India has developed a fleet of its own ships to carry LNG. Given all these costs as well as working out security risks, it does seem like the LNG option may be good for India.

But there’s a catch. We do not know how India has worked out its rate of growth and the rate of consumption over this period. If those calculations go awry whether on the plus or minus side, the LNG option could prove far more expensive than an overland pipeline. Experts say India’s requirement is likely to increase more than it has determined at this moment. If that is correct then we could expect India to try and work two options: LNG as well as an overland pipeline. It has started with LNG because that gives it a better handle on negotiations with Pakistan over the pipeline. Since the LNG project would kick off in 2009, there is time still for India to drive a hard bargain with Pakistan. As for Iran, all the deals work to its advantage. It has signed the LNG deal with India and China and has signed one with Pakistan on the pipeline. If India involves itself in the pipeline deal at some point in the near future, Iran gets more, not less.

We do not know if the Pakistani government was alive to this possibility coming on the heels of Mr Aziz’s statement last November. We also do not know if Islamabad has formulated a viable response to this development. However, one thing is obvious: Pakistan took an ill-advised decision in the late nineties to not take the option seriously. If the transit pipeline does not work out, Pakistan would have enough gas for its domestic consumption, whether it is through Iran or Turkmenistan, but nothing to show in royalties. That India could work the LNG option should also have been clear from how Egypt used it to export gas to Turkey to avoid an overland pipeline through Israel. *



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