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21 December 2011, Gateway House

TAPI: Possibility or pipe dream?

Growing instability in the region make the planned Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline seem more like a burden than a solution to India’s hunt for alternative energy sources. Is it wise for India to move ahead with the $7.6 billion project?

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On Nov 14, Pakistan signed the Gas Sales Purchase Agreement (GSPA) with Turkmenistan, a major milestone in the process of pushing forward the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project. The next step, the signing of the ‘Heads of Agreement’ and transportation and transit accords, is set to take place at the end of December, leading to commencement of construction soon after. Though the pipeline is predicted to largely alleviate India’s energy woes by providing access to untapped natural gas reserves, it will pass through highly unstable terrain.

The state of unrest in the two middle countries, unlikely to be pacified sufficiently in the near future to ensure security of the pipeline, warrants trepidation and the need for caution before deeming the $7.6 billion TAPI venture the best option in India’s search for alternative fuel sources.

The 1,680km route would start from Turkmenistan’s South Yolotan-Osman field and pass through Herat, Helmand and Kandahar in Afghanistan to Quetta and Multan in Pakistan, finally ending at Fazilka in India. The agreement signed among the four countries envisages the delivery of 90 million cubic metres per day (mmcmd) of gas from Turkmenistan to South Asia with 38 mmcmd (around 42%) each going to Pakistan and India and 14 mmcmd (around 15.5%) going to Afghanistan.

The domestic price of natural gas in India is dictated by the power and fertilizer sectors, which make up 70% of the nation’s natural gas consumption and are regulated to pay government controlled Administered Price Mechanism (APM) rates. In 2010, when the government increased the APM rates from $1.79 to $4.2 per mmbtu (million British Thermal Unit), the power sector found it difficult to supply electricity without an increase in electricity prices. Furthermore, since both electricity and fertilizer are closely linked to agriculture, farmers and agricultural units get subsidized power. High natural gas prices have a direct impact on the price of farm produce and consequently affect larger challenges, such as India’s food security troubles. Reducing these sectors’ dependence on natural gas will allow the government to deregulate the natural gas sector without an adverse effect.

While in theory, India would gain tremendously from the execution of this project by strengthening ties with Central Asia and being part of a potential trade corridor between the four countries, these opportunities are overshadowed by the turbulent climate in Afghanistan and Pakistan. Based on risks including war/civil war, riots, civil unrest, terrorism and political interference amongst others, hopes for safety along the length of the pipeline – the paramount concern in the decision to proceed with it – are not realistic at this time.

In Afghanistan, there’s fear that a political settlement post-withdrawal of NATO forces in 2014 will entail power-sharing between the Taliban and the government in Kabul, or that the Taliban may be given semi-autonomy in the eastern and southern Pashtun-held territories. Either circumstance is a likely precursor to flagging law and order, and the 12,000 troops that the Afghan government plans to deploy cannot be relied upon to guard the line amidst almost certain upheaval.

An equally perilous landscape in Pakistan further magnifies India’s worries. Passing through Baluchistan, a fractious and poverty-ridden region, the pipeline will be a glaring target for militants. The South Asian Terrorism Portal reports that there were at least 126 bomb blasts and grenade explosions across the province in 2009 alone. Rocket attacks on gas pipelines, railway tracks, power transmission lines, bridges, communication infrastructure and government and military facilities occur frequently. Ordons News reports that eleven pipelines were blown up in Baluchistan in a span of ten days in February, 2011. The risk of attack on TAPI cannot be underestimated.

With these factors in mind, the biggest question is that of insuring the pipeline. The insurance is broken down into various components; still the terrorist and political risks are fraught. There are examples of oil refineries in India, in relatively safe areas, which had to reduce their initial terrorist risk covers to get bids from insurance companies. In another example recounted by an executive in an Indian Insurance company, a Maoist attack on an oil pipeline in an Andhra refinery led to a loss of Rs. 900 crores ($182 million). Reinsurers in London found a lacuna in the clause and didn’t pay the claim. Thus, even a broad-based risk cover for this project seems difficult primarily because of the sensitive nature of the product and the territory it traverses.

Lastly, financial hurdles exist as well. In 2008, India and Pakistan proposed a rate of $5.7/mmbtu, which is even higher than the $4.2 APM rate. But Turkmenistan considered this below the market price and was reluctant to strike a deal below $11.4/mmbtu. Currently the delivered price of liquefied natural gas (LNG) long-term contracts is close to $7.5/mmbtu. Therefore, to get gas at the LNG market price from a sensitive area while LNG trains and spot cargoes exist is not economical. Turkmenistan also prefers bilateral pricing for exporting the gas, versus a flat rate, for countries involved. And there have been conflicts regarding linking the piped gas prices to other energy sources; after much discussion, the buyer nations have been forced to link the gas price with some percentage of the international crude oil rate. The Pakistan Daily Times reports that under the GSPA signed recently, Pakistan will pay 70% of crude oil.

Considering the above factors, India ought to evaluate the following recommendations:

  • A consortium of the right stakeholders

The involvement of Russia’s Gazprom along with Turkmenistan’s Turkmengaz and India’s Oil & Natural Gas Corp. (ONGC) in the consortium for the construction of this project will help secure the pipeline. These organisations have the geostrategic muscle and technical prowess to secure the project. Gazprom, the Russian energy giant, has been involved in the construction of several natural gas pipelines across Europe and Central Asia. With 1580.8 trillion cubic metres, Russia has the largest natural gas reserves in the world and one of the best, if not the best, technical expertise and personnel for natural gas pipeline construction through difficult terrains. Gazprom has indicated an interest in becoming a part of TAPI, and according to the Turkish Weekly, Russia and Turkmenistan’s deputy prime ministers confirmed that the two countries intend to collaborate in the energy and fuel sectors. ONGC India, though not previously involved in trans-boundary projects, owns and operates more than 22,000km of cross-country pipelines in India, and its presence in the consortium would be valuable in monitoring Indian interests. The Anglo-Dutch major, Shell, can also be considered as an additional or alternative member.

To finance this international consortium, each party would raise its equity stake to procure the loan for the financing required for the project. Each will hold an equal percent, with the operator, who will be responsible for construction of the pipeline, holding a percentage higher than the rest. In the potential member lists, Gazprom, ONGC, GAIL (Gas Authority of India Ltd.), and Shell have the capacity to be the operators. If the Asian Development Bank is willing to finance the project, it will take an equity stake in the project as well. With multiple stakeholders, the risk of such a huge project can be diffused, and the regional support would be beneficial to
India, possibly even providing increased security.

Non-TAPI Alternatives:

  • Revive discussions with Myanmar

India should recommence efforts to woo Myanmar for possible LNG exports and revive earlier talks of a pipeline from the region passing through Bangladesh. India’s relations with Myanmar have improved, and the Kaladan project linking the land-locked North-East to Sittwe port in Myanmar is already underway. The bilateral ties can be deepened to include energy ties as well.

  • Sub-sea routes to consider

A recent study conducted by officials of Peritus International Ltd and South Asia Gas Enterprise Private Limited (SAGE), and presented at the Off-Shore Technology conference in Texas in May 2011, builds on the possibility of an Oman-India pipeline which was unfeasible in the 1990s. The research suggests that the technology in this domain has improved considerably in the last decade, making it possible to build a pipeline at 3,000mts depth and above. Though Oman’s export of natural gas is not high, it will give an all important, continuous entry into the Middle East. The off-shore pipeline can be extended to either UAE or Qatar.

Threats of violence and discord along the pipeline remain valid grounds for distress, making TAPI more of a serious national security liability than an answer to energy problems. India’s commitment to a steadfast search for environmentally responsible and economically feasible sources of natural gas and other cleaner fuels is crucial as its economy surges, but the pipeline is an invitation for trouble. Until there can be a stronger basis for trusting in the project’s safety in the short- and long-term, India should hesitate before making the next move on TAPI.

Madhura Joshi is a Researcher at Gateway House

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

The Asian Energy Institute republished this feature, in the April 2012 issue of their bi-annual newsletter, here.

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