Analysis: Iran-Pakistan-India Gas Pipeline Imperiled

By Bill Samii

As the owner of the world's second-largest proven natural gas reserves, Iran is keen to exploit this resource as a source of revenue. It is therefore pursuing gas export deals with a number of countries.

One of the biggest potential customers so far is India, and negotiations for a pipeline stretching across Pakistan have been going on since the mid-1990s. A recent flurry of diplomatic visits suggested that the deal was about to be concluded, but U.S. security concerns and Indian anger over Iranian business practices are putting this in doubt.

Iran and India signed an agreement for an overland natural gas pipeline in 1993, and in 2002 Iran and Pakistan signed an agreement on a feasibility study for such a pipeline. India-Pakistan tensions over Kashmir and related security concerns have delayed the project. In late-February and early-March diplomats from all three countries said a deal would be signed soon, and Iranian Foreign Minister Kamal Kharrazi said the pipeline would be 2,700 kilometers long, and India would buy 7.5 million tons of LNG [liquefied natural gas] a year for 25 years (see "RFE/RL Iran Report," 7 March 2005).

On 16 March, however, Indian Petroleum Minister Mani Shankar Aiyar announced that his country might withdraw from the gas deal. "We will not buy gas from Iran if we cannot sell it in India," Press Trust of India reported him as saying. Aiyar explained that Iran wants to charge as much for natural gas as it does for LNG (about $4 per million British thermal unit [MBTU]), whereas the main Indian consumers -- the fertilizer and power sectors -- are unwilling to pay more than $3 per MBTU. With the addition of transportation and transit charges to the Iranian price, Aiyar said, the gas would end up costing $4.50 per MBTU. Aiyar added that India and Pakistan will need approximately 200 million standard cubic meters of gas daily, and Iran should offer a special price for such a large order.

Tehran, furthermore, is insisting on a "take-or-pay" agreement, in which India must pay for the agreed amount of gas even if it does not take delivery of it, Press Trust of India reported on 9 March. India reportedly prefers a "supply-or-pay" contract, in which Iran must deliver gas to the Indian border or pay for the contracted quantity. Tehran also rejected India's request for natural gas that is rich in petrochemicals, preferring instead to deliver "lean" gas that does not contain butane, ethane, or propane.

It could be a coincidence, but Aiyar's suggestion that the deal could fall through comes at the same time that U.S. Secretary of State Condoleezza Rice is visiting India and Pakistan. In fact, she referred to the proposed pipeline during a 16 March press conference in New Delhi, RFE/RL reported. She said, "We have communicated to the Indian government our concerns about gas pipeline cooperation between Iran and India. I think our ambassador has made statements in that regard and so those concerns are well known to the Indian government."

The timing of the Indian petroleum minister's comments suggest that New Delhi is pressuring Tehran for a better deal, and it could be taking advantage of Rice's visit to leverage its position.

India's Other Suppliers...

India is a huge and growing natural-gas market. According to the Energy Information Administration, natural gas use was nearly 25 billion cubic meters in 2002 and is projected to reach 34 billion cubic meters in 2010 and 45.3 billion cubic meters in 2015. India produces gas and has worked with outside partners -- including Bechtel, Gaz de France, General Electric, Total, and Unocal -- to increase production, but it is looking to other countries to fulfill its requirements.

One idea is to connect Bangladesh's natural gas reserves with the Indian gas grid. Burma could be a source of natural gas, too. Two Indian companies -- Oil and Natural Gas Corporation (ONGC) and Erstwhile Gas Authority of India, Ltd (GAIL) -- own equity in Burmese natural gas reserves, and Burmese officials have indicated an interest in running a pipeline to West Bengal in India.

Qatar --with the world's third-largest natural-gas reserves (14.4 trillion cubic meters) -- is another competitor for the Indian market. India's Petronet and Qatar's Ras Laffan LNG Company (Rasgas) signed an agreement for the provision of 10.3 billion cubic meters per year of LNG, and deliveries began in January 2004, according to the Energy Information Administration.

Indian Petroleum Minister Aiyar visited Moscow and Kazakhstan in late February to discuss energy issues. He reportedly said that India is willing to pay $2 billion for a 15 percent stake in Yuganskneftegaz, "The Financial Express" reported on 12 March. He also said India could invest $25 billion in the entire Russian energy sector. India's cabinet recently authorized discussion of the Turkmenistan-Afghanistan-Pakistan Natural-Gas Pipeline Project (see "RFE/RL Afghanistan Report," 25 February 2005). Iran does not, therefore, have a stranglehold on the Indian market.

...And Iran's Other Markets

Iran natural-gas reserves is an estimated 26.6 trillion cubic meters, according to the Energy Information Administration, but the country only produced about 76.5 billion cubic meters of natural gas in 2002. Most of that gas was used domestically, although Iran did export to Armenia and Turkey.

Iran is eager to reach other markets. Iranian Petroleum Minister Bijan Namdar-Zanganeh and Omani Oil and Gas Minister Muhammad bin Hamad bin Sayf al-Rumhi on 15 March signed an agreement on the export to Oman of 10 billion cubic meters of natural gas annually, beginning in 2006, IRNA reported.

The same day, Zanganeh and Kuwaiti Energy and Oil Minister Ahmad Fahd al-Ahmad al-Sabah signed a deal for the export to Kuwait of 10 million cubic meters of natural gas a day, beginning in late 2007, IRNA reported. Zanganeh said the deal with Kuwait is worth more than $7 billion over 25 years. He went on to say that the legal documents relating to the deal will be drawn up in a few months.

Earlier in March the possibility of Ukraine purchasing 15 billion cubic meters of natural gas from Iran every year was discussed at an Iran-Ukraine energy commission meeting in Kyiv. Two pipeline routes are being considered -- Iran-Armenia-Georgia-Russia-Ukraine or Iran-Armenia-Georgia-Black Sea-Ukraine. Other countries that have signed gas-related memoranda or at least discussed the topic with Iran include Austria, Bulgaria, China, Greece, Italy, and Turkey.

Iran likes to present every meeting as a major accomplishment by staging the signing of a memorandum of understanding, but these are not binding contracts. Conclusion of the deal with India is potentially very important for Iran, because it will curtail some of its political isolation and will earn it a place in the international gas market. But Tehran's pricing policies and Washington's opposition may scuttle this effort to breakout.

Bill Samii is a regional analysis coordinator with RFE/RL Online and editor of the "RFE/RL Iran Report." He earned his Ph.D. at the University of Cambridge. His research articles have appeared in the "Middle East Journal," "Middle East Policy," and the "Middle East Review of International Affairs (MERIA) Journal." He has contributed to several books about the Middle East.

Copyright (c) 2005. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

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