by Giovanni Pagotto

On March 15, 2015 in occasion of a dedicated intergovernmental meeting in Kabul, the negotiations over the construction of TAPI (a gas pipeline passing through the territories of Turkmenistan, Afghanistan, Pakistan and India) removed significant hindrances towards the implementation of the project. According to Sartaj Aziz, adviser to Pakistan’s Prime Minister on national security and foreign affairs, the project can already be launched by the end of the year. According to the reports, the most significant achievement was a compromise over ownership and private investment issues in Turkmenistan’s upstream segment.

However, the feasibility of TAPI as an integrated project remains far from reality. This article will group the project’s hindering factors into three main sets and discuss them in the following order: security issues; geopolitical factors; and economic challenges.

Historical sketch

The pipeline project TAPI is a gas pipeline, which will link the regions of Central Asia and South Asia and transport up to 33 bcm of natural gas (Table 1). Turkmenistan is the sole supplier of gas for the pipeline; India and Pakistan will receive 42% of the total available capacity each, while the rest of the gas would be supplied to Afghanistan.

The idea of building a major pipeline project that could bring significant natural gas volumes from resource-rich Central Asia to populous and energy-hungry South Asian states is not a novelty. The first steps in the direction of gas supplies from Turkmenistan to Pakistan through Afghanistan goes back to the early 1990s, when cooperation with the Taliban to form a government of national unity with the northern tribes and stabilise the country was hailed by the Bush administration. One of the reasons was an effort to ensure the construction and operation of the pipeline of the US consortium Unocal against its direct Argentinian opponent Bridas. Negotiations broke up just before the 2001 terrorist attacks, but immediately resumed after the consequent US invasion. A “steering committee” of oil and gas ministers of Turkmenistan, Afghanistan and Pakistan was created already in 2002 and was promptly backed by the Asian Development Bank for technical assistance. India finally joined in the 10^th meeting of the committee in 2008, and although the next decisive steps were delayed by intra-regional and international ramping tensions, with the recrudescence of the Afghan conflict and Pakistan-India mutual distrust, the representatives of the four countries signed the Gas Pipeline Framework Agreement and the related Intergovernmental Agreement in Ashgabat (Turkmenistan) in December 2010.

Two problematic issues included transit fees, and the above-mentioned restrictive Turkmenistan law precluding the private ownership of land and discouraging potential investors such as Total or Exxon. The Agreement on transit fees was settled in May 2012 after some disputes in a four-party summit, where the respective memorandum of understanding was signed. Concerning the Turkmenistani regulation, the state company TurkmenGaz with the other partners’ approval opted for “self-propulsion” and lead to the consortium refusing PSA rights concessions to foreign companies and aiming at receiving support from Russia and/or China.

In general, besides providing natural gas as such, it is undeniable that the TAPI project has an important strategic meaning for the countries involved.

It would be, in fact, about realising a much needed energy corridor between Central Asia and South Asia, and, in other words achieving a “natural partnership” by using the shortest possible route from the producer to the consumers. In these terms such an aim seems logical and beneficial to all parties involved. For the supply side (Turkmenistan), this would mean revenues and diversification of export routes, as well as competitive prices for natural gas. For Afghanistan and Pakistan, the project means additional supplies as well as transit revenues.

Nevertheless, the majority of energy analysts tend to look at the project with undisguised scepticism. The project, and notably its physical functioning and profitability, are undermined by a number of blatant risks and unfavourable conditions.

 Security concerns

The most pressing set of issues is physical security of the proposed project. These issues arise manly in the transit states – Afghanistan and Pakistan.

The tendency observed in media is more or less deliberately avoiding covering news about Afghanistan after the declared assassination of Al-Qaeda’s leader Bin Laden and the start of the gradual withdrawal of NATO and US troops from the country. This might give the impression that the security situation in the country has substantially improved. The reality seems to be somewhat worse than generally depicted. President Obama received in Washington his new Afghan counterpart last March, Ashfar Ghani and amidst abundant praises and compliments, openly acknowledged that “Afghanistan is still a dangerous place”, and local troops are still unable to maintain law and order in the country without foreign military assistance. On the same occasion, several former senior officials in an open letter described the environment in the Central Asian republic as a “stalemate” and remarked that the political and economic situation is fragile. UN Secretary General, Mr. Ban Ki Moon quoted in the work of Natasha Underhill warned that at present conditions the risk for the situation in the country to become irreversible still exists, especially as a result of weak government legitimacy and controversial elections. After a year it is probably still too early to assess President Ghani’s ruling performance. Stratfor’s analysis of September 2014 also envisioned a mounting risk after the complete withdrawal of US troops, promised by President Obama within the terms of its office. Stressing the fact that “political forces are still far from reaching a durable power-sharing arrangement”, it explains that, in brief, a divided pro-Western front is likely and particularly vulnerable to the Afghan Taliban.

The latter extremist group, moreover, announced that this year’s “spring operations” would begin on April 24, targeting what they called “the stooge regime” of Kabul, together with the “foreign occupiers”, that is, US troops. It does not come as a surprise therefore, that rumours about an imminent start of trilateral peace talks between the US, Afghanistan and Afghan Taliban in Doha, incidentally promptly denied by official sources, proved wrong and such a meeting, to this day, has not taken place and it is not likely to take place in the foreseeable future.

Overall, more than a quick and mediated resolution, the premises seem to suggest that tensions and clashes will persist in the medium to long term. In 2012, Pakistani press claimed that “the Afghan Taliban have assured that they would not sabotage the project,” and used this as a main argument to assert that the problem of transit was probably going to be solved soon. The main issue is whether it is wise to look at the Taliban as a rational actor. To this end, the reader should bear in mind the extremist religious values at the base of the movement, for which the latter has been perpetrating continuous acts of violence in the country and several major terrorist attacks abroad. It can be easily deduced that religious values for the group are more important than political and economic profitability. A situation where the government, which had previously agreed upon the non-sabotage, changes its political orientation as a result of elections or different external stimuli to a tough pro-Western and anti-Taliban stance, is not a remote possibility. Will the Taliban respect the agreement simply because pacta sunt servanda?

Even regarding the Taliban as a rational actor, as the US strategy shifts toward to more pressing priorities (Ukraine, ISIS), they retain their motives to conduct war against Kabul and try to profit from the imminent departure of well-trained foreign troops.

There is an idea of deploying troops to defend the construction operations and the functioning of the pipeline that would run through very dangerous regions (such as Kandahar and Herat). Military presence will increase costs and cause more insecurity, being likely to motivate terrorist attacks. Infrastructure is seen as a source of legitimacy for the central government and thus is a natural target for the terrorist attacks already.

Last but not least, there is lack of evidence that the area selected for the project has been cleared of land mines.

There are also security problems on the territory of Pakistan. The pipeline is planned through secessionist province of Baluchistan, which presents a heavy security threat. Quite obviously, the Baloch independentism organisations have stressed that any project involving transit in the area has to be agreed upon with a “legitimate” representative, in this case, the London-based leader Hyrbyair Marri. The risk of sabotage, therefore could be very high. Moreover, the Baloch independence group would gain significant leverage over Islamabad’s government from TAPI. Meanwhile, India would suffer heavily any provoked disruption.

Overall, the risks afflicting the physical functioning of the project are very high, if not to say unprecedented in international experience and, additionally, no significant improvement is foreseeable.

Geopolitical context

Security concerns – ultimately safety of transit through Afghanistan and Pakistan – would discourage most of foreign companies from entering the project. So why are the parties willing and determined to take the risk of long-term unreliable supply?

The answer can be found in the fact that a long-term project, especially when it deals with the shared use of a key resource like gas, as in case of TAPI, means that a long-term geopolitical game is at stake. Central Asia has a strategic location and all actors – especially Turkmenistan, Pakistan and India – have strong geopolitical interest in connection with the implementation of the pipeline. In particular, the two traditional geopolitical enemies in the area, Pakistan and India, see the pipeline as a way of building a relation of interdependence with Afghanistan while sharing the risk of such an attempt. Both India and Pakistan are looking at opportunities to enhance their status in the region. Both countries regard Afghanistan as a strategic ‘asset’, mainly because of its geographical position.

The US has been strongly backing the project since the very break-up of the Soviet Union in 1991. At the same time, there are hopes that the pipeline will help to promote better relations with the countries involved in it. The ultimate aim is consolidating a pro-US “curtain” in the area, while simultaneously breaking China’s monopsony in Turkmenistan’s upstream and the preferential relationship between the two.

The TAPI pipeline in virtue of its long-term nature can serve as a basis to build interdependent relationships with other actors. According to Nye and Keohane’s interdependence theory presented in their book “Power and Interdependence” a long lasting interdependence relationship can easily become asymmetric under the pressure of internal or external factors. Asymmetries in this case should be regarded as a source of power vis-à-vis the more dependent part.

Asymmetries that may emerge in a context of traditionally very tense international relations can be used as weapons. Natural gas, particularly if used in power generation, is very suitable for damaging purposes and/or retaliation. Therefore, the risk of a conflict escalation out of a dispute should be taken into account, especially in the light of the nuclear status of India and Pakistan.

At the macro level, the pipeline also could contribute in deteriorating China-US relations, due to a probable reinforcing “encirclement complex” of the former. This is even more likely to occur in the wake of the clear interest for Central Asian resources demonstrated by China. China, in brief, will try to counter the open support by the US and their aim to favour Turkmenistan’s differentiation away from its now de facto unique customer.

Overall, the project is entangled with a thick network of multi-level geopolitical interests. India and Pakistan tend to overestimate the potential benefit of gas trading for their regional aims over the risk of becoming vulnerable to an unreliable partner. There is also a potential of China-US contradictions of influence in the region.

Economics of the project

The most critical aspect for investors is the evaluation of the South Yolotan field in Turkmenistan to serve as the main source of gas for TAPI. Most recent estimates provided by the independent British auditor Gaffney, Cline & Associates reports the possibility of recovering up to 21,2 trillion cubic meters of gas from the field making it the second-largest reservoir of gas in the world after the Iranian/Qatari South Pars. In spite of the fact that these estimates have been heavily criticised, the field could sustain the production of volumes contracted by China (80 bcm/year in total by 2020, but only 25-30 bcm/year from South Yolotan through the D line of the Central Asia-China pipeline). The problem is lying in the closeness of the onshore upstream sector of Turkmenistan. Turkmenistan does not permit foreign companies oil and gas exploration and development on onshore fields, where the only notable exception to the rule is the Chinese CNPC.

In 2013, a proposal was made to European and American IOCs to develop offshore projects and swap the gas produced with the South Yolotan fields feeding the TAPI. This proposal is not likely to come into effect due to the higher costs and risks of offshore exploration. Moreover, at the moment, only CNPC would have the technical know-how and the economic capability to carry out the upstream investment needed for a project, which is evidently against Chinese national interest.

Without being in control of the upstream, foreign companies are very unlikely to invest on the realisation of the pipeline itself and a significant inflow of FDI is necessary for its feasibility.

Lastly, the main financial issue is the cost of the project. It was initially estimated in 2008 at about 7,6 billion USD, but in 2012 the cost had allegedly already rose to around 12 billion USD.

In the absence of international investors, the remaining options for the proposing states are to provide all the necessary funding themselves, or to rely on the assistance of the Asian Development Bank. Both options are questionable. The cost of the project, according to the 2008 estimate, goes far beyond the Asian Development Bank’s financing capabilities, while bearing significant risks.

There are two main alternatives to the TAPI pipeline: the “Peace Pipeline” between Iran and India through Pakistan, and the Oman-India offshore pipeline.

The “Peace Pipeline” from Iran’s South Pars field to India through Pakistan was considered the most promising option before sanctions against Iran were introduced in 2012. From this point of view, the TAPI has to be seen as an “offshoot of sanctions”. The cost was estimated around the same amount required by TAPI (7,5 billion USD). China has already declared it will finance a downscaled project of an Iran-Pakistan gas pipeline, which will not have any transit issue through Afghanistan (although Baluchistan will remain as a transit issue) and is very unlikely to receive a veto by the US amid threats of sanctions against Pakistan, thanks to the Chinese support. India already withdrew in the preliminary phase of the Peace Pipeline for security and pricing concerns.

India could instead take advantage of the gradual return of Iran in the market to contract sufficient volumes to fill an Iran-Oman-India pipeline, whose offshore section would cost around 4-5 billion USD. In this case, the transit risks seem to be lower than in case of Pakistan involvement and geopolitical concerns would be considerably reduced.

The cost of building the two alternatives to TAPI, according the latest estimates, would surpass the TAPI cost by approximately 1 billion USD, which, at the conditions described, should be seen as a very fair security premium that is worth paying.

The only loser in such a picture would be Turkmenistan. Ashgabat would see its diversification dreams vanish. However, the loss might be temporary: Iran, despite its huge domestic gas reserves, is also one of the biggest consumers in the world and has very poor infrastructure, especially in the North-Eastern part of the country. It is not therefore surprising that it declared its availability for transiting Turkmen gas for further export, since it could benefit itself from the FDI inflow to support the new trans-border infrastructure and “gasify” rural areas in the region.

All this will clearly depend on the demand trends of India and Pakistan, but due to the cost of alternative LNG supply, the scenario is not as remote as it may appear at a first glance.

Conclusions

Looking at the whole picture, trans-regional projects between Central and South Asia are undoubtedly very important for the development of both regions. In principle, taking into account only economic and geographic factors, the transit through Afghanistan is probably the optimal solution to attain this target. Nevertheless, having examined mounting security problems in Afghanistan, long-term geopolitical risks and the economic aspects of the TAPI pipelines and possible alternatives, what can be concluded is that the TAPI pipeline project faces a number of challenges that makes it very unattractive for actual implementation. If actors involved behave rationally, then they will not insert the TAPI into their energy strategy until the adverse conditions pointed out above desist. Also, in the wake of the imminent revocation of Western sanctions on Iran, absolute priority should be given to the viable alternatives centered on Iran.

Giovanni Pagotto

Graduate student of ENERPO program at the European University at Saint Petersburg (academic year 2014-2015). He holds BA degree in International Studies from University of Padova and a Master’s Degree in European Studies from Aalborg University. Areas of his scientific interests include natural gas trading and geopolitics, coal markets and EU energy policy-making. Address for correspondence: giovanni.pag889@gmail.com