x Abu Dhabi, UAEMonday 22 January 2018

As Pakistan buys Iranian gas India asks if it should, too

There is little evidence so far that Iran would be sufficiently dependable to contribute to India's search for energy security.

The much-delayed India-Pakistan-Iran (IPI) gas pipeline is back in the news, but now with just one "I" - India is no longer part of the project.

Iran and Pakistan marked the start of Pakistani construction this month, when the presidents of the two countries came together for a ground-breaking ceremony.

The pipeline is to be completed in time to start delivery of 21.5 million cubic metres of gas per day to Pakistan by December 2014.

There is much political symbolism in this as both Islamabad and Tehran are trying to snub the US, which has been against this pipeline and has been trying to isolate Iran for its nuclear programme.

During the ceremony the Iranian president, Mahmoud Ahmadinejad, accused "foreign elements" of trying to undermine Iran's relations with Pakistan and seeking to thwart the Islamic Republic's progress by using its nuclear programme as a pretext. "I want to tell those individuals that the gas pipeline has no connection whatsoever with the nuclear case," Mr Ahmadinejad said.

Rapidly rising energy demand in India and Pakistan has been the impetus behind the proposed gas pipeline from Iran's fields through Pakistan to India. It is expected that this project will help cement ties between Iran and Pakistan, and that Pakistan's annual royalties will be up to $600 million (Dh2.2bn).

The proposal, however, was stuck for a long time because of differences between Pakistan and Iran on pricing. Both India and Pakistan wanted Tehran to offer a price set on the basis of global practices for long-term contracts; they both rejected Iran's formula, which was to link the price to the price of Brent crude oil, with a fixed escalating cost component. Also, India was wary of the sums Pakistan was demanding for security and transit to India.

Despite US opposition to the project, both India and Pakistan had indicated that it remained a high foreign policy priority.

In the end Pakistan decided, in 2009, to finalise the deal, connecting Iran's South Pars gasfield and Pakistan's Balochistan and Sindh provinces.

However, the deal remains a controversial one in Pakistan, because of the high price that Iran is charging.

India had quit the project in 2009 though officially New Delhi continues to claim that it has kept its options open to join the project at a later date. Indeed, even China has shown interest in joining the project.

For India, the main issue is Iran's reliability as an energy provider. There is little evidence so far that Iran would be sufficiently dependable to contribute to India's search for energy security. A number of important bilateral projects involving Indian businesses and the Indian government have been rejected by Iran or have yet to be finalised, due to last-minute changes in the terms and conditions demanded by Tehran.

To date, Iran accounts for only about eight per cent of Indian oil imports. Moreover, both of the major Iran-India energy deals recently signed with great fanfare are now in limbo.

India's 25-year, $22 billion agreement with Iran for the export of liquefied natural gas (LNG), signed as far back as 2005, has still not produced anything, as it requires India to build an LNG plant in Iran. Such a plant would need American components, which might violate the US Iran-Libya Sanctions Act.

The other project - construction of a separate, 2,735-km, $7 billion pipeline to carry natural gas from Iran to India via Pakistan - is also stuck.

The current Indian government initially viewed that pipeline project as a confidence-building measure between India and Pakistan but in 2005, when pressure started mounting, Manmohan Singh, the Indian prime minister, went so far as to say he did not know if any international consortium of bankers would underwrite the project, given uncertainties about Iran.

The Indian strategic community has never been in favour of the pipeline proposal anyway, seeing it as giving Pakistan considerably too much leverage over India's energy security.

Both these projects have also made the unreliability of Iran as a trade partner clear to India. The national oil companies of Iran and India disagree about the legal interpretation of the contract, that was signed in 2005 before Mr Ahmadinejad was elected president of Iran.

The deal was based on a relatively low market price for crude oil. Naturally, then, India considers the deal final and binding, while Iran has argued that the price can be changed because the agreement has not been finally ratified.

In light of Iran's growing global isolation, sections of the Indian government have suggested that India's participation in the gas pipeline deal might not be strategically advantageous to India, given the very low quantity of gas involved.

Moreover, it has also been apparent that the Iranian gas is not the lowest-priced option for India. New Delhi has made it clear that although it remains interested in the pipeline project, it would pay for the gas only after it is received at the Pakistan-India border, it would not pay a penalty in case of a delay, and it is opposed to Iran's demand to revise the deal's gas prices every three years.

India's interests in its whole broad relationship with Iran have never been strictly commercial. After Pakistan and Iran signed their 2009 pipeline deal, India indicated that it was willing to resume negotiations regarding independently importing natural gas from Iran via an undersea pipeline, allowing India to bypass Pakistan.

As Iran and Pakistan move ahead with the project now, India is likely to wait and watch to see if the rhetoric of the "peace pipeline" actually matches the ground reality of energy security in its neighbourhood.


Harsh V Pant is a reader in international studies at King's College, London