Tapi pipeline & suspicions

Updated January 06, 2015


A gas pipeline. — AFP/file
A gas pipeline. — AFP/file

BOTH options for importing natural gas — the Iran-Pakistan and the Turkmenistan-Afghanistan-Pakistan-India pipelines — seem to be non-starters for now, despite strong binding international agreements.

After hiccups with the IP pipeline project because of international sanctions against Tehran, the 1800-km Tapi pipeline has also been delayed, once again.

According to reports coming out after the November 18-20 steering committee meeting of the five major stakeholders — four nations and the Asian Development Bank — in Ashgabat, the first gas to flow from the project could not be expected before mid-2019. When the framework agreements were being signed during the PPP’s tenure, the project was expected to be on line in 2016.

Stakeholders at the moot expected the signing of the concession agreement somewhere in 2016, after which it would require at least three years for the Tapi Special Purpose Vehicle (SPV) to follow tight schedules to complete the 56-inch pipeline in three years.

Given this delay, India has indicated revisiting its plan to be a part of the project; whether it would really need the gas from Turkmenistan after 2018 is questionable because it is already a major player in the Singapore LNG futures trading.

Some Chinese firms have reportedly indicated to Islamabad to be part of the Tapi project, but they were not encouraged

Obviously, Delhi is also unwilling to take greater responsibility than the three other partners — Turkmenistan, Afghanistan and Pakistan — to provide the guarantees required to build such a major transnational asset that will pass through its arch rival.

What is clear for Pakistan is that it could expect about 1.6 billion cubic feet per day of gas from the pipeline from its original assigned share of 1.3BCFD because of Afghanistan’s inability to absorb 300 million cubic feet per day of its allocated share.

It is also evident that with the possible induction of gas from Tapi, IP or LNG import and fresh domestic production, Pakistan’s domestic gas prices are to surge at least three times the current rate as the PML-N government struggles to reform the ailing and inefficient energy sector.

As if that was not enough, despite external factors and internal limitations to take a lead position on the pipeline project, a Pakistani group dealing with Tapi appeared to be favouring only a single company — Total — to become the consortium leader, while all other countries favoured expanding the list for pooling resources and risks.

The consortium leader has to take substantial risks and responsibility for financing and implementing the project. Some Chinese firms have reportedly indicated to Islamabad to be part of the Tapi project, but they were not encouraged.

Under the ADB timeline, the parties have to select a consortium leader by this September and sign a consortium agreement by March 2016 after inviting bids, evaluating them and selecting consortium partners.

Problems for the project also arose due to Turkmenistan’s refusal to allow multinationals to have a share in the field that will ultimately pump natural gas into the pipeline. Existing laws in Turkmenistan do not allow foreign shareholding in the upstream petroleum sector.

So, major companies, including those from the main supporter to the mega scheme — the United States — also seem to be out of the game, at least for now. Even ExxonMobil and Chevron, which were originally pushing for the project, do not see any attraction in it without shareholding in the field. That is also the case with Petronas of Malaysia.

But the ADB — appointed the transaction adviser in 2013 — has advised the parties to keep going even if there are delays. So the parties have agreed to pool their nominal resources in the TPCL by this September to keep up the momentum, even though none of the four nations have the financial and technical capability to deliver such a major project on their own.

The four nations have jointly established the SPV, the TAPI Pipeline Company Limited (TPCL), and registered it in the British Isle of Man to build, own and operate the pipeline from Turkmenistan to India via Afghanistan and Pakistan. International financial institutions and construction firms are also vary of the security situation not only in war-torn Afghanistan but also the terrorism-hit Pakistan.

Turkmenistan’s Turkmengas, Afghanistan’s Afghan Gas Enterprise, Pakistan’s Interstate Gas Systems Private Ltd and India’s Gail Ltd will have equal shareholding in the company, which would also be responsible for arranging financing, designing, construction and operation and maintenance of the pipeline.

The problem with Islamabad’s desire is that unless the scope of finding a consortium leader is expanded beyond Total, as sought by the other partners, none of the three major and original partners — Turkmenistan, Pakistan and Afghanistan — have the credit guarantee credentials to back the joint venture.

Point in question here about Pakistan is the repeated emergence of circular debt and the consequent sovereign default notices issued by independent power producers. In case India moved out, the problem would become even more serious.

What needs to be seen, however, is if the Tapi partners are able to follow the Chinese model of investment in Turkmenistan through technical services agreements instead of production-sharing contracts.

Published in Dawn, Economic & Business, January 6th, 2015

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