WASHINGTON, DC - Wednesday, June 06, 2012 -
On May 23, leaders from Turkmengaz met with Pakistan’s Inter State Gas Systems and India’s GAIL to sign the Gas Sale and Purchase Agreements (GSPA) to finally sign the long-awaited document that would finally put the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project into existence.
Discussed for nearly twenty years, TAPI has come to symbolize commercial opportunities in South and Central Asia in the ethos of the “New Silk Road.” While TAPI has been labeled a “peace pipeline” by the Asian Development Bank (ADB) and a “perfect example of energy diversification and energy integration” by the United States (U.S.), the project’s implementation is undermined by several critical factors: a shortage of investment, political instability, and commercial risk.
The 1,042-mile pipeline will draw oil from the Yolotan-Osman fields in Turkmenistan and transit across Afghanistan and Pakistan to energy-hungry India. Nearly 457 miles will cross Herat and Kandahar provinces in Southern Afghanistan.
According to Turkmen officials, TAPI will export 180 billion cubic meters (bcm) by 2030. The pipeline will carry 33 bcm per year. By 2018, Pakistan and India could import 38 million cubic meters per day (mcmd).
While the ADB’s 2008 feasibility project estimated TAPI will cost $7.6 billion, Daniel Stein of the U.S. Department of State noted in March observed that the costs will likely exceed $10 billion. If all goes as planned, design and construction will take four years, which means TAPI won’t be operational until 2018.
If successful, TAPI will be the solution to South Asia’s impending energy dilemma. Pakistan and India’s energy needs are expected to double by 2030. GAIL India has reportedly agreed to pay Turkmengaz to ensure the delivery of gas to the Turkmen-Afghan border; thereafter it will purchase gas vis-à-vis an international consortium that will include GAIL.
But the crux of the issue facing TAPI is this: who wants to be responsible for planning, constructing, and managing a gas pipeline through war-ravaged and under-developed Afghanistan?
Afghanistan: the Elephant in the Room
“The security situation in Afghanistan is the elephant in the room when it comes to the construction of TAPI, as the security situation in Baluchistan Province where there has been a steady drumbeat of attacks against energy infrastructure,” Anne Korin, co-director of the Institute of Global Security (IAGS) told Central Asia Newswire (CAN) this week.
Neither Afghanistan nor Pakistan retain a monopoly of force over territories on the pipeline's planned path, and cannot supply realistic security guarantees for the pipeline's construction.
Matthew Millham, a reporter for Stars and Stripes Magazine based in Kabul, echoes Korin’s apprehension over the security of a pipeline.
“There's no way to know if the pipeline would be a target for the insurgency. In Helmand, for example, there is a huge dam at Kajaki that supplies water to a large swath of this very dry province throughout the year. The dam also produces power, and the lines run through areas that were for years under Taliban control,” Millham told CAN via email.
“The general view among the coalition officers I've spoken with there is that the dam and the power infrastructure aren't on the Taliban's target list. It's too important to the livelihoods of ordinary Afghans, and the insurgents know that if they take it out, all of Helmand will have a good reason to want their heads.”
Moreover, it is important to understand how TAPI can be developed in the face of Afghanistan’s complicated and unpredictable domestic politics, filled with informal ethnic and clan politics and patronage relations. Constructing TAPI through Helmand and Kandahar provinces, both of which are major centers of opium production, requires the buy-in of regional, district, and village-level mullahs, shurahs, and maliks as well as farmers and shuttle traders.
According to the UN Office for Drug Control, opium from Helmand province is the largest source of funding for the insurgency, channeling between $100 and $400 million annually to the Taliban and affiliate groups. Many Afghans are storing opium, viewed as a valuable commodity, in preparation for the drawdown of international forces in 2014.
While the opium economy is not directly related to TAPI’s success, investors and policymakers are faced with the challenge of ensuring that the inhabitants of Helmand and Kandahar accept TAPI, and that its development provides transparent, fair, and accessible profit opportunities to the region’s inhabitants.
I discussed investing in Afghanistan a few weeks back with former Ambassador of Afghanistan to the United States and President of Capitalize LLC Said Jawad who noted the importance of carving a long-term political and economic vision for Afghanistan. Jawad emphasized that what Afghanistan will look like in 2030 is a more relevant question to investors than the status of the country in 2014. Afghanistan is now embarking on its “transition decade” and it is unclear what the country will look like in twenty years.
In that same spirit, until Afghans article a coherent political vision and develop institutions capable of sustaining that vision, there are few investors willing to invest in a pipeline.
The Challenges of Attracting Private Investment
While it appears the ADB will finance the project, the organization will require the expertise, experience, and resources of leaders in the private sector. When a consortium of private investors emerges, policy coordination and project implementation will be complicated by competing political interests between the TAPI states.
Turkmen President Gurbanguly Berdimuhamedov will not welcome Russian involvement in the project out of desire to diversify the flow of his country’s gas. Even though Pakistan and Gazprom signed a Memorandum of Understanding in 2005 for the construction of the Iran-Pakistan pipeline and discussed potential Gazprom involvement in the building of TAPI, Turkmenistan’s upstream advantage enables it to reject Gazprom influence.
Similarly, a consortium dominated by American companies could be perceived by extreme elements Afghanistan and Pakistan’s polity as a new form of American imperialism in the region.
Concerns over the security of Afghanistan and Pakistan are compounded by the lack of transparency and unpredictable politics of the Central Asian regimes. Just two days after the signing of the agreement, President Berdimuhamedov sacked Oil and Gas Minister Bayramgeldy Nedirov, citing his poor performance.
This seemingly unpredictable change in leadership surely does not provide confidence to international investors. Nedirov will now be replaced by deputy head of Turkmengaz, Kakageldy Abdullaev. This is one of the most recent headlines undermining TAPI, as earlier this year rumors surfaced about Afghanistan’s withdrawal from the project.
Politics aside, none of the four states involved in TAPI are equipped with the modern technology and the suitable infrastructure for downstream hydrocarbon operations. Building the supply chain networks to transport and sustain input materials and personnel throughout the entirety of the pipeline construction, accommodating for weather patterns and changes in the security environment, will be expensive and human-intensive.
Firms must also factor the financial costs of modifications in the security environment, seasonal climactic patterns, localized political conflicts over land ownership, the development of basic electricity and water delivery services, and security-related expenditures into the costs of doing business.
Yet, constructing TAPI is not impossible, just exorbitantly expensive and laden with time delays and tricky political dances. If TAPI is to be realized, “there will need to be a willingness to bear that added premium in return for the expected geopolitical and other benefits,” Korin asserts.
Who is willing to take on these extra security costs?
China. While China has not expressed interest in the project, it’s worth considering that Chinese investors represent one of a handful of groups who would seriously invest in the project, especially considering how eager the country is to increase its involvement in Central Asian economies. If TAPI were to become TAPIC, the project would benefit from China’s wealth, ambitious investment spirit, and ability to keep Pakistan in line.
Government-affiliated Chinese companies have the material resources and political will to invest in high-risk investment decisions. China has invested billions of dollars into high-risk projects in Central and South Asia including the Turkmen-Chinese pipeline (2008) and the $3 billion Aynak copper mines in Afghanistan.
As of 2011, Chinese firms had invested $25 billion into Pakistan. While U.S. and NATO investments in the region were primarily for military purposes relating to the war in Afghanistan, Chinese investments in the region have been motivated by commercial self-interest.
China’s involvement in the project could fill in the gaps where the U.S. is unable to exert its influence and keep the project on line.
Case in point: TAPI binds Pakistan to be part of a pipeline agreement with India, its long-term, nuclear rival, and with Afghanistan, with whom it shares a porous, conflict-ridden border. By promoting TAPI, the U.S. is creating the potential for problems to arise between Afghanistan, Pakistan, and India over the transit of gas.
With U.S.-Pakistani relations on the rocks, and NATO’s recent announcement indicating that it will no longer use the Pakistani supply route for delivering goods, the U.S.’ ability to influence the country’s long-term investment decisions is questionable at best.
For example, as a key transit state, Pakistan could, in principle, cut off gas supplies to India. In such a situation, the U.S. has few tools at its disposal to pressure Pakistan to resume the flow of gas to India. However, if China were a member of TAPIC, Pakistan would not dare threaten its wealthy ally.
While Chinese-Indian relations would complicate the realization of TAPIC, the presence of two BRIC states as part of one pipeline would likely reduce the apprehension of international investors.
Despite the optimism and rhetoric surrounding the buildup to the signing of the document, TAPI will not be realized until (at least) 2018, because the project is too risky under the current security, political, and financial conditions in South and Central Asia. Perhaps in another twenty years....