Agreement Could Help TAPI Advance With Progress Stalled

BMI View : An agreement between Turkmenistan and Afghanistan on the sale of gas via the long proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) Pipeline may help the project revive some of the recent momentum it has lost against the competing Iran-Pakistan-India (IPI). However with a number of obstacles remaining , TAPI is at risk of further losing grounds in a blow to Turkmenistan's quest to diversify its gas exports and firm up its regional influence.

An agreement was reached between the national gas companies of Turkmenistan and Afghanistan for th e s ale of gas via the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) Pipeline. The deal marks the final supply agreement following similar deals reached with India and Pakistan in May 2012. 2012. Under the terms outlined by the parties involved , Afghanistan would receive:

  • 0.493bn cubic meters (bcm) per annum for the first 10 years of operation ;

  • Supplies to would gradually increase to 1.46bcm per annum in subsequent decades .

New Supplies Could Stimulate Demand
Afghanistan Natural Gas Production & Consumption (bcm)

Although domestic production in Afghanistan currently meeting needs , it is likely the new supplies of gas would stimulate latent demand and boost consumption figures . Additional gas supplies could help to address the country's chronic power shortfall, with more reliable supplies encouraging badly needed investment in infrastructure. Gas from Turkmenistan could also be used to supply industrial customers, creating employment opportunities in a country where it is estimate d that half a million jobs need to be created annually in prevent the ranks of the insurgency from swelling with disenfranchised individuals.

The benefits of TAPI would extend to Afghanistan troubled finances from TAPI as well . A report prepared by the Asian Development Bank (ADB) , a key support er of the pipeline, concluded that Afghanistan was poised to reap some US$500mn in annual sales income from TAPI. Thi s is compared to domestic earnings from taxes, fines and tariffs of some US$1.6bn for 2012 .

Money In Gas If It Can Be Built
Afghan Government Domestic Revenues* 2012 (LHS) & Including TAPI (RHS) (US$mn)

While the economic benefits for Afghanistan are apparent, the challenges of bring ing TAPI online remain significant despite the support of key institutions such as the ADB . Prominent political powers are also pushing for the construction of the pipeline, namely the United States. Washington is eager to see TAPI advance as a rival to a similar Iranian project - the Iran-Pakistan-India (IPI) pipeline . Among the outstanding issues TAPI must confront are:

  • Security - As frequent pipeline attacks in Yemen and more recently in Iraq demonstrate, large fixed, infrastructure remains difficult to defend against sabotage. The security situation in Afghanistan is likely to remain volatile as NATO forces significantly reduce their numbers and shift their role from 2014. While Afghanistan may prioritise protection of the pipeline as a source of revenues and regional clout, the pipeline is almost certain to be a vulnerable and attractive target to disaffected groups.

  • Regional Politics - Although the net benefits are clear and the project has made promising initial progress, historical mistrust and current tensions could easily flare up and stymie TAPI. This is particularly true with a number of transitions underway. A still new civilian government in Pakistan is keen to assert its independence from the US and in Afghanistan, 2014 will see new national elections and NATO transitions from a combat to support role.

  • Financing - While recent roadshows have attracted interest, indeed the US assistant secretary of state for Central Asia Robert Blake told reporters at July conference in Ashgabat that a number of international oil companies were interest in helping to develop TAPI, it remains unclear exactly how the construction of TAPI will be financed. ( see, 'TAPI Roadshow Rumbles On,' October 8 2012). Squeezed budgets in Pakistan and Afghanistan, and to a lesser extend India, will require outside capital to bring the project online.

Competition For Market Share On Indian Subcontinent
Proposed Routes For Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) Pipelines

Despite momentum initially being squarely behind TAPI, generous financing by Iran has allowed Tehran to overcome the political resistance and sanctions with construction of the Iran-Pakistan portion of IPI underway . Our current forecasts have priced in imports of Iranian gas via IP from 2015, with the potential that the link may yet be extended to India which has continued to express interest.

While from a pure demand perspect ive, the scale of the gas shortfall in both Pakistan and India would support flows from both TAPI and IPI, for now, TAPI's loss is Iran's gain. Although we continue to expect supply shortfalls in both markets recent progress toward increasing liquefied natural gas (LNG) import capacity and boosting domestic exploration and production may well reduce the incentive to bring TAPI online over the medium to long term . Thes e potential developments make it critical that the TAPI project regain its previous momentu m. P revious targets to secure financing by end 2013 and to see first gas deliveries from 2018 look increasingly tenuous and we have yet to include any supplies from TAPI in our forecasts for either Pakistan or India given the continued uncertainty.

Growing Shortfall Leaves Room For More
India & Pakistan Natural Gas Net Exports *

In the absence of export route s to tap the gas markets of the Indian subcontinent, Turkmenistan has directed increasing volumes of gas toward China ( see, 'Gas Demand Boom: Winners And Losers,' June 28). Ashgabat has emerged as China's largest single source of gas imports, with volumes set to continue their rapid growth under ambitious deals agreed to between officials from both countries.

Received With Open Arms
Turkmenistan Gas Exports Via Pipeline To China (bcm)

The looming start of production from the mega field Galyknshy - where reserves are estimated to range between 13.1 trn cubic meters (tcm) and 21.2tcm - is due to support a significant ramp up in Turkmen gas output. Tellingly, the field is due to officially come online in a n Autumn 2013 ceremony attended by China's President Xi Jinping. The field will have a capacity of 30bcm at its peak, but plans call for an eventual tripling of Turkmenistan's overall gas output over the next two decades, making Ashgabat a key supplier of gas to the region.

Gas Seeks Infrastructure To Reach New Heights
Turkmenistan Natural Gas Production (bcm)

Yet despite booming trade with China, Turkmenistan is wary of history repeating itself with the risk of an overreliance on a single market for exports. This was the case over much of the country's recent history, with the vast majority of output directed to Russia . However a deterioration in relations in the post-Soviet era has seen Ashgabat increasingly shift away from Moscow in search of new partners . Turkmenistan has been keen to open new markets and diversify exports, but an absence of infrastructure has stymied plans and left output below capacity . Progress on a southern route via TAPI has slowed, as has as a long proposed but little progressed Trans-Caspian Pipeline that would allow Turkmen gas to flow to Europe via Azerbaijan ( see, More Pipe Dreams Than Pipelines As Corridor Takes Shape,' May 28 ).

This article is tagged to:
Sector: Oil & Gas
Geography: Turkmenistan, India, Iran, Pakistan