Energy Sector - 2

[Naresh]

<b>Ravish Ji :</b>

I am sorry that I cannot access the “Energy Sector - 1” Thread. As such I will once again Post Dr. Bhaskar Dasgupta’s Article “The Pipeline Perplexity”

Firstly : From the page 2 of the present Thread you will find that even our Prime Minister Man Mohan Singh as per the Article Indo-Iran pipeline fraught with risks : PM as per the Hindustan Times of 21st July 2005 was apprehensive of this Pipeline. The Hindustan times Archive is not accessible.

Secondly : It is rather disconcerting that one takes the view that <b>any disruption in the supply the whole world will feel how bad are the fellows</b>.

Pakistan has invaded (1) The State of Jammu & Kashmir (2) Pakistan’s 1965 War on India (3) Pakistan Slaughtered over Three Million East Pakistani Bengalis (3) East Pakistan’s Hindu Population content was 28 per cent at the time of Partition. In 1951 Pakistani Census it was 22 per cent. In 2001 Bangladeshi Census it was 9.2 per cent. Today it may be below 8 per cent.
(2) Pakistan’s Kargil Episode

<b><span style='color:red'>Has even a Single Country in the “Whole World” done anything about it?</span></b>

Here is Dr. Dasgupta’s Article which is presently inaccessible from the Hindustan Times Archive :

[center]<b><span style='font-size:21pt;line-height:100%'>THE PIPELINE PERPLEXITY : DR. BHASKAR DASGUPTA</span></b>[/center]

A couple of years ago, there were two major news items relating to discoveries of oil in the world. The first was in north eastern Russia and the second was in western Iraq. It was also reported that two rapidly growing economies, South Korea and Israel were planning to use those oil deposits through oil pipelines. South Korea would fund an oil pipeline from Russia to South Korea passing through North Korea, while Israel (with US help) would have a pipeline from Iraq, passing through Jordan and the West Bank into Israel proper. Both countries are energy starved and would love to have oil on tap to develop vast downstream industrial areas.

Do I see a double take? Do I see words like, "is this guy nuts? Who in his right mind would want to set up a pipeline through enemy territory?" Actually, you are right, the above two stories are purely fictitious, but the proposed Iran to India oil/gas pipeline passing through Pakistan is not! This is such a hair brained scheme that I am literally gobsmacked that the newspaper reports coming out of the subcontinent are actually suggesting that this pipeline will be agreed upon shortly.

I have spoken many a time before about the lunacy of this scheme in my financial column, but given the newspaper reports, I thought of dashing off something immediately to warn people of the dangers, as the people in the corridors of power in India seem to have gone off their rockers. Why is this idea such a danger and why are people continuously pointing towards the Indus River Treaty as a framework for the pipeline?

First some FAQ:

<b>1) What is the pipeline all about?</b>

It's going to be a natural gas pipeline. Currently, natural gas is liquefied, pumped into huge tankers and then carted around the world. What cannot be sold or piped off is simply flared off. In the photographs of oil installations, you will see a small flare usually somewhere around the installation. That is the natural gas which is being flared off.

<b>2) Where is it going to be laid?</b>

The pipeline starts in Asaluyeh, Iran, travels to Pakistan through Khuzdar, with one branch line to Karachi and the main line to Multan, Pakistan, and from there on to Delhi where presumably, the GoI will have a domestic routing into the industrial and domestic consumers. This is the overland route, there is also a proposal for an undersea pipeline which would totally bypass Pakistan, but would be much more expensive. In any case, the pipeline under discussion is the overland pipeline crossing Pakistani territory.

<b>3) So why can't you just ship it?</b>

That is what is happening right now, but the cost of liquefying it and shipping it almost doubles the landed cost.

<b>4) Why are the Iranian's so interested?</b>

Two major reasons, first is that because of the logistical bottlenecks the vast natural gas reserves are just flared off and not exploited properly. The second reason is security, shipping means exposing their key economic factor to the USA's battle fleets, which is in permanent residence in the Arabian Gulf and Persian Gulf.

<b>5) Why is Iran so interested now?</b>

Well, the Iranian South Pars field was only explored in 1988. The field is being developed by Grazprom of Russia, Total of France and Petronas of Malaysia. British Gas and Anglo-Dutch Shell is also participating in the project (both the field and the pipeline), with Grazprom signing a $3.2 billion protocol for the pipeline with Pakistan.

<b>6) Why is Pakistan so interested?</b>

For several reasons, the land of the pure is in deep doo doo economically, and it is anticipated that a gas pipeline from Iran to India can give Pakistan over $14 billion over 30 years, not to mention having another source of gas. Pakistan is fast finishing its own Baluchistan gas reserves, so having another source of supply would be much appreciated.

<b>7) Why is India interested?</b>

Well, we already mentioned the fact that it will be considerably cheaper to pipe it than to ship it. India is suffering from severe energy deficiency (for both industrial and consumer use) and pipelines from Central Asia, Iran and the Gulf would be godsend. The Gulf is a bit too far away, as well as it would be very difficult, not to mention expensive, to lay a pipeline on the sea floor. Central Asian gas will have to pass through Afghanistan and only a moron will consider that option. Which leaves the Iranian pipeline?

<b>8) Who is cheering for this inside India?</b>

Well, the corporates are desperate for energy sources as well as for opening up Iran's markets so the pipeline can be considered as a quid-pro-quo. The bureaucrats love theidea (they will have an entirely new kingdom to play with, make money off and generally behave in their usual corrupt manner. The technocrats also love the idea, finally linked into international gas grid, etc. (theoretically speaking, if the gas pipeline does come into the picture, it just needs a few sections to see a consolidated grid running from Western Europe to East Asia, Russia down to South Asia.)

<b><span style='font-size:14pt;line-height:100%'>9) So why am I getting so upset about this pipeline?</span></b>

Ah! Ha! Good question, read on, McDuff.

Let's take a theoretical pause and say that India says, "Sure, why not, let's have the pipeline today" and the bureaucrats/diplomats have been very nice and diligent, getting insurance from a syndicate, having an agreement with Iran and Pakistan that India will only pay for gas which is delivered at India's frontiers. The World Bank is involved and has brought together a whole bunch of construction firms, project financing firms, insurance firms, consulting firms to bring this happy situation about. The World Bank has drafted a 900 page contract (with 20 appendixes of 1000 pages each) which is signed with lots of fanfare by the Indian Prime Minister, the Pakistani President and Iranian President, huge photo clickage, huge headlines, everybody tickety boo and feeling quite pleased with themselves. Who knows, the Nobel Peace Prize may also be on the table!

In 2010 we have this nice shiny pipeline running across the country, delivering humungous quantities of gas to energy hungry industries and consumers sick of carting those silly gas canisters around every month or so. Energy is a funny resource, it has a massive force multiplier effect. It causes all kinds of nice chain reactions. Once there is cheap energy available, then the energy hog industries such as iron and steel, pharmaceuticals, manufacturing, etc start rapidly developing. Once we have these, then ancillary industries blossom and soon you have the rise of a huge industrial cluster in North India delivering almost five per cent of India's GDP directly or indirectly. It is no surprise that Gujarat and Maharashtra state have so much of industrial capacity, simply because of the relative abundance of cheap energy compared to other states. Besides this, you will have consumers having gas on tap with pipelines piped into their houses (so I am projecting this, stop chuckling!)

<b>Then we come to the "oops" moment. The grand poo bah of some obscure tribe in Baluchistan, Pakistan gets upset because a traffic policeman gave his third cousin's wife's son a ticket or some other grand poo bah of another tribe flew a kite over his territory or something important like that. You know how it is with these grand poo bah's, when they get upset, its not for them to just cluck their tongues, say "aww shucks", have a cup of tea and forget about it. These guys have got artillery pieces and rocket propelled grenades and they do use them as frequently like you and I have hot dinners. They look around for some nice obvious target like a Barn or something. Oh! so what's that long shiny thing? Man, I cannot miss that, so they pop off couple of grenades or attach some explosive devices to the pipeline. Now, as you well know, gas pipelines are rather sensitive, and don't really like explosives going off on or near them. So, the gas pipeline goes up, and it takes a month to repair it and all. We have huge protestations of security, shows of rangers patrolling the pipeline, insurance claims flying through here there and everywhere, and the normal cacophony breaks out. In one month, the Pakistani's say, hey, its repaired so take your gas already. The Iranians say, hey, you don't have to pay so why are you moaning?

<span style='font-size:14pt;line-height:100%'>I will tell you why we will moan. Five per cent of our GDP will be affected, confidence rocked, long term contracts cancelled, small scale industries going bankrupt by the hundreds, working capital requirements shooting up with liquidity crunches, households in a total uproar because they don't have gas to cook and the infrastructure to provide gas cylinders has been wound up, markets diving south, financing costs shooting up drastically, risk premiums dramatically increasing, increased unemployment, etc. There is no amount of insurance which can ever satisfy the total potential damage that this interruption can cause. If we assume that the GDP will be $1 trillion in 2010, then the direct cost and indirect costs will be in the tens of billions of dollars if not more. Yes, the economy will be big, but the damage will be huge as well, can we take that kind of shock and pain?</span></b>

Energy Security will be one of the key driving factors for India in the coming years. Other nations have gone to war over this; there have been riots, insurrections and revolutions over energy security. USA's foreign policy is almost completely driven by the need to provide energy security for its economy. While everybody hopes for Indo-Pak peace, I would still like to see evidence of stability in Pakistan before letting some unwashed tribesman or worse some foaming jehadi in Pakistan hold the fortunes of India hostage to his whims or some imagined foaming ideology. People will laugh this off by saying that I am being paranoid, Pakistan will gain so much from this pipeline that they would not dream of interrupting the supply. Unfortunately, I do not have a problem with the people who sign the contract or the vast majority of Pakistanis, but I do have a problem with the extremists. I see absolutely no evidence that these jehadi's are capable of understanding reason, logic, economics or international relations. They see a pipeline carrying gas to India and it may well be just too much for their easily excitable minds, after all fundamentalist see only what they want to see. With Kalashnikov's and RPG's sold in corner shops, there is motivation, there is opportunity, there are people and there is the means to pop off at the pipeline.

<b>I would like to see an impact assessment exercise conducted and made public. <span style='font-size:14pt;line-height:100%'>I would like to see the Government of India carry out a threat analysis and explain to the public why it is taking the decision and what procedures, threat minimisation, which other alternative energy sources it has analysed. I would like to see what will be the knock-on factors in case of interruption of the gas supply. I would like to see that Pakistan can control its unruly extremists. If India can say Kashmir is the Atut Aang and threatens to go to war over it, just what will India do when the blown pipeline blows a ghastly big hole in India's economy? Let's just think this pipeline and its implications through before we let the euphoria of the moment sweep us into exposing India's jugular.</span></b>

All this to be taken with a grain of salt.

<b><i>(Dr Bhaskar Dasgupta, currently working on a doctorate at Kings College in International Relations and Terrorism, also holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School. He works in the City of London in various capacities in the Banking Sector. He also lectures at several British Universities.)</i></b>

I believe Dr. Dasgupta was last working for an International Bank as a Director in the Risk Management Department.

Cheers <!--emo&:beer--><img src='style_emoticons/<#EMO_DIR#>/cheers.gif' border='0' style='vertical-align:middle' alt='cheers.gif' /><!--endemo-->