In 1993, Pakistan and Iran announced a plan to build a gas pipeline, which Iran later proposed extending into India. Dubbed the "peace pipeline," the Iran–Pakistan–India (IPI) gas pipeline would traverse over 2,775 kilometers (1,724 miles) from Iran's South Pars gas field in the Persian Gulf through the Pakistani city of Khuzdar, with one branch going on to Karachi and a second branch extending to Multan and then on to India.
This pipeline would give Iran an economic lifeline and increase its leverage and influence in South Asia. U.S. policymakers argue that allowing the IPI pipeline to proceed would encourage the Iranian regime to defy the will of the international community, develop nuclear weapons, and support terrorism. Furthermore, inadequate investment in Iran's oil and gas industry and increasing domestic demand could render Iran incapable of supplying natural gas through the IPI.
Energy Geopolitics and South Asia
India and Pakistan consume 537 million tons of oil equivalent (Mtoe) and 54 Mtoe per year, respectively. Islamabad and New Delhi are facing the growing challenge of supplying enough energy to meet rising domestic demand and develop their economies. By any standard, both countries are in a tight market because their local reserves are insufficient to meet these growing demands.
According to the U.S. Department of Energy's International Energy Outlook 2007, world demand for energy is projected to grow by 57 percent by 2030. Energy demand will grow most rapidly in India and Pakistan and other Asian countries that are not members of the Organisation for Economic Co-operation and Development (OECD). Meeting this demand will require producing an additional 35 million to 37 million barrels per day of petroleum and other liquid fuels by 2030. Yet according to the International Energy Agency, only an additional 25 million barrels per day is planned. In this context, it is little wonder that states are endeavoring to lock in energy supplies even if this requires dealing with rogue regimes.
Iran, Pakistan, and India have been negotiating for more than a decade to build a 2,775-kilometer gas pipeline from Iran's South Pars gas field in the Persian Gulf through Pakistan to India. The pipeline talks stalled in 1999–2003 because of Indo–Pakistani tensions, but they regained some momentum in 2004–2005 after New Delhi and Islamabad started a bilateral dialogue process. More recently, pricing disputes among the three countries have hampered progress. The memorandum of understanding on the project dates back to the mid-1990s, but no major international investors have committed to the project, largely because of continuing U.S. sanctions on companies that invest more than $20 million annually in Iran's oil and gas sector.
In late April 2008, India and Pakistan held ministerial-level talks on both the IPI and Turkmenistan–Afghanistan–Pakistan–India (TAPI) pipeline projects. India's Minister for Petroleum and Natural Gas Murli Deora said that both pipelines are equally important to Indian energy interests. In May 2007, India joined the four-party intergovernmental agreement with the Asian Development Bank (ADB) on the proposed TAPI natural gas pipeline. This pipeline would run from the Dauletabad gas field in Turkmenistan to the Indo–Pakistani border at a cost of $7.6 billion.
At the same time, energy-producing states including Iran and Russia are attempting to tap new markets, drive up oil prices, and enhance their own energy security by locking in demand. As Iran has become more isolated on the world stage, it has sought economic investment and political support from members of the U.N. Security Council. In this regard, China and Russia are key diplomatic backers and military suppliers of Iran.
Russia is determined to maintain its supplier dominance over European gas markets and is seeking to open up investment opportunities for Russian oil and gas companies, most of which are state-owned and flush with cash. It is also seeking to influence Iran to send its gas east through the proposed IPI pipeline instead of west through the proposed Nabucco gas pipeline, which would compete with Gazprom.
Russia is also interested in developing the Russia-proposed north–south energy and trade corridor. Both Iran and India have expressed interest in participating in this undertaking, which would connect them to Europe via Russia.
While Russia ostensibly seeks to assist the West in stopping Iran from enriching uranium, it also supports Iran's nuclear program by providing civilian nuclear technology, missile expertise, and surface-to-air missile systems to protect Iranian nuclear installations. The Kremlin hopes that IPI will mitigate Sino–Russian competition over Central Asian gas and undercut plans for the proposed TAPI pipeline.
China has expressed an interest in extending the IPI pipeline into China to obtain additional gas to feed its growing economy. China views Iran as a critical source of oil and gas and as an important node in its strategy to develop more overland energy transport routes to reduce its dependence on U.S.-dominated sea-lanes. Like Russia, China and Iran are interested in blunting U.S. influence in the region. However, as an oil importer, China shares with the U.S. an interest in stable and lower energy prices.
To isolate Iran because of its nuclear program and support for terrorism, the Bush Administration has expressed strong opposition to the proposed pipeline with Iran, which would give Iran an economic lifeline and increase its leverage and influence in South Asia. U.S. policymakers argue that allowing the IPI to proceed will only encourage the Iranian regime to defy the will of the international community and to continue using terrorism as a foreign policy tool. U.S. opposition to the IPI is aimed at containing Iran and promoting stability and security throughout the Middle East and South Asia.
India and Pakistan have other options to fulfill their energy needs that will be more reliable than the IPI. Instead of the IPI, the U.S. should encourage India and Pakistan to expand liquefied natural gas (LNG) imports, focus more on the proposed TAPI pipeline, and deepen cooperation with the U.S. in developing other energy sources, including clean coal, hydroelectric, and civilian nuclear.
India's Energy Needs
India's primary interest in seeking a pipeline deal with Pakistan and Iran is to diversify and expand its energy supply to provide for a rapidly growing economy. The Indian economy has grown by more than 8 percent annually for the past two years. New Delhi hopes to maintain this high growth rate over the next 25 years. This will allow India to raise large segments of its population out of poverty and fulfill its objective of becoming a major global power.
Already the world's fifth-largest energy consumer, India is projected to rise to third-largest by 2030, surpassing Japan and Russia. According to the U.S. Energy Information Agency's reference case scenario, primary energy demand in India is expected to grow by 3.6 percent per year, doubling from 537 Mtoe in 2005 to 1,299 Mtoe in 2030. India will need to quintuple its electricity-generation capacity from 1,600 gigawatts to nearly 8,000 gigawatts.
India generates 70 percent of its electric power and 50 percent of its total energy from coal. Indian policymakers have been working to diversify away from coal because Indian coal is extremely dirty and has low caloric value. India's soft coal produces about twice as much ash and particulate matter as U.S. coal produces. Gas-powered plants are much cleaner and more efficient, especially given the rising costs of emission-control equipment. Increasing dependence on gas has made demand for natural gas in India rise faster than demand for any other energy source.
Most of India's domestic sources of gas are used in the expanding electricity sector. As of January 2007, India had 38 trillion cubic feet of proven natural gas reserves. In addition to current stocks, several recent discoveries in the Bay of Bengal have added to India's known domestic reserves. Despite these finds, India's gas reserves are insufficient to meet its growing demand, and India will rely increasingly on gas imports.
India's LNG Portfolio
India produces approximately 80 million cubic meters (mcm) of natural gas per day, but domestic demand is 170 mcm per day. Thus, India must import approximately 90 mcm per day. According to energy consultants Wood Mackenzie, Indian demand for natural gas is rising 8 percent per year and will reach 270 mcm per day by 2020. "Around 200 [mcm per day] of this is likely to come from a mixture of state-controlled capped-price production, private-sector production and already-contracted LNG supplies, which leaves a gap of more than 55 [mcm per day], which could be filled by LNG imports." 
India has two LNG terminals and will complete a third terminal by 2009. Two additional terminals have also been proposed, and several companies are examining the viability of constructing additional LNG import sites throughout India.
India has a long-term LNG contract with Qatar's RasGas 2 project for the delivery of 7.5 million tons of LNG per year through 2029 and an additional 1.25 million tons per year on one-year contracts. In addition, India has active LNG contracts with Australia, Malaysia, Oman, and Turkmenistan.
In June 2005, India and Iran reached a $22 billion deal to export 5 million tons of Iranian LNG to India per year beginning in 2009. However, the talks have been stalled over the past two years, partly due to Iranian efforts to renegotiate the contract. Tehran may also be signaling its anger over India's votes against the Iranian nuclear program at the International Atomic Energy Agency meetings in September 2005 and February 2006. In January 2008, Tehran signaled its willingness to revive talks on the LNG deal.
Pakistan's Energy Needs
Pakistan is in a similar situation, but its overall energy demand is only a fraction of India's demand. Natural gas consumption accounts for 50 percent of Pakistan's energy use, and Pakistan consumes all of its domestic gas production. Without increased production, it will become a net importer. Domestic needs are pressing. Only 60 percent of Pakistani households currently have electricity, and only 18 percent have access to pipeline gas for heating.
Energy demand is expected to increase 250 percent over the next 20 years. To meet expected demand, electrical generating capacity must grow by 50 percent from 20.4 gigawatts in 2004 to 30.6 gigawatts in 2010. Accordingly, Pakistan is interested in expanding its sources of gas supply.
Pakistanis have begun to feel the energy crunch more than ever as scheduled outages have occurred six to eight hours per day since January.
The Proposed IPI Pipeline
In 1993, Pakistan and Iran announced the plan to build a gas pipeline, and Iran later proposed extending it into India. The pipeline would run 2,775 kilometers from Iran's South Pars gas field in the Persian Gulf through Khuzdar, Pakistan, with one branch going on to Multan and another to Karachi, a port on the Arabian Sea. From Multan, the pipeline would extend into India. (See Map 1.) This pipeline could potentially export 150 million metric standard cubic meters per day (mmscmd) of gas to Pakistan (60 mmscmd) and India (90 mmscmd).
The overland route was eventually chosen because it would be four times cheaper than the deep-sea route, even after including transit fee payments to Pakistan. Building the pipeline would cost an estimated $7.5 billion. However, additional nonmonetary risks and costs will need to be factored into this equation.
The pipeline has been referred to as the "peace pipeline" because creating economic linkages between India and Pakistan would likely encourage more stable relations between the two historical foes, which have fought three wars since their independence in 1947 and experienced two military crises in the past nine years. In fact, the Clinton Administration was relatively supportive of the pipeline idea in the late 1990s, when the "moderates" were in ascendancy in Teheran, as a way to defuse Indo–Pakistani tensions, but the Bush Administration has backed away from supporting the proposed Iran–Pakistan–India pipeline in recent years because of increased Iranian belligerence on the nuclear issue.
In addition to significant political risks, the pipeline faces several practical obstacles. Of particular concern is the 475 miles of pipeline through Baluchistan, one of the poorest and most unstable regions in Pakistan. This remote region is home to separatist tribes that employ private militias that fight over territory and resources—conditions that are hardly conducive to secure energy transportation.
Most notably, these tribes claim that they have not received their perceived fair share of the oil and gas wealth and have expressed their deep dissatisfaction with the Pakistani federal government by targeting critical energy infrastructure, such as water pipelines, power lines, and gas installations. For example, on October 10, 2006, the Baloch Liberation Army (BLA) blew up a gas pipeline and a water pipeline in Pir Koh. On January 1, 2007, the BLA claimed responsibility for blowing up a gas pipeline and two power pylons in Dera Bugti. (See Map 1.)
India has also been cautious about pursuing the pipeline, given its concern that Pakistan could use it as economic leverage against India. For example, Islamabad could threaten to cut off the supply if it is dissatisfied with India's policy regarding Kashmir or some other bilateral issue, much as Russia has repeatedly done in its bilateral relations with Ukraine and a number of other Eastern European states.
U.S.Policy Toward Iran
The United States has been firm in its opposition to the proposed Iran–Pakistan–India pipeline since negotiations started to gain traction in 2005. In 2006, U.S. Ambassador Steven Mann reiterated that "[t]he U.S. government supports multiple pipelines from the Caspian region but remains absolutely opposed to pipelines involving Iran." U.S. officials also continually remind India and Pakistan that U.S. legislation sanctions any company investing more than $20 million annually in Iran's oil and gas industry.
Indian support for the IPI undercuts U.S. efforts to isolate Iran economically by challenging U.S. sanctions against Iran's oil and gas industry. Over the long term, pursuing the IPI will increase Iranian influence in South Asia, which could contribute to greater instability in the region, especially if Iran develops a nuclear weapons capability and continues to support international terrorism.
Iran continues to flout international pressure to cease its uranium-enrichment efforts and discontinue its nuclear program. In March 2008, the U.N. Security Council took notice and passed Resolution 1803, the third round of sanctions on Iran, adding to the sanctions adopted in 2006 and 2007.
Resolution 1803 follows the December 2007 release of the controversial National Intelligence Estimate, which stated that Iran had halted its nuclear weapons program in 2003. While this may be the case, the report also recognizes that Iranian entities are continuing to develop a range of technical capabilities that could be applied to producing nuclear weapons and that Iran's uranium enrichment and ballistic missile programs are continuing. Both programs are vital for building a nuclear weapons arsenal. Moreover, Iran remains the world's biggest supporter and financer of terrorism.
In addition to these new sanctions, the first two rounds of sanctions are having a noticeable impact. According to Stuart Levey, Under Secretary for Terrorism and Financial Intelligence at the U.S. Department of the Treasury, the U.S. has had success in persuading leading key banks and businesses worldwide to begin severing their Iranian business ties by sharing information on illicit terrorist funding by Iranian banks.
Financially, Iran is finding itself increasingly shut out of the international banking system, making it nearly impossible for Iran to secure loans to rebuild its sagging energy infrastructure. More banks are refusing to deal with Iran in any currency due to the high risk involved. Indeed, 40 international banks, including some of the largest in the European Union (EU) and Japan, have stopped doing business with Iran.
Increasing international sanctions, combined with Iran's reputation for unreliability and mismanaging contracts, have substantially reduced direct foreign investment in Iran. This lack of foreign investment, coupled with Iran's massive economic mismanagement and isolation from the international financial community, recently led the OECD to lower Iran's debt rating to the second-worst rating, putting it on par with Gabon and Swaziland.
Iran's Troubled Oil and Gas Sector
Iran is an important economic power in the natural gas and petroleum industry, but numerous deficiencies in its oil and gas sector have caused the overall economy to lag far behind its potential and call into question Iran's future as an oil and gas exporter, including its ability to supply gas to Pakistan and India through the IPI pipeline.
Iran has the second-largest gas reserves in the world after Russia and the second-largest petroleum reserves after Saudi Arabia. Iran has an estimated 974 trillion cubic feet in proven gas reserves and 136 billion barrels in proven oil reserves. Oil provides more than 70 percent of Iranian government revenue.
Yet instead of reinvesting this money in the oil and gas sector, the Iranian government has generally spent it on ambitious weapons purchases, its nuclear program, support for terrorism, and economic subsidies. The Iranian regime is investing only about half of the funds necessary just to maintain hydrocarbon production, much less to expand production.
Iranian exports are declining by 10 percent to 12 percent annually according to a National Academy of Sciences (NAS) study. If current trends continue, Iran's oil exports will drop by half in less than five years and disappear entirely by 2015. This projected decline in production would be the result of a lack of investment in the oil sector and a shortage of natural gas for reinjection (to enhance oil recovery), caused by continuing massive growth in domestic demand for natural gas due to subsidized consumption.
Iran's domestic demand for natural gas is growing by nearly 9 percent annually, while its production is growing by 4.5 percent per year. Thus, domestic gas demand has increased at the expense of reinjection, accelerating oil depletion rates. Despite its massive gas reserves, Iran has been forced to import 23 mcm per day from Turkmenistan. However, on December 31, 2007, Turkmenistan stopped daily deliveries of gas, forcing Iran to begin importing from Azerbaijan.
These trends indicate that Iran will be an unreliable oil and gas supplier and a high political risk. The NAS study concludes that without major changes, Iran will cease to be a net oil exporter by 2014 and will therefore be incapable of supplying gas to Pakistan and India through the IPI.
Russian Interests in the IPI and Iran
Iran and Russia see the U.S. as their principal antagonist, which trumps any major differences between them. They favor a strategy of multipolarity, both in the Middle East and worldwide. Russian interests include keeping oil prices high because Russia is a high-cost oil producer, diverting Iranian oil and gas exports away from Russia-dominated European markets and maintaining the Kremlin's dominance over Caspian energy transportation.
The Kremlin views Iran through an economic and strategic lens. It seeks to keep oil prices high by heightening regional instability, to which end it supports Iran's bid for regional influence, even supplying the air defenses to defend Iran's nuclear program. Such support increases Iran's confidence and belligerence, amply rewarding its Kremlin backers. Every $1 increase in the price of a barrel of oil earns Russia an additional $1.4 billion per year in revenue.
Iran's regime also benefits from high oil prices because the additional revenue helps to cover up its economic incompetence. According to Cambridge Energy Research Associates, each $1 increase in the price of oil puts nearly $900 million more per year into Iran's coffers. Reflecting their joint interests, Iran and Russia are moving away from the dollar as their preferred currency in energy transactions and are cooperating to create an OPEC-style global gas cartel. This cooperation in sustaining high energy prices and cartelization of energy resources bodes ill for those states that would be supplied by the IPI.
While the Kremlin ostensibly seeks to help the West in stopping Iran from enriching uranium, it also supports Iran's nuclear program, knowing that sanctions will help to keep Iran in Russia's commercial sphere of influence. This serves the dual purpose of keeping the U.S. and its allies preoccupied and preventing Western companies from helping Iran to send its gas west through the proposed Nabucco gas pipeline. (See Map 2.)
Recent Iranian statements indicate a willingness to supply gas through the Nabucco pipeline, which forced Russian Prime Minister Vladimir Putin and President Dimitry Medvedev to work overtime, albeit subtly and stealthily, to prevent Iran's participation. Moreover, with uncertainty over the availability of Turkmen and Kazakh gas to fill Nabucco, Europeans will increasingly look to Iran as a source of natural gas.
Nabucco would directly challenge Russia's strategic position as gas supplier to Europe by opening up a southern export route that would bypass Russia and provide Caspian gas to Europe. Europe depends on Russian gas imports for 41 percent of its annual consumption and is becoming more dependent. Russia wants to increase this dependence so that Gazprom can use the resulting leverage to close bilateral energy deals that keep the EU divided over energy policy.
Thus, Moscow's strategy is to block all southern or western pipeline export routes that are not under Russian control and to keep Central Asian gas flowing north through the Russian network. Already geographically and commercially well-placed, the Kremlin wants to tighten its grip on its network and expand it, not dilute it with new competition. The core of this network is the old Soviet oil and gas infrastructure that was created specifically to integrate the periphery with the center— Central Asia and Eastern Europe with Russia.
Accordingly, Russia is seeking to expand this network through its proposed north–south energy corridor. This trade corridor is part of the Kremlin's plan to make Russia the primary hub in a vast pipeline network that would embrace Europe to the west and Iran, Central Asia, and India to the south.
Moscow's interest in the IPI pipeline dates back to 1995, when Gazprom and the Gas Authority of India signed a memorandum of understanding on constructing the pipeline. In addition to influencing Iranian decision making, Moscow has shown interest in the project both as a contractor and as an investor.
Moscow has also made commitments to develop Iranian oil and gas, particularly the giant South Pars field. According to a Gazprom statement, "the two sides agreed on the joint participation in the development of two or three blocs in South Pars field as well as on the participation by GazpromNeft in an oil production project in Iran." Gazprom also expressed a desire to participate in LNG projects in Iran.
By helping to manage the IPI, Gazprom would extend its political leverage and gain a massive consumer market, swallowing up smaller energy companies along the way. The Kremlin views the IPI as the ideal instrument to expand its commercial and strategic reach into Pakistan, India, and China. The Kremlin also hopes that the IPI will prevent construction of the Turkmenistan–Afghanistan– Pakistan–India pipeline. (See Map 1.)
China's Giant Energy Appetite
Ever seeking greater energy supplies, China has already expressed interest in the IPI and has even declared that it will gladly buy India's share if India chooses not participate. This enthusiasm is not surprising given China's considerable investment in its energy, military, and geopolitical relationship with Iran. Beijing's expressed interest in the IPI will also put New Delhi on the defensive because China has consistently outbid India in the competition for energy sources worldwide. Like Russia and Iran, China is interested in blunting U.S. influence in the region. However, as an oil importer, China also shares the U.S. interest in stable and lower energy prices.
China views Iran as a strategic source of energy supply for its ever-expanding economy. China also views Iran as an important link in its ambitious plans to develop overland transport routes for Middle Eastern oil, hoping to reduce its dependence on U.S.-dominated sea-lanes.
In February 2008, the Chinese National Offshore Oil Company reportedly signed a $16 billion contract to develop Iran's North Pars gas field. Under the agreement, Iran will export LNG from the field to China. In return, the Chinese company will invest $11 billion in downstream LNG plants and $5 billion in upstream gas field projects. If this deal goes through, it will be the second big oil and gas contract that China has signed with Iran in several months.
In December 2007, China signed a $2 billion contract with Sinopec to develop Iran's huge Yadavaran oil field.  This field will begin to produce 185,000 barrels per day within seven years. Iran has also signed agreements with multiple firms to develop South Pars. The South Pars gas field is located near the border between Qatari and Iranian waters in the Persian Gulf and contains an estimated 500 trillion cubic feet (14 trillion cubic meters) of gas, which is equal to 7 percent of the world's proven reserves and 50 percent of Iran's gas reserves.
Through a strategy of buying international political support with major energy deals, the Iranian leaders are counting on Russian, Chinese, and European diplomatic cooperation in exchange for lucrative energy business.
Some pipeline options would be less disruptive than the proposed Iran–Pakistan–India pipeline, such as the proposed TAPI pipeline. (See Map 2.) The United States has supported this export option—together with the proposed trans-Caspian pipeline—as a way to reduce Russia's leverage over Europe, strengthen the political independence of the former Soviet republics, and increase India's and Pakistan's energy security. TAPI would also help to stabilize Afghanistan by providing needed jobs to Afghans and promoting economic linkages in South and Central Asia.
As with the proposed Nabucco and trans-Caspian pipelines, Moscow is determined to block TAPI. Gazprom is already worried that its current monopoly on the Caspian states' pipeline routes will be undermined by a recent contract to build a 2,000-kilometer gas pipeline from Turkmenistan through Kazakhstan to China's western Xinjiang province.
Although TAPI's projected capacity is roughly half of the IPI's capacity, the potential loss of Turkmen gas supplies is of great concern to Moscow. According to the BP annual statistical review of world energy, Turkmenistan has the world's fifth-largest gas reserves: 2.9 trillion cubic meters. To maintain its supplier dominance over Europe, Russia needs to control Turkmen gas.
Furthermore, Russia relies heavily on Turkmen gas to meet its international contracts and is reaping windfall profits. Russia purchases Turkmen gas for about $130 per 1,000 cubic meters (well below market price) and sells it to Europe at market rates for $354 per 1,000 cubic meters. By manipulating prices, Russia is able to keep its market share in Europe while maintaining a subsidized and inefficient domestic energy market.
However, these price manipulations may change. Gazprom recently announced that it will pay "European prices" for Central Asian gas beginning in 2009. This move should be seen as part of the broader chess game of energy geopolitics. While the West had been offering to pay higher prices, this could be a powerful ploy to keep Turkmenistan in Russia's sphere.
Turkmenistan is increasingly looking to diversify its economy. It has announced a new law easing foreign investment and waiving numerous taxes and fees for foreign investment projects. President Gurbanguly Berdymukhamedov publicly announced that "[t]his law has been drafted as part of the policy of deep reforms of our economy and is aimed at attracting foreign investment." After the announcement, Makhtumguly Khydyrov, director of TurkmenGaz Oil and Gas Institute, said that Turkmenistan is seeking to boost annual gas output from the current 80 billion cubic meters (bcm) per annum to 130 bcm in the near future.
Despite recent Turkmen commitments to Russia, if new Turkmen reserves are tapped and available, Washington would still like to see both a trans-Caspian gas pipeline and a TAPI pipeline. Turkmenistan has recently commissioned Gaffney, Cline and Associates, a British consulting firm, to conduct an independent audit of the country's gas fields.
Expanding LNG Capacity: A Prudent Alternative
Regional pipeline construction involves many challenges, including complicated logistics and massive financing. When pipeline transport proves unfeasible, liquified natural gas is an alternative means of long-distance transportation. Liquefied natural gas is stored and transported in liquid form by tanker ship. After delivery to market, it is regasified and distributed via pipeline. Pipeline projects can run afoul of tricky political dynamics, such as long-standing regional tensions and unstable relations between neighboring countries. Taking these factors into account, India and Pakistan may decide that expanding LNG trade and port capacity is preferable to developing potentially volatile pipelines.
India's LNG prospects are promising. Beyond its current LNG imports, India continues to search for new sources of energy. One major source is Qatar, which has the world's third-largest gas reserves and is currently the largest producer of LNG. Qatar already provides LNG to India under a long-term contract and has announced that it will consider offering a major share of LNG on a priority basis to India after its expanded capacity of 77 million metric tons becomes operational by 2010.
Petronet LNG, India's largest LNG importer, anticipated increasing its LNG imports by 40 percent during 2007. Petronet has gone on a buying spree throughout Asia and Africa as part of its plans to increase capacity at its Dahej terminal from 6.5 million metric tons to 10 million metric tons by December 2008. It is attempting to secure LNG import deals totaling 2.25 million metric tons from additional suppliers, including Algeria, Egypt, Oman, and Trinidad and Tobago.
Australia has shown an interest in expanding LNG exports to India as it continues to develop its western gas fields. In 2008, the Australian Department of Industry plans to complete an analysis of the Indian gas market and identify opportunities for Australia–India LNG trade.
Increasing LNG capacity also fits well into India's planned naval expansion. After years of neglect and disrepair, India's navy has received much-needed attention, both from the Indian government and from the United States. With ambitions to expand the domestic shipbuilding industry and make "80 percent of the Indian Navy homemade," the defense and shipping fleets needed to increase India's LNG capacity would be readily available. The U.S. has pursued greater naval cooperation with India, proposing to accelerate the Indo–U.S. Maritime Cooperation Framework, which calls for expanded cooperation in joint patrolling of energy trade routes in the Strait of Malacca.
India is also seeking to strengthen its ties to the Middle East, both for energy security and because a large number of Indians work there. Likewise, India is working with its regional neighbors to counter the various maritime crimes (e.g., drug trafficking and piracy) that threaten some of the country's shipping routes. Given India's path toward increased naval capacity and cooperation, its desire to increase LNG shipments is consistent with its overall maritime policies and pursuit of stronger regional ties and stability.
Finally, by forgoing the IPI pipeline and thus constraining Iran's overland export capability, India and Pakistan would make the Iranian regime more dependent on sea exports through the Strait of Hormuz. As the second-largest gasoline importer after the United States, Iran is already dependent on seaborne imports for 40 percent of its fuel needs. This dependence stems from its reliance on its tanker fleet's access to international markets. Blocking the overland option may increase Iran's interest in promoting stability in this extremely important chokepoint.
What the U.S. Should Do
Constructing pipelines is geopolitically and logistically challenging, especially in regions fraught with political tensions, financial sanctions, and unstable transit areas. Given regional security considerations and the constraints on Iran's capacity to supply natural gas through the IPI pipeline, India and Pakistan would be best served by expanding their LNG import capacity and investing in alternative energy technologies and projects, such as hydroelectric power and renewable energy, rather than by pursuing the IPI pipeline.
To support India and Pakistan in meeting their rapidly growing energy demand, the U.S. should:
- Step up its energy diplomacy to discourage their pursuit of the Iran–Pakistan–India pipeline. The U.S. should develop a multifaceted strategy that incorporates diplomacy and economic policy tools to discourage pursuit of the pipeline. Washington should use public diplomacy, particularly in the international business community and regional media, to highlight the IPI's disadvantages compared with other energy alternatives for South Asia.
- Encourage India to increase LNG capacity and expand contracts with Australia, Qatar, and other Gulf exporters. LNG provides distinct economic and security advantages, particularly in the long run. Increasing LNG capacity also fits into India's planned naval expansion. India's planned expansion of its domestic shipbuilding industry would help to provide the naval and shipping fleets needed to increase its LNG capacity.
- Support the TAPI gas pipeline to boost the energy security of India and Pakistan, reduce Russia's leverage over Europe, and strengthen the political independence of Turkmenistan. Washington should engage in intensive diplomacy to encourage the Turkmen, Afghan, Pakistani, and Indian governments to build this pipeline instead of the IPI.
The U.S. should also offer Turkmenistan a development assistance package as an added incentive for energy cooperation, especially in health, education, and agriculture, to make it a primary natural gas industry partner in the region and facilitate the construction of both TAPI and the trans-Caspian gas pipeline. Building the TAPI pipeline will require further stabilization of the situations in southeastern Afghanistan and Baluchistan, Pakistan, before it becomes feasible from a security standpoint.
- Boost U.S. bilateral energy dialogues with India and Pakistan. These dialogues should focus on encouraging India and Pakistan to meet their energy needs in ways that facilitate economic growth and greater security and stability in South Asia. The U.S. should enhance its bilateral engagement with India on energy issues, including gas options, clean coal technologies, alternative fuels, strategic oil reserves, and energy efficiency projects.
- The U.S. should also expand its energy dialogue with Pakistan, particularly on hydroelectric power and development of LNG terminals, and encourage energy conferences in South Asia that bring U.S. companies and investors to the region to explore various projects.
- Expand energy cooperation with India within the framework of the Asia–Pacific Partnership to develop and disseminate technologies that support development of clean, efficient, and cost-effective energy.
- Continue to pursue U.S.–India civil nuclear cooperation. Although the U.S.–India civil nuclear talks are stalled because of Indian domestic political opposition, Washington should continue to pursue a dialogue with New Delhi on civil nuclear cooperation to overcome the technical hurdles and find common ground.
- Assist Pakistan in building large-scale hydroelectric projects and LNG terminals to meet its growing energy and electricity demand. For example, U.S. companies could provide much-needed foreign investment and technology for several major Pakistani hydroelectric projects.
Iran's mismanagement of its economy and continued pursuit of a nuclear weapons capability in the face of U.N. sanctions and international pressure make it an unreliable business partner and call into question its capacity to supply natural gas through an Iran–Pakistan–India pipeline. Moreover, Tehran's continued support for international terrorism means that any business venture with the current regime carries unacceptable political risks.
As major energy consumers, the U.S. and India share strategic interests in the Persian Gulf and Central Asia. Building the IPI would be contrary to these interests, would destabilize the Persian Gulf, and would strengthen Russia's grip over Central Asia, decreasing regional and global energy security. Accordingly, the U.S. should fully back TAPI to increase India's and Pakistan's energy security and reduce Russia's leverage in Central Asia.
India and Pakistan would benefit from an increase in LNG contracts and capacity. This would also strengthen India's ties to the Middle East.
Finally, blocking Iran's overland export option might also increase Iran's interest in promoting stability in the Strait of Hormuz. The U.S., India, and Pakistan should expand their energy cooperation to ensure security and economic prosperity in the region.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies; Lisa Curtis is Senior Research Fellow for South Asia in the Asian Studies Center; and Owen Graham is a Research Assistant in the Allison Center at The Heritage Foundation.
The foreign policies of India and Pakistan are driven increasingly by energy security. To sustain their booming economies and growing populations amid tight oil and gas markets, Indian and Pakistani policymakers are turning to energy deals with unsavory regimes, such as Iran's. At the same time, energy-producing states including Iran and Russia are attempting to tap new markets, drive up oil prices, and secure their own interests by locking in demand.