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Light at the end of the pipeline

Against all odds, India, Pakistan, and Iran have managed to bring themselves within a hair’s breadth of an agreement to build an overland pipeline that will convey natural gas from the South Pars field in the Persian Gulf to South Asia. To be sure, the last obstacle — whether or not the agreed price band for the gas should be subject to future revision — is a major one. In the absence of a properly functioning international market for gas, price discovery at any given moment in time is never easy. Typically, gas pricing is based on a complex formula linked to international oil prices, with an upper and lower band for the latter built into the equation for long-term supply arrangements. In 2005, the three countries reached an in-principle agreement on a pricing formula for the lifetime of the project but Iran now wants the right to seek a price revision every three years. Given the volatility in international oil prices, Iran’s apprehensions about getting locked into a disadvantageous position are understandable. But neither can India and Pakistan risk entering into a long-term project without some degree of price stability. The fact that the three countries have come this far is precisely because the project is a triple win for them in economic, political, and strategic terms. With a bit of effort and flexibility, this last hurdle can be overcome in a manner which distributes the risk from price volatility in an equitable and transparent manner.

Underscoring the political significance of the project, the Iranian side has proposed that Prime Minister Manmohan Singh and President Pervez Musharraf travel to Tehran to sign the final agreement with President Mahmoud Ahmadinejad later this year. No doubt the Bush administration will not be pleased and sundry Congressmen and Senators on Capitol Hill will vent their spleen. However, India must resist at all costs being forced to choose between the promise of future civil nuclear cooperation with the U.S. and the cheap and efficient import of gas from Iran. A country of India’s size and stature needs both and should have the confidence to ensure there is no trade-off. Apart from the initial wobble he displayed on the IPI project soon after the July 2005 Indo-U.S. nuclear agreement, Dr. Singh has done well to support the pipeline negotiating process. One by one, the three countries have overcome their misgivings about security, project structure, and financing. A proactive signal from the Prime Minister at this stage will go a long way towards overcoming the price revision issue and ensuring that the dream of a peace pipeline uniting the three neighbours becomes a reality.

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