Courtesy of STRATFOR (subscription required), analysis of latest developments regarding TAPI:

Two workmen stand next to the symbolic first piece of a natural gas pipeline to China outside of Turkmenabat in 2007.

Summary

Turkmenistan has some of the largest natural gas reserves in the world, but as a landlocked country it has struggled to transport its reserves to market. Now, however, Turkmen leaders are hoping a new pipeline will expand the country’s export options. On Dec. 13, Turkmen President Gurbanguly Berdimukhammedov, Afghan President Ashraf Ghani, Pakistani Prime Minister Nawaz Sharif and Indian Vice President Mohammad Hamid Ansari met in Turkmenistan to break ground on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. More than 25 years in the making, 1,800 kilometers (about 1,100 miles) long and costing an estimated $10 billion, the pipeline is scheduled to begin operations in late 2019 and will have a capacity of 33 billion cubic meters per year. After years of developing domestic fields and seeking to diversify its exports, Turkmenistan has taken a leading role in pushing the project forward.

Turkmenistan’s domestic production is rapidly approaching levels that outstrip its current export capacity. Though the country previously exported the bulk of its natural gas to Russia, it now exports nearly two-thirds (45 bcm) to China. The rest is split between Iran (9 bcm), Russia (9 bcm) and Kazakhstan (0.5 bcm). Turkmenistan is eager to diversify its export options even further, and its options to do so are through TAPI or through the more controversial planned Trans-Caspian pipeline. Because of advancements in political, financial and security areas over the past year, Turkmenistan is betting on TAPI.

Analysis

Unlike the Trans-Caspian Pipeline, which targets the European Union, the TAPI project targets emerging markets such as India and Pakistan, both of which are set to receive 14 bcm of natural gas per year from Turkmenistan. Afghanistan, which is not a major consumer at present and which will receive only 5 bcm annually, is rapidly approaching an energy crisis as deforestation creates a supply shortage. Less than a third of the Afghan population is connected to the electricity grid, and up to 85 percent of total primary energy consumption comes from biomass fuels — at the household level, firewood alone comprises 65 percent of total consumption. Thus, the government has made non-biomass supply options, such as natural gas, a priority in its efforts to improve energy access throughout the country.

For its part, Pakistan needs to meet a nearly 6 percent annual supply growth rate if it hopes to meet projected demand for 2020 (50 bcm) — an increase largely attributed to demand for compressed natural gas in the automobile sector.

Last but not least is India, which is expecting 6.8 percent annual growth until 2021, when it is expected to reach more than 180 bcm. Both India and Pakistan are forecast to have an increasingly large and prosperous population. After years of increasing its production at the Galkynysh natural gas field and improving the connectivity of its domestic distribution network, Turkmenistan is well poised to ramp up production to meet growing Indian and Pakistani demand.

In October, Turkmengaz reached a framework agreement with Japanese firms Mitsubishi, Chiyoda, Sojitz, Itochu and JGC to boost overall production at Galkynysh to 95 bcm by 2018 for the TAPI pipeline. Moreover, in stark contrast to previous attempts to get the project underway, Berdimukhammedov, Turkmenistan’s president, has this time actively pushed the leaders of the destination countries to move the project forward. These countries are often at odds with one another, but Turkmenistan is able to manage disputes through its supply of natural gas to the countries. Meanwhile, it has been relatively easy to convince countries with impending demand growth to cooperate in a pipeline project from the world’s second-largest natural gas field.

Paying for the Project

The Asian Development Bank has active projects in all three destination countries to help build out the necessary infrastructure. Early on in the project, it helped provide feasibility assessments to attract financial institutions’ interest in the project. Furthermore, the bank’s Afghanistan Infrastructure Trust Fund has outlined the terms of providing 2 percent of the required financing for consortium partner Afghan Gas Transit.

TAPI has undergone several iterations in the process to attract outside investment over the years, but in October the project was given impetus when Turkmengaz took on a leadership role and bought an 85 percent stake in the project. The investment is a testament to Turkmenistan’s recent prioritization of TAPI as a way to diversify exports and to expand the development of the Galkynysh field. The remaining 5 percent stakes in the project are doled out to the destination countries, with stipulations. Because of Afghanistan’s limited financial resources, it must raise 3 percent of its own financing (about $300 million) before the Asian Development Bank will provide the rest. If it cannot raise the funds, the Afghan government will forfeit its stake in the project, which may cause delays as investors search for another stakeholder. Similar restrictions have not been placed on Pakistan or India.

Despite the restrictions on funding, the consortium of Turkmengaz, Afghan Gas Transit, Pakistani Inter State Gas Systems and Indian GAIL needs now to raise only about 30 percent of the $10 billion necessary to begin construction. The favorable economic status of the project as well as Turkmengaz’s proactive commitments indicate it is capable of securing financing for the remainder of its stake. Even so, the firm may seek foreign partners to help fund the remaining 70 percent of the project. Although Turkmenistan may seek to attract foreign partners, the likelihood that it will offer up equity stake in the natural gas source field will depend on how desperate it is for financing and how much is needed. As of the groundbreaking, the Islamic Development Bank has announced its interest in providing financial backing for Turkmengaz, while Pakistan claims China may help finance its portion through its $46 billion investment project, the China-Pakistan Economic Corridor.

The Security Factor

The TAPI consortium’s ability to attract foreign financing will be linked to explicit security considerationsin Afghanistan and Pakistan. And even with the substantial amount of funding that has already been committed, the single most important factor during the development and construction phase of the project will be the security situation in Afghanistan and Pakistan. Turkmenistan has petitioned support from the United States and NATO to help protect the pipeline. But although Pentagon officials have expressed their interest in working with Turkmenistan, they have indicated it will be difficult to do so because of the country’s official policy of neutrality.

Instead, much of the security for the project is coming from the Afghan and Pakistani governments themselves. Turkmenistan, after all, has frequently coordinated with the political and security leadership in both countries, and Afghanistan has already pledged to allocate 5,000-7,000 security forces, likely from the Afghan National Army, to protect construction crews working on its portion of the pipeline. Pakistan, too, has committed to ensuring security during construction, specifically in Balochistan. And though, so far, there are no clear plans for security once TAPI is up and running, at that point there will be less of a security risk for the underground pipeline. 

Ultimately, to protect the pipeline during construction, the consortium will need to engage with local power brokers — not an insurmountable task. Typically, projects that bring value into a country face less opposition than those seeking to exploit resources for export, so the local Taliban elements will likely tolerate the project as long as their strategic interests are not threatened. Indeed, TAPI is unlikely to attract the ire of local tribal leaders unless it partners with Western investors. 

Though there are lingering security and financial obstacles to TAPI, they are all manageable. After more than two decades of planning, coordinators of the project have made significant progress on security and financing, and the pipeline has now entered its initial construction phase. If all goes as planned, within a matter of years Turkmenistan will be able to significantly diversify its natural gas exports.