November 10, 2007

Analysis: Pakistan unrest hurts pipelines

Published: Nov. 9, 2007 at 6:58 PM

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UPI International Correspondent

WASHINGTON, Nov. 9 (UPI) -- On Nov. 3 Pakistani President Gen. Pervez Musharraf declared emergency rule in Pakistan.

In his "Proclamation of Emergency," Musharraf began with the country's rising troubles from rising militancy and terrorism, beginning by telling the nation, "There is visible ascendancy in the activities of extremists and incidents of terrorist attacks, including suicide bombings, IED explosions, rocket firing and bomb explosions and the banding together of some militant groups have taken such activities to an unprecedented level of violent intensity posing a grave threat to the life and property of the citizens of Pakistan," and ending by proclaiming, "The constitution of the Islamic Republic of Pakistan shall remain in abeyance."

India immediately closed the border and put its troops on heightened alert.

An unintended but significant byproduct of the proclamation is to kill, perhaps for good, any Pakistani or Indian hopes for sharing in the burgeoning Caspian basin energy exports, threatening some projects that have been on the drawing boards for years. Proposed pipelines include those to bring Turkmen and Iranian hydrocarbons via Pakistan and thence onward to India. The chaos in Afghanistan initially dimmed Indian and Pakistani hopes as the chaos, combined with other more stable suitors, most notably China, stepped into the breach with offers and funding. Islamabad's recent pronouncement seems hardly likely to quell the anxieties of potential Western investors, painfully aware this is the first time since 1945 that a nuclear-armed state has declared a state of emergency.

For the foreign investment community, Pakistan's announcement constitutes a triple whammy for possible pipeline projects -- Iran, one of the major potential providers of energy exports, remains under relentless U.S. sanctions pressure, while neighboring Afghanistan copes with a persistent Taliban insurgency six years after they were driven from power. Pakistan in turn faces a turbulent North West Frontier province along with a second of Pakistan's four provinces simmering in unrest, Balochistan.

Pakistan's announcement will undoubtedly drive all but the most stalwart investors away, with Moody's Investor Service downgrading Pakistan's credit ratings from "stable" to "negative," negatively affecting Pakistan's foreign and local B1 currency bonds as well as B2 foreign-currency Pakistani recommendations on bank deposits. Across the frontier, India can only watch and wait.

Musharraf's pronouncement imperils two longstanding high-profile initiatives -- the Iran-Pakistan-India natural gas project along with the Trans-Afghanistan Pipeline. Both now seem to be triumphs of wishfulness over reality, despite their long genesis.

TAP was first proposed in 1989 by India's Rajendra Kumar Pachauri, head of the Tata Energy Research Institute, in partnership with Iranian former Deputy Foreign Minister Ali Shams Ardekani. As envisaged, the proposed $3.5 billion, 1,044-mile pipeline was annually to transmit 33 billion cubic meters of Turkmen natural gas from its Dauletabad fields via Afghanistan through Pakistani sites Quetta and Multan to Fazilka.

IPI was equally ambitious, with the projected $3.5 billion pipeline to become operational in 2015, with Pakistan importing 3.15 billion cubic feet per day and India eventually importing 4.25 billion cubic feet per day through the IPI "peace pipeline."

In light of current developments, both projects seem stymied for some time, while both Russia and China move swiftly to take up the slack in assessing Iranian and Turkmen natural gas.

India's energy import problems in the short and long term will only increase. On Nov. 7 the International Energy Agency said in its World Energy Outlook 2007 report that the rapidly rising Indian economy by 2030 would have to import 90 percent of its oil to cover domestic needs because its domestic proven oil reserves are "small."

The report also concluded that by 2025 India would surpass Japan to become the world's third-largest oil importer before 2025, with domestic consumption needs rising as high as 6 million barrels a day by 2030. According to the IEA, demand for oil imports by China and India will almost quadruple by 2030, severely disrupting markets. Since 2005, China and India between them accounted for about 70 percent of the increase in global energy demand.

India, like China, however, is not putting all its energy eggs in one basket, and is seeking out new opportunities worldwide, most notably in Africa. New Delhi is hosting its first India-Africa Hydrocarbons Conference. Petroleum and Natural Gas Minister Murli Deora told the conference, "We are committed to ensuring our billion-strong nation affordable access to energy. To insulate our economy from the vagaries of the international oil market and inflationary pressures that could arise from transferring the entire price rise to end-users, the Indian government and the national oil companies are absorbing over 85 percent of the difference between cost of import and domestic oil prices." Pakistan's options remain much more limited.

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