Ind-Ra: 'Peace Pipeline' of Energy from Central Asia to India Unlikely Before FY20

India will not receive gas for the next four to five years from energy-rich Central Asia through the proposed USD10bn Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, believes India Ratings and Research (Ind-Ra). The TAPI pipeline is unlikely to be commissioned by the proposed timeline of FY18, and India will continue to rely on domestic gas and imported LNG.

The agency sees four key issues associated with the successful commissioning of the pipeline a) the seller's willingness to sell gas at a price feasible for the ultimate buyer b) volume off-take assurance by end-consumers c) funding of the pipeline and d) geopolitical risks associated with the construction and operation of the 1,735km long pipeline.

The willingness of Turkmenistan state concern to price its gas in a manner which would ensure its cost competitiveness in countries where the gas is finally sold is essential for the project to take off. Turkmenistan is a net exporter of natural gas and its economy depends on such exports and hence may keep prices high. Additionally, the extractability of the proven reserves of 16 trillion cubic meters of gas from the South Yolotan-Osman field from where the gas would be supplied could pose a challenge. This could limit the quantum of gas available for transportation from the pipeline.

Many user industries would find the gas unviable for their operations and may refrain from entering into long-term purchase agreements if the landed price of gas in India from the pipeline were to be high at USD10/mmbtu-USD12/mmbtu. Additionally, operations of gas-based power plants and fertiliser plants using gas from TAPI (2x domestic gas price) would lead to high power tariffs and higher subsidy, respectively, which the government might not prefer. Transit fee payable to each nation from where the pipeline passes and funding tie-ups for the project could hinder the prospects given the geo-political risks and the lack of off-take agreements. Financial closure for the project would involve significant support from participating countries including equity participation and guarantees for the project debt. This is because the construction and operation of the pipeline, which will pass through difficult and conflict-affected geographies in three countries, carry major credit risks.

India's domestic natural gas output declined significantly over FY10-FY15 as gas supplies from KG-D6 and other east coast fields characterised by high temperature, high pressure deep sea water drilling did not materialise as expected. Thus, the government of India looked at gas-sourcing options outside of India including LNG (sport and term) and direct imports through pipelines. Given the high prices of term LNG (3x domestic gas prices), not all user industries are amenable to the use of such expensive gas.

The TAPI pipeline is likely to transport 90mmscmd of gas, out of which India's share will be 42% or equivalent to 38mmscmd. India's gas deficit stood at 148mmscmd in FY15, which means 26% of India's deficit can be bridged if volumes materialise. This could be sufficient to revive a part of stranded power based plants or kick start fresh investments in the fertiliser sector, provided the landed price of the gas is reasonable and lower than the term-LNG prices.

The pipeline will thus be a boost for energy starved India. However, its commissioning faces multiple challenges which are unlikely to be addressed quickly and will make it a long gestation project.

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