EurasiaNet Business & Economics - Trans-Afghan Pipeline Project Moving Forward, Faces Risks

BUSINESS & ECONOMICS

TRANS-AFGHAN PIPELINE PROJECT MOVING FORWARD, FACES RISKS

Mark Berniker 12/19/02

The leaders of Afghanistan, Pakistan and Turkmenistan are expected to meet in late December to hammer out an agreement on building a trans-Afghan pipeline that would carry Central Asian energy to southwest Asia, and possibly beyond. Experts caution, however, the project faces numerous obstacles, including political risks and potential financial pitfalls.

The three heads of state � Afghanistan’s Hamid Karzai, Pakistan’s Pervez Musharraf and Turkmenistan’s Suparmurat Niyazov � are scheduled to gather December 26-27 in the Turkmen capital Ashgabat. According to initial estimates, the 1,500-kilometer-long pipeline, stretching from Turkmenistan to Pakistan, would cost upwards of $2 billion to build, and would be capable of transporting about 30 billion cubic meters of natural gas annually.

Of the three countries involved in the pending deal, Turkmenistan stands to gain the most from much-needed revenues for its natural gas exports. The pipeline would also ease Turkmenistan’s dependence on existing Russian pipelines to carry Ashgabat’s abundant energy resources to international markets. Afghanistan would benefit from transit revenues and infrastructural development, while Pakistan would receive natural gas for its domestic market. But the pipeline’s main long-term customer, India, is not invited to Ashgabat, and has given no indication it wants its natural gas to flow through Pakistani territory.

Many analysts suggest that while the project is sensible in theory, unstable political conditions in all three countries mean that actual pipeline construction may not begin for a long time.

"Pipelines are easier to conceive than to build. The �in principle’ agreements may be easier than the technical details. The political situation in Afghanistan is not sufficiently stable, yet. And the pipeline will have a lot of politics associated with it. So we have to wait and see how things evolve, but I don’t think we will see a pipeline anytime soon," says Husain Haqqani, a visiting scholar at the Carnegie Endowment for International Peace, and a specialist on Afghanistan and Pakistan.

Politics aside, financing the project is expected to be a complicated and time-consuming process. Currently, the Asian Development Bank (ADB) is conducting a series of studies, and has bids out for companies that will conduct a major feasibility study next year.

"The ADB has short-listed a number of firms to carry out the $1 million technical study and the firm should be in place in the first quarter of 2003," said ADB spokesman Ian Gill, speaking from the bank’s offices in Manila, Phillipines.

"The three participating countries have requested ADB to mobilize co-financing for the Project after the feasibility study is completed. This would be from private sector participants and also from other multilateral and bilateral donor agencies," according to ADB documents. The documents go onto say the ADB expects it will take "another twelve months after the feasibility study" before the financing is likely to be secured. If all the studies pass lending muster, construction on the Trans-Afghan pipeline will not likely begin before the first quarter of 2004.

Documents provided to EurasiaNet by the ADB show that international lending institutions would like to "actively pursue India’s involvement in the Project as the principal consumer of the gas to be delivered by the pipeline."

Ultimately, the pipeline’s future could depend on India. Experts say that India’s often tense relationship with Pakistan makes New Dehli wary about participating in the trans-Afghan pipeline project, as the Indian government does not want to become dependent on Islamabad for energy supplies. At the same time, India is perhaps the primary market for Turkmen natural gas.

The trans-Afghan pipeline is crucial for the future of the Turkmenistan gas market, which has not been meeting its production targets, and faces the serious challenges of replacing outdated technology and attracting foreign investment. Turkmenistan is banking on the construction of the trans-Afghan pipeline to reverse years of decline in its drilling, processing and gas pipeline infrastructure.

According to a report broadcast by Turkmen television December 17, Ashgabat seeks to increase natural gas production to 85 billion cubic meters annually by 2005 and 120 billion cubic meters by 2010. To meet its targets, the Turkmen government is counting on upwards of $25 billion in investments in the country’s oil and gas sector.

The ADB and World Bank are expected to provide the bulk of the financing for the Trans-Afghan pipeline project, but there is a lot of work that needs to be done before a financial package is finalized. The US Agency for International Development (USAID), the international aid agency of the US State Department, is playing a role in the pipeline project, as well.

"USAID is in a complimentary role to the multilateral agencies, including the ADB and World Bank. USAID has a resident expert team in Afghanistan which is prepared to work with the Afghanistan government to help develop a legal and regulatory framework that will be required to secure investment to the build the pipeline," says Harry Edwards, press officer for USAID.

The ADB spells out its view of the Trans-Afghan pipeline when it says the "ADB is fully cognizant of the risks attached to this project, and these are considerable."

All three countries feature uncertain political environments. A recent assassination attempt against Turkmenistan’s Niyazov suggested that cracks in the country’s authoritarian system may be opening. [For additional information see the Eurasia Insight archive]. In addition, Niyazov has proven to be a fickle negotiating partner, capable of making sudden shifts in position. Some observers say Turkmenistan poses one of the major obstacles to a Caspian Sea treaty. [For additional information see the Eurasia Insight archives].

Beyond uncertainties in Turkmenistan, there are also concerns about the Afghan stretch of the pipeline. There are questions concerning the potential impact that feuding warlords could have in Afghanistan on the security of pipeline construction workers and energy operations specialists. In addition, experts say no pipeline equipment is manufactured in the region, so it will have to be imported from Japan or western Europe, considerably increasing the costs and financial risks of the project.

While the three governments of Turkmenistan, Afghanistan and Pakistan along with the ADB are pushing the project forward, questions remain whether private companies and major global financial firms will legally enter into a still unformed consortium. Governments and multilateral institutions may be more willing to take on that risk than private firms.

This is not the first time that the three governments, multilateral lending institutions and private companies have tried to develop a trans-Afghan pipeline. In October 1997, California-based private company Unocal established a consortium to develop the pipeline, but by August 1998, the company suspended construction plans after failing to secure financing for the project.

Although the trans-Afghan pipeline project is being revived, Unocal will not be a participant in the venture this time around. "Unocal is not interested in getting involved, again. The issue was that the lack of a stable government in Afghanistan made it difficult to get financing," says Terry Covington, manager of international communications for Unocal.

Editor�s Note: Mark Berniker is a freelance journalist specializing in Eurasian affairs.

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