Dear Mr. Deora,

Since your Ministry's e-mail server unceremoniously returned a previous message sent to your energetic predecessor, I am writing this open letter to you with the hope that you will consider it with some care.

A Pipeline Dream

Your predecessor's enthusiasm for pipelines that traverse Pakistan before reaching India was ill-advised on economic as well as strategic grounds. While ushering in peace with Pakistan is a desirable goal, it is important not to allow the atmospherics of the current peace process to become a crucial determinant to India’s long-term investments in energy. So I am glad that you have wisely decided to downplay the Iran-Pakistan-India pipeline project. I also urge you to put the project in cold storage.

But we still need to continue our quest for reliable, long-term fuel supplies that will support India's growing economy. Let me outline an alternative approach that will achieve our energy security objectives without putting India’s hydrocarbon jugular in Pakistan’s incorrigible and unreliable hands.

The Risk Premium

Compared to other options, the capital cost of a pipeline running through Pakistan may even be the lowest. Thanks to the representations made by the Pakistani government, the annual operating costs and transit fees may also seem competitive. But the biggest unknown is risk.

Inability to calculate and properly account for the overall risk premium makes the overland pipeline appear attractive, especially in these happy days of India-Pakistan detente. Thus from a purely commercial perspective, it is the quantum of risk premium added on to the known costs that will make all the difference to this project. Estimating political risk is at best an inexact science, but taking pot-shots at gas pipelines was a coming-of-age ritual for Pakistan's Baloch tribesmen even before blowing them up became a signature act in their rebellion against Islamabad. If the Pakistan Army cannot secure Pakistan's own domestic pipelines, can its promise to protect a pipeline to India have any credibility?

What is more, most of the collateral economic benefits will accrue to Pakistan and Iran even before any gas arrives in India. Our investment will create jobs and infrastructure there. This is not a bad thing in itself – but why not use Indian investment to create jobs and infrastructure that are badly needed in India? Wasn't this exactly what your Common Minimum Programme promised?

The Domestic Alternative

I invite you to consider building a state-of-art port with an integrated Oil & Gas processing terminal along India’s West coast. This would be connected to major Indian cities with modern highways and a network of domestic pipelines. Such a port will allow India to import not only Natural Gas from Iran, but also Oil & Gas from other exporting countries. The technology to carry Oil & Natural Gas on ships is mature, and if Indian ports can be upgraded to efficiently handle the seaborne traffic, such a project will provide all the capabilities of the overland pipeline, and more.

The Iran-Pakistan-India pipeline restricts India to a monopoly supplier and a monopoly transit provider. This is not a comfortable scenario for any purchaser. What I propose, on the other hand, takes a market-based approach. India will be able to purchase Oil & Gas from competitive international markets, from multiple vendors and through multiple shipping lines. No single supplier or government will be able to squeeze India commercially or politically. The Indian Navy can be relied upon to take care of those who attempt rougher methods of persuasion.

A Robust Opportunity

Your Cabinet colleagues and parliamentary supporters from the Left parties have unleashed strong rhetoric on employment generation. Let me assure you that by investing in a major infrastructure project in India you will be creating lakhs of jobs, and simultaneously allowing your government to redeem its pledge. India’s public investment in such an infrastructure will also attract private investment, both foreign and domestic. The best part is that the benefits of almost every single rupee your government spends will accrue to your own voters.

From a geopolitical point of view, I can understand why Pakistan is so excited about creating ‘mutual dependencies’. For the first time in its history, it will have good bargaining chips for its negotiations with India. While that is all very well as far as the Pakistanis go, I cannot understand why India has to pay for those chips that will almost certainly be used against us. How about keeping India’s energy security independent of the whims, fancies, preoccupations and delusions of our neighbour to the West? China, a country your predecessor is known to admire, is building road links across South East Asia, Myanmar and Pakistan, giving India a miss. It appears that there are few takers in Beijing for the ‘mutual dependency’ theory.

In conclusion, I wish you every success in your quest to find the oil to keep India’s lights burning. But you must replace your faith in the Pakistani government’s promises with faith in the promise of free markets. You must replace the desire to create mutual economic dependencies with a desire to create substantial economic growth at home. If in doubt, please remember this word of advice from a person we both admire.

Sincerely,

Nitin Pai

[Nitin Pai, arguably Indian Blogosphere’s foremost strategic thinker, maintains his own blog at http://acorn.nationalinterest.in]

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