TURKMENISTAN GAS

An option for increasing gas supply

By MUHAMMAD BASHIR CHAUDHRY
Jan 26 - Feb 01, 2004

The Steering Committee on Turkmenistan-Afghanistan-Pakistan (TAP) gas pipeline project held its seventh meeting at Islamabad on Dec. 8-9, 2003. Pakistan's Minister for Petroleum & Natural Resources, Turkmenistan's Deputy Prime Minister and Afghanistan's Minister for Mines & Industry and ADB representative led their respective delegations. The meeting, chaired by Pakistan's Minister for Petroleum, discussed the gas reserves certification for Daulatabad gas field of Turkmenistan, demand for natural gas in Pakistan, anticipated utilization of natural gas in Afghanistan, status of preparation of various initial agreements and also considered the draft feasibility study presented by Penspen Consultants.

The committee decided to set a six-month deadline for submission of Daulatabad gas field reserves certification by Turkmenistan; submission of a final/revised feasibility study by the Penspen Consultants of UK, asked Pakistan to submit detailed study on its gas requirements after 2010 and constituted a working group to deliberate on various issues of the feasibility study. The decisions of the steering committee were announced at a joint news conference on 9th Dec. 2003 by the heads of the delegations.

The TAP gas pipeline project is manifestation of Pakistan's efforts to make available gas to the local consumers including industries for the continued growth and development of the country and the welfare of its people. The project is an embodiment of regional cooperation and has great importance for the three partner countries. The TAP pipeline would be passing through difficult terrain, most of which is in need of continued political stability and security. Such regional infrastructure projects have long gestation periods because of difficulties in finalizing the project details, arranging finance with sound guarantees for safety of loan and equity and the actual execution of the project in areas having different customs and work ethics. Problems in implementation of TAP pipeline or failure to make it operational within budgeted cost and time would have important financial implications for all the stakeholders. In order to make proper and educated decisions, the stakeholders may consider inviting public views on different aspects of the project. The suggestions and thoughts in this paper are submitted for consideration of the government with a view to improve project parameters and facilitate the stakeholders in finalization of this important project in a cost-effective manner.

The committee gave six months to Turkmenistan starting from January 2004 to present an audit of Daulatabad Gas Reservoir. In the meantime, Turkmenistan would submit a Letter of Comfort with regard to availability of gas reserves to support the project. The meeting was reportedly told that Turkmenistan was currently negotiating with two companies to conduct an audit of Turkmenistan gas reserves at Daulatabad field. The companies being considered for carrying out reservoir study should be of international repute with vast experience for such work and also preferably be on the panel of the ADB and the World Bank as consultants for similar assignments. Moreover, the certification of gas reserves, based on a proper reservoir study, has to be in form and substance that the international creditors prescribe for financing such large infrastructure projects. In case gas from this field is proposed to be supplied to other buyers through any other pipeline, the same should be specified and certified that the recoverable gas reserves would meet the requirements of both the pipelines for the life of TAP project. Turkmenistan might be required to have concurrence of the governments buying gas from TAP pipeline before additional supply of gas from this field is committed to any other buyers.

According to press reports, the committee decided that the Penspen Consultants should revise the feasibility study keeping in view the gas requirement in Pakistan as no formal response had been received from India. The draft feasibility study was said to cover major routes and main aspects of the project; however, it was said that there is always room for improvement especially in a feasibility study. It was agreed that revised feasibility should include cost of project and security issues with special reference to Afghanistan during construction and subsequent operation of the pipeline. The consultants are supposed to table the final study before the committee in its next meeting to be hopefully held at Islamabad in four to five months time. It might be kept in view that the final feasibility study would also form the basis for approaching the investors and creditors for implementation of the project. Therefore, the stakeholders should ensure that the final feasibility study is reasonably good and is carried out with the active involvement of reputable international consultants for regional gas/oil pipelines.

The estimated cost of the project reported in the press varies from $2.5 billion to $3.5 billion. This is understandable due to fluid nature of project parameters at the moment. It is prudent that for such large projects different scenarios are prepared with different plausible assumptions. The consultants cannot prepare a good feasibility report if the TORs are deficient or the sponsors and their agencies do not provide enough reliable details or clarifications through face-to-face meetings. May be there are certain other areas that also need to be explored at this stage. This being the major revision of the feasibility study it should better be comprehensive and provide a basis for the consultants to prepare a good report.

The creditors and the investors usually discover missing areas or areas with insufficient details in the feasibility report howsoever good it might be when they seriously look at a project. This is unavoidable and the project sponsors/consultants usually know it and are prepared for that. However, the feasibility report should not be of such a quality that on submission it is declared as unacceptable by the creditors/investors. Due to revision of the feasibility one gets the impression that the progress of the project has been set back by a few months. This impression would be removed once a really good and bankable feasibility is submitted to the stakeholders.

The committee has formed a high level working group consisting of two senior officials from each country, which will reportedly coordinate with the ADB on project related activities including the feasibility report. Pakistan's Petroleum Minister reportedly said all the three countries have also signed a protocol and it is expected that the project will be completed at a cost of $3.5 billion by 2010. It may be noted that the capital cost at this stage of feasibility is only tentative and might possibly increase further as things are firmed up and actual surveys of the gas pipeline route are carried out. Higher capital cost will make difficult the raising of funds, to secure which Pakistan will presumably be providing major guarantees to the creditors, the investors and the gas supplier. The capital cost needs to be jealously watched by Pakistan, the sole buyer of gas at present.

Pakistani officials reportedly submitted in the meeting that demand in Pakistan in 2010 would be 200 to 500 million cubic feet per day in addition to the domestic production, while it would rise in the next five years to 1.4 billion cubic feet per day and would further go up to 2.5 billion cubic feet per day in 2025. The committee asked Pakistan to submit a detailed study on its gas requirements after 2010 and decided that pipeline size should be based on projected demand growth in Pakistan. These are critical areas and the government has to be extra careful. The country might come under great financial strain if the pipeline is designed at an excessive capacity say 1.5 to 2.0 billion cubic feet per day which is substantially larger than the supply gap estimated in the country by 2010. The government is urged to further refine supply-demand projections of gas preferably before the submission of the final feasibility by the Penspen Consultants. Gas price currently obtaining in the country might also be looked into and rationalized in a phased manner so that there are no difficulties with the gas consumers in 2010 when TAP gas starts flowing in our pipeline network.

Gas price is also important for the buyer country as well as the gas producer. Regarding import of gas, Pakistan reportedly has been in contact with the governments of Iran and Qatar; therefore, these options might also be concurrently progressed with the respective governments. Besides, there is need to further study the prospecting of gas within the country including off shore as well as the prospecting areas so far spared from exploration/development due to various reasons. TAP pipeline project must be cost effective and the gas so supplied should be cheaper than other competing sources which presumably have better prospects for security of supplies.

Pakistan's Petroleum Minister said that the committee had finalized the route of the pipeline that would commence from Daulatabad in Turkmenistan and will be connected to Pakistan's main gas pipeline system at Multan via Kandahar in Afghanistan. He said that the pipeline would also pass through the district of Dera Ghazi Khan. The southern route was chosen over a proposed northern path, which would have run through the Afghan capital Kabul on to Peshawar. The selection of the southern route shows that Afghanistan would possibly not be utilizing TAP gas for Kabul and surrounding areas. Thus, it appears now Pakistan is the only buyer of gas in stead of earlier expectation of three buyers including India and Afghanistan. India has not shown any response so far to the invitation and Afghanistan would probably be only a transit country. This has to my understanding considerably changed Pakistan's position. Now Pakistan might have to provide major guarantees for the purchase of gas as well as the raising of loan and equity funds for the project. This might require Pakistan on strengthening the existing set up for realization of the project. Further, there might be the need for more serious team work among experts drawn from various ministries for sorting out and negotiating different matters pertaining to the project including various agreements presently being prepared in cooperation with the ADB.

It may not be entirely so but it appears that due to selection of the southern route by the committee, the project cost has risen to $3.5 billion. There might be other valid reasons for that. The criteria used for selection of the route have not been made public. The government presumably supported this route due to lower per unit cost of gas to Pakistan. It is felt that the route selection might have been finalized after the final feasibility report was available for critical review on the two alternate routes. One could perhaps also suggest a third route. The TAP pipeline after entering Afghanistan could be branched out one pipeline proceeding to Quetta and the other to Peshawar. This might enhance flexibility for eventual export of gas to India through land route and sale of gas internationally through Gwadar port. In the process, Afghanistan and Pakistan could also benefit.

According to existing understanding, the TAP project is delivering gas to Pakistan only and the pipeline is not being extended to Gwadar Port in Pakistan or to India. In such a situation, Pakistan's contribution to the project could be kept within reasonable limit if the project is designed to deliver gas to Pakistan at the border near Quetta. On taking delivery, Pakistan could carry gas through its own pipeline network to Multan, Karachi or other places through its existing gas pipeline network. If need be the gas pipeline network at places could be replaced, enlarged or built afresh according to the need. Pakistan has steel pipe manufacturing capacity for gas as well as expertise for laying gas large pipeline therefore expanding or improving of existing pipeline network would not be a problem. Pakistan should also offer building the pipeline in Afghanistan or Turkmenistan as it has the steel and necessary expertise for the job.

The ADB, which has allocated $1.5 million to the feasibility studies, presented the status of various agreements in the meeting. The committee decided that these agreements would be finalized after completion of feasibility study and certification of Daulatabad field reserves. Now that Pakistan is the only buyer country of Turkmenistan gas, there might be a number of project parameters/guarantees/commitments which need adjustment according to the changed conditions. The Pakistani team might be assigned to study these matters including draft agreements in the context of the changed scenario before the next meeting of the committee.

This project can provide valuable experience to Pakistani professionals and presumably the government has associated some of the technical and financial experts to assist the Ministry of Petroleum in this endeavour. Long Term Credit Fund (LTCF) of the GOP for energy and energy related infrastructure is currently administered by the National Bank of Pakistan. Association of the LTCF officials with the TAP pipeline project work is considered to be mutually beneficial. The stakeholders might also consider informally sharing the final feasibility, through the courtesy of the ADB, with international banks and investors for their initial reactions. The stakeholders are urged to proceed in the finalization of the TAP pipeline project in a transparent manner and ensure equitable sharing of the costs and benefits of the project for welfare of the people of all the partner countries.