IPI: A

1
IPI A Road to Peace? The Promise and Pitfalls
of Deep Interdependence
2
The Problemposed by IPI

• 3 Regional Powers, with
• Differing, Often Conflicting, Objectives
• Yet Substantial Coincidence of Needs ?
  Gains to Interaction
• Beneficial Interaction Requires Deep Mutual
  Interdependence
• ? Costs of Interdependence
• Substantially raising both the Costs and Benefits
  of (Strategic) Policy Decisions

3
The Region
4
Fundamental Interestsof each power

• Sustained Economic Growth, requiring
• Energy (NG as Fuel of the 21st Century)
• Investment
• Technology
• International Power and Influence
• A Seat at the Table in all world issues
• Regional Preeminence over Rivals
• Leverage in dealing with non-regional powers
• Internal Stability Cohesion
• Relationship (/-) with U.S./ West

5
The Route
6
Particular Concerns - Iran

• Political Strategic Objectives Paramount
• Overcome Western constraints breakout to the
  east, South Asia China
• Develop leverage against the U.S. an
  India-Iran counterforce, breaking U.S.-proxy
  encirclement
• Through becoming an irreplaceable partner,
• as only sufficient supplier for India
• Financing growing import needs, technology
  acquisition, social subsidies, and investment
• Through extracting maximum rents from energy
  sales
• While securing long run demand ? stable
  (growing) income
• But, apparent ambivalence about selling its
  natural endowment

7
Particular Concerns - Pakistan

• Growing energy deficit NG is 60 of use
• Fully absorbing internal supply ? need for import
• 1 bcf deficit after 2015 expected
• Growing Internal Unrest e.g. Baluchistan
• on-going threats to energy infrastructure
• struggles over internal control
• Vast Investment Needs in face of seriously uneven
  development (esp. tribal areas)
• ? maximize transit fees, minimize cost at entry
  border
• Fear of strengthening key rival India
• Stayed on sidelines, avoiding negotiation

8
Particular Concerns - India

• Primary Concerns are Economic
• need secure and growing supply of energy
• 8 pa growth ? 4-fold increase on primary, and
  5-7-fold increase in electric, energy over next
  25 years
• NG a small but increasingly vital component
• NG use expected to rise 2.6-fold, from 15 to 20
  of energy use
• Pricing only viable in power production at
  3-3.50/mBTU LNG world market prices are 7-10
  /mBTU
• Subject to Security Constraints
• Deep Distrust of Pakistani Motives, Objectives
• Fear of Iranian Unreliability, non-economic
  objectives ?
• Desire for diversified sources

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Capabilities and Constraints - 1

• Iran Underdeveloped economy, functioning well
  below potential
• Substantial Energy Reserves
• 2nd Largest NG Supply Potential in World
• Substantial oil reserves using gas injection to
  maintain output
• Location between Europe, Middle East, Central
  Asia, and South Asia Hub between largest
  suppliers and largest users
• Cash Starved despite oil revenues ? investment
  technology constrained, as is ability to
  maintain social subsidies
• Pakistan Underdeveloped economy, with wide
  disparities in development level
• Energy reserves fully domestically committed
• Limited effective demand for energy imports
• Land Bridge Middle East - Central Asia and
  South Asia
• Politically unstable with weak internal security
• Kashmir Issue with India
• Bearing substantial military costs

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Capabilities and Constraints - 2

• India Rapidly growing (emerging market) economy
  facing substantial internal institutional
  barriers
• Potentially worlds 2nd largest consumer of NG
  and LNG
• Located far from adequate supplies
• China major competitor for supplies
• Rapidly growing energy demand, exacerbated by
  domestic pricing, regulation, inefficiency
• Substantial ability to finance investment,
  attract and use advanced technologies
• Potential (insufficient) supply from east
  Bangladesh, Myanmar
• Middle-East, Central Asian supplies by pipeline
  must pass through Pakistan, or under ocean (up to
  3000m depths)
• Issue of Kashmir with Pakistan
• Developing Partnership with the US

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NG Pipelines Actual and Proposed
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Strategic Alternatives Iran

• Export for revenue to break isolation, through
• IPI vs.
• Export to Europe through ( to) Turkey
  politically constrained
• I I pipeline under sea to India extremely
  costly, technologically complex
• LNG to world market requires substantial
  investment as well as political opening
• Currently lacks necessary technology sanctions
  complicate acquiring it
• Reserve for the (Islamic) future
• Domestic use
• Limited export to Pakistan and/or Islamic clients

13
Strategic Alternatives Pakistan

• IPI Provide Transit for Gas to India
• Generate substantial transit revenues
• Acquire needed energy input at low cost
• Requires investment in Infrastructure security
• Acquire leverage in relations with India and Iran
• Block land route to India
• Restrain growth of Indian power
• Look to Qatar, Iran, or TAP for needed increase
  in gas supply

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Strategic Alternatives India

• IPI Meets new energy need Iran via Pakistan
• Lowest cost alternative
• Subject to Pakistani interruption or internal
  turmoil
• Dependent on Iranian reliability
• Undersea Pipelines from Iran and/or Qatar
• Extremely expensive and technologically risky
• Iranian reliability issue
• LNG from Qatar (world market)
• Requires substantial domestic infrastructure
  development
• Market still underdeveloped, if promising
• (Partial) Supply Alternatives Diversification of
  sources
• Bangladesh Myanmar Pipelines
• Turkmen gas (TAPI), also through Pakistan 70
  bcf/yr (1.98bcm)?
• Develop Nuclear Energy Industry (French model)
  with U.S. Assistance currently only 3 of power
  generation

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IPI as Equilibrium Outcome

• Why? Economic Win-Win if all cooperate
• Low cost alternative for NG supply
• Allows range for flexible pricing agreement
• Satisfies India Pakistan NG needs over 25 year
  horizon, and Pakistani (Iranian?) revenue needs
• Satisfies key Iranian strategic objective
• Raises economic costs of political conflict
  confidence building measure between competitors
• Why Not? Constrains Strategic Autonomy
• Puts powerful levers in hands of competitors
• Raises costs of pursuing other objectives
• May require internationalization of guarantees
• Opposed by powerful outside interests, U.S.
  policy
• Only used by parties as instrument toward other
  (strategic) ends?

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Road to Peace?

• Raises both the costs and benefits of
  interaction, particularly at the margin
• Creates substantial economic surplus for
  negotiated division
• Natural Monopoly structure of pipeline
• Creates mutual dependencies for realization of
  value
• Creates incentives for extension of system
• Empowers mutual, asymmetric threats, with impact
  beyond loss of economic value
• withhold gas supply (captive demand)
• withhold payments (captive supply)
• Interdependence raises costs of conflict ability
  to inflict/suffer pain
• Increases vulnerability to domestic shocks
  within partners
• Beneficial cooperation inspires extension to
  other areas (confidence building)
• Creates (relatively) closed, self-sustaining
  energy-revenue system, implying
• Buffer against outside pressures, shocks
• Reduced incentive to pursue diversification of
  sources, users

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Likelihood of Realization - 1

• Obstacles
• Vast up-front costs (if less than alternatives)
• Negotiation difficult, fraught with moral hazard
• Exploited for other purposes, e.g.
• Iran break U.S.-proxy encirclement, tie others
  to own fate
• India pry concessions from U.S.
• Pakistan resolve internal political difficulties
• Pricing negotiations as a rent-sharing exercise
• Implementation subject to shocks
• Hold-up (extortion) by partners
• impact minimized by maintaining costly
  alternatives
• Domestic disruption within partners
• Outside interventions blocking realization
• Failure to resolve/put aside deep political
  differences
• Pakistani political turmoil
• U.S. opposition Principled or Strategic?
• Nuclear assistance to India to hold up Indian
  participation?

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Likelihood of Realization - 2

• Progress
• Growing realization of the technological
  difficulties and vast costs, or unreality, of
  alternatives ?
• Indian acceptance of Pakistani (arms length)
  participation
• Pakistani acceptance of separation of economic
  and political issues
• Serious negotiations over pricing mechanism
  (India-Pakistan vs. Iran
• Iranian acceptance of insurance responsibility
  guaranteed pricing of alternate supply
• Discussions of 3rd party (Consortium)
  participation
• Iran-Pakistan negotiations on truncated
  pipeline
• Indicates commitment to land route energy
  relationship
• Increases pressure on India to buy in
• Growing world demand pressure China may lock
  up supply?
• Apparent weakening of U.S. opposition?
• Possibility of India grand deal get IPI for
  no-nuke Iran?
• Would imply easier IPI access to financing and
  technology

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Can the Peace Pipeline Really be a Road to Peace?

• As a hypothetical Yes, anything is possible
• In Fact Perhaps
• The prior analysis would indicate that IPI is
  likely, if not certain, to be built
• Provided fundamentals of a game theoretic
  formulation
• If players rational, and understand each others
  rationality, IPI is a Nash Equilibrium outcome
• IPI impact on potential conflict/war
• Increases potential for friction/conflict new
  objects and levers
• Raises the economic stakes ability to suffer,
  inflict losses
• Reduces the likelihood, as ultimate stakes must
  be bigger to justify
• Alters the world balance of power in (often)
  unpredictable ways
• But, in and of itself, is unlikely to make
  peace less possible
• Passions, as much as economic interests, will
  decide!

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The End?