IPI: A “Road to Peace”? The Promise and Pitfalls of Deep Interdependence

1. IPI: A “Road to Peace”?The Promise and Pitfalls of Deep Interdependence

2. The “Problem”posed 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

9. 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

10. Capabilities and Constraints - 2 • India: Rapidly growing (emerging market) economy facing substantial internal institutional barriers • Potentially world’s 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

11. NG Pipelines: Actual and Proposed

12. 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

14. 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]

15. 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?

16. 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

17. 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?

18. 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

19. 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!

20. The End?