IPI: A “Road to Peace”?

The Promise and Pitfalls of

Deep Interdependence

Richard E. Ericson
ECU
 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
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 The Region

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 Fundamental Interests
of 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
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 The Route

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 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”
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 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
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 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 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

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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
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 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?

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