A commercial agreement has been signed for the trans-Afghanistan gas pipeline, but security concerns continue to threaten the $7 billion project. The WSJ's Deborah Kan speaks to South Asia Bureau Chief Paul Beckett. Photo: Getty Images
Tom Wright And
Santanu Choudhury
Updated May 22, 2012 9:55 p.m. ET

NEW DELHI—Countries involved in a U.S.-backed trans-Afghanistan pipeline will sign a commercial agreement Wednesday that is aimed at keeping the much-delayed $7.6 billion project alive.

The U.S. has, for almost 20 years, supported the plan to pipe natural gas over 1,800 kilometers from Turkmenistan via Afghanistan to Pakistan and India--commonly referred to as the TAPI pipeline. But the project has gotten nowhere because of the Taliban insurgency in Afghanistan and commercial disagreements between the partners. Despite security concerns, the countries involved have continued to push forward. For the U.S., the project offers a way to further isolate Iran, which is trying to build its own gas pipeline to Pakistan. It also could help deepen economic ties between India and Pakistan—rival nations that Washington wants to see cooperate more to help forge stability in the region, particularly Afghanistan.

Turkmenistan, a major supplier of natural gas, views the project as a way to reduce dependence on Russia and China as export markets. And India and Pakistan hope Turkmenistan's gas will help meet their huge energy import needs.

On Wednesday, state-owned energy companies from India and Pakistan will sign a 20-year agreement with Turkmenistan to purchase up to 33 billion cubic meters of gas a year via the pipeline, said Muhammad Ejaz Chaudhry, secretary of Pakistan's Ministry of Petroleum and Natural Resources.

An Indian government official declined to comment.

The countries recently agreed at a meeting in Pakistan on how much Afghanistan should get in transit fees, disagreements over which had been holding up a gas-purchase agreement. Afghanistan also will buy a small amount of the gas but has yet to reach an agreement with Turkmenistan.

The signing, which will take place in Turkmenistan, is backed by the Asian Development Bank. The Manila-based multilateral lender is funding a small part of the project and helped broker Wednesday's deal.

The U.S. isn't playing a direct role in the negotiations but has supported the pipeline since the 1990s, when a Unocal Corp.-led consortium entered negotiations with the then-Taliban government.

"We think this is a very positive step forward on TAPI," a U.S. State Department spokesperson familiar with the matter said Tuesday. "We hope to see further momentum and progress on this regional strategic priority."

It remains unclear how the project can progress given the Taliban insurgency, which controls large swaths of southern Afghanistan and parts of the Afghanistan-Pakistan border. A separatist rebellion in Pakistan's southwestern Baluchistan province, through which the pipeline must also pass, further complicates the picture.

Andrew Neff, a Moscow-based senior energy analyst at IHS, a global consultancy, said instability in Afghanistan means the pipeline—estimated four years ago to cost $7.6 billion to construct—is unlikely to attract financing from Western banks.

"The main hurdle is the security concerns in Afghanistan," Mr. Neff said.

The focus on the pipeline's geopolitical significance is "threatening to overtake the economic rationale of connecting suppliers with consumers," he said.

The U.S. is trying to squeeze Iran to give up its nuclear program by forcing countries like India to reduce their purchases of Iranian crude oil. The U.S. has promoted alternative sources of energy, signing a civilian nuclear deal with India and pushing projects like the TAPI pipeline.

New Delhi recently has begun to cut back on Iranian crude purchases, under U.S. pressure to do so by the end of June or face limited sanctions. Two years ago, India pulled out of a gas pipeline project with Iran, also after the U.S. asked it to do so.

But Pakistan has refused to pull out of the planned $1.5 billion pipeline with Iran, even after U.S. Secretary of State Hillary Clinton in March threatened economic sanctions if it proceeded.

The country argues it needs to push both the Iran and TAPI pipelines to meet a looming energy shortage. The U.S. refused to sign a civilian nuclear deal with Pakistan because of its history of nuclear proliferation.

"Pakistan can't afford to withdraw from the project," Mr. Chaudhry said.

Turkmenistan is hoping the deal will allow it to find alternative customers for gas from its massive Galkynysh field, the second-largest gas reserve in the world. The country was long dependent on Russia, which has cut back purchases in recent years amid the global economic downturn. The Central Asian country is exporting to China via a pipeline but is looking to diversify its markets further, Mr. Neff said.
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