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Pipelines or Pipedreams?
Rahul Tongia
V S Arunachalam
There must be few other situations where there are eager purchasers of natural gas (India and Pakistan),
willing suppliers of natural gas (Turkmenistan, Iran, Qatar and Oman), and yet, no pipeline. The distances
involved are modest, and techno-economic viability appears straightforward. This paper examines in detail
the policy, technology, and economics of an overland pipeline supplying natural gas to Pakistan and India.
Such a pipeline would be shared by both countries, and would represent a unique opportunity for co-operation.
As pipelines exhibit significant economies of scale, shared pipeline would offer the lowest price natural
gas for both countries. Pakistani consumers would obtain cheaper gas than from a lower capacity pipeline
for their exclusive use, also benefiting from transit fees paid by Indian consumers. An alternative to land-
based pipelines through Pakistan for India would be liquefied natural gas, which is more expensive due
to the capital-intensive nature of the liquefaction process. However, any overland gas pipeline does not
depend solely on economic viability, but on political acceptance as well. This study addresses some of the
potential concerns, briefly discussing options for overcoming security of supply worries. Through co-
operating on such a venture, one that offers the promise of significantly helping to build the infrastructure
of both countries, there is the possibility of the neighbouring countries becoming partners in progress, instead
of languishing as prisoners of geography.
IF the 20th century has been described as to import natural gas either through pipe- fuels, an analysis of their energy and power
the century of oil, the coming century is lines or by tankers as liquefied natural gas. scenarios reveals a greater similarity than
being heralded as the era of natural gas. This paper examines the feasibility of a chance would explain. In terms of elec-
Within ten years, the share of natural gas shared pipeline for India and Pakistan, tricity generation capacities, Pakistan has
in world primary energy supply is ex- supplying gas from countries in west and an installed capacity of 14,689 MW [HDIP
pected to overtake even that of coal, with central Asia. This is not the first study to 1998], and India has an installed capacity
an annual growth in consumption esti- suggest natural gas imports for Pakistan of 84,965 MW [CEA 1997], excluding
mated at 3.2 per cent, compared to about and India, though not necessarily as a their captive power plants. Table 1 shows
2 per cent for oil and for coal. This growth shared pipeline between the two countries the capacity and power generation in both
is most dramatic in the power sector, where, [Kubota 1996; Siddiqui and Tahir-Kheli countries by fuel type. These figures lead
due to improvements in combined cycle 1996; Raza 1998]. To be viable, such a to an annual per capita generation in
power plant technologies, natural gas has pipeline would need to demonstrate not Pakistan and India of around 450 kWh and
emerged as the fuel of choice for genera- only techno-economic feasibility, but also 420 kWh respectively. It is important to
tion of electricity. The largest share of political acceptance in both countries. note that these numbers are for gross
growth of primary energy used for power This paper is divided into three main generation only; the consumption is likely
production during the period 1995-2020 sections. In the first section, we summarise to be lower by about 25 per cent due to
will be from natural gas. While the use the power and natural gas sectors in both in-plant consumption and high transmis-
of coal for power production is also ex- countries and also review the uses of natural sion and distribution (T and D) losses.
pected to grow during this period, by 71 gas and technologies for its transporta- These numbers compare unfavourably with
per cent, natural gas usage in this sector tion. In the second section, we discuss the the 1995 world average net generation of
is expected to jump by 168 per cent. proposed pipeline system, including the over 2,200 kWh/year.
The benefits of natural gas based power factors involved in the choice of supplier The very high T and D losses actually
production are many, including the lowest nations and on the routing of the pipeline. incorporate widespread pilferage, which
price electricity, reduced environmental We also analyse the viability of such a is rampant not only in rural areas but in
impact (locally as well as globally), and amen- pipeline, based on criteria we define. The some big cities as well. The utilisation
ability to rapid construction. In addition last section examines the policy and de- pattern is also similar: unlike in more
to technological improvements, the in- cision framework needed for such a pipe- economically developed countries, agri-
creased use of natural gas is explained by line. This paper concludes with brief a culture has grown to be a major consumer
shifts in policy regarding its use for power brief discussion of concerns that both of electricity, with a consumption of 16.6
production. An example is the UK, which, countries may have, and possible avenues per cent in Pakistan (1996-97) and 30.5
in this decade, will increase its share of for overcoming the apprehensions that per cent in India (1994-95), and the share
natural gas from virtually zero to over one- might hinder what is otherwise an eco- consumed by industry is steadily declin-
third of the electricity generated. nomically attractive venture. ing. Rural electrification, seen as a symbol
India and Pakistan both look to natural of empowerment, has been a priority in
gas as an attractive fuel, not only for power INFRASTRUCTURE IN INDIA AND PAKISTAN both countries, more so in India, though
production but also for other applications. Electricity: While there are significant scarcity conditions still prevail. The power
Because of modest domestic reserves, both differences in the two countries’ electric- sector is regulated, and the prices charged
countries are examining various options ity profiles, most notably in choice of to consumers are often below supply costs.
Turkmenistan
11
Afghanistan
Iran
Multan
Pakistan
22
44
33
Oman
Note: The consumption points shown in both nations are for indicative purposes only. Actual consumption need not be clustered, and imported gas
can also join an existing transmission/distribution network.
This is especially the case for agricultural tion to use in power plants and industry, 1997], though domestic production is not
and domestic consumers, whose electric- natural gas is also used for domestic expected to rise dramatically above the
ity is cross-subsidised, at least partially by consumption (Table 2). Pakistan seeks to current levels.
industrial and commercial users paying increase the use of natural gas, especially The official government figure for
more than the average cost. for power production. There have been Pakistan leads to a reserves to production
Natural Gas: Natural gas does not many estimates of future demand, and all ratio (R/P) of 25.6 years, and the reserves
substantially contribute to India’s genera- show strong growth rates. Reports for estimate for India leads to a R/P of 21.6
tion of electricity. This is because of an (potential) demand by 2002 are about 33 years. While these appear low, they are
earlier government policy of prioritising BCM/year for Pakistan [Wajahatullah about double the North American R/P of
use of its modest reserves for producing TABLE 1: GROSS ELECTRICITY GENERATION CAPACITY AND GENERATION 1996-97
fertilisers and petrochemicals. Proven (Per cent)
Indian reserves are not large, about 490 Pakistan India
billion cubic metres (BCM), which con- Capacity (MW) Generation Capacitya (MW) Generationb
stitutes about 0.3 per cent of the world’s
reserves [BP 1998].1 Table 2 shows the Hydropower 4,826 (32.5) 35.3 21,618 (25.4) 18.7
Natural gas 4,015c (27.3) 27.1 6,698 (7.9) 79.2
consumption patterns for natural gas in Coal 150 (1.0) 0.6 53,643d (63.1) for all
India and Pakistan. It is estimated that by Oil/diesel 5,561c (37.9) 36.4 266 (0.3) thermale
2000, the potential Indian demand for Nuclear 137 (0.9) 0.6 1,840 (2.2) 21
natural gas would be about 80 BCM/year Wind 900 (1.1) (included in thermal)
[Ministry of Petroleum and Natural Gas Total 14,869 (100.0) 100.0 *4,965 (100.0) 100.0
1995]. Domestic production is unlikely to 1996-97 generation (billion kWh) 59.1 394.5f
be above 25 BCM, leaving a large volume Notes: a As of March 31, 1997 (provisional); this capacity is the working (derated) capacity.
for imports or to be substituted by other b March 31, 1996 through December 31, 1996 (provisional).
(less preferred) fuels. c Our estimate for breakdown between natural gas and fuel oil/high-speed diesel-based
The use of natural gas in Pakistan is power. Many plants have dual (or multi) fuel provision, and fuel used depends on supply.
d This total is technically listed as steam-based, but separate categories are given for gas and
older and more widespread than in India. diesel, implying this is largely coal-fired. However, a small amount of oil-based power
Beginning with the Sui gas fields in the might be included.
early fifties, Pakistan has developed a e The generation is given as ‘thermal’, including coal, gas, oil and wind. Estimates of the
widespread transmission and distribution respective contribution can be made from their share of total capacity. However, generation
network. Estimates for proven reserves by coal is higher than its capacity would indicate, due to its higher load factors. We estimate
vary, but government of Pakistan docu- its contribution overall at over 70 per cent of the total generation.
f Provisional.
ments show about 507 BCM of gas [HDIP Figures in brackets indicate percentage.
1998]. International estimates are a little Source: Pakistan Energy Yearbook 1997; CEA Annual Report 1996-97; ministry of power, Annual
higher, at 590 BCM [BP 1998]. In addi- Report 1996-97, government of India; Economic Survey 1997-98, government of India.
as bureaucratic and regulatory hurdles. natural gas would suggest. In part, this can (Per cent)
The much publicised Enron case did not be explained by the higher returns inves- Pakistan India
improve foreign investors’ confidence in tors see for gas-based projects, and is an 1996-97 1993
this sector or India’s own assessment of artefact of the regulatory environment
Power production 32.5 31
foreign intent. Parikh (1996) provides more [Tongia and Banerjee 1998]. Fertiliser 25.5 41
information on the Enron case. The main reason for worldwide growth Domestic 19.3
Pakistan also looked to IPPs to improve of natural gas for power production is the General industry/ combined
its power supply position. Anticipating improvement in the combined cycle gas commercial 21.5 28b
high returns, this sector became the turbine (CCGT). The efficiency of com- Other 1.5a
target of the bulk of foreign investment in bined cycle plants is approaching 60 per Total 100.0 100
Production 1996-97
Pakistan. The growth of IPPs has been cent,5 which is the highest for thermal (BCM) 19.8 27.7c
strong, with 2,884 MW of IPP capacity, generation. The capital costs have fallen
generating 30 per cent of the thermal- during the nineties to about $ 425/kW for Notes: a This includes 1.46 per cent consumed
based electricity produced in 1996-97 overnight construction costs, which is by the cement industry.
b This includes 4 per cent as petro-
[HDIP 1998]. Another 3,000 MW are about half that of coal-based power plants. chemical feedstock; domestic
expected to come online in the next few The two-year construction time is also consumption is expected to be very
years [Aijazuddin 1998]. Critics of IPPs very rapid, twice as quick as for coal small.
feel the growth rates for such power plants plants. This is all the more relevant when c Annual production is extrapolated from
are too high, driven by foreign investors’ considering the high cost of capital (high the April-December 1996 production.
appetite for very high returns, leading to interest rates) in developing countries. A Source: Pakistan Energy Yearbook 1997;
ministry of petroleum and natural gas,
production of more power than can be reduced construction period would thus Annual Report 1996-97, Government
consumed profitably. There are also reports help to lower interest during construction. of India.
of bad planning and corrupt practices. In addition, such plants are suitable for
Given the sluggish growth of Pakistan’s peak as well as base-load power, and offer TABLE 3: PIPELINE CHARACTERISTICS
economy in the past few years, it is ex- great flexibility for use in an unstable grid. Total Peak Compressor
pected that, in the near term, Pakistan will Another major benefit to use of natural gas Length Pressure Spacing
have a surplus of electricity.3 is environmental. Natural gas is seen as (km) (psi) (miles)
The bulk of these projects in Pakistan a clean fuel, with almost no particulate
(TAPS)
are based on fuel oil, which is easy to emissions, reduced sulfur and NOx emis- Turkmenista 2,715 1,200 120
import and the plants for which can be sions, as well as some 40-50 per cent Iran 2,655 1,200 120
constructed relatively quickly. However, reduction in carbon emissions compared Oman 2,430 1,200 120
electricity from fuel oil is not as competi- to coal [United Nations 1997]. Quatar 2,695 1,200 120
tive as that from other fuels such as natural The primary benefit of such plants is the Centgas* 2,084 1,440 180
gas, especially when viewed in terms of low cost of electricity. In the US, the cost Note: * Centgas is based on published data, and
fuel, (i e, marginal) costs. Even with the of power from a new CCGT plant is is our estimate of such a pipeline only.
2.5
divided by the volume of gas consumed. s h a re d 2 0 BTheC M other
lin e major component of delivered higher for Turkmenistan (via TAPS) and
The annual costs consist of capital scosts gas costs
h a re d lin e w it h n o
is the cost of the gas itself, paid Qatar, and lower for Iran, Oman, and
2.25 (to cover pipeline and compressor station t ra n s it fe eto
s the supplier. Typically, supplier nation Centgas.
costs), gas costs for consumption by prices are indexed to oil or oil product Figure 3 shows the transmission costs
2 compressors, operation and maintenance prices. While the exact prices may vary as seen by Indian consumers for varying
costs (fixed and variable) and transit fees slightly depending on the quality of the initial flows. Again, this assumes con-
1.75 paid. The capital costs are assumed to be gas and negotiations, we assume an equal sumption in Pakistan is 10 BCM/year. We
split pro rata between India and Pakistan. wellhead price of $ 1.10/MMBtu for gas can see that the costs are higher than for
1.5 For the sections up to delivery points in from all the countries. Estimates for Pakistani consumers, especially for low
7.5 10 12.5
Pakistan, the capital costs will1 5be shared1 7 . 5marginal 2cost 0
of gas in producer nations net flows. This is partially because of the
C o n su m p ti o n i n P a k i sta n [B C M / y r. ]
as per the negotiated consumption. For the are between $ 0.50-0.60/MMBtu, indicat- assumptions made about the pipe, but also
sections from there on to India, all the ing the supplier price we have used to be follows from a poor utilisation of the
capital costs will be borne by Indian reasonable. pipeline’s capacity and transit fees paid
consumers. Many forms of ownership are possible to Pakistan. We notice similar trends in
In pipeline transmission, the flow is a for such a pipeline, with a stake held by prices, with the exception that the ‘opti-
function of the diameter and the pressure any or all of the following: the producers, mal’ flow is now for a higher initial flow,
(see footnote 7 for a simplified formula). the consumers, a transmission company, about 25 BCM/year, which corresponds
Given a fixed diameter, it is possible, up and oil and gas distributors. In addition to a gross flow to India of 15 BCM/year.
to a point, to increase flow economically to these obvious stakeholders, such projects Metrics for evaluation: The delivered
through increased compression. In this are targets for outside financing, which is cost of gas for both countries is the sum
analysis, we choose different flow rates, useful given the magnitude of investment of the supplier nation costs ($ 1.10/
and optimise the compressor sizes accord- required, in the billions of dollars. Direct MMBtu) and the transmission costs. Based
ingly, i e, the entire compression system involvement by governments would show on these costs, for Pakistani consumers,
is optimised for lowest cost flow for given support for the project, and would also be sharing a pipeline would result in net
volumes. If a lower volume of gas is required for funding from multilateral savings of about 20 per cent. These sav-
transmitted than designed for, that is an agencies [Razavi 1996]. Other than fund- ings do not include the benefits of avoid-
inefficiency not accounted for. ing, the foreign exchange and other guar- ing oil imports or value addition due to
Transmission costs are only a portion antees that multilateral agencies can pro- utilisation of the gas.
of the total costs that the end-user faces. vide are very useful for reducing investor For India, the benefits of gas from such
In this analysis, we examine only the risks (and thus lowering costs of capital). a pipeline are measured in comparison to
1000 It is difficult to quantify the savings in and is about 20 per cent of the Ninth Plan acceptance. They cite that India and
800 project financing due to sharing 2 .7without
B il l i o n P R e (1997-2002)
S a vi n g s target for increase in genera- Pakistan do not trade enough with each
extensive risk-return tradeoff analyses. It tion capacity. Indian consumers would other, annually losing an estimated billion
600
is safe to7 .2assume even if financing costs also benefit from the cheapest additional
B i l l i o n P R e S a vi n g s
dollars. While part of this can be attributed
400 do not fall, investors will be more willing power, as fuel costs are the largest com- to the resistance of vested interests –
200 to accept project risks. They would also ponent of electricity tariffs from gas-based especially in the agricultural sector – in
0
be willing to participate in such a project power [Tongia and Banerjee 1998]. both countries, we do not feel that this
7.5 even without
10 counter-guarantees
12.5 15 for all 17.5 Window 2 0 of opportunity: The window of argument is relevant for the pipeline. The
possible contingencies. This could speed
C o n su m p ti o n i n P a k i sta n [B C M / y r . ]
opportunity for such a project is in the pipeline has virtually no losing stakehold-
up the implementation of the project. An consumers’ favour, with oil prices cur- ers, and would be a purely economic
additional benefit would be the availabil- rently at what are, in real terms, the lowest transaction. For both countries to accept
ity of Indian capital for the pipeline. It is they have been since the early seventies. the pipeline, they must stop playing zero-
possible that Indian investments are used This is relevant because gas prices are sum game strategies as they have in the
to cover some of Pakistan’s initial capital typically indexed to oil prices, and most past [Perkovich 1996]; the pipeline is a
costs and could be amortised, say, through gas contracts are for medium- to long-term win-win prospect.
transit fees. supplies (15-20 years). Most forecasts for
Cheaper power for India: The benefits oil prices during this period project low POLICY ISSUES AND CONCERNS
for Indian consumers are also significant. increases in price [EIA 1998]. Pakistan – does India complicate the
We expect that a primary user of imported There is an increasing perception among picture? The savings shown in Figures 4
gas would be the power sector. Many developing countries that the economic and 5 are based on varying levels of gas
upcoming power plants intend to use gas growth of the west was fuelled by cheap consumption in Pakistan. There remains
or premium distillates such as naphtha as and readily available energy. If inexpen- the issue of what the actual consumption
fuel. Due to limits on domestic availabil- sive fossil fuels could be the prime mover might be, both initially, and how it might
ity of gas, many projects would rely on for the prosperity of the west, it is only change (grow) over time. Some of the
LNG. Compared to the estimated ex-ter- natural that emerging economies also look benefits by sharing are based on relatively
minal price of $ 3.60/MMBtu for LNG, for their own supplies of energy. low consumption in Pakistan. If the
gas from such a pipeline would be 20-30 If Indian consumers do not receive access Pakistani consumption is high enough,
per cent cheaper. The exact savings would to piped gas through Pakistan, they will will it be worth having gas go onwards
depend on where the power plants are be left with no option but to depend on to India?
√
of $ 1.4 billion of foreign exchange (based on our analysis and looking at other pipe- be so arranged where if there were any
on oil at $ 18/barrel and 40 per cent operator line projects, we do not see how including untoward disruption of gas supplies to
share and gas at $ 2.25/MMBtu) [Lodhi Indian consumers for the pipeline would India, Pakistan’s supplies would also be
1998]. This translates into savings of ap- delay Pakistani gas or make it more ex- curtailed. This measure could be com-
proximately $ 250 million for every 5 BCM pensive. bined with a take-or-pay clause, to secure
used to replace fuel oil in power production. India – Security of Supply: There is the producers’ and investors’ earnings.
However, we are not sure that all the gas strong perception by some in India that While these steps may appear cumber-
imported would result in such avoided a pipeline through Pakistan would be a some, requiring many negotiations bet-
costs, especially given the depressed oil risky proposition. In addition to the cost ween India and Pakistan (and the other stake-
prices that are projected for the coming of the pipeline itself, there is the greater holders), it must be remembered that all
years. Also, the government does not place investment downstream in power and gas negotiations are inherently complex,
use of gas for replacement of fuel oil in industrial plants to utilise the piped gas. but are not exceptional or unrealisable.
power plants on a high priority. Higher The fact that the Indus Water Treaty has Other concerns: While financing such
priorities are given for the domestic sec- held up for over 25 years, through two a large project is an expected concern, we
tor, fertiliser production, high-speed diesel wars, should show that a pipeline could do not anticipate it to be a major hurdle
replacement in the power sector, and transcend political differences. given the large number of institutions and
kerosene replacement in the domestic sector The risks of disruption can be minimised countries that could be involved. While
[Wajahatullah 1997]. In addition, largely or countered by a number of mechanisms. some may view imported natural gas as
due to limited economic growth, there is We expect that much of the gas will be a drain on foreign exchange, imports can
an expectation that there will be a short- used for power production, in combined- also be viewed as an alternative to ex-
term surplus of power, limiting the need cycle power plants. These are often made hausting domestic reserves, which could
for power plants and natural gas as fuel. to operate with dual or multiple fuels, such be stored for emergencies, meeting peak
In addition, no new large fertiliser plants as naphtha or other distillates. This flex- requirements and variations in demand,
are under planning [Wajahatullah 1997]. ibility is desirable as insurance against and price flattening. Indeed, storage is an
Our conclusion is that even under sub- supply disruptions and price shocks. The option the US exercises heavily, with about
dued Pakistani demand as projected by a cost per 1,000 MW plant for the required 100 BCM of working gas stored under-
few Pakistani analysts, it still makes sense type of fuel oil/distillate for one month’s ground! This is almost a fifth of its annual
to lay a pipeline to Pakistan. However, usage would be around $ 15 million (ex- production [EIA-CABS, April 1998].
sharing the pipeline would increase its cluding transport and storage). One other issue that needs assent is the
commercial viability significantly, allow- The piped gas could be linked to do- inclusion of Iran as a supplier, or even as
ing its full potential to be utilised sooner. mestic gas networks, which could be fed a transit route. This is an independent
The lower the cost of gas, the less would by not only domestic gas but also LNG. issue, which needs resolving, but is not
be the possible need for government It is also possible for gas to be stored in seen as central to India and Pakistan
subsidy or intervention. strategic reserves; many OECD countries collaborating on a pipeline.
For the initial years, we feel that 10 have extensive underground gas storage,
BCM/year is a reasonable estimate for enough for months of consumption [In- DISCUSSION
Pakistani imports. This is 60 per cent of ternational Energy Agency 1995]. How- Many people we have held discussions
the 1996-97 consumption of gas [HDIP ever, such storage takes years to develop, with think such a pipeline is a good idea,
1998]. Such a volume for Pakistan implies and is also not necessarily the optimal but the prospects for its becoming reality
great scope for adding the Indian consum- method for dealing with short-term dis- are bleak, given the legion of outstanding
ers to better utilise a pipeline’s capacity. ruptions in supply [Flanigan 1995]. differences between the two nations. To
√
Total (France), Gazprom (Russia), and
p21–p22
this millennium. Q = 36.926d8/3 Petronas (Malaysia), announced that they were
L investing in Iran’s offshore gas fields, after
Notes Q = cubic feet of gas per hour, standard gas wavering for some time, the US administration
[This research is supported by the W Alton Jones pressure, temperature, and specific decided to waive the sanctions that ILSA
Foundation and the department of engineering gravity; would have required [Bennet 1998].
and public policy, Carnegie Mellon University. d = internal diameter of pipeline, inches; 14 LNG is not as flexible as it might appear. Due
We have benefited from discussions with L = length of pipe, miles; to the high capital costs, most liquefaction
numerous colleagues, government officials, and p1 = inlet pressure, pounds per square inch capacity is committed to long-term contracts.
industry specialists, many of whom we are unable absolute; Facilities are typically not built without a
to formally acknowledge. We gratefully p2 = outlet pressure, pounds per square inch buyer in mind. While some amount of surplus
acknowledge the discussions with and comments absolute. capacity exists, it is estimated that spot trades
from George Perkovich, Benoit Morel, Shyam More practicable formulae for modern trans- account for only 3 per cent of the market
Sunder, Granger Morgan, James Jensen, Shirin mission systems include the modified pan- [Anderson, Doman et al 1997].
Tahir-Kheli, Hilal Raza, Vijay Kelkar, Vaqar handle formula, which is what is used in our 15 The first of a kind pipeline is always expected
Zakaria, R P Sharma and M K Narayanan. The analysis. [Specifications for the pipeline are to be more expensive, partially because of
authors are responsible for the contents. taken from Tongia’s PhD dissertation 1998]. uncertainty in operating parameters. Future
This analysis was largely performed before the 8 There are reports of potential imports from pipelines also benefit from reduced surveying
nuclear tests conducted by India and Pakistan. gas fields in Bangladesh, as well as further and Right-of-Way charges. They can also
While these might create short-term barriers to east (Myanmar). However, the reserves are benefit from shared compressor stations.
communication and co-operation, they do not relatively modest, and such pipelines would 16 A simplified statistical example will show
detract from either the attractive benefits of such only supply gas to the eastern portion of how this might work. Assume that the
a pipeline, nor from the need for discussion about India. Without waiting for these developments, Pakistani demand will likely be ‘P’, and Indian
this or other forms of co-operation . In fact, with a number of companies are establishing LNG demand ‘I’. These will also have a variance,
economic sanctions coming into force, it might terminals along the coasts of India as a quicker Var[P] and Var[I], respectively. If we assume
induce both countries to look for new methods method of obtaining natural gas. For example, that the two demands are normally distributed,
of saving on infrastructure expenditure and foreign Enron intends to use LNG for the second then the variance of the sum will be:
exchange. A pipeline project would not only be phase of its Dabhol power project. Such LNG Var[P + I] = Var[P] + Var[I] + 2Covar[P,I]
all that, but it will also be a meaningful, long- terminals would not necessarily compete with Assuming that the demands in the two
term avenue for co-operation.] piped gas for customers. Even to the extent countries are independent, the last term drops
any LNG terminals serve areas near a pipeline, to zero. With this, the standard deviation of
1 This number is significantly lower than the they would offer diversity of supply, which the sum of the outputs (σ[P + I]) decreases
reserves listed at the end of 1996: 690 BCM. is desirable. by the factor of their square roots (in relative
It is unclear what has led to this downward 9 For this analysis, we assume that 1,000 terms). This can be seen as:
revision in estimates. (standard) cubic feet of gas has energy content σ[P + I] = √(Var[P+I]) = √(σ2[P] + σ2[I])