Richa Sekhani examines the Oil Pipeline Project involving India and Nepal and explores its potential to enhance Nepal’s economy, connectivity and regional cooperation.

The South Asian region has remained the least integrated in the world and has not been able to optimally utilise its existing potential because of fragmented transportation and communication systems in the region. To improve the connectivity in the region, a landmark agreement between the state-owned Indian Oil Corporation (IOC) and Nepal Oil Corporation (NOC) to lay a 41 Km (2 km in India and 39 km in Nepal) oil pipeline for the construction of Raxaul-Amlekhgunj petroleum product pipeline was signed on August 25, 2015 in Kathmandu. The project, in line with Indian Prime Minister Narendra Modi’s vision for enhanced regional connectivity within the SAARC, is the first trans-national petroleum pipeline. It has an annual capacity of 1.3 million tonnes, and is designed to supply cost-effective and environment-friendly petroleum products to the landlocked Himalayan nation-Nepal.

Background

The idea of the construction of a cross border pipeline was originally proposed by IOC in 1995 and both the countries entered into the agreement at the chief executive level in 2004. However, the execution of the project was delayed for over a decade due to various legal and technical issues. The pipeline was to be financed via a 50:50 partnership between India and Nepal; however, Nepal refused to finance its share of cost. Further, Nepal’s pro-China Maoists did not support the pipeline. Shortly after taking office in May 2014, Mr. Modi prioritising his intention to deepen ties with India’s neighbours, revived the construction of the pipeline during his visit to Nepal in August 2014. On August 24, 2015, a plan that was on the drawing board for 20 years, got formalised and a memorandum of understanding (MoU) was reached between both the countries for the construction of the oil pipeline.

A press release from the government of India said this MoU will promote bilateral cooperation in the oil and gas sector and secure a long term supply of petroleum products to Nepal¹. The project is proposed to be completed in two phases. Under the first phase, a pipeline from Raxaul in India to Amlekhgunj in Nepal would be constructed. This will be extended to Kathmandu in the second phase. There will be a long term contract of 15 years (initial contract for five years extendable for two terms of five years each) between the IOC and the NOC. The construction of the project is estimated to cost 2.75 billion rupees, with primary funding of two billion rupees coming from IOC and the remaining 750 million will be contributed by the NOC. In exchange, Nepal has also committed to buy the product for at least 15 years from India.

Nepal is highly dependent on India for its fuel requirements and imports around USD 1.1 billion worth of petroleum products from India annually. NOC is solely responsible for import and distribution of petroleum products in the country. According to NOC, Nepal has a capacity to store 71,620 kilolitres of petroleum products and the country’s requirement stands at 3,500 kilo-litres per day². Once the oil pipeline project is completed, which is expected to take 30 months, it will enable an uninterrupted supply of petrol, diesel, LNG and Aviation Turbine Fuel (ATF) besides the re-engineering of Amlekhgunj Depot and allied facilities. It is expected that through this pipeline, Nepal will receive 3,000 kilolitres of petroleum products daily.

Additionally, the project promises to supply quality petroleum products to Nepal. According to a number of reports and lab tests, the country has been facing a major issue of fuel adulteration with maximum number of cases been reported at Amlekhgunj-Raxaul route. The pipelines will address the problems of pilferage and adulteration. According to the MoU, the oil pipeline project will also help preserve the environment along the route. In case, the inhabitants are affected, proper compensation will be paid to them.

The issue of traffic congestion at Birjung in Nepal, the busiest border point for trade between both the countries, and recurring road blocks and strikes which have disrupted the regular fuel supplies in Nepal will be addressed by this initiative. Moreover, the pipeline will also reduce the labour and transportation cost. According to the Nepalese Commerce Ministry, savings of around 700 million rupees annually is possible through the construction of pipeline.

Conclusion

The oil pipeline project is one of the major steps toward regional integration whose potential strategic importance far outstrips its modest length. The initiative not only promises to foster a strong economic relationship between both the countries but also aims to strengthen the potentials of India’s neighbour by ensuring connectivity. An empowered neighbourhood is conducive for India’s own growth. With a surplus refining capacity of 4,746 barrels per day, India through this pipeline has the potential to supply petroleum products to the countries of South Asia.

However, the rising tensions between India and Nepal over the newly promulgated Constitution of Nepal, which have disrupted the movement of Indian oil trucks at the border, can act as a hindrance and delay the execution of the project. The oil-pipeline initiative represents a win-win outcome for both the countries which will also enhance regional connectivity and economic development across the region. Therefore, both India and Nepal should make a consolidated effort to resolve the disputes and re-energise their relations, so that the partnership benefits the region as a whole.

Note: This article has been previously published on the ORF website

Richa Sekhani is a Research Assistant at Observer Research Foundation, Delhi

¹ Press Bureau Information, Government of India, August 12, 2015 http://pib.nic.in/newsite/PrintRelease.aspx?relid=124943.

² Rajesh Khanal, “Nepal, India sign oil pipeline deal,” Kathmandu Post ,August 25,2015 http://kathmandupost.ekantipur.com/news/2015-08-25/nepal-india-sign-oil-pipeline-deal.html.