The Indian cabinet, chaired by Prime Minister Narendra Modi, on Thursday approved signing of a memorandum of understanding between India and Nepal for the construction of the much-touted cross border petroleum products pipeline.

The plan envisages laying a 41-km pipeline from Raxaul (India) to Amlekhgunj (Nepal) in the first phase of the project. In the second phase, the pipeline will be extended to Kathmandu. Re-engineering of the Amlekhgunj depot and allied facilities are among the packages of the project.

India will invest IRs 2.75 billion (NRs4.4 billion) on the project, while Nepal will contribute IRs 750 million (NRs1.2 billion). The project is expected to be completed within 30 months from its commencement. Nepal’s contribution will be spent on upgrading the Nepal Oil Corporation’s (NOC) Amlekhgunj depot and allied facilities.

Considering the close and friendly relations between the two countries and their people, the Indian government has agreed to honour Nepal’s request for the pipeline construction, said the Indian cabinet communiqué.

“The agreement will promote bilateral cooperation in the oil and gas sector and secure long-term supply of petroleum products to Nepal. It would help preserve the environment along the route and decongest the international border at Raxaul.”

The IOC had proposed building a cross-border pipeline in 1995 and signed an MoU with NOC at the junior executive level a year later. In 2004, the sides reached an agreement at the chief executive level.

However, the project failed to make headway as Nepal had been indecisive on the project due to various legal and technical issues. After much delay, the project was revived at the time of Indian PM Modi’s visit here on August 3 last year when he promised to construct the pipeline. Subsequently, the NOC and IOC conducted a joint pipeline survey.

The planned agreement on laying an oil pipeline again hit a snag following differences over the period of supply contract. The IOC wanted a Nepali pledge to buy petroleum products from it for 15 years, but the NOC insisted on continuing the existing five-year pact. The two countries review the supply agreement every five years.

The two sides renewed the supply pact on April 27, 2012, making the IOC as the sole supplier of the petroleum products to Nepal for the next five years.

“The period of the supply contract has been settled. The long-awaited project has moved ahead as planned,” said Jib Raj Koirala, joint-secretary at the Ministry of Commerce and Supply.

According to him, Nepal will buy petroleum products from the IOC for five years and the tenure will be extended either for the next 10 years, or two five-year terms depending upon the supply terms and conditions of IOC.

The government has also left option open for a third party to supply products through the pipeline as there could be other such parties willing to supply petroleum products to Nepal at a competitive rate.

Koirala said that Nepal and India will initially sign a framework agreement on the project, followed by a separate technical pact between the NOC and the IOC. The date for signing the agreements is yet to be fixed.

Once the pipeline is in place, Nepal will receive petroleum products at the rate of 190 kilolitres per hour. The pipeline is expected to reduce transportation costs in half, control leakage and ensure smooth supply and quality of petroleum products.

Nepal-India petroleum products pipeline

-    India entrusts IOC with the construction of the pipeline and re-engineering of the Amlekhgunj depot and allied facilities

-    Of the 41-km pipeline, about 39 km to be in Nepal

-    The project will be completed in two phases. In the first phase, a pipeline would be constructed from Raxaul in India to Amlekhgunj in Nepal

-     India will pump in Rs 4.4 billion for the project and Nepal will chip in Rs1.2 billion

-    IOC and NOC will sign a 15-year contract

(initially for five years extendable either for the next 10 years or two five-year terms)