The peace pipeline

While looking at the key trade and geo-political patterns in the world, it is imperative that the Pak-Iran gas pipeline is eminently sensible, should be completed and made operational at all costs. Thus, trade between Pakistan and Iran should not be a cynical exercise mired in political opportunism but should bring the two economies and people closer.
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On Monday March 11, 2013, the presidents of Pakistan and Iran Mr Asif Ali Zardari and Mr Mahmoud Ahmadinejad inaugurated the Iran-Pakistan gas pipeline. The pipeline is also, sometimes, referred to as the Peace Pipeline. The idea for such a supply channel was originally suggested by Malik Aftab Ahmed Khan in his article titled “Persian Pipeline”, which was published by the Military College of Engineering in the mid-1950s. It was conceptualised by Nobel Prize-winning Indian academic Rajendra K Pachauri and Iran’s former deputy foreign minister Ali Shams Ardekani.

In 1994, negotiations for ‘Peace Pipeline’ commenced between Iran and Pakistan. India joined the talks in 1999. Initially, the plan was dubbed as Iran-Pakistan-India gas pipeline, which was supposed to deliver Iranian gas to Pakistan and, onwards to India. However, India opted out of the project in 2009 citing dissatisfaction with the transit fee that Pakistan was demanding. There were also concerns about the security of the whole venture that traversed through hostile territory at several points. However, it is widely believed that India quit the project at the behest of the United States. Last year, a Chinese bank also abandoned the pipeline project out of fear that it might be subjected to international sanctions for dealing with Iran.

In late January, Iran and Pakistan jointly set up a company in order to build the Pakistani portion of the pipeline. Initially, the estimated time for completion of the Pakistani part was a little more than a year but according to recent Iranian media reports, it could take about two years.

The pipeline starts from Asalouyeh in Iran stretching 1,172 kilometres towards Pakistan. The 781 kms long pipeline on Pakistani side will travel through Balochistan where it will branch out towards Karachi. The main line will continue onward towards Multan and beyond. It will deliver 750 million cubic feet of gas on a daily basis. The cost of gas thus imported will be 14.53 dollars mmbtu. According to the terms of an agreement signed by Iran and Pakistan in 2010, if the latter fails to complete its side of the pipeline by 2014, it will be obligated to pay a daily penalty of a million dollars to Iran until the conduit is complete.

The Iranian side of the pipeline is almost complete. The Pakistani part of the project will cost around 1.5 billion dollars. Iran will loan one-third of this sum amounting to 500 million dollars out of which 250 million dollars will be paid directly to the construction firm responsible for laying 80 kms of pipeline inside Pakistan. The next tranche of 250 million dollars will help in laying the remaining 701 kms pipeline. This loan, alongwith a two percent interest plus LIBOR, will be repaid as a fraction of the price of gas. Pakistan will still need to raise sizeable funds in order to see the project through, a task that seems hurculean at the moment in the wake of considerably depleted foreign reserves and a hefty IMF repayment hovering over the head.

Pakistan is highly dependent on natural gas for domestic and commercial consumption as well as electricity generation. Moreover, natural gas also plays a very crucial role in transportation within the country. For years, Pakistan is desperately trying to cope with an acute energy shortage that has all but crippled the economy. Last month, the country suffered a nation-wide blackout that only served to further highlight its exponential energy woes.

The US is vehemently opposed to the project and assumes that the hasty progress of the Peace Pipeline is politically motivated since the energy issue, by all accounts, will play a pivotal role in this year’s general elections. The mandate of the present government will expire in a few days. The ruling party may be planning to use the Peace Pipeline as a gambit for securing votes since the public will perceive it as a practical step towards resolving the energy issue. Moreover, defying the US, or seeming to do so, is extremely popular in Pakistan whose overwhelming public opinion is anti-US despite being the recipient of enormous American aid.

The US has threatened Pakistan with sanctions if it builds the gas pipeline. However, it is more likely that sanctions will be imposed only after the actual delivery of gas starts. Pakistani companies buying gas from Iran may also face US restrictions. The State Department recently criticised Pakistan for wasting its limited resources on such projects. The US is concerned that the Peace Pipeline will enable Iran to evade international sanctions by selling a huge amount of its gas. This will, consequently, blunt US efforts to keep Iran under pressure over its nuclear activities.

In order to address Pakistan’s genuine energy concerns, the US has suggested the trans-Afghanistan pipeline for delivering gas from Turkmenistan to Pakistan through Afghanistan. The pipeline could be extended further to India. Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, which will effectively bypass Iran, has been on the tables in Washington for several years but could not materialize despite Asian Development Bank’s backing due to the fragile security situation in Afghanistan. The TAPI proposal is, however, still alive and may transpire in the next five years.

Pakistan’s current annual oil import bill exceeds 12 billion dollars. The bulk of the imported furnace oil is used for generating electricity. Importing gas from Iran may prove helpful not only in managing the severe energy crisis but also reducing Pakistan’s import bills to a reasonable extent. However, it is also important to carefully examine the diplomatic costs of carrying on with a geo-politically significant project that is not favoured by the international community.
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By Atif Shamim Syed

The writer is an investment banker and a freelance columnist for various publications. He can be reached at syedatifshamim@hotmail.com

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