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Sanctions and pipelines


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PLACE your bets. Will Pakistan risk inviting American and European Union sanctions upon itself, as well as the ire of its key ally Saudi Arabia, in return for Iranian help in overcoming a crippling energy crisis?

The simple answer is no. But the times are far from simple. For one, Pakistan’s own energy crisis is getting worse exponentially. By some estimates, put out by the Petroleum Institute, the country’s oil import bill will cross $50 billion in a little over 10 years’ time. That’s about five times what it is today.

Put it another way. Our peak shortages of gas today are just over one billion cubic feet of gas per day. By 2025, just over 10 years from now, these shortages will hit eight billion cubic feet, assuming a growth rate of four per cent per annum.

It’s hard to overemphasise the significance of this. Pakistan is one of the few countries in the world that has been relatively insulated from the full impact of the oil price hikes of the past decade precisely because we’ve had indigenous natural gas to fall back on.

As the price of oil went into triple digits, our consumption of indigenous natural gas intensified, until today when it accounts for almost half of our primary energy consumption in the country.

The result is all around us. The growing shortages have aggravated inter-provincial disharmony, and inaugurated an ugly chapter in our economic history: the bitter wrangling between industry and sectors over gas allocations.

Seen through the prism of Pakistan’s growing gas crisis, the Iranian pipeline seems like a solution as natural as the gas it will presumably carry. But as a wise old professor once wrote: geography proposes, history disposes.

The proximity of Iranian gas is geography’s proposition. But the sanctions imposed on that country by the international community hold the destiny of this proposition in their hands.

Let’s not underestimate the forces that stand behind the sanctions. Let’s recall that in addition to America, the EU and the UN all have Iran-specific sanctions in place.

US sanctions on Iran began with an executive order that became effective on Nov 14, 1979. Since then, there have been 24 additional executive orders tightening the noose further, the last of which became effective on Oct 9, 2012.

The earliest sanctions seized Iranian government properties in the US, went on to block all assets that were pledged to American banks, and in 1995 made illegal any investment by American firms in the Iranian oil and gas sector.

The latest executive order, of October 2012, goes so far as to “prohibit any transfers of credit or payments between financial institutions or by, through, or to any financial institution, to the extent that such transfers or payments are subject to the jurisdiction of the United States.”

This clause unplugs Iran from the global clearing house of all inter-bank payments as far as they are processed through New York.

Then on Dec 26, 2012, came an amendment to this order, issued by the treasury department, which expanded “the categories of persons whose property and interest in property are blocked” if they are found “to have provided material support for certain Government of Iran-related entities or certain activities by the Government of Iran”.

A little further down, the note clarifies that amongst the entities to whom it is prohibited to “provide material support” is the Central Bank of Iran and amongst the “activities by the Government of Iran” that are prohibited from being provided support to are the “purchase or acquisition of US bank notes or precious metals by the Government of Iran.”

And there’s the clincher. With these laws in place, you cannot transact with Iranian banks, you cannot make a payment to the Central Bank of Iran in dollars, and you cannot make that payment in gold without running the risk of being unplugged from the US financial system.

But as mentioned earlier, there are complications. Carefully read the myriad documents where the sanctions laws are clarified and you’ll notice strange loopholes in the text.

For instance, the prohibitions laid out earlier, according to the clarification, will “not apply to any activity relating to a project: “1. For the development of natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Turkey and Europe;

“2. That provides to Turkey and countries in Europe energy security and energy independence from the Government of the Russian Federation and the Government of Iran; and

“3. That was initiated before August 10, 2012.” Basically the red lines the US is trying to draw around Iran are not so red when they touch the matter of helping break Europe’s energy dependence on Russia. So can Pakistan ask for some of the red to be taken out of the red lines for the sake of its energy security as well?

The history of the sanctions clearly tells us that an executive order issued by the president would be enough for the purpose, without requiring any congressional approval.

So will Pakistan really press ahead with the project? Are the red lines drawn by the Americans really all that red after all?

It’s highly unlikely that Pakistan will risk calling the US warnings about sanctions a bluff. But it’s equally unlikely that the Americans will allow the sanctions to be triggered — that requires a determination from the secretaries of treasury and state — and push Pakistan’s economy into meltdown, because that is what would happen to us in the event. Our economy cannot withstand that sort of a blow, anymore than it can withstand the continuous declines in its gas supplies.

What’s more likely is that Pakistan is using Iran to build a negotiating position on some other table, and when the offer there is up to par, they’ll bargain geography’s proposition away on the tables of history.

The writer is a Karachi-based journalist covering business and economic policy.

Twitter: @khurramhusain

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (9) Closed

raika45 Mar 14, 2013 12:45pm

If America is not happy with the Iranian deal and wants an alternative supply line, why does it not supply Pakistan direct by gas tankers from America were gas goes for 3 dollars compared with what Pakistan will pay Iran in the 16 to 18 dollars range or what Doha is pushing at some 16 dollars?America has ample gas.

Faisal Alam Mar 14, 2013 10:46am
Energy security is the new world order..we must align our national objectives to achieve this....
Immad Mar 14, 2013 10:48am

Lets analyze the help of the entities we are afraid of. US has helped us in adding 900MW to grid against our need of 10000MW and has also refused to provide us the civil nuclear deal it extended to India. EU is busy in its own economic issues and has not helped us a bit to solve our energy crises. Saudi Arabia has indeed helped us by financing all terrorism activities that has left industrial and commercial activities at halt, thereby minimizing our energy needs. And we fear about the anger of these entities.

Farhan Mar 14, 2013 07:22am
What you suggest sounds too complicated and competent for our leaders to pull off. I think internal politics has more to do with this: with Nawaz Sharif likely to come up as the top contender for the next govt., the PPP has dealt a double blow of messing up his relationship with the Saudis and also triggering US sanctions on the next government. Unless Mr.Sharif walks away from the gas project, which will make him unpopular within the country.
Musa Ali Khan Mar 14, 2013 08:55am
we hope that our policy makers will not chat us about this project while dealing with opponents using diplomatic channels
cautious Mar 14, 2013 02:25pm
Author suggests that the IP is being used solely as leverage tool - while that makes sense on the surface that implies a govt that is sophisticated and understands how to deal with the American's - however there is ample evidence that this govt hasn't a clue on how to deal with America and blunders from one crisis to another. I will predict that the govt will end up with a partially completed pipeline, large debt to Iran, and exacerbated relations with the USA and it's European allies - lose/lose.
Cyrus Howell Mar 14, 2013 03:04pm
America has a network 178,000 miles of under ground pipeline carrying crude oil and refined petrol. The retail price of petrol is also determined by the amount of government taxes included in the pump price in addition to sales taxes in most countries.
Cyrus Howell Mar 14, 2013 03:05pm
"If you can't beat them, you join them."
Just an observer Mar 15, 2013 01:14am
President Zardari can never do any good for anyone including his mother country, unless it has something for him. A man whose greed for power and wealth has no bounds. Regarding the inauguration Pakistan/Iran gas pipe line, only one thing matters for Zardari it gives a chance to restore some shine to Pakistan People