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The Iran-Pakistan pipeline: Finding the win-win for Pakistan

Published Nov 09, 2013 03:09pm

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The government’s strategy on the IP pipeline has been dominated by the issue of financing the Pakistani leg of the pipeline, public pressure stemming out of acute power shortages and a political consensus that demands standing up to the threat of US sanctions. However, an overemphasis on these three factors should not hamper our ability to analyse other important dynamics involved in this project.

Indeed, the price at which Pakistan would contractually purchase Iranian gas is linked to international crude oil prices. Iran itself imports gas from Turkmenistan at USD 4/MMBtu while the price at which it would export to Pakistan is an exorbitant figure of USD 14/MMBtu. According to a recent report by Sustainable Development Policy Institute (SDPI), this would bring about a “death sentence” for Pakistan’s economy. Thus, if the pipeline project was to continue, Pakistan might end up having surplus supply of gas that consumers and local industry cannot even afford.

Moreover, Turkey, a current importer of Iranian gas still faces trouble getting adequate supply of gas from Iran during winter months, a time when Iran’s own domestic demand for gas peaks. On October 1, Iranian Oil Minister Bijan Namdar Zanganeh himself raised concern about Iran facing serious gas shortage because of slow progress in raising levels of production from South Pars – the field that is supposed to fill the IP pipeline. If such factors were seriously taken into account, the pipeline agreement would likely have never been signed at the first place.

In addition to exploring other options from Pakistan’s indigenous resources and renewable energy sector, the question that policymakers should now be asking is how the IP pipeline project can best come to an end so that Pakistan’s international standing is not damaged. It is thus important to explore the various exit strategies Pakistan could adopt and what implications each of them entails.

First, as Pakistan seems to do with other problems, politicians might be comfortable blaming the potential pullout on US pressure. However, this will not only prove unfavorable for the goal of reviving Pakistani-US ties, but will also seriously hamper the approval ratings of the new Pakistani government.

The second way out is to blame the previous government. While this option might be easy to digest, it has serious long-term repercussions. Holding the previous administration accountable for the failure creates a precedent in which a new Pakistani government can arbitrarily scrap an international agreement. This in turn creates a lack of trust among potential regional and international partners in Pakistan’s ability to see its agreements through from one administration to another.

The third possibility is to keep the project lingering. This will attract more energy aid projects from the United States and cheaper oil offers from Saudi Arabia. However, given that Pakistan will be liable to pay a $3 million per day penalty to Iran if its side of the pipeline is not completed by the end of 2014; this option is also not plausible.

The fourth possibility is to renegotiate the gas prices and the terms of the agreement with Iran. Though this option might be successful in de-linking gas prices from those of international crude oil, it would neither solve the financing issue nor the security concerns in regard to Balochistan.

These flawed options make the situation seem discouraging, in this conundrum lies a tremendous diplomatic opportunity which if articulated well could provide Pakistan with a win-win outcome.

Instead of provoking Iran’s anger by scrapping the gas pipeline deal without offering anything against it, Pakistan should replace it with another contract to import more Iranian-produced electricity. Pakistan is already importing Iranian electricity at Rs.10/unit and could enhance its import to the efficient levels of the current transmission capacity. Even increasing this capacity by building more transmission lines is a cheaper and a more viable option than to proceed with the IP pipeline project. Furthermore, it will also be in Iran’s interests to establish more power plants within the country which could be used for both, its domestic production and as well as for importing gas to Pakistan.

Meanwhile, pulling out of the project will also give Pakistan greater leverage with the United States and Saudi Arabia – the two staunchest opponents of the pipeline. Pakistan could use this leverage to procure favorable oil prices from Saudi Arabia, as well as assurances of heavy investment from the United States and other international partners to exploit shale gas and renewable energy such as solar, biomass, and tidal energy – sectors that are estimated to have tremendous potential. This will also improve Pakistan’s energy diversity and, in so doing, strengthen its energy security in the long run.

This exit strategy will allow the Pakistani government to save face without having to compromise its relations with either Iran or the United States. Additionally, it will increase the government’s ability to proceed with other necessary yet unpopular steps to put the economy on track. Even Iran will experience no short-term loss as a result of this plan; the 900 km pipeline it has completed on its side of the border is still necessary for its own domestic supply of gas.

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Abdullah Khurram focuses on global security issues at Johns Hopkins University. Assertions and opinions are solely those of the writer and do not reflect the views of any institution(s) that he is affiliated with.

He can be contacted at khurram@uchicago.edu


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


Comments (43) Closed



FactCheck Nov 09, 2013 05:07pm

The pipeline is just political crap to pacify people. It will never function through the terrorist infested territory. It will get blown up.

unbelievable Nov 09, 2013 05:40pm

Interesting article. The reality is that the govt put little thinking into the IP. Who in their right mind would enter into a multi Billion contract without performing an economic feasibility study, never having a firm grasp of the cost to build the pipeline, how to defend the pipeline, how to finance it or pay for the gas. No one even considered that Iran has a history of cutting of trade and closing it's border when it gets miffed at Pakistan. The only thing that mattered was creating the perception that the govt was doing something to alleviate power outages - the fact that it upset the American's was icing on the cake.

Jamshaid Nov 09, 2013 06:34pm

Dear, Its appreciable, what you have written. I am little bit confused about the dogma that If you or I are abreast with the problems, why the policymakers are not? And most of times, I am amazed to know that this country is in run just because of bureaucrats, then why these bureaucrats, so called policy makers are blind?

M. Asghar Nov 09, 2013 06:38pm

The Iran-Pakistan gas pipeline apart from the gas factor, has a fundamental geopolitical significance with far reaching consequences for the region. Hence, its scrapping must be avoided at all costs.

Syed Nov 09, 2013 07:08pm

Anything that will save us from Saudi Arabia.

Md Imran Nov 09, 2013 07:28pm

As long we trade with another ummah country, i dont think we need to worry about sanctions, leverage etc. The IP is critical and it should continue. Pakistan has enough and more funds to cover the expenses.

Shafique Nov 09, 2013 08:04pm

It is so simple: If the project is feasible and in our favor we should go for it otherwise scrap it and hang the culprits. Our dilemma is lack of honesty in decision making... Nobody challenges the status quo. Same bureaucrats who supported this project in previous Govt. will now be working against it to appease the Govt. Without INSAF nations cannot prosper.

Muhammad Nov 09, 2013 09:10pm

Can somebody shed a light on, how come Iran has built 900 km pipeline on it's side without a contract with Pakistan. (The contract was signed in March 2013).

Shaheer Tariq Nov 09, 2013 09:55pm

Awesome piece! Hats off.

Gp65 Nov 09, 2013 10:09pm

Both US and Saudi Arabia are aware about your inability to finance pipeline. So your really do not have leverage with them, even less so if you are going to increase electricity import. Also US government does not run businesses and so their State Department cannot give you any assurances about billions of dollars of investments that the proprietary shale technology requires. All that they can promise is a few hundred million here and there to streamline some existing power project out of the Kerry Lugar funds. That too assuming that your foreign office successfully manages the fall out the Hakimullah droning and prevents any self goal from Pakistani side.

Zain Nov 10, 2013 12:34am

This pipeline made a lot more sense when the gas prices were negotiated at 45% of crude oil prices. Surprisingly during PPP's government they raised it to almost 80% of crude prices. At 45% of crude prices its a very feasible project .if the price now for Iranian gas is $14 then spot LNG prices are about $16 to $16.5 and these will only reduce in the coming year and so on as more LNG projects come up and soon theyll be cheaper than the current negotiated price for Iranian Gas.There is an urgent need to renegotiate prices. Additionally if this pipeline faces the danger of terrorism and instability in Baluchistan then How will we progress of the TAPI pipeline when it passes through Afghanistan as well which is uncertain in terms of security after the US withdraws forces

wasim Nov 10, 2013 01:17am

I have not seen such a irrational article in my life.

hayder Nov 10, 2013 01:43am

hahahha amazing.. i am waiting for what happens next.. lets see if politicians let it happen or not

Farzad Nov 10, 2013 02:40am

The Iran-pakistan pipeline should not be allowed to fail at all costs. This project may not seem viable initially, but the geopolitical scenario of the Middle east is going to change quite rapidly in the near future. Pakistan would need to strengthen ties with the states it shares borders with. There is no doubt that billions of dollars are being invested in pakistan to sponsor terrorism and to force pakistan out of the deal so as to keep pakistan dependent on Saudi oil. Saudi oil will also not come at a cheap price, as pakistan would then in return have to provide nuclear umbrella to the rapidly weakening terrorist states of the middle east. These countries have done nothing but to weaken pakistan. Pakistan has played it's cards right, and it will not be long before it emerges as the economic power house of the middle east and asia.

S Nov 10, 2013 02:49am

The author does not realise that pulling out of the project can have serious repercussions, Iran can heavily damaged Pakistani interests in Afghanistan. It can align a lot more then it already is with India for regional goals. This pipeline serves a greater purpose of integrating regional Muslim countries and will also help lower sectarian differences/violence. The best option is to re negotiate the price, and put any delays on funding issues as that is a genuine problems and Iranians do realise that.

Also Pakistan will have to manage the balance with Saudis and USA, but if our leaders show good political skills they can manage that. We cannot have a policy of completely depending on just one or two countries or taking sides. We need to play good politics.

Zain Nov 10, 2013 09:30am

they need to renegotiate Ip gas prices which at present is $14.Spot LNG is $16 and will most likely fall from next year onwards which might reduce the economic sense of the pipeline at such high gas rates.

alisha mehta Nov 10, 2013 09:30am

india is so clever...remove itself from this project dew to international sanctions on iran... pakistan need to think seriously for the upliftment of its citizens

fahd mazhar Nov 10, 2013 11:19am

a wonderful piece of writing and research, i think IP has somthing to do with PPP better relation with iran, as far as cost is concern this project was the best among the worse options we had to help our gas crises. when we talk of gas crises, it means our factories requirements are not being fulfilled, and domestic use is also a problem. reciprocating it with electricity might not fulfil our gas issues..so i say i we do our part of the deal, do the face saving in international market,

Zain Nov 10, 2013 11:29am

@Muhammad: its actually feasible for Iran to go through with their side of the pipeline.In an event the ip project doesn't go through,this pipeline on the Iranian side is can be extended to Bander Abbas one of the main ports in Iran.It will be highly strategic for Future LNG exports if western sanctions end in future and of course the IP deal doesn't work

Saleem Nov 10, 2013 01:29pm

So when US and Iran make up their differences, Pakistan ends up with egg on face and without the gas or the "proposed generated" electricity from this "save face" arrangement. WOW!

Random Passerby Nov 10, 2013 01:57pm

This is out-of-the-box thinking. It is becoming evidently clearer that the gas price is very high, and with shale gas revolution it is expected that the glut in supply is further going to drive the price down.

On the other hand, if we are now stuck with this contract, it makes sense to import this gas and divert it completely to our rather large CNG sector. Since the price is still less than that of crude, CNG is still going to be cheaper than petrol, and it allows us to divert our local gas to the fertilizer and power sectors and to make sure that ordinary household consumers keep getting regular supply of gas.

MOD Nov 10, 2013 01:57pm

This is a good and informative article. We should not blame others. Last government did wrong and signed a contract at very high prices which is not sustainable in the long run. I agree with the author that the pipeline should be scrapped.

Nice read indeed !!

Ali Agha Nov 10, 2013 04:25pm

"The author is a Research Associate at the Middle East Institute in Washington D.C"

Abdullah Khurram Sb, your article looks like a thought injected on someones prescription in your backyard, rather than actually giving a food for thought on an exit strategy for Pakistan to take its hands off from the most viable option in the region to consume Gas.

I know you will not survive for long in a niche of Middle East Expert, if you decide to conduct research on an open field.

deeas Nov 10, 2013 04:58pm

"Iran itself imports gas from Turkmenistan at USD 4/MMBtu while the price at which it would export to Pakistan is an exorbitant figure of USD 14/MMBtu."

WoW, those who made this deal from Pakistan side should be punished. They were either totally incompetent or more likely corrupt.

Shah Nov 10, 2013 07:26pm

Taping shale gas can hurt environment, there is already underground water contamination in Pakistan. Solar, wind, bio, water could be good mix. Buying gas through IP pipe line should not be bullied by KSA and USA as Pakistan need to decide freely what is good. If this (IP) gas is expensive develop industries in Baluchistan to provide job opportunities and increase production. Many industries will happily buy it.

ahmad Nov 10, 2013 09:35pm

and if gas imports from iran are vulnerable to sanction then how the electricity imports will escape the same fate ?????

Syed Ahmed Nov 10, 2013 09:54pm

The answer to what Pakistan must do and must not do is very simple. Knock down the crutches and stand up on your own feet. Bring the looted money back to Pakistan.

Asif Bajwa Nov 10, 2013 11:13pm

@Zain: LNG can not be exported via pipelines... There is no technology in world which can export LNG via pipelines

Aslam Jahangir Nov 10, 2013 11:17pm

The author is a Research Associate at the Middle East Institute in Washington D.C Mr. Abdullah Khurram, I can understand the motives behind your blog, being a research associate at a middle east centre, Have you written this so Pakistan can further import Furnace Oil from Saudi Arab? which is far too expansive than this so-called expansive gas

Dr Faisal Nov 10, 2013 11:58pm

Interesting article....but why does everyone want to scrap the project.....our own friends n our investers donnot want to invest at home.......the prospects for them are bleak.......why Iran should invest in our future n give us concessions......they charged us market price...USA n our middle east friends have never invested in our service sector or industry.....We should renegotiate at best if we need to but going through the project will help us get out of the unwanted cults that hover above us......sometimes the psychological value of a project weighs far more than its economic implications. We should stand up n say no to outside dictations.....you will see all pressures will decrease. Abandoning the project will bring very bad name to us......n the idea about electricity is too farfetched.

Anoop Nov 11, 2013 12:06am

What is US changes the terms of the sanctions a tiny bit to include Electricity imports as well?

All infrastructure and other things gone down the drain.

Why haven't the Chinese done it yet?

US will not allow Iran to benefit by its Oil/Gas resources at any cost. Building all those Electricity infrastructure only to be slapped by sanctions and be rendered useless.

There are no easy options here, trying to be smart can easily backfire.. Remember post 2014 Pakistan will not have its supply routes trump card to threaten US. 2014 Dec is exactly a year away.

skeptic Nov 11, 2013 12:29am

A well thought article however with a simplistic end. Whether you import gas from Iran or import electricity,the embargo's will apply.Therefore the status with the US is not going to change.

hafsa Nov 11, 2013 01:16am

@Ali Agha: My God. I was just going to say this.

Anonymus Nov 11, 2013 06:18am

Very well written.

Munawar Ashraf Nov 11, 2013 09:25am

Transmission lines should be built to import power. To build oil or gas pipe lines is much more expensive. Explore Pakistani shale gas production. To buy gas at Dollars fourteen per MMBTU is economic suiside. Please don't do it. Let people build solar, waste, coal, hydroelectric power plants. Do not listen to technical babu corrupt engineers and officials. Munawar Ashraf. Canada

fayyaz Nov 11, 2013 11:59am

i think your article is not based on facts, and it is biased.

Zain Nov 11, 2013 12:51pm

@Asif Bajwa: Yes it cant be.But when deciding which project to pursue to yield cheaper gas to consumers mainly industrial,Independent power producers and general consumers,the government tends to weigh which results in a cheaper import.Spot LNG is $16 to 16.5.In the next 3 years it will drop to $12 in the recent tender the cheapest gasification prices were quoted from Engro's subsidiary Elengy pakistan at $0.7 .add this up and $14 in Iranian prices which are linked to the Japanese crude cocktail benchmark linking gas prices with oil ,will indeed seem as a bad choice in medium to longrun say 3 years from now and onwards That being said,the IP gas Pipeline was pursued at 45% of oil prices which made it then and will always make it a very decent project to pursue,its only the last government that has lost the bargaining edge of the deal

Shankar Nov 11, 2013 02:04pm

If it is true that Iran imports gas from Turkmenistan at 4 $ per mmbtu, why can't Pakistan do the same. Build a pipeline to Turkmenistan via Afghanistan instead of Iran. This project should never be stopped simply because Us or Saudi Arabia does not like it unless these countries can provide energy security to Pakistan at reasonable prices. On the other hand Pakistan should never let itself be fleeced by Iran or any other country for that matter.

pakistani Nov 11, 2013 02:34pm

@Random Passerby: well said, Iran gas pipeline and this deal is VERY important for Pakistan Just one can imagine what would happen after 20 years we'll get the same gas in double the price then and maybe Iran will not ready to give us then as once we did break the promise with them. Seriously people need to take care of our interests then world politics and take some pressure and it will definitely help us coming out of that shell of we can't do this and that without West or US approval or KSA approval. Iran could be the most valuable trust worhty friend of Pakistan if we keep going in the right direction with have this deal move forward.

Asim Qaiser Nov 11, 2013 04:10pm

Author is comparing imported gas price with that of domestic gas

Akram Nov 11, 2013 05:48pm

I think the author is mistaken, he has failed to grasp the potential of this pipeline. It will initially pipe gas for us Pakistanis, but it should lead to Pakistan piping the same Iranian gas initially into western China, possibly further down the line into Western india too one day. Thus leading to Pakistan earning transit fees. Considering Pakistan sits on one side of the second largest gas reserves in the world (Iran), and on the other between with over 40% of the worlds consumers (China and india). Its short sighted to only look at this in such a short term view, this is a longer term project, and our plan should also be long term with our interests at the forefront.

The author is based in the US, and looking at the issue through a US lense, it needs to be seen through a Pakistani viewpoint to understand its strategic value,

mulla Nov 12, 2013 09:08am

@Munawar Ashraf: we need gas from iran which is offering good price.. the price of gas will double every 5 years

ashutosh Nov 12, 2013 11:53pm

@Syed Ahmed: Easier said brother...