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.