Analysis: To build or not to build — the Iran pipeline conundrum

Published April 20, 2024
THE long-term project, which came to be known as the ‘Peace Pipeline’, has faced significant delays due to geopolitical pressures, sanctions on Iran and financial hurdles within Pakistan.—AFP/file
THE long-term project, which came to be known as the ‘Peace Pipeline’, has faced significant delays due to geopolitical pressures, sanctions on Iran and financial hurdles within Pakistan.—AFP/file

THE rooftop of Vaqar Zakaria’s home in Islamabad is strewn with photovoltaic panels that he says have lowered his electricity bill to virtually nothing. This is countered by the stark contrast in his rising gas costs. “From a steady Rs800 a month, it has risen to Rs4,000 in the last six months,” he says.

Mr Zakaria, head of environmental consulting firm Hagler Bailley Pakistan, is fortunate to have a gas supply at home. His situation highlights a nationwide energy paradox, where advancements in one sector are negated by crises in another.

“If only Pakistan had imported Iranian gas back in the late 1990s when there were no sanctions,” Mr Zakaria told The Third Pole, recalling a time when prices were far cheaper “at just $2 per million British thermal units (mmBtu)”.

A participant in some of the early discussions, Mr Zakaria remembers strategising over the proposed 2,775km pipeline that promised to link Pakistan’s energy supply directly to Iran’s abundant gas reserves.

Between the threat of US sanctions on one side and possible Iranian penalties on the other, experts question whether the ‘Peace Pipeline’ will be a panacea for the country’s energy crisis

The long-term project, which came to be known as the ‘Peace Pipeline’, has faced significant delays due to geopolitical pressures, sanctions on Iran and financial hurdles within Pakistan.

Iran’s proven natural gas reserves, estimated at 1,203 trillion cubic feet (Tcf) as of December 2021, are second only to Russia.

Ten-year wait

In February this year, the caretaker government decided to dust off the 2009 agreement, approving the construction of the first phase or 80km stretch (of the total 780km pipeline) from the Iranian border to Gwadar.

Meanwhile, Tehran has issued a deadline: finish the pipeline segment by March 2024 or incur financial repercussions amounting to nearly $18bn — a sum that could prompt international arbitration.

“We are very reluctant to take this drastic step,” Hassan Nourain, the consul general of Iran in Karachi, told The Third Pole, adding, “but the gas company of Iran is a national company and belongs to the people of Iran. It invested $1bn years ago. Now, the Iranian parliament is pressuring the government to decide the fate of this project”.

Iran had already fulfilled its part of the agreement by completing 1,100km of pipeline from the South Pars gas fields to the Pakistan border. Then in 2014, it extended the deadline by an additional decade, on Pakistan’s request, he added.

But Islamabad is also feeling the pressure from the US. Last month, Donald Lu, the US assistant secretary of state for South and Central Asia cautioned Pakistan against importing gas from Iran, as it would expose it to US sanctions.

In response, Pakistan’s Foreign Office spokesperson Mumtaz Zahra Baloch made a case for national sovereignty; since the pipeline is being built within Pakistani territory, “we do not believe that at this point there is room for any discussion or waiver from a third party”, she said.

Nonetheless, Thomas Mont­gomery — the acting US mission spokesperson in Pakistan — offered the following words of caution: “We advise anyone considering business deals with Iran to be aware of the potential risk of sanctions.”

The US has been pushing Pakistan to seek green alternatives; through its development agency it has helped add almost 4,000 MW of clean energy to Pakistan’s grid since 2010.

Speaking in a personal capacity, Senator Mushahid Hussain Sayed of the ruling PML-N highlighted the tension between national sovereignty and the US: “We invite its meddling by abdicating our own autonomy for decisions on our core interests.”

Despite the warnings from its longstanding ally, Defence Minister Khawaja Muhammad Asif told The Third Pole that the energy infrastructure project would proceed, signalling Pakistan’s intention to assert its autonomy: “We will go ahead with construction of the pipeline,” he said.

Waiver favour

While Pakistan grapples with Iran’s deadline, the land in Gwadar earmarked for construction has yet to be acquired, according to government insiders.

Micheal Kugelman, director of the Wilson Centre’s South Asia Institute in Washington, summarises the predicament: “Pakistan is seemingly caught between the devil and the deep blue sea — build the pipeline and risk being sanctioned, or don’t build it and get slapped with a massive fine.”

Ahmad Irfan Aslam, the former law minister in the caretaker government that greenlighted construction of the 80km section of the pipeline, points out Pakistan’s reliance on the US for “everything from economic bailouts to its security”. He warned any waiver request would necessitate complex negotiations.

“We cannot bear American sanctions. We will present our stance to the US,” Petroleum Minister Musadik Malik told journalists last month. “Iran has been told multiple times that we need their gas.

We want to complete this project but without any sanctions,“ he had said.

Mr Montgomery confirmed Pakistan has yet to present a formal waiver request. With Pakistan in a tight spot, Mr Aslam suggested exploring a deadline extension and seeking a waiver, which “would require support from both Saudi Arabia and the UAE.”

But as tensions mount in the Middle East over the war in Gaza, with new US sanctions against Iran announced on April 18, Mr Kugelman said it was unlikely that the US would grant Pakistan a sanctions waiver to proceed with the project.

Economic feasibility

Pakistan has around 19.5 Tcf of proven gas reserves, sufficient for just 12 more years, based on current annual consumption levels.

“The only advantage to have Iranian gas is if there is a guarantee of firm supply at favourable rates,” said Haneea Isaad, an energy finance specialist at the Institute for Energy Economics and Financial Analysis (IEEFA).

Although Khawaja Asif said the government was “looking towards raising funds from international banks”, Mr Zakaria warned that securing investment may prove challenging.

“Neither the development finance institutions nor western and Middle Eastern banks will lend for the project in view of US sanctions placed on Iran, which will also make it difficult for Pakistan to pay for the gas received from Iran,” he said.

Pakistan’s best bet may be to build the pipeline with financing from China or some other external source, notes Mr Kugelman.

Among possible funders is Russia. Senator Mushahid Hussain told The Third Pole that, “Russia has offered to fund the initial $160m for the 80km of Pakistan-Iran pipeline.”

Iran, said its consul general, “would be happy to provide technical and engineering support in building the pipeline”.

But Pakistan faces a complex energy transition, marked by growing demand and discussions centred on the immediate challenges of costs, legal action and geopolitical dynamics.

As Islamabad prepares to host Iranian President Ebrahim Raisi on an official three-day visit from April 22, Isaad warns against viewing Iranian gas as a panacea for Pakistan’s energy needs, emphasising it is “another imported

commodity and subject to geopolitical considerations and linked to global oil prices“.

Published in collaboration with The Third Pole at Dialogue Earth. A detailed version of this article can be accessed on their website and Dawn.com

Published in Dawn, April 20th, 2024

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