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The pipeline path

April 03, 2012

AT a time when Punjab’s cities are witnessing violent demonstrations against power outages, when the Supreme Court has declared all RPP contracts void ab initio and when each fortnight we see a fresh ‘circular debt’ crisis, it is understandable that everyone is looking to the Iran-Pakistan pipeline as a panacea.

We are all ready to make shrill noises about Pakistan’s sovereign right to go ahead with this project despite the threat of possible US sanctions. Since the question of sanctions looms large in the Pakistani imagination little heed has been paid, in the public discourse, to other aspects.

These aspects include: the work that Iran has done to extend the pipeline (IGAT 7) that it has built primarily to bring the Pars gas to the province of Sistan-Baluchistan; the cost of the Pakistan part of the project; the problems associated with building a pipeline through insecure Balochistan; and the viability of working out a barter agreement to enable Pakistan to pay for the gas without having to resort to the international banking system. Using this system could well entail denial of access to US financial markets.

In this and a subsequent column I intend to discuss my understanding of these issues in the hope that better informed and technically far better qualified experts inside or outside government will provide clearer and more definitive answers.

First, according to my reading of American law — the Iran-Libya Sanctions Act (ILSA) now made ISA again, the Comprehensive Iran Sanctions, Accountability and Divestment Act, the various executive orders and the Iran-related provisions of the National Defence Authorisation Act — a company can be sanctioned if it invests in Iranian energy projects or supplies equipment for them. And foreign banks can be sanctioned if they make payments to the Iranian central bank to pay for Iranian oil.

It would then seem that no sanctions could be imposed if Pakistan has not invested in the Iranian portion of the pipeline and no sanctions would apply if Pakistan made no payments for Iranian oil through the Iranian central bank. Gas purchases appear to be excluded from the present legislation.

Another part of the legislation calls for sanctions on pipelines to and from Iran but this has quite clearly not been applied to the three pipelines already operational — Iran-Turkey, Iran-Armenia and Iran-Turkmenistan. There appears to be little risk, therefore, of sanctions on the Iran-Pakistan pipeline though questions may be raised for local banks if they are asked to finance the project. (Legal experts might like to see the report prepared by Kenneth Katzman for the US Congressional Research Service).

Second, the Iranian part of the pipeline has been built up to Iranshahr, which is about 250km from our border. IGAT 7, a 56-inch-diameter pipeline, became operational in August 2010 and is supplying gas to Sistan-Baluchistan. The last portion up to our border remains unbuilt; however, so far as my information goes an Iranian company has been selected to carry out the pipe-laying. One should assume that the Iranians have wisely decided not to start work on the last portion until construction commences in Pakistan.

The 900km stretch built so far has reportedly cost the Iranians $700m. This means a cost, for a 56-inch-diameter pipeline, of less than $0.8m per kilometre. Presumably they have used pipes manufactured by their own Ahwaz Rolling Mill, a public-cum-private sector enterprise. Currently, the pipeline is carrying 1.8 billion cubic feet of gas per day (bcfd) but its capacity can be increased to 2.9bcfd which is more than sufficient to meet our needs. It is, however, the cost of the pipeline that should be of most interest to us as we ponder the allocation of contracts for the building of our 780 kilometre-long 42-inch-diameter pipeline.

Before I turn to the issue of the pipeline’s cost and financing let me talk about the sorry experience we have had in the past with energy projects. In 1984, we had purchased from the Soviet Union three turbines of 210MWs for the Multan power plant at a total cost of $371m for which the Soviets had provided the credit. This worked out at approximately 0.5 million per megawatt of installed capacity.

At that time I recall the then finance minister the late president Ghulam Ishaq Khan before signing the agreement in Moscow met Marshal Malinovsky, the then Soviet defence minister. Our minister argued that the price we were being asked to pay was too high. The marshal said the price was reasonable but complained bitterly that the Chinese had made copies of these Soviet-designed turbines and were selling them at half the price.

As ambassador in the US in 1990-91, I pointed this out and said that since it was then a buyers’ market, private investors should be able to get equipment at prices only nominally higher than those we paid in 1984 to the Soviet Union. We ended up agreeing that the cost would be $1.2m per megawatt for the Hub power plant and guaranteed a fixed return to the investors on this exorbitant price.

The scandal of the RPPs apart, there have been repeated instances in our public-sector organisations of exorbitant sums having been paid for contracts offered without public bidding or through manipulated tenders. On each occasion it has been argued that the need was urgent and procedures ensuring transparency and proper evaluation could not be followed. Let us not make this project another such example by suggesting that this pipeline should cost us $2m per kilometre and should be awarded without bidding.

The writer is a former foreign secretary.