The path of gas

April 11, 2012

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IN my last column I had suggested that Pakistan needed to be careful in awarding contracts for the Pakistan part of the Iran-Pakistan pipeline. We should study such recent examples of pipeline construction in our neighbourhood as the Dolphin Project in the UAE, the IGAT 7 pipeline in Iran and the Baku-Tbilisi-Ceyhan gas pipeline.

The first benchmark ought to be the IGAT 7 of Iran for the obvious reason that this is the pipeline from which our gas will be drawn and if there are any flaws there they will affect us irrespective of what improvements or changes we make in our own section of the pipeline.

Here the reported cost of the pipeline is $700m for 900km of the 56-inch-diameter pipeline. Perhaps this figure is wrong but we need to get the full details from our Iranian friends and work out what we can do including the possibility that we acquire the required pipe from the Iranian Ahwaz Rolling Mill, which presumably provided the pipe for the Iranian IGAT 7.

Of the other pipelines the one I have studied most closely is the Dolphin Project’s construction of the 48-inch-diameter pipeline connecting over 244km from the gas-receiving plant in Taweelah to the Fujairah power and desalination plant.

This successfully completed project was awarded to Stroytransgaz — a Russian company — in 2008 at $418m or roughly $ 1.73m per kilometre. At that time, steel prices were at an all-time high and Dolphin or Stroytransgaz contracted to buy 120,000 tons of pipe from Mannesman in Germany for more than $200m. Since then, steel prices have halved.

According to the Steelonthenet.com website billet prices that were above $1,000 a ton in 2008 now stand at just about $500. One assumes therefore that the cost of material would be about half of what had to be paid in 2008. Were we building a 48-inch-diameter pipeline we would have needed to use by Dolphin standard some 400,000 tons of pipe but since ours is a 42-inch-diameter pipeline the requirement would be reduced to about 320,000 tons and would cost, even if we went to the expensive Mannesman source, about $300m. (I have seen a news item that our interstate pipeline company has invited expressions of interest for the supply of 335,000 tons of pipe which is roughly in line with my calculation).

Compressor stations will be needed and I have not been able to determine how many will be needed and what they will cost but a perusal of the literature would suggest that for the amount of gas involved we may need three or four compressor stations with a total 100,000 horsepower. These should not in my view cost more than $50-75m.

As regard other costs an American study suggests that in America in 2007 pipeline costs were roughly divided between labour (35 per cent), material (35 per cent) and the balance as miscellaneous of which right-of-way costs were about eight to nine per cent.

They projected that material costs would decline but labour and right-of-way and other miscellaneous costs would rise. Material costs have, as stated, declined. This, however, is the only factor, which is common to Pakistan and the US. The other costs are much lower in Pakistan. The Balochistan government has granted right of way for free, and the cost of the skilled welder in Pakistan is about 10-15 per cent of the cost of welders in the US.

Our design and other miscellaneous expenses have to be much more modest since the current designed path of the pipeline, running parallel to the coastal highway will create few environmental concerns and require culverts or other major tasks other than the crossing of the Indus.

Perhaps this is wrong and experts should indicate what their evaluation is but to my mind in Pakistan the cost of material will be about 50 per cent of the total cost of our pipeline. That means our 780km pipeline should cost about $700m to $800m and no more. It is an amount that the government can easily cough up from its own resources if it diverts the gas surcharge towards this end, and the problems of finding foreign financing need not arise.

Turning now to the question of paying for the pipe that I presume we would import from Iran if Ahwaz Rolling mills has the capacity, I believe we have to see greater use of imagination and innovation. To start with, we must work out a mechanism whereby our payment is made in rupees used by the Iranians to pay for what they import from Pakistan. What can this be?

The Iranians have contracted to purchase 120,000 tons of hard red winter wheat from the US at an FOB (Free on Board) price in excess of $300. Given prevailing freight and insurance rates the CIF (Cost Insurance Freight) cost will probably be in the neighbourhood of $380. Internal distribution costs will push the delivered cost of wheat to the provinces bordering Pakistan to $400 per ton or slightly more.

Within Pakistan we face the quandary of a wheat surplus created by the purchase from the farmer at a price well above the prevailing international price. The cost of procurement given the Rs950 per maund that the farmer receives is probably Rs25-26000 per tonne. If Pakistani wheat is accepted as being the equivalent of American hard red winter wheat the FOB price of $300 will just about match our procurement price. Our cost of transporting wheat from the mandi towns to Port Qasim and then sea transport to an Iranian port should be possible for the $75 per ton.

We have also created a fleet of trucks capable of carrying 40-foot containers to cater to the needs of Isaf and Nato forces the need for which, even if supply routes are opened, will disappear in a couple of years.

If arranging overland delivery from our mandi towns directly to the flourmills in the Iranian provinces bordering Pakistan can be arranged would the freight and insurance cost remain below $100 per ton? The journey will be one-way; the chances of getting a return cargo are slim since there are few high-volume goods involved in Iranian exports to Pakistan unless something innovative is considered.

As ambassador to Iran in 1992-1994 I had proposed after some discussions in Tehran that in the areas of Balochistan bordering Iran we should ask the Iranians to supply gas cylinders that our own companies were not able to supply for logistical and other reasons. Could this proposal, which was then shot down, be resurrected to provide a return cargo?

The writer is a former foreign secretary.