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Pipeline economics


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A GOOD deal of excellent comment has appeared recently on the geopolitics of the Iran-Pakistan (IP) natural gas pipeline. But what about the economics of it?

Contrary to most expectations, and after a delay of years, Pakistan and Iran have finally made significant headway in the Iran-Pakistan (IP) gas pipeline project. Despite strong and consistent opposition from the US, Pakistan has cited the so-called peace pipeline as vital to its energy security and needs, and is committed to seeing gas flow from Iran by December 2014.

The IP pipeline is slated to deliver 750 million cubic feet of gas per day (mmcfd) from the Iranian South Pars gas fields, to the Sui Southern Gas Company’s transmission and distribution network. Currently, Pakistan is facing a natural gas shortfall of nearly 1.5 billion cubic feet per day (bcfpd), which is expected to rise — without countervailing measures — to around 6-8bcfd by 2020.

Pakistan is actively seeking a multitude of diverse sources to meet its rapidly growing energy requirements, including import of liquefied natural gas and liquid petroleum gas, the Tapi project, import of electricity from Central Asia and, possibly, India, and greater exploitation of indigenous hydel, natural gas and coal resources.

The IP gas pipeline is thus one, albeit important, component of Pakistan’s overall energy requirement mix. Pakistan has earmarked the potential gas supply from the IP pipeline exclusively for generation of approximately 4,000 megawatts (MW) of electricity. Currently, the country is facing a power shortfall of approximately 4,000-5,000 MW, which peaked last year at around 7,000 MW.

Thus, the gas from Iran via the IP pipeline can not only wipe clear the power shortfall, but it can do so at a significantly reduced generation cost from the current fuel mix which is skewed towards furnace oil and diesel.

The direct economic cost to Pakistan emanating from the energy crisis amounts annually to around three to four per cent of GDP. The direct cost is mainly in the form of lost output/GDP. However, the broader macroeconomic collateral costs are substantial too, and include a decline in employment levels, lower incomes, lower government revenue, a decline in export orders, drastically lower fixed investment levels, and greater fragility of the banking system.

In addition, the persistent energy shortfall has burdened public finances through the provision of heavy subsidies via the budget, amounting cumulatively in the past five years to approximately Rs1.5 trillion, leading to a diversion of budgetary resources from development projects, and to a rapid build-up of public debt.

The build-up and persistence of the inter-enterprise circular debt in the energy sector has sapped the financial strength of energy companies, severely curtailed their operations and profitability, and drastically reduced new investment in upstream exploration and production activities, and in downstream projects such as installation of new generation capacity. Another important motivation for Pakistan to actively pursue the IP gas pipeline could include a strategic diversification of its energy sources.

Iran is currently under three layers of international sanctions targeting its alleged pursuit of “non-peaceful” nuclear activities — a unilateral sanctions regime imposed by the US in conjunction with the European Union, and a multilateral regime under the framework of the United Nations.

Broadly, US sanctions prohibit US nationals and entities from business and arms dealing with Iran, while also targeting Iran’s financial dealings with the rest of the world. Its ambit extends to non-US persons, however, in the case of re-export of sensitive US-origin goods, technology or services to Iran or the government of Iran.

The UN sanctions regime embargoes all dealings with Iran and designated Iranian entities that relate to “proliferation-sensitive nuclear and ballistic missiles programmes”. UN sanctions on Iran have been imposed via four binding Security Council resolutions, namely: 1737 (2006), 1747 (2007), 1803 (2008) and 1929 (2010).

Prima facie, transactions with the Iranian oil and gas industry that do not constitute investment in Iran’s energy infrastructure appear to be excluded from the ambit of the sanctions’ regimes of the US, EU and the UN. In addition, the US has provided a waiver to nine countries from its sanctions rules on import of, and processing payments for, Iranian oil.

For this reason, South Korea, Japan, South Africa, China and India continue to purchase crude oil from Iran — though at lower levels than previously — while Turkey continues to be supplied Iranian gas via pipeline. In fact, Iran’s crude oil exports rose 13 per cent in February from January to 1.28 million barrels per day (mbpd) — but down from an average of 1.5mbpd in 2012 and 2.5mbpd in 2011, according to the International Energy Agency.

However, under new US rules that took effect from February this year, the importers of Iranian crude are required to pay in local currencies kept in escrow accounts — or risk being debarred from the US financial system.

The purchase of Iranian natural gas does not appear to be “sanctionable” activity under current rules. However, even if it were met by the US “dialling up the pain” for Pakistan, economically or via other means, cold economic logic dictates that Pakistan should follow through on the pipeline. This is so since the annual cost of the foregone natural gas is around two to three per cent of GDP, at least, while the likely cost of US economic sanctions would be far below this level.

(As a relevant aside, fears of an economic “meltdown” in case of US sanctions are grossly exaggerated — and appear to be designed to foster and perpetuate a degree of dependency. “Noopolitik”?)

Pakistan should pursue deeper economic engagement with Iran as part of an expanded effort for regional economic integration which the US purports to support. Relations with Iran should not be viewed as a “zero-sum” game to any other set of Pakistan’s important bilateral relationships — in line with the US approach to Pakistan and India.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

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

Comments (13) Closed

noman Mar 22, 2013 06:39am
surely pakistan must complete its side of pipeline it would greatly help pakistan in reducing enrergy crises and would greatly help in economic prosperity...
P N Eswaran Mar 22, 2013 07:14am
It is time to call off dictates from the West. Pakistan has done well to go ahead with IP pipeline. Next it should put an end to the interference in its domestic affairs by the 'fatherly nation' of Saudi Arabia.
M.Asghar Mar 22, 2013 09:37am
Iran and Pakistan are neighbours and are deeply culturally entwined. Their interaction must be reinforced in all the economic fields including the mutual defence for their good and that of the region away from the foreign geopolitical games Mar 22, 2013 11:38am
Pakistanis are Arabs. All Arabs are our brothers and sisters. That is why soon Arabic will be the only language of Pakistan.
abbastoronto Mar 22, 2013 11:57am
If our American friends are really interested in dealing fairly with Pakistan, Mr Olson should offer to build a pipeline from the US to Pakistan at American expense, and supply gas at 1/2 the rate that Iran plans to charge. That would surely make Pakistanis sit up and take notice.
Blazer_UK Mar 22, 2013 01:09pm
Iranians dont trust Pakistanis FACT
Al Kazmi Mar 22, 2013 01:44pm
Answer to Pakistan's Energy needs is Solar Energy. Pakistan has the most suitable climate for this. In the US law supports the Solar user that the Electric Supplier is required to buy surplus electricity that customer produces during the day hours and customer can use electric units at night. In Pakistan Solar Energy could be most useful for consumer who do not use more than 3000 watt/ hour. Equipment prices are all time low, particularly Chinese solar panels. Despite extra tax on Chinese panels in the US market one can recover the equipment cost in 18-36 months. In Pakistan I can expect Chinese Solar panels 30-50 % less expensive especially if Government decides to encourage solar energy but unfortunately it directly clashes with PPP's electricity related interests and obligation for which they have received billions(IPPs and Rental Power projects). Lot of info is availabel over the net for solar installation.
Akram Mar 22, 2013 03:32pm
Pakistanis don't trust Pakistanis....can we blame the Iranians?
pathanoo Mar 22, 2013 04:23pm
Pakistan must do what is in it's national interest and, likewise, America would do what is in it's (national interest). You don't sidle up to my enemy and expect me to look at it kindly, do you?
Ozz Mar 22, 2013 09:37pm
I do believe you're trolling...........
Imran Mar 23, 2013 01:13am
Please, in geopolitics no one is a real friend. It's all about interests of your own. Gas pipeline project is in Pakistan's interest which should be followed regardless whether they trust us or not.
Sue Sturgess Mar 23, 2013 02:43am
how would that be fair?
Shahid Mar 23, 2013 04:54pm
Solor is indeed a right step in the direction of the energy self sufficency together with hydro, wind and coal based energy. However, per unit solor costs are higher than other forms of energy and because of small size units (assuming you are talking direct conversion) the maintenance cost is high. To promote solor in Pakistan, we need to get the technology to build panels in order to bring the cost down and have a pool of skilled technicians to maintain a large number of small units