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17 March 2013

Pipeline politics

THE only existing gas pipeline in Pakistan is the Sui gas distribution network that has supplied Pakistani homes, factories and power plants for the past four decades.

Pakistan is a low energy producer, and has used mostly gas and hydropower, rather than coal, as the main energy source.

Unfortunately, Pakistan has burnt up the major part of its precious Sui gas reserves. Moreover, it has not exploited its hydropower or coal potential; has not explored extensively for oil and gas domestically; and does not have a liquefied gas import terminal nor the capacity to refine larger imports of oil. Thus, at present, the best and quickest option for Pakistan to fuel its homes and factories is the import of pipeline gas from Iran. But pipelines are always a highly political issue. They have played a prominent role in the politics of the region.

In the mid-1990s, the proposal for the Turkmenistan-Afghanistan-Pakistan gas pipeline was extensively discussed with the Afghan Taliban government. Two companies were vying to secure this project — Unocal from the US and Bridas from Argentina. Uninitiated in the realities of power politics and economics, the Taliban chose Bridas over Unocal to execute the project.

Soon after, they became international outcasts, reviled for their unacceptable suppression of women and other human rights violations. Politically isolated and financially bereft, the Taliban made the Faustian bargain to host Osama bin Laden and his cohorts. The rest is, well, history.

Since the 1970s, Pakistan also attempted, in fits and starts, to secure gas supplies from Qatar through a pipeline traversing several Gulf Cooperation Council countries and crossing underwater to the Pakistan coast. Initially, the project was hindered by technical difficulties and inter-Gulf politics. Later, political missteps between Islamabad and Doha further delayed the pipeline.

Subsequently, as the demand for gas rose globally and the price increased, this option became closed to Pakistan. Recent attempts from Islamabad to purchase Qatari gas have foundered due to differences over pricing and incentives. In any case, large imports are not feasible in the absence of either a pipeline or an LNG terminal in Pakistan.

The Iran-Pakistan gas pipeline also has a long history. It was conceived over 20 years ago. Initially, its implementation was delayed because Pakistan could not decide between the Turkmenistan, Qatar or Iran options.

In the spring of 1994, there was a strategic swing in Tehran towards India, first manifested in the change of the Iranian position on Kashmir at the UN Human Rights Commission. Soon after, the scheme emerged to build an underwater gas pipeline from Bandar Abbas to Gujrat or Mumbai. Closer study revealed the high cost and technical difficulties of such a venture. Soon after, Tehran floated the proposal for an overland pipeline to Pakistan and through it to India. After initial hesitation, Pakistan endorsed this proposal. India agreed to it only after the political dust raised by Kargil had settled. However, differences over gas pricing and transit fees between the three parties continued to bedevil the project.

Following Pakistan’s post-9/11 alliance with the US, and the emerging “strategic partnership” between Washington and New Delhi, enthusiasm for the Iran pipeline waned in both Islamabad and New Delhi. While Pakistan continued to pay lip service to the venture, India backed out from the deal after its agreement for peaceful nuclear cooperation with the US.

After several recent false starts, Pakistan has signed the agreement for the construction of the pipeline with much fanfare. Given the absence of other options, the deal is a “no brainer” for Pakistan. Further, Iran has already constructed most of the pipeline on its side. It has offered to provide a $500 million loan to Islamabad to construct its side of the pipeline. The gas supplied by Iran would go directly into the extensive Sui distribution network.

Yet, it is a measure of the prevailing cynicism in Pakistan, and mistrust of Islamabad that the conclusion of the agreement with Iran is being attributed to election politics rather than national interest.

Implementation of this agreement will not be smooth sailing. The US has warned Islamabad that import of gas from Iran violates (unspecified) sanctions and will have “consequences” for Pakistan. The US pressure is unjustified and unjust.

First, the UN Security Council sanctions against Iran do not bar gas (or oil) exports or imports. Restraints on Iranian oil exports have been placed unilaterally by the European Union and indirectly by the US through banking restrictions. These are not binding on other countries including Pakistan.

Second, even as regards the unilateral restrictions placed on import of oil from Iran by the EU and US, exceptions have been made by Washington for European and other countries, including India, which are highly dependent on Iranian oil. Since Pakistan has virtually no other quick option to meet its energy needs, the US threat of “consequences” is specially insensitive and unfair.

The US advice that Pakistan should instead execute the Turkmenistan-Afghanistan-Pakistan-India (Tapi) pipeline is disingenuous. This project is unlikely to be executed until there is peace in Afghanistan and this prospect is as distant as ever. Pakistan cannot afford to wait indefinitely. In any case, Pakistan (and India) can well consume all the gas that can be supplied through both the Iran and Turkmenistan pipelines.

There is one crucial issue in the agreement which should be clarified: the pricing mechanism. Hopefully, the price of Iranian gas has been linked to global gas prices. The expanding extraction of oil and gas from in the US and Canada has reduced gas prices to less than half of prices elsewhere. As shale extraction spreads to other countries — such as China — and the US and Canada build LNG terminals and pipelines to export shale gas, the world price of gas will come down dramatically.

If the Iran gas price is fixed at the current level, Pakistan is likely to find in a few years that it is paying well over market price.

Then, the “take or pay” provision in the Agreement would lock Pakistan into a very costly embrace.

By Munir Akram; a former Pakistan ambassador to the UN.
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