Escalating tensions between the US and Iran end Pakistan’s hopes for Iran pipeline with Chinese or Russian involvement
By Zafar Iqbal, Islamabad 2 July 2019
The shooting down of a US drone by Iran has had some unintended consequences for Pakistan. Desperate for more energy security, while its economy is in the doldrums, Pakistan was hoping to move forward on an energy pipeline with Iran through a third party. But, like the US drone, Pakistan’s hope for such a pipeline seems to have hit a major setback.
While Pakistani officials publicly maintain that there is little hope for an Iran-Pakistan pipeline, they have been quietly working with China and Russia in the hope that a third party can pull it off. But even those plans hit a roadblock after tensions between Iran and the US escalated.
The Chinese angle
Pakistan and China had signed a framework agreement on April 20, 2015, to award, without a bidding process, a contract to build a liquefied natural gas pipeline between Gwadar and Nawabshah pipeline and an LNG terminal. The contractor was to be China National Petroleum Corporation (CNPC). Exim Bank of China was to provide 85% financing for the project.
This was an alternate model to implement the gas pipeline project. CNPC was also to connect an 80km pipeline from Gwadar in Balochistan to the Iranian border if the US sanctions were lifted. “Now, CNPC is still interested in initiating work on this project,” an official said, adding that this is the only option that is available with Pakistan and Iran to implement the gas pipeline project.
But Dr Gulfraz Ahmed, former secretary of Ministry of Petroleum and Natural Gas, said that Pakistan cannot afford to implement the project. “Pakistan is also facing problems with the Financial Action Task Force (FATF). In view of this situation, it cannot afford to implement the project. It can ask Iran if it would implement the IP project after sanctions are lifted. India had been importing oil from Iran but stopped after the US waiver ended,” Dr Ahmed told Asia Times.
The former managing director of the state run gas utility Sui Southern Gas Company, Zuhair Siddiqui believes that pushing this project at this stage is likely to increase Pakistan’s political complications exponentially. Instead, he suggested that Pakistan look at other alternatives like LNG imports and the TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline project.
In June 2017, then Pakistan Prime Minister Nawaz Sharif visited Saudi Arabia for high-level talks. This was at a time when the diplomatic crisis between Saudi Arabia and Qatar was at its height. Saudi Arabia and its allies — Egypt, the United Arab Emirates and Bahrain – announced the withdrawal of diplomatic ties with Qatar.
During the meeting, Saudi Arabia also put pressure on Sharif to shelve any economic and diplomatic relations with Iran and Qatar. There was also pressure to suspend the IP gas pipeline project. The LNG Gwadar pipeline, which was an alternate plan to connect with the Iranian pipeline, was also shelved.
With Pakistan’s economy in meltdown, Saudi crown prince Mohammed bin Salman had promised a US$ 20 billion package for Pakistan. Part of this is a US$10 billion oil refinery in Gwadar, Balochistan. “Since Pakistan has a long border with Iran, the IP pipeline project should not be abandoned due to Saudi Arabia,” Ahmed said. He believes that the pipeline will bring a lot of economic benefits and energy security to Pakistan.
The Russian option
The second alternative is to divert the gas allocated for the Iran-Pakistan gas pipeline project to an offshore pipeline project being planned by Russia. The Russian firm Gazprom is conducting a study to build an offshore pipeline project from Iran to India passing through Gwadar.
Pakistan and Russia inked a memorandum of understanding in February this year to conduct a feasibility study to implement the US$10 billion offshore gas pipeline. However, even that option seems unlikely in the current scenario. In November, 2018, a team from Iran which included legal experts, arrived in Pakistan to discuss the execution of the gas pipeline project.
Naturally, the Iranian team was of the view that US sanctions would not affect the gas pipeline project. However, Pakistan feared being brought under US sanctions if it went ahead with the deal. The US has already warned Pakistan about its sanctions and asked it not to move on the gas pipeline following the sanctions imposed by the Trump administration.
The pipeline is slated to deliver 21.5 million cubic meters of gas per day to Pakistan.
Trump had announced the re-imposition of sanctions on Iran on May 8, 2018, when he signaled US withdrawal from the Joint Comprehensive Plan of Action (JCPOA). He also threatened to slap secondary sanctions on foreign companies that do business with Iran.
Meanwhile, the Iranian delegation lobbied hard with Pakistan to implement the project. Iran, Pakistan and India were to be the key partners, while Russia was invited as an observer. However, Pakistan said that gas under IP gas pipeline project and the offshore gas pipeline would come from Iran and therefore, Pakistan should implement only one project. It could be either the offshore gas pipeline or the IP gas pipeline.
Iran had agreed to implement the offshore gas pipeline project. Under the new model, the gas volume allocated for the IP gas pipeline project would be diverted to the offshore gas pipeline project. Iran had agreed to follow this model and officials were of the view that they would be supporting this model.
Officials with the federal Petroleum Division said that Iranian team was scheduled to visit Pakistan on June 19, and these two options would be discussed. During the visit of Prime Minister Imran Khan to Iran in April, Iranian President Hassan Rouhani took up the matter with the Pakistani side, and officials of two sides had also held a meeting on this project. Iran had also offered Pakistan the opportunity to implement the project through a ‘third party’. However, nothing came out of these meetings.
Shahid Khaqan Abbasi, former Petroleum Minister, said that Pakistan could not implement the IP gas pipeline project even through a third party. “Pakistan will not be able to generate funds. Even old oil contracts were facing sanctions and India and China are facing disruptions and challenges in oil imports,” he said.