IPP talks move forward as Islamabad vows to stick with Iran

10 September 2018
05 September 2018, Week 35, Issue 371

Talks around the Iran-Pakistan gas pipeline are moving forward with Islamabad vowing to ignore the latest raft of US sanctions. Simon Watkins reports

What:

Discussions between Iran and Pakistan are restarting surrounding the IP gas pipeline.

Why:

Iran is seeking new export routes and ties remain close with Pakistan despite the latest raft of US sanctions.

What next:

The Iranian section of the conduit has been built, but the Pakistani section has not yet been started. Top-level discussions will look to bring progress.

Given repeated accusations by the US that Pakistan has for many years been a duplicitous partner, Islamabad’s lack of support for renewed US sanctions against Iran would have come as little surprise to Washington. Islamabad supported the Haqqani guerrilla insurgency in Afghanistan and Al Qaeda globally against US forces, despite taking hundreds of billions of dollars in aid payments.

Just after the first wave of the new sanctions was rolled out on August 7, Pakistan’s Foreign Office spokesman Muhammad Faisal said: “We are examining the implications of the US’ re-imposed sanctions on Iran. However, Pakistan, being a sovereign state, reserves the right to pursue legitimate economic and commercial interests while respecting the international legal regime.”

Later, in his inaugural speech as Pakistan’s new prime minister, Imran Khan called for improving ties with the country’s immediate neighbours, including Iran. He also accepted an invitation for an early state visit to Tehran from President Hassan Rouhani.

Bubbling back up to the top of the list of practical initiatives that can be advanced quickly is the Iran-Pakistan gas pipeline (IPP), which, an Iranian Ministry of Petroleum source told NewsBase Intelligence (NBI), Khan personally backs and has made a priority project.

Demand

Pakistan certainly needs all the sustainable energy sources it can get. The country has seen domestic natural gas production stagnate at around 4 bcf (113 mcm) per day against demand of more than 6 bcf (170 mcm) per day, which has led to repeated load-shedding in many major cities of up to 15 hours a day.

Moreover, the supply and demand disparity is set to become even worse soon. Industry estimates project that Pakistan’s domestic gas production is set to fall to nearer 2 bcf (57 mcm) per day by 2020, owing to ageing infrastructure. Demand will expand to around 8 bcf (227 mcm) per day by the same time, driven by rising demand from the power, industry and domestic sectors as the economy continues to grow by around 5% per year.

According to Pakistan’s Ministry of Energy (MoE), the planned 75 mmcf (2.1 mcm) per day of gas (the estimated initial fiver-year flow rate) that would flow from Iran’s supergiant South Pars natural gas field via a direct IPP would add around 4,000 MW of electricity into the country’s grid.

The original agreement for the IPP, signed between Iran and Pakistan in 1995, was predicated on the pipeline running from South Pars into Karachi but the most recent iteration of the route involves the gas running from Iran’s Asalouyeh and into Pakistan’s Gwadar and then on to Nawabshah.

The latest projection of the cost of the pipeline is around US$3.5 billion, according to industry sources. However, US$2.5 billion of this has already been invested in the 900-km stretch on Iran’s side that has already been completed. Pakistan’s 780-km stretch has yet to be started.

Competition time

Given the geopolitical importance of both Iran and Pakistan to Russia and China, finding the money for the remainder of the project is unlikely to be problematic.

For China, there is a threefold motivation. First, it plans to integrate the IPP into the US$50 billion-plus China Pakistan Economic Corridor (CPEC) project, with Gwadar earmarked to be a key logistical node in China’s Belt and Road Initiative (BRI).

Secondly, it wants to keep Iran as one of its key suppliers of oil and gas in the future. And thirdly, it regards supporting those who the US opposes as being a central plank of its foreign policy, over and above the short-term tactic of wrong-footing the US in their ongoing trade war.

“One immediate reaction [of China to the burgeoning trade war with the US] will be to seek to expand and broaden economic links by offering improved market access to non-US companies, by strengthening supply chain links and by replacing American commodities with imports from emerging market nations,” according to Jonathan Fenby, China research chairman at TS Lombard.

“There is a tectonic shift going on that goes well beyond the tariff war, as China seeks to assert itself regionally and tries to establish a wider global role for itself while the US moves from the ‘constructive engagement’ of the Clinton, Bush and Obama administrations to regarding China as a ‘strategic competitor’,” he added.

For Russia, the motivations are no less imperative and its initial pledge to assist Pakistan has been on the table since March 2012. At that point, officials from Pakistan’s MoE went to Russia for talks with state-controlled gas giant Gazprom to discuss a range of co-operation deals, and it was agreed that the Russian gas giant would help finance and construct the IPP.

A key part of Russia’s willingness to see this pipeline taking Iranian gas to Asia was Moscow’s wish to keep the gas market in Europe dependent on Russian oil, and this strategy remains in place.

Added to this, though, is that Iran – and in particular its oil and gas resource – is now largely under the control of Russia, and Moscow sees the IPP as offering surrounding countries a viable alternative to the long-awaited and US-backed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline.

“A pipeline for Iranian gas, and later oil, running through Central Asia is a core strategy for Russia to exert its increasing influence in the Middle East, and to consolidate its presence in central and eastern Europe to the one side and Asia to the other,” said the source.

“In Asia, it builds on the already extensive energy relationship that it has with China,” he added.

The US clearly sees it the same way, as it has from the start tried to stymie progress on the IPP, Mahmoud Khaghani, former director-general of the National Iranian Oil Co. (NIOC) and director for Caspian Sea Oil and Gas Affairs at the MoP, told NBI.

In January 2010, despite Iran being close to completing its side of the IPP, the US formally requested that Pakistan abandon the project in return for which it would receive assistance from Washington for the construction of an LNG terminal and for the importing of electricity from Tajikistan through the Wakhan Corridor.

Although the IPP agreement came back into effect briefly, July 2011 saw the US interfere again in the corporate proxy shape of energy giant ConocoPhillips, which began mediating the notion of an LNG supply deal between Pakistan and then US ally Qatar.

Ultimately, this formed the basis of the 15-year agreement for Qatar to export LNG to Pakistan, signed in February 2016, that continues to this day.

Standing firm

In the past, progress on the IPP has also been negatively affected by questions over the pricing of Iran’s gas supply to Pakistan. However, NBI understands that this matter was largely resolved in June when senior Iranian energy and finance officials met with their Pakistan counterparts at the 18th Shanghai Cooperation Organization (SCO) summit to discuss a range of subjects, most notably oil and gas.

At that time, according to the source, the Iranians had been asking for a price of 14% of the Brent/JCC oil benchmark price, whilst Pakistan wanted 11%, so they agreed to meet in the middle at 12.5%, which is where it still stands.

This compromise was a signal that both countries are now looking to move on the IPP project as part of a much broader co-operation policy.

Rouhani specifically spoke of much wider ‘co-operation and co-ordination’ between the two countries to ‘expand defence co-operation’ especially in border areas, one of which Pakistan shares with India and another it shares with Afghanistan. He then condemned the relocation of the US embassy in Israel to the highly sensitive Jerusalem/Al-Quds site and the US’s recognition of the city as Israel’s capital.

This view was supported by Pakistani President Mamnoon Hussain. He also highlighted that his country could be of use to Iran in terms of ‘banking relations’ and underlined Pakistan’s support for the Joint Comprehensive Plan of Action (JCPOA) nuclear deal, urging all parties to abide by it.

Edited by

Ian Simm

Editor

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