The Iran-Pakistan Pipeline Pipe Dream

Don't let a burst of activity fool you—the chances of the gas line are shrinking.

The recent agreement between the P5+1 and Tehran regarding the latter’s nuclear program has boosted hopes in Pakistan that the long-delayed construction of an Iran-Pakistan (IP) pipeline can finally be completed. The reasoning in Islamabad is that the easing of international sanctions on Iran will make it easier to find international financing for the remaining segment of the pipeline inside Pakistan, estimated to cost $1.8 billion. Iran had offered $500 million in credit to Pakistan to do the engineering and construction, but recently withdrew that offer. According to official Pakistani sources, both sides renewed their commitment to the “Peace pipeline” at a ministerial meeting in Tehran in December, and Pakistan has welcomed Iran’s recommendation that it approach third parties, including European countries, for financing.

Like many proposals for cross-border projects in South Asia, the concept of an IP pipeline is driven as much by wishful thinking and political posturing as by hard economic analysis. One prominent narrative in the Pakistani media is that the IP pipeline is the most feasible solution to the country’s crippling energy shortages, but that the project is being stalled by Prime Minister Nawaz Sharif in deference to opposition from Washington and Riyadh. Pakistan’s former president, Asif Ali Zardari, with an eye on upcoming elections, joined Mahmoud Ahmadinejad in March 2013 in inaugurating work on the Pakistani section of the pipeline. Although no actual construction on the Pakistani portion of the pipeline has taken place since then, Zardari’s political grandstanding established a high-visibility benchmark against which Sharif’s leadership and patriotism will be judged. Sharif’s government has found it expedient, therefore, to periodically reassert its support for the project as a gesture of defiance of U.S. pressure, regardless of economic and political realities.

In public pronouncements since his election in May 2013, Sharif has shown a realistic understanding that Pakistan’s energy crisis is complex and not susceptible to a single remedy. His new national energy policy, announced in June of this year, is admirably candid about the need to cut back on energy subsidies, especially for the affluent; to crack down more forcefully on electricity theft; and to expand the use of indigenous power sources, including hydroelectricity and unexploited coal deposits in the Thar Desert. The government’s first budget talks as well about importing coal and electricity from India—not a popular proposal in some nationalist circles.

What Sharif has been unwilling to tell his countrymen are the reasons why the IP pipeline is problematic, if not misguided. Like his predecessor, Sharif apparently wants to avoid the political risks of trying to reshape public opinion about a popular project and reengaging more assertively with Iran, with which Pakistan’s relations have long been thorny.

Turkey’s experience in dealing with Tehran is instructive, demonstrating clearly that Iran can be a difficult and unreliable business partner that often fails to honor commercial contracts. Since the Tabriz-Ankara pipeline was commissioned in 2001, Iran has not supplied Turkey with its contracted annual volume of natural gas, which was supposed to reach 10 billion cubic meters (bcm) by 2007. Volumes vary every year, prices are often higher than from other sources, and the quality has been substandard and destructive of Turkish power-plant equipment. In January 2007 and January 2008, Tehran slashed gas exports to Turkey because of high Iranian domestic demand and the cut-off of important gas supplies from Turkmenistan. The supply was cut off again in February 2008 because of bad weather conditions. (Gas consumption in Turkey and Iran is highest during the winter, as it is in Pakistan.) Following a recent dispute between the two countries over contractual “take or pay” obligations regarding price and amount, Turkey took the issue to international arbitration.