The Iran-Pakistan Pipeline Pipe Dream

December 29, 2013 Topic: EconomicsTrade Region: IranPakistan

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.

If a major buyer like Turkey is treated so shabbily while Iran is suffering strict sanctions, how is Iran likely to treat new customers like Pakistan if sanctions are eased, new gas markets are developed, and the Iranian economy and domestic energy consumption grow? Iran aspires to become the hub of a regional gas network linking it with all of its neighbors and beyond. Pipelines already link it to Azerbaijan, Armenia, Turkmenistan, and Turkey. Tehran clearly would like to open markets for its gas in Pakistan, Afghanistan, and India, but a more compelling strategic goal is to build the region’s largest pipeline through Iraq, Syria, and Lebanon to Europe, bypassing the Gulf. The oil ministers of Iran, Iraq, and Syria signed a Memorandum of Understanding (MOU) to this effect in July 2011. Iran signed an agreement in 2013 to construct a pipeline from the South Pars field to power plants in Iraq’s southern province of Basra. With Syria now in turmoil, however, Iran has shifted its pipe-building attention to the southwest, to Jordan’s Red Sea port at Aqaba, and possibly Egypt.

In an environment of expanding markets, if Pakistan were tied to Iran by an expensive pipeline, it could expect to have diminished bargaining power over gas rates. Iranian gas supplies would be subject, moreover, to the vagaries of relations between Tehran and Islamabad, as well as Iran’s relations with other countries in the network. Given Iranian concern about the rising levels of sectarian violence against Shias in Pakistan, Iran-Pakistan relations are bound to be contentious. Turkey can compensate for gas shortfalls from Iran by deliveries from Azerbaijan and Russia. Shortfalls to Pakistan would be more disruptive.

Both Pakistan and India (an on-again, off-again pipeline partner) have already experienced problems in negotiating with Iran. Indian diplomats reportedly were furious in 2005 when Tehran linked its continued support for a $21 billion liquefied natural gas deal to India’s votes in the IAEA. Pakistan has encountered serious pricing issues. In October 2013, Pakistan’s semiofficial Sustainable Development Policy Institute issued a report that calls the pricing formula for IP pipeline gas agreed upon in 2009 an “economic death sentence for Pakistan.” The agreement, which ties the gas rate to the price of oil, ignored international gas pricing trends and saddled Pakistan with prices significantly above those charged elsewhere in the world, including in Turkmenistan. The report recommended not only that Islamabad renegotiate the purchase agreement and the heavy penalties for delayed pipeline construction, but that Pakistan’s limited funds would be better spent on building more hydrel dams than on gas pipelines.

If financing and pricing problems were not formidable enough, serious security threats persist and may be worsening. Most of the roughly eight hundred kilometers of pipeline to be built inside Pakistan would traverse the rugged and underdeveloped province of Balochistan, where ethnic nationalists have waged five separatist insurgencies against the Pakistan government since 1947. Favored tactics of the current insurgents, who have conducting the most recent round of Balochistani insurgency since 2004, are to bomb gas pipelines and kidnap and murder security personnel, construction workers, and foreign development officials. To complicate the problem, anti-Iran militant groups such as Jundallah use the province as a base from which to attack government targets across the border. Given the uncertain security situations in Balochistan and Xinjiang, it is no wonder that Chinese companies have been less than enthusiastic about joining the IP pipeline consortium in spite of the long-term economic benefits it might provide for western China.

There is growing evidence that the Iranians are losing patience with Islamabad. As early as May of this year, Iran’s deputy petroleum minister sent a letter to Islamabad expressing concern about Pakistan’s lack of progress in selecting an Iranian prime contractor and local sub-contractors and beginning actual construction. Judging from commentary in the Iranian press, many Iranians do not trust the Pakistanis. The general perception from Tehran appears to be that Pakistan will not pay for its portion of the pipeline, and that if the pipeline is built, they will not pay for the gas. Despite the public bonhomie reported during the meeting between Pakistan’s national security adviser Sartaj Aziz and Iranian foreign minister Mohammad Javad Zarif in Tehran in November, so many conflicting interests are at play on both sides that a breakthrough on the pipeline is unlikely anytime soon—if ever.

Robert K. Boggs is Professor of South Asia Studies at the Near East South Asia Center for Strategic Studies in Washington, DC. The views expressed here are his own.

Image: Flickr/hhoyer. CC BY-SA 2.0.