Energy infrastructure: China to build gas pipeline from Gwadar to Nawabshah

$3 billion agreement to be signed next month at President Xi’s visit, Chinese company to get LNG contract

ISLAMABAD: In a major breakthrough, Pakistan and China are set to sign a $3 billion deal during the upcoming visit of Chinese President Xi Jinping next month to build a natural gas pipeline that would serve as an alternative to the stalled Iran-Pakistan gas pipeline project.

The new project, though billed as an alternative to the Iran-Pakistan pipeline, would in reality serve as a complement to that project. While Islamabad and Tehran have been trying for several years to build a pipeline between the two countries, US and European sanctions against Iran have prevented the project from reaching completion.

The Chinese project would construct a liquefied natural gas (LNG) import terminal from Gwadar to the main natural gas distribution hub in Nawabshah. The pipeline location and dimensions, however, would mean that the Gwadar-Nawabshah component could be connected to any eventual Iran-Pakistan pipeline that would be built if and when sanctions against Tehran are removed. LNG imports are typically somewhat more expensive than pipeline imports.

Sources told The Express Tribune that during Prime Minister Nawaz Sharif’s visit to China in November 2014, Beijing and Islamabad signed a protocol to award the LNG import contract to China National Petroleum Corporation. The government is now working on a draft agreement to be signed between the two countries when President Xi visits Pakistan next month. Interstate Gas Systems (ISGS), the state-owned company that deals with gas import projects including the IP pipeline, is finalising a deal with a Chinese company for the Gwadar project.

Pakistan and Iran were set to implement their agreement by December 2014 but the two sides failed to commission the project following the threat of US sanctions against the Pakistani companies involved in the project. The two countries have now reached understanding on an alternative plan to implement the IP gas pipeline project, with Tehran also agreeing to extend the commissioning date of project and to waive the $2 million per day penalty.

According to initial estimates, the cost of the project is expected to be $3 billion, of which $1 billion will be needed to lay the pipeline from Gwadar and over $2 billion will be required to construct the terminal with LNG handling and re-gasification facilities, in addition to developing large storage facilities.

Under the protocol, China will meet 85% of the financing needs for constructing the LNG pipeline linking the Gwadar Port to Nawabshah and the terminal. Pakistan’s Economic Coordination Committee (ECC) of the Cabinet has already given in-principle consent.

This will be the second LNG terminal in the country, after the first terminal that is already being built by Engro Corporation’s subsidiary Elengy Terminal Pakistan at Port Qasim, which is likely to be completed by March 15.

The LNG pipeline starting from Gwadar will be extended to Iran for gas import when sanctions on Tehran are lifted. The pipeline will have the same specifications that were proposed for the IP pipeline including a diameter of 42 inches.

Published in The Express Tribune, February 27^th, 2015.