Pakistan seeks 50% price cut for Iran gas

Pakistan has asked Iran to make up to 50% reduction in the price of gas to be supplied through the Iran-Pakistan (IP) pipeline project.

While renegotiating a relevant deal, Pakistan also wants a lower volume of gas under the project as different sectors in the country are not interested in taking energy supplies at higher prices.

At present, the local distribution companies are providing gas to fertiliser plants and domestic consumers at Rs1,500, or $5.7, per million British thermal units (mmBtu) and Rs1,000, or $3.57, per mmBtu respectively.

Power producers have expressed their inability to buy imported gas at a price of over Rs2,000/mmBtu, which in dollar terms stands at $7.14. The government has established it as a commercially sustainable market benchmark for the IP gas pipeline.

Pakistan has already clarified that it could push ahead with the project if US President Donald Trump gives a waiver to Iran. The government has prepared a plan to hold negotiations with Iran on the IP pipeline in the face of hopes that the US and Iran could strike a peace deal, resulting in lifting of sanctions against Tehran.

Pakistan's government has observed that the IP gas pipeline price is even higher than the cost of liquefied natural gas (LNG). Earlier, LNG export from Qatar drew a lot of criticism as no sector was ready to consume it due to high prices. Owing to low demand, Pakistan and Qatar reached an agreement to divert 24 LNG cargoes before the eruption of US-Iran war.

Pakistan's oil and gas exploration companies have also faced multibillion-rupee losses following curtailment of gas supplies from fields in a bid to make room for LNG imports.

According to the government's calculations, the current gas price for the IP pipeline is $10.6/mmBtu, which translates into Rs2,970. Additionally, the transportation cost from Hub to Nawabshah is estimated at $1.25/mmBtu, or Rs350.

At Brent crude prices of $60, $70 and $80 per barrel, the IP gas price had been calculated at $8.20, $9.40 and $10.60 per mmBtu, respectively. In comparison, the LNG supplied under Pakistan State Oil's (PSO) sale-purchase agreement-2 would cost $7.14, $8.16 and $9.18 per mmBtu.

Now, the government has proposed the IP gas pipeline price, which has been based on Rs2,000 per mmBtu and calculated at 6.11% of Brent plus $1, which will be significantly lower at $4.67, $5.28 and $5.89 per mmBtu. This makes it the cheapest option across all three Brent scenarios.

The government has estimated the project cost at $2.5 billion and gas volume at 750 million cubic feet per day (mmcfd). It wants to reduce this volume as the country has not much room to consume imported gas. PSO is already importing LNG from Qatar, based on a contract, and the government has to consume this gas to avoid claims of damages from Doha.

Pakistan and Iran signed the Inter-Governmental Framework Declaration on May 24, 2009 in the presence of presidents of both countries, followed by a gas sale-purchase agreement inked on June 5, 2009. The agreement was signed between Pakistan's Inter State Gas Systems and National Iranian Oil Company (NIOC). Subsequently, the Ministry of Finance issued a sovereign guarantee in favour of NIOC.

Pakistan and Iran have struggled to execute the gas pipeline project but it could not be implemented owing to the US sanctions on Tehran. Iran pushed Pakistan into international arbitration and the two countries are now looking to find an amicable solution. Pakistan had earlier asked Iran to either scrap the project or seek a waiver from the Trump administration.