Nawaz Sharif appears to be making moves to capitalise on a recent thawing of relations between the US and Iran. The prime minister stated last week, at the UN General Assembly, that the multibillion dollar gas pipeline project between Pakistan and Iran will continue. Iran remains under economic sanctions due to US/Israel assertions that it is pursuing a nuclear weapons programme. Iran is a signatory of the Non-Proliferation Treaty and continues to claim that its nuclear programme is peaceful. Completion of the gas pipeline would provide some relief to Iran’s weakened economy and enable Pakistan to overcome its growing energy needs at a time when the country is enduring crippling energy shortages. However, the pipeline project faces numerous challenges and has suffered setbacks since it was originally proposed in the 1990s.
The biggest challenge yet is for Pakistan to come up with funds for the construction of the pipeline. Iran has completed its stretch of the pipeline, 900 kilometers from Assaluyeh to Iran Shehr, but Pakistan needs 1.5 billion dollars to complete its portion. Otherwise, Pakistan will face a three million dollar per day fine for failing to meet the project completion deadline of December 2014. Keep in mind that in August, the Nawaz Sharif government estimated that it could take up to two years for Pakistan to complete the pipeline. Even after completion, there are long-term risks to consider since a large portion of the pipeline will pass through insurgency-wracked Balochistan.
Securing the pipeline will also contribute to the already rising cost of gas. For Pakistanis, the estimated price of gas imported from Iran would be $13 per mmbtu compared to around $4 per mmbtu for domestic gas. One fails to understand the logic of the previous government, which agreed to link the price of Iranian gas to the international oil prices. This will lead to increasing prices in the future.
Although diplomacy between the US and Iran is improving, the US has stated that the pipeline is in breach of its economic sanctions against Iran. According to The Wall Street Journal, a state department official stated: “The way it appears at this point, the pipeline would attract sanctions … there are other options for Pakistan that are less expensive and more reliable.” It is vital to note that this particular set of sanctions has not been mandated by the UN; instead, the policy was created in the US Congress. Other countries including India, China and Turkey have not been threatened by economic sanctions — instead, they have been granted partial waivers so that they can continue to import oil from Iran. India, originally a part of the IP (Iran-Pakistan) gas pipeline project, backed away from the project shortly after signing a nuclear deal with the US.
The alternatives offered by the US include transporting gas from Turkmenistan and Afghanistan to Pakistan and India. The US has been in favour of such a pipeline since the 1990s, but the project has yet to become a reality due to the unstable and chaotic situation in Afghanistan. The second option consists of the Obama Administration injecting $7.5 billion into Pakistan, with the aim of creating energy projects by updating power plants and extending hydro-powered dams. According to Pakistan, the proposed trickling distribution of funds is unacceptable. Plus, the relationship between the US and Pakistan is so sensitive that any incident or a change of government can lead to an instant slashing of funds.
In essence, Pakistan has no money to build the pipeline. Gas prices would only increase if it is constructed and the nation may face sanctions once they find a way to build it. It sure seems wiser at the moment to take advantage of Pakistan’s immediately available domestic reserves, which is a significantly more affordable source of energy. Importing natural gas, either via pipeline through Iran or Afghanistan, makes more sense as a method to stabilise the nation’s grid after fundamental power generation deficiencies have been addressed.
Published in The Express Tribune, October 9th, 2013.