Pakistan-Iran pipeline

M. Umar Farooq Balochgas-pipline

The global energy resources have constantly been depleting. Taking the example of oil, 37% of the world energy need is met through oil and if oil production remains constant until it’s gone, there is only enough oil in the world to last 42 years.

The energy crises in Pakistan has aggravated to the extent which has seriously affected the economy and growth besides paralyzing the routine life. The Iran-Pakistan gas pipe line project, thus, appears to be the most essential project for Pakistan with no apparent alternatives in the foreseeable future. Iran being in direct confrontation with the US and international community on the issue of nuclear energy is facing challenges and sanctions. The US in order to isolate Iran has been forcing the international community to follow the suit. The US has managed to convince India to abandon the project and been pressurizing Pakistan to look for other alternatives. The recent trilateral Islamabad summit of Iran, Pakistan and Afghanistan has sent a clear signal to the US that Pakistan will pursue the project being in its national interest. In the prevailing scenario this energy rich region has become the focus of attention of global players. The pipeline project has thus been subject to the strategic interests of large global economic and military giants who do not want the project to materialize.

The proposed pipeline serves the best interests of both Iran and Pakistan. Iran needs new market for its reserves whereas the energy ravenous economy of Pakistan economy, stipulates oil and gas injection. Technically there seems to be no hitch in the project; however, question arises to assess the suitability of the project from economical and geo-political perspective. The need of exploring the realistic paradigm of the issue arises as it is feared that a technically and economically pragmatic project may not suffer due to geo-political scenarios of all the stakeholders. One main player of this game is the United States which is aimed at isolating Iran on both economic and political front. While technically being a viable project, the question arises whether the project stands economically feasible as well. Two important factors are associated to the query of economic viability of the proposed project – the project finances and the gas price.
This is a picture on economic viability to analyze its success. The total project estimates have been assessed to $7.4 billion. Funding of such a mega project was once a serious issue but the earlier raised concerns are now no longer critical due to the “segmented construction” approach. A “segmented construction” approach has been agreed so that each country will build the pipeline within its own territory and will have proprietary rights. While Iran has already started construction work at Pars field, Pakistan is ready for contracting procedure. Iran is subjected to US sanctions due to its nuclear standoff and is likely to face even tougher sanctions from United Nations or even strike on its nuclear installation. This war situation would have serious consequences not only on financing the project but will also put the process of construction of the pipeline in jeopardy. However, following positive indicators have shown that the funding of the project is no more a critical issue;
* A consortium was also under discussion among BHP (Australia), NIGC (Malaysia), Total (France), Shell (Netherlands), BP (UK) in addition to Iranian, Pakistani and Indian national gas companies.

* Russian Gazprom has expressed interest and last month Russian Prime Minister Mr. Fradkov visited Pakistan and signed a number of cooperation agreements.

* China has also offered to help finance the project.

* Norwegian Prime Minister has also expressed investment interest in the IPI pipeline at least in Pakistani part
The most recent breakthrough came on May 2nd 2007 when the World Bank’s vice president confirmed that the World Bank is willing to fund any of the gas pipelines [IPI & TAPI] though not officially approached by any member country after looking at lank acquisition procedures and environmental issues. The statement came at the same day when US Congress committee on international relations wrote a hard tone letter to Indian prime minister.

In the context of gas price, there have been a number of rounds amongst the member countries over the question of deciding the gas rate. Iran initially demanded $ 7.20 per million thermal unit (mBtu). The same was almost double of what India offered at border i.e. $ 4.25 per million thermal unit (mBtu). As stated by, Iran’s deputy oil minister Mohammad Nejad-Hosseinian, “the price suggested by India and Pakistan is almost half of the price we demanded. If the two governments intend to subsidize their domestic gas, there is no reason for Iran to pay this subsidy.” Both India and Pakistan initially rejected the price which followed a series of discussions and consultancies. As a matter of fact the gas price in India and Pakistan varies from $ 3 to US$ 7. According to the new formula the price of gas will translate to $4.93 per mBtu that is linked to the Japan Crude Cocktail (JCC) price (at current US $ 60 per barrel) at Pakistan-Iran border. In the case of oil price being $ 40 or US$ 70 per barrel, the equivalent gas prices would be $3.67 and $ 5.56 respectively. All three parties have expressed satisfaction with the formula while Pakistan has officially approved it. A high level Economic Cooperation Committee (ECC) officially endorsed the formula and plans for the construction of Pakistani segment showing a commitment on the Pakistani side to go ahead with the pipeline even without India. However, a new glitch in the price issue arose when Iran demanded revision of formula after every three years. In case India also undertakes the project, Pakistan would get additional benefit on account of transit and tariff fee for which dialogues between the two nations have not yet been concluded although this project possess potential of great development.

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