While Western attention was focused on Saudi Arabia's possible provision of
energy guarantees to China in return for a "yes" vote on Iran sanctions, Iran
was working to leverage its natural gas reserves into economic alliances with
China, India and Pakistan.
In addition to awarding concessions to China, on February 8 Tehran invited
Beijing to take the place of India in one of the most contentious energy
projects in South Asia: the Iran-Pakistan-India or "Peace" natural gas
However, economics and the realities of the confrontation with the United
States over Iran's nuclear program may force China to disregard the strategic
attractions of Tehran's offer - and the
pressing energy needs of its ally, Pakistan - and decline.
The world is in the middle of a boom in demand for natural gas and Iran happens
to be sitting on one of the largest undeveloped reserves in the world - the
offshore South Pars field. Tehran has carved the reserve into more than two
dozen blocks or "phases", which it offers to foreign partners for development.
Access to South Pars gas is a matter of considerable interest to China and
India, especially since their national energy companies have a chance to get
into the game because Western sanctions have sidelined the majors.
On February 11, Reuters reported that China National Petroleum Corporation
(CNPC) had "clinched" its deal for Phase 11 and would begin exploratory
drilling in March. The $4.7 billion investment, combined with on-shore crude
and refining projects, would give CNPC a total exposure of $10 billion inside
Meanwhile, India is moving more cautiously to finalize a deal with Iran to
participate in a 40% share in Phase 12 production and 20% in the related
onshore liquefied natural gas (LNG) facility. The Iranian government seems keen
to sweeten the deal, according to Dow Jones:
India has the option to
raise its investment in South Pars. For every extra dollar investment, India
will get a right in the downstream LNG project, [managing director of India's
state-run Oil & Natural Gas Corp Ltd Seifollah] Jashnsaz said.
Iran may also help Indian companies raise funds for the projects, with Naftiran
Intertrade [an arm of the National Iron Oil Co] depositing its foreign exchange
with Indian banks ...
These deals have a definite diplomatic
value to Tehran, as they increase the stake of key Asian players in the
continued viability of the current Iranian regime.
At the same time, they are strongly market-driven, designed to deliver cheaper
LNG for ocean shipment to India and China in return for their investment.
Iran's multinational pipeline projects - which remove Iranian energy exports
from dangerous international waters and lock in support for uninterrupted
supply by the sovereign states across whose territories the pipes run - have
been marked by greater frustration.
Over the past weeks, as the United States labored to tighten the noose around
Tehran, there has been a major flurry of activity over the proposed IPI
pipeline, designed to link South Pars natural gas with markets in Pakistan and
This project has been limping along for over a decade in the face of determined
US resistance, pricing squabbles, and Indian misgivings over relying on
Pakistan to protect the pipeline and ensure supply.
By 2008, India had discretely drifted away from the IPI project, never formally
abandoning it but never responding to calls to schedule further negotiations.
Iran, anxious for a geopolitical win on the pipeline, has restructured the
first stage as a smaller-diameter pipeline supplying Pakistan only. India's
departure also allowed the two partners to put the pipeline on land (India had
been agitating to put the pipe in shallow coastal waters to protect it from
Pakistani and terrorist shenanigans) and significantly reduces its cost.
After months of negotiations, on February 11 Islamabad and Tehran finalized
agreement on the key issues, including the issuance by Pakistan of a "comfort
letter" that provided Iran with the assurance that India - or China - could be
brought into the project at a later date. The two parties have vowed to sign
the formal agreement by March 8 in Ankara, Turkey. Dawn reported:
the comfort letter, the government of Pakistan would allow the third country to
import gas through [the] IP [Iran-Pakistan] line in case any country in future
comes to join the project, but the permission will be subject to the gas tariff
and transit fee to be worked out as per best practices of that time.
On February 10, as the Iran-Pakistan agreement neared conclusion, Iran's
ambassador to India stated that "the door is still open" for India to
participate. New Delhi has not responded.
Despite its apparent abandonment of the lower-cost IPI pipeline - and its
commitment to purchase millions of tons of LNG every year from Qatar - the
temptation for India to continue playing pipeline diplomacy is apparently
As an alternative to the IPI line, Indian promoters proposed a consortium
called "SAGE" or South Asia Gas Enterprise, a deep-sea pipeline envisioned as
India's geopolitical game-changer. It would draw on supplies from all the major
players - Qatar, Iraq and Iran -and carry natural gas from Oman to western
India at depths of as much as 3,500 meters. The cost of this unprecedented
effort was budgeted at a suspiciously inexpensive $3 billion (almost as cheap
as the downsized, overland IP pipeline, which came in at $2.538 billion in its
Indian diplomats also visited natural gas export giant Turkmenistan in early
February and received a polite expression of support for the legendary TAPI
(Turkmenistan-Afghanistan-Pakistan-India) pipeline, an anti-Russian conception
once so powerful it compelled Unocal to negotiate with the Taliban, and that
still clings to life in American strategy as the "other" non-Iranian pipeline
Turkmenistan's interest in TAPI (which adds the seemingly insurmountable
security headaches of Afghanistan on top of Pakistan's) is presumably less than
intense, since it recently completed pipelines to move its natural gas to China
A proposal reported by UPI seemed to defy geography by calling for landlocked
Turkmenistan to establish "an undersea route that would bring gas from
Turkmenistan through a point south of Iran using the proposed South Asia Gas
Enterprise pipeline to India ... [rendering] Iran's South Pars plans
In another effort to bring Turkmen natural gas into play, India also proposed
to invest in Turkmenistan and have its gas swapped to Iran. Iran would then put
its own gas into the ubiquitous SAGE network.
It remains to be seen if any of these plans come to fruition, or are being
floated merely to provide Western governments and investors with further reason
to shun the IP project.
India has the reserves, foreign exchange, and accommodating allies needed to
pursue natural gas pipe dreams.
For Pakistan, things are much more desperate. For Islamabad, the Iran-Pakistan
pipeline is seen as a vital source of energy and, if it can ever get extended
to a third country, potentially millions of dollars in transit fees.
Pakistan's desperation has also impelled it, albeit cautiously and equivocally,
to defy the US on the issue of dealing with Iran.
Pakistan, without significant oil and coal reserves, relies on natural gas for
50% of its energy needs - one of the highest levels of natural gas dependency
in the world. The deterioration of domestic gas production has translated
directly into power shortages. Today, Pakistan faces a daily shortfall of one
billion cubic feet, 20% of demand.
Pakistan's energy authority has signed contracts for Qatar LNG (and a storage
and regasification facility at Karachi) that will take care of about half of
the shortfall. The balance plus some extra for growth - about 750 million cubic
feet per day - could be supplied by the pipeline from Iran.
However, Islamabad is not in a strong position to resist American pressure and
finance its $1 billion section of the pipeline on its own.
High import costs and weak exports have combined to drain Pakistan's foreign
exchange reserves; it is relying on an injection of more than $10 billion from
the International Monetary Fund (IMF) to sustain its position.
As it struggles through the global recession and domestic security and economic
difficulties, Pakistan is also dependent on aid orchestrated by the US in order
to patch over its government deficit - now over 5% of gross domestic product -
and so keep the IMF happy.
For whatever reason, aid has been slow in coming.
A January filing with the IMF revealed that, of the $2 billion generously
pledged by "Friends of Democratic Pakistan" in April 2009, exactly zero had
been disbursed and only $100 million was expected by the end of the fiscal year
in March 2010.
At the end of January, President Asif Ali Zardari also raised the issue of $1.3
billion in arrears in "Coalition Support Funds", the US subsidy covering
Pakistan's war on terror-related expenditure, with US Defense Secretary Robert
In a speech before Pakistan's National Defense University on February 13, US
ambassador Anne Patterson put America's spin on Pakistan's complaints, stating:
ultimate solution to Pakistan's current and future economic challenges does not
reside with the United States or with the international donor community. It
rests with you, the people of Pakistan. American taxpayers will not forever pay
for Pakistan's economic and social development.
Washington's actions to date, if and when it comes time to finance a pipeline
connecting Pakistan with Iran, Islamabad will probably find itself bereft of
any US financial support, possibly in difficulties with the IMF over its
deficits, and unable to attract funding by international or private investors.
As Pakistan's energy minister promised that the much-delayed final signing
would take place in Turkey before March 8, it became clear that the US was
quite willing to play hardball over Pakistan's energy shortage.
Dawn reported that, according to sources, "another reason for the delay was
that [the] Pakistani government had been unable to allocate proper financing
for this project and the US was not willing to give financial assistance in
Meanwhile, Asian News International reported: "According to sources, US Special
Envoy to Afghanistan and Pakistan Richard Holbrooke, during his meeting with
Petroleum Minister Syed Naveed Qamar, said Islamabad would have to abandon its
pipeline accord with Tehran in order to qualify for extensive American energy
assistance, especially for importing Liquefied Natural Gas (LNG) and
"Insiders said that in case Pakistan cancels its plan of importing gas from
Iran through pipeline, the US would help Islamabad import electricity from
Tajikistan through Afghanistan's Wakhan corridor."
With the departure of India from the IPI consortium and the imposition of
relentless US pressure, both Iran and Pakistan are feeling the lack of a
partner with international financial and diplomatic muscle.
Unsurprisingly, there is interest in China replacing India in the project.
On February 8, the Tehran Times ran the following story entitled "China May
Replace India in IPI Project":
Iranian Foreign Minister Manouchehr
Mottaki stated China might replace India in the proposed Iran-Pakistan-India
gas pipeline project very soon as India has been dithering over the deal.
So far, there has been no official Chinese acknowledgement of this feeler.
China, like India, relies on ocean shipments of Qatar LNG for the bulk of its
natural gas needs for sound economic reasons.
The questionable economics of the IP project as far as supply to China is
concerned may restrain Beijing's enthusiasm for pitching in and pre-empting New
Delhi on this project.
None of the near-term options appears inviting for China.
Potentially, China could build an LNG train at the port in Gwadar, near the
pipeline's point of entry into Pakistan, to ship its share by sea. But that
would mean an investment of hundreds of millions of dollars to transport and
liquefy gas it could get near the wellhead at South Pars as part of its CNPC
Or it could spend billions building a pipeline north through Pakistan and the
Khunjerab Pass to Kashgar in Xinjiang, and in the process solve the
unprecedented technical difficulty of constructing and operating a gas line
over the high passes of the Himalayas.
It may transpire that the most feasible option for China would be to defer any
natural gas-related investment until Beijing and Islamabad jointly complete the
planned rail link between Gwadar and Kashgar, and LNG shipments can become a
viable component of growing two-way mixed freight traffic between China's west
and the Arabian gulf.
From a geopolitical perspective, China is pursuing its confrontation with the
United States over Iran very cautiously. It will think twice before
antagonizing India and further isolating itself diplomatically at this juncture
by poaching the IP pipeline project.
Therefore, Iran may be unable to leverage its natural gas advantage into
pipeline links to Pakistan, India, and China for the time being. Instead, it
may have to settle for liquefaction near the wellhead, and continue to endure
the vulnerability of ocean shipment to sanctions and war.
Peter Lee writes on East and South Asian affairs and their intersection
with US foreign policy.