Pakistan stung by Iran pipeline blow
By Syed Fazl-e-Haider
KARACHI - Iran has not only canceled a US$500 million loan promised to Pakistan last year to help fund its construction of pipeline to bring natural gas from Iran; it has also said it will demand compensation if Islamabad fails to build its side of the pipeline by the end of next year. The announcement came just days after Islamabad had agreed to speed up work on the US$7.5 billion project.
Reasons for Tehran's drastic and sudden u-turn decision could range from the dismal state of its own economy to understandings reached with the US last month on the future of its nuclear-development project. Complicating matters, Pakistan was reported last month to have built nuclear weapons for Saudi Arabia, Iran's arch-rival in the region, and that these were ready for shipping. Whatever the case, it turns the pipeline, once considered an energy lifeline for Pakistan's economy, into a liability for the cash-strapped South Asian country.
Iran's Deputy Oil Minister Ali Majedi, announcing the cancelation of the planned $500 million loan, said Tehran had no obligation to finance the Pakistani side of the pipeline project and warned that compensation would be demanded on failure to complete the
Pakistan end of the pipeline on schedule within the next 12 months.
"Pakistani officials were told in recent talks that, given the sanctions [on Iran], Iran is not able to finance construction of the pipeline [in Pakistan] and has no obligation to do so," Associated Press reported Majedi as saying. "If a contractor is chosen today and pipeline construction begins today, it will take four years to complete it. Should Pakistan fail to take gas by the end of next year, Iran will demand compensation under the terms of the contract."
The pipeline deal stipulates that Pakistan must construct its side of the pipeline by December 2014. If the country fails to meet this deadline, it will be liable to pay fines that could run into the millions of dollars per day. Islamabad has so far failed to secure the required funding for the IP pipeline due to the threat of sanctions from the US.
Iran's new stand on the pipeline has pushed Pakistan into a dilemma. There is a price the country will have to pay either way if it withdraws from the project or goes ahead. It will have to pay a penalty for abandoning the project, while it will have to arrange financing and face US sanctions in the event of starting work on the project. It will be hard for the country to arrange funds to pay the cost in either situation.
Iran's nuclear deal with Western nations rekindled hopes in Islamabad that it would be able to pursue the pipeline project, but the US has refused to exempt the project as a part of its sanctions against Iran. Islamabad took up the issue with US authorities at a meeting on the sidelines of the revised bilateral strategic dialogue in Washington last month. The US however was not convinced.
US State Department spokeswoman Jen Psaki, three days after the November 23 nuclear deal with Iran, said, "Our position on that [opposing the Iran-Pakistan pipeline] has not changed."
While the Iranian economy is in a mess, with a devalued currency, high inflation, and limited scope for exports, the nuclear deal reached last month with the US gives it access to $1.5 billion in revenue from trade in gold and precious metals, and will allow some $4.2 billion from energy sales to be transferred in installments if, and as, Iran fulfills its commitments, according to a White House fact sheet. Its scope for helping to fund the pipeline is therefore possibly greater now than prior to that deal.
US opposition to the pipeline is linked both to its sanction-regime against Iran and to Washington's determination to develop a gas pipeline from Turkmenistan through Afghanistan and on to South Asia, including Pakistan. It is also promoting the Central Asia South Asia Electricity Trade and Transmission Project (CASA-1000), which would allow Pakistan and Afghanistan to buy electricity from Tajikistan and Kyrgyzstan, pledging $15 million this month towards that.
Last week, Islamabad said it was pushing ahead with the much-delayed pipeline to Iran, a day after the Federal Minister for Petroleum and Natural Resources, Shahid Khaqan Abbasi, and Iranian oil officials decided during a meeting in Tehran to expedite work on the project. Pakistan's Ministry of Foreign Affairs declared that both sides had agreed to speed up work to finish construction of the pipeline.
Last month, Islamabad requested a $2 billion loan from Tehran to build its portion of pipeline on its territory. Iran has already laid the necessary 600 kilometers of pipeline on its side.
Last year, Washington pressed Islamabad to shelve the IP pipeline as a pre-condition to holding further talks on the possibilities of cooperation in the energy sector, but the US did not make any commitment to finance the proposed $13 billion Diamer Bhasha Dam project. Washington has also dangled Islamabad other energy carrots, including the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline and potential projects involving the importation of liquefied natural gas in efforts to convince the country to halt the IP pipeline.
The IP pipeline is considered vital to Pakistan's economy, as the country continues to face extreme power shortages and prolonged blackouts in rural and urban areas, severely restraining industrial growth. Under the pipeline deal, Iran would export 21.5 million cubic meters of gas per day to Pakistan from next year. Local experts however have warned that the high cost involved would itself cause severe damage to the local economy. The Islamabad-based Sustainable Development Policy Institute said in a recent report that the pipeline would be a "death sentence" for the country.
The report criticized Pakistani officials for blatantly ignoring the energy dynamics and pricing while agreeing to the pipeline deal with Tehran. The report raised serious doubts about how Pakistan could finance the at least $1.5 billion needed to construct the pipeline and whether it could go through with the project without facing US sanctions in place over Iran's nuclear program. It also urged the government to renegotiate its contract with Iran and uncouple the price of gas with the cost of oil.
Some local analysts suggest that the gas price may be renegotiated with Tehran, but that the government in Islamabad must not withdraw from the project under US pressure without securing a tit-for-tat deal with Washington. Pakistan may turn to Russia and China, which have shown interest in building and financing the pipeline through government-to-government cooperation.
The location of Pakistan provides a key to jump-starting strategic pipelines from both central Asia and the Middle East to supply energy to India and southeast Asia.
Syed Fazl-e-Haider (http://www.syedfazlehaider.com) is a development analyst in Pakistan. He is the author of many books, including The Economic Development of Balochistan (2004). He can be contacted at email@example.com.
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