Both President Asif Ali Zardari and his Prime Minister Yusuf Reza Gillani currently seem preoccupied with their neighbourhood. Zardari’s recent visits to some central Asia republics, followed by Gillani’s visit to Iran underscore a pro-active out-reach to the neighboring nations, presumably in search of energy, particularly gas.
Currently, Pakistan is seized with two major gas pipeline projects, both conceived in the early 1990s. One involves import of at least 750 mcfd (million cubic feet per day) of gas from Iran’s Pars gasfield to the southern Pakistan. The other envisages about 3.2 billion cubic feet of natural gas per day from a field near Daulatabad in Turkmenistan fields to Afghanistan, Pakistan and India through a 1,640 km pipeline (also called TAPI). Both are critical to the growing energy needs of south Asia, particularly of energy-deficient Pakistan and India, but progress on both seems hostage to multiple competing interests.
Old rivalry over the disputed Himalayan region of Kashmir and a contest for influence in neighboring Afghanistan hardly helps both south Asian neighbours to close ranks for a joint and mutually beneficial strategy on both projects.
Iran, on the other hand, has its own problems. Both Teheran and Washington are locked in a perennial acrimony that does not augur well for both Iran and Pakistan to mobilize funding for the project. India, on the other hand, has recently struck a bilateral price deal with Turkmenistan, thus upsetting Pakistan.
Until now, natural gas accounted for more than 43 percent of Pakistan’s total energy generation, but these supplies now seem to stagnate at around 4 billion cubic feet per day (bcfd), while the demand has risen to 6.5 bcfd, expected to rise to 8 bcfd in three years.
Iran and Pakistan remained engaged in talks over the project since early 1990s which lost warmth in the aftermath of a few significant gas discoveries in Sindh. The two sides later also roped in India in their talks as gas demand in Pakistan increased.
Pakistan and Iran signed the gas sale purchase agreement in June 2010. A segmented approach has been adopted for project, whereby both countries would be responsible for building and operating the pipeline transportation network in their respective territories. Around 62 percent of the Iranian natural gas reserves are located in non-associated fields, and have not been fully developed.
Major natural gas fields include South and North Pars, Tabnak, and Kangan. Pars in the south is Iran’s most significant gas field, estimated to have 450 TCF proven natural gas reserves. Pakistan’s efforts to meet gas shortages have not been successful in view of bureaucratic wrangling, manipulation and political inaction.
A plan envisaging import of 500MMCFD of liquefied natural gas (LNG) has been stymied by judicial disputes over changes in the bidding process.
The three nations kept on discussing the gas supply project for long, at times marred by differences over pricing mechanism and security concerns. As India signed a civil nuclear deal with the United States, Iran and Pakistan agreed to have Japanese Crude Cocktail formula under which price of gas delivered at Pak-Iran border would be around $9 per MMBTU (million British Thermal Unit) at a crude oil price of $90 a barrel. Compared with lower average domestic gas prices of about $3.5 per MMBTU, the imported gas would only be used for generating about 5000mw of electricity.
Iran’s dream of piping natural gas from its South Pars gasfields to Pakistan, however, may not come true at least until the end of 2014 because Pakistan, embroiled in an economic crisis and beset by an insecure political environment, is seeking a six-month grace period beyond Dec 31, 2014. If Iran invoked the penalty clause, Pakistan would have to cough up $200 million by December.
Islamabad desires an extension in the cut-off date to skip a penalty clause under which it is mandatory on Pakistan to start purchasing gas by the cut-off date or risk paying the price of stipulated amount of gas in penalty. While Iran has completed 80 percent of the construction work of the pipeline on its side, Pakistani part of project is mired in internal controversies. Under the agreement, 750 mmcfd of gas per day will be piped to Pakistan, which could be raised to the tune of 3.2 BCFD if the project was extended to China.
One of the reasons for the delay in technical studies related to route survey, the front-end engineering design etc. The Sui Southern and Sui Northern Gas Pipeline, (SSGCL) and (SNGPL), had offered to complete the physical survey of the pipeline in 8-10 months, but the petroleum ministry wanted to award the contract for survey and Front End Engineering Design (FEED) to a joint venture of the National Engineering Services of Pakistan and a local representative of ILF of Germany at a contract price of $55 million.
The completion of the route survey and FEED study, which should have been ready by the end of 2011, is a pre-requisite to hold an investors’ conference ahead of construction of 785 kilometer piece of the pipeline from the Iranian border to Nawabshah in Sindh at an estimated cost of up to 1.5 billion dollars.
Interestingly, the World Bank and the Asian Development Bank are interested in funding the project. Similarly, Russian and Chinese companies are also competing for their piece of the pie in the pipeline. Given Pakistan’s close ties with China, Islamabad may eventually award the engineering, procurement and construction (EPC) contract to Beijing.
This could also evoke China’s interest in extending the pipeline to its territory at a later stage. Pakistan, according to officials, would welcome both China and the Russian Gazprom participating in the project.
The 1,640 km TAPI project is proposed to bring 3.2 billion cubic feet of natural gas per day from Turkmenistan to Afghanistan, Pakistan and India. Out of this, Pakistan will get 1.365 billion cubic feet of gas per day, India 1.365 bfcd and Afghanistan 0.5 bcfd.
The project came into limelight when Pakistan and Turkmenistan signed a memorandum of understanding in March 1995, with Argentinean energy firm Bridas Corporation as the main sponsor. The US based UNOCAL and Saudi Delta Corporation offered themselves as alternative consortium and constituted a new firm, Centgas consortium. The attacks on US embassies in Dar es Salaam, Tanzania and Nairobi, Kenya some African countries in August 1998, prompted UNOCAL to pull out of the talks in 1998.
In December 2002 heads of Turkmenistan, Afghanistan and Pakistan signed a fresh memorandum of understanding, allowing the Asian Development Bank to sponsor a detailed feasibility study. Conducted through the British Penspen, the ADB submitted the feasibility study. The Banks is also ready to sponsor Pakistan’s equity in the TAPI project. The United States also supported the project as an alternative to the Iranian gas pipeline.
In April 2008, Pakistan, India and Afghanistan signed a framework agreement for purchasing gas from Turkmenistan, followed by an inter-governmental agreement in December 2010 in Ashgabat, the Turkmen capital.
India, meanwhile, struck a bilateral price deal with Turkmenistan, scuttling thereby Pakistan’s endeavours for a uniform gas price. Officials, however, are hopeful of resolving this issue collectively before end of the year.
As of now, the future of the two pipelines still seems to hang in balance. Yet, if all the stakeholders can close ranks, remove some of the major bilateral or trilateral frictions, the Iran-Pakistan (and potentially India) pipeline as well as the TAPI can indeed emerge as regional pipelines for peace and stability. The primary challenge for all the stakeholders, however, is how to decouple these commercial ventures from their competing political interests. One major challenge, for Pakistan at least, is how to neutralize Saudi Arabian and American opposition to the Iranian pipeline. Both dislike Iran getting into commercial deals with countries in the region, and this poses a challenge for Pakistan as to how to strike a balance between its relations with Washington and Riyadh and its quest for cheap energy from the next door neighbor.