Mar 17 - 23, 2008

Showing a China card to New Delhi, Islamabad and Tehran are set to formally sign the Gas Sales Purchase Agreement (GSPA) on the US$7.4 billion Iran-Pakistan-India (IPI) gas pipeline project this month. China has shown interest in joining the strategic gas pipeline project and it has reportedly said it would import about 1 billion cubic feet a day from Pakistan if India opts out.

China is putting pressure that she wants to join the project, according to the Iranian Foreign Ministry spokesperson Syed Mohammad Ali Hosseini. In case, China joins the project and replaces India, the pipeline might pass through Gilgit in Pakistan's Northern Area and Chinese experts are expected to visit Pakistan to finalize the route of the pipeline. With the replacement of India by China, the IPI project will turn into an Iran-Pakistan-China (IPC) gas pipeline project. Is the new IPC gas pipeline project viable?

Though the Pakistan-India section of the agreement is not yet finalized, Islamabad is willing to sign a bilateral agreement with Iran and it has also welcomed China's participation in the project. Pakistan has already initiated work on the project and technical details are being worked out with Iran. Under the deal, Iran would supply 2.10 billion cubic feet of natural gas to Pakistan on daily basis for a period of 25 years with delivery point pressure of 798 PSI. The gas supply is expected to begin by September 2012. Pakistan wants implementation on the project within the stipulated time frame, as the supply-demand situation in the South Asian country will worsen further in the coming years. The country has witnessed unprecedented gas load-shedding/management in the beginning of this year not only for the industrial but also for domestic consumers. According to an estimate, Pakistan is expected to get $200 to $500 million annually in transit fees alone.

Last year, Economic Co-ordination Committee (ECC), Pakistan's highest economic decision-making body approved the construction of project on a 'segmented basis'. Under this approach Pakistan and Iran will construct their portion of the project. Islamabad will award contracts worth up to $3 billion to construct its portion of a pipeline to transport Iranian gas to India. The ECC had also approved gas-sharing with India and the gas-pricing mechanism at the Iran-Pakistan border under the IPI gas pipeline project. The gas at the Pakistan border has been indexed with Japan customs cleared crude (JCC). In practical terms, this gas will be priced much higher than the locally produced gas, which is also indexed with international oil prices. Currently, the average gas production price in Pakistan is $2.6 MMBTU.

The Iranian gas under the approved formula will translate into $3.67 per MMBTU when the JCC price is $40 per barrel of oil -- a rate least expected given current international prices. The gas price will be $4.3 per MMBTU at $50 per barrel and $4.93 per MMBTU at $60 per barrel. The gas rate at the Pakistan border will rise to $5.56 per MMBTU when crude prices reach $70 per barrel. The tariff will further rise to $6.56 per MMBTU and $7.06 in case oil prices increase to $80 and $90 per barrel, respectively.


Is there any possibility of Iran, Pakistan and China cooperation on a venture for transporting Iranian crude to China via Pakistan? Is IPC pipeline project viable?

Islamabad has already said that it has no objection to the Chinese proposal of transporting gas from Iran to China through its land. Strategically located between the region with largest energy reserves of the world like central Asia and the countries with highest energy consumption like India and China, Pakistan is in a position to ensure energy security in the region by developing an efficient energy market and the cross border trade of energy.

China and Pakistan are already working on a proposal for laying a trans-Himalayan pipeline to carry Middle Eastern crude to western China. The route over the Himalayas would be an expensive and challenging engineering feat, and once the oil reached China it would have to be shipped thousands of kilometers further east to coastal areas, where most energy demand is centered. The pipeline would go in tandem with Karakoram highway. The proposed pipeline would link Gwadar port with China's remote western regions, and it would be partly financed by Beijing. The Chinese are also building a refinery at the Gwadar port, from where the pipeline would originate. It would allow Beijing to reduce the portion of its oil shipped through the narrow and unsafe strait of Malacca carrying up to 80pc of its oil imports. The two countries are currently repairing the Karakoram Highway, which connects Pakistan to China; following one of the ancient silk routes along the Indus. Chinese authorities are ready to lay a pipeline along this highway to transfer Iran's gas through Pakistan. Islamabad also plans to extend a railway track to China to connect it to the Gwadar port on the Balochistan coast.

Pakistan's Inter State Gas Distribution Company (ISGDC) has already floated a proposal for laying IPI gas pipeline project. Under the plan, Iran would build the pipelines from its Pars Gas Field to Jiwani in Balochistan (near Pakistan's border), while Pakistan would lay the pipelines from its side up to Jiwani. This would greatly save the cost of the proposed Iran-Pakistan gas pipeline project by $1 billion. Jiwani is a coastal town along southwest coast of Pakistan near Gwadar. The new port of Gwadar in southwestern Pakistani province of Balochistan is expected to serve as secure outlet for the Middle East, Central Asia and Iran oil and gas supplies through a well defined corridor passing through Pakistan. Gwadar is considered the terminus of all the proposed multi billion dollar gas pipelines reaching either from Daulatabad's fields in Turkmenistan, South Pars fields in Iran or from Qatar. From Gwadar, where China is developing an oil city, the gas would then go onto the world markets.

The Xinjiang is only 2,500 kms from Gwadar port in Balochistan. Pakistan provides China a viable and the shortest possible option to import oil from any of Gulf countries through its coastal town of Gwadar. During his visit to China in 2006, President General Musharraf had offered a 'trade corridor' to meet Beijing's energy requirements. Pakistan has already expressed its willingness to help China in constructing the strategic pipeline from Gwadar to its borders enabling it to import oil from Gulf countries.

While India maintains that only issues over the IPI pipeline project are pricing and its commercial viability, Pakistan accuses India of adopting delaying tactics in signing the landmark tripartite Gas Sales Purchase Agreement (GSPA), involving Iran, Pakistan and India. According to the official sources in Islamabad, Pakistan had offered India to hold talks for settling the issues of the transit fee for gas transportation on February 7 (last month) in Islamabad, but India neither declined nor accepted the offer. On the other hand, Iran has got tired of waiting for New Delhi to come to terms on the proposed IPI project and warned that China was eager to step in on the deal in India's place. Negotiations on the IPI gas pipeline began in 1994 but little progress has been made in last 10 years owing to volatile nature of ties between India and Pakistan.