Feb 09 - 15, 2009

Advisor to Prime Minister on Petroleum and Natural Resources, Dr. Asim Hussain told the Senate Committee in Islamabad last week that all issues regarding IPI Gas Pipeline Project have been settled with Iran.

According to proposed schedule of the Petroleum Ministry, Pakistan and Iran will sign the agreement within February-2009 and would award Engineering & Project Management. Contract by March, tendering and appointment of construction contract would be awarded in October and construction would start by December-2009, Dr. Asim revealed.

Pakistan has agreed to the fuel demand of Iran to link gas pipeline to 70% of the crude. Iran has agreed to pay penalty if it defaults in gas supply to Pakistan for any reason. The meeting was informed that Iran had first agreed to link the gas to 44% of crude. Later when price of crude fell in the international market, Iran revised it upward to 85%, then came down to 75% and finally agreed to 70% of crude oil prices as demanded by Pakistan.

More technical details of the proposed agreement between Pakistan and Iran were revealed by the Managing Director, Inter State Gas System, Syed Hassan Nawab while speaking Oil and Gas Forum in Islamabad on Saturday last. He said Iran will have to pay penalty if it defaults in gas supply to Pakistan under Iran-Pakistan-India (IPI) gas pipeline project. Briefing participants about the IPI gas pipeline project, Nawab said that draft of Gas Sales Purchase Agreement (GSPA) had the provision that Iran would pay penalty to Pakistan if it defaults in gas supply. He said that Pakistan will not sign deal with Iran to get gas from specific field as Pakistan would receive 90 million cubic meters gas daily from Iran. Iran has 170 billion cubic meters gas reserves and claims that it would extend it to 300 billion cubic meters in next 10 years.

He said that Pakistan has communicated to Iran about the gas price formula linking to 70 percent of crude oil price. He noted that now the prices between oil and gas had little difference in global market and therefore Iran wanted to link to 70 percent of crude oil price. Iranian gas will support us to generate 5000MW electricity per day and Pakistan Electric Power Company (PEPCO) had forecast that the country would require 11000 MW by 2020. Pakistan will have to pay $800 million at offer price by Iran if the crude oil price remains at $50 per barrel.

He said that the US sanctions against Iran would create problems to generate financing to carry out Iran-Pakistan-India (IPI) gas pipeline project. He said that commercial negotiations on projects like IPI should be held by commercial entities and concerned governments should support the negotiation process. Huge capital will involve in IPI project and the US sanctions against Iran could result in blocking the financing.

The security problem in Balochistan will also result in creating problems for IPI gas pipeline. About India stance on the project, he said that India might have stayed away from the project due to cost of gas that it would have to face. He said that India had the issue of transmitting gas on the borders either to Pak-Iran or Pak-India border. He said that Iran wanted to provide gas to India on Pak-India border and India is 1000-km away from Iran. Pakistan had accepted the Iranian demand and India would have to pay additional $2 % service charges for transportation and transit fee to Pakistan that might had caused India to be away from the project.

Petroleum Secretary Mehmood Saleem Mehmood said that government was committed to providing level playing field for the oil industry in Pakistan. He said that the government had recently increased margins of Oil Marketing Companies (OMCs) from 3.5 to 4 percent and dealers' margin 4 to 5 percent due to reduction in global oil prices. He said that Petroleum Policy 2009 is ready to be announced soon, in which the government would enhance the incentives for the oil and gas exploration companies to attract investors to expedite the exploration activities in Pakistan.

However, he said that the government is also receiving Petroleum Development Levy (PDL) from consumers. He said bidding process had been simplified in new petroleum policy to promote foreign direct investment in oil and gas sector. The government is working to introduce 10 percent blended ethanol motor gasoline that would secure around $11 billion import bill. Iran has committed 55,000 barrels per day crude oil to Pakistan on deferred payment for three months.

Government sources claim that the meeting between President Asif Ali Zardari and President Ahmedinijad on the side line of 63rd United Nations General Assembly Meeting in New York paved the way for the final agreement. The two leaders discussed bilateral relations with special focus on launching the gas pipeline project. They also agreed to promote trade between the two countries. "Pakistan registered a trade surplus with Iran- 66 million dollars exports to and 59 million dollars imports from Iran in the first three months of the current fiscal year.

The commercial AttachÈ at the Consulate General of Iran, Ahmad Fasihi recently stated that "the total trade volume will be increased to one billion dollars this year from last year's 420 million dollars after the signing of Preferential Trade Agreement (PTA) between the two brotherly countries". Both countries have reduced customs duty to 20 percent on 648 tradable Items which are included in, the list under PTA, However, even the target of a billion dollars, if achieved, would represent a very little percentage of the two countries' total trade.

If the IPI project is implemented, then there is little doubt that the relationship between the two countries would strengthen considerably with Iran not only becoming a major source of energy for our energy starved country but also as a means of earning valuable foreign currency from India.

India has periodically expressed reservations about relying on an energy supply route through Pakistan that it regards as a security risk. However, one would hope that through the continuation of the composite dialogue, a commitment made by President Zardari during his address to the joint sitting of Parliament, as well as their desire to meet their own rising energy requirements would lay to rest most of two reservations.

Of more concern to Pakistan with respect to the IPI, however, are America's reservations about his deal. The US wants to isolate Iran and has not minced words while telling Pakistan governments, past and present, not to go ahead with the deal. The US has been supporting Central Asia as an alternate energy source for Pakistan, though lack of security in Afghanistan has made these proposals difficult, if not downright impossible, to launch. With energy shortage assuming critical levels in Pakistan and with the US refusing to extend the same nuclear deal as given to India, it is doubtful if any Pakistani government would be able to resist public pressure to begin construction work on the IPI project.