June 7 - 13, 2010

Pakistan and Iran recently reached a final deal after 17 years to kick off physical work on the Iran-Pakistan (IP) gas pipeline, a project which has strongly been opposed by the United States. The two countries signed sovereign guarantee agreement on May 28 in Islamabad for supply of gas from Iran through the $7.5 billion pipeline project to be completed by the end of 2014. The agreement is a final deal on the IP gas pipeline project that has made Gas Sales Purchase Agreement (GSPA), which was signed last year in June in Istanbul, effective. The two countries in March signed the Head of Agreement (HoA) and Operational Agreement (OA), which was earlier, finalised and initialed by Pakistan's Inter State Gas System (ISGS) and National Iranian Oil Company (NIOC).

Pakistan's demand for gas, which is the primary fuel helping run the economy, has surged to 4,700 million cubic feet a day (mmcfd) against actual supply of 3,600 mmcfd. The analysts believe that it would not be possible for the government to provide Iranian imported gas to domestic as well as industrial consumers due to its high price, which was one of the reasons behind India's withdrawal from the pipeline project as it maintained that it would not be able to sell the gas at that price to domestic consumers.

The 'sovereign guarantee' agreement was signed in Islamabad by SR Kasaezadeh, Managing Director of the NIOC, and Irshad Kaleemi, Joint Secretary of the Ministry of Petroleum and Natural Resources. After taking the approval of the agreement from the NIOC's board, the Iranian authorities will conduct a survey and float a tender for contractor. The cost for the Pakistan section of the project is estimated at $1.65 billion, planned to be funded under public private partnership.

Kasaezadeh reportedly said that work on 900kms in Iranian territory had been completed whereas the work on 250kms had been left which would be completed soon. He hoped that the pipeline could be extended to other countries.

Under the GSPA, Iran agreed to export 750 mmcfd with a provision to increase it to one billion cubic feet a day (bcfd) at the rate equal to 78 per cent of crude oil for the next 25 years. The volume of imported gas, which will be about 20 per cent of Pakistan's current gas production, will be provided to the power sector to generate about 5,000 megawatts of electricity.

The Heads of Agreement (HoA) deal includes transporting gas through Pakistani territory to India if and when India decides to join the project. As per the HoA, Pakistan will have the right to charge transit fee in return for safe transit of Indian volume. HoA also addresses transportation tariff, which would be calculated in line with international practices.

As a part of the conditions precedents (CPs) to be completed by the parties to make the agreement effective, the government of Pakistan is providing a 'performance guarantee' on behalf of the Inter State Gas Company (ISGC). Since all other CPs of the agreement have been completed, the project is ready to enter the implementation phase.

Analysts see good reasons behind a steady and speedy progress on IP project, as Pakistan, the US frontline ally in war against Islamist extremism, is presently reeling under worst power crisis and Iran is facing opposition on its nuclear program from international community that wants crippling economic sanctions against Tehran. The US is opposed to large investments in any Iranian project because of Iran's dispute with the international community over its nuclear program.

The gas shortage has worsened the power crisis hampering industrial output and causing frequent electricity blackouts in the south Asian country. Pakistani officials have projected a gas shortfall of 10.34 bcfd by financial year 2015. The indigenous gas supply has been projected at 2.16 bcfd against the current gas supply of 4.3 bcfd. The demand for gas would stand at 12.5 bcfd by 2015. According to the official sources, about 48 per cent of thermal power generation is based on furnace oil, out of which about 62 per cent was imported at a cost of over $2 billion in 2007-08.

The country's demand for energy, according to one estimate, is expected to rise at the rate of 10-12 per cent annually in the foreseeable future, which means that if this rate of increase continues, demand for energy may well double before 2015.

Under the IP pipeline deal, Iran will initially transfer 30 million cubic meters of gas per day to Pakistan, but will eventually increase the transfer to 60 million cubic meters per day. Islamabad recently offered to provide India with security guarantees for the pipeline from the South Pars gas complex in Iran as an incentive to join the project.

Washington has already advised Islamabad to abandon IP pipeline project and seek other alternatives to meet the energy crisis.

"We have advised Pakistan to seek other alternatives," quoted Dawn in April Robert Blake, the US Assistant Secretary of State for South and Central Asian affairs as saying. "We do not think it is the right time for doing this kind of transaction (building IP pipeline) with Iran."

Critics say that Washington's advice to Islamabad not to proceed with IP pipeline project is unrealistic, as the country cannot go back on the Iran deal because of its chronic gas shortage for its own proven gas reserves are dwindling.

Pakistan Electric Power Company (Pepco) requires a gas supply of 976 mmcfd to operate its entire thermal system, whereas it is receiving only 275 mmcfd. The Pepco's shortfall has risen to 4,900MW, forcing the company to resort to additional hours of load-shedding, which has severely affected not only business and industrial activity but also the domestic consumers.

The country's natural gas reserves, which meet over 50 per cent of its energy requirement, have depleted rapidly in recent years with few hydrocarbon discoveries and decline in production from its largest Sui gas field in Balochistan.

Washington has not ruled out the idea of future cooperation in civilian nuclear field, but currently it is assisting Pakistan with power generation programmes in other fields.

Some analysts argue that in a tit-for-tat dialogue with Islamabad for a civilian nuclear deal, the US may ask Islamabad to abandon IP pipeline project, which is likely to be extended to China after India has withdrawn. Beijing has shown interest in building an Iran-Pakistan-China (IPC) pipeline that provides it a chance of getting a secure overland gas pipeline.