SAUDI'S ALTERNATIVE TO IP GAS PROJECT

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Apr 30 - May 6, 20
12

Saudi Arabia has offered energy-deficient Pakistan the alternative options to cope with the energy crisis in a move to make the country abandon the Iran-Pakistan (IP) gas pipeline project after Russia agreed to extend financial and technical aid to Pakistan for the $1.5 billion gas pipeline.

A "special message" about IP gas pipeline project from the Saudi monarch was delivered by the visiting Saudi Deputy Foreign Minister Prince Abdul Aziz bin Abdullah bin Abdul Aziz to Pakistan in his one-to-one meeting with Prime Minister Yousuf Raza Gilani in Islamabad this month.

The Saudi message comes at a time when the country expedites its efforts to strike a government-to-government deal on financing its portion of pipeline with Moscow and Beijing, despite stiff opposition to the project by the US. Saudi Arabia is believed to have offered a loan and oil facility to bail the South Asian country out of its financial and energy crises.

The Saudi offer is expected to be discussed at a Pakistan-Saudi joint ministerial meeting, which is currently being planned. Some local analysts believe that Islamabad could backtrack from the pipeline deal with Iran under the pressure from Saudi Arabia, the country's long-standing friend that helped it on many occasions. The country could not afford to go ahead with a project simultaneously being opposed by the US and Saudi Arabia.

The Saudi deputy foreign minister's visit took place against the backdrop of an intensifying cold war between Tehran and Riyadh over Syria crisis. Iran and Saudi Arabia have a history of mistrust, posing a serious challenge for Pakistan to maintain a delicate balance in its bilateral relations with them.

The essence of a message conveyed by Saudi Deputy Foreign Minister to Islamabad was that the 'Saudi Arabia looks askance at Pakistan's commitment to pursue energy cooperation with Iran and is nudging the government to reconsider its decision,' a local newspaper reported, citing Arab diplomatic sources based in Islamabad. Riyadh offered an 'alternative package' to meet Islamabad's growing energy needs in an effort to persuade it to abandon the Iran gas pipeline and electricity/oil import deals.

Pakistan foreign office however denied any pressure from Riyadh on the pipeline project with Iran. "I can tell you that there is no pressure from Saudi Arabia on the IP gas pipeline project," foreign office spokesperson Abdul Basit told the media reacting to reports that the visiting Saudi deputy foreign minister delivered an important message on IP pipeline project. He said, "Iran is also a brotherly country and there are no linkages between our relations with Saudi Arabia and our relations with Iran."

Pakistan is looking to increase its fuel imports from Iran to reduce power shortages that have crippled the country's industry and held back its economic growth. The IP pipeline, which will initially transfer 30 million cubic meters of gas per day, can bail the country out of the acute energy crisis. Talks between Russian and Pakistani officials were held during a visit to Moscow by a Pakistani delegation earlier this month.

Pakistani officials gave a presentation on IP pipeline project to Russian authorities, which are expected to respond formally towards the end of this month.

The Pakistani delegation visited Moscow after the sub-committee formed by the Economic Coordination Committee (ECC) of the cabinet in its meeting on March 13 decided to negotiate a deal on IP pipeline project with Russia.

Pakistan is however likely to accept only technical assistance instead of financial aid from Russia amid growing US pressure on Islamabad to shelve the project.

Moscow offered Islamabad to finance the pipeline project if its energy giant Gazprom was awarded the contract without bidding during a visit of Foreign Minister Hina Rabbani Khar to Moscow in February.

The country will have to waive Public Procurement Regulatory Authority (PPRA) rules if it decides to award the contract for laying pipeline in its territory to Gazprom.

The analysts believe that Islamabad could go ahead with the IP project if it strikes a government-to-government deal with Russia against the increasing pressure from the US, which has threatened the country that a gas pipeline project with Iran could cost dearly to its already shaky economy.

The country is pressing ahead with the project even after the Industrial and Commercial Bank of China (ICBC) refused to sign a contract for financial advisory services to raise funds for the pipeline apparently due to US pressure. The petroleum ministry on March 13 informed the ECC of the Cabinet headed by Finance Minister Hafeez Shaikh that the Chinese bank refused to sign the financial advisor contract despite being the lowest bidder. The Financial Advisor contract was signed by the Pakistani authorities on January 6, 2012 with other parties of first consortium including Habib Bank Limited (HBL) and Ernst & Young Ford Rhodes Sidat Hyder except the ICBC.

Financial Advisor comprising ICBC and HBL was appointed after international competitive bidding backtracked due to an adverse geopolitical situation.

The financing has come as the key issue, which could cause an overall delay in completion of the IP project. After withdrawal of a consortium led by ICBC, the second consortium led by Pakistan's United Bank Limited (UBL) is likely to back out of the IP gas pipeline project. The second consortium comprises UBL, Burj Capital Pakistan (Pvt.) Limited, ECO Trade Development Bank Limited, Fieldstone Group and Islamic Corporation for the Development of the Private Sector.

Islamabad has even decided to go ahead with the project even if Russia and China do not provide funds. The country needs $1.5 billion to lay the pipeline on its side of the border and for the connectivity network.

The country is left with at least two financing options to build IP pipeline after the Chinese bank backed off from financing the project. First, the government could set up separate accounts in Pakistani banks to collect a gas development cess levied to build the pipeline. Second, it may approach the China, Russia, or Iran for signing government-to-government contract for construction of the pipeline in its territory from the Iranian border. Iran has already offered $250million assistance to build the pipeline.