Peace pipeline: between the three countries

Column by: Ashfaq Rehmani

Email: pasrurmedia@hotmail.com

Access to cheap energy has become essential to the functioning of modern economies.
However, the uneven distribution of energy supplies among countries and the critical
need for energy has led to significant vulnerabilities. Threats to individual person's and
national energy security include the political instability of several energy producing
countries, the manipulation of energy supplies, the competition over energy sources,
attacks on supply infrastructure, as well as accidents and natural disasters. It is also the
limited supplies of the most common forms of primary energy. Oil and Gas that changes
perceptions on this topic. The potential need to change our primary energy sources in the
foreseeable future is the crux of the energy security question, leading to higher prices,
more limited access to sources of energy, competitions and political troubles, which in
turn make the threat even larger.
The Iran-Pakistan-India (IPI) gas pipeline, once ratified, will be a building block towards
peace and stability in South Asia, and would enhance the magnitude of trade between the
three countries. But the pipeline is yet to see an agreement on prices: the prices proposed
by Iran are more than double of what Pakistan and India are willing to accept. India
wants to pay a fixed amount per unit delivered to its border, but Iran wants the cost to be
linked to the fluctuating international energy prices, saying the prices offered by Pakistan
and India is half of what it is looking for. Also the instability in Balochistan and barrier
politics played by America is major hindrances coming in the way of the project.
Trilateral talks are underway, and all three countries are sanguine about the prospects of
agreement. The project was conceptualized in 1989 by Rajendra K. Pachauri in
partnership with Ali Shams Ardekani, former Deputy Foreign Minister of Iran. Dr
Pachauri proposed the plan to both Iranian and Indian governments in 1990. The
Government of Iran responded positively to the proposal. At the annual conference of the
International Association of Energy Economics, 1990, Dr Ardekani backed Dr Pachauri's
proposal.
The Iran–Pakistan–India gas pipeline, also known as Peace pipeline, is a proposed 2,775-
kilometre (1,724 mi) pipeline to deliver natural gas from Iran to Pakistan and India.
Project is India is predicted to require 146 billion cubic meters (bcm) of gas per annum
by 2025, up from 33 bcm per annum. With a total length of 2,775 km and an estimated
cost of $7 billion (2006) the pipeline is bound to change the face of regional politics in
South Asia. The much talked about “pipeline of peace” brings with it multi-faceted
implications for gas hungry Pakistan and India, and also for Iran, home to world’s second
largest natural gas reserve.
The pipeline will be supplied from the South Pars field. The initial capacity of the
pipeline will be 22 bcm of natural gas per annum, which is expected to be raised later to
55 bcm. It is expected to cost US$7.5 billion. The construction is to start in 2009 and the
pipeline is expected to be completed in September 2012. India has agreed to give
Pakistan a transit fee of $200 million per year, which is equivalent to $0.60 per million
British thermal unit for allowing passage of the pipeline through that country
Pakistan and India are facing acute natural gas shortage due to the rising energy demand
in both countries. In 1995 Pakistan and Iran signed a preliminary agreement for the
construction of a natural gas pipeline linking Karachi with Iran’s South Pars natural gas
field. Iran later proposed an extension of the pipeline into India. Once underway, not only
would Pakistan benefit from Iranian natural gas exports, but Pakistani territory would be
used as a transit route to export natural gas to India.
The gas pipeline which is expected to be completed in 3-5 years will pump 60 million
standard cubic meters of gas everyday to Pakistan where gas processing is still below 1
trillion cubic feet a year, while energy starved India which currently produces half of the
natural gas it needs would receive 90 million standard cubic meters per day.
The pipeline is proposed to start from Asaluyeh, South Pars stretching over 1,100 km in
Iran itself before entering Pakistan and traveling through Khuzdar, with one section of it
going on to Karachi on the Arabian Sea cost, and the main section traveling on to Multan.
From Multan the pipeline travels to Delhi where it ends. This project offers great
opportunities to Pakistan, as the gas pipeline will also set the course for possible oil and
gas pipelines to China, as China in the past has expressed its willingness to bring oil and
gas via Pakistan.
After blessing India with a civil-nuclear deal recently, the US opposed the project
because of the financial and strategic benefits it would give to Iran, and prefers a pipeline
project, which supplies gas to India via Turkmenistan.
The Bush administration has been blowing hot and cold on the issue, but by now it seems
evident that Washington would not want the IPI project to materialize. Pakistan and India
on the other hand are pressing ahead with the talks, albeit the three countries have failed
to reach an agreement on prices. Earlier this August, Iran offered a price of $8 per million
British thermal units (MBTU) to Pakistan and India, which was double of what they were
willing to pay (about $4.25 per (MBTU). The initial pricing formula Iran had forwarded
hitherto linked the gas price to Brent Crude Oil with fixed escalating cost component (10
per cent of Brent Crude oil) of $1.2 per mBtu to the Pakistan-Iran border. The Iranian
formula did not prescribe a floor and ceiling for the gas price either. Pakistan rejected the
formula, to which India followed suit calling it “unacceptable”.
A UK-based consulting firm Gaffney Cline was appointed by the mutual consent of all
three countries to facilitate them in setting a new price mechanism to sort out the issue.
Albeit, Iran is one of the leading producers of gas in the world, it is in desperate need to
boost exports to stabilize the faltering economy, and South Asia serves as the perfect
market for this purpose. If the deal comes through Pakistan would also have the option of
exporting gas to the international market, or even siphon out gas for domestic purposes.
Pakistan whose demand for gas is expected to grow substantially in the next two decades
can earn as much as $500 million in royalties from transit fee for the gas and pipeline in
accordance to international standards, and save $200 million by purchasing cheaper gas
from this project.
Four major companies have expressed interest in constructing the IPI gas pipeline: BHP
(Australia), NIGC, Patrons (Malaysia) and Total (France). A consortium consisting of
Shell, British Gas, Patrons and an Iranian business group is presently negotiating on the
logistics of exporting gas from South Pars, Iran to Pakistan. Also involved is the Iran
National Gas company and the Gas Authority of India Limited The Sui Northern Gas
Company (SNGC) has also joined the big names showing interest in the tripartite gas
pipeline, and recently announced that it would lay down 800km of the pipeline, which
would have an estimated cost of $1.6-2 billion.
The government views the pipeline to be a pact with Iran, where India is an additional
member, and wants to go on with the project even if India does not join. This can be
connected to the hostile relationship the two countries have. But economic collaborations
such as these would certainly sow the seeds of mutual co-operation and alliance.
Both Benazir Bhutto and Nawaz Sharif’s governments halted the projects because of
reservations in the army on the type of impact this project would have on the regional
issues of Kashmir and the government’s position on bilateral trade with India. India on
the other hand accused Pakistan of funding and aiding ‘fundamentalists’ who were
disrupting supplies, and also believed that the pipeline placed Islamabad at a strategic
advantage where it can “shut off the tap” in times of crisis or conflict.
Nine years ago in a meeting with the then president of Iran, Mohammad Khatami in New
York in September 2000, and President Musharraf termed the development of the
pipeline and the country’s natural gas reserve as “the country’s economic salvation”
which will “break an age old dependence on cotton textiles as Pakistan’s main export
earners”.
Pakistan and Iran on Monday initiated technical talks on draft of the operational
agreement under the IP gas pipeline project.
“In the marathon six-hour long meeting, experts from both sides deliberated upon each
word and clause of the proposed operational agreement draft,” a reliable source, who was
part of the talks, told The News. He, however, refused to divulge any further details,
saying that talks would continue for another three days or so, adding that nothing was
final as yet and therefore could not be shared with the media.

The five-member Iranian team was led by Iran’s Director Gas Exports, while the six-
member Pakistan team was headed by Managing Director Inter State Gas System Hasan
Nawab. In the coming rounds of these negotiations, Pakistan and Iran will also hold talks
on Conditions Precedent (CPs), which are prerequisites before making the gas sales
purchase agreement effective that both Islamabad and Tehran have already signed in
Istanbul. Under the gas sales purchase deal, Pakistan is bound to submit some conditions
precedent before September 5, otherwise the deal could elapse. However, the date for
finalising the conditions precedent can be extended, one time only, through mutual
agreement. Under the CPs, Pakistan will have to submit a Performance Guarantee and a
Comfort Letter. Hasan Nawab, MD ISGS, who is the focal person on all issues pertaining
to IP gas pipeline when contacted said the experts of both the sides had discussed the
standards and codes of the engineering that would be utilised in constructing the IP gas
pipeline. “The standards and codes of the engineering would be the same for the whole IP
gas line.”
“Although the pipeline will be constructed under the segmented approach under which
Iran will construct the pipeline in its area and Pakistan will construct in its own area from
Iran border to Nawab Shah, but factually the pipeline will be the same from Paras field
(Iran) to Nawab Shah (Pakistan).”He said such meetings at operational level would
continue and that officials of both the countries would meet again after Eidul Fitr. On the
issue of comfort letter, the source said as per this letter, the government of Pakistan would
have to allow a third country to import gas through IP pipeline in the event of any such
country joining the project in the future. Such permission, however, will be subject to the
gas tariff and transit fee that would be worked out at that time’s best practices.