Costs & Benefits Analysis: Iran-Pakistan (IP) Gas Pipeline
Pakistan and Iran share a relationship that runs deeper than just mere diplomatic ties. Both countries have similar interests and goals in the region of Eurasia and both face the same issues in regards terrorism, drug mafias, human trafficking, terrorism and infiltration by extremist groups, and asylum-seekers (mainly from Afghanistan). Similarly, they both share the same religious and ethnic makeup to a decent extent, not to mention the military training drills that the armies of both countries conduct every year. It is safe to assume that due to these similarities and a deeper relationship that binds us through the thread of Islam, these countries would want to be good companions and look after each other’s mutual interests.
In just such an act of mutual cooperation, Iran and Pakistan signed a deal to construct a gas pipeline between the two countries. The preliminary agreement was signed in the year 1995 and included only Pakistan and Iran at first, however, Iran sought to include India as well and signed an agreement with the Indian government as well in the year 1999. This IP pipeline was later transformed into the IPI (Iran-Pakistan-India) pipeline and was called by some as the Peace Pipeline. After signing a nuclear deal with the United States in the year 2009, India drew out of the deal on the pretext of security issues in the two countries involved as well as bogus pricing issues after being pressured by the United States to lift its involvement from the trilateral agreement. Pakistan was also urged by the United States administration in January 2010 to cease its involvement in the IP pipeline and instead the US would assist Pakistan in the construction of a liquefied natural gas terminal as well as in importing electricity from Tajikistan through the Wakhan Corridor.
Regardless of this pressure, Pakistan signed a final agreement with the Iran government at a meeting in Ankara on 16th March 2010 and the project was underway. The Iranian company responsible for constructing the pipeline had already begun its work in constructing Iran’s side of the pipeline already and the government announced that it had completed its side of the work on July 2011. Now Iran launched the announcement that if the Pakistani administration did not complete their side of the pipeline by 2014, they would have to face a daily penalty of $1 million dollars to Iran until its completion. After this announcement, the Pakistan government stated that private investors had started to become doubtful and uninterested about the project and had started to pull their investments. It also stated that to fund this pipeline, the government may have to start imposing heavier taxes on consumers as well as require government-to-government arrangements with Iran, China, and Russia. The price for Pakistan’s side of the IP pipeline was estimated at around $1.5 billion dollars, out of which Iran agreed to pay $500 million dollars as a loan to Pakistan.
Now, amidst the growing energy shortage as well as a crisis of gas and petroleum in Pakistan, the country is seeking to restart this agreement and to fulfill its end of the deal but it is not without its share of logistical and diplomatic issues. Already, the construction of Pakistan’s side has been roughly 7 years overdue and Iran is looking to cash in on its penalty of a million dollars a day. Iranian authorities have threatened Pakistan with an $18 billion fine if the multi-billion-dollar gas pipeline project is not completed despite US sanctions. The Iranian administration has given Pakistan the deadline of February-March 20224 to build a portion of the pipeline in their territory or be faced with the cumulative fine amounting to $18 billion.
This puts Pakistan in a precarious position as it does not have any means to pay off the fine, having already amassed gargantuan loan-payments and a current-accounts-deficit that is leading the country to an almost default-like state. Couple this with the international consensus on Iran’s trade, we have Pakistan in between a rock and a hard place. With the trade embargo that was placed on Iran under the Trump administration as well as present trade sanctions, Washington seems to urge Pakistan away from engaging in the deal, however, Iranian officials seem to be keen on seeing this agreement go through. The American government did not seem very apprehensive on the recent oil deal that Pakistan’s foreign ministry signed with Russia over the provision of oil to the country, so it is a matter of international debate as to why there is a heavier restriction on trade with Iran specifically.
Apart from this, the construction faces various logistical issues such as lack of private investment, depleted government funds, an already defaulted position in terms of loans, and administrative issues. Pakistan has reiterated its commitment to carry out the project, but only if international sanctions against Tehran are lifted, however, the government of Iran can choose to go to international court to avail its accumulated penalty from Pakistan if the project is not completed by the issued deadline. There are alternatives to the IP gas pipeline though. Pipelines with Turkmenistan (which supplies a considerable amount to Russia and China through interstate pipelines) through Afghanistan could be an option but it would require much more logistical management. An energy deal with China to set up two nuclear reactors at Chashma seems favourable but it cannot deal with the overarching energy crisis that Pakistan faces. The $4 billion dollars offered by the US to Pakistan for expanding its energy sector through both building more smaller damns to generate power as well as to buff up the existing dam at Tarbela is also a feasible option.
Despite these alternatives, the IP Pipeline is Pakistan’s cheapest and most feasible option. It will not only help minimize natural gas shortage of 1,000 to 1,500 mcfd but will also meet the shortage of 5000 to 6000 MW electricity. The actual $3 billion cost of the pipeline would be cheaper compared to the $5.3 billion-dollar annual oil imports and would be a one-time investment for the most part. This pipeline would help open up job opportunities for people of Sindh and Balochistan as well. Iran has also proposed that it would build an electricity grid next to the pipeline that could sell energy at subsidized rates to India and China. Iran with the cooperation of Pakistan’s State Oil (PSO) will also invest four billion dollars to build an oil refinery at Gwadar Port having refining capacity of 400,000 barrels of oil per day. In the end, the decision lies on the heads of the state to either take the more feasible deal and finish building the pipeline with Iran or shake hands with the devil once more and face the consequences, just at a later date.