The pipeline fron Iran
A look at complex politics around the project that is otherwise a win-win for all involved
DR. HASAN ASKARI RIZVI
The Iran-Pakistan (IP) gas pipeline Project makes economic sense both for Iran and Pakistan. However, economic arrangements among the nations cannot be pursued without taking into account the political environment. Iran and Pakistan have expressed their determination from
time to time to complete the IP gas pipeline project but there is little hope of its completion in the near future. In March 2010, Iran and Pakistan signed an agreement in Ankara, Turkey, to complete the Pipeline Project by the end of 2014. Both sides have reiterated their commitment to meet the deadline but the prospects appear dim in April 2012 for the flow of gas from Iran to Pakistan by the agreed deadline.
The delay in the implementation of the IP pipeline project can be attributed to a number of bilateral, regional and global factors.
It was in 1994 that Iran and Pakistan began to entertain the idea of a trans-border gas pipeline. The initial agreement to pursue this matter was signed in 1995. Four years later, Iran approached India to join this project so that the pipeline was extended to India. The government of India showed interest in the beginning but its interest waned quickly.
Initially India became less active in the project or raised some objections. In 2009, it decided to withdraw.
The Iranian government was disappointed by India’s decision because the extension of the pipeline to India would have increased Iran’s economic dividends. Iran and Pakistan toyed with the idea of including China (Xinjiang region) but this was not viewed as a practical option at that stage. Iran and Pakistan decided to work on it as a bilateral project.
The delay in the construction of the pipeline has increased its cost and raised doubts if Iran and Pakistan will succeed in completing it. The increased cost has added to the problem of resource mobilization for Pakistan because the laying of the pipeline in Pakistani territory is its responsibility. In March 2012, Pakistan’s official circles estimated the cost of construction of 800 Kilometer pipeline in Pakistani territory to be around 1.5 billion dollars.
Iran is using its own resources to set up pipeline in its territory; a large part of the work has been completed. Pakistan is seeking external financial support for laying the pipeline; it lacks domestic financial resources to complete its part of the pipeline. This has delayed the project on the Pakistani side where only paper planning has been completed and it is expected that NESPAK and a Chinese company would complete the route survey by June 2012. This would make it possible to call for bids for construction of the pipeline.
The following factors have caused the delay in the IP pipeline project:
Bilateral
Iran and Pakistan have generally maintained close and cordial relations but strains have emerged in their relations from time to time that slow down bilateral interaction. Pakistan and Iran diverged in their policy towards the Taliban in Afghanistan during 1996-2001. Whereas Pakistan supported the Taliban movement and their government in Kabul, Iran had strong reservations about the Taliban movement. It was perturbed by the capture of Kabul by the Taliban in September 1996 because, given the Saudi support to the Taliban, the Iranian leadership thought that the capture of Kabul by Taliban enjoyed the blessings of the United States. It supported the Northern Alliance by providing funds and weapons. The Taliban closed down Iranian embassy in Kabul in June 1997, and when they temporarily captured Mazar-i-Sharif in 1998, Iranian diplomats based there were killed.
Iran reacted sharply by moving its troops to the Afghanistan border that brought Iran and the Taliban regime in Kabul close to war. Iran criticized Pakistani support to the Taliban and blamed it for the deaths of its diplomats. This was in the backdrop of sectarian killings in Pakistan in the 1990s, including the killings of some Iranian nationals in Pakistan.
All this built strains in the Iran-Pakistan relations in the late 1990s. The IP Pipeline Project was pushed to the background. After September 2001, Pakistan’s attention was focused on terrorism related issues and Iran manifested ambiguity towards the political changes in Afghanistan after the U.S. attack in October-November 2001. It took Pakistan and Iran a couple of years to refocus on the pipeline issue.
Another issue that delayed the project was the pricing issue. Initially, Iran demanded a higher price for gas than what Pakistan had offered. It took almost one year to come to an agreed pricing formula.
Regional
The India factor has also contributed to delaying the project. It had two dimensions: India’s distrust of Pakistan and its growing relationship with the U.S., especially the civilian nuclear deal between India and the U.S.
Iran was keen to bring India into the pipeline project because this could make the project more profitable for Iran. This would have also yielded some financial gains for Pakistan in the shape of some transit fee and additional jobs for Pakistanis. India agreed to join the project to meet its growing energy needs. However, some elements in India’s official circles and a section of public opinion objected to it because the pipeline was to pass through Pakistan. They thought that the pipeline made India dependent on Pakistan’s goodwill because Pakistan could disrupt the gas supply in a situation of intense tension or conflict between the two countries. Many meetings were held between the officials of three countries but the Indian government was not satisfied with the assurances for uninterrupted supply of gas. Some of them suggested that India should seek an Iranian pipeline through the sea.
While India was exploring the Iranian option, it got new economic and security openings with the U.S. In July 2005, India and the U.S. entered into civilian nuclear technology transfer agreement which provided that the U.S. will help build India’s civilian nuclear programme mainly for power generation. It took another three years to go through the legal and constitutional requirements on both sides to make this agreement ready for implementation.
Indian interest waned in the IP Pipeline Project as the American offer was a better option and it opened new opportunities for Indo-U.S. cooperation. In 2009, India dropped out of the pipeline project. Iran and Pakistan decided to continue with the project and agreed to keep the option open for others to join later.
Global
The pipeline project got entangled in the U.S.-Iran wrangling on Iran’s nuclear programme. The United Nations Security Council has imposed four sets of sanctions against Iran during 2006-2011. These are limited sanctions and focus some Iranian officials and nuclear related organizations and institutions. These sanctions limit some categories of trade but do not directly affect the common people.
More problematic are the sanctions imposed by the U.S. Recently, the EU has also approved some sanctions which will become effective gradually. These sanctions adversely affect Iran’s trade and economic ties with these countries.
Pakistan does not have to observe the sanctions imposed by the U.S. and the EU. Further, these sanctions do not specifically cover gas related transactions. However, Pakistan faces two kinds of problems.
First, the U.S. has made it clear to Pakistan that it is opposed to its gas pipeline project and that it would like Pakistan to think of the alternative ways to make up for energy deficiency. Given Pakistan’s economic reliance on the U.S. and international financial institutions, it feels American pressure on the pipeline issue, although Pakistan’s leaders have reiterated their determination to go ahead with the pipeline project.
Second, under the provision of U.S laws, American or other multinational corporation or business group engaged in business in the U.S. or with the U.S. cannot pursue economic or business relations with Iran. If they do so, the U.S. can take action with reference to their business activity in or with the U.S.
This law deters all those international groups and companies to enter into an arrangement with Pakistan for building the pipeline in Pakistani territory for the IP gas project. Pakistan also faces the problem of raising funds for this project at the international level.
The U.S. favours an alternate gas pipeline from Turkmenistan to Afghanistan, Pakistan and India, often labeled as the TAPI gas pipeline. It is willing to help secure funds for its construction. The Asian Development Bank has shown interest in this project.
This is not a new project. It was floated in the late 1990s and Pakistan agreed to be part of it. However, it was shelved because of the troubled situation in Afghanistan during and after the Taliban period. Even now the situation in Afghanistan is uncertain and most analysts are of the view that Afghanistan will experience internal strife after the withdrawal of U.S./NATO troops from there by the end of 2014.
Despite the uncertain future of the TAPI pipeline, Pakistan continues to express interest in this project. However, no initial work has been done on this project and it is not clear if this can materialize if Afghanistan does not settle down.
Current Dynamics
Pakistan was hopeful that a consortium led by China’s Industrial and Commercial Bank would provide financial support to the IP Pipeline Project. In March 2012, this arrangement collapsed because the Chinese bank declined to pursue it, ostensibly in view of the U.S. opposition.
Now, the government of Pakistan is seeking other options within and outside of Pakistan for obtaining funds for the project. Pakistan can approach the Chinese and Russian governments for financial support.
Pakistan and Russia had discussed this project during the visit of Pakistan’s Foreign Minister, Hina Rabbani Khar, to Moscow in February 2012. Russia had shown interest in it. Now, after losing the offer from the Chinese banking consortium, Pakistan is expected to explore the Russian option.
The Russian government wants that its energy company, Gazprom, should be given the contract for constructing the pipeline “without bidding.” If the terms and conditions for financing the pipeline are acceptable, Pakistan may have to change the procedure and award the project without opting for international bidding competition.
If Russia’s Gazprom joins this project, this will be a major Russian contribution to Pakistan’s economy after the construction of the steel mill by the then Soviet Union. It could also contribute building positive and active relations between Pakistan and Russia.
If Pakistan’s faltering economy is to be salvaged, the energy crisis has to be addressed on a fast track. In addition to working on this project, Pakistan needs to explore other sources of energy and work towards efficient management of electricity production and distribution from the existing sources, including the issue of circular debt.
The IP pipeline project has a lot of potential but Pakistan will have to address the fallout of regional and global politics. This project can materialize by the deadline of 2014 only if Pakistan assigns priority to constructing pipeline and employs dynamic and down-to-earth diplomacy to mobilize resources and technical know-how from abroad.
The IP pipeline project can become irrelevant if the U.S. or Israel resort to military adventurism to destroy Iran’s nuclear programme. This will destabilize the region and the pipeline project will be totally forgotten, at least for a couple of years. The world will face an acute energy crisis. The developing countries like Pakistan that are already energy starved will face the worst ever economic crisis. The issues and dynamics of international and regional politics will change altogether.
The writer is a senior academic and political analyst.