Pakistan’s energy crisis and the pipeline politics
November 04, 2011
The severe energy crisis facing Pakistan today has had enormous negative impact on it economic development and political stability. The long power outages across the country have made it an issue of extreme volatility causing suffering in the daily life of Pakistani and putting Pakistan economic future in jeopardy.
Pakistan’s energy requirements are fast increasing and its economic growth and political stability are directly linked to the availability of adequate energy resources. Pakistan initiated negotiations with Iran in 1985 for construction of a natural gas pipeline linking Karachi with the southern gasfield. The agreement called “peace pipeline” was signed by the president of Iran and Pakistan in Turkey on 4th June 2009 after considerable delay and lengthy negotiations on price formula, security guarantee and transit royalties.
The situation is indeed dire for Pakistan. It is estimated that in the next four years, Pakistan’s gas production of 27 trillion cubic feet would not be enough for its needs. More than 60% of Sui gas has already been consumed. The import bill for oil is in excess of $13 billion. Pakistan’s oil reserves are 27 million barrels of which only 3% have been explored. In 2007, Pakistan consumed 45.4 million tonnes of oil equivalent (TOE) energy comprising 40.6% oil, 43.6% gas, 10.1% hydroelectric, 4.6% coal and 1.6% nuclear.
Since the 90s Pakistan has been trying to implement the proposed plan of laying the pipeline to import natural gas from Iran. But the international community, particularly the US, does not support the plan and hence Pakistan has always taken a cautious approach towards the issue. The talks that began in 1994 were finally concluded with the signing an agreement by the President of Iran, Turkey and Pakistan in Turkey in June 4, 2009. According the agreement, 20 million cubic meters gas will be imported per day from Iran under the IP gas pipeline project that will cost $7.5 billion. The 2,775 KM long pipeline is expected to be completed by 2016.
Despite the fact that the energy needs of Pakistan are desperate and immediate, the US ignoring this consideration has mounted strong pressure on Pakistan to abandon Iran pipeline accord. The American administration has assured Pakistan that it was well aware of the energy crisis confronting Pakistan and offered that if Pakistan foregoes the agreement providing gas import from Iran the US would help import electricity from Tajikistan through Afghanistan via Wakhan corridor. It would construct high voltage power transmission lines from Tajikistan to Pakistan.
The US has continued its pressure on the IPI and during her tour of Pakistan last week, US Secretary of State Hillary Clinton, without mincing any words, expressed American reservations about the Pakistan-Iran gas pipeline project. She said: “Iran is a very difficult, rather dangerous neighbour of all countries whose borders meet with it. Apparently, no p prediction can be made about the internal political and economic situation in Iran. So we think that if Pakistan’s energy needs can be fulfilled through alternative means, this can last long.”
The US’ determined opposition to IPI left no option for Pakistan but to accept TAPI project. Pakistan and Turkmenistan reached an accord on October 26 for the delivery of 1.3 billion cubic feet a day of gas at 69 per cent of crude oil parity price under the $7.6 billion Turkmenistan-Afghanistan-Pakistan-India (Tapi) pipeline project. The two sides agreed to formally sign a sales and purchase agreement in Ashkabad on Nov 15. The pipeline is expected to bring gas to Pakistan by December 2016, depending on a credible security apparatus in Afghanistan where it will provide 500mmcfd of gas.
Turkmenistan also offered to increase gas throughput to about two billion cubic feet a day if the two sides agreed on transporting about 700 million cubic feet a day (mmcfd) to Gwadar port for eventual sale or export as liquefied natural gas (LNG). The 1,640 km project envisages bringing 3.2 billion cubic feet of natural gas per day from Turkmenistan’s Daulatabad fields to Afghanistan, Pakistan and India. Pakistan expects to get about 2 BCFD. The project came into limelight when Pakistan and Turkmenistan signed a memorandum of understanding in March 1995. An Argentinean energy firm, Bridas Corporation, was the main sponsor. The US-based Unocal and Saudi Delta Corporation offered themselves as an alternative consortium and constituted a new firm, Centgas Consortium. But it gave up the project in 1998 after attacks on US embassies in Africa.
The talks were revived in December 2002 when heads of Turkmenistan, Afghanistan and Pakistan signed a fresh MoU and allowed the Asian Development Bank to sponsor a feasibility study. Conducted through the British Penspen, the ADB submitted the feasibility study. The United States also supported the project as an alternative to the Iranian gas pipeline. In April 2008, Pakistan, India and Afghanistan signed a framework agreement. The inter-governmental agreement was signed in December last year in Ashkabad. The price negotiations had till now lingering between Pakistan and Turkmenistan.
Under the price review mechanism inbuilt in the Pak-Iran GSPA, the pipeline gas price has to be renegotiated on the basis of alternative fuel prices (Turkmen gas in this case) a year before the commencement of the gas deliveries scheduled by Dec 31, 2014. “The final price that Pakistan secured after negotiations comes to about 69 per cent of brent crude parity price at Pak-Afghan border inclusive of transit cost.” The transit cost comes to about 8 per cent of gas price.
The deal would help to open up a price accord Pakistan had signed with Iran in June 2009 for delivery of 750 million cubic feet per day (mmcfd) at about 78 per cent of crude price. Islamabad expects to save another $6 billion from an expected price reduction, over the project life, if Tehran agrees to match the Turkmen gas price. The price opening with Iran could also provide an opportunity to Pakistan to walk away from the agreement without paying penalties in the event of enhanced UN sanctions against Tehran if gas prices were not reduced. The IPI has obviously fallen victim to geo politics and Pakistan has caved in, having little choice.
The current developments make the project of importing natural gas from Iran doubtful despite optimistic statements from Iran about completing the project at the earliest. The Iranian foreign minister had told Prime Minister Yusuf Raza Gilani in September that the Iranian part of the Iran-Pakistan gas pipeline would be completed by the middle of next year while PM Gilani had also emphasised the early completion of the gas pipeline project and the import of 1,000 MW electricity from Iran.
During his visit to Pakistan in September, Iranian Foreign Minister Ali Akbar Saleh said Iran was ready to lay the pipeline in Pakistani territory and that Iran could even start exporting electricity immediately if it could be connected with the grid system of Pakistan. Iran has offered to supply 10,000 MW electricity to Pakistan to overcome the current power shortage. At present, Pakistan is importing 35 MW electricity from Iran for Gwadar and plans are also under way to increase it to 100 MW.