Bleak future awaits mega Iran-Pakistan gas project
March 23, 2012
With the increasing isolation of Iran in the backdrop of growing American pressure the prospects of much awaited mega gas pipeline project have dimmed as major financier has opted out of the project. Though, the government of Pakistan has reiterated its commitment to carry on the project but China’s recent decision has dented its efforts.
Last week China's largest bank backed out of a deal to finance the gas pipeline project, a sign of the lengthening reach of U.S. economic sanctions on Iran. Industrial and Commercial Bank of China had withdrawn from plans to head a consortium that would finance $1.6-billion Pakistani portion of the cross-border pipeline. The move shows that even Chinese companies, which have staunchly opposed American efforts to punish Iran for its nuclear program, are beginning to bend to the sanctions on Tehran. China is Iran’s biggest export partner.
China's decision is a setback for the government of Pakistani, which fears that acute energy shortages could lead to civil unrest as well as economic strain. Pakistan says it would press ahead with the project and find replacement financing. However the government will have to take some bold steps to come out of US pressure.
Pakistan faces dire energy shortages which have badly impact national economy. The country has suffered huge financial losses in terms of exports and employment which resulted in country wide riots. But so far no practical steps have been taken to materialize the import of gas from Iran or any other country. The Iranians are ready to supply gas but Pakistani side has not done basic work but lip services.
Apart from American pressure troublesome situation in Baluchistan is also one of the deterrents that has forced the concerned authorities to consider alternative routes for the project. The authorities are contemplating to bring the gas via sea rather than land route.
Pakistan, considering the benefits of the project on April 08,2009 had cleared project to enter into GSPA with Iran. The Iran plans to pump 750 MMcfd gas from its Pars filed which would cover distance of 1150 kilometer up to Iran-Pakistan border. Approximately the distance of Pakistani segment is 787 km and would cost around $ 1.2 to 1.7 billion, according to initial estimates.
Both country have signed agreement necessary for the project including sovereign guarantee on May 28, 2010 and IP Gas Sales Purchase Agreement GSPA effective date confirmation letter on June 13, 2010. according to GSPA the first flow of gas was scheduled to be on December 2015.
The project is planned to be completed in two stages. In first stage starting from June 2010 to August 2011 route reconnaissance, bankable feasibility study, detailed route survey, Social and environmental impact assessment and front end engineering design was to be completed. Appointment of financial advisor, land acquisition, construction and commission and testing is scheduled to take place in May 2014 to February 2015.
The estimated capital cost of project was $1245 million incurred in 4 years. The project was to be funded at 70:30 debt to equity ratio. The required equity investment would be $373 million while $872 million would be debt, to be secured from domestic and international financiers such as multilateral financial institutions, banks and other financial institutions. The public sector would share equity of 51 percent or $190 million in the project and would be funded through investments from public sector institutions including National Bank, EOBI, SNGPL and SSGC etc. provincial governments of Baluchistan and Sindh will also contribute to the project.
The remaining 49 percent or $183 million of equity financing is expected to be done by private local and international investors. Initially government hoped that the Malaysian state-run Petronas, Russia’s and world’s largest extractor of natural gas Gazprom, China Petroleum Engineering & Construction Corporation (CPECC) and Jeddah based Saudi Arabian Xenel will also participate in the financing of the IP project but so far nothing has been materialized.
Pakistan desperately needs energy and the IP project is will is the answer to country’s problems as less expensive and environment friendly fuel will be available to the public. Implementation of IP would also develop secondary augmentation projects to supply gas from locations to markets. Power and fertilizer industry would benefit from the imported gas and would contribute to the growth of domestic economy.
Major benefit expected from IP project is the creation of jobs directly or indirectly through sub-contracts for suppliers and transporters. The less developed areas of country particularly Baluchistan and Sindh will also benefit in term of social infrastructure development.
USA is pressurizing Pakistan to quit the gas pipeline project but it is not ready to support Pakistan in its endeavors to meet energy needs. USA facilitated India with nuclear power project but threatening Pakistan with sanction. In his situation Pakistan is left with only option to press ahead with the project or face dire economic consequence.