Will Iranian Gas Resolve Pakistan’s Energy Woes?

Posted on 09/8/13
By Mohammad Alamgir Khan | ViewsWeek
Photo by Harald Hoyer, Creative Commons License
Photo by Harald Hoyer, Creative Commons License

The inauguration of the 1.5 billion dollar Iran-Pakistan gas pipeline (IP) by the presidents of the two countries’ in March this year caused considerable political and diplomatic stir, which can be felt even today. In Pakistan, it was hailed as an affirmation of the country’s sovereignty and a panacea to its crippling energy starvation, while  Western powers viewed it detrimental to their efforts to isolate Iran. The ensuing debates  have acquired altogether different and irrelevant complexions.

Pakistani policymakers seem to have shown haste in breathing life into this nearly forgotten venture, overlooking some key issues. Many in Pakistan feel that Western response makes the powerful countries look indifferent to Pakistan’s energy predicament. Sanctions-hit Iran stands to gain in economic, diplomatic, and political terms, as and when the pipeline is commissioned.

The big question is, where does Pakistan stand in terms of real gains from this undertaking? Does the venture provide it with the desperately needed affordable sustained supply of natural gas for power generation, industrial, commercial, domestic, and transportation usage? What does the country gain diplomatically? Are there better alternatives available to Pakistan?

The purely commercial project was conceived in 2005 to bridge the demand and supply gap of natural gas in Pakistan and India at an acceptable economic, diplomatic, and political price. India buckled under US pressure and pulled out of the project in 2010. Islamabad, however, decided to go ahead with the project.

The 42-inch diameter 1,180 miles pipeline will transport 750 million cubic feet per day (mmcfd) Iranian gas  to Pakistan with an option to increase it to one billion cubic feet. The deal will be effective for 20 years with the option of a five-year extension. Iran has world’s second largest proven natural gas reserves after Russia, estimated at 29.6 trillion cubic meters.

The estimated price of gas imported through the pipeline would hover around 13 dollar per MMBTU for the Pakistani consumer, compared to the 3.50 dollar per MMBTU of the domestically produced gas. Above all despite all rosy plans, it may not achieve the intended results at the agreed price.

Unfair pricing mechanism

The logic behind Pakistani negotiators agreeing to linking the price of Iranian gas to the international oil prices is beyond comprehension, and is bound to make it more expensive in the coming months and years. The foreseen impact on domestic and industrial consumers is too obvious.

Funding for the project may also become complicated down the road. After  leading financiers of the project backed out of the project, due to American pressure, the Iranian government announced to provide US$ 500 million loan to Pakistan for completing the project on its side; the remaining financial arrangements are to be made by  Pakistan. Given the poor condition of Iranian economy due to international sanctions, its financial commitment to the project will always be risky. Iran twice defaulted on payments for wheat and rice imported from Ukraine and India respectively in February 2012.

Furthermore, the conditions attached to the loan promised to Pakistan also remain unclear. Pakistan’s economic stability is also shaky. The IMF’s approval of 6.7 billion dollar loan package to kick start its economy may not resolve Pakistan’s serious balance of payments problem, leaving its ability to come up with approximately US$ 900 million for the IP project in doubt. How will it impact the project is anybody’s guess at this stage.

American unease

The American unease with everything Iranian was very clearly expressed by the State Department spokesperson soon after inaugural ceremony of the project. Contrary to the State Department’s expectations, the barely veiled warnings to Pakistan, have achieved the opposite effect. The US attempt at coercing Pakistan, has distorted the context in which the matter should have been debated. The damaging shift in focus of the resulting discourse on the project can only be termed unfortunate. The perception generated by the American pressure, has only helped transform a debate pertaining to a purely commercial transaction, into an issue concerning attempted denial of Pakistan’s rights to make independent decisions as a sovereign nation with obvious results.

The perception was further reinforced by the Secretary of State John Kerry during his recent visit to Pakistan when he reportedly gave thumbs down to the project. The American disapproval came at a time when Pakistan was in final stages of negotiating yet another bailout package with the IMF and many feared the deal may not go through given Washington’s leverage with this IFI.

Zardari’s political stunt?

Some in Pakistan believe that President Asif Ali Zardari’s decision to inaugurate the construction work on the controversial project weeks before Pakistan’s landmark May 11 general elections was a political stunt to win over voters, disenchanted with his poor governance. Defying US has always remained popular in Pakistan and the timing of  Zaradri’s decision fueled these speculations, which might hold some ground as well. Whether it was a stunt or a national compulsion, the terms of deal with Iran did raise serious questions about Pakistani decision-makers ability to comprehend the economic and diplomatic fallout of the venture.

President Asif Ali Zardari
President Asif Ali Zardari

The likely impact of the project on Pakistan’s national economy, the emerging situation in Afghanistan and shaky relations with the US were either ignored or affirmation of the intent to go ahead with the project was used by Pakistan to convey larger message.

When viewed in tandem with Pakistan’s handing over of  Gawadar port operations to a Chinese company and the resolve to create Gwardar-Kashgar economic corridor both by Pakistan and China, the emerging picture conveys a message signaling a possible strategic shift in the power dynamics of the region.

Pakistan may well be conveying her annoyance to the Americans and Saudis who are cozying up to the Indians and to cut the prevailing American influence in the region to size. Should this be the case, the pipeline symbolizes something much bigger than being a mean of addressing Pakistan’s energy problems. The interest expressed by the Chinese to extend the pipeline to Kashgar in western China nearly confirms the message that Pakistan is attempting to deliver to the US.

Notwithstanding the merits of extending a transnational pipeline to the emerging superpower for Pakistanis, there are other means through which the country can express a shift in its strategic outlook, toying with solution to the nation’s critical problems to communicate intent is at best imprudent.

If the pro-pipeline lobby in Islamabad has really done some serious homework, to purposely coincide the commissioning of project with the US troops pull out from Afghanistan, then time available to complete the project has to be given serious consideration. The available time window of about 13 months is very small for commissioning the project, given the overall political, economic and security situation in Pakistan’s restive Balochistan province, the route of much of the pipeline on its side.

Even if the project is completed in time, defying international pressure, Pakistan should not discount the prospect of more damaging post-project completion economic squeezing. This aspect assumes added importance when the Western interests in this region become increasingly focused at cornering Iran into total economic isolation.

Happy Iranians and angry Saudis

While the project must have been a source of relief to the Iranians, it has only earned Pakistan the ire of a number of countries, to include the US, Saudi Arabia and other Gulf sheikdoms at a time when both Pakistan’s economy and events happening in the region clearly compel it to stay out of trouble.

Safeguarding the pipeline in Balochistan, where security environment is precarious, will be expensive and challenging and add to the price of already expensive gas. The frequent blowing up of gas supply lines from Sui-Dera Bugti areas in Balochistan despite permanent presence of law enforcement agencies, serves to highlight magnitude of the security challenge that will most likely be faced after the commissioning of the project. Gas from Sui field accounts for 26% of Pakistan’s total natural gas production.

Pakistan’s choice

What should Pakistan do to address her energy needs? Are there any alternatives available to fulfill its near and long term energy needs? If Pakistanis have to really buy and use the Iranian gas, then what should be done to make it economically and diplomatically viable?

Located close to Jhimpir town of Thatta district, about 60 miles northeast of Karachi, Zorlu Enerji Power Project is the first privately owned and financed wind power project in Pakistan. (Photo by Muzaffar Bukhari, Creative Commons License)
Located close to Jhimpir town of Thatta district, about 60 miles northeast of Karachi, Zorlu Enerji Power Project is the first privately owned and financed wind power project in Pakistan. (Photo by Muzaffar Bukhari, Creative Commons License)

Pakistan has more than one option to address its energy problems. The power outages, for most part, are not caused by shortage of its power generation potential. Pakistan has enough installed power generation capacity to cater to the electricity requirements even in the hottest summer season, when the demand peaks out.

The inability of the last government of President Asif Zardari’s Pakistan People’s Party to address the circular debt problem (the money Pakistan government owed to the independent power producers also known as IPPS) aggravated Pakistan’s energy shortages. The IPPs pulled the plug demanding of the government to pay their outstanding dues exceeding a whopping 870 billion Pakistani rupee {US$ 8.5 billion) in 2013 from 186 billion rupees (US $ 1.8Billion) in 2008}.

The new government of Prime Minister Nawaz Sharif did retire a significant chunk of the debt which was followed by considerable reduction in power outages, but lack of political will to take unpopular economic decisions like shifting of the cost burden to the consumers is again causing the menace of circular debt to resurface along with power outages.

Hydropower potential

To address the futuristic demands, the country needs to fully tap the hydropower potential of the Indus water system, one of the largest in  Asia. Being the cheapest method of power generation, the higher the percentage of the electricity generated by this method, lower the overall cost of energy. Pakistan needs to press ahead with installation of hydro power projects of all sizes, besides enhancing the potential of existing dams and hydroelectric powerhouses.

The site of $7 billion Bhasha dam in northern Pakistan. (Photo by Muhammad Hasnain, Creative Commons License)
The site of $7 billion Bhasha dam in northern Pakistan. (Photo by Muhammad Hasnain, Creative Commons License)

The strange inclination of Pakistani planners towards building only big dams and mega powerhouses has caused it to ignore small-scale hydro power projects, at its own peril. Alongside completing schemes such as Bhasha dam in the mountainous northern areas and Neelam-Jehlum hydropower project in Pakistan administered Kashmir, there is serious need to develop small scale hydel projects. Pakistan can and must steadily increase the percentage of hydropower in its power generation mix to keep the prices within affordable range and allow government to withdraw the power sector subsidies which are hurting the economy.  Most international financial institutions are willing to finance such projects.

Natural gas promise

Pakistan has not been able to ensure optimal tapping and utilization of its domestic natural gas resources. After a prolonged delay, spreading well over a decade in undertaking the exploration of a very promising prospect, Oil and Gas Development Company Limited (OGDCL), Pakistan’s state-owned gas exploration company,  discovered a sizable gas field at Zin in Baluchistan in January 2012, which is presently under development. Zin is located in turbulent Dera Bugti region where maintaining order and protecting the gas installations will be a challenge in the years to come.

Although some exploratory concessions have been awarded to certain oil companies, the efforts of successive governments seriously fell way behind meeting the requirement. Barring some exploratory surveys, Pakistan’s largest conventional gas reserves, with an estimated potential of 22 trillion Cubic Feet located in areas around Kohlu in Baluchistan, have not even been touched due to poor law and order situation in the area and vested interests.

In addition to having sizable conventional gas reserves, Pakistan ranks 17th in the world with an estimated 51 trillion cubic feet of ‘technically recoverable’ shale gas reserves. The country also possesses an estimated 35 trillion Cubic Feet (TCF) Tight gas reserves. Even with the enhanced prices that have to be paid to the operating companies for selling the ‘Tight’ gas, it is economically more feasible than imported Iranian gas.

Bad deal

It is estimated that Pakistani consumer will have to pay a maximum of $6.5 per MMBTU for the indigenous ‘Tight’ gas, as compared to over US$13 per MMBTU for Iranian gas. Many experts believe that the country is not even utilizing even 20 percent of its recoverable natural gas resources. With such vast domestic gas reservoirs at its command, importing natural gas at exorbitant prices and adverse diplomatic fallout belies common sense.

Pakistan possesses sixth largest coal reserves in the world. Although the 175 billion tons coal reserves in Thar (the desert region in southern Sindh province along border with India)  is not of premium quality, yet tailor-made thermal energy plants can be built to substitute the overly expensive natural gas fired plants in the long run.

Pakistan’s power generation potential from wind and solar resources is also promising and pretty well documented.  The Gharo – Keti Bander Wind Corridor in the coastal region of southern Sindh province, spreading approximately 40 miles along the coastline, has a potential to generate over 60,000 MW of electricity. Such potential is available in the mountainous northwest as well.

Neighboring India produces over 17,000 megawatts from wind farms while Pakistan hardly produces any.  The environmentally friendly ‘green’ solutions can be effectively used to come up with long term practical and cleaner means to satiate the country’s energy starvation.

Green solution

The ‘renewable energy’ solutions are currently costlier than the in-hand conventional methods. However, given the aggressive research and manifold increase in the global demand and production of the required equipment for generating ‘green’ energy, the prices of wind turbines, solar panels and other associated equipment are likely to drop significantly, making green energy cost effective in the long run.

Pakistan is a nuclear power; however, intriguingly the contribution of the nation’s scientific community in adding nuclear energy to the national power grid remains almost negligible.

With so much potential and so many options to choose from, Pakistan still remains mired in energy crisis. The solutions are well within the country’s reach and there is hardly a need to adopt short term controversial and expensive methods. For starters, the country needs to address the crippling circular debt problem confronting the power sector on permanent basis to enable full usage of the installed power generation capacity.

Although solution of this problem is easier said than done, yet it needs to be done on war footing. Prudence demands that before going to any foreign source for purchase of expensive natural gas, Pakistan very seriously needs to tap its un-explored indigenous natural gas potential. If Pakistani government still feels that it is in country’s interest to pursue the IP gas pipeline then the prices have to be seriously renegotiated with Iran, and Pakistan’s friends have to be convinced diplomatically before commencement of work on the venture.

Turkey, despite being a NATO member buys gas from Iran and there is no western power that minds it to the extent of threatening to slap sanctions on it. Why should Pakistan be singled out?  United States and other powers should also realize Pakistan’s energy problems and extend help to the country in overcoming them. The discriminatory treatment meted out to Pakistan makes the country look for alternates out of sheer compulsion.

Pakistan’s energy troubles have exacerbated over the last few years. The crippling power and natural gas shortages, have adversely affected its economy, causing mass public unrest and dissatisfaction. The impact of energy shortage on the day-to-day life of an ordinary Pakistani, is so severe that from a purely economic problem, it has morphed into socio-economic predicament.

Keeping in view its grave nature, the problem needs to be solved keeping in view the overall interest of the country and its people in a rational manner by the nation’s leadership. Pakistan’s leadership should take a fresh look at this project purely from standpoint of its economic and diplomatic interests and make decisions purely in the interest of the country and its people.

The writer is an Islamabad-based defense analyst.

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