Iran-Pakistan gas pipeline revival

The stars appear to be finally aligning for the long-awaited Iran-Pakistan (IP) gas pipeline. Driven by necessity and bolstered by the current global environment, Pakistan has set its sights on commencing and swiftly completing a small 80-kilometre stretch of the pipeline.

Originally envisioned to span 785km in total, running from the Iran border through Balochistan to Sindh and extending to Punjab, this humbler endeavour aims to achieve its initial milestone in record time.

Iran has already fulfilled its part of the deal by completing the construction of its seventh cross-country gas pipeline, starting from Asalouyeh and stretching 1,172km to Iranshahr. From there, it extends another 270km to the border of Pakistan, as indicated by the available online details.

Amidst the politico-economic repercussions of conflicts such as those in Gaza and Ukraine, alongside inflationary pressures and risks to financial and property markets in the West, particularly in an election year in many places, the focus of Western nations is understandably absorbed by their own challenges. As a result, a small pipeline deal between two nations in which they have no immediate stake may not command much attention.

‘By splitting the project into smaller, more manageable segments, we can potentially circumvent US sanctions’

Moreover, China’s mediation in thawing relations between Saudi Arabia and Iran amid the turbulent Middle East context has also contributed to Pakistan’s confidence regarding economic relations with energy-abundant Iran.

The energy sector hierarchy in Islamabad has privately confirmed the end of confusion regarding the IP pipeline. They assert there is now a certain level of clarity within the relevant quarters to proceed with the project.

However, as the cabinet of Prime Minister Shehbaz Sharif’s government has yet to be announced and the portfolio of the minister of petroleum remains undecided, no official — not even the spokesperson of the Petroleum Division — seems inclined to comment on the recent developments and future prospect of the IP pipeline. This reluctance to speak may stem from sensitivities surrounding the matter.

Meanwhile, Nadeem Javed Bajwa, the Managing Director and CEO of Inter State Gas Systems Pvt Ltd (ISGS), the company tasked with building the pipeline, remains inaccessible despite multiple attempts to reach him for his input.

There is a prevailing perception that Pakistan, under the caretaker government, hastily decided to proceed with building the pipeline following the tit-for-tat missile strikes with Iran. Although tensions between Iran and Pakistan have since eased, concerns persist regarding the looming threat of a potential $18 billion penalty for failing to complete the IP project in time.

As per information shared by senior sources within energy circles, the ISGS has been assigned the responsibility for the project. It has also been determined that resources to cover the construction cost will be accessed from a dedicated fund established for the purpose.

During the last PPP rule in the country (2008-2013), the government imposed a Gas Infrastructure Development Cess Act on businesses to generate funds internally aimed at strengthening and expanding Pakistan’s gas infrastructure. Despite encountering resistance and legal obstacles, insiders revealed that the government managed to mobilise about Rs330bn through this gas levy.

It is reported that the government has allocated and released Rs42bn ($152 million) for the construction of the project, they added.

“The long-delayed project is now being prioritised owing to the widening demand/supply gap and the cost-effectiveness of piped gas compared to LPG imports,” stated a high-ranking official of ISGS. “We have the full backing of the Special Investment Facilitation Council (SIFC),” he added.

Salman Bashir, a former foreign secretary said: “If Pakistan was to prioritise its own interests, the IP gas pipeline would be completed.Given Iran’s abundant gas resources and our pressing need, there is no justification for delay. A foreign policy centred on prioritising relations with neighbours is imperative,” he stressed.

A member of the PML-N economic team, in a private discussion highlighted a critical point, stating, “the IP gas pipeline remains hostage to US sanctions on Iran. Any bank involved in financing the IP project would face significant hurdles in transaction clearance, particularly in New York.

“The Iran-Gwadar electricity transmission line, which we built from scratch during the PDM Govt (2022-23), was a testament to creative problem-solving enabled by a relatively modest financial investment. This transmission line model is now being applied to the IP pipeline project, with a significant reduction in scope from 2,775km to a mere 80km, all within the country’s territory.

“The looming threat of Iranian penalties may have influenced the timing of the project. However, by splitting the project into smaller, more manageable segments, there is a chance to circumvent potential US sanctions.”

Dr Nadeem Javed, former chief economist at the Planning Commission, underscored the risks associated with pursuing the Iran-Pakistan gas pipeline. “Given the volatility in foreign exchange situation and our consequent reliance on the International Monetary Fund, it is unlikely that such geo-economic and political initiatives can be carried through to their logical conclusion.”