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Iran-Pakistan gas pipeline project can help Islamabad meet Pakistan’s rising energy needs

Energy lifeline


ust before completing its tenure in 2013, the Pakistan Peoples Party-led government had announced plans to start the Pakistan segment of the Iran-Pakistan gas pipeline. Eleven years later, in its last days in office, the caretaker government approved the construction of the first phase of the pipeline within Pakistan’s borders. The project was never meant to get that delayed; gas supplies from Iran were expected to start in 2014. In fact, the agreement to start the Pakistan segment in 2013 was signed when Iran had already laid the pipeline to the Iran-Pakistan border.

One needs to keep in mind that back in 2013, with an electricity generation capacity of 16,500MW, Pakistan had been suffering from severe electricity shortages due to a lack of gas supplies. It required an additional 4,000 to 5,000MW and the IPGP was expected to meet this surplus demand by bringing 750 million cubic feet of natural gas per day to Pakistan.

The project had been conceived in the late 1980s, much before Pakistan’s energy woes peaked, and was initially planned as the “peace pipeline” taking Iranian gas supplies from Iran to India via Pakistan. The original plan had envisioned including Bangladesh and China in this endeavour, too. Unfortunately, the “peace pipeline” project soon turned into a pipe dream. What led to this development needs to be understood, before we may talk about IPGP’s future prospects?

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Initially, India was keen on the pipeline as it was seen as an effective way to attain energy security. However, there were concerns in Indian circles about the risks of relying on a pipeline that passed through Pakistan to supply their energy needs. That Iran almost always finds itself at odds with the US was also a big concern for India; so was the gas pricing. The Indian government did use the preposition of gas supply from Iran as one of the bargaining chips to sign a civil nuclear technology deal with the US in 2005 without signing the nuclear Non-Proliferation Treaty. After ensuring its energy security through CNT, India withdrew from the pipeline project in 2008.

Pakistan then demanded a similar arrangement from the US but did not receive a similar offer. That is why despite US concerns, Pakistan opted to forge ahead with the construction of the pipeline in a bid to tackle its escalating energy needs. The pivotal decision was made in June 2010 when Pakistan and Iran inked a deal green-lighting the pipeline project. The agreement, sealed between the Iranian Gas Export Company and Pakistan’s Inter State Gas Systems, outlined a 20-year gas supply commitment from Iran to Pakistan, including a five-year grace period.

It was agreed to construct a pipeline stretching across Nawabshah (Sindh) in Pakistan from the Iranian border (a distance of 781 kilometres). Approximately 665 kilometres of the pipeline would be in Balochistan and 115 kilometres in Sindh. The length of the Iranian portion of the pipeline is 1,100 kilometres. It begins in the energy economic zone of Pars and passed through Iranshahr and Bushehr. The route then continues through Fars, Kerman, Hormozghan and Sistan-Baluchistan.

Under the agreement, each country was obligated to construct the portion of the pipeline on its territory. The flow of Iranian gas to Pakistan was to start on January 1, 2015. The cost of this project at that time was $7.5 billion. The agreement stipulated that Pakistan will pay Iran $1 million per day in exchange for 750 million cubic feet of gas daily.

When in 2013, Pakistan’s federal government approved the deal for laying the Pakistani segment of the pipeline, Iran was already under sanctions from the US, European Union and the United Nations, following the International Atomic Energy Agency’s findings that it was not compliant with its international obligations regarding its nuclear activities. Subsequently, the US spearheaded efforts to financially isolate Tehran and block its oil exports to increase pressure on Iran to agree to restrictions on its nuclear programme and intensive inspections. The sanctions set a cap of $10 million on investments in the Iranian oil and gas sector.

The pivotal decision was made in June 2010 when Pakistan and Iran inked a deal green-lighting the pipeline project. The agreement, sealed between the Iranian Gas Export Company and Pakistan’s Inter State Gas Systems, outlines a 20-year gas supply commitment from Iran to Pakistan, including a five-year grace period.

Despite these restrictions, Iran supplies Türkiye with natural gas worth almost $10 billion annually. India and China have also resisted US sanctions and continue to import energy from Iran, demonstrating that, with adequate foreign exchange reserves, defiance of sanctions was feasible. Likewise, the Iran-Armenia pipeline, with a current capacity of 22.2 million cubic feet of gas per day, has been operational since 2007, amidst restrictions thanks to Russia’s support to Armenia.

Pakistan, however, could not afford to defy the West’s sanctions as it needed its support for an IMF bailout for its debt sustainability. Following a pragmatic approach, it issued a “Force Majeure and Excusing Event” notice to Iran in August 2013, which suspended Pakistan’s obligations under the GSPA.

Another element affecting Pakistan’s decision was the regional geopolitical rivalry between Saudi Arabia and Iran. The Iran-Pakistan gas pipeline could have been perceived as something that would bring Iran and Pakistan closer, upsetting Pakistan’s Middle Eastern allies.

Mindful of Pakistan’s challenges, Iran signed a revised agreement in 2019 to allow Pakistan more time to complete its segment of the pipeline. The agreement stipulated that neither Iran nor Pakistan would take the other to court for delays or impose fines until 2024.

Saudi Arabia does offer periodic oil supplies at deferred-payment deals to meet some of Pakistan’s energy needs. However, Pakistan continues also purchases the more expensive liquefied natural gas to meet its burgeoning energy requirements. This has greatly limited Pakistani economic growth and exposed the country to crises during periods of volatile LNG price spikes.

It was in this context, that Pakistan was engaged in talks with US officials to seek exemptions from sanctions. In March 2023, Iran vowed to take the matter to arbitration if Pakistan did not complete its portion of the pipeline by March 2024. After this, Pakistan reportedly sent a delegation to Washington to request the US administration to allow Islamabad to build the pipeline or help pay the expected financial penalty, which may amount to $18 billion.

On March 10, 2023, Iran signed a deal, brokered by China, to restore diplomatic relations with Saudi Arabia after a seven-year lapse. This was big news for Pakistan as it saved the country from choosing sides between friends.

Last May, Iran and Pakistan jointly inaugurated a marketplace and a power transmission line along their nearly 900-kilometer border in a significant move aimed at expanding bilateral, regional trade and energy cooperation.

On January 16, Iran launched missiles into western Pakistan, claiming they were targeting militants that they considered to be terrorists. Pakistan responded by firing missiles into eastern Iran, targeting what they referred to as “terrorist hideouts.” Following the missile strikes, both countries recalled their diplomats. However, sanity prevailed and they decided to reconcile.

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Within weeks of carrying out these tit-for-tat attacks, Tehran and Islamabad are trying to get the stagnant Iran-Pakistan natural gas pipeline moving. The recent extension granted by Iran until September 2024, allowing Pakistan to show progress or face a penalty of $18 billion, highlights the project’s critical juncture.

The interim government’s approval for the initial 80-kilometer stretch from the Iranian border to Gwadar, estimated at $158 million, marks a positive step. This phase, executed by Interstate Gas Systems and funded by the Gas Infrastructure Development Cess, aims to demonstrate Pakistan’s commitment to the project. Successful completion of this segment could pave the way for Pakistan to secure more time from Iran to complete the entire pipeline without facing the penalties.

History shows that the IPGP became a hostage to the trust deficit between Iran and the West. The project can potentially change the regional energy and geopolitical landscape, provided Pakistan and Iran can find solutions to bridge the trust deficit between them and the Western world.

The writer heads the Sustainable Development Policy Institute. His X handle is @abidsuleri 

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