For quite long, Pakistan has pinned hopes on Iran as a major supplier of energy and a trustworthy neighbour that can cater to its pressing energy needs. Efforts were made in the past in this regard that could not be successful due to several reasons, including the imposition of international sanctions on Iran.

The Iran-Pakistan (IP) gas pipeline has been one such project aimed at ensuring regular natural gas supply to Pakistan. Iran has constructed 1,150-kilometre gas pipeline from Pars gas field up to the border of Pakistan. Work on the 781-kilometre portion on this side of the border is stalled for many years. In the presence of sanctions, Pakistan has found it hard to secure funding for this purpose. According to the agreement, Iran is expected to supply 750 million cubic feet of natural gas each day to Pakistan.

Iran is upbeat about the removal of international sanctions and wants to take things forward from where they were left. The Iranian President Hassan Rouhani, who visited Pakistan last month, gave an assurance that his country was ready to take responsibility of providing complete energy security to Pakistan.

Apart from supply of natural gas, the prospects of selling crude oil, electricity and gas in liquefied form came under discussion during the visit. Businessmen from both sides held meetings and vowed to make best use of this opportunity.

In this context, one needs to look at where Iran stands in the global energy market and its potential to export energy products. The fact is that Iran has an electricity generation capacity of about 70,000 MW, which it plans to increase by about 5,000 MW every year. The country already exports electricity to Turkey, Iraq, Afghanistan, Pakistan, Azerbaijan and Turkmenistan. It has the fourth largest oil reserves and the second largest natural gas reserves in the world after Russia.

More than 70 per cent of the electricity generated in Iran is produced by natural gas that is available in abundance. Almost 99 per cent of the equipment required for power generation, such as power plants, water and electricity equipment, turbines, technical and engineering services for transfer and distribution is locally produced.

Petroleum and Natural Resources Minister, Shahid Khaqan Abbasi, is quite hopeful that in the absence of international sanctions, the IP gas pipeline can be completed in three years in the presence of the required funding.

Iranian Consul General in Lahore, Mohammad Hossain Bani Asadi, tells TNS that the "IP gas pipeline is the best and the most affordable option that Pakistan can have in the current scenario. The reason is that gas pumped through pipelines in gaseous form is ready to consume whereas the Liquefied Natural Gas (LNG) has to be re-gasified before being put to use."

"The cost of transporting it by sea and the charges related to re-gasification and handling at LNG terminal ultimately add to the cost," he adds. The Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, he says, "is also not as feasible as this pipeline as it has to pass through an unstable region in Afghanistan." He says though Pakistan has signed a 15-year LNG purchase deal with Qatar, its ever-increasing energy needs more sources.

Pakistan has expressed its intention to import as much as 3,000 megawatts of electricity from Iran, up from around 74 megawatts that it is purchasing at the moment for its coastal Makran division. The plan is that the increase in purchase volume will be gradual as Pakistan needs to set up a proper infrastructure to put it into the national grid.

Tahir Basharat Cheema, former managing director, Pakistan Electric Power Company (PEPCO), says Pakistan must go for finished Iranian electricity but try to gain maximum benefit from the existing situation. "Pakistan needs electricity but Iran is also desperate to find buyers in the global market and what better option it can have than a next-door neighbour. It would be great if Pakistan can negotiate a competitive unit rate, which is possible keeping in view the excess electricity that Iran wants to sell," he says.

"The agreement to buy 74 MW Iranian electricity for border and coastal areas in Balochistan is a prudent one. These areas would have been deprived of electricity if this arrangement had not been in place. Hardly 55 to 60 per cent area of Pakistan gets electricity while the remaining is off-grid. Prior to the signing of this contract, stand-alone diesel generators were used to power these areas-something that was not feasible."

Iran also plans to enhance its production of crude oil in order to export it to different markets, including the European Union (EU). It is quite capable of exporting crude oil in big volumes. Two Pakistani refineries -- Pakistan Refinery Limited (PRL) and Bosicor (now Byco) -- had been importing Iranian crude oil until 2010 when sanctions were imposed and banks refused to open letters of credit for oil purchases. Following the lifting of sanctions, a delegation from National Iranian Oil Company has visited Pakistan and explored the possibility of export their crude oil here.

Analysts believe that the possibility of imports from Iran can mean lower prices for Pakistan due to a more competitive environment and lower transportation costs. They say importing oil from neighbouring Iran is cheaper than buying it from Saudi Arabia and the Middle East. It is expected that in order to increase the viability of selling crude oil to Pakistan, Iran will try to curb smuggling of its refined petroleum products through Balochistan.

However, there are concerns as well. For example, a write-up titled, "The Cloudy Fate of Iran Oil Trade" written by Muhammad Umar Farooq and published by Byco Petroleum’s current newsletter states that Pakistani banks are still skeptical about the future of Iranian trade, at least in the short term. It mentions that it is generally believed that there is a reason to delay the restoration of banking channels between Pakistan and Iran because the day banking channels are restored, Pakistan will be asked to settle approximately $200m outstanding payments to Iran, which the country owes on account of purchase of electricity.

The LPG market is also quite big here and welcomes Iranian supplies. According to the Federation of Pakistan Chambers of Commerce and Industry’s (FPCCI’s) Standing Committee on LPG, Pakistani refineries are producing 1,500-1,600 tonnes of LPG per day whereas its local demand in summer stands at 1,700 tonnes per day and in winters at 2,200 tonnes daily.

It is estimated that 80 per cent of this shortage is covered by LPG that reaches Pakistan through informal trade. This means the potential of LPG import through formal channels is also quite high. Once this trade is done formally, the quality control will also be in place. The Iranian LPG coming through informal channels is low in heat value and has undesirably high sulphur content.