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National Institute of Management 14th Senior Management Course

Presenter : Muhammad Abbas Baloch, Ex-PCS Sindh

DS Faculty : Ms Zarrin Qureshi

Dated : 2oth November 2013

PAK-IRAN GAS PIPE LINE; PROS AND CONS

Sequence

• History of Project• IP Project as Solution to Energy Crisis.• Risk Analysis of Project• US Sanctions & Applicability to IP Project• Geo Politics of Gas Pipe Lines• Recent Progress• Recommendations

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AIM

• To familiarize the participants about Pakistan Iran Gas pipe line and its pros and cons.

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History of Project

• Idea was first conceived by young Pakistani Engineer Malik Aftab Khan in 1950 in an article published by the Military College of Engineering, Risalpur with title “Persian Pipeline” .

• Idea was finalized in 1989 and Iranian Government responded positively.

• Initial cost of construction was estimated at US$ 7.5 billion and an agreement signed in 1995 to construct pipeline from South Pars Gas field in Iran to Karachi

5Source:The 'peace pipeline'". The National. May 28, 2009.

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• No progress till 2004 and project revived after UNDP report which referred project as peace and prosperity Gas pipeline

• In February 2007, India and Pak agreed to pay Iran US 4.93 Dollar per Million British Thermal unit.

• In 2009 India withdrew from project over pricing and security issue after signing nuclear deal with US

Source: Iran- Pakistan Peace pipeline- Editor Dr. Noor ul Haq (History & Perspective)

Contd/

Contd/

• On 30th January 2013, Pak approved deal with Iran for laying Pakistani segment of pipeline and on 11th March 2013 project was inaugurated by President Asif Ali Zardari

• PM Nawaz Sharif Assured commitment to project in recent 68th Annual UN General Assembly Session

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Source Pakistan energy book 2011- USAID March 2013 report on Circular Debt

Project Profile

• Length. Total length is 2775 Km. 1172 km of length is in Iran and remaining in Pakistan.

• Route. Starts from Asalouyeh, Bandar-e- Abbas,

( Iran) to khuzdar, sui and Multan ( Pakistan).

• Diameter 56 inch (1,422 mm)• Capacity. Initial capacity would be 8.7 billion cubic

meter which will be raised to 40 billion cubic meter.• Cost. Expected cost to incur on completion would

be around 8 billion US Dollar.

8Source: Noor ul Haq, (2010-07-31). Iran-Pakistan Peace Pipeline.

Route of IP Gas Pipe Line

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IP Project as Solution to Energy Crisis

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• In Pakistan 50 % of generation is on Gas and 30% on oil and non availability of gas is directly impacted on electricity generation.

• Only 21% population has an access to natural gas and with rapid urbanization, the demand is growing

• The supply and demand gap is around 1.2 Bcfd which will rise to 3.1 Bcfd by the year 2015 and ultimately to 11.1 Bcfd by the year 2025

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Project as solution to Energy Crisis

Risk Analysis for Construction and Operation of Gas Pipeline Projects in Pakistan by S M Mubin accessed on 13th November 2013.

Impact of Energy Crisis has been visible in Pakistan as it has been battering all sectors in including domestic industrial, agriculture and commercial sectors.

Official statistic suggest that more than 400000 have lost job and annual loss is estimated to be around 240 Billion Pak Rupees.

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Source:Energy Crisis in Pakistan by Muhammad Asif, Quarterly magazine of South Asian Journalists & Scholars (July- September 2010), volume 29

Cond/

Energy Crisis

• Supply and Demand Gap in Pakistan is described in following diagram

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• Most of our IPPs ( Independent Power Producer)

are on furnace oil and cost of furnace oil is

increasing sharply thus driving up the cost of

power generation.

• Cost of furnace oil increased in real terms from $

236 per ton to $ 639 per ton.

Chapter 14, Energy - Pakistan Economic Survey 2012-13

Contd/-

Power Generation Mix in Pakistan

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• Unfavorable generation fuel mix which is cause of high electricity tariff is shown in following diagram

• The sharp increase in the cost of furnace oil coupled with the increase in the share of oil based generation is causing abnormal increases in the cost of power generation

• Pakistan after completion of project will import around 750 mcft of natural gas daily for generation of approximately 4000 MW of electricity.

16Source: Energy Policy finalized but not announced- Daily Dawn June 29, 2013

Contd

Contd

• Replacement of imported furnace oil by Iranian gas in our industries will result in estimated saving of billions of rupees.

• The pipeline will generate employment opportunities in Baluchistan and will also result in economic prosperity of Pakistan.

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Source: Energy Policy finalized but not announced- Daily Dawn June 29, 2013

Re-evaluating Gas Price

• Current formula is defective as it allow Pakistan to have gas at around 87 % of crude oil price but price should be lowered as Turkey and Armenia are importing gas at much lower price from Iran

• Cost of gas offered to Pakistan was around 2$ per MMBTU and now it is at around 14$ MMBTU.

• There is need to delink the gas price from oil price in international market and fortunately Iran is willing to consider gas pricing concessions for Pakistan

18Source : Pakistan Should Advance after re-evaluating gas price, The Dawn, 13 th November 2013

Risk Analysis of Project

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• Risk During ConstructionRisks during construction are generally related to risk during execution of work processes, material availability, manpower, finances (budget),time frame, legal and environmental.

• Risk During OperationMore precisely, risk during operation of IP pipeline include, Safety and security Risk, Investment Risk and Risk due to Natural Calamities

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US Sanctions & Applicability to IP Project

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US & UN Sanctions Regime

• Iran is currently under three layers of international sanctions including a unilateral sanction regime imposed by the US in conjunction with the EU and multilateral regime under the frame work of the United Nations

The Iran Sanctions Act (ISA) is a modified version of the 1995 “Iran Libya Sanctions Act” (ILSA) and it requires the US President to impose sanctions on foreign companies that invest more than US$ 20 million in one year in Iran’s energy sector

22Source: Iran-Libya Sanctions Act, 50 U.S.C. § 1701 note (1996)

A Possible Way Forward

• Careful study of US sanction laws reveal strange loopholes in the text as Investment" defined as the entry into a contract that includes responsibility for the development of petroleum resources in Iran or Libya

• Statute silent as to whether the construction of energy transit routes from Iran considered an investment or not

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Pakistan could escape from security council sanctions on trading with Iran by :-

a. Pakistan Could opt for waiver just like the one sought by Turkey and Turkmenistan as these countries have asked for waiver stating that they needed to trade with Iran on the based on their energy needs

b. Secondly, Pakistan can sign a bilateral investment treaty with Iran

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• The French oil company, Total SA, struck a $2 billion deal with Iran in September 1997, to develop natural gas reserves in Iran’s South Pars field

• This was the largest single foreign investment in Iran since the U.S. Embassy in Tehran was sacked in 1979

• Clinton Adm. found that deal violated ILSA, but ultimately decided to waive sanctions

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Total Case and US Sanctions

Sanctions& pipeline by Khurrum Hussain, Daily Dawn (Karachi) dated March 14,2013,

Turkey, Azerbaijan and Armenia Case

• It is worth mentioning that, countries, like Turkey, Azerbaijan and Armenia continued to import gas from Iran and from the same company (National Iranian Oil Company) from which Pakistan intended to buy gas.

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Would the Pipeline be an “investment” under US Sanctions

The Iranian side of the project has been financed entirely by Iran

Pakistan's investment in the project will start after the pipeline reaches Pakistani territory

Applying a plain-meaning interpretation of ISA, Pakistan’s involvement could be interpreted as one that does not directly contribute “to the enhancement of Iran’s ability to develop petroleum resources of Iran.”

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Energy Geo- Politics and South Asia

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US-India Front

• The strategic interest of India and US converging

• With Ambition to become a global power and history of troubled relation with Pak and China, it suits India to remain allied with US.

• Building IPI would mean contrary to India interest therefore, it isolated itself from the project

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Source : IP Pipeline, Instrument of Socio Economic Stability, by Aasir Kazmi Quarterly Magazine of South Asian Scholar and Journalist Jan to March 2010

Russia- Iran Front

• Europe imports 41% of its gas from Russia and its Russian plan to make Russia an energy hub with a vast network of pipelines in its North, South and West Corridor.

• The Development of South Corridor is possible through a pipeline from Central Asia, Afghanistan, Pakistan, China and India.

• Russian see IP will be detrimental to construction to TAPI which will effect on Russian dominance.

30Source : IP Pipeline, Instrument of Socio Economic Stability, by Aasir Kazmi Quarterly Magazine of South Asian Scholar and Journalist Jan to March 2010

China Role

• China see Iran as far safer and strategic source of energy for its ever expanding economy and an important link through Pakistan

• China and Pakistan are already working on proposal to laying a trans Hamalyia pipleline to carry Middle eastern crude oil to China

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Source : IP Pipeline, Instrument of Socio Economic Stability, by Aasir Kazmi Quarterly Magazine of South Asian Scholar and Journalist Jan to March 2010

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Meeting between Pakistan PM and Iran President in 86th UN General Assembly Session both leader underlined the need for early completion of project

PM in an interview in Us said that needs gas very badly. "We have to run our power plants and we need gas for them. There is an acute shortage of gas in Pakistan, so we have to import gas from somewhere.“

Recent Progress

Source: Iran, Pakistan vow to boost bilateral ties, The Iran project,25 th September 2013

Contd

• Pakistan PM in an interview said that we would proceed "unless US give us the gas, or the $3 million a day."

• Pakistani petroleum minister met with Iranian counterpart in meeting held on 8th October 2013 to provide $2 billion for the construction work .

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Source: Iran Pakistan commitment to IP Project, The Nation 25 th September 2013

• The Minister for Water and Power, Khawaja Asif while explaining his government’s position on the controversial project on its visit to US on 12th of November has reiterated Pakistan stance that, Building the Iran-Pakistan gas pipeline is our contractual liability and If we do not do so, we will have to pay the penalty for breaching the contract.”

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Iran pipeline contractual obligation, The Dawn, 13th of November 2013

Iranian Perspective about Pakistan Commitment

• From total cost of $ 1.5 billion and Iran agreed to partially finance the pipeline by providing the funding of $500m. An agreement for $250m was signed during President Asif Ali Zardari’s visit to Tehran.

• This clearly states that there is no financing problem and Pakistan is trying to find way out of project due to fear of US Sanctions.

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Source: Uncertainty over Iran Pipeline Project, The Dawn, 8th November, 2013

Contractual Obligation

• Pakistan is under contractual obligation to began construction of pipeline in Pakistani portion.

• Breach of contract would entitle Pakistan to pay a penalty of 3M US Dollar per day.

• Additionally, it would also result in deterioration of our relation with Iran and further worsen the energy shortfall in Pakistan

36Source : Pipeline Ambiguity, The Dawn, 15th November, 2013Source Iran pipeline contractual obligation, by Anwar Iqbak, The Dawn 13th November 2013

Recommendations

Pipeline does not bring peace but peace brings projects such as cross-border gas pipelines. Pakistan needs to move ahead, play its due role to complete the project.

Constructive engagement and diplomatic reconciliation with US rather than confrontation should be our focus

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• This IP pipeline presents Pakistan with an opportunity to establish itself as a reliable energy corridor or energy transit hub thereby not only achieving energy security for itself but also earn substantial amount of foreign exchange in terms of transit fees and royalties from pipeline by luring India and China into the project.

• it is imperative to address the Baluchistan problem properly and justifiably as to removing this major bottle neck hindering this enormously vital project.

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• Keeping in view the projected increase in energy demand and expected short fall of around 10 bcf by 2025 (2500 MMSCFD by 2015), the above pipeline would be vital to meet the shortfall and trigger economic growth in Pakistan.

• Pakistan Should stressed to delink the gas price from oil price in international market as Turkey and Armenia are importing gas from Iran at much lower rate than current rate of 14$ MMBTU offered to Pakistan.

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THANK YOU