The Iran nuclear deal could provide Iran’s neighbors with an opportunity to import natural gas.
Iran sits on the world’s second largest reserves of natural gas, but most of the country’s gas fields are underdeveloped. Despite vast natural gas resources, Iran has never really fulfilled its potential as a major exporter of natural gas. More than 90 percent of its natural gas exports go to Turkey.
Iran’s eastern neighbors have not benefitted from their strategic location next to such an important energy player. Much of that has to do with the dearth of pipeline capacity that would better connect Iran to the rest of the Middle East and South Asia.
There is one major pipeline project that has been on the drawing board for years that may now move forward given Iran’s reentry into the international community. Iran has been eager to build a natural gas pipeline to Pakistan and India, a project that would benefit all three countries. This would allow Iran to tap into a hungry market for its gas, and Pakistan and India could access much needed energy for electricity. The pipeline has been in the works for years but essentially on hold due to U.S. opposition. The U.S. has sought to block the project in order to isolate Iran and deny it of export earnings. Related: This Is Why Oil Markets Shouldn’t Worry About Iran’s Comeback
Iran completed its section of the pipeline on its territory in 2013, but the remaining route through Pakistan has been blocked due to international pressure. Western sanctions deterred Pakistan and India from following through. Instead, the U.S. heavily backed an alternative route, which would run from gas fields in Turkmenistan through Afghanistan, connecting to Pakistan and India. That project has not moved forward either.
Nicknamed the “Peace Pipeline” because it would tie together several countries that have had rivalries in the past, the Iran-Pakistan pipeline project received a crucial boost with the nuclear agreement, which could remove hurdles to investment and construction. The extension to India is not on the table right now, but connecting the pipeline to Pakistan looks increasingly likely. Related: Mexico’s First Offshore Auction A Major Disappointment
Pakistan’s Petroleum Minister Shahid Khaqan Abbasi responded to news of a historic agreement between Iran and the West by saying that the gas pipeline could begin operations by the end of 2017. “Removal of sanctions will facilitate us in meeting our commitments and addressing our energy needs,” he said in an interview with the Islamic Republic News Agency, and reported by UPI.
In fact, Pakistan got a head start on the pipeline, lining up financing from China earlier this year to build its section of the project, which will run from Gwadar to Nawabshah. A second section from Gwadar to the Iranian border also needs to be constructed, and that portion will be built by Pakistan itself. “We’re building it,” minister Shahid Khaqan Abbasi told The Wall Street Journal in April when Chinese President Xi Jingping visited Islamabad. “The process has started.” Related: This Is Why Californians Pay More For Their Gasoline?
The need is obvious. Pakistan suffers from chronic electricity blackouts amid a shortage of capacity and fuel. Pakistan regularly sees gas shortfalls of around 2 billion cubic feet per day (bcf/d), a deficit that swells to 2.5 bcf/d in winter. The pipeline with Iran could allow 750 million cubic feet of natural gas to flow into Pakistan each day when fully operational, with around one-third of that coming online by the end of 2017.
When completed, Pakistan could tap into an additional 4,500 megawatts of electricity capacity. The WSJ says that Pakistan’s portion of the pipeline could cost $1.5 to $1.8 billion. An optional LNG export facility at Gwadar could be added, which would bring the total bill to $2 billion.
The project also aligns with China’s ambitious development plans for the region. China already manages the port at Gwadar, and has an array of projects designed to create an “economic corridor” between Pakistan and western China, connecting the region by rail and road links, and allowing China to import raw materials from around the region.
The historic deal between Iran and the West could accelerate this development by removing a significant hurdle to the Iran-Pakistan pipeline.
By Nick Cunningham, Oilprice.com
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