Iran-Pakistan Natural Gas Pipeline Stumbles on Financing

It is hard not to feel some sympathy for Pakistan's current energy deficit problems, which are both severe and increasing.

The U.S. government's Energy Information Administration notes in its "country analysis" on Pakistan, "Pakistan's economy has continued to struggle with underemployment, slow economic growth, and high inflation. Pakistan's inability to meet domestic energy demand has resulted in electricity outages, which is a key political and economic issue in the country. The electricity industry faces problems with power generation theft, poor collection rates, line losses, and the poor financial position of generation companies. These issues have led to load-shedding, the temporary shut-down of electric lines when demand is greater than supply, which has costs the economy an estimated $13.5 billion per year…"

Four months ago Pakistani newspaper, "Dawn," noted, "Power can be out for up to 20 hours a day in the summer… The shortfalls that became the no. 1 issue in the recent election are estimated at 3,500 to 6,000 megawatts, up to a third of total demand…" before adding, "Combined with rampant theft of electricity and massive corruption in the country's power sector, Pakistan's ongoing energy shortages are unlikely to end anytime soon, whatever Islamabad does."

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Despite Washington's oft expressed displeasure, Pakistan has been engaged in lengthy discussions with Iran to construct a $7.5 billion "Peace Pipeline," which would deliver 21.5 million cubic meters of natural gas a day to Pakistan from Iran's massive offshore Persian Gulf South Pars field, currently being developed in conjunction with Qatar.

Aside from the political pressures from the U.S., the proposed pipeline has hit a significant snag - a lack of Pakistani funding.

While Iran desperately wants the pipeline, both as a source of hard currency and as an added hedge against possible U.S. military action, Tehran is increasingly frustrated with Islamabad's apparent inability to come up with the cash to construct its portion of the pipeline. While Iran currently produces around 600 million cubic meters of gas per day, almost all of which is consumed domestically, production is predicted to surge when the Persian Gulf offshore South Pars field comes online. Currently Iran's sole foreign natural gas client is Turkey, which buys about 30 million cmd.

Iran has nearly completed its segment of the pipeline but Pakistan has struggled to find the money to pay for the 485-mile section to be built on its side of the border. While in early October Pakistan asked Iran to provide $2 billion to finish construction. Iranian Oil Minister Bijan Zanganeh said on 31 October that there was "no hope" of exporting gas to Pakistan because the financing was not there.

Not so, according to Pakistan's Federal Minister for Petroleum and Natural Resources Shahid Khaqan Abbasi, who said in a moment of transcendent honesty during an interview with Pakistan's GEO TV, "There is absolutely no chance to abandon the pipeline project, because we need it."

Outside funding is unlikely, as investors and other governments are reluctant to get involved in the project because of the threat of breaching international sanctions on Iran.

In a case of diplomatic 'tough love," Iranian Oil Minister Bijan Namdar Zanganeh told reporters in Tehran recently that "the contract for supplying gas to Pakistan is likely to be annulled."

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Zanganeh's comments caused Pakistan Industrial and Trader Associations Front (PIAF) to issue a statement on 31 October, stating, "(Prime Minister) Nawaz Sharif should take timely measures to save this important deal and the private sector may be taken onboard on Pak-Iran Gas Pipeline Project as the recent statement of the Iranian Oil Minister has put this vital project in doubt."

Will Sharif take those timely measures?

Read your tea leaves, as Sharif is currently in Washington, meeting with President Obama, where no doubt the "Peace Pipeline" figured prominently on the agenda - along with Iran and drone strikes.

Given such a full plate, it seems unlikely that Sharif will give PIAF's concerns the attention they are hoping for.

By. John C.K. Daly of Oilprice.com