Bottom Line: Last week Pakistan announced that construction on the Pakistani portion of the Iran-Pakistan pipeline will begin on 11 March. This week Iran announced it would build a refinery in Gwadar, in Pakistan's Baloch province. This will spur China's energy plans in Pakistan and sets up Gwadar to become a major oil city near the Strait of Hormuz and out of Washington's hands.
Analysis: The Iranian-funded refinery—announced by Iran but not yet signed into force by the two parties—will have a 400,000 barrel per day capacity and comes on the heels of an announcement that construction on a massive Iran-Pakistan pipeline would begin on 11 March, despite sanctions threats from the US and shadow attempts by the US and Saudi Arabia to sabotage these plans. This will give greater impetus to Chinese oil and gas plans in Pakistan, and reshape Pakistan’s foreign policy clearly towards China and Iran and out of Washington’s hands. What would happen next would be this: China would revive its own oil refinery plans at Gwadar and eventually build its own pipeline from Gwadar to western China.
China is on a solid footing in Gwadar, though its projects have been stop and start over the past several years. In February, China took over operational control of the port and agreed to become its largest investor. For China, this is a significant port because of its proximity to the Strait of Hormuz. For the US, this development is significantly negative as it will not only give Iran more influence in the Strait of Hormuz, but it creates an Iran-Pakistan-China triangle of influence over this key strategic oil and gas transit point. China will feel less insecure about the volatility in Balochistan with Iran pursuing a refinery there as well. Essentially, this means a merger of the Hormuz Strait, Iran, and a Chinese-Pakistani energy corridor. US threats of sanctions will not sabotage the projects. The timing of these announcements is also important, as Pakistan has general elections coming up and Iran is keen to get these deals finalized before any potential government upset in which the US is expected to meddle.
Recommendation: Watch for a strategic shift to Gwadar as a major energy hub for Asia and as an emergent petrochemical center in the next 3-5 years. In addition to the Iranian-led refinery, we expect a Chinese oil refinery and petrochemical facilities and storage complexes to go up here, turning Gwadar into an “oil city”.