Iran-Pakistan pipeline to nowhere

One of the items on the agenda during Iranian President Ebrahim Raisi’s April 22-24 visit to Pakistan was the revival of the stalled Iran-Pakistan gas pipeline.[1]For Pakistan, this project represents bad choices. Going ahead may anger its financial benefactors – Saudi Arabia and the U.S. – which Pakistan cannot afford given its economic vulnerability. Dropping the project opens it to an arbitration by Iran, potentially exposing Pakistan to billions of dollars in damages, money that it doesn’t have.

President Raisi’s visit came three months after Iran and Pakistan fired missiles across their borders at alleged terrorists in each other’s territories. The two sides discussed security issues – terrorism, narcotics smuggling, human trafficking etc., along with economic issues. The Pakistan-Iran joint statement focuses on increasing trade between the two neighboring countries to $10 billion, and scaling up cooperation in the energy domain, including the cross-border Iran-Pakistan gas pipeline.

On face of it, an Iran-Pakistan pipeline makes economic sense. Iran has the world’s second largest natural gas reserves, while Pakistan’s economy is highly dependent on natural gas which comprises 40% of its energy mix. Pakistan’s limited domestic gas reserves have been depleted due to over-exploitation and it is increasingly turning to imports of liquefied natural gas (LNG). LNG is expensive and its prices fluctuate wildly. For instance, LNG prices rose five to six times their normal levels after the conflict in Ukraine began.

The geographical proximity gives a pipeline a natural advantage. The project intended to deliver 750 million to 1 billion cubic feet per day of gas by linking Asalouyeh, a city on Iran’s southern coast nearest to the South Pars Gas Field, to the town of Nawabshah in Pakistan, through the port of Gwadar.[2] South Pars is the world’s largest gas field and is jointly owned by Qatar and Iran. While Qatar has developed its share of the field extensively, Iran has been hampered by sanctions.

The pipeline was initially envisioned in in the 1980s as the Iran-Pakistan-India pipeline, but several missteps by Pakistan including the Kargil War, the attack on Indian parliament and the 2008 terror attack in Mumbai, ensured the Indian market would not be part of the package. Subsequently, in 2009, the plan was truncated, restricting the agreement to Iran and Pakistan.[3] Work on the 1,600-kilometer-long pipeline began in 2013.[4] Iran completed its 900-kilometer section soon thereafter. Pakistan was to complete its section of the pipeline by the end of 2014.

Geopolitics trumps geography. Iran is under U.S. sanctions, practically locking it out of the global gas market. Buying Iranian gas will run afoul of U.S. sanctions. Consequently, Pakistan never started work on the pipeline project.

Ten years after its deadline, Pakistan started work on its side of the border in early 2024, when Iran threatened to take it to an arbitration tribunal for not fulfilling its side of the agreement, with potential damages running to $18 billion.[5] The bilateral declaration during Raisi’s visit seems to be part of the same ongoing attempt to persuade Iran to not enforce the arbitration.

Pakistan’s experience with disputes that have gone to arbitration has been sorry. In 2019, a consortium of investors in the Reko Diq copper mine in Balochistan, which had been unfairly evicted from the project, was awarded damages of $5.6 billion by the International Centre for Settlement of Investment Disputes (ICISD).[6] Pakistan did not have the funds to pay and ended up re-awarding the project to the same consortium. In 2018, Pakistan was asked to pay $1.2 billion to a Turkish power company, whose ship-based power plant was seized by Pakistani authorities in an arbitrary manner.[7] Pakistan eventually escaped paying the award via backdoor negotiations with the Turkish President. These judgments show that Pakistan’s position on many of these projects was not legally sound and show why it wants to avoid yet another legal conflict.

However, going ahead with this project will cause another set of problems. The U.S. State Department, in its daily briefing on 23^rd April, said that countries dealing with Iran should be mindful of the resulting sanctions.[8] Pakistan, facing a severe economic crisis, depleted forex reserves, high inflation, and slow growth.is in no position to take on U.S. sanctions. Pakistan is seeking yet another bailout from the IMF, which will require American support. Pakistan is also financially dependent on Saudi Arabia, Iran’s rival in West Asia. Saudi Arabia has fought a war with Houthis, a Yemeni faction backed by Iran, and its oil fields were attacked by Iran in 2019.[9] Saudi Arabia has currently loaned Pakistan $5 billion to shore up its depleted forex reserves, and the latter is also seeking more such investment in various sectors of its economy, including mining.[10] Closer ties with Iran will put the Saudi largesse at risk. For Pakistan, the best course of action may be to follow the US/Saudi dictates and keep the money taps flowing, while just doing enough to head off legal action by Iran.

Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House.

Aditya Shinde is Research Assistant, Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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References

[1] Ministry of Foreign Affairs of Pakistan. “Curtain Raiser: Visit of the President of the Islamic Republic of Iran”, Press Releases, 21 April 2024, https://mofa.gov.pk/press-releases/curtain-raiser-visit-of-the-president-of-the-islamic-republic-of-iran

[2] Amber Imtiaz. “Pakistan-Iran Relations: Economic and Political Dimensions”, Center for Iranian Studies in Ankara, March 2019, https://www.researchgate.net/publication/344831604_Pakistan-Iran_Relations_Economic_and_Political_Dimensions

[3] “Pak, Iran formalise gas pipeline project”, Indian Express, 6 June 2009, https://indianexpress.com/article/news-archive/print/pak-iran-formalise-gas-pipeline-project/

[4] “High pressure: President inaugurates historic Pak-Iran gas pipeline”, The Tribune, 11 March 2013, https://tribune.com.pk/story/519089/president-inaugurates-historic-gas-pipeline

[5] Daniel Onyango. “Pakistan Ready to Begin Laying Gas Pipeline to Avoid Iran’s $18 Billion Arbitration Claim”, Pipeline Technology Journal, 7 February 2024, https://www.pipeline-journal.net/news/pakistan-ready-begin-laying-gas-pipeline-avoid-irans-18-billion-arbitration-claim

[6] “Reko Diq Project – Arbitration Award”, Antofagasta PLC, 12 July 2019, https://www.antofagasta.co.uk/investors/news/2019/reko-diq-project-arbitration-award/#:~:text=Damages%20include%20compensation%20of%20%244.087,incurred%20in%20enforcing%20its%20rights.

[7] Amr Arafa Hassan. “ICSID tribunal awards compensation for the seizure of power generation vessels, dismisses Pakistan’s counterclaim”, International Institute for Sustainable Development, 17 October 2019, https://www.iisd.org/itn/en/2018/10/17/icsid-tribunal-awards-compensation-for-the-seizure-of-power-generation-vessels-dismisses-pakistans-counterclaim-amr-arafa-hasaan/

[8] U.S. Department of State. “Department Press Briefing – April 23, 2024″, Briefings, 23 April 2024, https://www.state.gov/briefings/department-press-briefing-april-23-2024/#post-555091-RUSSIA

[9] “UN finds Iranian involvement in attacks on Saudi Arabia”, Saudi Gazette, 12 June 2020, https://saudigazette.com.sa/article/594169

[10] “Saudi Arabia nears $1bn deal for stake in Barrick’s Reko Diq”, mining.com, 18 April 2024, https://www.mining.com/saudi-arabia-nears-1bn-deal-for-stake-in-barricks-reko-diq/