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Iran-Pakistan pipeline not a done deal

Some small fanfare was given to the signature on May 24 between the presidents of Iran and Pakistan of an agreement for the construction of a gas pipeline running from the former's South Pars gas field through the latter's unstable Balochistan province to population centers in the east of the country, notably Lahore. This is the rump result of Iran's inability to come to terms with India for the Iran-Pakistan-India (IPI) pipeline, as it was originally proposed.

The most widely known reason for that failure is Iran's poor negotiating strategy over the pricing scheme (for background, see Delhi's options beyond Iran, 28 March 2006). However, another contributing reason was the Indian government's concern over the pipeline's security in transiting Balochistan in western Pakistan.

There has long been popular discontent there over the central government's failure to take the local population into its confidence in the development process of previous projects, provide significant social or development assistance to them, or even provide them gas resources from the deposits drilled in their territory. Roughly 450 of the Iran-Pakistan pipeline's 1,300 miles would pass through Balochistan.

A third reason why the original IPI pipeline project failed was the November 26, 2008, terrorist attack in Mumbai. With reports of the indirect involvement of Pakistan security services personnel, Indian opinion, always hesitant, rapidly shifted against the prospect of a pipeline giving Pakistan the capacity to shut off India's energy supplies by turning a tap. In the Indian view, nothing would stop the Pakistani government from producing or fabricating an incident in Balochistan where a pipeline attack could diminish or cut off gas to India.

China looks forward to replacing India as a third partner to receive gas transiting Pakistan. This could be delivered either as liquefied natural gas (LNG) exported from the Chinese-financed Pakistan port of Gwadar or overland through a pipeline parallel to the Karakoram Highway, also financed by China, which runs through the north of the country into the Xinjiang region in western China.

Russian companies would also like to assist the project's completion, as this would diminish if not eliminate Iranian competition for European markets, the prospect of which is a card that the European Union (EU) has been trying to play against Gazprom. Although gas for the Nabucco pipeline would be slated at least in the first instance to come from Turkmenistan, Iran has never been ruled out and has been in the EU's strategic view for years.

However, it is not clear that prospects for the Iran-Pakistan pipeline are much better than those for the IPI, despite its reduced scale and despite the signed document. When India was in negotiations with Iran over the price of eventual imports, it also had in mind the Turkish experience with Iran. (There is a gas pipeline between the latter two countries that has never really operated at full capacity) In that instance, Iran has unilaterally and repeatedly altered its interpretation of established agreements concerning prices and quantities as well as the quality of the product.

This experience and others have created a widespread perception in the industry that the Iranian government regards such signed agreements as starting-points for subsequent negotiations. Moreover, Iran's constitution explicitly forbids its government to recognize international judicial or arbitration mechanisms; as a result, the only recourse is Iran's judicial system (for background, see Another trans-Caspian pipedream, 24 October 2007).

The bilateral Iran-Pakistan project is projected to cost US$7.5 billion, but there is no indication where the funds for this will come from. The Asian Development Bank does not support the project. Also Russia's Gazprom does not have the deep pockets it once might have had.

Further, it is not clear that China's banks or its parastatal companies, which still have to pay their own way on a commercial basis, would be interested to sponsor the pipeline financially, in view of the fact that the prospect of China receiving any gas is so distant and contingent. In this respect, the Turkmenistan-Uzbekistan-Kazakhstan-China gas pipeline is a much better bet (for background, see Gas pipeline gigantism, 17 July 2008).

Finally, the effects of Iran's current unrest on the country's future economic development must be considered. These effects are likely to be much more serious than now suspected: only partial, sometimes anecdotal information is currently available for Tehran alone. However, one must anticipate that fuller information concerning destruction of physical economic assets throughout the country, resulting from the indiscriminate use of physical coercion against the public, will be shocking.

The purging of both teaching staff and students from universities plus increasingly widespread vandalizing of houses and other forms of personal property, not to mention public spaces and infrastructure, will take longer than expected to recover from, assuming that functionally autonomous paramilitary units can eventually be restrained and a semblance of civil order restored.

A national economy cannot survive the destruction and demoralization of the human resources upon which it depends; and that is what is now threatened in Iran. Fallout from such a catastrophe will not exempt the energy sector, and the Iran-Pakistan pipeline would accordingly suffer.

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URL:  http://www.robertcutler.org/blog/2009/06/iranpakistan_pipeline_not_a_do.html
First published in Asia Times Online, 26 June 2009.

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