Iran-Pakistan Gas Pipe Launched, Could Trigger U.S. Sanctions

By Ben Priddy, March 18, 2013

WEB EXCLUSIVE, Moscow. Iranian President Mahmoud Ahmadenijad met with Pakistani President Asif Ali Zardari in a ceremony last week to launch the construction of Pakistan's segment of the $7.5 billion, 1900-kilometer Iran-Pakistan (previously the Iran-Pakistan-India) gas pipeline. The pipeline aims to supply Pakistan with natural gas to fuel power generation, but it could also trigger U.S. sanctions, making it impossible to raise remaining funds needed to build the pipeline's last segment.

Immediately following the announcement of the IP pipeline launch, U.S. State Department spokesperson Victoria Nuland warned it could trigger the Iran Sanctions Act, which bans foreign firms from investing $20 million or more in Iran's energy sector. The Pakistani segment of IP is projected to cost $1.5 billion and Iran has already offered $500 million to help finance the project. "This pipeline project would take Pakistan in the wrong direction right at a time that we're trying to work with Pakistan on better, more reliable ways to meet its energy needs," Nuland said. If completed, IP would go on-stream in 2015, but the pipeline also faces competition from the U.S. and Asian Development Bank-backed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project, as well as proposed LNG projects to Pakistan and India.

The $7.6 billion, 1800-kilometer TAPI pipeline foresees transporting Turkmen natural gas through Afghanistan into Pakistan and India, with the strategic and commercial goal of creating an energy security link between four economies: Turkmenistan, Afghanistan, Pakistan, and India. As U.S. policymakers see it, the pipeline is a win-win, as it avoids Russian-dominated supply routes from the north and would theoretically lead to increased interest among downstream customers Pakistan and India in the future of Afghanistan's security. Yet, TAPI also faces competition from LNG projects in Pakistan and India, South Asia's largest gas consumer.

India has been a net importer of natural gas since 2004 and, despite a steady increase in the country's domestic gas production in recent years, the U.S. Energy Information Administration (EIA) predicts that Indian LNG import demand will continue to rise from it's current level of 12 bcm per year. TAPI could provide 12.5 bcm each to Pakistan and India, satisfying almost a third of Pakistan's current 43 bcm per year consumption and a fifth of India's 65 bcm per year consumption. Yet, crossing war-torn Afghanistan with a major transnational pipeline raises serious questions on the feasibility of the project. Furthermore, other energy majors, including Qatar and China, are increasing their stakes in supply routes and energy projects in Pakistan and India. The IP pipeline would carry only 8.7 bcm of gas per year as contracted to Pakistan, but with a 40 bcm maximum capacity.

Natural Gas Asia also reported this week that, on the sidelines of the IP pipeline launch, the Qatari government offered Pakistan a deal to provide it with 2 million tons of LNG annually at reduced prices. Qatar had initially offered to sell LNG to Pakistan at a rate of $18 per mmBtu, but lowered the sale price this week to between $14-15 per mmBtu.