By Syed Fazl-e-Haider
KARACHI – Iran has agreed to provide US$250 million to help Pakistan build its end of a gas pipeline between the two countries after Pakistani institutions, including Oil and Gas Development Co Ltd (OGDCL) and National Bank of Pakistan (NBP), refused to provide funds for the project because of US sanctions imposed against Iran at the beginning of this year.
Domestic funding for the project is crucial because the US and international sanctions against Iran are likely to block Western and multilateral funding. Deeply indebted Pakistan had earlier planned to borrow $300 million from local banks and $210 million in equity from state-owned companies.
State-owned OGDCL, Pakistan’s largest petroleum company, fears that financing an Iranian project could prompt the withdrawal of foreign shareholders, while NBP is concerned that involvement would lead to closure of its foreign branches due to US sanctions.
The United States has warned Islamabad that the gas pipeline project could violate US restrictions on major financial deals with Tehran, imposed as part of efforts to have Iran abandon its nuclear program, which the US says will lead to nuclear weapons.
Under a sovereign-guarantee agreement related to the Iran pipeline project, Pakistan is bound to start gas flows in 2014 or face a penalty the equivalent of $8 million per day.
Russia has shown interest in financing the IP project if Pakistan were to award a $1.2 billion pipeline contract to its energy giant, Gazprom, without going into a bidding process.
Another possibility is to approach China National Petroleum Corp for financing of the project.
Asim Hussain, Special Assistant to the Prime Minister on Petroleum and Natural Resources, on February 28 told the media in Islamabad that Iran had offered to provide $250 million financing for laying the pipeline infrastructure, against $500 million asked for by Islamabad.
Islamabad and Tehran are firmly committed to implementing the project despite US opposition. Under a $7.6 billion deal the two countries signed in June 2010, Iran is to export 21.5 million cubic meters per day of natural gas to Pakistan by the end of 2014.
Last year, Pakistan awarded a $55 million consultancy services contract for IP pipeline to German firm ILF Engineering Services, which is working in collaboration with the National Engineering Services of Pakistan.
The Gazprom financing proposal came during a four-day visit to Moscow by Foreign Minister Hina Rabbani Khar to Russia last month.
“If Pakistan accepts the demand of Russia and awards the contract to Gazprom, the largest explorer of natural gas in the world, Moscow will also provide financing for the project,” The Express Tribune reported a Pakistani official as saying. “However, Pakistan has not shown any willingness to grant the contract without inviting bids from competing parties, which will violate its Public Procurement Regulatory Authority rules.”
In 2010, the country sought Chinese investment by offering an engineering and procurement deal for the construction of the pipeline project to China, the major buyer of Iran’s oil and gas. China had shown interest in joining the pipeline project, originally planned to supply Iranian gas to India via Pakistan, after India’s withdrawal in 2009.
China is set to be the real beneficiary of sanctions imposed on Iranian oil by the West, as it will be able get more oil from Iran at lower rates. One aspect of China joining the pipeline project would be the possibility of it being extended to China’s northwestern province of Xinjiang.
The former government of president Pervez Musharraf asked China to import what would have been India’s share of the pipeline gas pipeline after India pulled out. The Chinese link could be laid alongside the Karakoram Highway, which connects Pakistan’s northern region of Gilgit Baltistan with western China.
Pakistan is keen to import Iranian gas to alleviate shortages of gas that are crippling industry and daily life. Its gas shortfall is forecast by the government to reach 2.22 billion cubic feet a day this year.
The US has offered Islamabad help in developing a Tukmenistan-Afghanistan-Pakistan-India (TAPI) pipeline as an alternative to the Iran project, and has offered to provide gas at cheaper rates from US energy firms. The US has also threatened Islamabad with economic sanctions if work on IP project is not stopped.
Beyond the gas pipeline, Iran has said it can provide 80,000 barrels of crude oil to Pakistan on a three-month deferred payment. A Pakistani delegation is scheduled to visit Iran next week to discuss the crude oil supplies on credit.
“The deferred payment facility should be forward-looking, otherwise the disparity between the rupee and dollar can hurt us,” The Express Tribune reported Asim Hussain as saying.
Pakistan’s currency is steadily weakening against the US dollar, with the rupee trading at around 90 to the dollar after losing more than 5% against the US currency since last June.
Islamabad is also considering a proposal, currently in the process of finalization, to use wheat exports to Iran to pay for oil imports. Iran agreed last week to import one million tonnes of wheat and 200,000 tonnes of sugar in exchange for export of fertilizer and iron ore to Pakistan....