Pakistan: Iran’s Plan to Develop Gas Pipeline and Refinery Unlikely to Amount to Anything

Energy shortages are fast becoming the norm in most nations and nowhere is this truer than in Pakistan where energy demand far outpaces resources and supplies. These shortages hurt multiple sectors – national security, international trade and the domestic economy – and look to grow worse, especially as the temperatures increase.

These pose a significant political risk for the ruling Pakistan People’s Party (PPP), who, consequently, has been trumpeting the re-launch of the Iran-Pakistan gas pipeline and the signing of the Memorandum of Understanding (MoU) to build Pakistan’s largest oil refinery in the southwestern port city of Gwader.

These announcements, however, are unlikely to result in anything significant because the PPP is not interested in any long-term projects as it’s focused on winning the upcoming elections. If it wins a majority in the polls it will then have no reason to continue this project – and upset the United States – and if it loses then the incoming government will most likely pivot away from Iran and towards Saudi Arabia.

In that sense, the United States, which has expressed concerns regarding this agreement, has nothing to worry about. This all could change, though, if China decides to support this pipeline and refinery.

To fully appreciate my assessment, one needs to understand the history of this project that first began in 1994 as the Iran-Pakistan-India pipeline with the goal of carrying gas from Iran through Pakistan to India. New Delhi’s departure from this venture in 2009 removed the end-use customer and left the pipeline in limbo. Despite this development, Iran continued to develop its end of the pipeline and, according to multiple reports, has completed most of this construction.

In the meantime, the economy of both countries has continued on a downward trajectory while Pakistan’s energy crisis has grown exponentially. While this makes the project more attractive to Islamabad, its lack of funds is forcing Iran to motivate its neighbor by offering 100,000 barrels per day of crude on deferred payment and $500 million of the $1.5 billion needed to finish the construction.

One should keep in mind, though, that this is just an offer and no money has – or will likely – change hands.

Iran’s enthusiasm for this project has less to do with Pakistan and more with China because Tehran likely wants to replace India with the other growing Asian economy while Beijing wants a reliable source of energy supplies. Furthermore, since China controls the Gwader port (where the Iran-Pakistan pipeline will end and the oil refinery built), it has already become an affiliate of this project.

Obviously, these developments are causing major concerns in the United States who continues to try and isolate Iran from the global economic community. Washington had offered to fund the construction of an alternative pipeline through Turkmenistan but since that project involved Afghanistan, security and geo-political issues doomed it from the beginning.

US pressure on Pakistan will continue through the International Monetary Fund (IMF) who was recently approached by Pakistan for a loan of up to $5 billion, sanctions under the Iran Sanctions Act and the influence of allies such as Saudi Arabia; indeed, Qatar’s recent offer of low-priced natural gas supplies may have been one such inducement. On the other hand, given the country’s dire situation and to prevent an Islamist takeover, Washington may grant a waiver similar to the one given to India, China, and Turkey.

I believe the US does not need to worry about the Iran-Pakistan pipeline and refinery project because it won’t amount to anything. As I noted above, if the PPP loses the upcoming election then the new government will pivot away from Iran and towards Saudi Arabia thereby ending (if only for the time being) this project; even if the PPP wins the election, economic pressure from the US will essentially have the same effect.

Secondly, any pipeline on Pakistan’s side of the border will have to go through Baluchistan and that province’s fragile security will delay the timeline and raise the costs. Furthermore, they will negatively impact motivation and this will affect Chinese involvement because – similar to what’s going on in Afghanistan – Beijing is prepared to wait for access to resources but not for an indeterminate amount of time.

The US, however, should be proactive and use allies such as Saudi Arabia and Qatar to provide discounted energy to Pakistan – especially its new government. Furthermore, it should focus on developing the country’s energy infrastructure through organizations such as the World Bank, IMF and the Export-Import Bank.

The upcoming elections will provide a new opportunity for Washington to engage and influence Pakistan; the question now is whether the US is up to that challenge.