May Issue 2010

“We need this gas urgently, but on the other hand, not at this price”
– Dr Gulfraz Ahmad, Former Secretary,
Ministry of Petroleum and Natural Gas

The Iran-Pakistan pipeline agreement, inked in March, is the latest step Islamabad has made in the long-running negotiations with its neighbour over the trans-boundary flow of compressed natural gas to this energy-stressed nation. By reaching this understanding with Tehran, the government of Pakistan has taken a concrete step towards addressing the gas and electricity shortage in the country — Pakistan is currently faced with an electricity shortage nearing 5,000 megawatts per day and by 2015 the gas pipeline could increase the nation’s power generation capacity by 25%. These days, besides electricity load-shedding, Pakistan is now undergoing gas load-shedding as well. With unending rising demand, Pakistan’s gas shortage is on the verge of turning into a major crisis if the pipeline deal doesn’t materialise.

Iran’s huge offshore South Pars gas field in the Persian Gulf is slated to pump vital energy resources to Pakistan through a pipeline passing through Balochistan and Sindh. The construction of the pipeline is estimated to cost a whopping $7.5 billion. The plan is for Iran to supply 750 million to 1 billion cubic feet of gas per day, by mid-2015. Replacing furnace oil imports with these gas imports could save Pakistan industries $1 billion annually.

The players may have to wait another five years for the deal signed in Turkey to materialise, but the symbolism of two sizeable neighbours standing shoulder-to-shoulder with Iran serves Tehran’s immediate need for posturing on the global stage. Defying the United States’ efforts to isolate Iran from the world, Pakistan and Turkey, two of Iran’s key allies, have stood firmly with the cleric-ruled Islamic Republic.

The Iran-Pakistan gas pipeline deal has already increased the likelihood that China will be part of the project, since India abandoned it following its deal for civilian nuclear reactors in 2008 with the US. The pipeline’s Balochistan-Sindh route may be changed if China agrees to share the project. So far China, a member of the United Nations Security Council (UNSC), has shown neither interest nor disapproval of the idea. However, think tanks in the United States, fear China may be entering the deal sooner or later and they see China’s dependence on Iran as the biggest hurdle to the UNSC maintaining effective sanctions against Tehran. In a recent UPI wire service report, US political analyst Gal Luft was quoted saying that the pipeline could also “have profound implications for the geopolitics of energy in the 21st century and for the future of South Asia.”

Sources in the Pakistani foreign ministry say Washington has been using a carrot-and-stick approach in dissuading Islamabad from pursuing the pipeline with Iran. For example, Islamabad was offered assistance from the US to build a liquefied natural gas terminal and the option of importing electricity from Tajikistan through Afghanistan. Every time the Iran-Pakistan gas pipeline entered a new phase, a Turkmenistan option was propagated through news reports as more economical and viable.

Pakistan’s foreign office has been rejecting Washington’s concern with regard to its ties with Iran. “We have concluded the I-P gas pipeline project with Iran,” said spokesman Abdul Basit at an April briefing. “This is our sovereign decision and the government of Pakistan will take decisions only in consonance with its own national interests.” The government says this is just one plan to help Pakistan address the energy crisis.

The pipeline agreement benefits Iran immensely too. Iran has not only found hope for a prosperous future with the breakthrough 560-mile gas pipeline, but it has also found itself a great deal. Gulfraz Ahmad, the former secretary for the Ministry of Petroleum and Natural Gas, is unhappy with how Pakistan has negotiated the recent agreement. He led negotiations for Pakistan in the mid-1990s and says that delays, political instability and inexperience has resulted in a deal that favours Iran and will have Pakistan paying too much for imported gas. “We need this gas urgently,” Dr Ahmad says, “but not at this price.”

More pipelines could be snaking across the region to Pakistan. The current deal only serves Pakistan’s needs in the medium term. Gas imports beyond what the I-P deal provides will be needed to ensure Pakistan’s energy security. This will come from more regional agreements and foreign investment, though it won’t be easy. “For foreign investment and successes in the energy sector, it is paramount to ensure physical security in terms of law and order. At the same time, investors’ confidence in Pakistan’s judicial system is vital,” he says.

In this interview, Newsline talks with Dr Gulfraz Ahmad about the history of these negotiations, the potential for re-negotiating the price and the nation’s future energy needs.

Q: What were the initial options for Pakistan to meet its future energy needs?

A: The initial understanding on pipelines was achieved in the mid-1990s with Iran and Turkmenistan. Qatar was ready for the gas pipeline much before. So, there has been a concept of a pipeline from Qatar, Iran or Turkmenistan. The shortest was from Turkmenistan, but Afghanistan was not stable enough. As far as Qatar is concerned, the pipeline involved an undersea conduit that had to either traverse through the territorial waters of Iran or part of the Iranian coastline. The Qatar pipeline was, in effect, impossible if Iran was not part of the process. There was a conflict of interest as well: If Iran could give us gas, then why should Tehran allow Qatar’s pipelines to go across its territorial waters?

Q: You were at the helm of the affair at that point. What strategy was adopted to reach the best deal?

A: A Shell-led consortium was trying to negotiate the price for Iranian gas. We decided to give a few months to each country to discuss prices with us. We gave the opportunity to Turkmenistan first because its gas was landlocked, there was no other market and I thought we could get a good price from them. We believed that once that price was negotiated, we could then use it in talks with Iran and Qatar. Following this strategy, I negotiated a price with Turkmenistan on September 15, 1997. We agreed on $1.65 for 1 million Btu above the floor and $2.05 per one million Btu was the cap, and within these very narrow limits it was linked with the price of crude oil, but the price could never go beyond the cap price. Once I had signed this agreement, I started negotiations with Iran. Iran’s presidential envoy, Mr Qasimpur, was charged with the responsibility to negotiate the price. When initially Mr Qasimpur came to Islamabad, their expectations were very high, in the range of $2.50. After six months, when he came back, Iran had come down to $2.20. We reminded Mr Qasimpur that even if he matches the Turkmen price, we still could not give them the contract, as we wanted a price slightly below what Turkmenistan was offering us, in order to justify walking out of the agreement on grounds of national advantage.

The Iranian envoy agreed to discuss with his government and push the price a little lower than $2.05. Soon the military took over and the Musharraf regime interrupted the process. I was removed from the petroleum office, but I was very anxious for the project not to be lost in the crackdown against politicians and the former government.

Dr Gulfraz Ahmad

Q: What happened to the other pipeline options?

A: Well, Qatar had lost interest in the gas pipeline due to the complexity arising from Iran. Qatar was keen before anybody else, because they thought it could be the only pipeline to bring gas to Pakistan. Later, Qatar also changed its national strategy and adopted an LNG route. That is how time was lost.

As far as the Turkmenistan pipeline is concerned — after we finalised the price, the consortium started seeking the consent of warlords for protection of the pipeline, and even started education projects in the area. Meanwhile, the state department stopped UNICOL from pursuing this project as it thought this would help the Taliban government, and it did not want to do that.

Q: Where does India enter the pipeline talks?

A: In January 2004, I authored a United Nations Development Programme (UNDP) report on Peace and Prosperity Gas Pipelines. This first-of-a kind study looked at the benefits of a shared pipeline for the people of Pakistan and India. There are tremendous economies of scale because if you double the diameter of a pipeline, the cost does not double but the carrying capacity goes up by 5.5 times. This lowers the per unit cost as well as the landing cost of gas. The paper proved that both economies in 2004 needed a boost through environmentally clean gas at the minimum price for the next 40 to 50 years. That study was able to move minds in both countries, and I was invited to India to present the work of the study under the auspices of the UNDP, twice.

I submitted that Pakistan could bring a pipeline from any source, while the North Indian market of New Delhi could only be energy secure at twice the market rate, by whatever means. On the other hand, if Pakistan allowed the pipeline to go to India, its landing cost would be halved, while India would still be the principal beneficiary. Pakistan’s landing cost of gas would be subsided due to the overriding benefit to India.

Q: Who is responsible for this delay and the cost incurred thereof?

A: We have lost precious time. The price of natural crude oil went up by $140 a barrel, then, the price of natural gas went very high as well, and so pre-2007 price negotiations would have been in a different matrix than today.

First, even though the construction would have taken time, the military government interrupted the process when we were going to put sovereign guarantees at less than $2.05 per million Btu. The military government also wasted precious time by waiting for India to agree on the price structure and modalities until the price jumped, leaving them with no option but failing to meet the rising energy demand in the country.

Q: How do you see the pricing structure of the Iran-Pakistan gas pipeline agreement?

A: I am now appalled to know that the present negotiations are in the region of 80% of Brent crude, compared to the under $20 crude oil price in 1997 when talks with Turkmenistan concluded and Iran was ready to sell gas at a much lower price. At the same time, prices were not linked with Brent crude oil. I am very fearful of the existing mechanism: When you make a commitment for an off-take of natural gas for 40 years through pipelines you have made, you are market dependent on the source for a long period of time. You never give market prices in this situation because even if you don’t need the gas, you are still obligated to buy it. Even if the gas is highly priced and your economy cannot afford it, you still have to buy it. These people who have committed 80% of Brent crude did not know that it was not the spot purchase they were agreeing to, but instead they were giving a guaranteed market for 40 years — no one ever does that. I don’t think that they are aware of that. If it was a one-time buy, we can agree on a fixed price, but if we want to buy for four decades, then we should recieve the benefit of a reduced price. Let’s say we realise that there are cheaper options available to us: we may import coal, or we may put more money in Thar coal. Now, even if oil slides down to $60 a barrel, this price will still be about $8 per Btu.

Q: The government might claim to have relied upon evaluations by independent consultants. Nonetheless, what options are there for Pakistan now?

A: One scenario is that this project drops for one reason or the other. In the sale-purchase agreement, it is written that some average amount of gas would be bought every year, and if you don’t get it, you still have to pay for it. For example, if Iran offers at 50% of Brent crude, India would not buy it because you want some major compensation for committing your market. The best scenario for Pakistan would be to have India enter the project so we could go back to the price negotiation table. On the one hand, we need this gas urgently, but on the other hand, not at this price.

Q: Do we have any legal ways to deal with the situation?

A: There are examples of unilateral changes in international contracts when two parties enter into a contract and at some stage one party becomes aware of the fact that carrying out the contract can be extremely damaging and may even bankrupt them. There are international precedents to adjust the contract to the extent that they still get enough profit. Even if this bilateral agreement is signed with Pakistan and Iran, any new government could re-open the issue — but it is going to annoy our friends. It is best if this government realises the enormity of the issue.

Q: How would the local gas industry react given the lower prices received by them and higher prices for the Iranians?

A: Our own indigenous gas industry has started looking at this price saying that “if you are going to buy it at such high price, then why don’t you give it to us here and we will find you more gas.”

In fact, the local gas price is part of the concession agreements under the policy when it was signed. If it was signed in the ’60s and ’70s, the price was really low, but these companies made their investment at that time. Thus, they are making the required rate of return at that low price. These companies don’t realise that the investment would be made today, and earlier investments were under different contract agreements. This has created a difficulty internally.

Q: How do you see the future energy security of Pakistan?

A: The gap between projected need and projected indigenous supply is growing, and this gap cannot be filled without rightly price imported natural gas. Importing natural gas is inescapable for Pakistan’s energy needs because from 2010 onwards your gas production is going to go down. Two LNG trains and one Iran gas pipeline is not sufficient. By 2020, we would need a second pipeline and by 2025, we will need yet another if we assume economic growth at 8 per cent.

Q: There are still prospects of US-led UN sanctions against Iran, which may hamper the purchase of gas from the country. How do you analyse Washington’s understanding of our needs?

A: Until its energy security is taken care of, Pakistan would not remain a strong enough ally for the United States. I am pleased to know the director of International Energy Initiatives in the Brookings Institute told me that he has made a convincing case for Pakistan for civil nuclear power and also for not coming in the way of Iran gas pipeline. The US, during Prime Minister Gilani’s visit, was amenable to Pakistan’s needs for civil nuclear power compared to its past stance.