Gazprom backing out of Iran-Pakistan pipeline?

We’re well into May, well past the April 30 deadline for Russian energy giant Gazprom’s final yes or no on the Iran-Pakistan pipeline, rightly causing serious concern in Islamabad. Pakistan’s financing problems have already caused serious delay, constraining its ability to complete its part of the pipeline before the agreed Dec ’14 deadline. According to sovereign guarantees, Pakistan is liable to pay $1m per day in case of overshooting the scheduled completion date.
And even though the most recent official response has been the typical “will be completed on time” (Ijaz Chaudhry), experts are beginning to seriously question Islamabad’s ability to deliver, especially as American pressure systematically removes all prudent avenues of securing finances.
GAZPROM GAMBIT: Sources close to the project speak of a dichotomy in the government’s position.
“One the one hand it (govt) is 100 per cent committed to the project, and confident it will complete construction according to the agreed timeline,” said a consultant with ILF, the German company responsible for the project, on condition of anonymity. “One the other, it has neither requisite technology nor finances to achieve such an end.”
Speculation about Islamabad’s finances is made worse by the government’s freeze on payments to ILF, and the organisation’s Germany based parent body’s decision to suspend resources to its Pakistan chapter till cash flow resumes. Others see the Russian silence as a logical, lengthy analysis of an evolving situation that requires extremely prudent risk management considering the size and scale of required investments and guarantees.
A senior project consultant, asking not to be named since he’s not allowed public comment, told Pakistan Today that expecting an immediate answer from the Russians was foolish to begin with. “Seriously, the ICBC pullout was quite a shock and embarrassment for the government that staked the pipeline as a crucial vote winner in the elections. The feeling here has been that it overplayed the Moscow card since the beginning,” he said. Indeed, Islamabad’s newfound likeness for Moscow, especially foreign minister Hina Rabbani’s spirited outreach, indicates something concrete is being worked on. But a definitive answer cannot be realistically expected before President Putin visits Pakistan later in the year. For now, the Russians will worry about the build-up to Pakistan’s general election, and how different parties posture with regard to American and Saudi incentives of breaking away from anything even remotely Iranian.
“Only and only if the Russians are confident the present dispensation will continue, or whichever replaces it will stay committed to the project, will they pledge the monies,” the consultant said.
DEADLINES AND DELIVERABLES: Interestingly, even though that complicates deadlines and deliverables, whether or not ILF-Pak’s maintaining operations indicates behind-the-scenes hope remains to be seen.
“Russia’s backing away will seriously limit Pakistan’s options,” according to Salman Shah, former finance minister and part of Gen Musharraf’s economic team that negotiated prices with the Iranians. “If the Russians back out, Pakistan will not have access to technology like compressors that are primarily US-made. And even if the question of raising indigenous finances is settled somehow, the government does not have the political will to antagonise the Americans at this point.”
Dr Shah also stresses that the project, in its present format, is simply unviable. “They will have to renegotiate prices even if construction gets going. This government has agreed to much higher prices than we negotiated. The Iranians will have to be more realistic and offer us an affordable deal.”
TAPI LIKELIHOOD: American pressure to break from the deal stems from its wider sanctioning of forex inflows into Iran – citing concern regarding Tehran’s uranium enrichment drive – and advocates the alternate tapi project. Pakistan remains weary because since its inception in the early ‘90s, tapi has been considered unfeasible, owing to 475kms of proposed pipeline through hostile Afghan territory. Strangely the resulting logjam, with Pakistan unable to leverage either option, may bode ill for energy projection, but does not render the project completely useless, at least not just yet. “There was never any real likelihood of the Iran pipeline coming through,” according to Syed Sayem Ali, senior economist (MENA & Pak) with Standard Chartered Bank in Karachi. “They’re just using it as a bargaining chip with the Americas as discussions regarding nato supplies and drone attacks near completion”. Sayem’s take will be tested shortly, as negotiations are indeed almost concluded. If ILF’s funding suddenly dries and bankruptcy prevents further operations, StanChart’s monthly economy review will indeed merit greater appreciation.
“This doesn’t even suit the Russians. Tapi should interest them more, it’s in their natural area of influence. And the Chinese have a natural interest in assisting the Iran pipeline. Yet neither are happening, an indication of how complicated this particular problem has become,” Sayem adds.
ENDGAME: It would seem that even the best case scenario of the Russians agreeing, that too on our terms (still contentious), would now not see Pakistan reaching the finish line in time. The Iranians have all but built their part of the pipe, while here work has not even begun.
“It’s a non-starter,” says Sayem. “Why do you think even financial and technical feasibilities have not been sanctioned?”
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