Iran pipe dreams and beyond

A careful look at what’s under the cover

The Iran Pakistan Pipeline should be an important part of Pakistan’s energy plan, but for some reason the government is still vacillating about it. Statements like “it will remain a pipe dream unless US sanctions are lifted” expose the seriousness of the government in its implementation. This is sophistry, as Iran has already spent over US $ 2 billion to build the pipeline on its side of the border, and therefore no construction work is required in Iran itself. At the same time Pakistan has committed to building a pipeline financed by the Chinese from Gwadar to Nawabshah, therefore all that is needed is a forty eight inch fifty kilometer long pipeline – something that can be constructed quickly at a cost approx. $ 100 million – or the price of a few bullet proof Mercedes cars for our VIPs but would save the country billions.

The US sanctions on Iran would not apply on any construction on Pakistani soil. As far as trading with Iran is concerned, it must be noted at Iran already supplies 10 bcm of gas to Turkey via a pipeline, Iran also exports over 340,000 barrels of oil per day to India and has extended it a $ 5 billion credit line. Pakistan LPG association is negotiating purchase of LPG from Iran, therefore to say the buying O&G products from Iran would violate US sanctions is to put it politely – incorrect.

But the savings would be immense as compared with the governments’ preferred alternative LNG. Liquefied Natural requires the gas to be cooled to -180 C, all this requires sophisticated equipment and energy and typically $2.5-3/mmbtu. The gas must be transported via double hulled specialised vessels which at current charter rates costs $ 30,000 per day. Due to faulty design the ships can only be filled up to sixty percent capacity something that again adds to the cost. There is a 3-5 % boil off during the shipment. Once in port the LNG carrier needs to dock at specialised terminal and the LNG re-gassified, with energy losses and additional cost – in the case of the Elengy terminal in Karachi this is currently 1.5/mmbtu. So by the time gas is in the pipeline it typically adds $ 4/mmbtu to the purchase price of the gas itself. In Pakistan’s case which is purchasing LNG at 13.37% of the price of Brent – currently trading at $ 50/ barrel the price of gas in pipeline is approximately $ 8.5 / mmbtu, exclusive of any taxes.

Accordingly the cost of Pipeline gas is much cheaper than LNG, based on the TTF index for benchmark index for Russian gas in Europe (Holland and France) is $ 5.5 /mmbtu inclusive of transmission costs. Iran itself has been selling gas to Turkey (after the arbitration ruling) for approx. $ 5 /mmbtu. The agreement inked with Turkmenistan for gas is at $ 3.0/mmbtu at the border. In the case of Iran a similar purchase price of $ 3/ mmbtu should be negotiated.

The price of gas particularly LNG has fallen dramatically over the last six months due to the advent of US based gas importers in the market, and the reaction of major suppliers such as Russia to protect their markets by lowering the price of gas. For example Japan purchased LNG in May for $ 4.1/ mmbtu while the Platts JKM index dropped to $ 4.6 / mmbtu. At the same time demand for gas itself is reducing due to renewables being the preferred option over fossil fuel.

Given the lack of interest from Pakistan Iran has offered Indian and other investors to set up industry in the port of Charbahar, near Gwadar, that utilise Gas as feedstock with a price of $ 2.5/ mmbtu, the industries being mooted include Fertiliser, petrochemicals (particularly ethane) and Aluminium smelters. Aluminium smelters themselves don’t use gas but require large quantities of power which would be fired by cheap gas. If this offer is indeed taken up it can be extremely detrimental to Pakistan, because the existing pipeline has a limited capacity, if that this capacity is utilised by Indian industry, then when Pakistan finally decides it needs gas, then there would be no spare capacity in the pipeline left. Building another pipeline in Iran specially to transport gas would not only be very expensive, but would entail negotiating any residual international sanctions on Iran, something that could be tricky and potentially depriving Pakistan of cheap gas.

Pakistan must realise what is in its own interest and make that a priority. An example is the Nord Stream 2 pipeline planned between Germany and Russia. This pipeline, if built, circumvents existing pipelines that pass through Ukraine and Slovakia potentially depriving these allies in billions of revenue in transit fees. It would concentrate about 80 percent of Russian supplies to Europe along one route and increase Gazprom’s share in the German market to 60 percent from 40 percent. This has annoyed Germany’s allies particularly the US and its special envoy and coordinator for international affairs Amos Hochstein, particularly given the delicate relationship between Ukraine and Russia. However the German Chancellor Angela Merkel is undeterred and has vowed to pursue this project as it is in Germany’s commercial interest. The lesson for the Pakistan government is that it must put Pakistan’s own interest first when negotiating any long term agreements.

Unfortunately our politicians and their acolytes have extensive business interest in overseas. Accordingly in negotiations they prefer the interests of those countries rather that of Pakistan, and as a result we have to continually suffer and pay for this.