Iran aims for an energy break-out
By Peter Lee
While Western attention was focused on Saudi Arabia's possible provision of energy guarantees to China in return for a "yes" vote on Iran sanctions, Iran was working to leverage its natural gas reserves into economic alliances with China, India and Pakistan.
In addition to awarding concessions to China, on February 8 Tehran invited Beijing to take the place of India in one of the most contentious energy projects in South Asia: the Iran-Pakistan-India or "Peace" natural gas pipeline.
However, economics and the realities of the confrontation with the United States over Iran's nuclear program may force China to disregard the strategic attractions of Tehran's offer - and the pressing energy needs of its ally, Pakistan - and decline.
The world is in the middle of a boom in demand for natural gas and Iran happens to be sitting on one of the largest undeveloped reserves in the world - the offshore South Pars field. Tehran has carved the reserve into more than two dozen blocks or "phases", which it offers to foreign partners for development.
Access to South Pars gas is a matter of considerable interest to China and India, especially since their national energy companies have a chance to get into the game because Western sanctions have sidelined the majors.
On February 11, Reuters reported that China National Petroleum Corporation (CNPC) had "clinched" its deal for Phase 11 and would begin exploratory drilling in March. The $4.7 billion investment, combined with on-shore crude and refining projects, would give CNPC a total exposure of $10 billion inside Iran.
Meanwhile, India is moving more cautiously to finalize a deal with Iran to participate in a 40% share in Phase 12 production and 20% in the related onshore liquefied natural gas (LNG) facility. The Iranian government seems keen to sweeten the deal, according to Dow Jones:
At the same time, they are strongly market-driven, designed to deliver cheaper LNG for ocean shipment to India and China in return for their investment.
Iran's multinational pipeline projects - which remove Iranian energy exports from dangerous international waters and lock in support for uninterrupted supply by the sovereign states across whose territories the pipes run - have been marked by greater frustration.
Over the past weeks, as the United States labored to tighten the noose around Tehran, there has been a major flurry of activity over the proposed IPI pipeline, designed to link South Pars natural gas with markets in Pakistan and India.
This project has been limping along for over a decade in the face of determined US resistance, pricing squabbles, and Indian misgivings over relying on Pakistan to protect the pipeline and ensure supply.
By 2008, India had discretely drifted away from the IPI project, never formally abandoning it but never responding to calls to schedule further negotiations.
Iran, anxious for a geopolitical win on the pipeline, has restructured the first stage as a smaller-diameter pipeline supplying Pakistan only. India's departure also allowed the two partners to put the pipeline on land (India had been agitating to put the pipe in shallow coastal waters to protect it from Pakistani and terrorist shenanigans) and significantly reduces its cost.
After months of negotiations, on February 11 Islamabad and Tehran finalized agreement on the key issues, including the issuance by Pakistan of a "comfort letter" that provided Iran with the assurance that India - or China - could be brought into the project at a later date. The two parties have vowed to sign the formal agreement by March 8 in Ankara, Turkey. Dawn reported:
Despite its apparent abandonment of the lower-cost IPI pipeline - and its commitment to purchase millions of tons of LNG every year from Qatar - the temptation for India to continue playing pipeline diplomacy is apparently irresistible.
As an alternative to the IPI line, Indian promoters proposed a consortium called "SAGE" or South Asia Gas Enterprise, a deep-sea pipeline envisioned as India's geopolitical game-changer. It would draw on supplies from all the major players - Qatar, Iraq and Iran -and carry natural gas from Oman to western India at depths of as much as 3,500 meters. The cost of this unprecedented effort was budgeted at a suspiciously inexpensive $3 billion (almost as cheap as the downsized, overland IP pipeline, which came in at $2.538 billion in its final form).
Indian diplomats also visited natural gas export giant Turkmenistan in early February and received a polite expression of support for the legendary TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline, an anti-Russian conception once so powerful it compelled Unocal to negotiate with the Taliban, and that still clings to life in American strategy as the "other" non-Iranian pipeline to India.
Turkmenistan's interest in TAPI (which adds the seemingly insurmountable security headaches of Afghanistan on top of Pakistan's) is presumably less than intense, since it recently completed pipelines to move its natural gas to China and Iran.
A proposal reported by UPI seemed to defy geography by calling for landlocked Turkmenistan to establish "an undersea route that would bring gas from Turkmenistan through a point south of Iran using the proposed South Asia Gas Enterprise pipeline to India ... [rendering] Iran's South Pars plans irrelevant."
In another effort to bring Turkmen natural gas into play, India also proposed to invest in Turkmenistan and have its gas swapped to Iran. Iran would then put its own gas into the ubiquitous SAGE network.
It remains to be seen if any of these plans come to fruition, or are being floated merely to provide Western governments and investors with further reason to shun the IP project.
India has the reserves, foreign exchange, and accommodating allies needed to pursue natural gas pipe dreams.
For Pakistan, things are much more desperate. For Islamabad, the Iran-Pakistan pipeline is seen as a vital source of energy and, if it can ever get extended to a third country, potentially millions of dollars in transit fees.
Pakistan's desperation has also impelled it, albeit cautiously and equivocally, to defy the US on the issue of dealing with Iran.
Pakistan, without significant oil and coal reserves, relies on natural gas for 50% of its energy needs - one of the highest levels of natural gas dependency in the world. The deterioration of domestic gas production has translated directly into power shortages. Today, Pakistan faces a daily shortfall of one billion cubic feet, 20% of demand.
Pakistan's energy authority has signed contracts for Qatar LNG (and a storage and regasification facility at Karachi) that will take care of about half of the shortfall. The balance plus some extra for growth - about 750 million cubic feet per day - could be supplied by the pipeline from Iran.
However, Islamabad is not in a strong position to resist American pressure and finance its $1 billion section of the pipeline on its own.
High import costs and weak exports have combined to drain Pakistan's foreign exchange reserves; it is relying on an injection of more than $10 billion from the International Monetary Fund (IMF) to sustain its position.
As it struggles through the global recession and domestic security and economic difficulties, Pakistan is also dependent on aid orchestrated by the US in order to patch over its government deficit - now over 5% of gross domestic product - and so keep the IMF happy.
For whatever reason, aid has been slow in coming.
A January filing with the IMF revealed that, of the $2 billion generously pledged by "Friends of Democratic Pakistan" in April 2009, exactly zero had been disbursed and only $100 million was expected by the end of the fiscal year in March 2010.
At the end of January, President Asif Ali Zardari also raised the issue of $1.3 billion in arrears in "Coalition Support Funds", the US subsidy covering Pakistan's war on terror-related expenditure, with US Defense Secretary Robert Gates.
In a speech before Pakistan's National Defense University on February 13, US ambassador Anne Patterson put America's spin on Pakistan's complaints, stating:
As Pakistan's energy minister promised that the much-delayed final signing would take place in Turkey before March 8, it became clear that the US was quite willing to play hardball over Pakistan's energy shortage.
Dawn reported that, according to sources, "another reason for the delay was that [the] Pakistani government had been unable to allocate proper financing for this project and the US was not willing to give financial assistance in this regard".
Meanwhile, Asian News International reported: "According to sources, US Special Envoy to Afghanistan and Pakistan Richard Holbrooke, during his meeting with Petroleum Minister Syed Naveed Qamar, said Islamabad would have to abandon its pipeline accord with Tehran in order to qualify for extensive American energy assistance, especially for importing Liquefied Natural Gas (LNG) and electricity.
"Insiders said that in case Pakistan cancels its plan of importing gas from Iran through pipeline, the US would help Islamabad import electricity from Tajikistan through Afghanistan's Wakhan corridor."
With the departure of India from the IPI consortium and the imposition of relentless US pressure, both Iran and Pakistan are feeling the lack of a partner with international financial and diplomatic muscle.
Unsurprisingly, there is interest in China replacing India in the project.
On February 8, the Tehran Times ran the following story entitled "China May Replace India in IPI Project":
China, like India, relies on ocean shipments of Qatar LNG for the bulk of its natural gas needs for sound economic reasons.
The questionable economics of the IP project as far as supply to China is concerned may restrain Beijing's enthusiasm for pitching in and pre-empting New Delhi on this project.
None of the near-term options appears inviting for China.
Potentially, China could build an LNG train at the port in Gwadar, near the pipeline's point of entry into Pakistan, to ship its share by sea. But that would mean an investment of hundreds of millions of dollars to transport and liquefy gas it could get near the wellhead at South Pars as part of its CNPC deal.
Or it could spend billions building a pipeline north through Pakistan and the Khunjerab Pass to Kashgar in Xinjiang, and in the process solve the unprecedented technical difficulty of constructing and operating a gas line over the high passes of the Himalayas.
It may transpire that the most feasible option for China would be to defer any natural gas-related investment until Beijing and Islamabad jointly complete the planned rail link between Gwadar and Kashgar, and LNG shipments can become a viable component of growing two-way mixed freight traffic between China's west and the Arabian gulf.
From a geopolitical perspective, China is pursuing its confrontation with the United States over Iran very cautiously. It will think twice before antagonizing India and further isolating itself diplomatically at this juncture by poaching the IP pipeline project.
Therefore, Iran may be unable to leverage its natural gas advantage into pipeline links to Pakistan, India, and China for the time being. Instead, it may have to settle for liquefaction near the wellhead, and continue to endure the vulnerability of ocean shipment to sanctions and war.
By Peter Lee
While Western attention was focused on Saudi Arabia's possible provision of energy guarantees to China in return for a "yes" vote on Iran sanctions, Iran was working to leverage its natural gas reserves into economic alliances with China, India and Pakistan.
In addition to awarding concessions to China, on February 8 Tehran invited Beijing to take the place of India in one of the most contentious energy projects in South Asia: the Iran-Pakistan-India or "Peace" natural gas pipeline.
However, economics and the realities of the confrontation with the United States over Iran's nuclear program may force China to disregard the strategic attractions of Tehran's offer - and the pressing energy needs of its ally, Pakistan - and decline.
The world is in the middle of a boom in demand for natural gas and Iran happens to be sitting on one of the largest undeveloped reserves in the world - the offshore South Pars field. Tehran has carved the reserve into more than two dozen blocks or "phases", which it offers to foreign partners for development.
Access to South Pars gas is a matter of considerable interest to China and India, especially since their national energy companies have a chance to get into the game because Western sanctions have sidelined the majors.
On February 11, Reuters reported that China National Petroleum Corporation (CNPC) had "clinched" its deal for Phase 11 and would begin exploratory drilling in March. The $4.7 billion investment, combined with on-shore crude and refining projects, would give CNPC a total exposure of $10 billion inside Iran.
Meanwhile, India is moving more cautiously to finalize a deal with Iran to participate in a 40% share in Phase 12 production and 20% in the related onshore liquefied natural gas (LNG) facility. The Iranian government seems keen to sweeten the deal, according to Dow Jones:
India has the option to raise its investment in South Pars. For every extra dollar investment, India will get a right in the downstream LNG project, [managing director of India's state-run Oil & Natural Gas Corp Ltd Seifollah] Jashnsaz said.These deals have a definite diplomatic value to Tehran, as they increase the stake of key Asian players in the continued viability of the current Iranian regime.
Iran may also help Indian companies raise funds for the projects, with Naftiran Intertrade [an arm of the National Iron Oil Co] depositing its foreign exchange with Indian banks ...
At the same time, they are strongly market-driven, designed to deliver cheaper LNG for ocean shipment to India and China in return for their investment.
Iran's multinational pipeline projects - which remove Iranian energy exports from dangerous international waters and lock in support for uninterrupted supply by the sovereign states across whose territories the pipes run - have been marked by greater frustration.
Over the past weeks, as the United States labored to tighten the noose around Tehran, there has been a major flurry of activity over the proposed IPI pipeline, designed to link South Pars natural gas with markets in Pakistan and India.
This project has been limping along for over a decade in the face of determined US resistance, pricing squabbles, and Indian misgivings over relying on Pakistan to protect the pipeline and ensure supply.
By 2008, India had discretely drifted away from the IPI project, never formally abandoning it but never responding to calls to schedule further negotiations.
Iran, anxious for a geopolitical win on the pipeline, has restructured the first stage as a smaller-diameter pipeline supplying Pakistan only. India's departure also allowed the two partners to put the pipeline on land (India had been agitating to put the pipe in shallow coastal waters to protect it from Pakistani and terrorist shenanigans) and significantly reduces its cost.
After months of negotiations, on February 11 Islamabad and Tehran finalized agreement on the key issues, including the issuance by Pakistan of a "comfort letter" that provided Iran with the assurance that India - or China - could be brought into the project at a later date. The two parties have vowed to sign the formal agreement by March 8 in Ankara, Turkey. Dawn reported:
Under the comfort letter, the government of Pakistan would allow the third country to import gas through [the] IP [Iran-Pakistan] line in case any country in future comes to join the project, but the permission will be subject to the gas tariff and transit fee to be worked out as per best practices of that time.On February 10, as the Iran-Pakistan agreement neared conclusion, Iran's ambassador to India stated that "the door is still open" for India to participate. New Delhi has not responded.
Despite its apparent abandonment of the lower-cost IPI pipeline - and its commitment to purchase millions of tons of LNG every year from Qatar - the temptation for India to continue playing pipeline diplomacy is apparently irresistible.
As an alternative to the IPI line, Indian promoters proposed a consortium called "SAGE" or South Asia Gas Enterprise, a deep-sea pipeline envisioned as India's geopolitical game-changer. It would draw on supplies from all the major players - Qatar, Iraq and Iran -and carry natural gas from Oman to western India at depths of as much as 3,500 meters. The cost of this unprecedented effort was budgeted at a suspiciously inexpensive $3 billion (almost as cheap as the downsized, overland IP pipeline, which came in at $2.538 billion in its final form).
Indian diplomats also visited natural gas export giant Turkmenistan in early February and received a polite expression of support for the legendary TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline, an anti-Russian conception once so powerful it compelled Unocal to negotiate with the Taliban, and that still clings to life in American strategy as the "other" non-Iranian pipeline to India.
Turkmenistan's interest in TAPI (which adds the seemingly insurmountable security headaches of Afghanistan on top of Pakistan's) is presumably less than intense, since it recently completed pipelines to move its natural gas to China and Iran.
A proposal reported by UPI seemed to defy geography by calling for landlocked Turkmenistan to establish "an undersea route that would bring gas from Turkmenistan through a point south of Iran using the proposed South Asia Gas Enterprise pipeline to India ... [rendering] Iran's South Pars plans irrelevant."
In another effort to bring Turkmen natural gas into play, India also proposed to invest in Turkmenistan and have its gas swapped to Iran. Iran would then put its own gas into the ubiquitous SAGE network.
It remains to be seen if any of these plans come to fruition, or are being floated merely to provide Western governments and investors with further reason to shun the IP project.
India has the reserves, foreign exchange, and accommodating allies needed to pursue natural gas pipe dreams.
For Pakistan, things are much more desperate. For Islamabad, the Iran-Pakistan pipeline is seen as a vital source of energy and, if it can ever get extended to a third country, potentially millions of dollars in transit fees.
Pakistan's desperation has also impelled it, albeit cautiously and equivocally, to defy the US on the issue of dealing with Iran.
Pakistan, without significant oil and coal reserves, relies on natural gas for 50% of its energy needs - one of the highest levels of natural gas dependency in the world. The deterioration of domestic gas production has translated directly into power shortages. Today, Pakistan faces a daily shortfall of one billion cubic feet, 20% of demand.
Pakistan's energy authority has signed contracts for Qatar LNG (and a storage and regasification facility at Karachi) that will take care of about half of the shortfall. The balance plus some extra for growth - about 750 million cubic feet per day - could be supplied by the pipeline from Iran.
However, Islamabad is not in a strong position to resist American pressure and finance its $1 billion section of the pipeline on its own.
High import costs and weak exports have combined to drain Pakistan's foreign exchange reserves; it is relying on an injection of more than $10 billion from the International Monetary Fund (IMF) to sustain its position.
As it struggles through the global recession and domestic security and economic difficulties, Pakistan is also dependent on aid orchestrated by the US in order to patch over its government deficit - now over 5% of gross domestic product - and so keep the IMF happy.
For whatever reason, aid has been slow in coming.
A January filing with the IMF revealed that, of the $2 billion generously pledged by "Friends of Democratic Pakistan" in April 2009, exactly zero had been disbursed and only $100 million was expected by the end of the fiscal year in March 2010.
At the end of January, President Asif Ali Zardari also raised the issue of $1.3 billion in arrears in "Coalition Support Funds", the US subsidy covering Pakistan's war on terror-related expenditure, with US Defense Secretary Robert Gates.
In a speech before Pakistan's National Defense University on February 13, US ambassador Anne Patterson put America's spin on Pakistan's complaints, stating:
[T]he ultimate solution to Pakistan's current and future economic challenges does not reside with the United States or with the international donor community. It rests with you, the people of Pakistan. American taxpayers will not forever pay for Pakistan's economic and social development.Based on Washington's actions to date, if and when it comes time to finance a pipeline connecting Pakistan with Iran, Islamabad will probably find itself bereft of any US financial support, possibly in difficulties with the IMF over its deficits, and unable to attract funding by international or private investors.
As Pakistan's energy minister promised that the much-delayed final signing would take place in Turkey before March 8, it became clear that the US was quite willing to play hardball over Pakistan's energy shortage.
Dawn reported that, according to sources, "another reason for the delay was that [the] Pakistani government had been unable to allocate proper financing for this project and the US was not willing to give financial assistance in this regard".
Meanwhile, Asian News International reported: "According to sources, US Special Envoy to Afghanistan and Pakistan Richard Holbrooke, during his meeting with Petroleum Minister Syed Naveed Qamar, said Islamabad would have to abandon its pipeline accord with Tehran in order to qualify for extensive American energy assistance, especially for importing Liquefied Natural Gas (LNG) and electricity.
"Insiders said that in case Pakistan cancels its plan of importing gas from Iran through pipeline, the US would help Islamabad import electricity from Tajikistan through Afghanistan's Wakhan corridor."
With the departure of India from the IPI consortium and the imposition of relentless US pressure, both Iran and Pakistan are feeling the lack of a partner with international financial and diplomatic muscle.
Unsurprisingly, there is interest in China replacing India in the project.
On February 8, the Tehran Times ran the following story entitled "China May Replace India in IPI Project":
Iranian Foreign Minister Manouchehr Mottaki stated China might replace India in the proposed Iran-Pakistan-India gas pipeline project very soon as India has been dithering over the deal.So far, there has been no official Chinese acknowledgement of this feeler.
China, like India, relies on ocean shipments of Qatar LNG for the bulk of its natural gas needs for sound economic reasons.
The questionable economics of the IP project as far as supply to China is concerned may restrain Beijing's enthusiasm for pitching in and pre-empting New Delhi on this project.
None of the near-term options appears inviting for China.
Potentially, China could build an LNG train at the port in Gwadar, near the pipeline's point of entry into Pakistan, to ship its share by sea. But that would mean an investment of hundreds of millions of dollars to transport and liquefy gas it could get near the wellhead at South Pars as part of its CNPC deal.
Or it could spend billions building a pipeline north through Pakistan and the Khunjerab Pass to Kashgar in Xinjiang, and in the process solve the unprecedented technical difficulty of constructing and operating a gas line over the high passes of the Himalayas.
It may transpire that the most feasible option for China would be to defer any natural gas-related investment until Beijing and Islamabad jointly complete the planned rail link between Gwadar and Kashgar, and LNG shipments can become a viable component of growing two-way mixed freight traffic between China's west and the Arabian gulf.
From a geopolitical perspective, China is pursuing its confrontation with the United States over Iran very cautiously. It will think twice before antagonizing India and further isolating itself diplomatically at this juncture by poaching the IP pipeline project.
Therefore, Iran may be unable to leverage its natural gas advantage into pipeline links to Pakistan, India, and China for the time being. Instead, it may have to settle for liquefaction near the wellhead, and continue to endure the vulnerability of ocean shipment to sanctions and war.
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