Last month, after years of on-again, off-again negotiations, Iran and Pakistan signed an agreement for a bilateral natural gas pipeline to be sourced from the South Pars deposit. India has since asked to reopen negotiations, from which it had earlier withdrawn, to make the project trilateral. While pricing issues between Iran and Pakistan appear to be resolved, questions about pipeline security in Pakistan, pricing with India, and the role or non-role of China, are only three of the sets of problems still awaiting resolution.

BACKGROUND: The idea of exporting gas from Iran to India was first discussed by the two countries in 1993, when Indian relations with Pakistan ruled a tripartite arrangement out of the question. Russia's Gazprom would have been involved in constructing an underwater pipeline, but costs proved to be prohibitive. Following this, the possibility of including Pakistan was introduced. In 2001, Iran reportedly offered Pakistan US$ 8 billion in transit fees over a 30-year period for such a three-way pipeline, which would run little more than half the distance from New York to Los Angeles, and which was then estimated to cost US$ 5 billion.

Negotiations proceeded throughout the decade on a double bilateral basis, i.e. Iran-Pakistan and Iran-India, but never the three talking together. Pricing proved to be a stumbling block in both sets of bilateral talks. In 2006, the Indian petroleum minister stated that Iran wanted India to pay LNG (liquefied natural gas) rates for regular natural gas and without discounts for large-quantity purchases. Pakistan, which heavily subsidizes the domestic price of gas and also prospects for natural gas on its own territory, sought the right not to consume quantities it contracted to buy from Iran if these proved unnecessary to satisfy demand.

After India withdrew from the trilateral project in 2008, China has indicated an interest in expanding the bilateral Iran-Pakistan project into a trans-Pakistan route to Xinjiang and from there to eastern China. This interest became more solid after Iran and Pakistan agreed a pricing formula in March 2009. According to a bilateral Iran-Pakistan project proposal, the pipeline would begin from Iran’s Assalouyeh Energy Zone in the south and stretch over 560 miles to Iranshahr, 120 miles west of the border with Pakistan. Construction would cost $7.4 billion. The gas would be supplied from the South Pars field, where Russia's Gazprom is a big investor, and the pipeline would have an initial capacity of 22 billion cubic meters per year (bcm/y) that could be expanded to 55 bcm/y, half of which could go to India in the event. The price for Iran’s gas to Pakistan would vary between $260 per thousand cubic meters (tcm) and $485/tcm as a function of the average price of Japanese customs-cleared (JCC, nicknamed “Japan Crude Cocktail”) oil imports.

IMPLICATIONS: The Iran-Pakistan project still encounters difficulties, not least of which is uncertainty over which exact direction the gas might flow once it enters Pakistan. While there was for a long time much talk about a tripartite Iran-Pakistan-India project (which organizationally never got past the stage of two simultaneous bilateral sets of negotiations between Iran and each of the other two individually), it had long been intended by the parties that a possible variant might be for the gas to go to the Pakistani port of Gwadar, on a small peninsula in the country’s southwest at the entrance to the Persian Gulf, there for liquefaction and sea transport to China.

Four years ago, Pakistan’s president Pervez Musharraf had offered China the possibility of constructing a pipeline through a corridor running the north-south length of the country. This corridor would have run from Gwadar into Xinjiang, following the path of the Karakoram highway (the highest paved international road in the world) linking Pakistan and China. A railway track was also in the preliminary planning stages. However, not only would the cost of construction have been enormous, but also once in China the oil would have required further transport eastward to the areas where energy demand is highest. In the absence of India’s participation in a tripartite gas pipeline from Iran through Pakistan, China bruited the possibility of constructing a gas pipeline running parallel to the projected oil pipeline parallel to the Karakoram Highway.

During the past decade Beijing had helped to construct and develop Gwadar port, which opened at the end of 2008. It had planned to continue the development through constructing an oil refinery there that would have begun by producing 200,000 barrels per day (bpd), a figure later projected to double, sourced from the Persian Gulf countries and sent overland through Pakistan into western China for further eastward transshipment. Late last year, however, China shelved this project, a decision taken followed only a few months after the suspension of work at the Khalifa refinery project, also in Balochistan, by a United Arab Emirates state company.

Although financial conditions and the global recession were invoked in both instances, the security situation in Balochistan also undoubtedly was a factor. Not only was the integrity of the pipeline running over the territory in question, in view of social unrest in the economically poor province, but also the physical safety of Chinese engineers and workers in particular could not be guaranteed. As presently designed, the gas pipeline project would bring no economic benefits to Balochistan or the people living there.

CONCLUSIONS: In the absence of further Chinese involvement in Gwadar, in either oil or gas, it is now reported that Russia’s Gazprom would be involved in constructing the Iran-Pakistan gas pipeline. This makes sense, since India had earlier approached Gazprom while considering gas imports from Iran bilaterally by an undersea pipeline circumventing Pakistan, and also since Gazprom is heavily invested in the South Pars field from where the natural gas for the pipeline would be sourced.

Yet China’s interest in the project is not fully dead, and the route through Pakistan, now planned through Balochistan and Sindh, will be subject to change should Beijing revive its willingness to make an offer. This means that none of the actual feasibility studies or technical surveying has even begun: actual construction, let alone delivery or consumption, cannot begin anytime soon.

The bilateral Iran-Pakistan agreement was signed in Ankara because, according to its own terms, Turkish law will govern it. The need for such a set-up by itself suggests that problems of implementation remain to be resolved: ten years ago, the parties had hoped to be able to draw up contracts based upon European models to which they had access. From India’s standpoint, one of the crucial issues is that it wishes to pay only for the gas that it transports from the border with Pakistan, while Iran wants to charge India for its share of the gas even if India does not receive it due to unforeseen disruption of transit through Pakistan. Against this “take-or-pay” arrangement India had in 2006 proposed a “supply-or-pay” arrangement whereby Iran would be obligated to deliver gas at the Indian border with Pakistan, or else pay for the quantity not delivered.

In the past, India had discovered that the Iranian side sought to reopen negotiations on previously settled points during subsequent rounds of discussions. All these elements, along with disagreements over the quality of the gas to be imported, account for the final failure of the Iran-India talks two years ago, although some observers also point to the bilateral U.S.–Indian civilian nuclear accord. Further complicating the situation, the two parties disagreed over the quality of the gas to be delivered: India sought to receive gas rich in petrochemicals such as butane, propane and ethane, but Tehran rejected the idea. For these and other reasons, some voices within the Indian foreign policy establishment today argue against such a tripartite arrangement and seek to revive the project from the 1990s for a bilateral undersea pipeline.

AUTHOR’S BIO: Robert M. Cutler (http://www.robertcutler.org) is Senior Research Fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada.