Thursday, February 18, 2010

Iran, China, and the Natural Gas Game

I have an article up at Asia Times on Iran’s natural gas diplomacy entitled Iran aims for an energy breakout. Iran is having good success in enticing Chinese and Indian energy companies to take blocks (known as “phases”) of the offshore South Pars gas fields.

Just as Secretary Clinton was jawboning the Saudis to give China energy assurances in return for Beijing's OK on sanctions, China National Petroleum Corporation reportedly finalized its $4 billion+ deal to develop South Pars Phase 11 and will begin exploratory drilling in March.

Iran is finding less success in getting a natural gas pipeline built to its east—the long-gestating Iran-Pakistan-India a.k.a. IPI or “Peace” pipeline--despite the fact that, from an economic point of view, the project is an absolute slam dunk.

India has effectively scuttled the project, citing security and transit cost concerns, but the real reason is probably its acquiescence to the United States’ implacable determination to deny Iran the economic, security, and diplomatic leverage a pipeline would provide.

Iran and Pakistan are trying to pull the project together themselves, and hope to sign the final agreement in Ankara by March 8.

However, Pakistan is flat on its back fiscally and financially and the United States has its boot rather firmly on Islamabad’s windpipe. Islamabad and Tehran have issued invitations to Beijing to get involved and replace India, but I don’t think the economic and geopolitical benefits are there for China.

As a result, Pakistan and India are being forced to go the liquefied natural gas by ocean shipment route (from Qatar) instead of getting less expensive natural gas by pipeline (from Iran).

Not a huge deal for prospering, coal-rich, and diversified India, but Pakistan is in the middle of a severe, structural energy crisis and it desperately needs Iranian gas.

To give China Matters readers an idea of the dimension of the problem, here’s a clip from AFP—which doesn’t mention the structural issue of the declining Pakistani domestic gas production, or the fact that Pakistan relies on gas for 50% of its energy needs—and an excerpt from my Asia Times article describing the importance of the pipeline and the U.S. diplomatic pressure and, possibly, financial engineering, being used to block it:

From AFP:

Since late December, Pakistanis have been suffering at least six hours a day without power, as a lack of rain to run hydro power plants exacerbates a long-running power shortage.

In rural areas and poorer city neighbourhoods, blackouts can last for most of the day.

Pakistan is only able to produce about 80 per cent of the electricity it needs, officials from the main power regulatory authority the Pakistan Electric Power Company (PEPCO) say.

From Asia Times:

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.

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."

For Pakistan to try to defy the United States on its pet issue of Iran, Pakistan must be pretty desperate. That’s something that American policymakers should be thinking about as they push Pakistan to the wall on the IP pipeline.


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