Pakistan and Iran are forging ahead with energy co-operation, despite the objections of the United States. Lurking in the background is China, which is quietly involved in triangulating the relationship.
IHS Global Insight perspective | |
Significance | On 11 March, Pakistani president Asif Ali Zardari oversaw the inauguration of the Iran-Pakistan (IP) gas pipeline, almost 19 years after preliminary discussions began on a project that could alleviate Pakistan's severe energy shortages. |
Implications | But with a price tag of USD1.5 billion just for the construction of the part of the pipeline on Pakistan's territory, profound questions have been raised about its funding by a country in the middle of severe economic challenges. |
Outlook | In a further development ahead of Zardari's trip to Iran, Pakistani and Iranian officials announced plans to build a USD4 billion oil refinery in Gwadar, to be built by Iran. For the moment, Iran's sanctioned economy does not have the capacity to undertake such a large project, which is likely to bring further US criticism. The location of the planned project near Gwadar port has further highlighted the convergence of China's interests with those of Iran in the region. |
Alleviating energy shortages
In the past two years, acute energy shortages have crippled life in parts of Pakistan, prompted street protests especially during the prolonged dry season, and contributed to a significant decrease in economic growth. According to an internal assessment by a Western embassy in Islamabad whose findings were shared with IHS, the shortage of electricity and gas has caused annual economic growth to fall by up to 3%. The report stated: "For Pakistan's economy, energy shortages have created an unprecedented crisis."
The United States opposes the IP gas pipeline project, which will enter Pakistan through the southwestern Balochistan province, in keeping with Washington's view that any economic engagement between Iran and a foreign country violates the international sanctions prompted by Tehran's nuclear programme. Before the inauguration of the project, US Department of State spokeswoman Victoria Nuland said during a press briefing: "If this deal is finalised for a proposed Iran-Pakistan pipeline, it would raise serious concerns under our Iran Sanctions Act. We have made that absolutely clear to our Pakistani counterparts."
The port
Pakistani and Western officials speaking to IHS have revealed an often ignored insight into the IP project, involving Pakistan's February decision to hand over a strategic port also on the shores of Balochistan to a Chinese operator. The timing of China's deepening engagement in Balochistan just ahead of the IP gas pipeline inauguration prompted one senior Western diplomat to tell IHS: "The Chinese seem to be deepening their involvement in that part of the world and I believe they will quietly finance this project." Pakistani officials have refused to speculate in public on a Chinese link to the project, although one senior official told IHS that "a Chinese angle in financing this project is very likely".
On 18 February, Pakistani president Asif Ali Zardari oversaw a formal ceremony at the presidential mansion in Islamabad, where the China Overseas Port Holding Company was formally given the management rights of Gwadar port. The move followed an abrupt decision by Pakistan in 2012 to cancel an agreement with PSA Singapore, which had signed up in 2008 to manage the Gwadar port for 40 years. Pakistan cited PSA Singapore's failure to meet its obligations for further development of the infrastructure of Gwadar port as the primary reason for the cancellation.
Western officials say Islamabad's decision was mainly a way to facilitate China's strategic interests in a port that Beijing financed the building of between 2002 and 2006 at a cost of USD248 million. Although the exact terms of the financing have not been made public, a senior Pakistani government official told IHS that the terms are "extremely concessional" and allow the "loan to be repaid over a 20 year period with a grace period of a further 10 years".
Previously, Pakistani officials have said that China is keen to develop the port, as well as a rail and road network linking Gwadar to its western Xinjiang province – a move that will considerably shorten the distance between China and the oil-rich Middle East. In tandem with this move have been discussions between Beijing and Islamabad for the past two years for China to sell six submarines to the Pakistani navy. A final contract will mark Pakistan's largest ever single defence purchase in dollar terms.
At one stage during negotiations between Pakistan and Iran on the pipeline project, Pakistani officials had said that the link would eventually extend to supply gas to India and China as well. Both India and China are among the developing world's fast emerging economies, and India also faces significant energy shortages. A Western ambassador in Islamabad who has closely tracked both projects told IHS on 11 March after the IP gas pipeline was inaugurated: "The missing element in the story seems to be the financing part. Where will Pakistan or Iran raise at least USD1.5 billion to finance the building of the pipeline?" He cited "credible reports" suggesting the involvement of "Chinese financing for the project". However, the diplomat clarified that China is not likely to lend directly to the Iranian government or the Pakistani government for the project, knowing the strong US opposition, but will instead channel funds quietly through banks to privately owned companies involved in the IP project.
Outlook and implications
Chinese financing for the IP gas pipeline, as well as discussions on the submarine sale to Islamabad, falls in line with Beijing's long suspected move to build up its presence in the Indian Ocean region. Indian officials have publicly chastised Beijing for building a 'string of pearls' around India to contain the expansion of India's influence in its surrounding region. One Indian official told IHS: "China will not just head in to Gwadar because commercially it makes sense. There is a wider regional interest." On 7 February, A.K Anthony, India's defence minister, said the upcoming transfer of the management of Gwadar port to China was "a matter of concern to us", indicating India's continuing opposition.
But Pakistani officials insist that China's growing interest in Gwadar is driven primarily by commercial considerations. An official from Pakistan's Ministry of Foreign Affairs told IHS: "China has emerged as the world's economic power house. There is nothing more sinister about their arrival in Gwadar than just pure commercial interest to get closer to the oil-rich Middle East." When asked if the IP gas pipeline project will be funded by China, he said: "I cannot get into the specifics. For the moment, there is no Chinese footprint on this project. But China is keen to develop new sources of energy supply. In future, this pipeline can always be extended to China when the right opportunity comes about".
In a further development ahead of Zardari's trip to Iran, Pakistani and Iranian officials announced plans to build a USD4 billion oil refinery in Gwadar, to be built by Iran. For the moment, Iran's sanctioned economy does not have the capacity to undertake such a large project, which is likely to bring further US criticism. The location of the planned project near the Gwadar port has further highlighted the convergence of China's interests with those of Iran in that region. A Pakistani intelligence official told IHS the refinery will "take many years to build and is not imminent". However, he added: "The coming together of Iran and China in Gwadar clearly suggests a commonality of interests between the two."