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James Durso

James Durso

James D. Durso is the Managing Director of Corsair LLC, a supply chain consultancy. In 2013 to2015, he was the Chief Executive Officer of AKM…

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Iran-Pakistan Pipeline Suspension Could Backfire For The U.S.

  • On 7 August, Pakistan announced it was suspending its natural gas pipeline project in Iran under threat of U.S. sanctions.
  • With the pipeline on hold, one alternative is the Central Asia-South Asia power project.
  • Anti-U.S. sentiment in Pakistan could increase as a result of the suspension of this pipeline project.
Pipeline

America’s economic siege of Iran has been costly for Tehran’s neighbors, and now it is Pakistan’s turn to pick up the tab.

On 7 August, Pakistan announced it was suspending its natural gas pipeline project in Iran under threat of U.S. sanctions, and issued a Force Majeure and Excusing Event notice to Iran under the Gas Sales and Purchase Agreement (GSPA) and suggested the matter be settled by arbitration. In response, Iran rejected Pakistan’s force majeure notice and granted a ten-year extension instead, and both sides got to work on a way forward.

On 9 August, The Intercept reported U.S. State Department officials told Pakistan’s ambassador to Washington that if Prime Minister Imran Khan was removed by a no-confidence vote “all will be forgiven in Washington.” The stated reason for the Americans’ agita was Khan’s neutrality on the Russia-NATO war in Ukraine, but his opposition to U.S. military bases in Pakistan and closeness to China (actually, a longstanding policy of Pakistan) may have been considerations. And, according to John Menadue, “Khan refused offers of large amounts of money, also linked to U.S. support for an IMF loan, for Pakistan to send ground forces to support the Saudi air campaign against Yemen.”

It was a bad week for Pakistan’s leaders who looked like U.S. pawns who obeyed Washington’s orders to stage a peaceful coup, but had no leverage to make Washington go along with the natural gas pipeline that Pakistan desperately needs.

The Iran-Pakistan natural gas pipeline was already behind schedule (Iran has completed its leg of the pipeline) and Pakistan was facing an $18 Billion dollar penalty at the time the Americans stopped play. The project was conceived in 1950 and in 2010, despite U.S. opposition, the countries reached an agreement on a 25-year GSPA and the construction of the 2,775 km pipeline that would send gas from Asaluyeh, Iran to Multan, Pakistan. The initial cost was estimated at $7.5 billion.  Related: Standard Chartered: All-Time-High Demand Will Push Oil To $100

Pakistan needs the gas as it is plagued by persistent power shortages that lead to 18-hour blackouts in rural areas and 6-10 hour load shedding in cities. Businesses that must cope with production halts due to brownouts, and those that are able buy back-up power generators.  

Pakistan has made investments in power generation and distribution but in January 2023 the country suffered a breakdown in the national grid. Another blackout happened in October 2022. 

An unreliable supply of electricity is, according to the World Bank, “a significant barrier to economic growth.” One recent study found that business profitability in developing countries may be reduced up to almost 40% by power crises, and the U.S. Institute of Peace reports of Pakistan, “the shortages impose large costs on the economy as a whole - estimated at 

about 2 percent of gross domestic product (GDP) annually - through lower output, exports, and employment.”  

Not quantified are the health effects from stress and uncertainty, interrupted sleep, and the effects of interruptions on hospitals and water and sewage treatment facilities. 

With the pipeline on hold, one alternative is the Central Asia-South Asia power project (CASA-1000), a $1.16 billion project for the export of surplus hydroelectricity from Kyrgyzstan and Tajikistan to Afghanistan and Pakistan, where it will supply energy equivalent to the needs of 2 million households. The U.S. Agency for International Developments expects a commercial start in 2024, but that may slip if Afghanistan’s Taliban government can’t manage the tower construction process in a satisfactory manner. And will it be possible to expand the project if Pakistan won’t have access to Iranian gas for power generation? 

Another potential energy source is the Turkmenistan–Afghanistan–Pakistan–India (TAPI) natural gas pipeline, an 1100-mile, $10 billion, project to ship 33 billion cubic meters of gas per year has seen numerous delays since the pipeline consortium was announced in late 2014. Construction started in early 2018 with a projected in-service date of 2021, but halted later that year after workers clearing the route were killed by unknown assailants. Also, the project’s $10 billion cost estimate is a decade old, and an update may cause further delay to the Asian Development Bank-funded effort. Turkmenistan will loan Afghanistan the funds for its share of the project, to be repaid from gas transit revenues.  

Representatives of the government of Turkmenistan met Taliban officials in Afghanistan in October 2021, and the Taliban announced it will dedicate 30,000 troops to pipeline security.  But in June 2023 the United Nations (UN) reported of conflict between Taliban Interior Minister Sirajuddin Haqqani, who is also leader of the Haqqani Network, and First Deputy Prime Minister Mullah Baradar. Per the UN: “Haqqani is reportedly seeking to take under his control … the construction of the Afghan section of the Turkmenistan-Afghanistan-Pakistan-India gas pipeline.” If true, intramural competition among Taliban personalities may delay Turkmenistan’s desire to start TAPI and be less reliant on China, its primary gas customer, and worsen Pakistan’s energy deficit. 

Despite the Taliban brawling, or maybe because of it, officials from Pakistan and Turkmenistan met in Islamabad in June and signed a Joint Implementation Plan committing both sides to speeding up implementation of TAPI. 

Despite his arrest and imprisonment, Imran Khan is the probably most popular politician in Pakistan. And he has the support of many young people who feel “He’s fighting for our future” and want to live in a normal country, not an appendage of the military. 

The revelation of the U.S. hand in Khan’s downfall at the time the failure of the pipeline project was disclosed will be a challenge to the military, security services, and the political establishment if they are seen as unable to get something of benefit from the U.S., while eagerly following Washington’s orders - what is known in the Philippines as an “Amboy.”

The generals probably know their usefulness to the Americans is wasting now that they aren’t needed to guard NATO supply routes to Afghanistan (or pretend they are doing something about the Taliban) so they will strive to preserve the relationship and the rent it provides. One way they are “doing the needful” is by continuing to supply ammunition to Ukraine. 

Military-controlled businesses probably lost participation in building the pipeline but may be able to skim from the proceeds of increased liquified natural gas (LNG) imports, which will increase in the short term though Pakistan may have to pay a higher spot rate. The loss of Iranian natural gas may benefit the U.S. as it will try to create a dependency in Pakistan for American LNG, much as it did to Europe after the sabotage of Nord Stream, and the canceling of the EastMed pipeline, because of Washington’s objections on environmental grounds. 

Pakistan may eventually move away from gas and quadruple domestic coal-fired power, but this will make its already-bad air quality even worse. If Pakistan decides to adopt substantiable and green electricity generation, that will open the door for China, the world’s leader in renewable power and supplier of solar panels (though they are made in Xinjiang, a target of U.S. sanctions.)  

As they say, “It seemed like a good idea at the time.” 

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Removing the irksome Imran Khan probably seemed clever to the Beltway Bismarcks, but it put Washington on the side of Khan’s persecutors and did not bring about a material improvement in Pakistan’s political culture. 

The Americans have already disrupted the region with their failed nation-building effort in Afghanistan, topped by the disastrous (and live-streamed) retreat from Kabul in August 2021. But kneecapping a needed natural gas pipeline was gratuitous and demonstrated Washington’s heedless pursuit of revenge for the 1979 humiliation in Tehran, regardless of the cost to others. U.S. actions will likely reanimate anti-Americanism - never far beneath the surface – limiting the efforts of the Sharif government or the military to move closer to the U.S., which will be a waste of time as Pakistan’s public may soon regard America as a bigger threat than India. 

The winner in all this is China, Pakistan’s “all weather friend.” China’s Minister of Foreign Affairs, Wang Yi, will probably dispense with the “I told you so” and start talking up “win-win” solutions as he steers Pakistan even more in China’s corner.  

China’s big investments in Pakistan, its “lifeline” energy purchases from Iran, its patience and realism in Afghanistan, and increasing ties in Central Asia, where it has proposed a China-Central Asia (C+C5) cooperation mechanism and entered into Comprehensive Strategic Partnerships with the five republics, show it is gaining influence in countries with natural resource wealth that occupy strategic locations key to trade to and from Eurasia. 

Pakistan, Iran, and Afghanistan are long-term prospects, but the Central Asian republics want to improve ties with America today. But Washington must pursue policies that don’t damage their economies while expecting them to pay the price of U.S. policy choices that won’t be felt by Americans. Otherwise, U.S. policies will be a labor-saving device for Russian and Chinese diplomats who will make gains simply by being “not America.”

By James Durso for Oilprice.com

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