According to Business Monitor International (BMI), US sanctions on Iran have ended the short term hopes of bringing the Iran-Pakistan (IP) pipeline onstream. The 780 km pipeline was to have been completed by 31 December 2014, allowing for 30 million m3/d of gas to be delivered from Iran to Pakistan. However, according to an unnamed Petroleum Ministry official quoted by the Express Tribune, the Pakistani government has invoked force majeure on the US$ 3 billion Pakistani section of the pipeline. In view of sanctions, the official states that ‘it is not possible to generate required funding through international financial institutions and arrange the foreign companies’ consortium to lay down the pipeline’.
The gas shortfall
Gas supplies from Iran were to have provided an important lifeline for Pakistan, which has been plagued with acute gas shortages. As it does not currently possess any working gas import infrastructure, it has been unable to plug the shortfall between available domestic gas supplies and local demand. In 2013, BMI estimated that Pakistan consumed approximately 39.3 billion m3 of gas. However, USAID estimates that Paskistan required an additional 56 million m3/d of gas – or approximately 20.4 billion m3/y – to fully meet its demand needs.
Gas shortages are affecting the economy and are a key political issue confronting the government. Frequent blackouts and gas cuts to households have taken protestors to the streets; at the beginning of December residents from Gujiranwala are demonstrating against gas shortages. The power, fertilizer and textile industries are also constantly in competition for gas supplies. In November 2014, supply shortfalls led the government to suspend gas supplies to the textile sector until March 2015. This could save a considerable loss of income from the textile sector to the economy. According to All Pakistan Textile Mills Association, the industry accounts for 52% of the country’s total exports, 46% of its manufacturing sector and employs 40% of its labour force.
LNG: A limited alternative
The IP pipeline would have met more than half of the gas shortfall highlighted by USAID. With the prospects for IP increasingly dim, Pakistan had been looking to LNG imports as an alternative. A floating LNG receiving terminal at Karachi is underway and is to be operational by 26 January 2015, according to operator Engro Elengy in October 2014. The plant can import 6.1 billion m3/y at its peak, though only a third of this capacity will be used at its onset. Hence, in its first year the LNG import terminal will supply less than a tenth of the gas needed to fully meet Pakistan’s demand.
Moreover, prospects of supplies to the Karachi terminal remain unclear. Pakistan has yet to secure a long term supply agreement, as pricing disagreements have obstructed progress with countries from Algeria to Qatar. There could be a breakthrough in the coming month, following Qatar’s acquiesce to lower gas prices, from US$18/million Btu as originally requested, to US$14 – 16/million Btu after a meeting on 15 November. While state owned Sui Southern Gas Company (SSGC) is expecting to seal the deal with Qatargas in December 2014, the length of the contract could still be a stumbling block. While Qatar is leaning towards a longer term deal, Pakistan is only looking at a two year deal that will allow it the option of exploring cheaper alternatives if and when prices fall. Pakistan is also in talks with Petronas for a supply deal, but will likely encounter the same obstacles in negotiations as it did with Qatar.
As such, even when the terminal is ready, there is a high likelihood that Pakistan will be turning to the spot market for supplies, if it fails to clinch a deal with Qatar. While the start up of LNG projects, particularly in Australia, in 2015 should make more supplies available to the market, spot quantities are still uncertain. The winter period could be partially difficult for Pakistan to procure LNG from the spot market, given typically stronger demand and Pakistan’s tighter finances and credit worthiness relative to other buyers in the market.
Fitting in Iranian gas
The broader plan that Pakistan is resting its gas hopes on is an alternative LNG receiving terminal at Gwadar. Envisioned to have a capacity of 10.2 billion m3/y, gas will be delivered via a 700 km pipeline linking Gwadar to Nawabshah, that is estimated to cost US$ 3 billion. According to Pakistani newspaper, the Express Tribune, China will be meeting 85% of the pipeline’s financing needs as part of a wider US$ 45 billion investment it committed to Pakistan.
What is more significant about this LNG terminal and gas pipeline project is that it keeps the option of importing gas from Iran open. According to BMI, it is no coincidence that the proposed Gwadar terminal has the same capacity as the planned IP pipeline. The Gwadar port is also located in Balochistan, southwest Pakistan, which borders Iran. If sanctions are lifted, Pakistan retains the option of connecting the pipeline to Iran. Another option that was floated was to obtain Iranian gas via Oman – gas due to Pakistan would be sent via pipeline from Iran to Oman, which would then be chilled for LNG delivery into Pakistan. This is an ideal option for Pakistan, which risks paying an US$ 3 million/d penalty to Iran for its failure to complete its section of the IP pipeline – and take Iranian gas.
However, the ability of the proposed Gwadar LNG and gas pipeline project to plug Pakistan’s gas shortfall will be plagued by the same issues limiting the effectiveness of the IP pipeline and the Karachi terminal in doing so:
- LNG imports: Pakistan’s resistance against a longer term supply contract and higher prices will continue to restrict its ability to secure fixed gas supplies for the country.
- Imports from Iran: Unless Iran reached a nuclear deal with the US and other western powers, Pakistan will face difficulties securing funding from international financial institutions for projects involving that country.
A third import alternative is the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. However, BMI believes that this project will also be difficult to execute due to security concerns in Afghanistan, while Pakistan could similarly struggle to raise funds for its section of the pipeline.
As such, BMI has only factored in a small quantity of gas imports into Pakistan in its forecasts. Although, it expects import volumes to grow from 0.56 billion m3 in 2015 to 6.20 billion m3 by 2023, this is till only about 30% of Pakistan’s additional gas requirement for 2015. This may not be sufficient to provide Pakistan’s economy the relief needed to boost longer term economic growth. More market oriented means of pricing and distributing gas are needed to correct Pakistan’s gas shortfall.
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/03122014/pakistan-gas-shortages-1730/