Iranian gas still a long way

Posted on August 29, 2011. Filed under: Natural Gas |

NOTWITHSTANDING Iranian optimism over completion of IranPakistan Gas Pipeline by the end of 2012, a delay seems inevitable beyond December 2014 deadline set under the bilateral implementation agreement between the two states. A late starter, Islamabad has sounded Tehran to allow a six-month grace period beyond December 31, 2014.

A formal discussion on extending the deadline is expected soon. Islamabad is seeking extension in the cut-off date because of a penalty clause in the agreement that makes mandatory for it to buy gas from Tehran or pay for the equivalent quantities if it is unable to purchase.


Iran is quite comfortable with construction schedule as it is already laying pipeline from its gas fields to border towns around Iranshehr.


Pakistan has lost a lot of time mainly to internal wrangling over who should prepare technical studies related to route survey, front end engineering design (FEED) etc. Sui sisters, Sui Southern Gas Company Ltd (SSGCL) and Sui Northern Gas Pipeline Ltd (SNGPL) that together have one of the largest gas transmission system in the world, were forced to stay out of the race to pave the way for foreign firms.


Then security agencies had their concerns over the proposed aerial survey by foreign consultants for the pipeline’s Gwadar to Multan and Nawabshah route. They thought the petroleum ministry should have sought security clearance before taking the decision for the survey, particularly in Balochistan. .


Under the petroleum policy and other relevant rules, aerial survey for the identification of minerals and oil and gas deposits should be done by the Geological Survey of Pakistan in coordination with the security agencies. Sui gas companies had shown interest to complete the physical survey of the pipeline route in 8-10 months because of their expertise in the area.


But the petroleum ministry decided to award the contract to a foreign consultant — a local representative of the ILF of Germany – in joint venture with the National Engineering Services of Pakistan at a bid price of $22 million that was later intriguingly increased to $55 million.


As the contract signing for route survey and FEED remained hostage to minor disputes over taxation and security related issues, authorities panicked that further delays could attract penalties from Iran, starting with about $200 million by December this year. The real worry is that Iran may not restrict itself to just penalty and also demand construction cost of the pipeline from South Pars field to Sistan.


The completion of route survey and FEED study is a prerequisite to hold an investor conference, bidding for EPC contract, financial close and start construction of 785 kilometer piece of the pipeline from Iran border to Nawabshah in Sindh at an estimated cost of $1.25 — 1.5 billion. Under the agreement, the FEED study should be ready by December 2011 and after some other project milestones, the first flows from the pipeline should start by December 2014.


Apart from the World Bank and the Asian Development Bank’s interest to be part of the financing to lay pipeline inside Pakistan, the Russian and Chinese companies are competing to get the construction contract for the pipeline project. Given their existing bilateral relationship, Pakistan is more likely to assign engineering, procurement and construction (EPC) contract to Beijing which is also said to have shown willingness to provide financing for the project.


Such an equation also involves Chinese interest in extending the pipeline, perhaps at a later stage, to its Eastern regions or at the very least take advantage to set up industrial units in a specialised zone around Gwadar. Nevertheless, senior executives of the Russian energy giant — Gazprom — have been visiting Islamabad quite often to bid for the project and have already submitted formal expression of interest. The IPI (IranPakistan-India) as the project was originally known was conceived in 1990. One should hope it materialises in 2015.


The SSGC and the SNGPL — with vast domestic pipeline experience are also in the run for the project to improve their profile as international pipeline engineering firms and to enhance cash flows through IP contract to flow about 750 mmcfd per day of gas from Iran’s South Pars gas field. The gas flows could ultimately be enhanced to 3.2 BCFD in view of the Chinese interest.


After New Delhi pulled out of the project on being wooed by the US through the landmark civil nuclear deal, former Finance Minister Shaukat Tarin, as head of the Economic Coordination Committee (ECC) decided to go for importing only 750MMCFD — instead of originally planned 3.2 BCFD — from Iran to limit foreign exchange outflow to a single source.


The bilateral agreement has the provision to enhance supplies to 1BCFD, although the project design envisages throughput enhancement to 3.2 BCFD at a later stage given a 42” diameter of the pipeline.


Pakistan has been interested in attracting both Chinese firms and Gazprom in view of Russian experience in pipelines and Chinese expertise in engineering and ability to provide funds. Discussions with Chinese officials at a joint economic commission’s meeting were reportedly held early this month in Beijing by a Pakistani delegation led by Water and Power Minister Syed Naveed Qamar.


Separately, Islamabad had also invited Gazprom, the largest extractor of natural gas in the world, to participate in the Iran-Pakistan pipeline project in a meeting of the Pakistan-Russia Inter-governmental Commission held on September 22, 2010 in Russia.


Pakistan would prefer to fund the project through public-private partnership in an attempt to ensure at least a part of the return on financing to remain within the country.


Pakistan and Iran had signed the gas sale purchase agreement in June 2010. A segmented approach has been adopted for the IP gas pipeline project whereby each participant country — Iran and Pakistan — are responsible for building and operating the pipeline transportation network in their respective territories.


Pakistan gas supplies have stagnated at four bcfd while the demand has risen to 6.5 BCFD. The constrained demand is estimated to rise to eight bcfd in three years. Iran has an estimated 982 trillion cubic feet (TCF) or 27.8 trillion cubic meters (TCM) of proven natural gas reserves which are the world’s second largest after Russia but has been finding difficult to develop them in view of the US and the UN sanctons.


The most significant gas field in Iran is the offshore South Pars field, which is estimated to have 450 TCF proven natural gas reserves. It is the dedicated gas supply source for the IP project.


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