Long-thwarted project gets go-ahead as Islamabad anticipates lifting of sanctions on Iran

ISLAMABAD—China will build a pipeline to bring natural gas from Iran to Pakistan to help address Pakistan’s acute energy shortage, under a deal to be signed during the Chinese president’s visit to Islamabad this month, Pakistani officials said.

The arrival of President Xi Jinping is expected to showcase China’s commitment to infrastructure development in ally Pakistan, at a time when few other countries are willing to make major investments in cash-strapped, terrorism-plagued, Pakistan.

The pipeline would amount to an early benefit for both Pakistan and Iran from the framework agreement reached earlier this month between Tehran and the U.S. and other world powers to prevent Iran from developing nuclear weapons. The U.S. had previously threatened Pakistan with sanctions if it went ahead with the project.



Dubbed the “Peace Pipeline,” the project will further bolster improving ties between Pakistan and Iran, which had been uneasy neighbors for decades as a result of Pakistan’s ties to Iran’s long-term adversaries, Saudi Arabia and the U.S.

“We’re building it,” Pakistani Petroleum Minister Shahid Khaqan Abbasi told The Wall Street Journal, referring to the pipeline. “The process has started.”

The pipeline will bring much-needed gas to Pakistan, which suffers from a crippling electricity deficit because of a shortage of fuel for its power-generation plants. Pakistan has been negotiating for months behind the scenes for China to build the Pakistani portion of the pipeline, which will cost up to $2 billion.

Tehran says that its 560-mile (900-kilometer) part of the pipeline from an Iranian gas field is complete. Iran has long pressed Pakistan to build its half of the scheme.

Pakistan hasn’t begun construction, however, in light of threatened sanctions from the U.S. for trading with Iran. Islamabad had been trying to work around the sanctions by asking the Chinese to construct the pipeline but not yet connect it to the Iranian portion. The prospect of an Iran nuclear agreement, which would ease the sanctions in stages once the deal is completed, has given Islamabad further impetus to clear the project. Among the first restrictions to be lifted, according to the framework accord, would be prohibitions on Iranian energy exports.

“This [Iran nuclear agreement] will help us in getting a few things which were coming into the way of the Iran-Pakistan gas pipeline to be cleared and we will move forward,” Pakistan’s ambassador to Iran, Noor Muhammad Jadmani, said Sunday in Tehran, according a report on IRNA, the official Iranian news agency.

Pakistan is negotiating with China Petroleum Pipeline Bureau, a subsidiary of Chinese energy giant China National Petroleum Corporation, to build 435 miles (700 kilometers) of pipeline from the western Pakistani port of Gwadar to Nawabshah in the southern province of Sindh, where it will connect to Pakistan’s existing gas-distribution pipeline network.

China Petroleum Pipeline Bureau referred questions to CNPC, which didn’t respond to a request for comment.

The cost would be $1.5 billion to $1.8 billion for the pipeline, or $2 billion if an optional Liquefied Natural Gas terminal at Gwadar is included in the scheme. Under the deal, 85% of the financing will be provided by a Chinese loan, with Pakistan coming up with the rest.

The remaining 50 miles (80 kilometers), from Gwadar to the Iranian border, will be built by Pakistan. The pipeline, which would take two years to build, would eventually supply Pakistan with enough gas to fuel 4,500 megawatts of electricity generation—almost as much as the country’s entire current electricity shortfall.

The pipeline would give Iran a market to its east for its gas. The pipeline scheme, conceived in 1995, originally was supposed to extend to India. Tehran blames U.S. pressure for India dropping out in 2009.

Islamabad believes the Iranian gas is the cheapest and simplest energy supply option for Pakistan. Pakistan will also start to take liquefied natural gas from Qatar, and it remains in protracted multicountry negotiations over a pipeline that would bring gas from Turkmenistan through Afghanistan to supply Pakistan and India. Washington had long lobbied Pakistan to go for the Turkmenistan pipeline instead of the Iranian one. There was no immediate comment from the U.S. embassy in Islamabad on whether Washington had now changed its view on the Iran pipeline.

The Chinese president’s visit, which has been postponed at least twice, is now expected on or around April 19.

Pakistan has had a close strategic alliance with China for decades—aimed mostly against common foe India—but now Beijing is seeking to add an economic dimension to the relationship. Islamabad and Beijing plan an “economic corridor” linking the Pakistani port of Gwadar, which is under Chinese management, to southwestern China with road and rail connections. The highly ambitious program, which also includes power-generation projects, carries a price tag of some $40 billion. Unveiling agreements and details for the economic corridor will form a center piece of Mr. Xi’s visit.

The Iran pipeline isn't part of the economic corridor but it will be separately fast-tracked, Pakistani officials said.

“The Chinese have an expertise, a willingness to come here, and also work in areas which are not considered to be very safe,” said Hamayoun Khan, director of the Pakistan Council on China, an independent think tank based in Islamabad.

—Jeremy Page in Beijing contributed to this article.

By SAEED SHAH
April 8, 2015 1:47 p.m. ET

The Wall Street Journal