Pakistan’s Dwindling Energy Supplies And Economy; Regional Instability And Cooperation

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Context

Energy shortages in Pakistan are worsening overtime and the nation faces a two-fold challenge. On the one hand, the country is struggling to meet the present energy shortfall. On the other hand, it faces the daunting task of figuring out how to support the future economic growth.

Meanwhile, the economy is stagnating from the energy scarcity and the worsening law and order situation. According to a World Bank estimate, widespread load shedding and the economic impact of energy shortages are estimated at upward of 2 percent of GDP. The State Bank of Pakistan claims that by year 2016, the country will face an acute gas shortfall of 3.021 bcfd (billion cubic feet per day).

After years of delay, the country is working on a number of energy projects and trade approaches simultaneously, with special emphasis on regionalism. Nonetheless, lack of political consensus, including domestic and regional instability, has hindered exploiting of both the internal and external energy resources.

The list of projects include the Iran-Pakistan (IP) gas pipeline project, Turkmenistan, Afghanistan, Pakistan and India (TAPI) pipeline project, and Central Asia-South Asia (CASA) 1000, Daimler Basha dam. As the trade and economic relations between Pakistan and India improve, regional rival India has recently offered to export liquefied gas and electricity to Pakistan. One of the recent successes came in the form of approval from the Word Bank for $1.1 billion worth of Hydropower and Agro projects.

Pakistan is also actively engaged in exploring energy and trade relations with China, Russia, Kuwait and Qatar. However, none of these approaches and projects will resolve the nations immediate energy and economic crisis. The success of these initiatives is dependent upon stable FATA, Balochistan, and Afghanistan. Moreover, success would require good relations with India and US, and easing of international tensions over Iran’s nuclear program that ultimately is linked to the ties between Russia, China and US.

Analysis

IP Project Is Still Viable

Despite strong American opposition and the decision of a Chinese bank to withdraw from funding the project, Pakistan’s Foreign Minister Hina Rabbani Khar recently stated that the IP gas-pipeline is still viable. She added that there are multiple funding sources for the initiative and to complete it by 2014. For example, Russia has taken progressively more interest in the plan and its energy giant Gazprom has shown interest in building the required infrastructure for the gas pipeline.

Sweden has been added to the list that not only opposes the IP project but also the proposed US backed pipeline, the Turkmenistan-Afghanistan-Pakistan-India (TAPI).

Meanwhile, in February Iran approved a project that will provide 1000 megawatts of electricity to Balochistan through the Zahedan-Quetta transmission line. The Iranian Consul General Seyad Hussan Yahyavi stated that Iran is willing to deepen cooperation with Pakistan and help the country meet its energy needs. He added that Iran is already providing electricity to the villages along the border, but the perilous security situation of Pakistan has been a challenge.

Commenting on the Pakistan-Iran gas pipeline project, he informed that Tehran has completed work on its side with the help of a German firm, while Pakistan has shown lack of interest. He attributed this to pressure from other countries to cease the project.

TAPI And CASA 1000

At the recently held quadrilateral meeting in Dushanbe, President Zardari gave assurances to Iran and other regional countries that it remains committed to the IP and TAPI projects, despite pressure from the US and the risk of sanctions.

Pakistan, Afghanistan and Tajikistan especially welcomed Russia’s interest in a gas pipeline project and the leaders of the four countries called for accelerated construction of the CASA-1000 power project. Last year, President Medvedev had stated that Russia was ready to invest “hundreds of millions of dollars” into the CASA-1000 project, and to send power from Tajikistan to Kyrgyzstan, Afghanistan and Pakistan.

“But for it to happen, necessary organizational decisions should be taken first, we have to be invited,” Medvedev told reporters.

Pakistan-India Regional Trade And Energy Cooperation

The relations between India and Pakistan have thawed since Pakistan agreed to grant India the Most Favored Nation (MFN) status. Prime Minister Yusuf Raza Gilani and his Indian counterpart Manmohan Singh met on the sidelines of the Nuclear Security Summit in Seoul in March and expressed a desire towards intensifying the dialogue process. The two leaders had earlier met in Maldives where they had vowed to turn a new page in their bilateral ties. President Zardari also met Manmohan Singh during a visit to India on April 8th.

However, Pakistan is facing resistance from the religious and nationalistic elements. The critics have argued that without resolution of the longstanding issues and security concerns, trade ties with India should not be promoted. Moreover, the opponents believe the larger industries of India are likely to benefit more from these economic ties. Caught in the midst of these opposing schools of thought, Pakistan has decided to move ahead with bettering economic ties, and India seems to be reciprocating.

Liquid Natural Gas From India

As economic and trade ties between India and Pakistan warm up, India’s state-owned oil and gas company GAIL wants to provide Pakistan liquefied natural gas (LNG). This would be done through an extension of gas pipeline to Lahore. The company has plans of bringing gas to Gujrat, and then will transit this gas through the Dahej-Vijaipu-Dadri-Bawana-Nangal-Bhatinda pipeline to Indian Punjab, and onwards to Pakistan. As opposed to building an LNG terminal that takes longer time, supplying gas through extension of pipelines is thought to be more feasible for this venture.

Electricity From India

Pakistan is also discussing importing electricity from India. Lahore Electric Supply Company (LESCO) recently announced it has agreed to import 500 megawatts of electricity from India through the Kasur border. The project is expected to be completed in six months, with the construction of 45 kilometers-220 kilovolt transmission line, and is likely to resolve the energy crisis in Lahore.

India looking to Import Iron Ore From Afghanistan Via Pakistan

On the other hand, India is also exploring a Pakistani route for the transport of iron ore from Afghanistan. The project worth $11 billion and involves a consortium of 7 states and many private firms. The companies in the consortium include state-run miner NMDC Ltd, steelmaker Rashtriya Ispat Nigam Ltd (RINL), private sector steelmakers JSW Steel Ltd, JSW Ispat Steel Ltd, Jindal Steel & Power Ltd, and Monnet Ispat & Energy Ltd.

Chairman of the Steel Authority of India, CS Verma recently commented that Hajigak mines and a 6 million-tons steel plant are being developed for this purpose. The Hajigak deposits contain about 1.8 billion tons of ore, with an exceptionally high iron concentration ranging from 61 percent to 64 percent.

The contract, to be signed in about two months, will be the biggest capital-intensive investment in Afghanistan, outweighing China’s $4.4 billion investment in Aynak Copper mine. Mining work is expected to begin in 2014 as the Afghan forces take over the security responsibility of the country. However, there are concerns whether Afghans will be able to provide the needed security.

As compared to using the longer Iranian route via Charbhar, Verma elaborated that India would prefer Pakistan for transporting the ore out and for building a slurry pipeline. While Pakistan recently approved the trade and transit treaty that allows Afghanistan to send goods to India, it has remained concerned about losing influence in Afghanistan as Indian economic clout increases there.

“Pakistan has been very clear that its red lines are security issues, things like training of forces etc,” an Indian diplomat stated in New Delhi. “On other fronts, there is less of resistance. They are allowing goods from Afghanistan to go through, it’s a start.”

Foreign Direct Investment, New Border Crossing, Business Visas

During the border post inauguration ceremony on April 13, India’s trade minister informed that India has decided to allow foreign direct investment from Pakistan. Liberalizing heavily restricted trade and investment flows is now central to the peace efforts. The border opening has a capacity to handle 600 trucks a day, which will increase trade between the two countries exponentially. According to a report published by the Industry Chamber of India ASSOCHAM, the new border crossing will raise the trade from the present $2.6 billion to $8billion annually.

“India has taken an in-principle decision, as a part of the process to deepen our economic engagement, to allow foreign direct investments from Pakistan in India,” said Trade Minister Anand Sharma at a news conference accompanied by his Pakistani counterpart Amin Fahim.

Sharma added that an agreement to relax restrictions on visas for Pakistani businessmen was almost ready. Some 600 Pakistani businessmen recently attended a fair trade in India to promote their products in Indian markets.

Energy Cooperation With Middle East

Pakistan has also solicited support and cooperation from the Gulf countries in fulfilling its energy needs.

Kuwait Providing $40 Million For Neelum-Jhelum Hydropower Project

Kuwait Fund for Arab Economic Development (KFAED) is to provide a loan of $40 million to Pakistan for the construction of Neelum-Jhelum Hydropower Project. The preliminary signing ceremony has already taken place between the Government of Pakistan and Kuwait Fund. Subsequently, agreement was also signed with Neelum Jhelum Hydropower Project Company (NJHPC), which is a subsidiary of Water & Power Development Authority (WAPDA).

The project is located at Muzaffarabad district of AJK. The other donors include Exim Bank of China, UAE, and the Saudi Fund for Development. The project aims at developing national power generation system and indigenous renewable energy resources.

Liquid Natural Gas From Qatar

During his visit to Qatar in February, PM Gilani explored joint development of hydropower energy with his counterpart. The discussion also included identification of sources for financing, exploration of investment opportunities, rehabilitation of existing hydropower plants and infrastructure development.

To resolve the energy shortages of Pakistan, Gilani expressed interest in importing 500 million cubic feet of LNG per day from Qatar.

World Bank Approves $1.1b Worth Of Hydropower And Agro Projects

The World Bank approved a $1.1 billion loan for two projects in Pakistan last month. The Tarbela IV Extension Hydropower Project will add power generation capacity of 1,410 megawatts. The World Bank Country Director for Pakistan Rachid Benmassoud commented,

“The Tarbela IV Hydropower Project will enhance Pakistan’s energy security by adding low-carbon, least-cost and renewable hydel power to its energy portfolio”. He also said the new project does not require any land acquisition and will utilize the existing infrastructure.

On the other hand, The Punjab Irrigated Agriculture Productivity Improvement Project is geared toward maximizing water use efficiency for increased yield per unit of water. The $250 million Punjab Irrigated Agriculture Productivity Improvement Program Project is aimed at getting maximum productivity by introducing modern methods like drip and sprinkler irrigation systems, which will also encourage crop diversification.

US May Support $12 Daimer Bhasha Dam

The US is considering financially supporting Daimer Basha, a $12bn dam in Pakistan. The aid is an attempt to improve US’s image in the country. Despite being Pakistan’s largest international donor, it is seen in an unfavorable light by many in Pakistan.

American officials hope the dam would help to improve relations. US aid would also be crucial in garnering support from other international agencies such as the Asian Development Bank.
The dam, on the Indus River, would provide 4,500MW of cheap, green energy helping to relieve Pakistan’s electricity shortages and could also prevent devastating damages in flood season. It will take about eight years to complete.

India is likely to object to the US support for the dam, as it is located in the disputed Kashmir region. Moreover, US support for the dame is likely going to be linked to Pakistan assistance in the war against terror.

Pakistan-China Energy Cooperation

During a visit to China in August last year, Zardari was keen in presenting Pakistan as an energy corridor for China. Pakistan can be a gateway for supplying crude oil and gas flows into China and offers a number of avenues for funneling energy. The country has supported road-rail-air networks connecting Pakistan’s northern areas with Xinjiang and energy (oil and gas pipelines) and communication (fiber optic) corridors between Pakistan and China. The aim is to connect Shanghai to Gwadar via Urumqi, and ultimately to the Strait of Hormuz.

“These new economic arteries will transform the destiny of the region and usher in a new period of peace and stability”, Zardari stated during the visit.

While Pakistan is geo-strategically located for the supply of China’s energy resources, regional security issues and internal instability of Pakistan have restricted realization of this potential.

Nonetheless, the country has made clear to China that it presents a viable option. This will, however, necessitate greater investment by China in Pakistan’s infrastructure, and in regional security issues, to provide a stable platform for delivery of energy.

Pakistan and China have a mutual interest in stability of the region, particularly as Xinjiang province is plagued by a low-level insurgency from elements of its Muslim Uyghur population. China has repeated accusations that militants linked to the Uyghur insurgency have trained in camps located in FATA.

Pakistan-Russian Energy Cooperation

During President Zardari’s visit to Russia in May last year, both countries agreed to boost investment and trade and to undertake joint projects, especially in the areas of energy, agriculture, infrastructure development and metal industry.

In a joint statement issued following the meeting between Russian President Dmitry Medvedev and Asif Ali Zardari in Kremlin, the two leaders agreed that improved collaboration would help foster strong bilateral ties based on common interests and respect. Both sides hailed the signing of the deal between Moscow and Islamabad on Air Transport. A Memorandum of Understanding was also signed between the Russian Ministry of Energy and the Ministry of Petroleum and Natural Resources of Pakistan towards enhancing cooperation in energy and agriculture sectors.

Moreover, the Russian Premier told reporters last year that Pakistan was an important economic and trade partner for Russia and also announced his country’s support for Pakistan’s proposed trade and energy projects.

“Pakistan is not only an important trade and economic partner but also a key Russian partner in South Asia and the Islamic world,” Putin was quoted as saying by ITAR-TASS news agency.

Russia will also provide partial funding and technical assistance for CASA-1000, expansion of Pakistan Steel Mill ($500m Grant), Guddu and Muzaffargarh power plants, and Thar coal project.

During, Hina Rabbani Khar’s visit to Russia in February, both countries discussed and updated each other on the status of the above listed project.

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