Feb. 19 (Bloomberg) -- Pakistan may fail to secure natural gas from Iran because banks are reluctant to finance a $7.4 billion pipeline, intensifying the search for domestic deposits to avoid shortages within three years.

A decade after the ``Peace Pipeline'' from Iran to Pakistan and India was suggested, none of the three governments have committed any money to the project, said Faraz Farooq, an energy analyst at JS Global Securities Ltd. in Karachi.

The government expects annual economic growth of as much as 8 percent for the next five years in Pakistan, where natural gas meets half the energy needs. President Pervez Musharraf is banking on growth to eradicate poverty, and curb Islamic militants fighting to end government support for the U.S. in the war against the Taliban in neighboring Afghanistan.

``Pakistan's focus at present is encouraging companies to aggressively explore for fuels in offshore and onshore regions,'' said Mohsin Ahsan, an energy analyst at Invisor Securities Ltd. in Karachi.

South Asia's energy needs and new drilling areas are on the agenda at the 3rd Pakistan Oil & Gas Conference that started in Islamabad last night. Pakistan will seek proposals by explorers to revise incentives in the five-year petroleum policy that ended last year, Ahsan said.

Prime Minister Shaukat Aziz said at the conference yesterday a new policy within 30 days will increase incentives to boost output.

Oil, Gas Shortage

Pakistan produces about 65,000 barrels of oil a day, or 21 percent of its domestic needs, and the remainder is imported, according to JS Global's Farooq. About 11 local companies and 16 overseas companies such as BP Plc, Petroliam Nasional Bhd., Petroleo Brasieiro SA and OMV AG are exploring in Pakistan.

The Islamic nation's daily output of 3.8 billion cubic feet of natural gas meets present demand, Farooq said. By 2010, output will be 1 billion cubic feet less that required, he said. Energy demand is growing 7 percent annually in line with economic growth, he said.

The pipeline from Iran was initially stalled by hostile relations between India and Pakistan, which have fought three wars over the disputed region of Kashmir since independence from Britain in 1947.

``The political issue will remain a big hurdle to overcome for a transnational pipeline, especially involving two rather hostile neighbors,'' said Victor Shum, senior principal at Purvin & Gertz in Singapore. ``There are many challenges.''

Investors are hesitant to fund a pipeline that may become a target for attacks by militant groups opposed to Indian rule in Kashmir, said Praveen Martis of U.K.-based Wood Mackenzie.

`Risk Premium'

``Our basic stance is that the project faces significant hurdles in terms of price and security of supply to India,'' Martis said. ``The risk premium will add to project costs.''

Bomb blasts on a cross-border train from India to Pakistan killed at least 64 people yesterday, Indian Railways Minister Lalu Prasad Yadav told reporters in New Delhi today.

``The blasts are aimed at derailing peace talks,'' Prasad told reporters in a briefing in Hindi.

The Attari Express runs between Delhi and the Indian border town of Attari and from there to Lahore in Pakistan as the Samjhota Express. Samjhota means concord in Hindi.

India, the world's second-fastest-growing major economy, is essential to the project because Pakistan's consumption is insufficient to justify the investment.

`Prize in India'

``India needs to be on board for the project to take off,'' Martis said. ``The prize is in India.''

Pakistan plans to proceed with plans to build a gas pipeline from Iran even if India pulls out from the project, Prime Minister Aziz said.

``Pakistan is committed to the Iran gas pipeline,'' Aziz said in Islamabad yesterday at the opening of the conference. ``We have enough investors in Pakistan to build the infrastructure for gas import.''

Pakistan, Iran and India are close to an agreement on the pricing and volume of gas to be imported from Iran, Aziz said.

``My ministry is keen and optimistic for the implementation of this project and consider it a symbol of regional cooperation,'' Bonakdar Hashemi, director general, Oil & Gas Corp., Ministry of Petroleum, Iran said in Islamabad today.

In the past year, the U.S. has pressured Pakistan and India to abandon the pipeline from Iran and isolate the Middle Eastern country because of concern its nuclear program masks a plan to build atomic weapons.

U.S. `Focus'

``The project doesn't come at the right time as the focus right now in Washington is to reduce investment in Iran's energy sector,'' said Gal Luft, executive director for the Institute for the Analysis of Global Energy in Washington.

Investments to boost domestic gas output may be hindered by concern that rebel tribes may damage installations, Luft said. Rebels in Baluchistan, a desert region in western Pakistan bounded by Iran, Afghanistan and the Arabian Sea, damaged a gas pipeline on Feb. 14. Baluchistan produces 25 percent of the nation's gas.

The Baluchi tribes are demanding a greater share in the province's gas and mineral wealth. Supporters of tribal leader Nawab Akbar Khan Bugti, who led demands for a larger portion, accused the army of killing him in his mountain hideout in August. Bugti was wanted by the government for allegedly ordering bomb attacks on natural gas pipelines and oil installations, prompting Musharraf to deploy 3,000 soldiers in the sparsely populated province in 2003.

`Untapped Gas'

``They have a lot of untapped gas in Baluchistan but they'll have to pacify the Baluchis so that more exploration can take place,'' Luft said.

Musharraf, 63, who became a key U.S. ally in its war on terrorism after withdrawing support for Afghanistan's former Taliban regime in 2001, said Pakistan has arrested more than 600 terrorist suspects since 2001. The Pakistani army is searching for remnants of Taliban and al-Qaeda networks in its tribal region bordering Afghanistan.

To contact the reporters on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net.

Last Updated: February 19, 2007 02:37 EST