Iran, Pakistan Begin Border Gas Pipe Amid Sanctions Threat

The presidents of Pakistan and Iran inaugurated work on the cross-border leg of a gas pipeline that the U.S. has warned may breach a sanctions regime aimed at curbing the Persian Gulf nation’s nuclear program.

Pakistan’s benchmark KSE 100 share index plunged 2.5 percent in Karachi, the biggest drop in almost two months, as the news sparked concerns the U.S. would impose penalties.

Asif Ali Zardari, on his second trip to Iran within a month, joined Iran’s Mahmoud Ahmadinejad and the country’s Oil Minister Rostam Qasemi in the southern port city of Chabahar for the ground-breaking ceremony, Pakistan state television showed. The leaders offered a prayer for the project’s success and uncovered a plaque at the construction site.

Once completed, the 1,931-kilometer (1,200-mile) natural gas pipeline would help alleviate the energy crisis in Pakistan, where 18-hour blackouts last summer forced factories to close and triggered street protests. Iran is under U.S. and European Union restrictions over its atomic activities, measures that have curbed oil exports and complicated the repatriation of cash from crude sales.

Pakistan’s decision to proceed with the $1.3 billion energy link comes amid a bid to repair relations with the U.S., the South Asian nation’s biggest aid donor, after damaging setbacks including the killing of Osama bin Laden by American commandos in Pakistan in 2011 and a cross-border U.S. airstrike that killed 24 Pakistani soldiers. The U.S. needs Islamabad’s support as it withdraws combat forces from Afghanistan.

Oil Refinery

Ahmadinejad attacked opponents of the pipeline in a speech at the ceremony, drawing parallels between Iran and Pakistan.

“Foreigners are seeking to create divisions between nations in the region in order to control them and rob them of their wealth,” he said. “The only way for regional nations to safeguard their independence, identity, culture and wealth is through cooperation and unity.”

Iran has completed 900 kilometers of the pipeline on its side of the border, according to the website of Pakistan’s Interstate Gas Systems Pvt. Ltd., which will oversee construction in Pakistan. Under an accord signed in June 2010, Iran will provide about 21.5 million cubic meters of gas a day to Pakistan for 25 years. The deal can be extended by five years and volumes may rise to 30 million cubic meters a day.

The two countries are also expected to sign an agreement today to build a $4 billion oil refinery in Pakistan’s Gwadar, the state-run Press TV news channel reported.

‘Serious Concerns’

Work on extending the pipeline into Pakistan has been delayed by difficulties in arranging funding. The ground- breaking ceremony comes just days before Pakistan’s government, headed by Zardari’s party, is to hand over power to a caretaker administration ahead of parliamentary elections in May. The president’s term expires in September.

The U.S., which has offered to help Pakistan secure gas via an alternate route from Central Asia, has recently reiterated its concerns over the pipeline.

“If this deal is finalized for a proposed Iran-Pakistan pipeline, it would raise serious concerns under our Iran Sanctions Act,” Victoria Nuland, U.S. State Department spokeswoman, told a weekly briefing in Washington March 7. The U.S. hopes Pakistani won’t “go in a direction that would cause sanctions to kick in,” Nuland said, according to a transcript posted on the State Department website.

While Pakistan is aware of concerns in Washington, “all our friends including the U.S.” should show greater understanding of the country’s energy needs, Pakistan Foreign Office spokesman Moazzam Ahmad Khan told reporters March 7.

The pipeline would transport gas from the South Pars field in Iran via Baluchistan province in southwest Pakistan to an off-take point.

To contact the reporters on this story: Augustine Anthony in Islamabad at aanthony9@bloomberg.net; Haris Anwar in Islamabad at hanwar2@bloomberg.net; Ladane Nasseri in Dubai at lnasseri@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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