Iran recently announced the setting up of a $4 billion oil refinery near Pakistan’s Gwadar port with an estimated capacity of about 400,000 barrels per day. This intensification of ties with Iran is said to have snubbed the US and the international community that had placed economic sanctions on Iran with a view to hinder its nuclear program.

The understanding was reached during a meeting between Iranian delegation led by Oil Minister Rostam Ghasemi and Prime Minister Raja Pervez Ashraf.

In fact, Pakistan President Asif Ali Zardari has called for more joint ventures between the two countries in sectors other than energy.

However, the sudden interest in Iran to set up an oil refinery has also been looked at with certain skepticism as China has gained control of the Gwadar Port in Pakistan. Iran could well export the oil to China through Pakistan, thus undoing the effect of the heavy sanctions placed upon it by the international community.

This view becomes further solidified as China would have no qualms in snubbing the US. In fact, this arrangement would be particularly beneficial for China as not only would it help in further strengthening ties with Pakistan by investing in the pipeline.

Especially, after it has been handed over the control of the Gwadar Port, but also would become a consumer of the oil that is produced, giving it an opportunity to come closer to Iran.

The Iran-Pakistan (IP) gas pipeline has been in news and final negotiations on gas prices and funding of Pakistan’s side of the pipeline are yet to be carried out. The pipeline is expected to be completed by 2014.

It is expected that Iran would finance the $500 million to Pakistan to be payable over a period of 20 years. And the other half of the $I billion would be arranged through a Chinese loan to be raised by Pakistan through gas infrastructure development (GIDC).

Iran-Pakistan relations

Iran and Pakistan are bound by historic, linguistic and cultural ties. But balancing the Arab world, especially the Gulf States and Iran has been one of the challenges of Pakistan’s Foreign Policy.

The relation between the two countries began with Iran being the first country to officially recognize Pakistan as an independent country. The relations between the two countries were at their best during the 1970s and 1980s.  

The two countries share a 900 kilometers long somewhat turbulent border. However, it is Afghanistan with whom both the countries share a border and where both their interests unite and also diverge.

The relations between the two countries have been strengthening for a considerable period now. In November 2012 three Memorandums of Understanding were reached between the two countries-to promote economic cooperation, timely completion of the IP gas pipeline and electricity import from Iran. The two sides also agreed to increase the bilateral trade to $5 billion mark.

However, the 2700 kilometres “peace pipeline” project, as it was called, was first proposed in the 1990s and was meant to carry gas from Iran to India through Pakistan. This was an effort by India and Iran to showcase the “good neighbourly” relations between the two nations and they also inked preliminary deals for the same.

India, however, withdrew from the project in 2009 following concerns over three aspects-gas prices, transit fees payable to Pakistan and Pakistan’s reluctance to guarantee safety of the pipeline in its territory.

The prevalent view was that India did not want to invite the US’ scorn as the project would amount to undoing the effect of the sanctions placed on Iran. India had signed a civilian nuclear energy deal with the US and thus succumbed to US’ pressure.  

Following this, the pact between Iran and Pakistan was signed in June 2009 in Turkey and an agreement on pricing was reached in September. It took some time because the Pakistani government had problems in allocating funds for the project and obviously could not expect financial assistance from the US.

The plan was that Iran would initially export 30 million m3 per day of gas to Pakistan and then increase it to 60 million m3 per day. Each country was responsible for building the section of the pipeline that ran through their country.

Iran has already announced the completion of the 900 kilometers of the pipeline on its soil.

China factor

It is said that China is already in control of the Gwadar Port, which is a major Port of the region and if Iran builds an oil refinery there it would benefit the whole region. China took control of the Gwadar Port, which enabled it to secure energy and maritime routes, giving it an Arabian Sea naval base.

Now Beijing’s support to the IP Project will give China further impetus, especially when the US is so much against its completion.

In fact, China will be playing an important role as a major commercial and political partner of Iran, which is focused on enhancing its refinery capabilities, working against US-led sanctions and advancing its nuclear energy capabilities.

A fallout of US-led economic sanctions on Iran has been a greater opportunity for China to cooperate with Iran. China finds itself with lesser competition for its companies as very less European and Asian investors are willing to invest in Iran.

For Iran, China works as a coping mechanism-both economically and politically - at a time when most of the international community is trying to restrain it.   

China’s growing energy needs are set to further deepen Iran-China relations. Statistics from International Energy Agency state that China would be relying on the Middle East for  70 per cent of its oil imports by 2015.

This would be a welcome development, especially when the international community is bent on opposing its nuclear development program, and the leadership in Iran would be more than willing to turn increasingly to China and Pakistan for some support.

As far as Iran-Pakistan relations are concerned, the efforts have been to enhance cooperation in different sectors. The Pakistan President recently called for the speedy implementation of the railroad project between Economic Cooperation Organisation (ECO) member states.

ECO is an intergovernmental regional organization established in 1985 by Iran, Pakistan and Turkey for promoting economic, technical and cultural cooperation among member states.

He also said that the security arrangement signed between the two countries would contribute to the fight against terrorism, border crimes, illegal trade and drug trafficking.

Critics, however, have pointed out that Pakistan’s going ahead with the IP Project with Iran is more to do with election politics, which are due to be held in May this year than a solution to its energy crisis that Pakistan has been highlighting. Even the handing over of the Gwadar Port to China is seen as a politically motivated move ahead of elections.

There is however, much more scope of improving Iran-Pakistan relations by increasing the exchange of goods and services. Pakistan has been trying to convince the US that the energy deficiency in the country that has been crippling developmental plans requires it to obtain energy from any feasible source.  

The entire world will watch closely whether the IP gas pipeline gets successfully completed or not. Another matter of concern is whether Pakistan is able to effectively handle security issues related to the pipeline traversing its volatile territory.

In any case deepening of Iran-Pakistan ties would certainly benefit Pakistan-that is suffering from an energy crisis, Iran-which is looking for potential commercial and political partners, and also China-which has been supportive of Iran-Pakistan energy ties and has been slowly increasing its footprint in Pakistan.