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UNCLAS SECTION 01 OF 02 ISLAMABAD 001243 
 
SIPDIS 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: EPET ETTC ENRG EFIN EINV PGOV PREL IR PK
SUBJECT:  Iran-Pakistan Pipeline Moves Closer to Reality as the Two 
Countries Sign a Gas Purchase Agreement 
 
¶1.  (SBU)  Summary:  Iran and Pakistan intend to sign a Gas Sales 
Purchase Agreement in Istanbul on June 5, bringing the long-debated 
pipeline a step closer to reality.  Although India has apparently 
dropped out of the equation, Pakistan and Iran have agreed to a 
25-year proposal for the supply of at least 750 million cubic feet 
of gas daily via a pipeline to be built through Baluchistan. 
Although the GOP estimated capital costs of the pipeline to be $1.2 
billion, they are likely to be much higher, once security is 
factored in.  In the optimistic scenario presented by the GOP, 
financial close will be reached by March 2010, and construction will 
be completed by 2013.  End Summary. 
 
¶2. (SBU) On June 4, Advisor to Prime Minister on Petroleum and 
Natural Resources Dr. Asim Hussain announced that Pakistan and Iran 
would sign a Gas Sales Purchase Agreement (GSPA) for the 
Iran-Pakistan (IP) gas pipeline project in Istanbul on June 5. 
India, an original party to the pipeline, is not included in the 
project at this time.  Pakistan and Iran decided to sign a GSPA in a 
third country after disagreements on legal jurisdiction; the 
agreement will be governed by French law.  The 25-year agreement 
contains a five-year renewal option.  The Pakistani team is led by 
the Managing Director of Inter State Gas Services (ISGS), Hassan 
Nawab, and a representative from the National Iranian Oil Company 
will sign for Iran. 
 
¶3.  (SBU)  The capital costs of the Pakistani portion of the 
pipeline are estimated at about $1.25 billion, to be funded with a 
debt-equity ratio of 70:30.  Given the strategic nature of the 
project, the GOP will hold the majority of the shares in the 
pipeline corporation.   Debt financing is proposed to be secured 
from a combination of domestic and international financiers and the 
target date for achieving financial close is March 2010. 
 
¶4. (SBU)  Sui Southern Gas Company (SSGC) and Sui Northern Gas 
Pipeline Limited (SNGPL), government owned enterprises, will 
construct the pipeline under the supervision of a German project 
management consultant, ILF.  The consultant will also prepare a 
bankable feasibility study, secure project financing, and provide 
procurement support.  The actual construction of the pipeline is 
planned to begin in 2010 and to be complete in 2013. 
 
¶5. (SBU)  Iran has agreed to reduce the diameter of the pipeline 
from 56 to 42 inches due to the absence of India.  Dr Asim 
maintained that India would have to lay an additional 42-inch 
pipeline if it rejoined the project at a later date.  Pakistan has 
agreed to import a minimum of 750 million cubic feet per day 
(mmcfd), which is nearly 25 percent of the country's current gas 
production and which will be able to generate approximately 4000MW 
of electricity. 
 
¶6. (SBU)  The gas is to be supplied from Iran's South Pars gas field 
and delivered at Pakistan-Iranian border, near Gwadar.  The Pakistan 
section of the pipeline is to be laid close to the Mekran Coastal 
Highway from the border to Nawabshah, a distance of over 785 
kilometers. 
 
¶7. (SBU)  The gas price will be $7 per million British thermal unit 
(mmbtu) if calculated at $50 per barrel crude oil, $9.40 per mmbtu, 
and $13 per mmbtu, calculated at $70 and $100 per barrel, 
respectively.  Sources at the Ministry of Petroleum confirmed that 
the pricing formula is based on 80 percent price of Japan crude oil, 
although no mention was made of this benchmark at the press 
briefing. 
 
¶8. (SBU) Dr. Asim also maintained that Iran has promised to export 
1000 MW of electricity to Pakistan, another outcome of President 
Zardari's recent visit to Iran. (Note:  Iran has been exporting a 
small amount of electricity to the Gwadar area for many years.  End 
Note) 
 
¶9. (SBU) Comment:  This pipeline project has been under discussion 
for almost 15 years, initially including India as an end user.  The 
 
ISLAMABAD 00001243  002 OF 002 
 
 
sticking point has always been Iran's high price demands, as well as 
the difficulties involved in any negotiation between India and 
Pakistan.  With India out of the picture, at least temporarily, it 
appears that Pakistan has succumbed to its urgent need for energy 
and agreed to pay Iran's high asking price.  Pakistan maintains that 
generating electricity from imported gas is cheaper than any other 
liquid fuel option, and Pakistan currently generates over 60 percent 
of its electricity from furnace oil, a high-cost, high-polluting 
option.  Reliability of supply remains questionable, not only 
because of the uncertain track record of Iran, but also due to 
security considerations along the proposed route of the pipeline in 
Baluchistan, where separatist violence is common. 
 
¶10.  Comment (Cont'd.) The GOP is well aware of U.S. objections to 
the pipeline under ISA, but in past responses to our demarches has 
requested our understanding of Pakistan's difficult position, due to 
the energy crisis it is confronting.