Iran plans to set up the largest refinery in Pakistan, a US$4 billion facility at Gwadar in the country’s southwestern Balochistan province. Islamabad and Tehran are set to sign a deal for the refinery, which will have a 400,000 barrels per day capacity, on March 11 , the day two sides have announced they will begin the Iran-Pakistan (IP) gas pipeline project on their border.
Under the deal, Tehran will lay an oil pipeline from its territory to Gwadar to transport crude oil for processing. Visiting Iranian oil minister Rostam Ghasemi last month agreed in Islamabad to set up an oil complex with an oil refinery at the Gwadar Port in Balochistan. The proposed refinery in Gwadar is expected to give China an impetus to restart work on its Gwadar oil refinery after it was halted in 2009.
“If Pakistan and Iran succeed in completing the oil refinery and the pipeline, it may prompt China to revive its projects of establishing an oil refinery in Gwadar and laying an oil pipeline from Gwadar to western China to get oil supplies,” The Express Tribune reported an unnamed Pakistani official as saying. “The coastal oil refinery project may also create scores of employment opportunities for the local people.”
Iran’s plan to lay an oil pipeline and establish an oil refinery in Gwadar is likely to raise eyebrows in Washington, which is already opposed to the IP (Iran-Pakistan) gas pipeline. The addition of oil to the pipeline mix being planned by the authorities in Tehran and Islamabad comes at a time when the US is trying to block the Iran’s oil exports to the world and pressing Islamabad to abandon the IP project because of Tehran’s nuclear program. Gwadar is strategically located as a hub for South Asia, Central Asia and West Asia, and is likely to emerge as a free oil port serving as petro-chemical center for the region.
China last month took over operational control of Gwadar Port and agreed to put funding in place that will make it the biggest investor in the port city after simultaneously becoming the builder, financer and operator of the Arabian Sea port, which is located near the Strait of Hormuz, through which most of its oil imports transit. A major oil refinery could turn Gwadar into a transit terminal for Iranian and African crude oil imports.
The proposed oil complex project will be completed by Iran in a joint venture with Pakistan State Oil (PSO), the country’s oil marketing giant. The Gwadar refinery plan will replace those for UAE-assisted Khalifa refinery, a plan that has been in doldrums since 2007 and saw the UAE’s state-run International Petroleum Investment Company (IPIC) finally suspending the work on the project. A China-funded refinery project in Gwadar failed to make any headway due to financial constraints and concerns over the security situation in Balochistan.
The plan to lay an oil pipeline from Iran to Gwadar was discussed between Pakistan and Iran during the visit to Tehran of petroleum adviser Dr Asim Hussain in December 2012. Iran also offered 100,000 barrels per day of long-term crude supply to Pakistan on deferred payment.
China is expected to revive its earlier planned projects including establishment of an oil city in Gwadar. A petrochemical city and a major refinery along with petrochemical logistics and storage complexes were planned to be set up in the proposed Gwadar oil city.
Under a deal signed between Pakistan and the China in 2006, Great United Petroleum Holdings Company Limited (GUPC) of China agreed to conduct the feasibility study and preparation work for the petrochemical city project in Gwadar involving an initial investment of $12.5 billion. China had expressed interest in constructing an oil refinery in Gwadar with an output of refining 60,000 barrels crude oil per day, during former president Pervez Musharraf’s visit to China in February 2006. The refinery and the oil pipeline projects have been the part of the proposed Pakistan-China energy corridor.
An oil pipeline from Gwadar to western China will reduce the time and distance for oil transport from the Gulf to China and a major oil refinery at Gwadar would further facilitate China’s oil imports.
Pakistan could function as an energy corridor linking the oil fields of Iran, and possibly even Iraq, with the Chinese market by means of a pipeline that would cross the Himalayas above Kashmir. Gwadar has greater scope as a free oil port in the Asian region and it can serve as a future petroleum hub, meeting oil transshipment requirements – not only of different countries, but of China in particular.
Imports of crude oil from Iran through the proposed pipeline would allow energy-deficient Pakistan to meet its furnace oil requirements, which stand at nine million tons per year, and will also save on transportation costs.
Pakistan will import 750 million cubic feet of gas per day (mmcfd) through the proposed IP gas pipeline. The country however faces pressure in securing sufficient funding for the project from foreign countries and financial entities due to the US sanctions imposed against Iran because of its nuclear ambitions.
“Iran is losing half of its oil revenues because of international sanctions imposed over its disputed nuclear programme,” AFP quoted Iran Economy Minister Shamseddin Hosseini as saying.
Tehran however agreed to provide $500 million loan to the country for laying the pipeline in its territory after seeking assurance from Islamabad that it will not back out under US pressure and complete the project on time. Construction of the pipeline is estimated to cost Islamabad $1.5 billion.
Last month, the US State Department issued Islamabad a fresh warning on the IP pipeline project after Pakistan’s federal cabinet on January 30  gave its final approval for building a pipeline in its territory with financial and technical assistance from Iran.
“We’ve made clear to countries around the world, including Pakistan, that we believe that it’s in their interest to avoid activities that could be prohibited by UN sanctions or that could be sanctionable under US law,” APP (Associated Press of Pakistan) quoted Victoria Nuland, the State Department Spokesperson as saying in Washington on February 21  during a press briefing. “We understand that Pakistan has significant energy needs and requirements, but there are other long-term solutions to Pakistan’s energy needs that we would believe would have better potential for success and would better meet Pakistan’s needs than spending scarce resources on projects like this [IP pipeline].”
Pakistan President Asif Ali Zardari visited Iran and vowed to build the IP pipeline despite the US pressure. Iran’s supreme leader Ayatollah Ali Khamenei reportedly told Zardari that the pipeline project must go ahead despite US opposition.
“The Iran-Pakistan gas pipeline is an important example of Tehran-Islamabad cooperation, and despite hostilities towards the expansion of ties we must overcome this opposition decisively,” AFP reported Khamenei as saying to Zardari. “Accessing safe energy source is the first priority for any country including Pakistan. In this region, the Islamic republic is the only nation that has safe energy resources and we are ready to provide Pakistan its energy needs.”