Moscow and Islamabad Discuss LNG Cooperation

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(Source: Kremlin.ru)

Executive Summary:

  • Pakistan and Russia are discussing a potential liquefied natural gas pipeline (LNG) to deliver Russian LNG to Pakistan, opening another market for Russia’s sanctions-bound energy industry.
  • Another project that Pakistan is working on is the Iran-Pakistan (IP) pipeline, which has faced numerous obstacles due to regional security concerns, financing issues in Pakistan, and US sanctions against Iran, placing Islamabad in a difficult situation.
  • Islamabad had conveyed to Moscow that strengthening relations with Russia is an important priority of Pakistan’s foreign policy, as it will open the country to new markets beyond Southeast Asia.

A Russian delegation led by Deputy Prime Minister Alexei Overchuk arrived in Islamabad on September 18 for a two-day visit. To strengthen bilateral relations, they held separate meetings with top Pakistani leadership, including President Asif Ali Zardari, Prime Minister Shehbaz Sharif, and Foreign Minister Ishaq Dar. Connectivity and energy collaboration were the main focus of the bilateral discussion (Geo TV, September 19). This visit comes at a time when the two nations are exploring future liquefied natural gas (LNG) transactions. Moscow announced that it could export LNG to Pakistan by 2026, once its LNG export terminals are operational. This would allow for Pakistan to reconsider some of its previous agreements regarding LNG. Pakistan’s long-term LNG contracts signed in 2016 and 2021 with Qatar include price re-opening clauses, meaning Islamabad could renegotiate the LNG price with Doha in 2026. Russia’s LNG offer would become a strategic option for the South Asian nation to secure a favorable LNG import price amid Western sanctions restricting its options in the region (Energy Update, August 13). Pakistan has encountered numerous obstacles in building and establishing energy infrastructure, and a partnership with Russia would benefit not only Pakistan’s energy industry but also Russia’s sanction-bound economy.

In 2022, Pakistan initiated talks with Russia on energy purchases, particularly LNG and oil (see EDM, October 5, November 11, 2022; Dawn, September 19). Pakistan-Russia energy collaboration deepened in 2023 when Pakistan began purchasing Russian crude oil at a discount (see EDM, August 16, 2023). In September 2023, Pakistan received its first liquefied petroleum gas shipment from Russia (Express Tribune, September 18).

Connectivity emerged as a critical topic in the talks between Dar and Overchuk. The two leaders underscored the potential for further energy collaboration and agreed to integrate transit lines by linking the International North-South Transport Corridor (INSTC) with the China–Pakistan Economic Corridor (CPEC) (Dawn, September 19). This integrated connectivity could facilitate trade between Pakistan, Russia, and Central Asia through existing infrastructure and new routes via Afghanistan and Iran.

Overchuk’s visit came two months after a meeting in July between Sharif and Russian President Vladimir Putin on the sidelines of the Shanghai Cooperation Organization summit held in Astana, Kazakhstan. During the meeting, Putin offered to build an LNG pipeline that would pass through Iran to Pakistan and potentially connect to India. This multi-billion dollar agreement for the construction of an LNG pipeline has been under consideration by the two countries for the past few months (Express Tribune, July 11).

Islamabad and Moscow are additionally exploring multiple routes for a proposed Russia-Iran-Pakistan-India (RIPI) LNG pipeline, which would give Moscow access to energy-starved South Asian markets. This LNG pipeline project could therefore help Russia compensate for its losses in the European energy market, which witnessed a 70 percent decline due to sanctions imposed after the start of its expanded war against Ukraine. Moreover, the proposed LNG pipeline would set a new precedent of interregional cooperation between Pakistan and Russia. The major obstacle to this strategic LNG pipeline could, however, be US sanctions against Moscow and those engaging with Russia in such initiatives (Express Tribune, July 11).

Another project that Pakistan is working on is the Iran-Pakistan (IP) pipeline, also known as the Peace pipeline. The 1,180-mile-long IP pipeline—which was meant to supply 750 million to one billion cubic feet of natural gas per day to Pakistan for 25 years—has been facing delays since 2010, when the two countries signed an agreement to construct the pipeline from Iran’s South Pars gas field to Pakistan (see EDM, June 3, 2009; see China Brief, March 5, 2010). While Iran has constructed the pipeline on its territory for $2 billion, Pakistan could not begin construction in its territory due to US sanctions against Iran, trouble financing its construction, and geopolitical and security issues, including in Balochistan, where Baloch insurgents frequently target gas pipelines.

Islamabad asked Tehran for a 10-year extension to build its portion of the pipeline in 2014 (Iran International, February 26; Business Recorder, May 6). The extension expired in September 2024, and reports show that Iran warned that Pakistan would have to pay a $18 billion penalty if it did not complete its part of the project by the extended deadline (Voice of America, September 5). Under the penalty clause of the IP contract, Pakistan will have to pay Iran $1 million per day from January 1, 2015, if Iran takes Pakistan to the arbitration court. The United States has warned Pakistan of “serious consequences” if it implements the IP agreement with Iran. A Pakistani official revealed, “We tried hard with Americans seeking [a] US waiver, but the Biden administration is against the IP gas pipeline project.” Alternatively, Iraq secured such a waiver in order to prevent instability after sanctions against Iran were first reimposed in 2018, which has been renewed yearly (The News, August 27; Middle East Eye, November 3, 2018).

Critics, however, say Islamabad has not seriously attempted using indirect measures to avoid US sanctions regarding the IP project. For example, Pakistan could use “barter trade” to receive Iranian gas. The country took no logistical, legal, or financial steps to determine these kinds of options and failed to prepare a formal request for a sanctions waiver from the United States. Islamabad would have had to engage an international legal firm working on US sanctions regimes to accomplish such a task, which there is no evidence of (Arab News, April 7).

Pakistan is keen to proceed with the Russian LNG project, which is also likely to face US sanctions. In a meeting with Overchuk, Sharif recalled his fruitful discussion on bilateral energy collaboration with Putin in July and conveyed his thanks to Putin for sending the high-level delegation to discuss expanding bilateral cooperation. He conveyed to the Kremlin that strengthening relations with Moscow was an important priority for Pakistani foreign policy. Sharif has stated that Pakistan desires to expand trade, economic, energy, transit connectivity, and security operations with Russia. For a cash-strapped and energy-starved Pakistan, Russian cooperation could be essential in achieving its goals in these key sectors (The News, September 19). The main reason for strengthening ties with Russia, however, is geopolitics. Pakistan has supported China, its “all-weather friend,” on international issues for years and China has played a significant role in bringing Pakistan and Russia closer (see China Brief, September 20).

Both nations will be discussing the complexities that could arise from payment mechanisms due to the US sanctions imposed on Russia’s energy transactions over the war in Ukraine. Sanctions against Russia restrict the use of dollars and euros in international trade. Russia has been excluded from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system, resulting in import and export issues. These complexities are likely to affect the LNG pipeline project. In theory, Pakistan could secure a commercial agreement to avoid severe repercussions of US sanctions on the proposed RIPI LNG pipeline (Express Tribune, July 11). For the proposed RIPI LNG pipeline project, Pakistan is not expected to repeat the mistakes it committed in implementing the pipeline deal with Iran. Considering evolving regional dynamics and energy demands, the proposed LNG project between Pakistan and Russia could serve as a vital conduit for regional cooperation, though the challenges posed by US sanctions remain a significant hurdle for Islamabad and its partners to overcome.