Pakistan search for energy could run afoul of U.S. Iran sanctions

McClatchy NewspapersSeptember 16, 2011 

ISLAMABAD — Pakistan's power supply network is in deep crisis, pounding the economy and making life miserable for average Pakistanis. But one of the solutions that Pakistan has proposed to fix the problem, a natural gas pipeline from Iran, faces objections from the United States. This week U.S. officials warned Pakistan not to depend on Iran.

There is no place where the country's energy shortage isn't profound. Rural areas are without electricity for up to 16 hours a day while towns often go without for as many as 12 hours daily, forcing factories to close and plunging homes into darkness.

Natural gas supplies are rationed, with factories in the country's most populous province, Punjab, going without two days a week.

Pakistan's economic output is cut by at least 4 percent because of the shortages, the government estimates, something that hampers the country's hopes to battle extremism by creating more economic opportunities. The outages also feed political discontent, triggering frequent, if local, street protests.

Solving the energy problems is a top priority for the United States' aid program, with a State Department delegation here this week, led by Ambassador Carlos Pascual, the Obama administration's special envoy on international energy affairs.

But Pakistan's plans for a 1,700-mile natural gas pipeline from Iran, which would provide Pakistan with a cheaper source of fuel for electricity generation, is a stumbling block.

Mark Stroh, a spokesman for the U.S. Embassy in Islamabad, described the talks as constructive and collegiate but confirmed that U.S. officials told the Pakistanis that the proposed Iran-Pakistan pipeline would run afoul of U.S. sanctions on Iran. Such deals "undermine the international community's effort to pressure Iran into meeting its international obligations" regarding its nuclear program, Stroh said.

"The proposed Iran-Pakistan pipeline, if it is built, could raise concerns," Stroh said. "We have raised this issue with the government of Pakistan and we are encouraging the government to seek alternatives."

The Iran Sanctions Act, originally passed in 1996, prohibits U.S. investment in Iran but also applies to other foreign investors. The Pakistan government this month gave the go-ahead to the Iran pipeline, though it remains unclear how Islamabad would finance its $1.65 billion share of the cost.

An alternative, preferred by the U.S., would be for Pakistan to import the gas from Central Asia, via a pipeline that passes through war-torn Afghanistan.

Pakistan's biggest export earner by far, the textile industry, is concentrated in Punjab province, which has been badly hit by the power shortage, throwing thousands out of work. Many factories simply close when there's no piped gas, which runs boilers and other machinery.

Ejaz Gohar, chairman of the All Pakistan Textile Mills Association, which represents the big textile manufacturers, said that shutting off gas for two days a week meant a 21 percent increase in costs.

"Our industry is bleeding," Gohar said. "A lot of companies have not been able to sustain the increase in costs. How can we be competitive in this situation?"

Pakistan's electricity generating problems go back decades, with critics saying the industry is badly mismanaged, is loaded with debt and isn't making use of the generating capacity it has.

Despite Pakistan's huge hydroelectric potential, it hasn't built a big dam project since the 1970s. Since the U.S.-backed government of President Asif Zardari was elected in 2008, a mushrooming chain of "circular" debt has enveloped the power sector.

The government has assumed $3.6 billion of the power industry's debt. The government-owned power grid owes another $2.5 billion to private-sector generators, even as the government, according to Finance Ministry figures, spent at least $7.4 billion on electricity subsidies during the 2008-2010 period.

Washington and international lenders such as the International Monetary Fund have repeatedly urged Pakistan to cut subsidies, which anemic government finances cannot afford.

Critics say that the government hasn't added to the electricity infrastructure in its three-and-a-half year term, while sinking billions of dollars into unproductive subsidies and taking on debt.

Of the $3.6 billion debt the government assumed, half were bills the government itself hadn't paid, said Ejaz Rafiq Qureshi, the spokesman of the Pakistan Electric Power Co., the state-owed national electricity grid. The rest is owed by private consumers.

At the end of August, a group of nine private power plants demanded that the government pay them within 30 days $540 million it owed for power generation.

Roughly half of Pakistan's current electricity output of 13,000 megawatts comes from the private generators. But there is more capacity that the government doesn't use. Government-owned equipment that could generate another 2,000 megawatts has been sidelined because of poor maintenance. Private equipment that could generate another 2,500 megawatts has been taken out of service because the government hasn't paid its bills, said Abdullah Yusuf, who represents the private producers. Combined, that amounts roughly to the entire immediate shortfall.

"If you had this capacity available, straight away your problem would be solved," said Yusuf.

A longer-term energy project is Pakistan's proposed $12 billion Diamer Basha dam, which would add 4,500 megawatts to Pakistan's electricity generating capacity. Washington is considering providing significant funding to the project. Separately, the U.S. Agency for International Development is currently working on projects that will add 900 megawatts to the Pakistani grid next year.

(Shah is a McClatchy special correspondent.)

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