Energy investment fuels Saudi relations with Pakistan, India and China

audi Arabia uses oil and broader energy diplomacy to deepen the influence and impact of its foreign policy. One key pillar of Riyadh’s strategy is to use investment in other countries’ infrastructure to take larger shares in foreign markets and to decrease market share for rival nations.

Energy diplomacy is the interaction between two or more countries interconnected by various power-production or consumption sectors, including one or more components of trade, services, investment, technology and energy transmission. 

This kind of diplomacy deepens informal links, improves relations between countries and global engagement, and, in addition to economic and technological dimensions, can also address political and security dimensions.

Iran-Saudi competition 

Iran and Saudi Arabia, two regional rival powers in the Middle East with huge oil and gas reserves, compete on a variety of issues; however, the main confrontation between Tehran and Riyadh is on one matter: each wants to be the superior political actor in the Middle East. 

Tehran and Riyadh have faced off in geopolitical confrontations in the region for decades, including the recent wars in Syria, Iraq and Yemen, and over the presence of IS in the Middle East. The competing strategies have centred on weakening their rivals’ standing and stabilise their own position, investing in creating domestic and foreign political pressure on the rival country.

US sanctions

Iran’s largest export destination is primarily China, followed by the European Union, India and Turkey. In 2017, China imported an average of 700,000 barrels per day from Iran. China’s growing economy is dependent on oil imports – and focusing on energy sources is the primary objective of China’s National Energy Policy.

Between April and August 2018 India imported 658,000 barrels of oil per day from Iran


Before the US sanctions on Iran, Chinese companies were actively present in Tehran’s energy industry. Iran, meanwhile, had considerable involvement in China’s energy sector through providing reliable energy for rapid economic growth. As the partnership deepened, the Chinese firms strengthened their role as an influential actor in the Middle East energy market. 
India is Iran’s second-largest oil customer. Between April and August 2018 India imported 658,000 barrels of oil per day from Iran. India is also interested in getting more involved in Iran’s oil and gas exploitation and infrastructure projects.

Saudi investments

During a recent trip to Pakistan, which met with widespread praise from compliant Pakistani officials, Saudi Crown Prince Mohammed bin Salman announced Saudi Arabia’s willingness to “help” its economy. 

Saudi oil minister Khalid Faleh said he would invest $10 billion in oil refineries in the Gwadar Port on the Indian Ocean. Direct investment in Pakistan has declined by 17 percent in recent years, and the efforts of the Islamabad government to create interest among foreign investors in a direct presence in Pakistan have not had much effect. 

Foreign direct investment in Pakistan over the past seven months has fallen by $30 million compared with the same period last year. Pakistan’s economic situation gives Saudi Arabia an opportunity to influence Pakistani foreign policy and its relations with neighbours.

In 2014, Pakistan signed an agreement with Iran to import natural gas from the Islamic republic. But due to its financial problems, Pakistan is unable to construct a pipeline to import gas from Iran. India and Pakistan signed the TAPI project with the aim of importing natural gas from Turkmenistan. Saudi Arabia also showed interest in providing financial support for the TAPI project. 

All developments in the region show Riyadh is interested in playing a role in regional energy diplomacy and geopolitics.

Saudi Arabia has an active involvement in the Indian energy market and will use its investments to influence India’s foreign policy and reduce Iran’s role in the Indian energy market. In early 2018, Saudi Aramco held 50 percent of Indian refinery shares, with a value of $44 billion, and capacity to refine 60 million tons of crude oil a month. 

India is a major oil customers of both Iran and Saudi Arabia, and the two countries are working hard to get more from India’s energy market. Saudi Arabia has been planning a massive surge into south Asia, and has allocated cash from its $500 billion foreign investment fund to India. 

Aramco set up a new office in New Delhi to oversee its participation in the Indian energy market, and last year India invited Saudi Arabia to participate in the Strategic Reserves programme.

During MBS’ recent trip to New Delhi, his first official visit to India, it was announced Saudi Arabia would invest $100 billion in India over the next two years. Based on a $44 billion investment last year in the petrochemical sector, the $100 billion reported may not be far off reality. 

Could Saudi investments in Pakistan’s Gwadar port be a threat to Indian investment in the Chabahar port in the coming years?

China has major projects such as the one road belt and the sea silk route, which will increase the role of China in regional and global markets. The new Silk Road plan is designed to invest in the infrastructure of more than 60 countries and the development of two commercial routes, the Silk Road Belt and the Silk Road of the Sea, which were presented by China in 2013.

The construction of the oil pipeline from Gwadar to China will reduce the delivery time of oil from the current 40 days to just one week



By becoming a crucial point on the route, Gwadar will become an industrial hub for the region, easily accessible to Central Asia, Afghanistan, the Middle East and Africa. 

Saudi Arabia also has geopolitical considerations in Gwadar. The construction of the oil pipeline from Gwadar to China will reduce the delivery time of oil from the current 40 days to just one week, and Saudi Arabia, like most other oil suppliers, is investing in oil and gas companies in the long term for oil refineries and petrochemicals.

When bin Salman visited China, the leaders of both countries emphasised the need to develop bilateral relations and signed no fewer than 35 economic cooperation agreements worth a total of $28 billion at a joint investment forum. 

Saudi Arabia’s Aramco, the world’s largest oil exporter, will sign a memorandum of understanding with China’s Norinko Corporation to build a refinery and petrochemical project in Panjin, northeast China. Aramco also plans to raise the minimum stock in Zhejiang’s petrochemicals. Zhejiang’s petrochemicals division is building a refinery and petrochemical complex in the eastern province of Zhejiang. 

These investments help Saudi Arabia regain its position as the world’s primary oil exporter to China. Saudi Arabia is also strengthening its market position by signing oil supply contracts with non-governmental Chinese refineries. Riyadh also wants to play an important role in China’s One Road One Belt project.

Saudi investment in the Pakistan, India and China energy sectors gives an opportunity to play a key role in these countries’ energy security. Riyadh will be able to increase oil exports to these countries, while an Iran under sanctions will be unable to play an important role. 

If the US doesn’t extend its waiver to major Iran oil buyers, it is likely that Iran’s biggest customers – mainly China and India – will look to Saudi Arabia.

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The Future of Iran-Pakistan Energy Relations Seems Dim

With the re-imposition of sanctions on Iran, it is not just the Islamic Republic’s global, but regional energy links which have been shaken, spelling bad tidings for future economic and political cooperation. Alternatives to Iran’s drastically under invested energy sector abound for those countries which, like Pakistan, are undertaking serious efforts to make up for their own deficits. What can the current state of relations between Pakistan and Iran tell us about the future of regional energy relations?

 

With a population of almost 200 million, Pakistan ranks as the twenty-sixth largest economy in the world. This demographic advantage brings with it greater urgency in matters regarding energy. According to the U.S. Energy Information Administration, 62% of Pakistan’s population is dependent on biofuels, such as wood, for cooking and heating. Given this high rate of dependency, the extent to which whole swaths of the country are lacking in electricity and gas becomes clear.

 

Recognizing the needs of the population, the Pakistani government has proposed a plan to increase domestic energy production and hydrocarbon exploration, increase natural gas imports, diversify the combined capacity of installed electricity production, improve domestic standards for energy efficiency, and gradually eliminate natural gas subsidies.

 

Iran shares land and maritime borders with several countries, such as Turkmenistan and Qatar, which are rich in gas resources. Others in close proximity, such as Afghanistan, Pakistan, and Armenia, as well as the UAE, Kuwait, and Oman, are still in need of natural gas suppliers. In addition, Iran is home to a wide network of pipelines which (with the exception of 90 to 100 days during the winter when domestic demand peaks) has the capacity to transport gas to countries in need of additional sources of gas for much of the year.

 

Thus, in many ways, Iran is ideally positioned to benefit from both transportation and swap deals, provided there is active cooperation through diplomacy and allowing the energy industry representation in regional initiatives. The realization of this potential, however, is evidently being held back by the unfavorable international conditions to which Iran has fallen victim, not to mention its own weak attempts at energy diplomacy initiatives and active participation in energy transmission projects.

 

In 1990, Pakistan began negotiations with Iran for gas exports. At the same time, India’s growing energy demands led to joint support for what was termed the Peace Pipeline, which signaled a new chapter in India and Pakistan’s relations under which the two rivals would come together to enjoy the mutual benefits of Iranian resources. In 2011, however, due to U.S. pressure, India withdrew its support for the Peace Pipeline, an unfortunate development for Iran which had hoped the pipeline would serve to develop and expand its friendship and cooperation in the region.

 

According to the initial agreement, Iran would have transported natural gas via a 2700-kilometer pipeline through Pakistan to India. It was anticipated that in the event of a final agreement, 1100 kilometers of the pipeline would be constructed in Iran, 1000 kilometers in Pakistan, and 600 kilometers in India. The plans projected that 150 million cubic meters of gas would be exported daily to the subcontinent: 90 million cubic meters for India, and 60 million cubic meters for Pakistan.

 

Iran completed its own extension of the pipeline to deliver natural gas from South Pars to the Iran-Pakistan border by December 2014, long before the deadline. However, Islamabad has still not taken steps to comply with its own obligations, and no practical steps towards the construction of the project in Pakistan’s territory have been undertaken.

 

Diversification of energy resources represents a major pillar of Pakistan’s national energy policy. At present, Pakistan is planning to import natural gas and liquefied natural gas (LNG) from new sources, as well as importing electricity from Turkmenistan. Renewable energy will also play an important role in Pakistan’s energy basket in the coming years.

 

Running Rings Around Iran: The TAPI Project

 

One of Pakistan’s alternatives in diversifying its energy resources comes in the form of the TAPI project, which was designed to deliver Turkmen natural gas to India via Afghanistan and Pakistan. The project was first conceived with U.S. support in 1990 as a means of boosting regional links while circumventing Iran.The cost of the project is estimated to range from $7 billion – $9 billion. TAPI is projected to transfer 90 million cubic meters of gas per day along the route of Turkmenistan–Afghanistan–Pakistan–India.

The Asian Development Bank is the project’s primary sponsor, along with the World Bank, the United States, and India. In political terms, the United States and its allies, including NATO, are the most important political supporters of this pipeline.Washington’s approach to the pipeline is based on its long-term strategic goals in the region.

 

Through this economic project, the geopolitics of the region may be bolstered in the US’s favor and pave the way for the establishment of permanent bases in Afghanistan, and thus a higher presence along the borders of Iran. By removing Iran from the thriving and growing energy market of the region, the United States will cause irreparable damage to the Iranian economy and political influence in the region.

 

LNG and The Post-Pipeline Future

 

Natural gas and LNG now form 50% of Pakistan’s total energy basket, and this will increase in the coming years due to Pakistan’s new agreements with LNG suppliers. At present, Pakistan imports LNG from Qatar since a $21 billion deal was signed in February 2015 to buy liquefied natural gas from Doha. Under the agreement, Pakistan will receive 500 million cubic feet of LNG per day. The Pakistani energy crisis will likely be alleviated by imports of Qatari gas, but those imports will not resolve the problem completely.

 

Meanwhile, the shale gas revolution that the U.S. experienced in the early 2000s has provided an opportunity for the country to transition from energy importer to energy exporter – cementing its role with increasing success since 2017. 3.166 million cubic feet of these U.S. exports are planned for Pakistan. U.S. natural gas is key to diversifying the nation’s energy supplies while expanding trade relations.

 

The U.S.’s reliance on the shale gas revolution and increasing LNG exports to expand and develop relations with neighbors and allies provide Pakistan with an enthusiastic alternative supplier also looking to divert Iranian gas interests. The shale gas revolution and LNG exports provide a new tool for the U.S. to wean allied nations off of Iranian oil and gas. In 2018, Pakistan has imported 13 billion cubic feet (Bcf) of LNG from the U.S. — a huge increase compared to the previous year’s figure of 3.2 Bcf.Seeking new, more robust opportunities afforded by sea channels, Russian energy giant Gazprom is considering the possibility of supplying 5-7 million tons of LNG annually to Pakistan. In July 2014, Pakistan and Gazprom signed an agreement to construct three LNG terminals, with the first shipment arriving on July 2015. Currently, as noted above, Pakistan is increasing its LNG imports from Qatar, and hopes to do the same with Gazprom’s gas authorities; work is on-going to find ways of boosting Russian LNG exports to Pakistan.

 

In 2016, Pakistan and Azerbaijan agreed to sign deals in various fields including those that would allow Azerbaijan to supply the country with electricity, crude oil and refined petroleum products, liquefied petroleum gas (LPG), and LNG. Pakistan is increasing its LNG intake amid increasing demand for gas and decline in production. In 2017, the State Oil Company of Azerbaijan Republic (SOCAR) won a tender to supply Pakistan with two LNG cargoes to be delivered in October according to Pakistan LNG. SOCAR began delivering LNG to Pakistan in October. The LNG was delivered in two cargoes, each carrying 140,000 cubic meters.

 

Natural Gas Price, Electricity Generation

 

The cost of Iranian natural gas is of major concern to Pakistan, as the latter needs Iranian natural gas to generate electricity. At present, Pakistan’s demand outstrips its supply by between 4000-7000 megawatts. However, the cost of Iran’s gas as proposed by the IP project is too expensive for use in power plants. The electricity generated from Pakistan’s power plants, mainly located in the Baluchistan province, costs $3.5 per one million units, while the cost for Iran’s gas is $12.

 

Thanks to the China-Pakistan economic corridor, Islamabad will soon be able to generate electricity from coal-fired power plants. The goal of the China-Pakistan Economic Corridor project is to turn the Gwadar Port into an energy hub in the region. Islamabad is also trying to address its electricity shortage in part through other projects such as the Casa 1000 project. The Casa 1000 is one of the most important infrastructures in the regional energy market, with a capacity of 1300 megawatts from Kyrgyzstan and Tajikistan providing a very good platform for the purchase and sale of energy in the region. By transferring electricity from Central Asia to South Asia via Afghanistan, the economic benefits of Central Asia and South Asia will be met in a mutually advantageous regional arrangement.

 

Last September, Turkmenistan completed an upgrade of its largest electric power plant, which it is hoped will help boost exports and eventually allow supplies to Pakistan. In 2018, Calik Holding signed a memorandum of understating with Turkmenistan and Pakistan to invest $1.6 billion over the Turkmenistan-Afghanistan-Pakistan transmission line. Afghanistan and Pakistan will receive 1000 megawatts of electricity annually from the project, thereby leaving Iranian energy firms in the dark.

 

What is on the Horizon?

 

Iran needs to redefine the role energy exports play in its foreign policy, especially in relation to its neighbors. Iran holds the potential to use active regional energy diplomacy to maintain a share in neighboring markets, provided it succeeds in reducing tensions and thus paving the way for advanced economic benefits.

 

Pakistan is investing in renewable and planning to increase this portion of its energy basket with the construction of a hybrid solar-wind energy system to bring energy to rural areas.

U.S. sanctions against Iran are clearly another factor that will drive Pakistan toward other energy partners. Iran may well lose Pakistan as an electricity importer, especially with the progress being made in electricity deals with Turkmenistan. If Iran intends to be present in the Pakistani energy market, it first ought to offer reasonable prices which can compete with Al-Anjali as well as Turkmen gas, as worked in the case of retaining Indian business.

 

If Iran can break the deadlock with the U.S., it may finally benefit from the financial capabilities and technology needed to produce more oil and gas to export to its neighbors. If the oil and gas pipeline projects which connect Iran to its neighbors function at their highest capacities, then the links forged through the deals which result could be a key to bringing peace and stability in the region — with the added bonus of making it much harder to impose effective sanctions on Iran after such links have been cemented.

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The Future Of Iran-Pakistan Energy Relations

Energy relations form one of the main pillars of Iranian-Pakistani relations. In 1990, increased domestic demand for natural gas led Pakistan to begin negotiations to export gas from Iran. India’s growing energy demand led to joint support for a 2,700-kilometer “Peace Pipeline” that would allow India and Pakistan to import Iranian resources. According to the initial agreement, 1,100 kilometers would be constructed in Iran, 1,000 kilometers in Pakistan, and 600 kilometers in India. A projected 150 million cubic meters of gas would be exported daily to India and Pakistan, with 90 million cubic meters for India and 60 million cubic meters for Pakistan.

In 2011, however, due to U.S. pressure, India withdrew its support for the Peace Pipeline. This was bad news for Iran, which hoped that the pipeline would help develop and expand its friendship and cooperation in the region. Nevertheless, Iran completed the required pipeline to deliver natural gas from South Pars to the Iran-Pakistan border by December 2014. But Islamabad has not taken any practical steps to keep to its end of the deal.

Pakistan’s former Ministry of Foreign Affairs spokesman has stated that in order to achieve long-term goals of regional stability, Pakistan’s national interest require new energy transit projects. Pakistan supports the economic strengthening of the region and has stated that the energy and energy sectors are important factors in realizing regional political and economic goals. But it has increasingly looked to places other than Iran to develop these resources.

One of Pakistan’s alternatives to diversifying energy resource is the TAPI project, a U.S.-backed rival to the Peace Pipeline proposed back in 1990 to deliver Turkmen natural gas to India via Afghanistan and Pakistan. India joined the project in 2008. The leaders of the four countries signed an implementation contract in December 2015, and practical work finally began in 2016. The first gas will start to flow in early 2020. The project will cost an estimated $7-9 billion and will transfer 90 million cubic meters of gas per day to these countries.

Liquified natural gas (LNG) now forms 50 percent of Pakistan’s energy basket, and this will increase in coming years due to Pakistan’s new agreements with LNG suppliers. In February 2015, Pakistan signed a $21 billion deal to buy 500 million cubic feet of gas a day from Qatar. The arrival of Qatari gas will alleviate but not solve Pakistan’s energy crisis. So, Pakistan is looking elsewhere. Because of the shale gas revolution, the United States became an energy exporter by 2017 and plans to send about 3 million cubic feet to Pakistan. The Russian energy giant Gazprom is also considering the possibility of supplying 5-7 million tons of LNG annually to Pakistan. In July 2014, Pakistan and Gazprom signed an agreement to construct three LNG terminals, and the first shipment arrived in July 2015. Pakistan and Azerbaijan also signed deals in 2016 for the latter to supply electricity, crude and refined oil products, and both LNG and liquefied petroleum gas (LPG). The Azerbaijani state oil company SOCAR will begin delivering LNG to Pakistan in the coming months.

At present, Pakistan lacks 4,000-7,000 megawatts of the energy it needs. Iran is a natural place to turn. But the cost of Iran’s gas is too expensive for use in Pakistan’s power plants. The electricity generated from Pakistan’s power plants, mainly located in Baluchistan province, costs $3.5 per one million units, while the figure for Iran’s gas is $12. Increasingly Pakistan is looking east. Thanks to the China-Pakistan economic corridor, Islamabad will soon be able to generate electricity from coal-fired power plants and import electricity from places like Turkmenistan. The larger goal of the China-Pakistan Economic Corridor project is to turn the Gwadar Port into an energy hub in the region. Islamabad is also trying to address part of its electricity shortage through other projects such as the Casa 1000 project, which is designed to boost the electricity trade between the Central Asian countries of Tajikistan and Kyrgyz Republic and the South Asian countries of Afghanistan and Pakistan.

Iran needs to rely on energy diplomacy to maintain regional markets and especially to reduce tensions with neighbors, thereby paving the way for advanced economic benefits. Pakistan is investing in renewables and planning to increase the share of renewables in its national energy basket with the construction of a hybrid solar-wind energy system to bring energy to rural areas. If Pakistan can attract foreign capital and technology to build required energy infrastructure (such as LNG terminal and pipelines), it will require less Iranian natural gas and electricity, instead relying on others to make up the shortfall. U.S. sanctions against Iran will be another factor influencing Pakistan’s preference for energy partners.

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