Iran to build oil refinery in Pakistan

Chabahar, Iran is only about a hundred miles away from Gwadar, Pakistan.

Iran has inked a deal to build an oil refinery in Gwadar, Pakistan.

In a major move to boost bilateral cooperation, Iran has agreed to set up a $4 billion oil refinery in Gwadar with an estimated capacity of about 400,000 barrels per day.

Prime Minister’s Adviser on Petroleum and Natural Resources Dr Asim Hussain told Dawn on Wednesday that an understanding to this effect had been reached during a meeting between Iranian delegation led by Oil Minister Rostam Ghasemi and Prime Minister Raja Pervez Ashraf.

This represents a rather substantial investment on Iran’s part, even if the amount of oil it will process is not world-altering. But what I find interesting is the question: why?

Just a hundred miles away from Gwadar, Iran has its own brand new port city, called Chabahar. It even has oil facilities already built there. What Iran doesn’t have is a way to easily sell oil to Pakistan: under the crushing sanctions regime spearheaded by President Obama, Iranian energy has contracted by about 45%. They’re desperate for new markets and sales.

Pakistani-Iranian energy cooperation is an old sore point for the U.S. The UN sanctions against Iran do not apply to many types of energy-related transactions. The sanctions regime put in place by the US, Canada, and Europe (and others) does restrict oil sales, but Pakistan is not a party to those.

Still, Pakistan is vulnerable under American sanctions, which as of last month added penalties for other countries doing business with Tehran, including in the energy sector.

Regardless, Iran and Pakistan are proceeding with further energy links. In addition to the Gwadar refinery, Islamabad has agreed to build a new natural gas pipeline from Iran to Pakistan.

It is important to keep in mind that this is South Asia, and within South Asia this is Baluchistan. A low-level insurgency has been roiling Baluchistan for years, enough to scare away the investors who might conceivably develop the regions own gas reserves (which are substantial). And in general, projects in Pakistan tend to last several years longer than they’re meant to — if they even happen at all. So it’s not clear yet if this is anything other than a talking point between the two countries (or an election stunt for Pakistani President Zardari).

But it also important to keep in mind that Pakistan is its own country and will make decisions that maximize its own interests. They are not there to do America’s bidding, and the U.S. has built up enough bad blood over the last decade to make complying with any sanctions regime — no matter how necessary people think it is — incredibly difficult.