Iran has asked the highest ranking Indian and Pakistani officials to sign the final contract on construction of the “peace pipeline” during their upcoming meeting with the Iranian president.

During recent months, many things have been said about the peace pipeline which is to take Iran’s natural gas to India through Pakistan. Therefore, Petroenergy Information Network has conducted the following interview with special representative of the Iranian minister of petroleum in peace pipeline affairs.   Q: Mr. Hojattolah Ghanimifard, the main points about the pipeline, which has been emphasized by various media is the alleged 30% discount considered for India and Pakistan for buying Iranian natural gas. This was first announced by the Indian minister of petroleum. Has he confirmed those reports?
A: He has denied those reports in a meeting with the Iranian Minister of Petroleum Seyyed Kazem Vaziri-Hamaneh. During a meeting that we had with the Indian oil minister, he also categorically rejected media reports about the 30% discount. I categorically deny any discount being considered for India and Pakistan and those rumors are based on a false report. Talking about discount is only possible when there is a standard to compare the price against. During past negotiations, Iran had presented four price formulas to India and Pakistan during five months of talks and they also offered their formula to Iran. At that time the formulas were very different and the three sides accepted to take advantage of a consultant. Since the consultant’s opinion was not taken as final therefore no price formula was proposed to Pakistan and India and perhaps this is a reason for rumors about Iran considering discount for India and Pakistan.
Another point is that the difference between gas price for Pakistan and India and the gas price considered for other regions is due to nature of the gas market. The best example is different gas prices in various European markets as well as difference in gas price even in different states of the United States.   Q: Has the gas price considered for India and Pakistan is lower than the price in other markets?
A: The formula used for setting price of Iran’s gas will be based on the price of natural gas in Japan because that country currently accounts for 50% of natural gas consumption of the world. The Japanese energy market has not been as fluctuating as corresponding markets of Britain and the United States and price have been relatively stable there. Information on prices shows that the Japanese market will be among the main markets consuming liquefied natural gas in the near future. Although consumption of liquefied natural gas will be higher in the United States, China, Korea, and some other European countries, Japan has been a source of great demand for liquefied natural gas and due to proximity of Japan to the Indian market, it has been taken as a base to determine price of the Iranian gas. According to mathematical calculations, a model has been worked out which shows the relation between price of liquefied natural gas and crude oil in Japan with a correlation coefficient of 95%. Therefore, if Iran was not supposed to sell gas to India and Pakistan, it could carry it from Assaluyeh to Japan. Therefore, through reverse calculation from LNG price in Japan, we reached at LNG price dry gas at border between Iran and Pakistan. To convert LNG price in Japan to its price in Assaluyeh, transportation costs should be deducted and to consider LNG price in Assaluyeh, we should have calculated the cost of constructing a plant for converting gas to LNG with daily capacity of 60 million cu. m. to calculate the costs of converting dry gas to LNG. Then we should deduct costs of investment, operations, wear and tear, and other instances from price of LNG to convert price of LNG in Assaluyeh to price of dry gas delivered to LNG plant.
Also, since slight operations are needed on the gas before it enters the pipeline, the relevant costs should be added to the cost of transferring gas to Pakistan border. Since in addition to 60m cu. m. of gas which is to be exported via the pipeline, 50m cu. m. of gas has been considered for domestic consumption in south Iran, a 56-inch pipeline and needed compressors have been considered and the cost of investment, operational costs and the cost of wear and tear has been calculated. As a result, the cost of transferring gas to Pakistan border has been added to the price of dry gas entering the pipeline in Assaluyeh and price of Iran’s dry gas in million BTU at Pakistan border has been reached at. Therefore, price of Iran’s natural gas is dependent on price of crude oil imported by Japan because stability and future consumption estimates of the Japanese market have proven it to be a reliable and stable market whose price is most closely related to the situation in Pakistan and India.
This formulate, in the upper and lower limits of prices distances from a linear model and approaches an S curve, which changes in view of price changes in Japan’s imported crude oil. It should be noted that the price of Japan’s imported crude is about 80 percent higher than crude varieties of the Persian Gulf region and 20% higher than very light crude varieties. As a result, changes in crude oil price affect the price of gas exported to India and Pakistan. In addition, due to a price review clause that has been included in the construct and confirmed by three countries, this formula can be changed according to special conditions of the market that cannot be predicted beforehand. Therefore, no long-term judgment has been made for a 20-year period of time.   Q: Has a fixed price been considered in this contract for Japan’s imported crude oil or LNG or the price will be calculated at the time of the implementation of the contract?
A: No fixed price will be mentioned in a contract, but it is a formula; that is, if price of Iran’s dry gas at border with Pakistan is considered as Y, our Y is equal to a figure multiplied by X when X is price of the crude oil imported by Japan in addition to a constant price. In an S curve, the steepness of the curve is determined according to a constant price. In other words, gas price cannot be determined before the implementation of the contract has been started and would depend on X variable, that is, the price of Japan’s imported crude oil.   Q: So, is it made clear at the time of contract signing?
A: When a contract is signed and confirmed by officials of three countries, the formula will specify a price that will be referred to before review of price according to review clause of the contract. However, this is a formula and not a fixed price. The market situation will determine the final price.   Q: Therefore, Iran gas will not be sold at $4.93.
A: According to the value of X in the formula, we will have a certain price, but this does not mean that we have signed the contract according to a fixed price. It is only a formula.   Q: If the formula led to a good price under current circumstances, but conditions at the time of contract signing required a lower or higher price, will the contract change accordingly?
A: when the contract is signed, the price has been set on the basis of the formula and no fixed figure is mentioned. Suppose that four years from now, the gas is to be transferred according to a certain price. At that time, we must enter the price of Japan’s imported crude into the formula, not at that time of contract signing. At the time of signing, there is only a formula and no price would be mentioned.   Q: So, as long as gas has not entered into the peace pipeline, we cannot say at what price the Iranian gas has been sold?
A: Yes, because there is a formula, which is dependent on price of crude oil and price of Japan’s imported crude oil at that time will determine the price.   Q: The contract for selling gas to India and Pakistan has been compared to Iran’s gas sales contract with Turkey. Can we compare the two markets?
A: In an energy market, be it coal, oil, gas, and even electricity, price is different at different places. Price of gas in various parts of Europe is different and prices in the United States are not the same, even in the course of a single day. Are prices in southern states of the United States are the same or are they the same in northern states of the United States and Canada’s Toronto, which is close to them? Is the oil price constant throughout oil markets? Is Brent crude sold at the same price in the American markets as it is sold in the European markets? Is Saudi Arabia’s crude price the same for Asian and Mediterranean destination? Since we have been exporting crude oil for a long time, the difference in price is acceptable for many parties and crude prices are not the same for various destinations although the distance, quality of oil, and time of transfer may be similar. This is the structure of the energy market and if, for example, Saudi Arabia exported oil to Europe at the same price that it considers for the Asian markets, it would be marginalized in the market. Since we have only exported gas to Turkey, some believe that gas export to all places should be done at the same price that has been considered for Turkey.
The closest gas exporting country to us is Russia, which is one of the biggest gas exporters of the world. But its price for various markets is different. Isn’t it more appropriate to announce daily gas prices so that they would not think that export price considered for one destination should be generalized to all destinations? The question is why Iran does not sell all its crude oil in Asia, where prices are higher, and export part of it to European, including Mediterranean and African markets? Economically speaking, if we are only present in a single market, like the Asian market, we could not expect price of our exported oil to increase 1-2 dollars per barrel. Therefore, diversification of markets will not only make them more secure for the country, but also prevents a market from lowering its price because it is oversupplied with crude oil. Also, all littoral counties of Persian Gulf are potentially capable of exporting gas. If Iran could raise its production to cover domestic consumption and also injection into oilfields and feeding petrochemical complexes and also set some gas aside for exports, it would turn into a major hub for gas export to the world. Maybe you will be able to sell gas to a market at an unreasonably high price for a short time, but your rivals will finally conquer that market. Only those contracts can survive in the long term that they observe the interests of both sellers and buyers. Another point is that we may decide that we do not want to be exporting gas anymore. However, this is not a decision to be expected from the Islamic Republic of Iran and the 20-Year Perspective Plan shows that Iran should be a gas exporter in the long run.   Q: In view of our country’s realities and some remarks made by MPs about flaws of the peace pipeline contract, to what extent have various authorities been informed about the project?
A: Whenever a contract is signed by the Ministry of Petroleum, it would conform to permits issued by related authorities. Therefore, if Majlis needs more information on this contract, it is our duty to provide them with that information. Our activities are authorized by legal authorities and will certainly offer our report to the parliament. For drawing up the contract, the best experts and even experts from nongovernmental bodies have been consulted, so that it would conform to the highest possible international standards.   Q: As you said before, the most important achievement of peace pipeline negotiations was finalization of the price review clause. However, the Indian press had quoted Indian officials as saying that the review clause has been deceitful and may slow down the general course of negotiations. Have you changed the period considered for reviewing gas price from seven to three years?
A: The price review clause is nothing new and was presented to both sides in the early text of the peace pipeline contract in May 2006 and it had been emphasized during past negotiations.
Of course, Indian and Pakistani sides rejected the clause and despite we had reached an understanding with Pakistan once, India had not accepted it because the Indian side maintained that due to considering all possible prices of crude oil from zero to infinity in the price formula, all changes in the market will be taken account of. However, the Iranian side argued that although a price curve has been included in the formula, but the shift of the curve has not been taken account of by the formula and this would only be possible when market conditions change compared to conditions of the time that the formula has been drawn up. However, we have been charged by the Indian press to have changed the previous agreement. This clause is not a unilateral provision and if during all the years of the contract, market conditions remained the same, the price would also remain the same after review of prices. However, since nobody can predict a market’s situation for 25 years to come, a price review clause has been included, which is a necessity like the provisions considered in all similar international contracts.
Fortunately, India and Pakistan accepted it after long negotiations and due to the fact that it assures healthy conditions for the contract. They asked Iran for an extra time to offer their own texts of the contract before experts from three countries could draw up a single contract texts.   Q: However, the media have it that you have changed the period considered for price revision from seven to three years?
A: Iran had never mentioned a 7-year period for revising gas price and it had not been mentioned in previous texts of the contract. Iran’s proposal has been based on market conditions and considering the fact that they had proposed longer periods, I don’t think that the main problem is the period before gas price review. However, inclusion of that clause in the contract was very important because its absence would have made the contract unreliable.   Q: What is the usual time considered in other contracts before a price review is carried out and why this period has been considered three years for the peace pipeline contract?
A: Usually, when market conditions are not fluctuating, the time for reviewing contractual price can be longer. However, when there are wide fluctuations in oil, gas, and LNG markets, a contract would be safer when it tries to keep away from long-term fluctuations of the market. The time for the review of the contract should be neither so short as to make its finance impossible, nor so long as to damage one party and benefit the other party. During negotiations with India and Pakistan, we announced that apart from international standards no other standards have been considered by Iran and although the time proposed by us may be longer than what they had proposed inclusion of that clause in the contract was one of our main goals.   Q: What do you mean by saying that the time for price review may be longer in other contracts?
A: There have been contracts whose period of price review has been longer than we have proposed and there are instances that the aforesaid period has been as long as seven years.   Q: What is the normal period usually considered in international contracts?
A: It depends on whether the contract can be extended or not? Are there other rivals in that market too and how long is the contract’s overall period as well as the length of the pipelines’ course. Therefore, there may be even longer period for price review.   Q: Has a three-year period been mentioned during negotiations for the first time?
A: No. The text had been sent for them already and the price review clause was put into the text last May. The proposed period was brought up during February negotiations and Iran insisted on it. Therefore, it has not been raised during negotiations for the first time.   Q: But Indian press has quoted their minister of petroleum as saying that the clause may postpone contract signing by two months.
A: The Indian minister of petroleum has never said that. In a meeting that we had with the Indian minister of petroleum as well as deputy oil and energy minister of Pakistan, he told his colleagues and even representatives of Pakistan that Iran’s request was quite logical and noted that Iran did not want it to be a unilateral request and, therefore, the three countries should reach an understanding on it. In this way, late the same day, a meeting was held with the Indian minister of petroleum and during the last day of talks, we were informed about positive stance of India and Pakistan that seemed to have reached an agreement on that point. Of course, it seemed that they were not positive toward the period of time that we had proposed.   Q: So, you don’t think that this issue will prolong overall negotiations?
A: No, because they have told us that they will send their own texts. Since the text should be drawn up in a single language we give them enough time to finish it.   Q: Has the Iranian negotiating team been under political pressures during peace pipeline negotiations to give concessions to India due to political considerations?
A: Every claim should be supported by relevant evidence. This contract has been in focus for a long time and negotiations related to it started before the election of the present government. Bilateral negotiations on this contract took more than 15 years and trilateral negotiations have been underway for about two years. How long should it take for a contract to reach a certain level of standards in all its articles and protect the interests of all involved parties? How long should we complain that a small country like Qatar is emerging as the world’s biggest liquefied natural gas exporter?
What is our international standing in the gas market despite the fact that we enjoy the world’s second biggest gas reserves after Russia and rank higher than Qatar in this regard? Of course, this does not mean that we have forgotten domestic applications of gas. But have we used this God-given bounty in the best possible manner? Is delayed presence of our country in international markets beneficial for us? This does not mean that we are in a hurry to take part in international competition at any cost. Therefore, I deny that we have been under political pressures for signing the peace pipeline contract. None of the executive officials should allow opportunities before the country be lost. If I cannot finish such a major contract despite availing of the assistance of my colleagues in various sectors, I must not let the country to lose such opportunities. Therefore, I prefer that, if I am obstructing the course of something that is beneficial to our national interest, to resign, and get out. The Iranian delegation is under no political pressure to give concessions to customers in return for concessions to be taken from them elsewhere. This contract has been designed to protect national interests of all involved parties and its contents will be finalized at the point where national interests of three countries converge.   Q: After the fourth meeting in Tehran, Iran has done its best to keep the contents of trilateral agreements totally secret, but this has been considered harmful to national interests. Why do you insist so much on keeping the information secret?
A: As the Iranian side, we intended to disclose the price formula at the same night that the agreement was reached because the oil industry has already done the same about the formula for determining price of exported oil. Those who have or have not signed contracts with us have free access to that formula and it can be studied by international institutes to see whether we pay due attention to our national interests when entering international markets or announce price formulas for the export of crude oil to various markets without care for national interests. We hope that someday our gas export to various destinations and in various forms such as pipeline, liquefied natural gas and compressed natural gas reaches an amount that we would be able to announce our price formulas for various destinations. If Pakistani and Indian officials had not insisted on secrecy about the price formula, we were not concerned about disclosing the formula. Of course, it is usual for contracting countries to withhold various articles of contracts from media. Even contracts that are signed between domestic companies are considered secret until the two sides agree to publish details. Contracts are given to third legal or real persons and usually giving information about the contract to concerned officials of each country is a power of the contracting parties. If a local newspaper in a given country finds out about the contents of a secret contract, the government of the country in question can sue that paper. However, as a contractual party if we could not prove that the information about the contract has been leaked through officials, we could not take legal action against them or take legal action against a local newspaper in another country.   Q: Does secrecy over the contract includes the gas price too?
A: The text of every contract is usually secret. Some articles of the contract are kept secret out of the fear that rival countries may try to undermine the position of the signatory country in the target market. A major part of a contract’s contents are put at deposal of financiers and related institutes for funding the project. Therefore, the contents of the contract will be exposed to the public in the future. However, even if this did not happen, it does not mean that the concerned officials of the country in question have not had access to relevant information.   Q: That is, you are ready to communicate that information to concerned officials?
A: It has always been the case. The Ministry of Petroleum, as a major institution complying with laws and regulations of the Islamic Republic of Iran observes those laws at all times. If it has to give a report about its activities, the ministry is sure to do that