Over the objections of the United States government, Iran and Pakistan finalized a deal earlier this week to build a truncated 1,100 km version of the projected 2,600 km Iran-Pakistan-India gas pipeline, which India has opted out of, at least for now.

The plan has been under discussion for two decades and, political observers say, and could well alter the strategic balance of power on the subcontinent as China enters the picture to cooperate with Iran and Pakistan, and to take some of the gas.

If anything, it is an indication that while Pakistan is continuing to seek some accommodation from the Americans, neither Pakistan nor Iran appears intimidated by the US's increasingly tough attempts to crack down on Iran for its alleged ambitions to build a nuclear bomb, and demonstrates the limits on American power.

Although Richard Holbrook, the US Special Envoy to Pakistan and Afghanistan, continues to warn Islamabad against going ahead, Tehran and Islamabad formally signed the US$7.5 billion agreement, under which Iran will supply its energy-deficient eastern neighbor with natural gas from 2014. The pipeline is designed to deliver 750 million cu ft of natural gas daily to Pakistan, which can be raised to 1 billion cu ft per day for 25-year validity of the pact, which can be extended by five years.

"Iran will play a key role in guaranteeing global energy security,'' Iran's Oil Minister Masood Mir-Kazemi told local reporters. The pipeline will connect Iran's South Pars gas field with Pakistan's southern Balochistan and Sindh provinces.

Iran, which possesses the world's second largest gas reserves after Russia, has already built over 900 km of the pipeline as negotiations droned on. Iran will now begin to build the next 300 km to the Pakistani border, through the Iranian port of Chabahar. Pakistan will build a 700 km link to Sindh.

US Reaction

Meanwhile US Special Representative for Pakistan and Afghanistan Richard Holbrooke warned that "Pakistan should be wary of opting for a gas deal with Iran. New sanctions on Iran (for its supposed independent nuclear program) can impact Pakistan."

The UN Security Council approved new sanctions on Iran this month.

It is not yet clear how Pakistan, which depends on America for substantial military and civil aid, will respond to the US threat. Pakistan Foreign Minister Shah Mahmood Qureshi has said publicly that the pipeline would go ahead despite the US objections.

Pakistan Prime Minister Yusuf Raza Gilani has been quoted as saying: "If the US imposes sanctions, they will have international implications and Pakistan as a member of the international community will follow them."

India Left Out

The original IPI project included India. In the mid-1990s, Tehran and New Delhi signed preliminary pacts for a project appropriately nicknamed the "peace pipeline" as the gas was to be transported to India via Pakistan, two warring neighbors.

But India has remained noncommittal due to differences about the price of gas, especially in the wake of cheaper shale gas availabilities and domestic options, security issues in Baluchistan, the high transit fees demanded by Pakistan and pressure from Washington not to engage with Tehran due to its supposed independent nuclear program.

Following the failure of India to join the pipeline project earlier this year, Pakistani Foreign Minister Shah Mahmood Qureshi said the project should be re-named the Iran-Pakistan-China project.

India Wary Of Gas Price

Though officially New Delhi continues to say that negotiations over IPI will continue, opinion in India today suggests that the country should be cautious.

Writing in The Economic Times, well-known economist Swaminathan Aiyar said, "given the price that Pakistan has agreed to pay Iran, the project could well turn out to be the country's Enron. It will bleed Pakistan's exchequer, just as Enron drove the Maharashtra government (which agreed to buy electricity at a very high price) towards bankruptcy and was aborted.''

Indeed, observers in India say that IPI formula links the gas price to oil prices could make the import very expensive -- US$10/mmbtu at today's oil price of US$78/bbl) and as much as US$20/mmbtu when oil hit its 2008 peak $147.bbl.

New Delhi has fixed its domestic gas price at US$4.2 per mmbtu sold by state firms.

A senior official at the ministry of petroleum told Asia Sentinel: "Such a price formula can mean economic suicide as emerging shale gas technologies are sending natural gas prices plummeting. Indian firms ONGC and RIL are looking at shale gas options closely.''

China Steps In

Beijing, meanwhile, has expressed interest in the pipeline being re-routed to China, much to New Delhi's chagrin, and presumably to America's. Given Pakistan's close connections with China, which range from arms supply to nuclear reactors, Islamabad is not averse to the idea.

Beijing has told Pakistan it would be willing to import 1.05 billion cu ft (bcf) of gas per day if India opts out of the project. Pakistan can import up to 2.2 bcf of gas a day via the IP pipeline.

China has been looking at Pakistan to access the hydrocarbon rich Middle East, Iran, Afghan hydro power and possibly Iraq, to follow on its success in building oil and gas pipelines from Myanmar. Chinese firms are expected to invest US$2.5 billion in the IP project and are looking at broadening their involvement.

China is estimated to have invested US$15 billion in the rich Baluchistan region , spanning an oil refinery, copper and zinc mines and the Gwadar deep water port in the Gulf of Oman.

India Weighs Options

India's options include Turkmenistan, Burma, an ambitious 2,000 km Middle East (ME) deep sea gas pipeline from Qatar via Oman to India's west coast states of Gujarat or Maharashtra. The state utility Gas Authority of India Ltd (GAIL) signed an agreement on the Middle East pipeline last year with New Delhi-based South Asia Gas Enterprise Pvt. Ltd (SAGE), a private sector consortium comprised of the Indian Siddhomal group firm and UK-based Deep Water Technology Co, exclusive of state companies' involvement to implement trans-national pipelines as is the usual case.

India is also closely looking at the US$3.5 billion, 1,700 km, US-backed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. Despite the production new gas from the KG basin, India's natural gas demand will not be met by domestic supplies.

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com