August 16, 2009

China calls halt to Gwadar refinery

By Syed Fazl-e-Haider

QUETTA, Pakistan - Cash-strapped Pakistan, which has had to accept more than US$11 billion from the International Monetary Fund, is threatened with the loss of a huge foreign investment after China said it had shelved its multi-billion dollar coastal oil refinery project at Gwadar, in southwest Balochistan province.

China has formally informed the Pakistani authorities that the refinery project has been deleted from the list of financial development plans agreed with Islamabad for the financial year ending next June as there has been no progress on the project, according to a Business Recorder report.

The decision, which follows suspension in January by the

United Arab Emirates state-run International Petroleum Investment Company (IPIC) of work on the $5 billion Khalifa Coastal Refinery (KCR) project at Hub, also in Balochistan, creates uncertainty about the future of the planned $12.5 billion mega oil city project in Gwadar, of which the refinery there was to be a key element.

It also casts doubt over plans for a corridor carrying energy pipelines and refinery products the length of Pakistan from Gwadar onto western China.

The global recession was a factor in forcing the Chinese and UAE governments to shelve their refinery projects, the Business Recorder report said, citing sources in Pakistan's Petroleum Ministry. Local analysts, however, believe that security concerns were also an important factor.

The province has battled with a low-level insurgency for the past five years. Most recently, a security forces' checkpoint was attacked on Wednesday in Quetta, Balochistan's capital, killing four people and injuring five others.

The United States is also turning its attention to the province, which borders Afghanistan to the north, as part of its battle against Taliban insurgents in the region.

Many Chinese nationals have been attacked, kidnapped and killed in the country since May 2004, when three Chinese engineers were killed in Gwadar.

While its nationals are under threat in Pakistan, China is also concerned about Islamist militants operating in China's western Xinjiang Uyghur Autonomous Region. It says some have been trained in Pakistan's unruly tribal areas to the north of Balochistan. Xinjiang, a Muslim-dominated region, was the scene of riots last month in which 197 people were killed. Beijing claimed Uyghur separatists were responsible for the violence.

Great United Petroleum Holdings Company Limited (GUPC) of China started work on the Gwadar petrochemical city project in December 2006. Under a memorandum of understanding signed between Pakistan and China that year, GUPC was committed to conduct a feasibility study and preparation work. The GUPC was also to build 1,000-2,000 service stations in the country.

China had expressed interest in building the refinery during a visit to China in February 2006 by Pakistan's then-president General Pervez Musharraf, who also offered a "trade corridor" that would carry imported Middle East oil and refined products from Gwadar to Kashghar, in western China.

China had planned to build a refinery and petrochemical complex with an initial 10 million tonnes per year (200,000 barrels per day) capacity, later expanding to 21 million tonnes. Pakistan has allocated 5,000 hectares of land for the proposed oil city.

Gwadar is close to the entrance to the Persian Gulf and the Middle East, China's biggest source of crude, and a pipeline to western China would greatly reduce the time and distance required to transport the fuel, while cutting out the congested seaways around Singapore.

The earlier halted UAE-built Khalifa refinery was originally planned for Gwadar, before being moved east to Hub district. In 2007, the UAE signed an implementation agreement with Islamabad to establish the $5 billion refinery, which Abu Dhabi's IPIC was to build with a target refining capacity of 200,000 to 300,000 barrels per day. So far the UAE government has not started work on the project, which was scheduled to be completed by 2012.

In March, Pakistan told the UAE government that if work did not start within 60 days, Islamabad would seek other investors or expand the capacity of the Pak-Arab Refinery (Parco), in central Pakistan, by 100,000 barrels of oil per day.

It was not possible for the UAE to immediately start work on the refinery, with a huge investment, due to the global economic meltdown over the past year, according to a report published in The News on March 30. In view of the expected delay in initiating the Khalifa project, the government would ask Parco, the country's largest refinery, to start increasing capacity, the report said, citing Asim Hussain, adviser to the prime minister on petroleum.

China is playing an increasing role throughout Pakistan's economy, from sales of consumer goods to developing natural resources, with several mining projects underway in Balochistan. It has been the biggest foreign investor and partner in the development of Gwadar port for commercial shipping as well as an energy hub.

The port was officially declared functional last December, yet the outlook there is also uncertain. The government is in dispute with the Pakistan navy, which is reluctant to vacate 582 hectares of land it is using at the port and which is wanted for development. Ports and Shipping Minister Babar Khan Ghauri said late last month that the port may be shut down if the navy did not vacate the land, the Daily Times reported.

Syed Fazl-e-Haider,, is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan (2004).

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