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AKD Quotidian about — Pakistan Market: In the backdrop of geopolitical concerns

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by March 12, 2013 Brokerage

Karachi, March 12, 2013 (PPI-OT): The KSE-100 Index shed 442 points or -2.5% yesterday, ostensibly on concern that the inauguration of the Iran-Pakistan (IP) gas pipeline project could attract US sanctions.

According to AKD Securities for now, developments related to the pipeline seem to be a populist ploy (Pakistan’s energy deficit remains acute with shortfall of 5,000MW at summer peak) and the KSE-100 Index has recovered 1.3% in morning trade. The Iran Sanctions Act 1996 was expanded to cover Iran’s energy sector via the Iran Threat Reduction and Syria Human Rights Act 2012 where US legislation on Iran related sanctions now extends to JVs with the Government of Iran to develop petroleum resources outside Iran and/or the construction of infrastructure that can be used to transport Iran’s energy products. Waivers that were issued to countries displaying a reduction in crude oil import are currently winding down. While near-term market outlook merits caution from headline economic metrics, the checkered history of the IP pipeline undermines its actual implementation and resulting risk of sanctions, in AKD Securities views.

The `Peace Pipeline’: Dubbed the `Peace Pipeline’, the IP gas pipeline project first came into prominence in the mid-1990s when a preliminary agreement was signed. Although geopolitics/funding constraints prevented Pakistan from wholeheartedly embracing the project, the country’s sizeable energy shortage has prompted the GoP, in its last week in office, to now opt for formal inauguration with Iran to provide 75Ommcfd gas. In this regard, the construction cost of laying the pipeline through Pakistani territory is reportedly -US$1 .5bn where Iran has offered to finance a third of this cost i.e. US$SOOmn. Gas is expected to flow into Pakistan’s distribution system by end-CY1 4, potentially increasing power generation by 4,000MW.

Awaiting Further Clarity: While cognizant of Pakistan’s energy deficit, the US has consistently advocated that Pakistan opt for the proposed Turkmenistan- Afghanistan-Pakistan-India (TAPI) gas pipeline and/or LNG import. In contrast, gas import from Iran poses risks where US State Department spokesperson Victoria Nuland has recently stated that the IP pipeline would raise serious concerns under AKD Securities Iran Sanctions Act. In this regard, even closer US allies e.g. the EU, Japan and S. Korea have had to substantially reduce their import of Iranian crude in order to comply with US requirements and qualify for waivers from sanctions. Recall that the State Department has recently waived conditions for releasing US economic and security assistance to Pakistan, citing national interest. However, the State Department’s recent comments do not give an indication as to whether the IP project will face the same treatment.

Investment Perspective: While near-term market outlook merits caution from headline economic metrics, the checkered history of the IP pipeline undermines its actual implementation and resulting risk of sanctions, in AKD Securities views. Thematically, AKD Securities sees continuing bottom up investing across Teleconis and Chemicals near term. More tangible risks include an unfolding of concerns on the BoP profile and deterEoratiori in domestic law and order in the run up to General Elections.

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