In a fresh push towards completion of a multibillion-dollar gas supply project, the government on Friday decided to start building an 80-kilometre segment of the Iran-Pakistan gas pipeline, extending from the Iranian border to Gwadar, at an estimated cost of $158 million (Rs44.2 billion), to ward off $18bn potential penalties from Tehran.
The Cabinet Committee on Energy (CCoE) meeting was held and the decision was made by Caretaker Finance Minister Dr Shamshad Akhtar.
“The CCoE approved the recommendations of the Ministerial Oversight Committee for the IP Project (Iran-Pakistan gas pipeline project) constituted by the prime minister in September 2023 whereby the committee recommended to start work on the 80km segment of the pipeline inside Pakistan, i.e. from Pakistan border up till Gwadar in the first phase,” said an official statement issued by the Ministry of Energy, rather than the Ministry of Finance.
Inter-State Gas Systems (Pvt) Ltd (ISGC), a petroleum division entity, will execute the project and will receive funding from the Gas Infrastructure Development Cess (GIDC).
Independent consultants suggested that Pakistan could face penalties if Iran continues with its arbitration bid.
Former Prime Minister Shehbaz Sharif constituted a committee in January 2023 to recommend a way forward, keeping in mind its economic viability and financing.
The caretaker government replaced it with a Ministerial Oversight Committee (MOC) in September, which endorsed the decision of the previous committee and got the waiver application prepared by foreign legal counsel.
The Ministerial Oversight Committee also obtained an opinion from the foreign legal firm, Willkie Farr & Gallagher LLP.
Regarding US sanctions on Iran, Willkie Farr opined that if Pakistan proceeded with the project, there was a likelihood of the imposition of sanctions on the ISGS, which had little international exposure.
Regarding the force majeure and/or excusing event notice given by Pakistan, Willkie Farr said the country did not have a strong case post-September 2019 under French law as no documentary evidence was available to support that concrete steps had been taken by Pakistan to implement the project. Therefore, it was considered a better choice to execute the project.
Based on this opinion and interactions held with Tehran over the past year or so, the Ministerial Oversight Committee recommended that though the final draft of the waiver application was ready, its filing with US authorities was deferred due to the current geopolitical situation.
Considering Tehran’s material breach notice, the petroleum division has already formed a coordination committee in January as per Clause 19.1.1 of the gas sales and purchase agreement (GSPA) to start work on the 80km pipeline segment.
In May 2009, Pakistan and Iran signed an agreement for the supply of 750 million cubic feet per day (mmcfd) of gas for 25 years from Iran’s South Pars gas field.
Implementing the project in their respective territories was a requirement for both countries. As per the agreement, the project was supposed to commence supply by January 2015. Iran has completed over 900km of the pipeline, but the remaining 250km segment is still unfinished.
In December 2012, the government of Iran proposed financing the project and the engineering, procurement, and construction (EPC) contractor through a government-to-government agreement.
However, the Iranian government unilaterally backed out of that agreement in March 2014, citing financial constraints.
Pakistan has therefore served the notice of force majeure and/or excusing events to the National Iranian Oil Company (NIOC) under the sales and purchase agreement. Accordingly, project activities were halted.
In February 2019, the NIOC sent a notice of material breach of the sales and purchase agreement obligations and a notice under the sovereign guarantee issued by Pakistan.
The matter was negotiated with Iran and both sides agreed to extend the time for five years under the French Civil Code. Accordingly, an accord to amend the sales and purchase agreement was signed in September 2019.
On Dec 21, 2023, the NIOC served a material breach notice on Pakistan’s Inter-State Gas Ltd, alleging material breach of buyer’s warranties.
Through the same notice, the NIOC has served a notice pursuant to the sovereign guarantee issued by the government of Pakistan in favour of the NIOC.
The NIOC granted the ISGS a 180-day period to rectify the alleged material breach and referred the matter to the Coordination Committee for resolution.
If Pakistan does not implement the project, Tehran has the option to move to the Paris-based International Court of Arbitration, with potential contractual liability estimated to be $18bn.
