Islamabad is considering initiating construction on an 80-kilometer segment of the Iran-Pakistan gas pipeline project, stretching from the Iranian border to Gwadar, in order to avoid a potential penalty of $18 billion. This penalty could be imposed if Tehran decides to pursue arbitration at the International Court of Arbitration in Paris due to the project’s non-execution. A source from the Ministry of Energy disclosed that Pakistan also plans to seek a waiver of US sanctions for the IP project.
Initially, it has been decided to commence work on the 80-kilometer segment from the Pak-Iran border to Gwadar in the first phase of the IP project. The estimated cost for this portion of the project is $158 million, and funding will be facilitated through the Gas Infrastructure Development Cess (GIDC). According to the official, the agreement for the project, signed in May 2009, entails the supply of 750 MMCFD of gas for 25 years from Iran’s South Pars gas field to the Pak-Iran border.
The project involves laying a 1,931-kilometer pipeline to transport Iranian gas to Pakistan, with 1,150 kilometers within Iran and 781 kilometers within Pakistan. Both countries are responsible for implementing the project within their territories. As per the agreement, gas supply was scheduled to commence by January 2015. While Iran has completed over 900 kilometers of construction within its territory, the remaining 250 kilometers are yet to be built.
In December 2012, the Iranian government proposed financing and an EPC contractor under a government-to-government agreement. However, Iran unilaterally withdrew from the G-to-G agreement in March 2014, prompting Pakistan to issue a Force Majeure notice to the National Iranian Oil Company (NIOC). Subsequently, project activities were suspended. In February 2019, NIOC issued notices of Material Breach and invoked the Sovereign Guarantee issued by Pakistan.
Negotiations ensued, resulting in an amendment agreement to the Gas Sales Purchase Agreement (GSPA) in September 2019, extending the project’s timeline by five years under the French Civil Code. However, Iran warned that further extensions would require substantial progress by Pakistan within three months, or else Iran would seek international arbitration.
On December 21, 2023, NIOC issued a Material Breach Notice to Pakistan’s Inter-State Gas Limited (ISGS), alleging breach of buyer’s warranties. ISGS was given 180 days to remedy the breach, failing which the matter would be referred to the Coordination Committee for resolution. Failure to implement the project may lead Tehran to pursue arbitration, potentially resulting in a contractual liability of approximately $18 billion for Pakistan.
