ISLAMABAD: 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 decision was taken at a meeting of the Cabinet Committee on Energy (CCoE) presided over 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.

The project will be executed by Inter-State Gas Systems (Pvt) Ltd (ISGC), an entity of the petroleum division, and will be funded through the Gas Infrastructure Development Cess (GIDC).

The move followed opinion from independent consultants that Pakistan could be exposed to penalties should Iran press ahead with its arbitration bid.

Cabinet Committee on Energy approves construction; work to be funded through GIDC

Former prime minister Shehbaz Sharif had constituted a committee in January 2023 to recommend a way forward, keeping in view 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 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, executing the project was considered a preferable option.

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.

Both countries were required to implement the project in their respective territories. According to the agreement, the project was to start supply by January 2015. Iran has already constructed over 900km of the pipeline, while the remaining 250km segment has yet to be completed.

In December 2012, the government of Iran proposed to finance the project and the engineering, procurement and construction (EPC) contractor under a government-to-government agreement.

However, the Iranian government unilaterally backed out from that agreement in March 2014, citing financial constraints.

Pakistan, therefore, served the force majeure and/or excusing events notice to the National Iranian Oil Company (NIOC) under the sales and purchase agreement. Accordingly, project activities were halted.

The NIOC served a notice of material breach of the sales and purchase agreement obligations as well as a notice under the sovereign guarantee issued by Pakistan in February 2019.

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 gave the ISGS a 180-day period to remedy the alleged material breach and referred the matter to the Coordination Committee for resolution.

If Pakistan doesn’t implement the project, Tehran has the option to move the Paris-based International Court of Arbitration, with potential contractual liability estimated to be $18bn.

Published in Dawn, February 24th, 2024