ISLAMABAD: The newly elected governm­ent has decided to seek exemption from potential US sanctions against Pak­istani entities to be inv­olved in the construction of Pak-Iran gas pipeline.

“We will seek exemption from US sanctions. Pakistan cannot afford sanctions in the gas pipeline project,” Minister for Petroleum Dr Musadik Malik told journalists during an informal chat on Monday evening.

This is in contrast to the stance put forward by the Foreign Office, whose spokesperson told a press briefing last week that there was no room for any discussion or waiver from a third party.

The issue became a hot topic after US diplomat Donald Lu, during a deta­iled testimony before a US House subcommittee last week, said that Wash­in­gton was committed to preventing the construction of the pipeline. It was here that Mr Lu noted that Islam­abad had not applied for a waiver for any US sanctions that may be attracted by the project.

Musadik says Pakistan can’t afford sanctions on gas pipeline project

During his talk, Dr Malik also shared the government’s concerns over the request by gas companies for a massive gas price hike, irrespective of exchange rate gains or losses.

He told journalists the government would plead vigorously Pakistan’s case for the waiver on technical, political and economic grounds at relevant forums, including through lobbying. He also expressed the hope that the construction on the project would begin soon while complying with contractual obligations with Iran.

An official said the caretaker government had delayed the filing of a request for exemptions from US sanctions due to changing geopolitical situation, though its draft had been finalised.

The minister in resp­onse to a question said the natural gas supply was restricted to only a quarter of the population in cities while over 70pc of their rural compatriots did not have access to natural gas. Since about 99pc population was connected to electricity, the government would also need to ensure cutting electricity cost by diverting natural gas to efficient power plants.

He explained that six LNG-based power plants, the most efficient in the system, were currently producing electricity at Rs22 to Rs26 per unit depending on the LNG rate, which could be red­uced up to Rs12 per unit if domestic gas supply to those plants was ensured. “We would ensure cheaper electricity,” he vowed.

Independent consultants were of the opinion that Pakistan could be exposed to penalties if Iran pressed ahead with its arbitration bid.

To ward off $18bn potential penalties from Tehran, the caretakers had decided last monthto start building an 80-km segment of the gas pipeline, extending from the Iranian border to Gwadar, at an estimated cost of $158 million (Rs44.2bn).

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

While Prime Minister Shehbaz Sharif had constituted a committee in January 2023 to recommend a way forward, keeping in view pipeline`s economic viability and financing, the caretaker government replaced it in September with a Ministerial Oversight Committee (MOC).

The MOC endorsed the decision of the previous committee and got the waiver application prepared by foreign legal counsel.

The MOC also obtained an opinion from the foreign legal firm, Willkie Farr & Gallagher LLP.

Regarding the 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 MOC recommended that though the final draft of the waiver application was ready, its filing with US authorities was deferred due to the 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.

Pakistan and Iran signed an agreement in May 2009 for the supply of 750 million cubic feet per day (mmefd) 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 January2015. While Iran has already built over 900km of the pipeline, the remaining 250km segment has yet to be completed.

In December 2012, the government of Iran proposed to finance the project and an engineering, procurement and construction contract under a government-to-government agreement. But the Iranian government later 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 again and both sides signed an accord to amend the sales and purchase agreement in September 2019, agreeing to extend the time for five years under the French Civil Code.

On Dec 21, 2023, the NIOC served a material breach notice on Pakistan’s ISGS, alleging material breach of buyer`s warranties.

The NIOC also served a notice pursuant to the sovereign guarantee issued by the government of Pakistan in its favour.

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, March 26th, 2024