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ISLAMABAD: The government is to utilise Rs 45 billion under Gas Infrastructure Development Cess (GIDC) on construction of 80-kilometre gas pipeline from Iran border to Gwadar to complete the long-delayed Iran-Pakistan (IP) gas pipeline, well informed sources told Business Recorder.

The caretaker government’s Cabinet Committee on Energy (CCoE) which is scheduled to meet on Friday (today) will accord approval to the proposal of Petroleum Division, as in case of any further delay, Pakistan may have to pay contractual liability of $18 billion, the sources added.

As per cost estimates for construction of 80-km pipeline, i.e., $ 158 million (equivalent to Rs 45 billion) would be utilised from GIDC funds, and up to Rs 2.5 billion can be provided during FY 2023-24. The requirement of remaining funds amounting to Rs 42.5 billion may be considered during FY 2024-25 on approval of GIDC Board.

IP gas project: Govt has sought relaxation from US, PAC informed

“To avert the possibility of an arbitral award against the GoP and invoking of sovereign guarantee, Finance Division has endorsed the proposal of initiation of work on IP gas pipeline project,” the sources added.

However, Finance Division argued that as review of the project and decision of its implementation utilising GIDC funds rests with the High-Powered Project Board (HPPRB), the Petroleum Division may move the case of utilisation of GIDC funds for consideration of the GIDC Board.

The Inter-Governmental Framework Declaration of the Iran Pakistan Gas Pipeline Project was signed by the Presidents of Pakistan and Iran on 24th May 2009 for supply of gas of 750MMCFD for 25 years from South Pars gas field of Iran and delivered at Pak-Iran border near Gwadar.

The project having a length of 1,150-km within Iran and 781-km within Pakistan was to be implemented by each country in their respective territories. The first gas flow was to start from 1st January 2015. Iran has completed construction of over 900-km within Iran, while the remaining segment of 250-km is yet to be constructed by Iran.

The Iran Pakistan Gas Sales Purchase Agreement (IP-GSPA) with take or pay obligation was approved by Cabinet on June 3, 2009 and was signed on 5th June 2009. The Sovereign Guarantee was issued by the GoP on behalf of Inter State Gas Systems (Pvt) Limited (ISGS), a wholly owned state company, on May 28, 2010. The IP-GSPA became effective on June 13, 2010. The project; however, could not be implemented due to international sanctions on Iran.

Considering the challenges faced by Pakistan, the government of Iran proposed to provide financing for the project, as well as, EPC contractor under the Government to Government Cooperation Agreement on December 1, 2012. The Cabinet approved the Cooperation Agreement on January 30, 2013.

Subsequently, the Iranian government unilaterally withdrew from Government to Government Cooperation Agreement on March 17, 2014. Pakistan; therefore, served the Force Majeure and/ or Excusing Events Notice under the IP-GSPA to National Iranian Oil Company (NIOC) on March 29, 2014 after seeking Prime Minister’s approval. Accordingly, the project activities have been on hold since then.

As an alternative strategy to implement the IP Project, after seeking ECC approval, Gwadar-Nawabshah LNG Terminal and Pipeline Project was conceived under G2G Framework Agreement with China.

The EPC contract was initialled with the Chinese nominated company, China Petroleum Pipeline Bureau, in April 2016. However, the CCoE on June 6, 2017 advised the Petroleum Division to drop the project forthwith. Subsequently, the Cabinet did not accord approval to extend the G-to-G Framework Agreement with China.

NIOC served a notice of Material Breach of IP-GSPA obligations, as well as, a notice under the Sovereign Guarantee issued by the government of Pakistan in favour of NIOC on February 27, 2019. The matter was negotiated with Iran and both sides agreed to extend the time for five years under the French Civil Code.

Accordingly, the Amendment Agreement No. 3 to the GSPA was signed on September 5, 2019 after approval of the Cabinet.

The GoP has maintained engagement with Iran at two levels, i.e., Technical Committee level and Ministerial level. So far two meetings each at the Technical Committee level and Ministerial level have been held with Iran.

During these meetings, Iran was informed about the steps being taken by Pakistan regarding project implementation including its intent to file the Waiver Application and the prospective implications on the future course of action of the project if the Waiver Application is rejected. While emphasising urgent action by Pakistan, Iran stated that further extension of time under the French Civil Code would be subject to substantial progress by Pakistan on the project within next three months; else Iran would be constrained to refer the matter to international arbitration under the GSPA.

Both sides agreed to form a high level committee to discuss all matters related to the project. Secretary Petroleum has been nominated from Pakistan side for the High-Level Committee.

The MOC endorsed the decisions of the previous committee and got the Waiver Application prepared by foreign legal counsel. MOC also obtained the legal opinions from foreign legal counsel, M/s Willkie Farr & Gallagher LLP.

With regards to the US sanctions on Iran, M/s Willkie Farr opined that if Pakistan proceeds with the project, there is a likelihood of imposition of sanctions on the company.

Regarding the Force Majeure and/or Excusing Event notice, M/s Willkie Farr opined that Pakistan does not have a strong case post September 2019 under the French law as no documentary evidence is available to support that concrete steps have been taken by Pakistan to implement the project.

On December 21, 2023, NIOC served a Material Breach Notice to ISGS alleging material breach of buyer’s warranties under clause 15.2(d) of the GSPA.

Through the same notice NIOC has served a notice pursuant to Clause 7 of the Sovereign Guarantee issued by Government of Pakistan in favour of NIOC. NIOC gave a 180- day period to ISGS to remedy the alleged Material Breach and referred the matter to Coordination Committee for resolution. The in-house working, based on worst case scenario, shows a potential contractual liability of $18 billion.

The MOC, after due consideration to the discourses held with Iran during the past one year has taken following key decisions: (i) though the final draft of the Waiver Application is ready, its filing with the US authorities is deferred due to current geo-political situation; (ii) High-Level Committee to discuss and resolve all outstanding issues with Iran including further extension of time under the French Civil Code; (iii) in consideration of NIOC’s Material Breach notice, Petroleum Division has constituted vide letter No.8(2)/2024/Dev-III/IP-Main of January 9, 2024 the Coordination Committee in accordance with Clause 19.1.1 of the GSPA to be headed by Joint Secretary, Petroleum Division; and (iv) the Committee recommends, subject to approval by competent authority, to start work on construction of gas pipeline from Pak-Iran border to Gwadar (80-km of the pipeline), initially by utilising GIDC funds.

The Committee has also decided to continue engagement with the governments of Russia, China, Turkmenistan and Azerbaijan regarding gas swap arrangement in relation to the project.

Copyright Business Recorder, 2024

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test Feb 24, 2024 11:24am
Hopefully we will be receiving cheap gas from Iran and also we can do barter trade with Iran so instead of paying in dollar we can use goods and also local currencie to facilitate cross border trades.
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