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ISLAMABAD: The Cabinet Committee on Energy (CCoE) headed by the caretaker minister for power and petroleum has decided to start work on the first phase of the 80-km segment of the Iran-Pakistan (IP) gas pipeline inside Pakistan, i.e., from Pakistan’s border to Gwadar.

As per cost estimates for the construction of the pipeline, $158 million (equivalent to Rs45 billion) would be utilised from Gas Infrastructure Development Cess (GIDC) funds, and up to Rs2.5 billion can be provided during FY 2023-24. The requirement of remaining funds amounting to Rs42.5 billion may be considered during FY 2024-25 on approval of the GIDC Board.

The government will utilise Rs45 billion under the GIDC on the construction of the pipeline. The government fears that in case of any further delay, Pakistan may have to pay a contractual liability of $ 18 billion.

GIDC funds to be used towards IP gas pipeline

According to an official statement, a summary of the Petroleum Division regarding the IP gas pipeline was taken up by the CCoE in its session of February 23, 2024. The CCoE approved the recommendations of the Ministerial Oversight Committee (MOC) for the IP Project constituted by the prime minister in September 2023, whereby, the committee recommended starting work on the 80-km segment of the pipeline inside Pakistan, i.e., from Pakistan’s border up till Gwadar in the first phase.

The project will be executed by Inter-State Gas Systems (Pvt) Ltd and will be funded through the GIDC. All the concerned Divisions gave the nod to move ahead with the project to ensure gas supplies to the people of Pakistan, thereby, addressing the increasing energy needs of the country.

However, the Finance Division argued that as the 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 the GIDC funds for consideration of the GIDC Board.

The pipeline will not only boost the energy security of Pakistan but will enhance the confidence of the local industry which would be ensured with the enhanced gas supplies. This will also catalyse the economic activity in the province of Balochistan and will contribute to the economic progress of Pakistan.

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

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 the supply of gas of 750 MMCFD for 25 years from South Pars gas field of Iran and delivered at the 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 of GoP, 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 the 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 the National Iranian Oil Company (NIOC) on March 29, 2014, after seeking the 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 the 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.

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

The MOC endorsed the decisions of the previous committee and got the waiver application prepared by foreign legal counsel. The MOC also obtained the legal opinions from foreign legal counsel, M/s Willkie Farr & Gallagher LLP. With regards to 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, the 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, the NIOC has served a notice pursuant to Clause 7 of the sovereign guarantee issued by the Government of Pakistan in favour of the NIOC.

The NIOC gave a 180-day period to ISGS to remedy the alleged material breach and referred the matter to the coordination committee for resolution. The in-house working, based on worst-case scenario, shows a potential contractual liability of $ 18 billion.

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

Copyright Business Recorder, 2024

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