Shelving of IP gas project: Iran threatens to take Pakistan to The Hague

ISLAMABAD: In a new development, Iran has threatened to move the arbitration court against Pakistan for unilaterally shelving the IP gas line project invoking the penalty clause of the Gas Sales Purchase Agreement (GSPA). Pakistan and Iran signed the GSPA in 2009 under IP gas pipeline project in the era of the Pakistan People's Party (PPP). Since then, the project could not get a shape.

Now under the latest scenario, Tehran has asked for payment of over $1.2 billion, as under the penalty clause from January 1, 2015, Pakistan is bound to pay penalty of $1 million per day if it fails to have intake of gas from Iran under the IP project, a top official of the Petroleum Division told The News.

Keeping in view the gravity of the issue, secretary Petroleum Division in an internal note, of which a copy is available with The News, has sensitised Prime Minister Shahid Khan Abbasi, saying there are vibes emanating from Iran to move the arbitration court seeking the imposition of penalty of $1.2 billion against failure of Pakistan to implement the project.

The prime minister, however, did not give any response when he was sent the question through an SMS, asking if the secretary Petroleum Division has sensitised you (the premier) over the intention of Iran on moving the arbitration court seeking penalty over failure of Pakistan to implement the project and if it is true, what strategy Pakistan will have to avoid the penalty.

The News on June 07, 2016 published a story that Pakistan had shelved the IP gas line project in the wake of pressure of a leading gulf country. The decision had irked authorities in Iran at that time, but now in latest development Iran after pause of 20 months has conveyed to Pakistan in plain words that it is going for arbitration seeking the huge penalty of $1.2 billion which is equal to almost the cost of the project.

The project was to be implemented under segmented approach which means that Iran had to lay down the pipeline on its side and Pakistan had to build the pipeline in its territory. The project was to be completed by December 2014 and come on stream from January 1, 2015. Under the penalty clause it was agreed by both sides that if Pakistan fails to have intake of Iranian gas from January 1, 2015, it will have to pay $1 million per day as penalty.

When this correspondent had filed the story on June 06, 2017 saying the IP project has been shelved, Shahid Khaqan Abbasi, who was at that time petroleum and natural resources minister, had confirmed that the government has deferred the project as it wants the private sector to invest in the LNG terminals and import LNG in the country and to this effect, both new LNG terminals are being erected. He had stated that if the private sector succeeded, the government may then abandon the project.

However, the minister at that time did not buy the information that the government has abandoned the project because of pressure from a gulf country. “We have deferred it as private sector is going to install more LNG terminals with a plan to import 1.2 billion cubic feet per day.

The official said that under the IP gas line, Pakistan could not arrange funding for the project as the US and UN had imposed sanctions on Iran and no international firm and donors were ready to finance the project and owing to this Pakistan sought the forced majeure to avoid $1 million per day penalty as per sale and gas purchase agreement inked with Iran. However, Iran did not buy the arguments on which Pakistan sought the force majeure so far.

Then Pakistan satisfied Iran that it was serious towards the project and to this effect it has started initiating Gwadar-Nawabshah LNG Pipeline (GNGP) with the same specifications agreed with Iran and the said pipeline will later on be called as IP gas line.

“On this argument, Iran did not charge the penalty which was due from January 1, 2015,” the official said. "So much so, Iran had agreed to review the gas price downward under IP gas line and to this effect for the last one year and eight months, Pakistan's official team is waiting for green signal from the top man of the country to visit Iran and start the talks for downward gas price. So far no permission has been granted to the officials of the Ministry of Petroleum and Natural Resources for the reasons best known to the top leadership," the official said.

“The government in June 2016 failed to resist the pressure from one of the Middle East countries which is why it had abandoned the project,” the official insisted, saying: “The decision had also annoyed Beijing as Chinese company was given the contract of GNGP under government to government arrangement. China had earmarked 85 percent of the funding for the project.