Will Pakistan defy US sanctions to complete ‘Peace Pipeline’ with Iran?

Pakistan risks major financial setbacks if it fails to construct its part of a gas pipeline with Iran. Islamabad must follow India’s lead in resisting US sanctions to secure vital national energy supply.

Islamabad has formed a diplomatic channel to convince Washington to ease sanctions on Iran, which would finally allow for the completion of a crucial pipeline project to bring cheap Iranian natural gas to Pakistan.

Iran has vowed to take the matter to arbitration if Pakistan does not complete its portion of the pipeline by March 2024, as stipulated in an agreement between the two West Asian countries.

Discussions on constructing the massive pipeline project began almost 29 years ago, in 1994 – then called the Iran-India-Pakistan pipeline – which originally envisioned moving Iranian gas to Pakistan, Bangladesh, and China. The focus later shifted to constructing a pipeline between Pakistan and Iran only, but the project has never been completed.

According to the terms of the IP-GSPA (Gas Sales Purchase Agreement) signed between Iran and Pakistan, each country was obligated to construct the portion of the pipeline on its own territory, and the first flow of Iranian gas to Pakistan was to start January 1, 2015. The agreement stipulated Pakistan would pay Iran $1 million per day in exchange for 750 million cubic feet of gas daily, with a contract lasting 25 years.

Iran completed its portion of the pipeline in 2011, however, Pakistan has failed to construct its portion, largely due to difficulties caused by US economic sanctions imposed on Iran for the country’s alleged nuclear weapons program. US sanctions block Pakistan from purchasing Iranian gas, and this geopolitical risk has made Pakistani banks unwilling to finance the project.

Because of US foreign policy pritiorites, therefore, Pakistan continues to rely on more expensive liquified natural gas (LNG) to meet its burgeoning energy needs, which has greatly limited Pakistani economic growth and exposed the country to crises during periods of volatile LNG price spikes.

Due to these difficulties, Pakistan’s Inter-State Gas Systems (ISGS) and the National Iranian Gas Company (NIGC) signed a revised agreement in 2019 to allow Pakistan more time to complete its segment of the pipeline. The agreement stipulated that neither Iran nor Pakistan will take the other to court for delays or impose fines until 2024.

But US sanctions have continued to make Pakistan’s completion of the project difficult, and Iran is now threatening to sue Islamabad for $18 billion in fines if it breaks the agreement and fails to complete construction by the 2024 cutoff date.

Financial straits or US pressure

As Asif Durrani, a former Pakistan ambassador to Iran, tells The Cradle:

“Pakistan needs roughly $3 billion to lay a pipeline stretching over a radius of 781 kilometers inside the country. The question is who will finance this project, and secondly, the US sanctions on Iran, which took the air out of this project as far as Pakistan is concerned, need a revisit by the US authorities to protect the faltering economies of the region.”

The sanctions, he adds, were primarily focused on the energy sector of Iran and set a cap of $10 million on investments in the Iranian oil and gas sector.

Durrani is not convinced that US sanctions make completion of the pipeline impossible, however.

“These are lousy arguments because, despite these restrictions, Iran supplies Turkiye with almost $10 billion annually in natural gas,” he argues, adding that India and China have also resisted US sanctions.

Durrani contends that Pakistan and Iran are neighboring nations and that neighbors must always conduct business with one another. He urges private sector participation in the IP gas project to accelerate the development phase of this huge project.

Now a senior fellow at the Islamabad Policy Research Institute (IPRI), the former Pakistani envoy to Tehran had in 2021 criticized the US for sabotaging the Iranian nuclear deal, claiming that Iran, as a Non-Proliferation Treaty (NPT) member, had the legal right to use nuclear energy for peaceful purposes.

Dr. Muhammad Abdul Muqtedar Khan, an Indian-American academic and a professor in the Department of Political Science and International Relations at the University of Delaware concurs with Durrani’s logic, telling The Cradle that too many countries in this region tend to yield to US pressure unnecessarily.

India, he says, disregarded US outrage over the Russian oil issue and refused to capitulate, unlike Pakistan which is still in a state of vacillation. In the same way, Pakistan could proceed with the Iran gas pipeline project, citing its energy and resource constraints in the face of pressure from Washington.

“In 1990, India, China, and even Bangladesh showed interest in the peace pipeline – but, in 2008, as a result of the Indian nuclear accord with the US, New Delhi decided to withdraw. As the thing unfolded, Iran has already installed the pipeline on their side of the border, but Pakistan is still dilly-dallying about it because of the US pressure and lack of the financial means to begin construction,” Khan adds.

He says Iran has spent a considerable amount of money constructing its section of the pipeline and would want compensation for the resulting commercial loss. “Iran has granted sufficient time for the pipeline’s development, and if Pakistan begins building its gas infrastructure, it could gain some cushion to reduce its import bill.

Pakistan is hedging its bets

Pakistan’s Secretary of Petroleum, Ali Raza Bhutta, disclosed in a meeting of the country’s Public Accounts Committee (PAC) that Pakistan has spoken to the US about the gas project, seeking relief in sanctions on Iran to press ahead with the construction of the pipeline.

Islamabad’s top energy official went on to add that since there was a ban on importing gas from Iran, the government has conveyed to the US ambassador to either grant Islamabad permission to go ahead with the project, or compensate Iran for the penalty imposed for opting out of the project.

As Noor Alam Khan, Chairman of the Public Accounts Committee, tells The Cradle:

“I did not convene this meeting specifically for the IP gas project, the focus was only on the audit paras of the petroleum ministry, and I suggested during the meeting – not the secretary – that the Ministry of Foreign Affairs should approach the US to let them know how serious the situation is.”

When informed that the secretary of petroleum had briefed the committee on the IP gas project and that media had quoted him saying that either the US should pay the damages or permit the country to continue with the IP gas project under the terms of the Iran agreement, Khan, a member of a breakaway faction of former president Imran Khan’s Pakistan Tehrik-e-Insaf party, became irritated, said it was nonsense, and hung up the phone.

The Pakistan National Assembly’s Foreign Affairs Committee also discussed this matter last week. The committee’s chairman, Mohsin Dawar, raised fears about the fact that several nations in the region have received waivers for importing Iranian oil even though Iran is under sanctions.

Pakistan, however, was unable to secure such a waiver to conduct such lucrative oil and gas business with Iran. He pressed the appropriate ministries to examine opportunities for receiving exemptions for the IP gas pipeline with Iran, much as India and China had done for Iranian oil imports.

IP Gas Pipeline in perspective

The plan for the IP Gas Pipeline, which is also called the “Peace Pipeline,” dates back to 1994, when India was also part of the project.

The 1,700-mile (2,735 km), $7.5 billion project planned to move gas from the South Pars Gas Fields to India through the western part of Pakistan, Balochistan. Since its inception, the project has encountered numerous obstacles that have caused repeated delays in the execution of a natural gas project that was badly needed by energy-starved Pakistan.

In 2008, the three nations were close to reaching an agreement before India opted to pursue an alternative project, the Turkmenistan-Afghanistan-Pakistan-India pipeline (TAPI). The US pressure and sanctions on Iran appear to have impacted India’s decision to withdraw from the IP gas pipeline agreement and pursue an alternative that excluded Iran.

Then, in 2010, a 25-year-long Gas Sale and Purchase Agreement (GSPA) was signed, to construct a pipeline stretching across Pakistani territory from the Iranian border to Nawabshah, a distance of 781 kilometers.

Approximately 665 kilometers will travel through Balochistan while 115 kilometers will run through Pakistan’s Sindh province. The length of the Iranian portion of the pipeline is 1,100 kilometers. It begins in the energy economic zone of Pars and goes to Iranshahr and Bushehr. The route then continues through Fars, Kerman, Hormozghan, and Sistan-Baluchistan.

From the Pakistani border to Nawabshah, the pipeline will stretch around 781 kilometers. After completion, the IP gas pipeline was projected to supply 750 million cubic feet of gas per day to Islamabad from Iran. According to the deal, gas supplies from Iran would start in 2014. But, this assumption turned out to be a pipe dream and has not been realized during the past nine years.

A panacea for Pakistan’s economic woes

“Pakistan’s issue with foreign reserves would progressively get worse if it were unable to achieve a deal with Iran because years were spent in negotiations between Pakistan, Iran, and Turkey to create a close economic relationship for significant infrastructure projects, but the US sanctions and pressure shattered all these dreams,” Muqtedar Khan maintains.

He believes that Pakistan is currently dealing with a protracted foreign exchange problem that cannot be remedied by borrowing money from China, Saudi Arabia, or the International Monetary Fund (IMF) because Pakistan would still have to pay back the initial debt.

“Strangely, Pakistan and Iran have failed to create a mutual understanding despite their common Islamic background. As an alternative to US dollars, they may conduct business in their own currencies. Even though they are neighbors, it would be a diplomatic failure if they did not restore a reciprocal trade relationship,” Muqtedar Khan concludes.