ISLAMABAD: Pakistan faces a daunting $18 billion penalty in an ongoinginternational arbitration case initiated by Iran over the long-delayedIran-Pakistan gas pipeline, prompting Islamabad to formally request a10-year extension for project implementation until 2035. The pleahighlights intensified US sanctions under the Trump administration as theprimary barrier preventing construction on Pakistan’s side. Thisdevelopment underscores the intricate interplay of geopolitics, energysecurity, and legal obligations that has stalled the bilateral venture forover a decade.
The Iran-Pakistan gas pipeline, often referred to as the IP or PeacePipeline, was envisioned to transport natural gas from Iran’s South Parsfield to Pakistan, supplying up to 750 million cubic feet per day toaddress chronic energy shortages. Iran completed its portion of theinfrastructure years ago, stretching approximately 1,150 kilometers, whilePakistan has yet to build its 781-kilometer segment from the border toNawabshah. The project, initially agreed upon in 2010 under the Gas SalesPurchase Agreement (GSPA), aimed to foster regional energy cooperation buthas been repeatedly hampered by external pressures.
Iran launched arbitration proceedings in September 2024 at the Paris-basedCourt of Arbitration under French law, accusing Pakistan of breaching thecontract by failing to construct its section despite multiple deadlineextensions. Tehran seeks $18 billion in damages, reflecting penaltiesoutlined in the GSPA for non-performance. Pakistani officials, includingthe Attorney General and representatives from Inter State Gas Systems(ISGS) and the Petroleum Division, contend that international sanctions onIran rendered compliance impossible, particularly during the final 180-dayextended deadline that expired in 2024.
A Ministerial Oversight Committee, chaired by Deputy Prime Minister andForeign Minister Senator Ishaq Dar, is actively reviewing strategies tomitigate financial risks. Parallel to the legal defense, diplomaticchannels remain open for an out-of-court settlement. Sources indicatehigh-level discussions between Islamabad and Tehran, with Pakistan pushingthe extension proposal informally while emphasizing that US sanctionscontinue to pose insurmountable challenges to progress.
The US sanctions regime, reimposed and expanded under recentadministrations, targets Iran’s energy sector and discourages third-partyinvolvement through secondary sanctions threats. Pakistan has historicallysought waivers from Washington to proceed without penalties, but suchrequests have faced resistance. The current impasse reflects broaderconcerns over economic repercussions, as proceeding could invite USfinancial restrictions, while defaulting risks the massive arbitrationaward.
Pakistan’s energy landscape has evolved since the project’s inception, withincreased reliance on liquefied natural gas imports, domestic exploration,and renewable sources potentially reducing the urgency for the IP pipeline.However, the potential $18 billion liability remains a critical economicthreat, especially amid fiscal constraints and foreign reserve pressures.Legal experts anticipate the arbitration verdict between 2027 and 2028,providing a timeline for resolution if diplomatic efforts fail.
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The request for extension to 2035 aims to preserve the agreement whilebuying time for possible geopolitical shifts, such as sanctions relief.Iran has shown some flexibility by previously offering extensions andexpressing willingness to revive the project, though recent reports suggestPakistan is also exploring shelving options under a settlement frameworkcontingent on sanctions waivers. This dual approach balances legal defensewith pragmatic diplomacy.
The stalled pipeline exemplifies the challenges of cross-border energyprojects in a sanctions-dominated environment. For Pakistan, averting thepenalty is paramount, while Iran seeks enforcement of contractualcommitments. Ongoing negotiations could lead to renegotiated terms,including adjusted volumes or pricing, if external conditions improve.
Ultimately, the outcome hinges on diplomatic ingenuity and internationaldevelopments. Resolution through settlement would safeguard bilateral tiesand avoid severe economic strain, whereas prolonged arbitration risksescalating tensions and financial burdens for Pakistan.
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