Will Iran Pipeline cancellation result in new penalties on Pakistan?

Pakistan has yet to recover from the Reko Diq and Broadsheet cases where the government has to pay billions of dollars in fines and now, we are facing an Iranian threat of billions of dollars in fines. Pakistan’s real problem is lack of continuity in economic policy and the cancellation of the previous government’s projects by every government that comes to power with the help of the army’s hand on its shoulders.

In 2009 Pakistan signed an agreement with Iran that a gas pipeline would be built by December 2014 that would deliver 21.5 million cubic meters (760,000 million cubic feet) of gas per day to Pakistan. The construction was based on a segmented approach, with Iran laying down the pipeline on its side and Pakistan on its territory. Iran has built its side of the pipeline but we have yet to do anything.

In February 2019, “Tehran formally issued a notice to Islamabad, saying it was moving an arbitration court against Pakistan for failing to lay down the pipeline in Pakistani territory within the timeframe stipulated in the bilateral agreement. Since then, Pakistan has been exploring different legal and diplomatic options to avoid the litigation. “We are analyzing the overall international situation regarding Iran and studying Tehran’s position over the gas pipeline project through an international law firm,” Sher Afgan Khan, additional secretary at the Ministry of Energy, told Arab News. Pakistan hired the French law firm, Gide Loyrette Nouel, to study the deal and prepare a legal response to Iran’s position that the US sanctions do not impact its gas import trade.”

In May 2019 Pakistan informed Iran “it could not execute the project while Tehran was under a US sanctions regime. “We are trying our best not to violate (the US) sanctions … we are already on the FATF’s [Financial Action Task Force] grey list,” Khan said, referring to Pakistan’s formal placement on the intergovernmental organization’s list in June last year.”

Pakistan “is caught in a catch-22 situation over the deal. Under a penalty clause, Pakistan is bound to pay $1 million per day to Iran from Jan. 1, 2015, for failing to build its part of the pipeline. If Iran takes the case to an arbitration court, Pakistan will likely to have to pay billions of dollars as a penalty.”

The government of Pakistan “has hired a French law firm to explore ways of avoiding being hit with a multi-billion-dollar bill for failure to complete its side of a gas pipeline project with sanctions-hit Iran. Legal experts have been called in to look at options to deal with an Iranian threat to bring international court action against Islamabad over missed construction deadlines and see if the project can be completed without attracting US sanctions.”

If American sanctions were the issue, then Pakistan should have thought this through before signing the 2009 deal with Iran.

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