Iran may annul Pakistan gas pipeline project contract

While Pakistan is banking on funds from Iran to complete its share of the gas pipeline, the Iranian Oil Minister on Wednesday said the contract for the project was likely to be annulled.

While Islamabad maintains that there is no official word on this yet from Tehran, the project is already in limbo since it does not have the $2 billion to complete its share.

Earlier, in October, the government had sought financial assistance from Iran as not many were interested in backing the project given the threat of U.S. sanctions.

However, official sources said the main issues were financing and the agreement . The government at that time had not done its homework and why such a deal with high prices for gas and huge penalty clauses was negotiated was not clear, the sources pointed out. Iran had already offered $500 million but Islamabad says it would need $2 billion to complete its share of the project.

Two days ago, Petroleum Minister Shahid Khaqan Abbasi said the project was going ahead and construction contracts were to be signed. He had also dismissed speculation that U.S. sanctions would affect the project. The pipeline was discussed with U.S. President Barack Obama during Prime Minister Nawaz Sharif’s visit last week.

Iran has already constructed more than 900 km (out of 1,100 km) of the pipeline on its territory at a cost of $700 million.

Conceived in the 1990s as a “peace pipeline,” the project initially had India on board and was scheduled to be completed by December 2014. Iran had expressed concern over Pakistan’s delay in starting work.

The agreement was slammed by a report by Sustainable Policy Development Institute (SDPI), “Rethinking Pakistan’s Energy Equation: Iran-Pakistan Gas Pipeline.”

It called for renegotiating the gas purchase agreement and pricing and the huge penalty clauses. The agreement would give Pakistan gas at the price of $13/MMBtu which would increase periodically depending on the crude prices, the report said.

The agreement also stipulated construction of Pakistan’s side of the pipeline by December 2014.

If Pakistan failed to meet this deadline it would be liable to pay heavy daily penalties, which could run into millions of dollars.

Official sources said given the acute energy requirements, Pakistan remains committed to all options for addressing energy needs, including the pipeline project.