The Pakistani government has decided to seek exemption from potential US sanctions that could affect Pakistani entities involved in the construction of the Pak-Iran gas pipeline, Minister for Petroleum Dr Musadik Malik said on March 25.
“We will seek exemption from US sanctions. Pakistan cannot afford sanctions in the gas pipeline project,” Minister for Petroleum Dr Musadik Malik told journalists during an informal chat.
He emphasized that the government would strongly advocate for a waiver for Pakistan on technical, political, and economic grounds, through various forums including lobbying. Dr. Malik hoped the project’s construction would begin soon while maintaining contractual obligations with Iran.
Dr. Malik’s statement contradicted the Foreign Office’s recent press briefing, where the spokesperson asserted that there was no room for discussion or waivers regarding third-party sanctions.
The matter gained prominence after Donald Lu, Assistant Secretary of State for South and Central Asia, told the House Foreign Affairs Committee last week that importing gas from Iran would expose Pakistan to U.S. sanctions.
Lu emphasized Washington’s commitment to preventing the pipeline’s construction and noted that Pakistan had not requested a waiver for any potential US sanctions triggered by the project.
An official source revealed that the previous caretaker government had delayed submitting a request for exemptions from US sanctions due to the changing geopolitical landscape, despite finalizing the draft.
During his discussion with journalists, Dr. Malik also addressed the government’s concerns regarding a substantial proposed gas price hike by gas companies.
Dr. Malik highlighted that natural gas supply is currently limited to only 25% of the urban population, while over 70% of rural citizens lack access to natural gas. With nearly 99% of the population connected to electricity, he stressed the need to cut electricity costs by diverting natural gas to efficient power plants.
He pointed out that six LNG-based power plants, operating at Rs22 to Rs26 per unit, could reduce costs to as low as Rs12 per unit with domestic gas supply. Dr. Malik pledged to ensure cheaper electricity for the nation.
US says it does not support Pakistan-Iran Gas Pipeline
The U.S. State Department has said it does not support Pakistan’s proposal to construct a pipeline for importing gas from Iran.
State Department spokesperson Mathew Miller cautioned Pakistan against going ahead with the gas pipeline plan. However, he refused to comment on the nature of sanctions Islamabad could face for importing energy from Iran.
“But we always advise everyone that doing business with Iran runs the risk of touching upon and coming in contact with our sanctions, and would advise everyone to consider that very carefully,” said Miller, adding that “the assistant secretary made clear last week, we do not support this pipeline going forward.”
Risk of facing penalties
Independent consultants have warned that Pakistan could face penalties if Iran proceeds with its arbitration bid.
To mitigate potential $18 billion penalties from Tehran, the caretaker government had decided to initiate the construction of an 80-km segment of the gas pipeline, stretching from the Iranian border to Gwadar, at an estimated cost of $158 million (Rs44.2bn).
The project will be overseen by Inter-State Gas Systems (Pvt) Ltd (ISGS) and funded through the Gas Infrastructure Development Cess.
Pak-Iran Gas Agreement
Pakistan and Iran agreed to a gas supply deal in May 2009, with Iran’s South Pars gas field providing 750 million cubic feet per day (mmefd) for 25 years. Iran has completed over 900km of the pipeline, but a 250km segment remains unfinished.
In 2012, Iran proposed financing the project but withdrew due to financial constraints in 2014. This led Pakistan to invoke the force majeure clause. In 2019, the agreement was extended by five years.
In December 2023, Iran accused Pakistan’s ISGS of breaching buyer’s warranties, leading to a 180-day remediation period. Failure could result in arbitration, with Pakistan facing a potential liability of $18 billion.