The Iran-Pakistan Gas Pipeline project is confronting numerous hurdles from day one. Iran has warned Pakistan to initiate Attribution court proceedings for the failure to construct the gas pipeline and invoked the penalty clause of the Gas Sales Purchase Agreement (GSPA). Iran could have Pakistan an $18 billion penalty if Pakistan fails to complete the pipeline project by 2024.

A formal agreement between Iran and Pakistan was signed in 2009. It was aimed to transport natural gas from Iran to Pakistan, designed to have the capacity to transport around 22 billion cubic meters of natural gas per year. As per the agreement, it’s planned to begin construction in 2012 and be completed by 2014. Iran has completed the construction of its part but the construction on the Pakistan side started in March 2013 but was on a halt ever since. In 2015, Pakistan agreed to import gas from Qatar, further weakening the possibility to complete it. On September 2019, the Inter-State Gas System (ISGS) of Pakistan and the National Iranian Company (NIGS) drafted a new agreement to find a mutual solution for the completion of the project. 

US sanctions on Iran delayed the construction. The US was a part of the Joint Comprehensive Plan of Action (JCPOA) commonly known as the Iran-nuclear deal, which aimed to limit Iran’s nuclear Program and to use nuclear energy only for peaceful purposes. In 2018, the US unilaterally withdrew and imposed sanctions on Iran.

During a media interview, the Iranian Prime Minister expressed the following statement:

 “ The Iran-Pakistan gas pipeline project remains a priority for us, and we expect Pakistan to fulfill its commitments and complete the construction promptly.” Iran declares the US sanction illegal as Iran is a sovereign country and can expand its nuclear program if they want. 

International sanctions on Iran due to its nuclear program have stopped foreign funding. There was no development on Pakistan’s side from 2017 to 2019 due to the lack of financing and isolation of the International Community because of the US Sanctions on Iran Nuclear Program. Foreign companies and allied countries of the US or the countries who have exposure to the US Financial system have been reluctant to participate. Securing the necessary financing, technology, and expertise for the construction and operation of the pipeline became challenging. The pipeline passes through volatile regions, including Balochistan province in Pakistan, which has experienced security issues and conflicts. These security issues have raised doubts about the feasibility of the projects and have deterred potential investors to participate in the project.

Pakistan has a fragile Economy and a penalty of $18 billion will make it worse. The Iran-Pakistan Pipeline project was initiated to enhance Pakistan’s energy security by providing a reliable source of natural gas. The prolonged delays and uncertainties surrounding the project undermine Pakistan’s efforts to diversify its growing energy demands. Pakistan’s national oil and gas company, Oil and Gas Development Company Limited (OGDCL), predicts indigenous oil reserves will be exhausted by 2025, and that Pakistan will run out of domestic sources of natural gas by 2030.

According to Islamabad Research Policy Institute (IRPI) Iran-Pakistan gas pipeline  would cost around $3 billion to Pakistan but it would reduce oil imports by $5.3 billion, and help buy oil for another $2.3 billion. Moreover, it can help in earning transit fee if the pipeline is extended to third country; India and China. The imported gas from Iran will help replace the costly furnace oil being used as fuel in power houses in Pakistan that will help to save one billion dollars per annum. The project will provide job opportunities in Baluchistan and Sindh.

Pakistan could face an energy crisis, political backlash, and diplomatic strains. The failure to complete the pipeline project would continue to affect Pakistan’s energy security and reliance on expensive alternative energy sources. Moreover, failure to complete the gas pipeline will exploit its reputation in the international community. Failure of the pipeline project could strain diplomatic relations between Iran and Pakistan. Iran provides regional connectivity to Pakistan as it provides a vital link between Pakistan and Central Asia and it has the World’s second-largest natural gas reserves. However, Pakistan is the energy-deficient country so Pakistan needs Iran to import reliable gas and oil from it.

Tensions between Pakistan and Iran could create many difficulties for Pakistan in terms of the energy crisis, Trade Barriers, and regional conflict. Iran, as the supplier of natural gas, may view Pakistan’s inability to complete the project as a breach of trust and a strain on regional dynamics. Furthermore, the failure of this highly beneficial project for Pakistan could lead to a political backlash, as it would raise criticism towards the government for its inability to successfully complete a project that has the potential to help overcome the energy crisis in the country.

Pakistan could face economic challenges as well energy crisis. Pakistan will be unable to meet its energy needs due to a lack of resources and can not afford alternative energy resources and infrastructure. As mentioned above, this pipeline passes through the volatile areas of Pakistan. Failure of the project can lead to grievances among people of that area, who may have had high hopes for economic opportunities associated with the pipeline construction and operation. It will extend Pakistan’s ongoing energy crisis, leading to continued power shortages and stopping industrial growth. The imposition of such a penalty may deter investors from engaging in any projects with Pakistan due to its fragile economy and the failure of one of the most vital projects, the Iran-Pakistan gas pipeline. This project had the potential to be highly beneficial for both Pakistan and Iran.