Iran agrees to waive $200m a month penalties

ISLAMABAD: In a major development, Iran has agreed to waive the penalty clause under which Pakistan is bound to pay $200 million a month for not meeting the gas pipeline deadline of December 31, 2014. 

Under the Gas Sales Purchase Agreement (GSPA), there is a clause of take andpay under which Pakistan will be exposed to $200 million penalty as per the volume of the gas if it fails to develop infrastructure and lay out the pipeline in its territory from the point of 250 MP at the Pak-Iran border to Nawabshah.

Now Iran has decided to waive the penalties to be invoked from December 31, 2014 by agreeing to the change in the deadline of the completion of the project on Pakistan’s side, but Tehran has linked the waiver with the seriousness of the Government of Pakistan

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Pakistan has been asked to start constructing the infrastructure for laying out the pipeline on its side and then Iran will come forward to bail Pakistan out in terms of sharing the funding Pakistan requires to complete the project, a senior official at the Ministry for Petroleum and Natural Resources confided to The News after getting positive vibes from the Pak-Iran talks in Iran.

Pakistan says it could not arrange the required funding from the international financial institutions because of the US and EU sanctions on Iran for its nuclear ambitions. Iran accepts this but says penalties will not be imposed on Pakistan for not meeting the deadline provided it shows seriousness towards the project. During the PM’s visit to Iran, the two countries have agreed to continue the project with a new impetus.

According to the official, there is no impact of sanctions on constructing the infrastructure and laying the 781 kilometers pipeline from the Pak-Iran border to Nawashah; rather these are imposed on the export of gas.

Since the US and EU countries seem inclined to relax the economic sanctions on Iran and owing to the visit of Pakistan’s premier to Iran, the top official at the Ministry of Petroleum and Natural Resources said, there is now visible activities that can be felt in the ministry to initiate the process for building the infrastructure. The government has already imposed the gas infrastructure development cess (GDIC), which fetches Rs48-49 billion a year.

This amount will be used to initiate the construction of the infrastructure to show seriousness. Iran has completed the 900- kilometre-long pipeline under the IP project but Pakistan has so far not initiated any work.

After the go-ahead signal for the IP project at the highest level, the technical level talks will be held for changing some clauses in the gas sales purchase agreement and a new timeframe will be worked out for the completion of the project. Pakistan thinks it can complete the project in 15-16 months period once sanctions on Iran are lifted.

It is being hoped that Iran will soon come out of the woods in terms of sanctions and Pakistan will be able to arrange the required funding. Iran has also indicated that it might provide $500 million to Pakistan for laying the pipeline provided Islamabad shows seriousness.

The Nawaz Sharif government thinks that if sanctions on Iran are removed and by that time Pakistan completes the pipeline, then it will be able to import 750mmcfd gas per day, which will be later increased to one billion cubic feet gas per day. Under the GSPA, the price of gas to be imported from Iran will be at 78 percent of the crude oil as it is linked with Japan cocktail price.

Pakistan will get gas from Turkmenistan under $7.5 billion TAPI project at 69 percent of the crude oil price. There is a clause in the GSPA with Iran, according to which if Pakistan manages to get gas price deal with another country at less than the price of gas agreed with Iran, then Tehran will bring down the price of gas accordingly. Pakistan also needs to renegotiate the gas price with Iran under the new scenario. Under the GSPA with Iran, both countries can review the price every three years after the project comes on stream.

Pakistan is facing a shortage of 2.5 billion cubic feet gas per day and in case the IP project gets materialised, then the imported gas will be injected into the powerhouses to get rid of costly furnace oil. This will help save $1.6 billion a year and Pakistan, in return, will be able to generate 5,000MW from gas that will bring down the cost of electricity.