Deal under cloud: Govt declares force majeure on Iran pipeline project

Published: May 10, 2014
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The move may spark legal wrangling between the two countries over a project conceived years ago to bridge the widening gap between demand and supply of energy in Pakistan. ILLUSTRATION: JAMAL KHURSHID

The move may spark legal wrangling between the two countries over a project conceived years ago to bridge the widening gap between demand and supply of energy in Pakistan. ILLUSTRATION: JAMAL KHURSHID

ISLAMABAD: 

The government has issued a ‘force majeure and excusing event notice’ in connection with the Iran-Pakistan (IP) gas pipeline as a precaution to stave off hefty penalties, saying the project could not be pushed through in the face of US refusal to exempt it from sanctions, sources say.

The move may spark legal wrangling between the two countries over a project conceived years ago to bridge the widening gap between demand and supply of energy in Pakistan.

Under an agreement, Pakistan is bound to pay a penalty of $3 million per day if it fails to finish the project by the deadline of December 2014.

The notice has been sent ahead of Prime Minister Nawaz Sharif’s crucial visit to Iran starting May 11 during which the pipeline project will feature among other important matters.

However, Iran has been insisting all along that the pipeline could be constructed despite the risk of US curbs and points out that Pakistan was fully aware of the geopolitical situation at the time of signing the deal.

“The government has declared force majeure, which is usually enforced in war or emergencies, because it is unavoidable,” a Foreign Office official told The Express Tribune, but asked not to be named.

Officials believe if Pakistan pressed ahead with the project, it could invite US sanctions and said Iran had also been told about Islamabad’s inability to make progress in this situation.

Soon after coming to power in June last year, the present government had reviewed the gas import project in an inter-ministerial meeting held on July 22, 2013 under the chairmanship of adviser to prime minister on national security and foreign affairs.

It was decided in the meeting that exemption should be sought from the US and a document covering legal and political aspects would be handed over to the US secretary of state during his visit in July 2013.

It was also agreed that Iran’s response to any suggested sovereign framework including timelines and procedural matters should be gauged.

Later, the document covering legal and political aspects was given to Secretary of State John Kerry, but he refused to commit any concessions, officials said.

Pakistan had also told Iran about a raft of measures taken to complete the project on time. However, after failure to arrange finances, the steering committee of the Economic Coordination Committee (ECC) in a meeting held in May 2012 called for exploring the possibility of a state-to-state arrangement, officials said.

The two countries initialled a government-to-government cooperation agreement on December 1, 2012. Under the agreement, the Iranian government nominated Tadbir Energy as the engineering, procurement and construction (EPC) contractor and offered a loan of $500 million. The rest of the financing was to be arranged by Pakistan.

As a result, presidents of Pakistan and Iran performed ground-breaking of the project on the border to mark the beginning of construction work in Pakistan. However, officials said, the new Iranian government backed out of the financing offer and the contract with Tadbir was terminated.

Published in The Express Tribune, May 10th, 2014.

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Reader Comments (35)

  • unbelievable
    May 10, 2014 - 2:54AM

    It’s hard to argue that Pakistan was not aware that the USA would apply sanctions – USA came right out and said so before you signed the agreement. Not sure that stupidity or arrogant chest thumping is an excuse for not honoring your agreement.

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  • B
    May 10, 2014 - 2:59AM

    And I thought Pakistan was a nuclear country.

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  • Ch. Allah Daad
    May 10, 2014 - 3:40AM

    Iran proved that its not a true friend and PPP government proved that it was not loyal to Pakistan. In past Z.A. Bhutto used cancellation of Atomic Reprocessing Plant for his political dramas and in future Bilalwal will use cancellation of this pipeline for his political slogans.

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  • Coolio
    May 10, 2014 - 6:48AM

    How come China and Russia construct pipelines with Iran, but Pakistan is under the thumb of the West?

    Pakistan has a failed government that puts western interests ahead of the public that is in need of energy from Iran.

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  • kulwasnt singh
    May 10, 2014 - 6:51AM

    @Ch. Allah Daad: Ch. Sahib how is Iran at fault please explain.

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  • Raj - USA
    May 10, 2014 - 7:40AM

    Force Majeure or supervening impossibility is a set of circumstances that were beyond the control of the party invoking this clause, not foreseen at the time of signing the contract, and has occurred after the contract came into effect that has made it impossible for the party to perform. Importantly, the conditions that made it impossible should have come after the contract was signed. These events may include, events like if US sanctions were imposed after the contract was signed, war breaking out between Pakistan and Iran, any act of God, such as, earthquake, tsunami, etc., Force Majeure clause cannot be invoked for the sole reason to avoid a commercial loss. However, if the contract signed by Pakistan has specifically mentioned that even sanctions that were already in force when the contract was signed could be considered to fall under this clause, Pakistan can invoke this clause.

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  • faisal
    May 10, 2014 - 9:08AM

    Its not Washington this time, its Riyadh. Didn’t we all know this?

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  • May 10, 2014 - 9:30AM

    iran is the arcitect of sunni muslim genocide in syria, Pakistan should deal with iran strongly, Iran is enemy number 1. we should just capture iranian oil and gas fields thats the easiest solution to making Pakista a rich and powerful country

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  • Wali
    May 10, 2014 - 9:44AM

    Reading this article it looks like Pakistan doesn’t have much of a leg to stand on in this case in terms of force mejeur.
    Moreover this case epitomises Pakistan in a nutshell. Someone clearly has to be answerable, why Pakistan went ahead signing treaties/accord with no financial commitment to show for the project.
    Now please do not compare Pakistan with other countries who have done business with countries who have done business with Iran – those cointries do not live on international hand outs and charities!

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  • Syed A.
    May 10, 2014 - 10:13AM

    What a joke!Recommend

  • sharabi
    May 10, 2014 - 10:29AM

    My comment is still same ( And that is unchanged from 2 years):
    Mark my words,Pakistan will not be able to get a single canister of Gas through this pipeline until India is a partner in this project.

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  • back bencher
    May 10, 2014 - 10:46AM

    @Coolio all fullfield agreements are before sanctions. Pakistan is not bound to Iran for its misdeeds and had under major sanctions. Iran is making Pakistan a EscapeGoat.

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  • Wali
    May 10, 2014 - 10:46AM

    @faisal

    Does it matter if it is Riyadh and not Washington. The bottom line is Pakistan doesn’t have the finances (2billion dollar) to undertake a project of this size and have to go out with a cap in hand seeking dolls…. And none of the usual suspects (us/world bank/adp/imf/saudis/eu…etc etc) were ever going to commit to this project with the iranian sanctions in place!

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  • Polpot
    May 10, 2014 - 12:07PM

    NS Pakistan Iran must stregthen Synergies
    +++++++++++++++++++++++++++++++
    One less synergy to bother about.

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  • Polpot
    May 10, 2014 - 12:09PM

    How about exercising Force Majure against Polio TTP and Musharraf?
    +++++++++++++++++++++++++++++
    Pls always mention that u read it here.

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  • Polpot
    May 10, 2014 - 12:17PM

    “However, Iran has been insisting all along that the pipeline could be constructed despite the risk of US curbs and points out that Pakistan was fully aware of the geopolitical situation at the time of signing the deal.”
    +++++++++++++++++++++++++++++++++++++++++++++++++++
    Maybe Pakistan was not aware of the geopolitical situation….but before accepting penalties it surely was aware of its track record of completion of projects…most being delayed by at least a decade,

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  • Asad Khan
    May 10, 2014 - 12:26PM

    @kulwasnt singh:

    Ch. Sahib how is Iran at fault please explain

    Iran is at fault because she offer a loan guarantee but then back out at first place. Had Pakistan consumed that guarantee and then did not complete the pipeline Then Pakistan is guilty whole and purposefully.

    Pakistan did what she could. No Private Investor is risking in this project. Even the compressors can not be procured from certain west countries for this project.

    Pakistan can build the rest of the line if she wanted too but the present govt did want to invoke US sanctions on its AID. Simply put there is no US pressure on Pak for that project but if Pak goes ahead then US will cut back on her AID (entirely or partially) which the incumbent pro US govt does not want. This is the issue that Iranian are bit annoyed on Pak.

    regards,

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  • usman786
    May 10, 2014 - 3:35PM

    Ask the Zardari to either pay it or finsih the project himself for taking such stupid decision.

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  • Ch. Allah Daad
    May 10, 2014 - 7:24PM

    @kulwasnt singh:
    $3 Millions per day fine is not a friendly gesture. Iran knew that in developing countries, project don’t complete on time and it also knew that sanctions will delay or cancel the project altogether. A true friend would not put us in this awkward situation. Although PPP government is more to blame but Iran should have understood the situation too.

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  • Raisani
    May 10, 2014 - 9:55PM

    Say “All is Well”. :)

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  • Raj - USA
    May 10, 2014 - 10:27PM

    @Ch. Allah Daad:
    From the reports I have read, the penalty is approximately $3 million per day according to the “take or pay” clause. However, there is another clause in the agreement whereby either party can walk out of the contract and also avoid paying the daily damages. It is by paying the other party the cost it has incurred in laying the pipeline on its side. So, if Iran wants to stop gas supplies at any time during the tenure of the agreement, they can do so but have to pay Pakistan the cost Pakistan had incurred in laying the pipeline on its side. Similarly, if Pakistan wants to walk away from the contract, they can do so by paying Iran the cost Iran has incurred for laying the pipeline on its side. The costs Iran has incurred for laying the pipeline on its side were mentioned at approximately $700 million in the initial reports. However, recent reports mentions a much higher amount of approximately $ 2 billion as the costs Iran has incurred for laying the pipeline on its side. If Pakistan is a true friend of Iran, they should not have put Iran in a position to incur costs for laying the pipeline on its side.

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  • Hormoz
    May 10, 2014 - 10:36PM

    @ali:
    Ali visit Iran in peace.its more fun

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  • Polpot
    May 10, 2014 - 11:48PM

    @Ch. Allah Daad: “A true friend would not put us in this awkward situation. ”
    +++++++++++++++++++++++++
    And Pakistan has been a true friend that made Iran invest more than a Billion Dollars on the Iranian side of the Pipeline?

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  • Parvez
    May 11, 2014 - 12:16AM

    This was Zardari’s decision right at the end of his tenure knowing full well that it was not workable and the country would suffer……….playing politics with the country’s well being is disgraceful.

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  • Asad Khan
    May 11, 2014 - 1:29AM

    @Polpot:

    And Pakistan has been a true friend that made Iran invest more than a Billion Dollars on the Iranian side of the Pipeline?

    And how do you deduce that Iran laid the line inside her territory just for Pakistan?.
    Let me refresh you.
    Iran laid that line for hedging against the hope that India will joined in IPI again cuz India is shrewd operator. India did not budge, as Pak needs gas urgent so Pak enter into contract for Iran-Pakistan Line (the dia of this line remains the same just in case India will joined up later). Pak did not have the cash, Iran knows this & offer loan. Pak bids, no ones showed up, Iran said we have not got any money to spare, Pak said nothing doing just complete the whole line by yourself, Iran said no thx. case closed.

    Basically two fluffy tried to open gold shop & got screwed. The sanctions on Iran was so demanding that she eventually agree to let her Nuclear Program under full IAEA spectrum in order to save her economy.

    regards,

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  • May 11, 2014 - 1:35AM

    @Polpot: actually, Iran would have developed it anyways to supply gas to its eastern regions it was just trying to get money from Pakistan too

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  • Polpot
    May 11, 2014 - 6:10AM

    @ali: “Iran would have developed it anyways to supply gas to its eastern regions it was just trying to get money from Pakistan too”
    ++++++++++++++++++++++++++++++++++++++++
    So Pkistan was gullible enough to fall into the trap and also to agree to pay a daily 3 Mn USD Penalty!

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  • Sexton Blake
    May 11, 2014 - 6:24AM

    It is difficult to believe the world economic quagmire instigated by the US, which pretends to be be an ardent believer in freedom and democracy. I am still waiting for the US to to give an explanation, which any intelligent person would believe, as to what Iran has done wrong. So far Iran appears to be the most peaceful country on earth. In regard to the pipeline contract Iran has carried out its part. It is now up to Pakistan to stop being an American poodle and carry out its part. A contract is a contract even between friends.

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  • Sexton Blake
    May 11, 2014 - 7:56AM

    I am starting to get a new light on Pakistan people. If the people writing in giving reasons why Pakistan should wheedle out of its contract are any example of Pakistan thinking I would not want to do business with anybody from Pakistan.

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  • Polpot
    May 11, 2014 - 10:57AM

    @Sexton Blake: I would not want to do business with anybody from Pakistan.””
    +++++++++++++++++++++++++++++++++
    Sir what u r now discovering is what every Indian knows!

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  • Polpot
    May 11, 2014 - 11:21AM

    “Officials believe if Pakistan pressed ahead with the project, it could invite US sanctions and said Iran had also been told about Islamabad’s inability to make progress in this situation.”
    +++++++++++++++++++++++++++++++++++++++++++++

    So assuming that Pakistan signed a contract with a country A and for arguments sake Tanzania threatened to impose sanctions on Pakistan if the contract was implemented….that would consititute a Force Majuere. Right?
    Now replace A and Tanzania with any other country you like.
    In conculsion any contract with Pakistan is not worth the paper it is written on.

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  • observer
    May 11, 2014 - 11:59AM

    @Wali:

    “The bottom line is Pakistan doesn’t have the finances (2billion dollar) to undertake a project of this size and have to go out with a cap in hand seeking dolls”

    Not really. Pakistan has the money to spend $3B a year on nuclear bomb and missile development. The real truth is Pakistan places a very low priority on energy development compared to nukes.

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  • observer
    May 11, 2014 - 12:06PM

    How ironic has this turned out to be! The Pak establishment never really was serious about the Iran pipeline. They just created a lot of smoke in the hope of “scaring” the US into giving Pakistan nuclear waiver and tens of billions of dollars. Washington called Pakistan’s bluff and now the establishment is facing Iran’s wrath for lack of good faith and the reality of having to pay $3M penalty per day as per the inked contract. Iran is furious that Pakistan just used Iran’s good faith to play games with Washington.

    Moral: Those who have a crooked feet may end up with their foot in their mouths.

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  • Polpot
    May 11, 2014 - 3:14PM

    ET: Pls carry an interview with Zardari…after all he is the architect of this imbroglio…
    ++++++++++++++++++++++++++++++++++++++++++++++++++++++++
    He just cannot be in politics and sit quiet.

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  • Sexton Blake
    May 11, 2014 - 3:52PM

    @observer: “Pakistan spends $3billion a year on nuclear bomb.”
    Dear observer, Polpot,
    All the Western countries seem to be the same. Most Australians probably did not even know where Afghanistan and Iraq were 13 years ago, and certainly had never heard of the Taliban. However, Australia is just coming out of a 13 year war with them, which it apparently could afford, and now the spendthrift Australian Government is indicating that it is experiencing difficulty paying pensions to old people amongst other things. Pakistan, Australia and most Western countries had statisticians 20 years ago to now so they knew exactly what their commitments were going to be in 2014. The Pakistan Government is only fooling people who want to be fooled.

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