US sanctions on Iran: AGP asks why no clause in GSPA incorporated

The Auditor General of Pakistan (AGP) is said to have raised serious objections over what it said that no clause regarding international sanctions on Iran was incorporated in the Gas Sale Purchase Agreement (GSPA) under Iran-Pakistan Gas Pipeline Project (IPGP), which resulted in a risk of penalty at $3 million per day from January 2015 onwards.

This has been revealed in the performance audit report on the accounts of Inter State Gas Systems Limited (ISGSL) for the financial years 2015-20.

The audit report pointed out that the ISGSL and the National Iranian Oil Company (NIOC) Iran signed GSPA on June 5, 2009.

The buyer shall either take or pay, or if not taken, pay for a minimum quantity of natural gas for the contract year calculated.

The timeline for completion of project was December 31, 2014.

The auditors worked out that the ISGSL had to pay $16,500 million at the rate of Rs167 per US dollar as penalty from January 1, 2015 to June 2020; in case both the parties failed to reach an amicable solution within the extended time period, the company could end up paying millions of rupees as penalty to the Iranian company.

The performance of the ISGSL reveals that Pakistani section of the pipeline was to be laid from Iran-Pakistan border up to Pakistan off take point at Nawabshah (781km) before December 2014 but the ISGSL could not start the project till June 2020 due to international sanctions on Iran.

The National Bank of Pakistan (NBP) and the Oil and Gas Development Company Ltd (OGDCL) refused to invest in the project.

Former Managing Director (MD) ISGSL in Economic Coordination Committee (ECC) steering committee meeting on December 31, 2010 and March 5, 2012, and the secretary Ministry of Petroleum and Natural Resources in meeting held on March 13, 2013 stated that if Pakistan failed to meet the target date of completion of laying down of pipeline as per GSPA, either it would have to take the gas or pay $3 million per day under the agreement. Furthermore, in the event that the GSPA was terminated due to ISGS default, the ISGS would be liable to pay NIOC pipeline cost of Iranian side, which was around $2billion.

The issue was discussed by the ISGSL board of directors (BoD) in different meetings in order to seek extension in the take or pay clause.

However, the issue of amendment remained unresolved till August 2019.

Finally, the NIOC and the ISGS signed amendment agreement no 3 to the GSPA on September 5, 2019.

As per amendment, the limitation period for initiation of any claims arising under the GSPA was extended for additional period of five years from the date of signing the amendment.

The audit report also stated that the ISGSL has no source of income from its business activities as no project could have been materialised since 1996.

The Gwadar-Nawabshah LNG terminal and pipeline project was started as an alternate of Iran-Pakistan Gas Pipeline Project.

It was impaired after incurring Rs553 million, on the direction of the Cabinet Committee on Energy (CCoE) due to high cost estimates. Machike-Taru Jaba Oil Pipeline Project could not be executed due to mishandling, which also caused an impairment loss of Rs225 million.

The project structure of North-South Gas Pipeline involving investment of $2 billion from Russian state-owned company could not progress due to non-finalisation of project structure in spite of having received seven-time favourable comments by local and international law consultants towards Russian-nominated company.

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