Pakistan has reportedly informed Iran of its decision to shelve the long-stalled Iran-Pakistan (IP) gas pipeline project, under an out-of-court settlement. Despite this, Pakistan has expressed willingness to revive the project if the United States grants a waiver from its sanctions on Iran.
The gas pipeline, originally envisioned to connect Iran’s vast natural gas reserves to Pakistan, and potentially India, has remained frozen since 2014 due to political and economic pressures, particularly the sanctions imposed by the US.
A 15-Year Journey: The Struggles Behind the Pipeline
The IP pipeline’s origins trace back to the early 1990s, when Iran, seeking avenues to export its vast natural gas reserves, proposed a pipeline that would run through Pakistan and possibly extend to India. The project was seen as a mutually beneficial deal, with Iran looking for buyers for its cheap gas, while Pakistan hoped to alleviate its growing energy deficit with a more reliable and cost-effective energy source.
Initially dubbed as the Iran-Pakistan-India (IPI) pipeline, the project was a symbol of hope for regional cooperation and economic integration. However, tensions between India and Pakistan, combined with international political dynamics, soon led to India’s exit from the project in 2009, leaving Iran and Pakistan to continue the venture alone.
Despite these setbacks, Iran continued to construct its section of the pipeline, while Pakistan repeatedly delayed its own work. A huge part of that was due to domestic and international pressures, as cited by Pakistan.
Sanctions and Legal Challenges; Why Pakistan could not fulfil its promise?
One of the key factors contributing to the delay has been the imposition of US sanctions on Iran, which intensified after Iran’s nuclear activities came under international scrutiny. These sanctions, which have been in place since the mid-1990s, created significant obstacles for Pakistan.
Despite this, Pakistan’s commitment to the pipeline remained strong, with both countries signing agreements in 2010 and 2013 to complete their respective portions of the pipeline.
The new agreement held that a length of 1150 kilometres within Iran and 781 kilometres within Pakistan was to be implemented by each country in their respective territories. The first gas flow was to start from 1st January 2015. Iran completed construction of over 900 kilometres within Iran. Meanwhile Pakistan continued to stall them.
Even when the two countries were reaching an accord the pressure from the United States was palpable. The US went so far as to offer assistance in constructing a liquefied natural gas terminal and importing electricity from Tajikistan through Afghanistan’s Wakhan Corridor if Pakistan cancelled the deal like India had.
Pakistan, also, even after signing the deal, was hesitant to get things started because of the threat of US sanctions. There were also reports that Saudi Arabia, a country Pakistan was relying heavily on to manage its debt situation, had expressed its concerns regarding the pipeline being built. In short, geopolitical pressures got the better of Pakistan and it failed to comply with its agreement.
And not just Pakistan, potential financiers hesitated, international suppliers of critical equipment stepped back, and reputable contractors grew wary of exposure to sanctions violations. What was envisioned as an infrastructure project increasingly became a geopolitical liability.
From Pakistan’s perspective, these conditions fundamentally altered the environment in which the agreement had been signed. The sanctions, it argued, were not peripheral obstacles but events that struck at the heart of the project’s feasibility. On that basis, the Pakistani state company Inter State Gas Systems (ISGS), responsible for the project, invoked the force majeure and excusing events clauses of the Iran-Pakistan Gas Sales and Purchase Agreement (IP-GSPA) and formally raised the matter with the Iranian authorities, seeking recognition that circumstances beyond its control had intervened.
That argument, however, failed to gain immediate acceptance. In a letter dated April 14, 2014, the National Iranian Gas Company rejected the force majeure notice outright, maintaining that the situations cited did not meet the threshold required under the agreement. In their view, sanctions and financing difficulties did not excuse performance. The rejection hardened the legal contours of what had already become a politically fraught standoff.
At the same time, the calendar was closing in. Both sides were facing a deadline to contract and complete their respective segments of the pipeline.
Things kept on staying the course, until the next few years. Some hope resurfaced in 2016 after sanctions on Iran were lifted and President Rouhani visited Pakistan, where the gas pipeline was discussed with Prime Minister Nawaz Sharif. Pakistan agreed to move ahead after securing Chinese funding, with China offering 85% of total financing and seeking to replicate the LNG pipeline model for the Gwadar–Iran border stretch.
However, the Iran nuclear deal soon began to unravel. The US withdrawal under President Donald Trump in 2018 led to renewed sanctions, reviving pressure on countries engaging with Iran and forcing the project back into limbo. Political instability in Pakistan, marked by Nawaz Sharif’s ouster, a brief Abbasi premiership, and the arrival of the PTI government under Imran Khan, further weakened momentum and stalled progress.
Iran had already completed its side of the pipeline by 2014, but it was becoming clear that Pakistan was struggling to keep up with its commitment, following Pakistan’s failure to meet its deadlines, and this failure led to legal repercussions.
Iran demanded that Pakistan fulfill its obligations or face a daily penalty of $1 million for every day the project was delayed. In addition, Iran initiated legal proceedings, which raised the stakes considerably for Pakistan, potentially resulting in a fine of up to $18 billion in international arbitration.
The dispute took on a sharper legal edge on February 27, 2019 when Iran issued a formal notice alleging material breaches of buyer’s warranties under the IP-GSPA. The notice raised the spectre of penalties and deepened concerns about the financial and legal exposure stemming from a project that had been stalled more by global politics than engineering failures.
Negotiations resumed, and by September 5, 2019, both governments opted for de-escalation rather than escalation. An addendum to the IP-GSPA was signed, extending the limitation period for any claims by a further five years from the date of the addendum. The move effectively pressed pause on litigation risks. Following the agreement, Iran withdrew its notice of material breach, and no penalties were accrued under the terms of the gas supply agreement.
Despite the years of delay, contested interpretations, and shifting geopolitical winds, the project was not formally abandoned. Management continued to maintain that the pipeline remained viable, at least in principle. Both the government and the company reiterated their commitment to pursuing the project, holding onto the possibility that a change in the international environment could still revive an agreement long suspended between diplomacy, sanctions, and unfinished steel in the ground. However that hope now seems to be fading.
Economic Repercussions of a failed deal
The economic implications of this delay for Pakistan were profound. Pakistan’s energy sector continues to suffer from chronic shortages, with the country facing power deficits of 5,000 to 6,000 MW.
Natural gas, which supplies nearly half of Pakistan’s energy needs, has become increasingly scarce, and the country has had to turn to more expensive sources like liquefied natural gas (LNG) and imported oil to meet demand.
The lack of a reliable, cost-effective gas supply has further strained Pakistan’s economy, contributing to inflationary pressures and rising energy costs for both domestic and industrial consumers. The IP pipeline was expected to provide Pakistan with up to 750 million cubic feet per day (mmcfd) of natural gas, which would have been significant enough to boost power generation and industrial output.
Without the pipeline, Pakistan has increasingly relied on LNG imports, which come at a premium. This has resulted in ballooning energy bills and a growing debt burden, making it harder for the government to keep up with subsidy payments. The broader economic impact includes stagnation in key sectors, including manufacturing and agriculture, both of which are heavily dependent on affordable energy supplies.
The 10-year extension Pakistan had asked for in 2014 ended in January 2024, and Iran was once again knocking at Islamabad’s door. Reports started coming in that if Iran took Pakistan to international arbitration court, the country could be fined up to $18 billion for not holding up its half of the agreement.
The potential of the fine set things straight. A meeting of the Cabinet in February 2024 finally approved the construction of the first 80 kilometres of the Pakistani side’s pipeline to avoid the fine. Reports started coming in that Russia was providing funds for this initial construction which would cost Pakistan somewhere around $160 million. But none of that ever materialised.
Speaking of economic costs, the mere legal consultancy that the ISGS paid, with help from the government exchequer, has been an increasing burden over the years. Legal fees, just in 2024-25 amounted to more than Rs 350 million, clocking at similar levels since 2019, making the delay and arbitration more and more expensive over time.
Geopolitical Ramifications: The US Factor
The United States has been a persistent obstacle in the realization of the IP pipeline. In 2010, the US pressured Pakistan to abandon the project by offering alternative energy solutions, including LNG imports and the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. Despite these threats, Pakistan, in the past, resisted U.S. pressure, arguing that its energy needs cannot be ignored or deferred indefinitely. Yet the legal battle over the pipeline only intensified Pakistan’s geopolitical dilemma, turning an already difficult policy choice into a higher-stakes test of alignment and consequences.
Should Pakistan proceed with the pipeline, it risks antagonising the United States, a power that continues to wield significant influence over international financial institutions and, by extension, Pakistan’s economic room to manoeuvre. On the other hand, shelving the project entirely would be seen as a major setback in Pakistan’s efforts to diversify, signalling that even long-negotiated options can be sacrificed when external pressure sharpens. As fate would have it, Pakistan can apparently concede on the latter but not the former.
Over the last two years, Pakistan has been able to cosy up to the United States, owing to a new administration in Washington and a novel form of administration in Islamabad/Rawalpindi. That shift has materially altered Pakistan’s position on foreign trade, tariffs, mineral deals, and even energy needs. With policy choices increasingly calibrated around managing economic exposure and geopolitical signalling, Iran seems like a very distant choice of ally.
And this change is not just for Pakistan. After what ensued in Venezuela, the entire world is becoming more and more wary of its energy needs and energy mix, treating energy security less as a sectoral concern and more as a core geopolitical vulnerability.
One part of the dynamic, however, has not changed: the U.S. is still calling the shots for Pakistan. With newfound “benevolence” that the U.S. now has for Iran, President Trump stated that any country dealing with Iran will face an additional 25% tariff; an escalation Pakistan might not be willing to risk, given its diplomatic reliance on the Trump administration over the last year.
The Future of the IP Pipeline: A Path Forward
As of now, the fate of the IP pipeline remains uncertain. Iran has extended the gas sale agreement, and despite the legal challenges, both countries remain committed to the project. However, Pakistan’s ability to proceed hinges on securing a waiver from the US, as well as renegotiating terms with Iran, including reduced gas volumes and lower prices.
In this pretext, what seems to be prevailing is the might of the US. “Pakistan wants the agreement extended if the U.S. grants a sanctions waiver, along with reduced gas volumes and lower prices from Iran,” were the words of a source close to the negotiations cited by a local newspaper. Backdoor diplomacy between the two countries has also been ongoing.
The diplomatic and legal wrangling over the pipeline’s future highlights a complex intersection of energy politics, where technical feasibility is rarely the decisive factor. Pakistan’s energy crisis is real, and the need for affordable and reliable energy is more urgent than ever. Yet the longer the dispute drags on, the clearer it becomes that the IP pipeline, while once framed as a potential game-changer, may no longer be the silver bullet it once appeared to be: not because the underlying logic of supply has vanished, but because the cost of pursuing it has been steadily inflated by sanctions risk, legal exposure, and the diplomatic price of defying a “partner” with too much leverage.
That leverage matters because Pakistan has, over the last few years, dug a hole too deep for itself on the U.S. side for it to simply jump out of it when convenient. Its economic dependencies, diplomatic calculations, and reliance on pathways shaped, directly or indirectly, by U.S. influence have narrowed the range of choices it can credibly take without triggering blowback. In this context, deciding whether to proceed with the project or explore other avenues is no longer a strategic choice.
Either path carries weighty implications. For Pakistan’s energy future, for its relationship with Iran, and for its broader geopolitical standing in a region where alignment is crucial.
The gas pipeline remains an unresolved question, one suspended between necessity and consequence. One of the biggest what-ifs in our energy debate. Its eventual fate could have shaped Pakistan’s energy landscape for decades to come.
Whether it can still become a revived corridor of supply, is not yet official. But the decision has the potential to show one thing. And that is, how serious is Pakistan in its intention to meet the immediate needs of its economy and populace, against the realities of an external order in which the country’s options will become increasingly conditional.
