ISLAMABAD, March 10: Pakistan is likely to face penalties because of the delay in implementation on the $3 billion Iran-Pakistan gas pipeline because of Islamabad's indecision over the award of a contract to conduct Front-End Engineering Design (FEED) study – a pre-condition to arrange financing and start physical construction.

The ILF had offered to complete the study in 18 months, but was asked to reduce the completion time to 12 months because of the inbuilt penalty clauses in the agreement between the two countries for delays.

However, after Mr Qamar's exit from the ministry last month as part of a cabinet reshuffle, the authorities were finding it difficult to take responsibility for the contract award because public procurement rules require an international competitive bidding. This had not been done in this case, the official added.

Officials said the two gas utilities – SSGCL and SNGPL – had offered to jointly complete the FEED study in 12 months at half the price with local expertise and manpower. The two utilities have over the years developed one of the largest gas transmission systems in the world spread over 84,000 kilometres.

The FEED study is a pre-requisite to a bankable feasibility study of the project that could then be presented to local and international investors for financing. In the absence of the study, the feasibility report cannot be completed and an investor conference could not be arranged, the official said.

“The petroleum secretary should take responsibility to either award the contract to ILF, seek fresh guidance from the economic coordination committee (ECC) of the cabinet or simply give away the project to the public sector companies, but further delays will attract penalties,” a senior official associated with the project said.

He said the Iranian ambassador in Islamabad had already informed the petroleum ministry that the “clock is ticking and penalties are nearing”.

Under the agreement, the FEED should have been ready by December this year and after some other milestones, the first flows from the pipeline should have started in Dec 2014.

By June next year, the two sides are required to start negotiations on the first price revision. Specific penalties are set under the agreement for completion of FEED, feasibility report, financial close, contract award for construction, start and completion of the project.

“The penalty amounts may not be very big, but will be a waste of foreign exchange without getting gas inflows or any benefit from the project,” the official said.

The problem arose because of an ambiguous decision taken at a high-level meeting during the tenure of former finance minister Shaukat Tarin. Mr Tarin had told the petroleum ministry that although he had no objection to

the hiring of a foreign firm, he was confident that local companies had the

ability to carry out the job,

The IP project is supposed to bring raw gas from Iran's South Pars gas field in the Persian Gulf onshore to Iran's port city of Assaluyeh, where it will be refined and processed for pipeline quality. The 1,150-km Iranian segment of the pipeline will take the gas from Assaluyeh to the Iran-Pakistan border, running along the southern coastal area of Iran.

Tehran has already constructed almost 80 per cent of the 900-km 56-inch diameter pipeline from Assaluyeh to Iranshehr, the capital of its Sistan province. The pipeline has the capacity to carry 3.2 Bcfd of gas, out of which 2.1 Bcfd is meant for export.

Pakistan has announced the import of up to one BCFD of gas in the initial stages. Islamabad is to build a 42-inch diameter pipeline with design capacity 1.06 Bcfd along the coastal line from Iran-Pakistan border to

Nawabshah, where it has to be connected with the existing gas distribution network.

The project, cleared by the federal cabinet in 2009, required the Iranian gas to be used for power generation of about 4,000mw after completion in Dec 2014. However, because of rising domestic gas shortfalls in current supplies, the government may have to utilise it for existing shortfalls and increase inflows to meet power generation requirements.

Official estimates, however, suggest the gas coming from Iran will not be economically viable for domestic use because of its higher price. They said the current domestic price was $4.39 per mmbtu while Iranian gas would will cost $9 per mmbtu and could be used for only power generation.

The international lenders and development partners agree that Pakistan needs to fast-track cross-border pipelines because the years 2011 to 2014 were critical as the gap exceeding 1.3 BCFD (billion cubic feet per day). According to Munawar B. Ahmed, a former managing director of SSGC, the gas flows from the IP project could not materialise in 2014-15, as forecast by the government.

“The route survey, feasibility, financing, EPC contract, etc., will take at least three to four years, with additional three to four years for construction and commissioning. So we cannot expect to have the first gas before 2017”.