Pakistan’s Petroleum Minister Musadik Malik announced in December that he planned to request a sanctions waiver for the Pakistan-Iran gas pipeline project from the Trump administration.
Signed in 2009, the gas pipeline agreement between Iran and Pakistan involved the construction of a 2,775-kilometer-long gas pipeline, 1,172 km of which would run in Iran and the rest in Pakistan. The goal was to bring Iranian oil to Pakistan to address the latter’s energy shortages while earning Iran revenue from gas exports. However, the project, envisaged as a “Peace Pipeline,” has become a legal and geopolitical minefield.
Iran has completed the pipeline running on its territory with a $2 billion investment but work on the Pakistani stretch is yet to begin. With U.S. sanctions on Iran applying to the Iran-Pakistan pipeline project, and Washington denying Pakistan a waiver of the sanctions, Islamabad has been unable to proceed with the project.
Meanwhile, Iran has filed a case against Pakistan in the International Court of Arbitration for not laying the pipeline.
In March 2024, Islamabad sought to convince the Biden administration to relax sanctions. However, its pleas fell on deaf ears. It is now preparing to approach the Trump administration with renewed appeals, determined to revive a project that was once envisioned as a cornerstone of regional energy cooperation.
Meanwhile, Pakistan has engaged two American law firms to represent its case at the International Court of Arbitration in case U.S. sanctions remain in place. If the arbitration favors Iran, Pakistan could face heavy penalties, further straining its already fragile economic situation. Not only will it have to pay up the $18 billion arbitration claim from Iran for delaying the project but also its energy shortage will persist.
Pakistan’s Energy Shortage
Pakistan has sizable gas reserves but these are yet to be tapped. Pakistan’s domestic gas production is limited, hovering around 4 billion cubic feet per day (bcfd), while demand is estimated to range between 6 and 8 bcfd. It has sought to fill the resulting supply-demand gap through LNG imports. Pakistan currently imports a third of its energy resources, including oil, coal, and Liquified Natural Gas (LNG). According to the International Trade Administration (ITA), natural gas comprises 38 percent of its primary energy supply.
Pakistan has been importing LNG to meet its growing needs, with its first regasification terminal established at Port Qasim in Karachi in 2015 and a second terminal in 2017. Despite these imports, Pakistan faces an energy deficit of around 5,000 megawatts (MW) per day. The government has opened the LNG sector to private companies, which are permitted to import LNG for their specific industry needs.
The Pakistan-Iran gas pipeline was considered an ideal solution to this energy shortage. Since Iran is Pakistan’s neighbor, transporting Iranian gas is less expensive than importing through sea routes from other countries. Consequently, the pipeline project remains central to discussions about the country’s energy future.
However, Washington’s continued sanctions on Iran’s energy sector have thrown a wrench into these plans, not only preventing Pakistan from completing its section of the pipeline but also cutting off access to the U.S. or any other international financing body for funds to complete the project.
Iran’s Stakes and Strategic Pressure
For Tehran, the gas pipeline project is now more than an economic endeavor. While it may have begun as a commercial project, it has since evolved into a strategic gambit aimed at asserting regional influence and bypassing decades of U.S.-led sanctions, particularly in navigating relations with Pakistan, its otherwise “mostly” friendly neighbor.
With the world’s second-largest natural gas reserves, Iran has long sought to diversify its energy markets, particularly in the wake of sanctions targeting its oil and gas sector.
Initially, the Iran-Pakistan project was envisioned as a regional energy corridor, connecting Iran not just with Pakistan but also with India. However, India eventually withdrew from the project under U.S. pressure, leaving Pakistan as the sole partner.
Iran’s completion of its portion of the pipeline reflects its determination to press forward despite obstacles. For Tehran, the project now is as much about economics as it is about political leverage — pressurizing Pakistan with arbitration threats to not only fulfill its commitments vis-à-vis Tehran but also intensify its pleas for waivers from the U.S.
By positioning itself as a reliable energy partner to Pakistan, Tehran seeks to break out of its isolation and carve out a more assertive role in regional diplomacy. For Pakistan, this strategic calculus adds another layer of complexity to its diplomacy as it navigates its obligations while managing delicate ties with both Iran and the U.S. Pakistan is now caught between the necessity of meeting its energy demands and the political risk of further complicating its already strained relationship with the U.S. by engaging with a country still under heaving sanctions.
Pakistan’s Tightrope Diplomacy
While Pakistan continues its strong ties with Washington — its key source of financial aid and military support — its geography and economic realities compel it to engage with Tehran. Beyond energy, Pakistan’s cooperation with Iran is important for border management, trade, and security, making the relationship crucial despite persistent challenges. In 2024, Pakistan and Iran signed eight agreements and memorandums of understanding worth $10 billion across various sectors.
However, despite their geographic proximity, bilateral trade has remained lackluster. Over the last two decades, while Iran’s exports to Pakistan have grown at an annual rate of 13.5 percent, Pakistan’s exports to Iran have declined by up to 44 percent annually.
Earlier, under increased Iranian pressure, Pakistan considered bypassing U.S.-dominated financial organizations and seeking funding from non-Western allies like China. However, the U.S. warned that doing business with Iran’s energy sector — even without Western financing — would have costs for Pakistan.
Pakistan is thus stuck with negotiating a difficult balancing act. It needs to secure its energy future while navigating the diplomatic tightrope between Washington’s sanctions and Tehran’s growing impatience.
As Pakistan prepares to persuade the new U.S. administration to reconsider its position, the pipeline project’s future remains under a cloud. Past experience suggests that a meaningful shift in position on the part of the U.S. is unlikely.