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ARTICLE THE 'PEACE PIPELINE' PROJECT: BALANCING THE GEO-POLITICAL AND LEGAL SEESAW BY ALI ARSLAN* The Iran-Pakistan-India (IPI) gas pipeline project, popularly known as the 'Peace Pipeline,' was tabled for discussion in the 1990s. After a series of geopolitical oscillations, Iran and Pakistan finally signed a Gas Sale and Purchase Agreement (GSPA) to begin energy-trade in May 2009. This article analyses the necessity for such a project, the impediments the IPI has encountered and has yet to encounter, and the legal options that can be employed to overcome them. It is bemusing that, even after a decade of gestation, the idea has not fully materialised into a binding trade agreement. The project was always technically and economically viable. However, geo-political dilemmas and legal predicaments have been delaying it. Faced with an acute shortage of energy resources, owing largely to rapidly burgeoning industrial and residential demand for energy, the developing economies of Pakistan and India seek exploitable reserves of natural gas and other fuels. This drive has brought them to Iran's doorstep. Both India and Pakistan perceive this deal as a major breakthrough in trade with Iran. However, energy security concerns, magnified by the geo-politics of the region, continue to tarnish the prospects of a successful energy project. The two rivals have long been entrenched in zero-sum thinking, and India is greatly reluctant to give political leverage to Pakistan, lest it be used against India's economic and foreign policy interests in the future. Since energy plays a vital role in economic development, environment, and society, detailed legal frameworks are constructed for such projects. However, these frameworks are typically eclipsed by the political backdrop against which international relations tend to operate. For the IPI, transit, pricing, and security concerns have been major impediments and were addressed in every round of negotiations. Despite some makeshift solutions, these problems shall recur. There is clearly a need for a comprehensive trade agreement with the essential characteristic of an efficacious dispute settlement mechanism. Iran, Pakistan, and India apparently wish to pursue this project in a political vacuum. However, the geo-politics of the region are such that it has rarely seen
*

LL.M. (London), Member of the Lahore Bar Association. 187

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a day without international interest in its everyday affairs. The IPI is effectively forced to walk a very fine line, balancing the see-saw of geo-political concerns and legal obligations. Depleting energy resources show cracks in the global village The astounding increase in demand in emerging economies, such as India and China, has created strong competition for energy resources with the West. Although industrialised countries are looking towards new sources of energy, oil and gas are still the backbone fuels in these economies. Under the pressure of similar concerns, China, Russia, and Central Asian states have established the Shanghai Cooperation Organisation (SCO), which aims to cement regional stability and enable the easy sharing of resources and technology.1 The resources in these areas are important reserves for the rest of the world, especially the West. The Russian Gazprom (largest extractor of natural gas) already controls European energy markets. Russia's current goal is to dissuade any of the Central Asian gas reserves from reaching European or North American markets.2 Russia is clear in its support for the IPI, which faces eastwards as opposed to the westwardfacing Nabucco pipeline. All three countries in the IPI hold observer-status in the SCO and could soon become members. India would be welcomed by Russia, whose leaders know well that any serious challenge to the US hegemony must include the two emerging powers of the world, i.e., China and India.3 Moreover, Russia and China endorse a cooperative regional effort against building Islamic militancy, in which India could be a strategic ally. Likewise, Pakistan, sharing the Durand line with Afghanistan and a long border with Iran, is an indispensable part of every strategic move in the area. The IPI could potentially foster a strong bond between India and Pakistan to ensure regional unity; also, fused with the goals of the SCO, the IPI project poses a grave threat to the strong hold of the USA in the unipolar world. Sceptical of this eastwards development, the USA is pressuring the governments of Pakistan and India against entering into any agreement with Iran and openly supports the alternative Turkmenistan-Afghanistan-Pakistan-India (TAPI).4

A. Cohen, 'The Dragon Looks West: China and the Shanghai Cooperation Organisation' (2006) 961 Heritage Lectures 1-4. 2 S. Akbarzadeh, 'India and Pakistan's geostrategic rivalry in Central Asia' (2003) 12:2 Contemporary South Asia 224-225. 3 M. Nazemroaya, 'The Sino-Russian Alliance: Challenging America's Ambitions in Eurasia' (2007) Global Research, available at http://www.globalresearch.ca/index.php?context=va&aid=6688 4 See Steve Mann's statement in A. Maleki, 'Iran-Pakistan-India Pipeline: Is it a Peace Pipeline?' (2007) 7:16 MIT Center for International Studies 2. 188

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The USA is opposed to the IPI because it would act as an economic lifeline for Iran and would blunt the sanctions imposed on Iran by the USA subsequent to its attempts at developing chemical and nuclear weapons.5 The noxious blend of political turmoil and depleting resources gives rise to energy security concerns. The concept of energy security does not have a uniform meaning, underpinned as it is by regional intricacies and dimensions of the global market. The World Bank defines energy security as the sustainable production and use of energy at reasonable costs to ensure a certain quality of life.6 Similarly, Deese defines it as a condition whereby a nation perceives a high probability that it will have adequate energy supplies at affordable prices.7 After the political sea-change across the world following 9/11, energy security concerns have multiplied. Besides escalating consumption, energy resources have become a prime target for insurgent activity and armed conflict. In recent years, Pakistan itself has suffered numerous attacks on its gas pipelines in the province of Balochistan. The concept of "energy security" must encompass not only diversification, but the safety of the entire process of energy supply. This requires close collaboration between producers and consumers.8 Energy security and the IPI The primary energy security concern for India and Pakistan is to ensure sufficient energy to support economic growth and prevent debilitating energy shortfalls that would trigger social and political turbulence.9 In Pakistan, the aim of providing energy to the periphery has amplified demand. The Indian energy deficit shall keep widening if new resources are not exploited to meet growing needs. Conversely, the energy security concern for Iran is to find buyers for its product. Both India and Pakistan acknowledge the importance of diversification and are looking for more sources. Despite a combination of energy sources, however, the rate at which existing sources are diminishing far outstrips the development of new sources. Both countries must seek feasible regional reserves of gas to generate energy. The multi-billion dollar, 2700-km long IPI would connect India and Pakistan to one of the biggest gas reserves of the world. While India is eager on an underwater pipeline from Iran, the cost of the project and the danger in skirting the Pakistani territory makes it unfeasible. A pipeline treading
5

S. Verma, 'Energy Geopolitics and Iran-Pakistan-India Gas Pipeline' (2007) 35 Energy Policy 3287. 6 World Bank Report, 'Energy Security Issues', (2005) The World Bank Group Moscow, Washington. 7 D. Deese, 'Energy: Economics, Politics and Security' (1980) 4:3 International Security 140. 8 D. Yergin, 'Ensuring Energy Security' (2006) 85:2 Foreign Affairs 78. 9 Ibid., p. 77. 189

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the land of Pakistan is the only option for India to secure provision for its energy needs from Iran in the coming future. Pakistan's energy security concerns are myriad. Not only is there swiftly rising demand, Pakistan is fraught with domestic and regional terrorist cells which intermittently disrupt the supply of natural gas.10 In order to utilize its strategic position and act as an energy corridor, Pakistan must secure energy installations against sabotage. It is critical to consider energy security in the context of international and regional relations. The IPI shall bring together two rivals: India and Pakistan. It is expected to be a landmark step towards economic co-operation which has largely been absent between the two neighbours. Bilateral trade has never flourished, hampered not only by political rivalry, but also due to weak economic structures and limited import-substitution. India's real concern is providing political leverage to Pakistan through the IPI whereby Pakistan shall be able to hold the supply hostage to resolve contentious issues, especially Kashmir.11 Drawing an analogy with France and Germany in cross-border energy projects, the doctrine of 'integrative bargaining' could moderate political tension. Integrative bargaining binds countries in a common project whereby, without prejudice to political and social interests and differences, such projects ensure long-term commitment.12 I support the argument that integrating resources would compel Pakistan and India to co-operate and shall, therefore, minimise politicallymotivated disruptions in the project. The project's prospects are aptly described as not being a 'panacea for the ills of the peoples of both nations,' but possible to materialise with 'political will.'13 Being the founding members of the Economic Cooperation Organisation (ECO), Iran and Pakistan share close relations with respect to such projects. However, Iran shall not be content by entering into the project with only Pakistan as a partner. Pakistan, conversely, is drawn by its relations with Iran and the USA. India is in a similar situation. The USA has imposed unilateral economic sanctions on Iran, details of which shall be discussed later, as a result of which the USA does not want either India or Pakistan to enter into the IPI. Pakistan is currently a frontline ally of the
10

M. Sahir and A. Qureshi, 'Specific concerns of Pakistan in context of energy security issues and geopolitics of the region' (2007) 35 Energy Policy 2036. 11 T. Siddiqi, 'An India Pakistan Dtente: What it could mean for Sustainable Development in South Asia and Beyond' (2004) 75 Analysis from the East-West Center 4. 12 M. Malitza, 'Ten Thousand Cultures: A Single Civilisation' (2000) 21:1 International Political Science Review 82-85. 13 R. Tongia and V. Arunachalam, 'Natural Gas Imports by South Asia: Pipelines or Pipedream?' (1999) 34:18 Economic and Political Weekly 1063. 190

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USA in the War on Terror whereas India, although a pioneer of the non-aligned movement, has succumbed to political expediency and entered into a civil nuclear technology agreement with the USA. This places both the countries in complicated positions with respect to the US foreign policy and regional politics. Iran, on the other hand, looks for India's affirmative support in order to enter international market and shore up its non-US support; it already shares cordial business relations with China and Europe, as neither has given in to the US exhortations. Maleki suggests that India could be inducted into the ECO as an observer in order to facilitate such a project and this project could be a part of a pipeline system controlled by a consortium within this organisation. This would greatly allay the concerns over the operation and security of pipelines.14 However, it remains to be seen if India would want to join hands with an organisation constituent of Muslim-majority countries while combating rising Islamist militancy within its territory. Pakistan's role as a transit country In international law, "transit," to fit the global structure of states, could be defined as "goods or persons moving from one country to another."15 The concept of the "freedom of transit" was first introduced in the Barcelona Convention and Statute on Freedom of Transit 1921 addressing petroleum movement through waterways and railways. This was a steppingstone for Art. V of the General Agreement on Tariffs and Trade (GATT) and Art. 7 of the Energy Charter Treaty (ECT). The Convention states that all member-states shall facilitate trade and transit without distinction on the basis of nationality.16 Moreover, even-handed tariffs shall be applied to facilitate international traffic.17 As the scope of the Convention does not extend to pipelines, it is important to look into Art. V, GATT. The GATT is a key multilateral agreement on transit which, although it does not secure enforceable transit rights, does ensure freedom of transit if the right has been granted. The discrepancy in Art. V is that it does not extend to state-owned pipelines and concession holding companies.18 Pakistan and India are signatories to the GATT and the World Trade Organisation (WTO), successor to the GATT, whereas Iran only has an observer status at the WTO. If the IPI matures to include India at a later stage, Pakistan shall take
14

Maleki, n. 4 above, p. 2-3. A. Stanic, 'International Law Framework for the Transit of Oil and Gas: The Caspian Perspective' in I. Bantekas et al (eds.), Oil and Gas Law in Kazakhstan (Kluwer Law and Taxation Publishers 2004) p. 281. 16 Art. 2. 17 Art. 4. 18 Stanic, n.15 above, p. 287. 191
15

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on the role of the transit country between Iran and India. The sending and the receiving states shall rely upon freedom of transit to ensure supply, with oil and gas squarely falling within the GATT.19 However, energy products have always received a distinct treatment which increased the need for a specialist instrument. With increasing global interdependence, there was a need for a more balanced and efficient framework to succeed the complex web of bilateral agreements and non-binding legal instruments. In pursuit of this goal, the Economic Charter Treaty came into force in 1994, based on integrating European and Russian energy sectors to create a world energy market. Pakistan and Iran both have observer status at the ECT. With particular reference to energy transit, Art. 7 does not grant a transit right to states; it imposes obligations to be applicable when a right of transit has been given. Para 10 forbids states to disrupt or obstruct supply of energy products in transit even when in dispute. It also extends to private companies thereby resolving the shortcomings in the GATT. Although the ECT has not been signed by India or Pakistan, it does offer guidance to the gradual inclination of the global order towards a norm of free and safe transit. Freedom of transit contours the negotiation process of transboundary trade projects. When the commodity is an energy product, these concerns multiply. A special agreement needs to be signed between the parties and, in all probability, a pre-existing international covenant on general transit facility would not be adequate to guarantee the fulfilment of obligations. The USA and Canada provide an exemplary arrangement for bilateral agreements. These agreements, however, are of a more commercial nature. Each state takes complete responsibility and ownership of goods in transit while present within its control. The project under consideration, if attempted as a tripartite venture, shall not take the form of such agreements. A transit agreement shall involve a number of countries, where the transit countries enter into agreements both with sending and receiving states. Even if the transit countries are acquiring an off-take, it shall not effect the primary agreement between producing and purchasing countries. The IPI involves three countries--- an archetypal transit pact. Any agreement which is finalised between India and Iran for the trade of natural gas crossing the Pakistani terra firma would have to include Pakistan, imposing upon it the responsibilities of a transit state. This is not to suggest that there is some legal obligation on Pakistan to grant a transit right. The grant of such a right is the exclusive prerogative of a country on a project by project basis. However, once that right has been given it remains
19

Ibid., p. 285-286. 192

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to be seen if international law would be able to secure a safe passage for natural gas. Being a member of the WTO, Pakistan has been implementing the GATT rules in various sectors, especially agriculture and trade- related investment measures.20 Less has been seen for energy products. Freedom of transit has not been a right woven into domestic law and policy till now. By and large, a singular concern with all transit states to date has been the renegotiation and disruption of energy supply.21 The transit state sits over the trade route and could theoretically sabotage the pipeline at any time, holding supply as a bargaining chip for renegotiation or greater and cheaper off-take. In other pipeline projects such as the IPC and Tapline, Syria and Turkey posed problems to Iraq (sending country) with respect to transit fees, which kept increasing.22 Although states keen on foreign investment and development projects will typically not risk such an act, the prize for this disruption might be incentive enough for them to cut supply. Political tension between Pakistan and India obviously deepens concerns with respect to the role of Pakistan as a transit country. With political and economic leverage over major energy contribution to India, Pakistan would always have the upper hand. If the IPI materialises, Pakistan would be earning annual transit fees of nearly US$ 600 million.23 Promises of greater wealth still could drive Pakistan to suspend supplies and force India to renegotiate transit fees on a profit-maximising basis. Besides, India considers it highly probable that Pakistani leadership would use their transit position as tool in the contentious issue of Kashmir. However, I do not suggest that entering into transit contracts is impracticable or detrimental to the concerns of sending and receiving states. The Transmed pipeline between Algeria, Tunisia, and Italy is an excellent recent example of a successful transit project. It must be noted, however, that political and economic pressure from Italy and Algeria forced Tunisia to adhere to the contract. That might not always be the case, especially in the IPI. Other solutions do exist. One of the major solutions is to have alternative routes available whereby just the threat of an alternative would act to deter the transit country from malevolent activities.24 With respect to the IPI, however, Pakistan stands assured that any alternative would be extremely expensive.
20

See www.wto-pakistan.org; Z. Mahmood, 'WTO and Pakistan: Opportunities and Policy Challenges' (1998) 37:4 The Pakistan Development Review 695-696. 21 P. Stevens, 'Pipelines or Pipe Dreams? Lessons from the History of Arab Transit Pipelines' (2000) 54:2 Middle East Journal 225. 22 Ibid., p. 227-230. 23 E. Sridharan, 'Economic Cooperation and Security Spill-Overs: The Case of India and Pakistan' in M. Krepon et al (eds.) Economic Confidence-Building and Regional Security Report 36 (Washington DC Stimson Centre October 2000) 70. 24 Stevens, n.21 above, p. 238. 193

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However, although Indian apprehensions are not entirely without merit, the IPI is Pakistan's opportunity to reinforce its economic backbone rather than crush a fiscal artery. Such a project, involving foreign investment from multinational institutions, would require supply continuity guaranteed by Pakistan.25 Currently, following the pattern of a commercial project for the IPI might be more feasible. As and when India joins in, the project would become a transit project. However, owing to the long history of animosity and conflict between Pakistan and India, the IPI could not be similar to Transmed, wherein leaving Algerian territory the gas became Italian property and any transit dispute was between Tunisia and Italy. A more plausible commercial arrangement would be where Pakistan shall purchase gas from Iran and then sell the requisite amounts to India. Thereby Iran shall be free from any financial risk and India would be sold gas by Pakistan in order to meet costs of the project.26 Iran proposed, in October 2008, that any reduction in supply from Pakistan to India shall result in a proportionate reduction of supply to Pakistan as well. In lieu, Pakistan wants an MFN status clause in the GSPA to be signed with Iran, whereby any favourable terms afforded by Iran to another country shall have to be afforded to Pakistan as well.27 None of the clauses have been agreed to till date. It has also been suggested that India could sell the electricity produced to Pakistan as collateral for gas supply, whereby disruption on either side would mean disruption on the other. As already suggested, any politically-motivated disruption might not be free of peril as both countries shall be locked into energy-related agreements which are hard to sever. It is submitted that entering into such projects would ensure economic co-operation and reduce political mayhem and compensate for lack of regional energy regulation. A serious concern shared by India and Pakistan is the territory of Balochistan which shall also host the IPI. This mineral rich province is the economically weakest and physically largest in Pakistan. Over the years, poor government policies have created a province that will be most troublesome to navigate. For India, this concern is limited to possible disruptions of supplies. For Pakistan, conversely, non-cooperation by Balochi chieftains could mar its standing in the international arena with respect to any further development and foreign investment in such transboundary projects. The discord with the nationalist movement of Balochistan has left its mark on the recent history of Pakistan through the sabotage of domestic pipelines. Although monitoring and patrolling systems could be used to ensure freedom of transit and energy security, acquiring land rights poses a paramount hindrance.28
25

T. Siddiqi, 'India and Pakistan: Pipe Dream or Pipeline of Peace?' (2004) 5.1 Georgetown Journal of International Affairs 39. 26 Ibid., p. 40. 27 Reported in Shana, available at http://www.shana.ir/135033-en.html 28 Siddiqi, n. 25 above, p. 39. 194

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In the former USSR, acquisition of encumbrance-free land was unproblematic due to government ownership. The ownership of property in most countries, however, is inalienable.29 The competing concern, of course, is that land has to be reclaimed by the government in order to facilitate construction and development projects for economic progress. In Pakistan, there are various means by which land can be provided. First, a right of user or easement could be granted over a piece of land for laying the pipeline after notifying the landowner and paying him the due compensation.30 Besides leasing the land, landowners could enter into joint ventures. Once having constructed the pipeline, the parties could share profits earned from the transit fees and off-take from the pipeline. The last option to acquire land is through compulsory acquisition under the Land Acquisition Act 1894 and Articles 172 and 173 of the Constitution of Pakistan 1973. Although unclaimed land belongs to the state, privately-owned land could be acquired from owners for substitution or compensation. The task then is to identify the best solution to acquire land, keeping in mind the concerns of sabotage, supply disruption, and state responsibility. In the Baku-Tbilisi-Ceyhan pipeline (BTC), governments have acquired land in lieu of compensation and leased the land to the consortium. However, as the IPI only involves state corporations, compulsory acquisition would be the best solution for security and exclusivity. In addition, overarching rights of landowners and third parties such as licensees, easement-holders, and mortgagees shall have to be circumnavigated and appeased for the successful operation of the gas pipeline project. Thus, the only plausible solution is compulsory acquisition following compensation. In line with international law on expropriation, compulsory acquisition of land and assets on the land could only be for a public purpose following a due process of compensation.31 The final declaration for public purpose with respect to the IPI shall be made by the Oil and Gas Regulatory Authority (OGRA), Government of Pakistan.32 If foreign private investment is involved, the International Financial Corporation's Performance Standard 5 might apply, whereby all such acquisition shall be accompanied by the payment of adequate compensation. Despite provision of land being the responsibility of the host government, the projectinvestor needs to make a replacement plan and present that as a part of the Economic and Social Impact Assessment.33
29 30

Universal Declaration of Human Rights 1948, Art. 17. Oil and Gas Regulatory Authority Ordinance 2002, S. 32. 31 Land Acquisition Act 1894, Ss. 6, 11, 16 and 31. 32 Oil and Gas Regulatory Authority Ordinance 2002, S. 33. 33 International Finance Corporation's Performance Standards on Social and Environmental Sustainability No.1 - 8 April 30, 2006. 195

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Trade agreements and dispute settlement Significant large-scale energy deals are usually enveloped in the Inter Governmental Agreements (IGAs). States would agree to an energy deal or project and would then involve state-corporations or private entrepreneurs to execute the agreement. Operating as performance-guarantees, the IGAs help the states to maintain control over affairs of the project. The IGAs overcome cross-border risks or devise a strategy to collectively reduce those risks. Statebacked efforts for the promotion of trade are imperative for improving regional tensions which could potentially sabotage a project. Government representatives, while negotiating the IGAs, determine all the cardinal issues which might become a hindrance in the operation of a contract, ensuring that businesses dealings with each other will not require deliberation over issues such as transit route and taxation. Since the 1990s, the IPI has been discussed by successive governments, but political tension between India and Pakistan and pricing issues with Iran could not be resolved. Proposals have been made for a tripartite-agreement, whereby interdependence and binding legal obligations would ensure cooperation.34 Conversely, bilateral agreements could be entered into; each agreement focusing solely on the problems of the contracting parties. Pakistan has shown interest in the project even if India does not become part of the deal. Iran, however, has been pressing the Indian government to join in the agreement, while India has remained sceptical of the project due to the aforementioned security concerns and has abandoned the negotiating process since 2008. Amid this political chaos, a tripartite-agreement seemed unrealistic. Consequently, May 2009, an accord was signed between Iranian President Ahmadinejad and Pakistani President Zardari for the construction of the first phase of this pipeline and gas trade.35 Following this accord, a GSPA has been signed between the National Iranian Oil Company (NIOC), Iran and Inter-State Gas Systems (ISGS), Pakistan, which could be the first phase of the IPI. It is interesting to note that Iran has constructed most of the pipeline in its territory despite the lack of any IGA, let alone a business deal. It shall enable Iran to start supplying gas to Pakistan by 2013.36 This GSPA was signed by the ISGS for Pakistan which is a semi-autonomous corporation, owned by Sui Southern Gas Company (51%) and Sui Northern Gas Private Limited (49%), looking after Pakistani interests in proposed projects of gas import from Iran
34

Verma, n.5 above, p. 3291. Pakistan, Iran sign framework for gas pipeline accord (May 25, 2009), available at http://archives.dawn.com/archives/36942 36 Ibid., and Gas price accord with Iran signed (June 7, 2009), available at http://archives.dawn.com/archives/18240 196
35

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and Turkmenistan.37 The construction of the pipeline in Pakistan has thus been taken over by the two government utilities, Sui Southern and Sui Northern, which collectively own the entire gas distribution network in the country.38 As for the GSPA, it shall be governed by French law which shall be neutral to both Iranian and Pakistani interests. Similar to the commercial arrangements mentioned earlier, both countries take full responsibility and ownership of assets in their own jurisdiction rather than involving another concessionaire. A major cause of delay in finalising this project was gas pricing. Iran had proposed various pricing plans but none was feasible for Pakistan. The agreed formula uses the Japanese Crude Cocktail as yardstick, which is the average price at which Japan purchases crude oil from various markets. Gas prices have wherefrom been calculated to be US$ 7, 9.4 or 13 per MMBTU if crude oil is purchased at US$ 50, 70 or 100 per barrel respectively.39 Although the Ministry of Petroleum and Natural Resources, Government of Pakistan, claims that this price is high, the demand for gas is such that costs shall be met. In all probability, it would be imperative to join India in the project to make it economically sound, or, alternatively, attract China. The agreement between Iran and Pakistan does not discount prospects of India joining in later. For instance, according to the agreement, the pipeline shall be 42-inches in diameter. If India joins in before the construction phase begins, the diameter shall be increased to 56-inches.40 Subsequently, host countries shall enter into concession agreements with private companies. The IPI, as mentioned earlier, has not been franchised to a consortium or private undertaking. Within Pakistan, any such concession has to be granted by the OGRA. No person (natural or legal) is allowed to construct or operate any pipeline of natural gas without a general or specific license to do so.41 These licenses are normally given on competitive bidding. However, in the IPI, the license that was being granted to the ISGS was not competitive as the IPI is a government deal. If a sub-license is granted to another undertaking, competitive bidding shall take place.42 Moreover, the OGRA is authorised to prescribe tariffs keeping in view protection of consumers, licensees' costs, reasonable rate of return, and reasonable terms to facilitate and attract investment.43 Under the Petroleum Act 1934, the Pakistani
37

See www.isgs.pk B. Vellani, 'Pakistan' in, The International and Comparative Legal Guide to: Gas Regulation 2009 - a practical insight to cross-border Gas Regulation Works (Global Legal Group 2009) 201. 39 See n. 36 above. 40 See http://www.isgs.pk/ipi_project_brief.html 41 Oil and Gas Regulatory Authority Ordinance 2002, S. 23. 42 Petroleum Exploration and Production Policy 2009, 4.2 Licensing System. 43 Oil and Gas Regulatory Authority Ordinance 2002, Ss. 6 & 7. 197
38

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government can permit or prohibit the import of petroleum.44 The government can make rules as to the storage and transportation of petroleum and prescribe different forms of licenses.45 Thus, any agreement or deal which is finalised by a ministry or its organ has to be presented to the Parliament and the Federal Cabinet for approval. An integral part of any trade agreement is a dispute resolution mechanism which is resorted to in case of any dispute or falling out between the parties. With respect to international dispute settlement, diplomatic means are most commonly used. There is an array of dispute settlement mechanisms available to choose from. Diplomatic dispute resolution is based on mutual co-operation and consensus which might be difficult for countries in the IPI if there occurs a dispute. Another solution--- with its own limitations--- is the International Court of Justice (ICJ). The ICJ is an organ of the United Nations established to resolve disputes between states. With respect to the energy sector, there is a paucity of case law, largely because most of the disputes involve private concessionaires who would not have a locus standi at the ICJ. Conversely, if a state takes up its national's case, the costs are so colossal that the cases rarely go beyond the jurisdictional stage. Most importantly, the ICJ lacks specialist knowledge of the energy sector and, therefore, is ill-equipped to resolve energy-related disputes. Therefore, the energy sector has directed most of its dispute settlement towards arbitration from as early as 1929, when the Anglo-Iranian Company entered into an arbitration agreement with the Government of Iran, wherein the more diligent party was allowed to appoint a sole arbitrator. Such arbitration agreements underwent further improvement in the 1954 Iran Consortium Agreement, whereby disputes would automatically be routed to arbitration, on the appointment of an arbitrator by the President of the International Monetary Fund if the dispute was regarding the rate-of-exchange. The agreement also provided for conciliation and expert committees for other general disputes.46 Likewise, the ECT, as a specialist instrument, provides a comprehensive dispute settlement mechanism. The ECT methodically divides state-state arbitrations and investor-state arbitrations. The latter could be resolved by dispute settlement as proposed in the agreement, in the absence of which claims could be submitted to the International Centre for Settlement of Investment Disputes (ICSID), or arbitrators appointed under the Arbitration Rules of UNCITRAL, or the

44 45

S. 4 (a). S. 4 (c)-(j). 46 Economic Commission for Europe, The Legal Status of International Gas Pipelines, United Nations 1967 ST/ECE/GAS/21, p. 78-80. 198

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Arbitration Institute of the Stockholm Chamber of Commerce.47 As for the state-state disputes, arbitration is conducted by the Permanent Court of Arbitration.48 As for transit disputes, Article 7 provides for a conciliation mechanism which shall be more efficient.49 Although none of these mechanisms are binding on Pakistan, they provide a guideline to devising dispute settlement machinery for the upcoming project. In the IPI, Iran, Pakistan, and India could provide for international arbitration to which they would submit their claims in case of a dispute. Pakistan, being a signatory of the New York Convention 1958 and having ratified it through the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance 2007, shall be bound by the outcome of international arbitration. With respect to international investment disputes, Pakistan has signed and ratified the International Convention on the Settlement of Investment Disputes between States and Nationals of other States 1966, whereby the ICSID arbitral awards shall be capable of being registered and the High Court shall have the power to enforce them or hear proceedings with respect to them.50 Such arbitral awards shall also be binding on the government.51 As for disputes between nationals of a country and the project operators, the domestic legal system should provide adequate protection. In the Baku-TbilisiCeyhan project, British Petroleum (BP)--- BP leads the BTC Co. Consortium-- has been provided legal protection by Turkey which has reduced access to justice for its citizens.52 Insofar as Pakistan is concerned, the OGRA has the power to arbitrate between investors, civilians, and concessionaires applying Pakistani law.53 In case of compulsory acquisition of land for construction of the pipeline, a person who has been served with a notice could object to such acquisition.54 In the event he does not object to the acquisition notice per se, he can still make a reference application against the award settled for acquisition.55 Securing foreign investment for the Peace Pipeline For a project of such colossal expense, it is rarely possible for a developing country to fund it fully by itself. It looks to the international community for
47 48

Art. 26. Art. 27. 49 Para. 7. 50 Arbitration (International Investment Disputes) Ordinance 2007, Ss. 3 & 4. 51 Ibid., S. 5. 52 Amnesty International, Human Rights on the Line: The BTC Pipeline Project (May 2003) Amnesty International UK 5. 53 Pakistan Petroleum (Exploration & Production) Rules 2001, R. 74. 54 Land Acquisition Act 1894, S. 5. 55 Ibid., S. 18. 199

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funding, lending, or investment. Foreign monetary involvement in such projects is not only important for capital investment, but also to gain access to western technology and expertise.56 The 1950s saw an increasing trend of Bilateral Investment Treaties (BITs). However, in the Barcelona Traction case, it was noted that the developing treaty framework was not proportionate with the multiplication of investments in the last half of twentieth century.57 One of the major pitfalls in these frameworks was a lack of dispute settlement mechanisms. Despite such covenants being pacta sunt servanda, disregard of treaty obligations would be commonplace depending on the politics of the time.58 Owing to this increase in foreign investment, various institutions have been set up in the past few decades which fund projects in various fields in different regions of the world. Although this process stemmed from the consequences of the World Wars in order to rehabilitate and redevelop badly affected areas, the operation of such efforts has gradually broadened its ambit. Not only are global and regional institutions working towards redevelopment, but are also paying attention to finer social and political issues such as poverty, unemployment, education, health, and human rights. A prime example in such efforts is the World Bank Group, which is a consortium of various lending and financial institutions.59 Not only does the involvement of such an institution guarantees a financial support system to the project, it also introduces a level of accountability that is otherwise largely missing in developing countries. Although such institutions show an interest in development projects around the world, it is occasionally difficult to surmount barriers erected by international relations and politics. Usually, benefits to the developing world come in the form of alliances for developed nations at an international level, giving them some collective leverage over the rest of the world. However, the World Bank has not shown much interest in funding the IPI, influenced in part by the US foreign policy.60 After Iran and Libya tried to develop weapons of mass destruction and attacked the US personnel and property, the USA imposed unilateral sanctions under
56

J. Salacuse, 'The Energy Charter Treaty and Bilateral Investment Treaty Regimes' in T. Walde (ed.) The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International 1996) p. 323. 57 Barcelona Traction, Light and Power Company Limited, (Belgium v. Spain) Judgment February 5, 1970 I.C.J 3 p. 46-47 para. 89 - 90. 58 L. Brazell, 'The Energy Charter Treaty: Some Observations on its International Context and Internal Structure' in T. Walde (ed.) The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International 1996) p. 227. 59 See www.worldbank.org 60 S. Chaudhary, 'Iran to India Natural Gas Pipeline: Implications for Conflict Resolution and Regionalism in Iran, India and Pakistan,' TED Case Studies, available at www1.american.edu/ TED/iranpipeline.htm 200

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the Iran-Libya Sanctions Act. Under this Act, the President could choose two out of six sanctions mentioned in Section 6, ranging from prohibition on procurement of goods and services to forbidding the extension of loans, credits, or guarantees exceeding US$ 10 million. Technically, the definition of investment in the Act did not include long-term purchase agreements and even transit pipelines to and through Iran.61 Nevertheless, involvement in any activity which could have resulted in economic support for Iran's nuclear or chemical weapons program was discouraged by the Clinton and Bush administrations. Consequently, the US Secretary of State Condoleezza Rice and the US President George W. Bush, in their visits to Pakistan in March 2005 and 2006 respectively, showed concern and a reluctance to support the IPI. Furthermore, in March 2009, the Obama administration extended the tenure of previous sanctions by at least another year. Local governments and states have been allowed to direct divestiture and prevent investments in institutions and persons exceeding US$ 20 million in the Iranian energy sector, in particular, pursuant to the Iran Sanctions Enabling Act.62 Europe, on the other hand, does not agree with such sanctions, arguing that they are very imperfect solutions to international terrorism. Despite the USA attempting to give these sanctions an extraterritorial effect, it was compelled to show flexibility in order to avoid a rift with Europe, especially when considering the investment projects being launched by French companies such as Total in South Pars Field, Iran.63 Moreover, with the Russian Gazprom's investment, and emerging economic giants and gas consumers, India and China, the US Sanctions might be limited to the US companies. Nevertheless, the impact of the foreign and economic policy followed by the USA could still be felt in the practices of international institutions and even in direct private investment. In light of such sanctions, it is important to seek an alternative which shall allow investment in the IPI despite the involvement of Iran. One of the solutions, analogous to the BTC, is to get India to purchase gas from Pakistan--- and not Iran--- leaving India free to receive investment from such global institutions. Following the civil nuclear deal with the USA, India has entered the league of world leaders, whereby it has an attractive portfolio for foreign investment and various high-scale projects. Pakistan alone might not be able to utilize any similar solution because it shall be purchasing gas directly from Iran, which constitutes an investment in the Iranian energy sector itself.
61

K. Katzman, 'The Iran-Libya Sanctions Act 1996' (Updated August 2006) Congressional Research Service - The Library of Congress, CRS Web 4. 62 S. 3. 63 J. Schott, 'The ILSA 1996: Results to Date' (July 23, 1997) Testimony before the Committee on International Relations, US House of Representative, Washington DC. 201

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A possible solution lies in involving an increasingly gas-hungry China. China is already purchasing costly LNG from Iran. Following the construction of the IPI or even a pipeline from Iran to Pakistan, transporting gas to China would become a very cost-efficient task. Moreover, China's industrial prowess and technological acumen could considerably help in the IPI's construction. Besides the sanctions, there is an array of other problems envisaged by investors when investing in projects in the developing world.64 Typical risks include political instability which, considering the constant power struggle between military dictators, presidents, democratic governments, and newly emerging socio-religious political camps in Pakistan and the events following the 2009 Iranian presidential elections, is a valid concern. Foreign investors also run the risk of being caught in the political or social crossfire of tribes and communities residing close to the IPI. On the other hand, Pakistan's energy sector presents a great opportunity for foreign investment in terms of its relaxed investment policies providing for privatisation as well as tax and duty exemptions, inexpensive trained labour and personnel, a growing economy and, most importantly, its geo-strategic position, connecting the Central Asian states with the Gulf and the Far East.65 Although BITs seek to further and secure investment, entering into numerous treaties would not attract foreign investment so long as there is significant political risk. This risk is a direct factor of a country's stability and it falls to its institutions to bring about such stability. Moreover, energy sectors around the world were regulated industries; government owned corporations formed the backbone of these sectors. Many countries are still in the process of privatisation, including Pakistan. Pakistani business and economy have never been fully owned or regulated by the government. There have been several attempts to open up private shares and debentures in government corporations, making them quasi-government ventures. The energy sector, especially gas, has various state-run and private companies operating in upstream and downstream gas markets. Even the government corporations such as Sui Northern and Sui Southern are receptive to private shareholdings and investment on a project by project basis.66 Still, the energy sector has not been truly opened to private competition as that would hurt what the government sees as its natural monopolies.

64

M. gt, 'Eurasian Energy Prospects and Politics: Need for a Longer-Term Western Strategy' in T. Walde (ed.) The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International 1996) p. 85. 65 See 'Five Key Reasons to Invest in Pakistan,' available at http://www.pakboi.gov.pk/ 5keyreasons.htm 66 Ministry of Petroleum and Natural Resources, Government of Pakistan (www.mpnr.gov.pk). 202

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Although BIT's cannot provide all solutions, they do attempt to regulate trade and investment relations between most countries. Over time some trade regimes have flourished, for example, the BIT between China and Pakistan.67 In a recent milestone for this trade regime, a new state-of-the-art port facility being constructed in Gwadar, Balochistan, has been contracted to Chinese construction and development companies. Since Western countries began investing in Eastern European energy markets, entering into BITs was no longer a solution for political risk posed. In view of these shortfalls, the ECT was introduced in 1994. This Treaty aims to replace the BITs in energy trade with a single multilateral framework. Although the IPI countries have not signed the ECT, it shall provide guidance regarding the formation of an agreement as it addresses various issues in cross-border energy trade. The ECT ensures that foreign investors shall be given same protection as nationals.68 This seems ironic in the case of state controlled energy sectors. It is important to note that government corporations or state utilities have never been exposed to the market's competitive edge. Any private investment would, therefore, be considered useful and complementary for the sector's development so long as it does not reduce the scope of powers and market control of the corporation or state utility. Pakistan's petroleum policy69 seeks to encourage foreign and private investment in the exploration, production, and distribution of energy in Pakistan. Investment decisions in the energy sector, considering its incredible importance, are to be made by the government. Therefore, all investors in Pakistan need to enter into some arrangement with the government, either directly or through its corporations. These arrangements could include joint ventures, licensed activity, shareholding or privatising assets. National treatment is guaranteed to foreign investors under Foreign Private Investment (Promotion and Protection) Act 1976. Section 9 of the Act guarantees equal treatment to industrial undertakings with or without foreign private investment and this treatment does not denigrate protection afforded by the Federal Government as per Section 10. A fear addressed in the ECT is of the loss of foreign property or assets by means of expropriation and compensation.70 International arbitration has developed a trend of following the Hull Formula of prompt, adequate, and effective compensation, whenever foreign property or assets are compulsorily acquired

67 68

Bilateral Investment Treaty signed between China and Pakistan on 12/02/1989. Art. 10. 69 Petroleum Exploration and Production Policy 2009. 70 Art. 12 & 13. 203

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by a government. This has translated into a determinate standard of full compensation whereas any other standard would only be arbitral caprice.71 Section IV (I) of the World Bank Guidelines on Treatment of Foreign Direct Investment forbids the expropriation of foreign private investment except where it is for a bona fide public purpose, in a non-discriminatory manner with adequate compensation paid in return.72 The Foreign Private Investment Act reflects the same, ensuring in Section 5 that no such property or asset shall be acquired without due process, meaning thereby that compensation shall be paid for any such take-over. Likewise, the Protection of Economic Reforms Act 1992, in Sections 7 and 8, provides that no asset of private ownership involving foreign investment shall be compulsorily acquired. However, the amount of compensation shall be decided through the dispute settlement mechanism to be adopted. Another important issue the ECT addresses is that of the transfer of money and assets from the host country.73 Many developing financial markets would only allow inward investment and not repatriation. Section 6 of the Foreign Investment Act 1976 provides for repatriation to the extent of original investment and profits generated in the original currency of investment. Furthermore, the Protection of Economic Reforms Act 1992 provides for withdrawing foreign currency without having to declare it at any stage and provides immunity from enquiry as to the source of the funds.74 As mentioned earlier, most frameworks are designed only to protect ex post failure of investment. Thereupon the political risk that parties run remains a constant threat, albeit slightly reduced, especially when the host country is politically unstable or new to the league of countries attracting foreign investment. Therefore, international insurance and guarantee organisations have been established. The Multilateral Investment Guarantee Agency (MIGA) is one such institution; it strives to promote and protect direct foreign investment in private sector projects which reduce poverty and boost development and industry. Although part of the World Bank, thereby sharing its limitations, it is important to consider its categorisation of a project such as the IPI. As a part of its guarantee providing process, the MIGA assesses every project with respect to the environmental and social impact it shall have. The IPI would be considered part of 'Category B' which pertains to projects of limited adverse environmental and social

71

P. Norton, 'A Law of the Future or of the Past? Modern Tribunals and the International Law of Expropriation' (1991) 85 AJIL 505. 72 M. Shaw, International Law (Cambridge University Press 2008) 6th Edition p. 835. 73 Art. 14. 74 Ss. 4 & 5. 204

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impacts, largely specific and reversible. Such projects are also readily addressed through mitigation measures. Investment projects, which are guaranteed, should be financially sound, commercially viable, environmentally-friendly, and compatible with labour standards and other policies of the host country. This insurance extends to equity and shareholding as well. Getting such an institution involved with the project would reduce the risks of political conflict in the region and other security concerns. Insurance covers everything from breach of contract to a disruption caused by an act of war or civil disturbance. Insurance arrangement by the MIGA or any other similar institution would create an environment where breaching its part of the contract would be difficult and cumbersome for Iran, Pakistan, or India. Conclusion Despite the ebb and flow in its relationship with geo-politics, the IPI could be a constructive move for the region. Besides stabilising regional relations, this project shall be a gateway for further progress. Although energy matters are not regulated by any multilateral treaty in the region pertaining to the IPI, in my opinion, Pakistan shall in all probability be able to trounce maximum legal apprehensions associated with the project through its domestic legislation. Foremost, the domestic legislation requires a detailed EIA which would ensure protection of the environment. Foreign investment is highly supported by the government. As the IPI would be a unique venture in energy trade for Pakistan, its success would determine future projects and investment, thus Pakistan should try its utmost to facilitate the project in every respect. The socio-political conundrum, however, requires regional cooperation for its resolution in order to ensure energy security and safety of the pipeline. Safeguarding human rights is not the sole responsibility of Pakistan, but all three countries involved should ensure that human right violations are kept to a minimum. As for geo-politics, it is for the regional powers to engineer a mechanism which would ensure immunity of economic prosperity from instability of politics. With more such projects, soon the time shall come when a regional or international covenant, in this region, shall police energy-related matters ensuring that no 'Peace Pipeline' would have to be tossed between geo-politics and the law.

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