ISLAMABAD — Iran has slapped Pakistan with a final notice to finish its part of a cross-border gas pipeline or face international arbitration, and possibly billions of dollars in fines.

Tehran’s warning is the neighbors’ latest flare-up over the long-delayed 1,900-kilometer (1,180-mile) pipeline, a project seen as critical to Pakistan’s energy needs as its own proven gas reserves are set to run dry in a little over a decade.

Iran has said it spent $2 billion building its 1,150-kilometer share of the pipeline, inaugurated in 2013, but Pakistan’s portion remains unbuilt due to U.S. sanctions against Tehran over its nuclear program.

Last year, Islamabad invoked a force majeure clause to suspend its contractual obligations, citing factors beyond its control. Tehran immediately rejected the move.

Then, in February, Pakistan announced it was starting construction on the 80-kilometer first phase of the pipeline within its borders.

The following month, Donald Lu, the U.S. assistant secretary of state for South and Central Asian Affairs, cautioned Pakistan against importing gas from Iran, which has some of the world’s biggest reserves. Since then, no further work has been done on Pakistan’s share of the pipeline.

Now, Iran is threatening to take its case to the International Court of Arbitration if Pakistan doesn’t meet a looming deadline to finish the pipeline. Pakistan had in 2014 asked for a 10-year extension to build the pipeline, which expires this month.

Pakistani officials face a delicate balance trying to avoid Washington’s ire over doing business with Iran but they also want to sidestep huge court fines that would hammer the crisis-hit economy — Islamabad recently agreed to a $7 billion International Monetary Fund (IMF) bailout.

“Iran’s case is pretty much straight forward that Pakistan has violated the terms of a bilateral agreement for which it can be sued as clearly mentioned in the written contract,” Ikram ul Haq, an expert on economy and taxation who holds a doctorate in law, told Nikkei Asia.

Local media have said the Paris-based court could impose penalties of up to $18 billion on Pakistan if it loses the case. Those figures are based on contractual daily penalties for not completing the project, plus interest and damages.

“Pakistan and Iran have robust channels of communication, including [on the pipeline notice],” a spokesperson for Pakistan’s Ministry of Foreign Affairs said in a statement on Thursday. “We have always said we would like to resolve all issues through friendly consultations.”

A government official privy to the late August notice told Nikkei that Islamabad was taking it seriously and exploring its options, but added that the $18 billion figure was “pure speculation.”

In 2019, the arbitration court ordered Pakistan to pay an Australian mining company nearly $6 billion over a breach of contract after it yanked the firm’s access to a copper and gold mine. It later agreed to pay $1 billion to the company’s parent as part of a settlement.

The U.S. sanctions are the linchpin of Washington’s broader bid to isolate Iran on the global stage, and the pipeline “has become a casualty of this strategy,” said Ahsan Hamid Durrani, executive director of Islamabad-based Policy Research Center.

Hampered by the sanctions, Iranian traders smuggle up to $1 billion worth natural gas into Pakistan annually, according to a report earlier this year by Pakistani intelligence agencies.

Pakistan would struggle to get a sanctions waiver from Washington that would allow it to finish the pipeline project, Haq said.

“Pakistan is economically weak and dependent on the IMF,” he added. “Unlike India, Pakistan cannot get any waiver from America.”

Durrani agreed Islamabad has little room to maneuver, with countries under IMF programs expected to comply with international sanctions.

“Pakistan doesn’t have any leverage with the U.S. to circumvent the current sanctions regime,” he said. “With the IMF loan agreement still in process. Pakistan needs every ounce of support from the U.S. and … cannot jeopardize that by violating the sanctions.”

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