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Mega gas scam lands at Dar's table

The incumbent government's first mega scam amounting to Rs 210 billion relating to the supply of gas at concessional rate to a fertiliser plant has reportedly landed at the table of Finance Minister, Senator Ishaq Dar, well informed sources in Petroleum Ministry told Business Recorder. Mari Petroleum Company Limited (MPCL), a public sector company, has refused to knock down its price artificially and urged the federal government for a status quo.

Official documents obtained from Petroleum Ministry reveal that the Ministry of Planning and Development headed by Ahsan Iqbal opposed revision in Gas Sale Purchase Agreement (GSA) that proposed sale of natural gas to Engro's fertiliser plant at concessional rates, saying the proposal needs to be re-evaluated because it will have legal/financial implications for the MPCL and SNGPL. However, Ministry of Industries and Production (MoI&P) which had promised supply of gas at concessional rates to the fertiliser plant and got the requisite approval from the ECC has yet to submit comments on the "existing terms and conditions".

There are a total of 10 fertiliser plants in the country. Fatima Fertiliser and Engro Fertiliser are two new plants established under Fertiliser Policy, 2001 of M/o Industries and are entitled to a subsidised fixed gas price of $0.70 per MMBTU for ten years from date of commercial operation. All other old plants have already availed similar gas price dispensation under respective fertiliser policies and their gas price is Rs 123 per MMBTU. The old plants are also subjected to Gas Infrastructure Development Cess @ Rs 197 per MMBTU which has been declared by High Courts as ultra vires to the constitution and the Ministry has filed appeals against the said decision(s).

M/s Engro Fertiliser Limited (EfL) has two fertiliser plants with two separate Gas Sales Agreements (GSAs) with MPCL and SNGPL as follows: (i) oil plant will get 103 MMCFD gas from MPCL (Mari Shallow) with annual capacity one million ton; and (ii) new plant with 1.3 million tons annual capacity will get 100 MMCFD gas from SNGPL's Qadirpur.

Documents further disclose that in view of demand-supply gap, SNGPL was not supplying gas to Engro's new plant during 2011 and 2012 while 12% curtailment was also being made by MPCL in its gas supply to Engro's old plant for a diversion to power sector. The ECC of the Cabinet, in its meeting on March 8, 2013, approved the MoI&P's proposal subject to the condition that existing terms and conditions including price of gas, remain the same:

MoI&P had submitted the following proposals: (i) M/s Engro exiting Mari gas allocation be reallocated to SNGPL for onward supply to Engro's new plant on a dedicated basis which may be supplied under Engro's existing SNGPL contract with all terms and conditions staying unchanged including concessionary pricing for feed gas at actual feed consumption; (ii) SNGPL to remain liable to supply gas from its system after gas supply declines from Mari till completion of their 20-year contract with Engro; (iii) the existing GSAs of MPCL and Engro related to the old plant may be novated to SNGPL. The existing allocation of 100 MMCFD be thus freed up to be supplied to Engro old plant through interim Term Sheet/contact till the implementation of long-term solution; and (iv) Engro old plant may be allowed to join a consortium of the remaining three fertiliser plants on SNGPL system on terms and conditions approved by ECC vide Case No ECC/167/16/2012 on December 18, 2012. The documents further reveal that Engro has been maintaining that its new plant is entitled to a concessionary pricing price of $0.70 / MMBTU as envisaged in Fertiliser Policy, 2001 which has also been approved by ECC at the time of initial allocation of 100 MMCFD gas to Engro and the same has been reflected in its agreement with SNGPL.

Ministry of Petroleum and Natural Resources, on the other hand, argues that Engro's entitlement of said concessionary pricing can only be allowed in case the gas is supplied by SNGPL is on terms of its agreement whereas gas supply from any other source cannot entail such dispensation.

In view of the fact that M/s Engro has two fertiliser plants with separate agreements on different terms and conditions, M/o Industries has been requested to clarify as what is to be construed from the phrase "existing terms and conditions'. MoIP has yet to respond to this.

Petroleum Ministry maintains that allowing the concessionary gas sale price of $0.70 per MMBTU for feed stock gas to Engro would entail following financial implications: (i) as MPCL will be selling gas to SNGPL at its prescribed price which at present is Rs 88.44 per MMBTU instead of directly selling to Engro at prevailing sale price of Rs 123.41 per MMBTU for feed stock and Rs 488.23 per MMBTU for fuel stock, it will reduce Gas Development Surcharge by approx. Rs 2.9 billion per annum; (ii) the current gas pricing to Engro also includes a component of Gas Infrastructure Development Cess (GIDC) @ Rs 197 per MMBTU over and above gas sale price, which will not be applicable in case of Engro's stance is accepted resulting in reduction in potential collection of GIDC by Rs 4.2 billion per annum; and (iii) this will reduce the weighted average cost of gas of the system from Rs 345.27 per MMBTU to Rs 337.17 per MMBTU.

Ministry of Petroleum and Natural Resources acknowledged that it understands that the term 'existing terms and conditions' pertains to Engro's existing GSA with SNGPL and that gas sale price for feed stock will be $0.70 per MMBTU as provided in GSA. Since SNGPL was unable to supply the contracted volumes of gas to Engro, it can also be considered that maximum period of 10 years for concessionary pricing may be extended adequately for which exact period will be worked out by MPNR in consultation with SNGPL.

MPCL has written three letters to the Ministry of Petroleum aimed at stopping provision of gas supply at concessional tariff. MPCL in its latest letter written on November 28, 2013 says: "since SNGPL is proposed to be substituted for Engro for allocated gas and contracted period, therefore, modification will be needed in the gas price notification as serial 3(1) for sale of gas from Mari Habib Rahi reservoir and the weighted average of feed and fuel (works out to Rs 370.51 per MMBTU based on current prices) will have to be notified for MPCL's sale to SNGPL. The price can be revised annually to account for any adjustment in MPCL's wellhead price. This may practically not be possible as SNGPL is only a distribution company.

In addition to financial loss, MPCL will be exposed to innumerable operational constraints, owing to the fact that natural gas is being supplied to all the downstream customers from a common header. MPCL further stated that based on its experience with distribution companies, it foresees that payment from SNGPL could be delayed. On the contrary, MPCL is receiving prompt payment from EFL. The change-over therefore, does not suit MPCL.

MPCL argues further that keeping in view the acute shortage in the country, the subsidy given to the fertiliser sector has already been questioned by SC. Hence, no change in the present arrangement is recommended. "If forced into revising down its prices and assuming SNGPL's remaining 17-year obligations, MPCL will lose Rs 112 billion, followed by federal government by Rs 19 billion and Sindh government will lose Rs 80 billion," the sources added. "We wish to reiterate that SNGPL's commitments towards EFL should not be honoured at the cost of MPCL and suggest that status quo as it relates to MPCL in terms of prices, may be maintained," said Mohammad Asif, a senior MPCL official, in his letter.

Copyright Business Recorder, 2013


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